PUBLISHER’S NOTE
As the independent news source for the industries on all sides of the real estate process, we often are asked about important issues affecting the landscape. The TILA-RESPA Integrated Disclosure rule has obviously been on everyone’s thoughts, and the closer we get to the deadline, the more questions we’ve received.
Will we be ready? Are the systems in place? Will the CFPB give us more time after Aug. 1?
As your educational resource, October Research, LLC, has reached out to our sources in the industry to get a feel for where we stand. Some things we have answers for now, other things we will continue to find answers to over the next five months. We reached out to a number of LOS companies to gauge their status, but did not get much response. We know that solutions will be available come Aug. 1, but will they be integrated and allow everyone to be as productive and effective as they can be?
HUD granted a restrained enforcement period the last time the mortgage disclosures changed in 2010, and just extended compliance time for new reverse mortgage rules, in part because of “a delay in delivery of certain system enhancements.” Although the CFPB has talked often about the 21-month implementation window for the rule, is there room for the bureau to follow HUD’s lead and grant leniency as the deadline nears? Stay with us for the answers to these and many more questions.
Since the Consumer Financial Protection Bureau (CFPB) issued the TILA-RESPA Integrated Disclosure (TRID) rule in November 2013, implementation of the new Loan Estimate (LE) and Closing Disclosure (CD) forms — and the resulting transformation of the mortgage transaction process as we know it today — seemed far enough off on the horizon for people to breathe easy.
When the industry requested a long lead-up to implementation to absorb the rule’s impact and roll out the technology needed to support compliance, the CFPB conceded and declared Aug. 1, 2015, as D-Day. In the 16 months since the bureau set that deadline, most of the education and training efforts have been led by the title insurance and settlement service industries. In recent months, other providers, such as Realtors and mortgage brokers, have joined in that effort.
As the implementation date now is less than five months away, it appears most of the industries that will be impacted by these changes have deployed implementation plans and are setting strategic deadlines. But are lenders — upon whom the CFPB has bestowed the responsibility and liability for the timing, completion and accuracy of the new disclosures — where they should be in the training and preparation process at this moment?
Some are deeply concerned that many loan origination systems (LOS) or software platforms will not be ready for rollout until the second quarter, and as a result, many lenders will not be ready or able to take loan applications after Aug. 1.
“I have been traveling a lot in recent months to industry conferences and meetings and speaking to lender clients about their readiness and software implementation, and I keep hearing the same story — that this is a huge change and their systems and software are nowhere to be seen or tested,” said Zack Boonjue, chief operating officer with PPDocs Inc., a law firm in Arlington, Texas, that specializes in the preparation of real estate documents. “I’m afraid it’s going to be a mess on Aug. 1.”
Others are more optimistic that lenders are beginning to prepare for what was never going to be an easy transition, no matter how much time they were given to prepare for it or other regulatory burdens on their plates. Morton W. Baird II, an attorney whose law firm represents credit unions throughout Texas, conceded: “I know of no one that is going through training right now. It is a change the likes of which I have not seen in my career. It is a major undertaking and expensive process.”
But he noted, “I am very optimistic that ultimately, we will end up with a great new system and look back and say, ‘that was painful, but it sure was worth it.’
“We have no choice,” Baird added. “The CFPB has said it will not postpone implementation, and they gave us plenty of time to think about it.”
Software slow to come together
As lenders of all sizes have been grappling to digest, understand and prepare to implement the TRID rule, software vendors have been working hard on the practical aspect of compliance: the systems that will support everyone’s ability comply with the rule. But creating this software is not as simple as tweaking platforms that already are in use today; the new regulations require a near-reinvention of the wheel.
“What we really have are new forms that will need to be supported, new data elements within those forms that need to be supported and new processes for how to close loans,” said Dan Sogorka, president of RealEC Technologies, a division of Black Knight Financial Services.
