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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2017

Overcoming Bifurcated-Disclosure Confusion

Real-time collaboration helps relieve issues with seller’s forms

 At a Glance

Know Before You Owe

The Consumer Financial Protection Bureau’s Know Before You Owe rules are designed to help consumers understand their loan options, shop for mortgages that are best for them, and avoid costly surprises at the loan-closing table. The consumer-disclosure rules, also known as TRID, replaced four disclosure forms with two new ones – the Loan Estimate and the Closing Disclosure. The new forms are designed to be easier to understand and easier to use. The rules also require that the borrower gets three business days to review the Closing Disclosure and ask questions before closing on a mortgage.

Source: Consumer Financial Protection Bureau

It’s hard to believe that this time last year, the Consumer Financial Protection Bureau’s (CFPB’s) “Know Before You Owe” consumer-disclosure rules, or TRID, had only been in place for a little over six months. Mortgage originators at that time were still adjusting to the new Loan Estimate and Closing Disclosure forms mandated under Know Before You Owe — especially the requirement to deliver the Closing Disclosure at least three days before loan closing.

Even now, some mortgage originators are still struggling to find their footing. According to recent figures from Ellie Mae’s Origination Insight report, time to close reached 51 days this past January, which was higher than any month in the previous year.

One factor that continues to introduce confusion, time and expense into the mortgage closing process is the frequent need to issue separate buyer and seller versions of the Closing Disclosure document. These bifurcated forms are sometimes called the “buyer’s form” and the “seller’s form.”

Bifurcated approach

Know Before You Owe specifies that both the buyer and seller must receive a Closing Disclosure with details of the mortgage transaction. While the seller’s disclosure may be delivered at any time up to the closing, the borrower’s disclosure must be delivered at least three days prior to closing. In many cases, the lender (or, occasionally, the settlement agent) will generate a single Closing Disclosure document and deliver it to both the buyer and the seller. This is a combined buyer/seller Closing Disclosure.

At other times, the settlement agent may have concerns about protecting the seller’s privacy and may choose to limit how much seller information is disclosed to the buyer. In these instances, a bifurcated approach may be used, wherein the lender prepares the buyer’s version of the Closing Disclosure (the buyer’s form) and the settlement agent prepares the seller’s version (the seller’s form).

The bifurcated approach is most commonly used when the seller has liabilities that must be disclosed to agency investors that are not relevant to the borrower. Suppose the proceeds of a home sale will be used to pay off not just the seller’s first mortgage, for instance, but also a second mortgage as well as an additional lien. If one of these debts is not properly paid off, the property could become encumbered. Although title insurance generally protects lenders against property encumbrance related to title defects, Fannie Mae, Freddie Mac and other investors require disclosure of a seller’s liabilities as an additional safeguard before purchasing loans.

Settlement agents may choose to produce a separate seller’s form for any reason, but concerns related to disclosure of private information, such as seller liabilities or the seller’s mailing address, are most common.

Many mortgage originators are already frustrated by the added time and cost associated with a bifurcated Closing Disclosure process.

Certain states and local municipalities (California is one example) also have strict privacy laws limiting the kinds of consumer information that can be shared without written consent, which may motivate settlement agents in these regions to prefer a bifurcated approach.

Current procedure

The Know Before You Owe consumer-disclosure rules as written permit this bifurcated approach to the Closing Disclosure — with some caveats. The buyer and seller’s forms must show identical fees and use the same fee names. Additionally, they must bear the same issue date — even if they are not physically delivered to their respective recipients on the same date.

This is because mortgage regulations define “issue date” as the date the disclosure is delivered to the consumer. Because most organizations interpret “consumer” to mean the buyer, the date of issuance to the buyer is used on both versions of a bifurcated Closing Disclosure. Given the CFPB’s tricky rules around calculating the three-business-day waiting period — not to mention the requirement to issue a new Closing Disclosure if changes occur — it’s easy to see how a bifurcated approach increases the probability of compliance missteps, which is a serious concern for mortgage originators.

True, it may be the settlement agent who typically produces the seller’s form, but the CFPB holds lenders accountable for ensuring the form’s accuracy and retaining the loan file. Additionally, the CFPB mandates that lenders are responsible for ensuring the regulatory compliance of third-party service providers — including settlement agents.

Further complicating the matter, settlement agents sometimes choose to safeguard sensitive seller information by simply not conveying it to lenders until after closing. Since lenders can’t resell loans to Fannie Mae or Freddie Mac without disclosing seller liabilities, collecting this information from the settlement agent becomes an extra item on the post-closing checklist. This is bad news for lenders, who know all too well that post-close work is an unprofitable and time-consuming endeavor.

A way forward

A better approach involves promoting meaningful collaboration between loan originators and settlement agents using a platform that supports real-time communication and automated notifications. Ideally, a determination should be made upfront as to whether a combined or bifurcated Closing Disclosure document will be issued. Once that determination is made, the parties should work together closely to create both forms using identical fees and fee names.

This process is made much easier if the forms are generated by the same document engine or platform. Real-time notifications that alert both parties when a change is made to either form can eliminate the compliance risk of mismatched forms and ensure disclosures are reissued to both borrower and seller in a timely fashion.

In this scenario, the settlement agent can feel confident that the seller’s private information is protected, because coordination with the mortgage originator is clear and documentable. The originator, in turn, benefits from reduced compliance risk and a more streamlined disclosure process that eliminates extra post-closing effort and expense.

GSE assist

The same technology that enables loan originators and settlement agents to collaborate on Closing Disclosures in real time also will make it easier for lenders to furnish Uniform Closing Dataset (UCD) data to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in the required Extensible Markup Language (XML) format. Effective Sept. 25 of this year, both GSEs will require lenders to submit an XML UCD file along with a copy of the Closing Disclosure in a Portable Document Format (PDF).

For the first year, the GSEs will require submission of borrower data only. In other words, lenders must submit a PDF copy of either the combined Closing Disclosure or, if a bifurcated approach is used, the buyer’s form along with an XML file containing the corresponding UCD data. Beginning in third-quarter 2018, the GSEs will require submission of both the buyer’s and seller’s forms and associated UCD data.

The GSEs are encouraging lenders to begin submitting both borrower and seller data well in advance of the 2018 mandate to test their processes. Collaboration platforms that support the latest MISMO data standards, upon which UCD is based, can make GSE data delivery easy through the use of built-in import and export tools for the UCD XML file.

To date, the CFPB has done only limited auditing of loan-originator compliance with the Know Before You Owe consumer-disclosure rules. But with initial UCD enforcement around the corner and the requirement to disclose seller liabilities coming hard on its heels, it could be only a matter of time before we begin seeing stricter regulatory enforcement.

• • •

Many mortgage originators are already frustrated by the added time and cost associated with a bifurcated Closing Disclosure process. Those who choose to ignore the nagging symptoms of process inefficiency will only feel the pain intensify after UCD enforcement.

Making the investment in real-time collaboration can provide immediate relief for a problem that’s not likely to go away any time soon. After all, the GSEs have communicated no intention to restrict the use of a separate seller’s form. With the right technology, loan originators and settlement agents can work on their separate forms in lockstep, limiting their compliance risk and ultimately enabling a faster and less-expensive closing and post-closing process.


 
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