ISACA Slides- Part Deux

© 2014 Ellie Mae, Inc.© 2014 Ellie Mae, Inc.

CFPB and Tech changes the Lending Landscape - how does the mortgage industry keep up?

© 2014 Ellie Mae, Inc.

This presentation may contain forward-looking statements under the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. These forward-looking statements may include the company’s ability and timing to enhance the features and functionality of Encompass360 software and services and of new product launches. Additional risks and uncertainties related to the company’s business are discussed in the company’s Securities and Exchange Commission filings, including but not limited to the company’s most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. Unless otherwise required by applicable laws, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The content provided in this slide presentation is intended for Ellie Mae® webinar attendees and their staff only and should not be distributed outside your company. Ellie Mae does not permit any unauthorized copying, distribution or redistribution of this presentation. Specific authorization must be obtained in writing from Ellie Mae, Inc. Violations of copyright are subject to substantial penalties as provided by the law plus attorney's fees incurred as a result of violation. The content is intended for general information purposes only. It should not be construed as legal advice or opinion on any specific facts or circumstances. You are advised to consult your own compliance staff or attorney regarding your specific residential mortgage lending questions or situation to ensure your compliance with applicable laws and regulations.

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Agenda

• Industry & Company Background• Industry Drivers• Technology and Customer

Demands lead to a new Approach• Compliance & Audit Road Ahead


Industry & Company Background


How you manufacture a Mortgage Loan

Origination

Processing

Underwriting

Quality Control & Compliance

Servicing

Funding

Shipping & Delivery

Closing


We provide on-demand automation and business management technology for residential mortgage lenders and banks

Today, our technology helps lenders maintain compliance to the myriad of regulations that they now must adhere to, while producing high quality loans that meet investor requirements through a unique collaboration approach that delivers efficiency for both parties.

Our Business


MORTGAGE LENDERS

COMMUNITY BANKS CREDIT UNIONS

REGIONAL BANKS

300 Regional Banks

400 Community Banks

200 Credit Unions

1,900 Lenders

Serving 100,000+ Mortgage Professionals


Lending Technology

Compliance Technology

TQL

Private Services

Powering The Industry


Who’s Who: GSE’s

Government Sponsored Enterprise> Fannie Mae (FNMA)

> Freddie Mac (FHLMC)

> Ginnie Mae (GNMA)


Evolution of the Mortgage Industry – New Millennium

• Government had little direct involvement• Unprecedented increases in loan volume

and property values• Loan originations by brokers at 55% in

2001• Dramatic increase in Subprime lending• Technology hits the industry

/

Pre-WW I

Post-WW I

1929-1940

Post-WW II

Boom & Bust of 60’s, 70’s, 80’s,

90’s

New Millennium

Crash of 07 &

08


Evolution of the Mortgage Industry – 07 & 08

Subprime segment becomes unsustainable Rise in delinquencies, uncovering fraud Massive decline in value of all mortgage backed securities

abruptly restricting mortgage funding Collapse of mortgage markets – most severe economic

recession in 80 years Initiated more regulation, stricter underwriting standards

(Dodd-Frank Act)

Pre-WW I

Post-WW I

1929-1940

Post-WW II

Boom & Bust of 60’s, 70’s, 80’s,

90’s

New Millennium

Crash of 07 &

08

http://en.wikipedia.org/wiki/File:Subprime_Mortgage_Offer.jpeg


Dodd Frank Wall Street Reform & Consumer Protection Act signed

“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big

to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

Important new agencies created include:• Financial Stability Oversight Council• Consumer Financial Protection Bureau (CFPB)


Types of Regulatory Compliance

Fair Lending Regulations

Consumer Privacy Regulations

Consumer Protection Regulations


Industry Drivers


Industry Drivers

1. New Regulatory oversight continues to drive business decisions• Dodd-Frank Bill- 848 pages for law has led to close to 400

new rules introduced, 155 of which have been finalized, over 13,789 pages of legislation introduced

