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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2016

Absorbing the TRID Blows

Although the implementation of new disclosure regulations was staggering, it provides a learning experience

Absorbing the TRID Blows

It’s been a difficult few months for the mortgage industry. Facing new regulations from the Consumer Financial Protection Bureau (CFPB), the industry scrambled to prepare, and picked up several bumps and bruises along the way.

In the aftermath of implementing those regulations, many mortgage professionals may have found themselves dinged up — but they’re still standing. And now before moving onto the next fight, the industry players have a chance to look back and make sure they learned the appropriate lessons from this latest regulatory bout.

The expression “set it and forget it,” as popularized by infomercials in the 1990s, now seems to be the mantra for the mortgage industry as we continue to assimilate new regulations. This was certainly the case with the recent implementation of the new Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rules. For nearly two years, lenders and their vendors spent countless hours and much of their technology budgets on new TRID solutions and redesigning workflows.

Now that the Oct. 3 TRID-implementation deadline has come and gone, and the mortgage industry is back to business as usual, it’s worth looking back to consider why the implementation was so difficult, what the industry could have done differently and what can be done better moving forward.

Studying these will help the industry learn from its successes and failures, as well as help establish best practices for improving TRID processes and implementing future regulations.

What went wrong?

Although the industry certainly decried the enormity of the implementation task at hand (new timelines, new forms, new tighter tolerances and much more), it possibly wasn’t taken as seriously, early on, as it should have been. Deep down, many people may have believed someone else — such as a vendor or document company — would solve the issues, or at least that regulators would grant a lengthy grace period.

How lenders of different sizes approached the challenge also may have played a factor in the scramble that took place ahead of the deadline this past year. To some extent, solving for TRID became a tale of two markets: Large lenders, many of which spent years building or customizing their mortgage-compliance technology specifically for their businesses; and small to midsize lenders, many of which started later and relied on vendors for out-of-the-box technology.

Then there was the buy-or-build decision. The jury is still out on customized solutions, but the verdict is in on the vendor community, and it’s not entirely positive. Some vendors had poorly thought-out solutions and last-minute bugs, or they didn’t address issues until after TRID’s effective date.

Preventative and detective controls improve not only customer

satisfaction, but also regulatory compliance and the bottom line.

This obviously caught the attention of CFPB Director Richard Cordray. At this past October’s Mortgage Bankers Association Annual Convention and Expo, Cordray said, “Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date. It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.”

Are you compliant?

At the most basic level, TRID requires lenders to provide borrowers with detailed information about the true cost of their mortgage, the components — such as fees, interest and taxes — that make up the cost, and to make this information available so there are fewer surprises at the closing table.

There are basically two approaches that lenders and vendors can take to assure that they are complying with the rule. They can rely on predictive controls that prevent them and their suppliers from inputting the wrong data, calculating costs incorrectly and missing deadlines. Alternatively, they can use detective audits to monitor the quality and timeliness of the information they are delivering.

In the mortgage industry, preventative and detective controls improve not only customer satisfaction, but also regulatory compliance and the bottom line. Preventative solutions assist lenders in identifying and correcting eligibility issues or preventing data errors from happening in the first place. For errors and issues that can’t be prevented, detective solutions can help by auditing TRID-disclosure timing, changed circumstances and fee tolerances across all disclosures to determine if changes are allowable under TRID or if revising the disclosure is permitted or required.

When it comes to TRID compliance, both approaches are necessary.

What have we learned?

Several important lessons came out of TRID implementation. Among the most important are that everything is likely to be more complicated and time-intensive than originally thought, and those who delay in adopting the best-available technology will regret that decision in the future.

Why were the largest lenders more ready for TRID? They had the luxury of greater planning, more resources to focus on the issue and more time to communicate and educate their partners and vendors.

Historically, the mortgage industry has been slow to adopt the newest technologies. Many mortgage-technology systems used within the industry are not using Mortgage Industry Standards Maintenance Organization (MISMO) Version 3.3. They use workarounds, which is unfortunate because MISMO 3.3 is better-suited than earlier versions for working with multiple disclosures, as required for TRID compliance. Although participation has grown significantly over the last year and a half, it hasn’t been enough to make MISMO 3.3 a fully-embraced industry standard.

That, however, might change in the near future. In 2017, Fannie Mae and Freddie Mac will begin requiring lenders to submit their loans using the Uniform Closing Dataset (UCD), which uses the MISMO 3.3 data format. To help prepare for the UCD delivery requirement, the government-sponsored enterprises highly recommend lenders work with their vendors and service providers now to implement and use the UCD.

What comes next?

Down the road, even more will be expected of lenders under TRID. One aspect of the rule has been overlooked by some solutions. According to private-sector legal counsel, TRID requires lenders to monitor all fee changes on all Loan Estimate forms and not just compare the final Loan Estimate and the final Closing Disclosure. According to the CFPB’s published TRID examination procedures, a lender “may use a revised estimate of a charge instead of the amount originally disclosed if the revision is due to one of the reasons” specified in the TRID rule.

Lenders, therefore, need to have a solution that can monitor all Loan Estimate and Closing Disclosure delivery-timing sequencing, fee changes, reasons for revising fee disclosures and change tolerance, if any, between those fees that were disclosed in “good faith” on a Loan Estimate and those on the Closing Disclosure. The solution needs to retain evidence of compliance — TRID places substantial data-retention requirements on lenders — and be easily accessible to regulators and examiners.

A typical examination at the state level, and even at the federal level, can require at least two to three years’ worth of data. Data includes not only the Loan Estimate and Closing Disclosure, but any other documents or communication records that impact those disclosures. For example, if a settlement company had a last-minute change on a particular fee, such as the title insurance fee, the lender would be responsible for reissuing the Closing Disclosure. The lender, however, would need to have documented evidence on the fee adjustment, whether it’s an e-mail or a collaboration platform record, and it would need to be easily accessible if an examiner checks to see what caused the fee change or tolerance error. 

Down the road, even more will be expected of lenders under TRID.

An average set of initial disclosures, including all state-specific documents and agency requirements, combined with the closing package, can be anywhere between five and seven megabytes. Capturing and storing all of the disclosed and revised documents, such as the Loan Estimate and Closing Disclosure forms, can easily require each mortgage loan file to be 10 megabytes. Capacity is not the issue, but logically categorizing and storing all of these documents along with the electronic data so that it is contemporaneously accessible is even more vital going forward because of TRID.

•  •  •

Over the past few years, there have been a lot of patchwork solutions — not just with TRID, but also with other previous rule implementations, such as the Qualified Mortgage requirement in 2014 and RESPA reform in 2010. In working with vendors, there can be a strong tendency to bandage over problems as a bridge to provide what is necessary to get by in the short term. Although bandages can be a helpful interim solution, they don’t address larger issues and can result in a continual battle to stay afloat.

If lenders and vendors have only addressed TRID by adding short-term fixes, such as new data fields or custom codes to a legacy loan origination system, they may find themselves disappointed and frustrated in the coming months. Something as big as what the industry just went through will require a holistic re-assessment to ensure long-term compliance.

Winston Churchill once said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” When it comes to TRID, that is exactly right. 


 


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