Keeping up with MERS
New membership rules go into effect on March 18, 2013
FINANCIAL REPORTING INSIGHTS |
Any bank or credit union that is a member of Mortgage Electronic Registration System, Inc. (MERS) should pay close attention to recent changes in its rules and compliance requirements. Since 2011 MERs has launched a number of initiatives to clarify and strengthen its business practices and member rules. No doubt, these changes have been in response to the groundswell of court rulings and government consent decrees that have challenged its business model in recent years. The objective of the changes is to reduce the potential legal and compliance risks facing MERS and its members. Yet, as of early 2013, there’s no clear sign that these cases are abating or that the debate about MERS has been settled. So given the unresolved issues, MERS members should monitor events closely, and brace for the possibility of more refinements and changes to MERS compliance requirements
For now, member banks and credit unions are advised to review their procedures and practices against recent MERS announcements and evaluate whether they are in compliance. One important requirement is for the submission of an annual report attesting to compliance with quality assurance standards, along with an updated quality assurance plan. Some member banks and credit unions, however, may not be fully aware of recent rule updates; consequently, they may not have planned for the changes, budgeted for it or implemented quality control measures. Small organizations may also lack the staffing needed to support the requirements.
Even the largest organizations may find themselves in a position of non-compliance with some of the more technical MERS requirements. The best way to insure compliance is to incorporate compliance monitoring into the bank’s everyday loan origination and servicing practices and procedures; these should track compliance at every step of the process, as well as generate an audit trail that can identify any deviations.
Before discussing this process, let’s briefly review some of the recent changes announced by MERS.
April 2011 announcement
In April 2011, MERS announced new reporting requirements in response to the consent order issued by the Office of the Comptroller of the Currency. The requirements included an enhanced quality assurance review and issuance of an annual independent report of quality assurance standards compliance. Mortgage originators, servicers or subservicers with 1,000 or more registered loans must submit their report by Dec.31 of each year, according to the new rules.
May 2012 announcement
In May 2012, MERS issued a second announcement which revised and clarified requirements related to the annual independent compliance report. It stated that general members with 1,000 or more mortgages registered with MERS must use an external independent auditor or consultant for their annual report attestation. For general members with less than 1,000 mortgages, they have the option to use either an independent internal or external reviewer. Lite members are not required to submit an annual report.
December 2012 announcement
In December 2012, MERS announced a revised set of the System Rules of Membership, due to go into effect on March 18, 2013. (The last revision to member rules was in 2007.) This latest announcement pointed to no dramatic changes in the rules; instead, it appeared to clarify and refine the previous ones. From a compliance perspective, the most important takeaway from this announcement was that the compliance requirements and quality assurance programs clarified in 2011 and 2012 remain essentially intact; i.e., that members establish and maintain a quality assurance program, submit an annual report attesting to compliance with MERS quality assurance standards, and maintain a documentation trail that can be used to prove compliance to independent reviewers, if necessary.
In Rule 2 - Registration on the MERS System, Section 4, the new rule states:
“At the time that a MERS loan is registered on the MERS System, the Member shall use commercially reasonable efforts to verify that it has complied with the preceding sentence, which shall be satisfied by verifying that the information in the applicable public land record and on the MERS System, as specified in the Procedures, is consistent. Each member shall maintain an adequate quality assurance program to ensure that the foregoing verification procedures are effective. Upon a Member becoming aware of any discrepancy between the information shown on the MERS® System and the information in the applicable public land records, the Member shall promptly correct the discrepancy.”
Under Rule 7, Disciplinary Actions, Section 1(b) Cure Period, the new rule states:
“…. To the extent that a violation may be cured, curing the violation includes a written explanation of why the violation occurred, actions taken to prevent reoccurrence, and to the extent practical, rectifying the violation (e.g., submission of a complete annual report or a quality assurance plan). At the expiration of the Cure Period, and any extension thereof, if MERSCORP Holdings determines the matter has been cured, no further action will be taken and the issue will be closed. If MERSCORP Holdings determines that the matter has not been cured, MERSCORP Holdings may impose monetary penalties as set forth in the MERS® System Penalty Schedule published and in effect at the time of the violation.
Developing a system of compliance
What is the most effective way for MERS members to insure they are in compliance with the new rules and requirements? The easiest and most efficient way is to build MERS compliance processes right into the bank’s loan origination and servicing processes. Such a comprehensive approach insures that MERS compliance is maintained through every step of the process while at the same time providing an audit trail that can be used periodically by internal parties and, if need be, by external independent parties.
The first step is to review MERS rules against each mortgage loan practice and procedure, and determine what changes will be needed to ensure initial compliance. Next, the bank should implement a broad quality assurance program designed to periodically review and confirm compliance and identify gaps and deficiencies. Gaps which equate directly to MERS exception conditions should also be identified. The process should identify a solution to rectify the deficiency, as well as develop a process for requesting and inventorying MERS temporary and permanent waivers.
Some requirements, such as the placement of Mortgage Identification Numbers on security instruments, are straightforward and easy to do. Others, such as the field level reconciliation of MERS-registered mortgages with the bank’s own loan system, is not as obvious and will require additional effort to achieve.
MERS Quality Assurance Program
Banks should develop their MERS compliance processes with an external reviewer in mind. The goal is to ensure that an independent reviewer (i.e., bank employee not directly involved with mortgage origination and servicing, or an external consultant) can review the audit trail without major difficulty. If the more transactional MERS requirements have been incorporated into daily processing, an independent reviewer should be able to easily do periodic compliance reviews, as well as formalize the documentation to be used to satisfy the annual reporting requirement.
What happens if the bank finds technical violations?
Even large organizations with vast resources may find themselves unable to achieve 100 percent compliance. Older mortgage loans, acquired portfolios and system limitations can often thwart efforts to stay in compliance with the more technical requirements. Consider, for example, the MERS requirement for reconciliation of registered loans. Many organizations will struggle to ensure that every required field is reconciled across the entire portfolio. If this happens, the best option is to disclose and acknowledge the problem as soon as possible. MERS much prefers disclosure over perfection; in fact, it may even grant a waiver if the bank is upfront about a compliance issue. In cases where the exception is more of a technicality than a true compliance deviation, MERS has been known to grant permanent waivers. In other cases, temporary waivers have been granted that allow the bank to remediate such conditions without having to report a deficiency. So if you do discover some technical violations, the best strategy is to disclose them to MERS sooner rather than later, and request a waiver.
For more information
For more information or assistance with this topic, please contact Joseph Benfatti, director, Technology Risk Advisory Services, at 619.516.1180 or at Joe.Benfatti@mcgladrey.com