By: John Vong
The clock is ticking. On August 1, less than four months from today, the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule goes into effect. Given the sweeping changes that will be required, time is quickly becoming a mortgage lender’s worst enemy.
The country’s largest banks have been working on their TRID solutions for more than two years. However, based on our discussions with lenders, leading loan origination system providers and document vendors, we believe that many mid-sized and smaller lenders are still behind in terms of readiness.
Some lenders are still in the process of selecting new vendor partners; others are waiting for new solutions from existing service providers before beginning their testing, training, and educational efforts. Although there is still time to do this, there may not be as much time as they think. So what can a lender who hasn’t already started the process do now to prepare?
With less than four months to go, here are seven essentials for your “to do” list.
1. Make sure you have the right technology…and secure it fast!
Under TRID, a lender will have significantly greater liability for the timing, completeness, and accuracy of the Loan Estimate and Closing Disclosure. It’s a game changer. Investors and mortgage insurance companies know this, and we suspect that they will be even more thorough in their compliance reviews, refusing to purchase or insure loans with even minor TRID defects. Non-compliant loans that are missed during the initial screenings will likely be put back to lenders if errors are later discovered.
For the most part, compliance will be measured against four criteria:
• Were the disclosures provided on the proper forms (i.e., the LE and CD)?
• How were the disclosures delivered to the borrowers?
• Were they given to borrowers on time?
• Was each disclosure item on the LE disclosed within “variation” tolerances on the CD?
While it is theoretically possible for a small lender to manage this process manually, realistically, prudence suggests that technology is needed to automate and “back-stop” compliance. The right technology will help lenders gather the data that goes into the LE from various vendors; compute the LE accurately; deliver it in a timely (and trackable) fashion to the borrower and compare the initial LE against the final CD to make sure that variances are within tolerance. Moreover, the right technology will connect and communicate with numerous parties. Connectivity, or the ability to obtain and transmit accurate data in a timely fashion, is extremely important because TRID requires many detailed, individual figures to be imported into the disclosure forms.
One area where we see connectivity as a significant issue is between the lender and the settlement agent. Even at the closing table, data often needs to be transmitted between the settlement agent and the lender. Because this is a two-way process and everything needs to be auditable, “eyeballing” the data isn’t going to cut it. Proper connectivity allows last-minute changes to be detected, validated, and audited in real time, so that the closing disclosures can be completed in a timely manner.
Ideally, the right technology should also be compatible with Mortgage Industry Standards Maintenance Organization version 3.3 and the Uniform Closing Dataset (UCD). Some mortgage technology systems used by the industry have not yet upgraded and will be using work-arounds. This is unfortunate because MISMO 3.3 and UCD were designed for TRID and its multiple disclosures structure. We believe MISMO 3.3 will play a critical role in getting disparate systems to communicate with each other.
Finally, the Consumer Finance Protection Bureau is driving an overall, end-to-end electronic workflow for residential mortgage loans–not just e-signatures or e-delivery, but entirely electronic processes. So having the right technology, whether built or bought, will be the number one task for a lender’s TRID preparation.
Having said that, it’s time to stop shopping! Once you’ve selected an LOS vendor, compliance system, or document provider, it can take some out-of-the-box vendors weeks, not days, to negotiate and close the deal, and up to another two months, depending on the requirements, to integrate the solution into your platform and then train your IT, operations, and loan production teams. In the case of ComplianceAnalyzer, implementation typically takes two to four days for a mid-sized lender that uses one of ComplianceEase’s LOS partners.
So counting back from August 1, a lender needs to be closing the deal now. Also, keep in mind that many vendors are adding new customers and are still working around the clock to be TRID ready, so the queue may be much longer than usual.
2. Ask the “tough” questions now, rather than face tough times later.
If a lender is planning to rely on a vendor–LOS, title/settlement service provider, document preparation company or workflow management provider–for TRID compliance, time is of the essence.
In a recent survey of ComplianceEase customers, we discovered that less than 15 percent are very confident that their LOS would be completely “TRID ready” by August 1.
Lenders need to do their due diligence and press for answers to key questions. Here are a few to ask current and prospective partners:
• How will your solution be modified to accommodate TRID? Will the solution be adequate in terms of scope and functionality?
• What is the scope of the offering? End-to-end TRID compliance, including generation of compliant disclosures, or just components?
• When will it be ready for testing?
• Will it be MISMO 3.3 and UCD ready? If not, what extensions will be used from MISMO 2.6?
• Will it provide real-time connectivity with major vendors?
• Will your solution test for disclosure delivery timing, fees variance, valid changed circumstances and re-disclosure requirements, loan product features comparison, projected payments table and APR and amount financed calculations?
• Will compliance with federal and state consumer credit laws and regulations based on lender’s license types and exemptions be audited?
• How will your solution handle and flag last-minute changes at the closing table?
• Will system architecture support the special requirements of TRID, such as time stamping and retaining each and every disclosure and revised disclosure?
