Recently an appeals court found that the
origination process followed by countrywide was flawed. The jury went to the
extent of saying that it amounted to fraud. The verdict landed Bank of America
in trouble. The lender bought Countrywide in July 2008 just as the country was
falling into a financial recession. Now Bank of America is being held liable
for fraud over the deceptive mortgages sold by its countrywide unit during the
housing boom. In fact, the US Department of Justice has already started
pursuing claims against Bank of America and some of its top executives for the
rapid mortgage approval process followed by the bank.
Bank of America has already resolved a large number
of outstanding litigations with investors and the now the lender is focusing on
settling the issues it has with enforcement agencies like the US Department of
Justice.
What this
means for lenders?
In recent times, mortgage regulators have taken
action against lenders experiencing fast growth with the objective of ensuring
that they have adequate infrastructure to support the growth. In particular,
the regulators are interested in finding out whether the existing
infrastructure is good enough to handle the volume of business the lender does.
This is usually done by comparing one lender to another lender of similar
business volume and size.
These actions seem to suggest that the regulators
are trying to develop a generalized standard as against specific standards that
need to be met.
Until now, lenders only had to fulfill specific requirements.
This allowed them to compare their specific actions to certain specific
standards and determine whether they were fair or not.
But now we are seeing the creation of a generalized
'reasonableness' standard that requires lenders to evaluate their performance
on the basis of the procedures and processes adopted by their competition. This
creates extra pressure on lenders to build adequate compliance infrastructures
because just meeting the minimum statutory requirements will probably not be
enough in the future.
In addition, when more and more lenders implement
such practices to protect their customers and avoid defaults, it will put extra
pressure on companies that lag behind their competition.
What this means is that lenders can no longer
afford to be content with meeting the minimum regulatory requirements. Instead,
they have to measure their performance against their competition and ensure
that their compliance performance is satisfactory. They also need to review
their conduct and business practices from a generalized 'reasonableness'
perspective.
In other words, a lender's compliance will always
be viewed in retrospective. This means that the lender should be able to
predict and review possible outcomes and conclude that their practices are
reasonable and that they are not engaging in fraudulent activities. This will
not be possible if lenders do not keep themselves abreast of the happenings in
their industry. They need to watch the developments in the marketplace and
ensure that their actions are justifiable and mainstream.
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