In 2010, the Obama Administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a collection of regulations designed to ensure that the events that led up to the housing market meltdown of 2008 would never happen again. While the Dodd-Frank legislation was designed to restore stability and honest business dealings to the real estate industry, the regulations only tangentially affect realtors and real estate agencies. Rather, the bill’s different regulations apply largely to financial institutions, including banks, investment firms, and mortgage lenders.
The Roots of Dodd-Frank
The real estate industry was, of course, the major factor behind the economic downturn of 2008. Between low interest rates for mortgages and a range of other relaxed standards for house loans, the housing market essentially became a cesspool of bad debt. The instability of the market eventually led to a bubble burst that caused a wider credit crisis throughout the United States (and around the world), leading to the worst financial crisis since the Great Depression. The Dodd-Frank legislation was meant to bring about housing market recovery and protect the economy from a recurrence in the future.
Dodd-Frank directly impacts the real estate industry in many ways. For instance, banks can only issue housing loans that are “qualified mortgages.” By “qualified,” the legislation means that recipients of housing loans cannot have a debt-to-income ratio of more than 43%, according to Yahoo! Finance. Banks must also verify the borrower’s “ability to repay” using 8 different criteria.
Mortgage lenders aren’t the only ones impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to Greg MacSweeney, the editorial director of Wall Street & Technology, “virtually every aspect of financial services” is impacted in some way by Dodd-Frank. From hedge-fund managers to information technology experts, just about every person in the banking or investment community has to deal with some part of the mammoth-sized Wall Street Reform bill.
How Document Management Systems Can Help Ease the Strain of Dodd-Frank Compliance
Considering the lengthy and multi-faceted nature of the Dodd-Frank Wall Street Reform and Consumer Protection Act, how can banks and mortgage lenders hope to address all of the disparate demands and regulations of the bill? As with other areas of government compliance, a sophisticated electronic document management system (DMS) can go a long way toward finding harmony in the chaos of the Dodd-Frank regulations. Here are three specific areas in which DMS could help a mortgage lending firm reach compliance.
- Managing Stress Testing: One of the federal regulations that Dodd-Frank introduced was mandatory stress testing for banking firms. American Banker defines these stress tests as a way for banks “to demonstrate protection from adverse economic pressure.” Unfortunately, these tests put a good deal of strain on a bank’s IT professionals. Per the American Banker article linked above, most financial institutions have had to revamp their “risk and compliance infrastructure” completely to meet the requirements of Dodd-Frank’s annual stress testing mandate. These changes include tweaks or updates to how banks are tracking their capital data, loan data, mortgage service data, and more.
Perhaps said more clearly, banks (and specifically, IT departments) now have more at stake when it comes to tracking and storing organizational data. An advanced document management system can help to simplify the process, by giving the bank a strong and secure central hub for storing, accessing, updating, and auditing information.
- Easy Auditing: Speaking of auditing, DMS is beneficial to banking institutions for how it simplifies things for the external auditor. Document management systems like eFileCabinet utilize secure portals and user-based permissions to efficiently and securely provide external parties—whether they are auditors or clients—with access to certain documents, files, or folders.
Not only does this easy auditing feature eliminate a lot of the pain and irritation that comes with auditing, but it also brings an air of transparency to banking institutions that hasn’t always been there. The Dodd-Frank legislation was enacted largely because of how corruption and illicit activity in the banking and housing loan industries led to the housing bubble burst in the first place. Using DMS to establish a clearer devotion to transparency is a good way for current mortgage lending institutions to separate themselves from the corruption of the past.
- Easy Proof of Compliance: To avoid trouble with federal regulators, it is in the best interest of mortgage lending firms to make sure that they are only approving qualified mortgages and that they are vetting prospective borrowers based on other required criteria. With document management software, firms can keep a clear record of housing loan activity. In other words, DMS makes the financial stability of a mortgage lender traceable, enforceable, and easy to manage—leading to quicker and easier audits on both sides of the equation.
Are you interested in learning more about eFileCabinet, or how our software is already helping companies in the housing industry—like title companies and property management companies? Visit us on the web at www.efilecabinet.com.