Too Small to Comply

Jun 04, 2013

Featuring Darius Bozorgi, President & CEO

Monthly Podcast Transcript - Duration: 14 minutes

Adrienne Ainbinder, Moderator: Welcome to the Veros Real Estate Solutions monthly podcast. This month we are focused on mortgage industry compliance, or more specifically, how the regulatory process is unfolding from an operational perspective. I'm here with Darius Bozorgi Veros’ President/CEO and I know this was a hot discussion topic at the recent MBA Technology Conference, so Darius can you lay a little bit of groundwork here for the listeners?

Darius Bozorgi: Yeah, it was a big topic. As everyone knows there have been a slew of new regulations that have come out. Some that have come out, some that still yet to come out. If you're a lender, you can get audited, you can get examined, you can get questions, not only from the regulator but also from other stakeholders, namely investors, you may be selling loans to. If you’re vendor, it’s important to understand what the new rules of the road are that may affect your business and affect your ability to be a vendor for your customers just from a compliance stand point. So the entire compliance landscape is changing and it’s important for everyone to be aware of what the new rules of the road are.

Adrienne Ainbinder: Absolutely. Now just last week industry publication, Mortgage Daily, cited a study that was done by the National Association of Federal Credit Unions, and that study stated that, when considering all the costs associated with complying with rules spawned by Dodd Frank, 58% of those surveyed said the interest rates on loan products are higher as a result of complying with the law and 21% said they would hire more staff if they weren't burdened with compliance costs. What’s your reaction to that finding?

Darius Bozorgi: Well, I actually disagree on the second part. I agree that compliance costs are going to go up, compliance related costs are certainly going to go up, because of the new expectations. I take a little bit issue with the notion that they would have hired more staff. I think what they’re saying is, in terms of, they’re anticipating they would have had increased business but for the compliance issues that would have allowed them or required them to hire more staff. But I still think the extra staff is actually required in part to deal with compliance issues. I would be concerned if somebody is saying, “I’m reducing, I have all these new regulatory expectations around compliance and I think I'm going to be able to do that with my existing resources.” I will be concerned about that kind of scenario.

Adrienne Ainbinder: Sure.

Darius Bozorgi: Now, I’d go on to say that I think the increase compliance related costs both and technology solutions, both in human resources, will be more than offset by the savings that you get from not having to deal with things like paper in the future, if this goes the way I think it will go, the way its trending already, and then also, reduction in things like repurchase risk. So the savings that lenders and stakeholders will receive will more than offset the increased compliance related cost.

Adrienne Ainbinder: Sure. Now coming out of that recent MBA Technology Conference I know the you and I discussed what you termed perhaps the next iteration of “Too Big to Fail, which might be, “Too Small to Comply”, and you noted that this is maybe somewhat of an unintended consequence that’s really hitting some of the small and midsized lenders where it hurts. So what do you think can be done?

Darius Bozorgi: Well this is going to be a big question as we go on. I think it will be one of the biggest questions out of all the new regulations. Can a medium, or more so, small size company effectively meet compliance expectations or do the regulations in effect, make them adversely selected because they can't comply? Personally I think the answer is that they can, and think that’s what we will see and I think the saving grace here is technology and that is the main answer that’s going to allow a small-size lender or a medium-size lender to be able to comply. There are so many platforms and solutions out there, like those offered by Veros, but also other industry participants as well, that allow a lender of any size to meet regulatory expectations.

Adrienne Ainbinder: Now, you alluded earlier in the conversation to the ROI that ultimately will come from on-boarding this kind of technology. What about at the front end? How can these smaller guys especially really manage any potential front-end expense of the technology?

Darius Bozorgi: Well, we are rapidly moving to a very data centric world, and I think the regulatory expectations and guidance that is out there really compliments that, but for the fact that we’re moving to this very data centric world, I think you’d have real challenges meaning any of the regulatory expectations. So I think we’re fortunate that these things are happening kind hand-in-hand because one allows you to achieve the other. So with technology platform solutions, analytics, and various data solutions, companies, really of any size, so in particular you're asking about small size lenders, they can track their vendors and vendor performance. They can manage orders of basically any settlement service and review those orders and centralize their policies around those on one system. They can verify data, data elements on the loan. Whether that’s data about borrowers, or data coming from service providers on tools like appraisals. They can reconcile deficiencies. They provide electronic chain of custodies and everything that they need to do to verify compliance as expected in this new world order. So the tools are there. I think many lenders don't know that they’re there and perhaps understand how to use or implement them within their existing infrastructure.