2. Standardization and technology are enabling the banking industry to become more data-centric

3. New technology is requiring increased product expansion into consumer direct (Web & Mobile)


How you manufacture a Loan

Origination

Processing

Underwriting


Servicing

Funding

Shipping & Delivery

Closing


Many Ways To Originate A Loan


A Foundational Approach Is Not Enough


Many Different Systems to Manufacture a Loan

CRM PPE Disclosures

LOS

Closing Docs StoragePOS EDM

Troubleshooting / SupportHosting

Disaster RecoveryBusiness Resumption

IT ResourcesHardware Refresh Server Licenses

Compliance


Compliance & Audit Road Ahead

CFPB Final Rule Effective Compliance Date

Loan Originator Compensation and Qualification

Applications on and after 01/01/2014Financed Credit Premiums: 01/01/2014

Ability-to-Repay / Qualified Mortgage (QM) Standards Applications on and after 01/10/2014

High-Cost Mortgage Loans (HOEPA) Applications on and after 01/10/2014

Homeownership Counseling Applications on and after 01/10/2014

ECOA and HPML Appraisal Requirements Applications on and after 01/18/2014

Integrated Mortgage DisclosuresFinal Rule to be Published Fall 2013Estimated Effective Date (2015)

HMDA Loan Application RegisterProposed Rule TBDEstimated Effective Date (2015)

Qualified Residential Mortgage (QRM)Final Rule TBDEstimated Effective Date (2015)


2014: RESPA/TILA Integrated Mortgage Disclosures

• Fundamental Input Screen Changes to Capture Detailed Fee Information

• Changes in Rate and Fee Calculations • Changes in Disclosure Tracking• New Detailed Data Disclosure Capture (Disclosed Data Comparisons)• New Output Forms

• Loan Estimate (previously GFE and Early TIL Disclosure)• Closing Disclosure (previously HUD-1 and Final TIL Disclosure)• Pre-Loan Estimate (new disclosure)

• New Methods to Calculate and Disclose Data on Output Forms• Revisions to all State Specific Output Forms affected by Change• Analyze and Revise Data Mapping to Major Partners including GSEs

• Uniform Closing Dataset (GSEs)


2014: HMDA Loan Application Register

• Enhance Input Form to Capture New Data Points and Information

• Reporting Data Enhancements• Generate LAR

• Analyze and Revise Data Mapping to Major Partners including GSEs

• Analyze New Input Field Impact on other Input and Output Forms



RESPA

TILA

HOEPA

CFPBData HMDA

Agency

Systems

Vendors


Technology and Customer Demands lead to a new Approach


2014 Customer Research

2014 Planned Research Activities and Focus• Mobile functionality and pricing• CRM• Consumer Direct – Additional feature/function

after R1• Compliance workflow • Workflow/ automation • Single system to manufacture• Journey map• Other areas as needed by product


Product Investments to Support our Customers

Compliance:• Improving compliance throughout the entire process• Requiring data governance

Security:• Increase data protection against malicious attacks (Heartbleed, etc) • Vendor Management

Comprehensive:• Workflow changes• Data Centric instead of docs/paper• Performance, reliability and security

End to End Investment:• Single Entry point & Source of record

• Acquisitions• Automating the entire mortgage process • SaaS• End-to-end integrated solution (Risk associated with integrations

various)


Building the Product Strategy

EXECUTIVE ADVISORY BOARD

STRATEGIC CLIENT INPUT

USER GROUPS / FOCUS GROUPS

CLIENT CARE / ACCOUNT MGMT.

MARKET RESEARCH

MARKET VALIDATION


One system with less data exchanges

• Single system with consistent data and calculations

• Data and calculations from within one system

EncompassData and Calculations

Input Forms

Compliance Tests

Disclosures and

Closing Docs

vs.

