Enter your e-mail address and password below.

  •  
  •  

Forgot your password? New User? Register Now.
   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2016

TRID is a Game-Changer

New regulatory standards are propelling a major shift in priorities for mortgage originators

r_2016-01_Potter-TRIDchart

In the run-up to the implementation of TRID, some mortgage-industry observers described the new consumer-disclosure regulations as a paradigm shift. Now that TRID has been in force since its official launch this past October, it’s fair to say those experts were correct. TRID is a paradigm shift — defined as a fundamental change in approach or underlying assumptions.

The underlying assumption that drove the mortgage industry for many years was that the purchase-and-sale contract serves as the foundation of the homebuying transaction. The contract, and the closing date established by the pact, set the expectations for everyone involved in the transaction, including the lender and its timeline and process.

TRID shifts the process from a contract transaction to a financing transaction in which the lender is in charge — with all the potential liability that entails. That change, it turns out, has lasting implications that were not felt in full until TRID was put into practice this past fall. The new timelines and demands for certainty embodied in the TRID Loan Estimate and the Closing Disclosure forms are forcing a big adjustment within the industry. In that context, it’s worth noting that adjusting to new expectations is even more difficult than adjusting to new documents.

Those new expectations, however, also drive a new approach. Following are several examples of the changes that mortgage lenders will have to embrace under TRID — the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule.

  • First, the accuracy of initial disclosures, fee estimates, loan information and changed circumstances will be judged by regulators in light of “the best information reasonably available” and the “due diligence” performed.
  • Second, TRID encourages lenders to leverage technology and lays the foundation for the mortgage industry to become even more dependent on technology in the future. 
  • Third, the execution of TRID only intensifies vendor-management pressures for mortgage originators.

The test

It is unclear at this point how some of TRID’s new standards will be applied in practice. What is known, however, is that the “T” in TRID stands for the Truth In Lending Act, a violation of which opens a lender to significant liability. As a result, the impact of the new TRID standards on the industry appears to be equal parts unknown and critically important.

TRID makes clear that the mortgage lender is required to disclose all items to the homebuyer according to the “best information reasonably available.” What’s deemed reasonable by regulators seems to be a call that will be made based on the thoroughness of the “due diligence” that is performed.

Over the last few years, the meaning of due diligence has become all too familiar to companies and to mortgage lenders that sell loans and servicing rights. Although industry norms will develop over time, mortgage lenders under TRID are committing more resources (due diligence) to assuring accurate information is issued to prospective homebuyers as early as possible in the process. This has the simultaneous effect of being good for consumers in terms of information and transparency as well as a more costly practice — with lenders taking on additional labor and risk.

Technology

Mortgage lenders that successfully navigated TRID’s implementation and initial execution without incurring too much damage likely relied heavily on technology to do so. As the nuances and operational challenges of TRID came into view leading up to its Oct. 3, 2015, launch, lenders turned to technology solutions for everything from estimating condo-association review fees to producing closing-disclosure information. And this is just the tip of the iceberg. Loan-origination systems were forced to add hundreds of data fields and functionality to perform the thousands of calculations necessary as a loan application moves through the pipeline.

Document-management systems have been invaluable for the correct placement, rounding and presentation of fees and figures. Service-provider vetting and management systems are now employed by mortgage lenders to assist in all areas of TRID — from fee determination to ensuring a responsible party is closing the loan. TRID also was a catalyst for action for mortgage originators who had not yet adopted a policy related to the American Land Title Association’s best practices — an initiative to assist settlement- service providers, including lenders, in adapting to the stricter regulatory environment in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In a post-TRID world, technology will only become a greater differentiator among mortgage lenders. Some lenders select technology solutions to proactively solve problems and increase efficiency when a new approach challenges underlying assumptions. Other lenders accept technology only when it has been implemented by a competitor or proven too obvious not to use. In the past, this might have only spelled success or failure in the competitive market.