• Are system results capable of being reproduced easily and audited later by lenders, investors, and regulators (like banking agencies and the CFPB)?
• Do you have the necessary customer service bandwidth, particularly as the go-live date approaches and in the early days post-August 1?
3. Allow plenty of time for testing.
The testing environment matters–document delivery systems and interconnectivity with other parties should be tested and ready before August 1.
Anyone who has ever used new tools to perform unfamiliar tasks knows how important it is to have a test environment and a period of time in advance of actual implementation to actually perform testing. Lenders will need a proper internal testing strategy to make sure that their results are compliant, so that they’re ready to go on August 1. Since testing is data driven, lenders will need to make sure that data is available and properly input, and that the output matches the input. We believe that the testing environment is going to be very important, particularly when lenders need to verify that the data that’s initially input into the LE accurately translates into the CD. This isn’t new, but under TRID, the forms are entirely different from what lenders have been used to and the stakes of getting anything wrong are higher.
Lenders–big and small–should leave themselves adequate time to perform internal testing and then make any adjustments that need to be made. Timing varies based on a lender’s loan volume, but one thing is clear: testing shouldn’t be done merely days before TRID’s effective date. In fact, some larger lenders have been testing since the beginning of 2015.
4. Develop a communications plan for all key players…And don’t forget the borrowers!
Technology is only part of the solution. Having internal and external communications plans prepared before the first of August will be important.From an internal standpoint, lenders will need to educate and train all staff on the revised policies and procedures for the new workflow. Additionally, users should practice using the new system so that they’re fully up to speed on any new technology and understand how to implement TRID in advance of its effective date.
An external communications plan will also have a significant role simply because of all the people involved in a mortgage loan transaction, particularly a purchase transaction: the buyer, the seller, the loan officer, the real estate agent, the title company and the settlement agent.
Anyone who has ever purchased a home with a mortgage knows that changes, such as the water heater needing repairs or need for escrow, can occur all the way up to and including at the settlement table. In the current environment, there’s a relative degree of flexibility for the buyer and the seller to bargain for different settlement-related fees and charges all the way to the closing table. However, the new rule says negotiations need to be locked down three days prior to closing.
Buyers, sellers, and real estate agents will need to understand that there will be less flexibility built into the settlement process. Any changes made too close to the closing date may cause delays in the settlement process. A purchase contract can expire and the whole transaction could fall apart because of very strict TRID rules. So lenders need to communicate this now, not three months from now, so there won’t be any unpleasant surprises. Plan to set the right expectations on last-minute changes from day one!
5. Consider using fewer (but better) title and settlement agents.
Many lenders are winnowing down the number of title and settlement agents that they are using in the origination process, focusing on strong suppliers who can deliver accurate, dependable data electronically.
Using settlement agents that “get the new rules” and have more advanced software to interface with lenders is another step that should be considered. Remember: The biggest lenders are going a step further and doing their closings internally.
6. Don’t forget the “off ramp.”
Know the rule well. Under TRID, if any figures in the final CD wind up not being correct, lenders have the ability to correct the figures and make refunds of potentially excessive fees and charges. We call these correction measures that can be taken after closing the “off ramp.” It’s very important, particularly for small to mid-sized lenders, to be aware that they’re able to limit liability and preserve the salability of the loan if they take the “off ramp” shortly after the loan is closed.
Specifically, the new rule says that violations of “good faith disclosure” requirements for the LE may be cured if the lender takes action within 60 days of consummation (not necessarily closing). If, for example, the borrower actually pays more on the final CD than is disclosed on the LE, the lender then may refund the increased amount to the borrower and submit a new (revised) CD to the borrower.
Lenders and settlement agents should have clear understandings on re-disclosure duty and who pays the refund. That said, lenders will need to review any current LE/CD problems to determine what their “off ramp” costs could be. A recent look at ComplianceEase’s loan production statistics have shown that under current RESPA guidelines there is an error rate of 16 percent. So, be careful: the “off ramp” option could be an expensive crutch, which lenders may not want to add to the cost of future volume.
7. Remember: August 1 isn’t just the goal line–it’s also the beginning.
Lenders can’t just “set it and forget it” when it comes to compliance. They’ll need to be fluid. Ongoing vendor management will be important for banks and non-banks alike. Given the enhanced liability for TRID violations as well as new operational challenges (e.g., connectivity and data transfer), lenders may desire to shorten their lists of approved title and settlement agents. They’ll also need to reconsider their budgets: Should buyback and indemnity reserves be adjusted? How does current incidence and the cost of issuing post-closing-corrected RESPA disclosures compare with future expectations?
Large institutions began their TRID preparation two years ago. Their resources allowed them to build or implement new compliance technology, employ testing environments, and begin educating their staff on the changes to policies and procedures. Small and mid-sized lenders who haven’t had the time or resources to prepare for TRID may have some difficulty adjusting. But, as Yogi Berra said, “It ain’t over ‘til it’s over.” By taking these steps now, there is still time to be prepared by August 1.