One of the last requirements of the Dodd Frank Act still in front of the industry is the TILA RESPA Integrated disclosures (TRID).
I think all stakeholders will agree that the home loan process, which includes disclosures, has become increasingly complicated. Much of the complication has risen out of the unknown, the what-ifs and past and current behavior of the regulators and investors.
In a vacuum, disclosing could be relatively easy. By in a vacuum, I mean that only creditor fees and no other 3rd party fees or government taxes and assessments were required to be disclosed by the creditor.
I am still a little unsure how we got saddled with those requirements, when in fact, those assessments are part of a cash transaction as well.
Where is the culpability of the real estate agent? Oh well, I won’t go down that path.
Also, disclosing would be relatively simple if all the entities were the same. It would also be much simpler if a home loan were just a commodity, where all loan programs were the same, where the level of MLO expertise and integrity were all the same and all companies involved had the same cost base, government assistance, expertise and service level commitments.
But, as we all know, that is not the case.
With each regulatory turn, the responsibility for disclosing fees and loan terms, including fees that are also a part of a cash transaction or are charged by a party unrelated to the creditor, has become ever more detailed.
This detail, while good for the consumer, is also extremely information dense and difficult for someone not versed in the industry to understand. It also creates a loan for the consumer that ultimately costs more because of the risk to the creditor and the cost of compliance.
So it is my humble opinion that even though these new disclosures are better and more understandable than ever, consumers will still be faced with an incredibly complex disclosure; one which even though incorporated into only a couple of forms must take into consideration all of the above. Because of this, most consumers will still require the help of their mortgage loan originator to understand it.
I think it is fair to say that there are consumers who do not need the expertise of an MLO to assist in the process and can line up GFEs (soon to be Loan Estimate) on their own, and via the internet are able to shop with lenders anywhere in the US. In fact even the CFPB puts their pricing online, (although they do not seem to have the same disclosure requirements).
The tough part for the consumer is to be able to shop the non numerical aspect of the transactions. In the big picture, I do believe that combining the regulations and the disclosures into one set of documents will ultimately reduce the amount of disclosures, which in turn should make the numeric aspect less overwhelming for your typical consumer.
Now, I would like to point out a few of the items in the new disclosure process that will have the highest impact on the industry, as well as on the borrower. Some, if not all, will impact creditors’ current policies and procedures, technology platforms, vendor relationships, compliance needs, service level commitments, and borrower perceptions.
All creditors must use the various resources available to them to interpret the guidelines, and then create a roadmap which will allow the staff, business partners and borrowers to work within the system. There are certainly several decisions to make and policies to set.
Here are 8 vital topics for all of us to consider and set Policies and Procedures on.
1. Definition of days both for the loan estimate and the closing disclosure.
Even though it would appear easy, these two operate under different timing conventions. Creditor business days are used for the LE and federal calendar days are used for the CD. The latter is easily defined but business days are not so readily defined. The creditor may be working in wholesale whereas a Broker is open for the majority of their business activities on Saturday and their holiday schedule may be different.
2. Are all of your current software vendors ready for LE delivery, CD delivery, compliance checks, archiving, proper audit trails documentation, and delivery methods?
How well will current systems integrate with any new systems? How will you get training out for your business partners including compliance with RESPA, TILA, QM, HOEPA, ECOA, etc. Because as most of you know, even some ECOA considerations are intertwined into the new disclosures.
3. At what point is a change of circumstance (COC) provided?
If it does not exceed the 10% tolerance bucket, do you re-disclose and does that re-disclosure reset the base for the 10% tolerance?
4. Who initiates and performs the COC?
Is it the branch, the broker, the MLO, operations, a combination of the above, or just the compliance department? If it is not a valid COC and/or is in the 0 or no tolerance bucket does the P and P call for immediate disclosure? Do you wait and disclose all at once on a final LE and then put out a CD? Do you just include the changes and provide them all in the CD? Finally, does the P and P change based on the amount of the change and effect on APR or loan attributes, etc.?
5. How early in the process can a CD be disclosed? Can you issue a CD before the loan is locked?
Obviously the borrower will not want ten days to shop as they are requesting closing docs. Does the delivery method used change based on the type of transaction? How do you document that the borrower had the appropriate time to review the CD, especially if there was a change that did not trigger a new three day review? Remember, if there are minor changes the borrower may request to see the new CD one day prior to consummation.
6. Who will deliver the CD to the borrower?
It appears that the seller will need to be provided a CD as well. Is the creditor taking that on and will the closing agent still supply a closing statement in addition to the CD to the buyer and seller? How is this communicated to a broker in a TPO transaction? There continues to be collaboration between the closing companies and the lending community as we work through the what-if’s.
7. What procedure will be put in place to manage all changes done after consummation and closing?
What if a closing agent is provided new fees, credits, or charges that were not available at closing? What processes are in place to indicate no additional changes can be made to the CD during the proper time periods after closing?
8. What controls will you put in place that will allow you to test your compliance?
This should include a level of vendor management for calculations, timing requirements, adequacy of audit trails, general testing, and monitoring of your policies to ensure they are being followed consistently.
Finally, as we are all aware by now, this regulation on the surface seems simple, such as a few changes that integrate the GFE and TIL. In fact, there is a huge shift that has compound effects that we will be working through for potentially years to come. Some of the guidance will only be fully interpreted by future audits and court cases brought on by creditors, regulators, and trial attorneys.
I believe the best way to proceed is to complete a well thought-out, well designed and consistently monitored compliance plan. This plan must incorporate all of your software providers, vendors, and business partners. When the regulators and attorneys come knocking (and they will), you must be able to demonstrate that you are in compliance. Having documented policies and procedures, and complete audit trails will be your best friends. You need to hold each company that you have a relationship with to the same level of dedication, because at the end of the day the rules of TRID hold the creditor and possibly their employees accountable, not their business partners or vendors. What guidance each creditor puts around these areas will dictate who they are, how important compliance is to them, and what level of long-term success the company will enjoy.