Adrienne Ainbinder: So, that leads me to my next question. If you are to put yourself in the lender’s shoes what sort of things you be looking for in a technology solution or perhaps a vendor partner to have confidence in that ultimate ROI?

Darius Bozorgi: That’s a great question and I think that's the key question now because vendor selection itself is an important compliance issue and I think that’s going to be one of the areas of focus by regulators, by investors, when they are working with their lenders. So are due diligence is the key and the key is documenting that due diligence. So the question, if you are lender is, “does the vendor have the right controls in place? Both in terms of the application or service that you interested in procuring from that vendor but also from an operational stand point and fortunately there are good tools out there to help in that due diligence process. Whether that’s SSAE16, formally referred to as SAS70, in particular you want to focus in on SAS70 Type 2, or even looking at, even if is not government related work, there’s great resources out there through FISMA specifically controls found in NIST 800–53 that really give a good idea of types of controls, relative to technology solutions in particular, that vendor should be employing. You also want to make sure vendor is financially sound, the vendor that has a good track record in providing these solutions. I mean even common sense things like demo the actual solution interested in using. I am continuously amazed how people buy things sight unseen. You just have to do a lot more diligence. There's information out there to help you with that and then you have to document that due diligence. So if somebody comes saying, “Why did you pick vendor X?” You have the basis for that answer.

Adrienne Ainbinder: Sure. Absolutely. So let me ask another question. The big trigger of course, ROI is a major factor, but everyone is really focused on how to limit the risk for potential penalties or non compliance in a situation where there is a negative audit. So what do you see being the most critical step for a lender to take when they are already in that precarious position and to limit their regulatory risk?

Darius Bozorgi: The biggest thing that a lenders is going to have to do is going to be able to document and report on their policies, processes, and procedures. When I say document I’m really talking about two things. One- Do they have policies, processes and procedures in place? So it’s kind of like when you talk about controls, it’s one thing, do you have a control in place, and is that documented? Do you have a documented policy? Do you have a documented process? That's only half the equation. The second part which is going to be equally important and this is where people get caught up and find themselves into problems. Is do you have documented evidence that you're actually following these policies, processes and procedures? It is one thing to have a control, it’s the other thing to actually have tested that control and make sure that it's actually working in accordance to your expectations and that you’ve documented that. Some lenders unfortunately don't have policies and procedures and they don't have any documented evidence that they followed them. Some have policies and procedures but no evidence that it’s been followed at all. The good ones out there have both and all lenders are going to have to move to that area where they have both.

Adrienne Ainbinder: Sure. So going back to the concept of, Too Small to Comply, and this adverse selection theory, how we get the train back on the rails or do you think that it's going off the rails?

Darius Bozorgi: Well I don’t think the train is off the rails yet, as you pose the question, but we certainly could be headed for collision if unintended consequences are not properly managed. A friend of mine just forwarded me a clip, a Jon Stewart clip from The Daily Show earlier this week, and in it he was reporting on a government spend of what he said was approximately $1 billion over four years on a failed database project for VA that never saw the light of day. Now if that’s in fact true, that’s very sad, people should be upset about that and they should be aware of it, but they should also know that real systems, that have seen the light of day, that are in place today, that are working, they exist. Through the use of these systems, platforms, vendor management systems, analytics, data solutions, that lenders can meet regulatory expectations, and provide a much more efficient, safer, and profitable, that’s the thing, people think that just because we have all these new compliance expectations that that means less profit. I don't agree with that. I think the technology that's available can allow stakeholders to meet regulatory expectations and generate greater profit. Very complementary.

Adrienne Ainbinder: Absolutely. Just to clarify. I think one of the solutions existing out there that you're referencing is of course UCDP, and so lenders should be aware of that as a proof of concept out there. Right?

Darius Bozorgi: UCDP is a prime example and actual model, of a very successful industry solution that is real. People did not, when it was first announced, even going back to its predecessor CDD, people said, “great idea, but we don't believe it, we don’t think it will see the light of day.” Not only did it see the light of day in record time, but is proven to be wildly successful in terms of the collection of appraisals, the analysis of data within those appraisals, the understanding and quantification of risk associated with appraisals.

Adrienne Ainbinder: Absolutely. Okay. Well Darius I want to thank you for taking the time talk with us today about something that I believe we’re going to start hearing a lot more about as the industry moves forward. For our listeners I hope you visit us at and follow us via Twitter @VerosRES. Until next month podcast thanks for listening.


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