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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2017

Alleviate Disclosure Pain

Collaborating early and often can ease fee-estimation concerns

Alleviate Disclosure Pain

It’s amazing how much mortgage disclosures have changed in just two years. Back then, responsibility for preparing initial and closing disclosures was clearly delineated and relatively pain free. Originators completed the Good-Faith Estimate (GFE) and Truth in Lending (TIL) initial disclosures, and settlement agents handled the HUD-1 Settlement Statement.

In addition, the tolerance limits for how much a given fee could change between the two documents were clearly defined and readily understood by all parties. There were very few headaches. That was all before implementation of the TILA-RESPA Integrated Disclosure rule, or TRID.

The TRID consumer disclosure rules made a number of changes to how disclosures are treated. For one, the tolerances that apply to each fee became more difficult to discern and, in some cases, stricter. Originators also found themselves responsible not just for curing any discrepancies between the new Loan Estimate (LE) and Closing Disclosure (CD) forms, but also for paying regulatory penalties in the event of a TRID violation.

It wasn’t long before originators became the party most likely to create both disclosures — even though virtually all closing costs, other than origination fees, are determined by third parties. These third-party charges include appraisal fees, title company charges, escrow reserves and prepaids like homeowner’s insurance and taxes, none of which can be controlled by the originator.

Illogical as it may seem, originators often populate both the LE and the CD without any real-time coordination with the appraisers, settlement agents and other third-party vendors who are best positioned to calculate closing costs. Instead, originators rely on a variety of tools, including humble worksheets, web-based fee calculators and fee-estimation engines integrated into their loan origination systems (LOS) to determine these costs.

This insular, “do-it-yourself” approach purports to protect originators from exposure to third-party errors. In truth, however, it can easily reduce the accuracy of fee estimation and may unwittingly expose originators to unnecessary loan costs and compliance risk. It also can have a substantial negative impact on the borrower experience.

The better approach is to coordinate with third parties closely, early and often using modern tools that make such collaboration painless, secure and affordable. Consider Section E of the Closing Cost Details, which covers transfer taxes and other government fees. This is a place where originators could save themselves a lot of headaches, risk and unnecessary costs by collaborating more closely with third parties earlier in the mortgage process.

Garbage in, garbage out

To estimate Section E fees, originators typically use a web-based fee calculator or third-party fee estimation service. The problem with this methodology is twofold. First, the fees estimated by calculators and vendor services are only as accurate as the information they receive from the originator. The information required by a given fee estimator varies, but typical originator inputs include information about the property’s location (state, county and city), the number of pages to be recorded and the purchase price or new debt amount.

These calculators often are pre-populated with “standard” or default values for certain data fields, which further dilutes the precision of the estimation process. Originators often calculate recording fees based on a 30-page filing, for instance, even when the actual page count is higher or lower.

Second, this approach depends on the accuracy and timeliness of third-party fee databases, which is an unnecessary gamble when more reliable data can be obtained straight from those closest to the source. The trouble is that originators don’t always have a clear idea of the final number of pages that will be recorded after closing.

Settlement agents, who work closely with their local recording offices and understand jurisdictional filing requirements, are much better equipped to answer this question. Yet instead of getting fee estimates straight from the horse’s mouth, many originators still sidestep settlement agents to get fee data from a middleman — and pay for the privilege.

Virtually all closing costs, other than origination fees,
are determined by third parties.

Stale data also is a concern when it comes to fee-estimation calculators and services. A settlement agent who works with a recording jurisdiction on a daily basis will have much more up-to-date fee information than a database that is updated less frequently. A few top-shelf fee estimation services offer real-time fee monitoring, but they often consider this a premium feature and charge originators accordingly.

So, what is the alternative? Prior to TRID, it was common practice for an originator to simply pick up the phone or shoot an e-mail over to the settlement agent to request the page count and other information needed to estimate fees. Nowadays, most originators recognize the pitfalls of these communication mediums, which are neither secure nor auditable. Additionally, unchecked voicemail and e-mail filtering can result in missed messages that add unwanted and costly time to the origination process.

Cost of inflation

In lieu of tracking down the settlement agent for an exact figure, originators frequently rely on fee engines to inflate or pad estimates to ensure the amount on the LE is higher than the final charge on the CD. TRID’s tolerance provisions only apply to fee increases, not decreases — and besides, most originators prefer to credit or refund consumers for over-estimated fees rather than charge them more at the closing table. They might not prefer it, however, if they realized the true cost of this practice.

In a best-case scenario, an originator will succeed in determining final fees in time to list them on the CD. If any final fees fall outside TRID’s tolerance limits, the originator can simply credit the appropriate amount back to the borrower as a lender credit. All too often, however, originators do not obtain final fees until after the closing. This is especially true of those pesky Section E recording fees.

Here’s where the cost of imprecise fee estimation starts adding up. If the final fee turns out to be less than was estimated, as is often the case due to fee padding, the originator must refund the customer — even if it’s only a dollar or two. Settlement agents, who typically handle borrower refunds on behalf of originators, have reported that the cost of cutting a check, mailing it to the borrower, and then following up when it inevitably ends up in a low-priority to-do pile is often more than the refund itself.

Saddling settlement agents with the cost and frustration of handling thousands of miniscule refunds is hardly advantageous to the originator-settlement relationship. Of course, if the final fee is higher than was estimated, the settlement company must eat the difference itself. In either case, originators must issue a revised CD and ensure that copies are issued to both the borrower and the servicing file in accordance with strict timing requirements.

Let’s not forget that refunds and redisclosures make for a messy and confusing borrower experience. Repeat and referral business are the cornerstones of any originator’s or settlement agent’s business model. Post-closing hiccups can leave a bad taste in a borrower’s mouth and diminish even an otherwise flawless lending experience.

Cutting out the middleman

The solution to this expensive conundrum lies in settlement-originator collaboration. Modern collaboration portals already exist that enable originators to share, receive and validate documents and data directly with their network of settlement agents.

By getting fee information straight from the source, in real time, originators can disclose exact fees on the CD with confidence, completely avoiding the hassle of cutting checks and re-issuing the CD after the loan closes. It’s much more efficient and secure than phone or e-mail, and leading platforms even automate the creation of an audit trail that tracks activity along the way.

Saddling settlement agents with the cost and frustration of handling thousands of miniscule refunds is hardly advantageous to the originator-settlement relationship.

Real-time CD collaboration has proven so successful and cost-effective that collaboration technologies are already evolving to deliver efficiencies further downstream. The latest technologies now allow originators and settlement agents to share post-closing information and communicate the status of recorded documents.

Eventually, these centralized platforms may offer upstream efficiencies as well, making it easier for settlement agents to weigh in on fee estimation during preparation of the LE and eventually eliminating the impetus for originators to pad fee estimates altogether.

• • •

It is ironic that automated fee estimation, often selected for its presumed efficiency and independence from third-party inputs, can create more downstream compliance headaches and clean-up than simply communicating with third-party vendors. Automation itself is not the problem. It’s just that we should be automating originator-settlement communication, not the estimation of fees. Electronic collaboration keeps assumptions out of the equation and sources the information from those most knowledgeable, creating the efficiency, transparency and control needed to reduce costs and deliver a positive consumer experience.


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