PHOENIX—The mortgage industry is facing new regulationsaffecting the real estate market post-recession.GlobeSt.com recently caught up with ChuckMatthews, responsible for leading the strategic directionfor WGM Associates, aScottsdale-based technology company that helps real estate relatedbusinesses like title companies, to discuss these changes and how theyaffect the industry.

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GlobeSt.com: What mandates have the federalgovernment placed upon the mortgage industry and why were thesechanges put into place?

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Matthews: The mortgage industry is facingnumerous challenges as it struggles back from the implosion of theUS economy in 2008. The end of the mortgage refinancing boom andweak demand for new loans has resulted in declining mortgage loanvolumes. At the same time, legislation and regulation intended toprevent another financial crisis has led to dramatically increasedoversight and compliance requirements and costs. The post-mortem ofthe financial crisis revealed many systemic deficiencies that insome instances led to fraud, escrow fund theft and excessivemortgage losses. Some of these problems stemmed from outsourced orthird-party service providers utilized in the mortgage lendingprocess. Banks continue to rely on a large number of complexrelationships with both foreign and domestic third partiesoutsourcing functions such as tax, legal, title, escrow, audit,marketing and/or information technology operations. The integrationwith third-party providers is often to such an extent the third-arty becomes an integral component of the bank's operations,directly engaging with the bank's customers.

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Regulators remain concerned that the quality of risk managementover third-party relationships may not be keeping pace with thelevel of risk and complexity of these relationships. Regulatorscite examples in which banks have: failed to correctly assess andcomprehend the risks and costs involved in third-partyrelationships; failed to perform adequate due diligence and ongoingmonitoring of third-party relationships; entered into contractswithout assessing the adequacy of a third-party's risk managementpractices; entered into contracts that incent a third-party to takeinappropriate risks to maximize the third-party's revenues andengaged in informal third-party relationships without appropriatecontracts in place. New oversight requirements have evolved fromthe Dodd-Frank act and the ensuing creation of the ConsumerFinancial Protection Bureau. Additionally, federal regulatoryagencies overseeing lenders like the Office of Comptroller of theCurrency have issued bulletins reminding lenders they areresponsible for the actions of their third-partyproviders. Importantly, while regulations have multiplied,guidance on how to comply has been less forthcoming.

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GlobeSt.com: Why should the real estateindustry be concerned about these changes? What has been theimpact on the lending industry? And what are the new best practicesand expectations of the changes?

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Matthews: As a result of these loomingregulatory changes, banks have mobilized massive resources toimprove risk management processes and oversight of third-partyservice providers. Notably, compliance is the fastest growingdivision of most banks today. Lenders have also drastically reducedthe number of third-party like title agencies with whom they arewilling to work to reduce their regulatory compliance risk.National lenders have sought to work with only the largestthird-party organizations with well-developed compliance functions.The impact has been felt greatest on independent and small titleagencies struggling to implement costly new requirements and buildadditional risk mitigation processes. Regardless of size, titleagencies across the country have been working feverishly for thepast year with their trade organization, the American Land TitleAssociation, to adopt risk management processes intended to meetthe requirements of new regulations. ALTA's Best Practicesframework has established a baseline compliance model to helpencourage banks and other lenders expand their use of third-partytitle agencies. The ALTA Best Practices focus on protectingborrower's non-public personal information, ensure IT and physicalsecurity, and safeguard escrow settlement funds. Borrowers shouldask if their selected title company has adopted these practices tosafeguard their privacy.

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Adjusting to the new regulatory landscape is not a simpletask. Title agencies are utilizing outside advisors tocounsel and implement these changes. Companies like WGM have aheavy emphasis in the information security aspects of the riskmanagement process. Grand Canyon Title Agency of Phoenixspent nearly a year revamping and documenting risk managementprocesses to comply with the ALTA Best Practices in 2013. GrandCanyon continues to revise and update practices to meet lenderrequirements. Some title agencies and other third parties have yetto begin the process despite lender insistence. ALTA advises allmembers across the US to have completed a preliminary assessment oftheir organizations by September 2014.

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GlobeSt.com: Are there further changespending?

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Matthews: New regulations and rules are stillbeing developed by the regulatory bodies like the OCC andCFPB. After four years, experts estimate that just over halfof the required regulations under Dodd-Frank have been put forth.Major milestones loom in August 2015 with new requirements forintegrated mortgage disclosures. Organizations like ALTA have andcontinue to advocate additional transparency in the rule makingprocess and for greater guidance in the implementation of theresulting regulations.

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GlobeSt.com: Whatis the biggest take away from these fundamental changes in theindustry?

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Matthews: Many borrowers are likely unaware ofthe complexity of the mortgage lending process and the banks' useof third-parties to fulfill the lending process. Borrowers shoulddemand to know that the privacy of their mortgage information andthe security of their transaction is protected to the highestlevel. Borrowers should be prepared for additional changes aslenders and their third-party providers implement new regulatoryrequirements.

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