As the mortgage industry approaches the one-year anniversary of the October 2015 implementation of the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosure rule, there is little doubt that the impact is still being felt.
Early reaction from the CFPB suggested that the industry’s reaction to TRID was akin to the unfounded panic that surrounded Y2K, while other reports demonstrated the impact of TRID on home sales, mortgage closing times, and on borrowers themselves.
One of the earliest reports about TRID’s impact on the loan process showed a startlingly high error rate in the first mortgages to be written post-TRID.
That report, from Moody’s, showed that TRID compliance violations were found in more than 90% of the loans reviewed by several third-party firms after TRID’s implementation.
It should be noted that most of the errors identified in the Moody’s report were merely “technical” in nature, and not serious.
But a new report from ACES Risk Management (or ARMCO) shows that the rate of serious mortgage defects is rapidly rising, and has been ever since TRID became the law of the land.
The report from ARMCO, a provider of financial quality control and compliance software, is its first Mortgage QC Industry Trends report, which breaks down loan defects using the Fannie Mae loan defect taxonomy to identify where defects are occurring.
The report is derived from reviewing post-closing quality control data from more than 60 lenders, and covers more than 50,000 unique loans.
And while the dataset is not all-encompassing, the results of ARMCO’s review provide some potentially alarming insight into the impact of TRID on lenders.
The verdict? Serious loan defects rose during the first two quarters after the implementation of TRID, the fourth quarter of 2015 and the first quarter of 2016.
According to ARMCO’s report, the overall industry critical defect rate trended downward for most of 2015, falling to 0.77% in the third quarter.
Then TRID happened. After that, the defect rate began to climb in the fourth quarter, reaching 1.21%. The trend then continued into the first quarter of this year, with the critical defect rate increasing to 1.92%.
And according to ARMCO’s analysis, the rise in defects is almost entirely from legal/regulatory/compliance defects, otherwise known as TRID.
“The implementation of TRID in the fourth quarter of 2015 is directly responsible for both the increase in compliance-related defects and the critical defect rate for the entire industry, as defect rates for all other categories continue to decrease,” said Phil McCall, chief operating officer for ARMCO.
According to ARMCO’s report, legal/regulatory/compliance defects made up 25.9% of all defects reported in 2015, while in the first quarter of 2016, they accounted for 50%, an increase of 93%.
In its review, one key issues seems to stand out as a reason for a compliance defect – the Closing Disclosure form.
“A key deficiency in this category that has been identified by many lenders is errors and omissions on the Closing Disclosure. A large number of these defects are directly attributed to the creation of the CD by lenders rather than by settlement agents, who historically had performed this function,” ARMCO noted.
“It became apparent in early January that lenders’ closing departments were ill equipped with knowledge and a fundamental understanding of the complete settlement process, which includes Realtors and sellers as participants in many transactions,” ARMCO continued. “This was a new fundamental process industry-wide and in hindsight, many lenders feel they should have partnered with their primary settlement agents to assist with the learning curve prior to implementation.”
Previously, before TRID that is, errors in the loan package documentation category were in the top category in terms of causes of critical defects. In 2015, for example, 35.3% of the defects came from loan package documentation. That figure fell to 26.4% in the first quarter of 2016.
“Based upon our discussions with many lenders, corrective action planning has been at the heart of reducing the defects associated with loan package documentation,” ARMCO said in its report. “Lenders have been able to systemically identify the root cause of these defects and establish touch points through the manufacturing process to ensure the required documents are properly identified and included in the final loan package.”
While TRID-related errors are on the rise, McCall believes that there is a light at the end of the tunnel.
“Prior to Q4 2015, lenders were doing an excellent job of driving down critical defect rates, and once the industry begins to implement corrective action plans for TRID-related defects, we expect to see the overall and compliance critical defect rates to trend downward once more,” McCall said.