LOS Compliance System

Docs System

Data Data Data


The Need for a True Quality Loan Flow


Single Approach With Multiple Versions

Conventional Purchase

Conventional Refinance

FHA

JUMBO


Single Approach With Multiple Versions

FannieMae or Freddie Mac Direct Seller

Investor (Wells, Citi)

Portfolio

Ginnie Mae


Quality Control Throughout the origination process

Objectives of quality control are:• Verify loan data• Ensure compliance with regulations• Identify ineffective or inconsistent procedures• Uncover errors• Ensure that investor/insurer requirements are being met• Evaluate the quality of originations and servicing• Pinpoint communication breakdowns


How you manufacture a Loan

Origination

Processing

Underwriting


Servicing

Funding

Shipping & Delivery

Closing




Vendors, Shareholders, Prospects & Audit

With all the regulators to adhere to why does Audit need to step up?

Our Customers demands 100% alignment and coverage with SOC 2 Trust Services, Security, Privacy, Confidentiality, Availability, Integrity

Our Investors demand 100% alignment with COSO 2013 and CobiT (4.1 – 5), adoption of the ISO27002:2013 and PCI DSS V.3 by 2015

The GRC and reporting over our unified control framework is examined almost daily as each of our partners, customers and clients is required to validate every dependency they allow for in our systems and financial controls.


Audit Is Constant and Coverage is Expanding


Increased Awareness of Mortgage Lending Compliance Complexity


2014: Qualified Residential Mortgage (QRM)

• Maintain client’s existing workflows• Support QRM exempt transactions• Provide ‘at-a-glance’ information on QRM eligibility• Real-time assessments of QRM eligibility• Provide meaningful output forms

• New Encompass QRM Management Tool• New QRM Output Forms• Leverage Encompass Compliance Service • Leverage Ellie Mae’s Total Quality Loan program (TQL) to

document QRM loans with supporting information


Fair Lending Regulations: Fair Housing Act

Enacted as part of the Civil Rights Act of 1968

Enforced by HUD and Department of Justice

Protects the applicant from discrimination based on:• Race• Color • Handicap • National origin • Sex • Religion • Familial status


Fair Lending Regulations: Equal Credit Opportunity Act

ECOA enacted in 1974 Prohibits discrimination based on any of the following prohibited

aspects of the credit transaction listed below: • Sex • Marital status • Age • Race • Color • Religion • National origin • Receipt of public assistance benefits • Applicant’s exercise of any of his or her rights under the

Consumer Credit Protection Act


Consumer Privacy Regulations

Fair Credit Reporting Act (FCRA) – 1970• Now under Dodd Frank• Requires consumer reporting agencies use fair, confidential, and

accurate reporting methods• Requires disclosure upon denial due to consumer credit• Defines the permissible purposes for accessing a consumers

credit file

Gramm-Leach-Bliley Financial Modernization Act - 1999• Amended under Dodd Frank

Fact Act: Fair and Accurate Credit Transactions Act – 2003


Dodd Frank Wall Street Reform & Consumer Protection Act

Title X –Consumer Financial Protection Bureau• Regulates consumer financial products and services in

compliance with federal law• Director appointed by the President, with the advice and consent

of the Senate, for a term of five years

Title XIV – Mortgage Reform & Anti-Predatory Lending Act• Loan origination standards• Underwriting standards• Requirements for high cost and reverse mortgages• Servicing standards• Appraisal activities• Mortgage resolution and modification


Consumer Protection Regulations – Now Under Dodd Frank

Truth In Lending Act (TILA; Regulation Z)• U.S. Federal law enacted by congress in 1968• Designed to protect consumers in credit transactions• Requires disclosures of key terms of the lending arrangement

along with all costs

• Intended to promote the informed use of credit by requiring disclosures about its terms and costs

Real Estate Settlement Procedures Act (RESPA, Regulation X)• Passed by congress in 1974• Promotes consumer notification in a timely manner on the

nature and costs of the settlement process • Offers consumers protection from unnecessarily high

settlement charges caused by certain abusive practices, such as referral fees

Documents

ISACA Slides- Part Deux