Now, the Consumer Financial Protection Bureau (CFPB) and its regulatory partners at the state level have dramatically increased expectations around cybersecurity, vendor management and technology-based solutions to enhance the customer’s experience. It is not a secret that the CFPB leadership, for instance, has been extremely supportive of eClosings, which can only be accomplished with the adoption and expense of additional software. The move toward technology-based solutions in the mortgage industry will only increase going forward, propelled by all stakeholders, now that TRID has shown lenders what technology can do for mortgage businesses.

Vendor management

TRID took the already hot topic of vendor management and threw gasoline on the fire, so to speak. One of the first things many mortgage lenders did in the wake of TRID was to re-examine their settlement-service provider policies. Even those that didn’t make an overt policy change now have the thought process in place, and the mandate from CFPB, to apply more rigorous vendor-management requirements. 

Lenders that offer Federal Housing Administration (FHA) 203(k) rehab construction loans are now parsing the new FHA handbook to determine where the approved consultants, inspectors and related service providers fit in the TRID vendor-risk tiers. Other service providers, like settlement and title companies, have added “compliance fees” or “technology fees” to their itemized fees. Mortgage lenders must decide whether to allow those types of charges.

One aspect of TRID that has implications going forward is the way the CFPB treats borrower-selected vendors. Because fees charged by those providers are considered no-tolerance items (or fees not subject to a limit) in the TRID disclosures, it is tempting for lenders to avoid any type of vetting or approval. On the other hand, the fact that such vendors are not subject to fee limits does not mean the lender’s responsibility to protect the consumer from risk, even self- imposed risk, has been alleviated. 

Along those particular lines, it gets even more complicated if a consumer’s ability to shop for settlement-service providers is exercised. Under TRID, a lender generally can select all settlement-service providers, not allowing the consumer to shop around, which results in zero tolerance for fee changes over the course of the loan process. If the lender allows the borrower to shop for settlement services, it also must provide the borrower with a written list of potential providers — although the consumer has the right to select providers not on that list. In the case where shopping is allowed, there is more flexibility for the fees to vary during the process, but the lender also must be able to document that the consumer (not the loan originator) chose the providers. Some lenders have added disclosures and acknowledgements to their document packages to ensure the consumer is informed of the rules in that area.

In a post-TRID world, the oversight, monitoring and management of vendors and consumer consent are guaranteed to continue to increase. For many on the business side, this is not a wholly bad development. The time and effort it may cost a mortgage company to comply with new vendor procedures and reporting could be vastly overshadowed by the cost savings achieved by culling underperforming or risky service providers from the ranks. At the same time, it does represent another compliance-related requirement, driving up the cost and turn times in the typical mortgage transaction. The bottom line is that if whom you worked with was important before TRID, it is an even more critical decision post-TRID.

Best practices

It is easy for compliance folks and sales people to write at length about the new liabilities, risks and obstacles created by TRID. In reality, much of the rule drives lenders to where they should have been already. Among the best practices TRID helps to encourage in the mortgage industry include the following: 

  • Routinely evaluatingour pipelines for efficiencies and pick-ups;
  • Providing informationto the consumer early and often;
  • Communicating frequently with our employees and our service providers; and
  • Setting proper expectations for all involved.

If anything, the mortgage lenders that were already doing it right will now have to find new, innovative ways to set themselves apart in the coming year. Process- improvement solutions and new marketing technologies should gather steam in the year ahead. Lenders are turning their attention to the consumer experience in new and interesting ways.

•  •  •

The transition to a post-TRID set of assumptions — the paradigm shift — is now in play within the lending community. The same shift soon will be affecting Realtors, settlement providers, technology vendors and ancillary industry partners. The primary group left to weigh in on the change is consumers. 

Time will tell whether the new Loan Estimate and Closing Disclosure forms mandated by TRID will be embraced by consumers as tools that advance transparency and enhance loan shopping, or whether the documents will simply be signed and ignored by most consumers — viewed as little more than a paperwork byproduct of regulatory overreach. 


 


Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Scotsman Guide Digital Magazine
 
 

Related Articles


 
 

 
 

© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy