The present invention relates generally to systems and methods for lending transactions involving loan initiation. More particularly, the invention is a system and method for ensuring that loans provided by lending institutions comply with the most current federal, state and local regulations. This is accomplished by extracting data from a lending institution's loan origination system and forwarding the data over a secure communication connection to a server located at a service provider's site. The server archives the lending institution's data and processes the data to assess whether every mortgage loan originated by the institution complies with all federal, state and local regulations applicable to each loan initiation.
As the standard of living for more people has increased over the last decade, many have sought to own their own home. This has brought an increase in the number of home mortgage loan applications. There are tens of millions of mortgage loan applications processed every year resulting in over a trillion dollars in new residential real estate loans. It is estimated that between five and six percent of the principal amount of these loans was paid out in fees, charges and expenses to consummate these transactions, amounting to between $60 and $72 billion. To protect consumers involved in these credit transactions, the Federal government as well as state and local municipalities have enacted laws and regulations that impose requirements on institutions and personnel involved in the business of originating and closing mortgage loans. These laws and regulations establish transactional standards and disclosure requirements that are enforced by state and Federal agencies. As new laws, regulations, licenses and rules are added over time, mortgage loan applications have become more varied, complex and prone to error, resulting in an increase in exposure to non-compliance liabilities of the institutions that process these applications. With the growing complexity of the mortgage loan industry, consumers have sometimes been subjected to compliance errors, overcharges and careless lending practices.
Federal and state regulators are conducting increasingly aggressive policing campaigns to ensure compliance by the mortgage industry. These efforts have significantly increased the costs for non-compliance in terms of monetary penalties and legal expenses, as well as in terms of tarnished reputations to the lending institutions. Because of the substantial growth in Internet and multi-state lending activities, the potential for serious compliance violations is likely to increase along with a corresponding increase in compliance scrutiny and enforcement activities by Federal and state regulatory agencies. The mortgage industry, including mortgage-backed securities investors, face the prospect of significant losses if they are forced to refund fees and charges, repurchase noncompliant loans, and pay civil and criminal penalties. To counter these potential losses, the industry will incur increased expenses associated with compliance audits and compliance policies, procedures and reporting.
In order to overcome these problems and to satisfy regulatory compliance requirements, institutions offering mortgage loans have attempted to audit loan compliance on a manual basis. This approach results in a tedious, time-consuming and costly process that allows only a small statistical sample of loan applications to be examined for compliance with requirements. The results of this process are also oftentimes inconsistent due to factors such as varying degrees of understanding, differences in interpretation and processing errors. With greater competition in the mortgage loan market, there is also a strong need to reduce the cost of regulatory compliance as well as to reduce penalties for failure to meet compliance requirements. Some mortgage companies have attempted to employ risk management techniques, which have proved inadequate as a solution to the compliance and related liability problems.
While the home mortgage loan industry is probably more regulated than other industries, the compliance difficulties are also encountered in many other areas. Other applications where automated compliance assessment would reduce costs and speed transaction processing include automobile and other consumer loans.