Sogorka, whose company works with the nation’s top 10 mortgage lenders, noted that most LOS systems already are in a constant state of flux.
“There is already a lot of nuance and complexity there,” he said. “Lenders today use their LOS to originate loans. Then they have their servicing platforms, and they also have title companies that have underwriting and title production platforms, as well as appraisal production software platforms — so what you’re talking about here is a whole lot of people in the value chain who must connect with each other in some way. All of those people have to make a lot of changes, and all of those changes have to be knit together and it all has to happen by a specific date.”
The new regulation requires the LE (formerly the Good Faith Estimate and Early TILA Disclosures) and CD (formerly the HUD-1 Settlement Statement) documents to be based on the unique features and attributes specific to each individual loan. Additional calculated disclosure data will be required to produce the disclosure documents, and some estimate that more than 2,000 different disclosure formats may be required, depending on the specific characteristics of the selected loan product.
It may be difficult for form vendors to account for all of those variations, said Daniel Liggett, client service manager for Associated Software Consultants’ PowerLender Loan Origination & Processing System.
“One form vendor we work with is publishing several different pages of the three-page LE, and another form vendor has created an online service people can use to get the LE and CD,” Liggett said. “The way we are handling it is we have decided to generate the LE and CD based on the Uniform Closing Data Set from MISMO.”
MISMO Version 3.3.1, which includes new data points and structures to support regulatory requirements and as well as mortgage insurance coverage and conditions, title, payoff and property valuation fields, was released in November and is ready for use by the industry.
Some companies, such as PPDocs, got to work on developing new software soon after the CFPB finalized the TRID rule. PPDocs, which has posted on its website, www.ppdocs.com, about the importance of getting ready for compliance, views the changes “not as an obstacle, but an opportunity,” Boonjue said. Still, Boonjue said he is troubled by reports that some software vendors are behind the curve.
“We are hearing that some loan origination software developers may not meet that deadline, will not support all loan programs, or will not be producing the new required forms at all,” he said. “You can’t get comfortable with these changes until you play with it. You can’t really train your folks if they have nothing to train with.”
Although many other software providers assured us that they are ready and testing their programs with many lenders, Rod J. Alba, vice president of mortgage finance at the American Bankers Association (ABA), said he is concerned because many ABA members have been told that some vendors did not expect to deliver their systems until the spring.
“Only the beta versions of the software will be ready,” Alba noted. “So really, what we’re talking about is a universal delivery of compliance systems into May or June. Once they deliver the systems, the question remains, are they going to work? Are there going to be flaws or elements that need to be fixed? Vendors are doing great work, but are they leaving banks enough time to do their testing? I have heard from my banks, especially community banks, that in order to do real analysis on the accuracy and compliance, that will take a full month. That puts us right at the line. In the meantime, you are going to have to be training your employees, all during the busy spring and summer seasons that will probably stay very busy if rates stay where they are at.”
What’s more, the regulations require lenders to have backup contingency plans in case of vendor delay or failure — so companies may have to work with more than one vendor to ensure compliance, Boonjue said.
“You should be interviewing or talking to at least two vendors for everything. If they are in-house people, that’s OK, but you’re putting all of your eggs into one basket. You’ve got to have options and be talking to different solution providers,” he said.
Some are questioning whether there are enough vendors in the marketplace to adequately meet these demands, but most sources we talked with disagreed.
“There are plenty of vendors out there, but this is something we are all facing and going through together. It is one of the toughest regulations to implement that we have seen,” Liggett said.
And there will be other challenges come Aug. 1. As Lucy Griffin, a compliance consultant and president of Compliance Resources Inc., in Reston, Va., and a veteran of several federal agencies, pointed out: “For an application taken on July 31, you will have to use the old forms all the way through to the end of closing, even if that happens in October. For applications taken in August, you have to use the new forms and systems, which means everyone will have to run the same systems side-by-side, and that is a major logistical problem for most systems.”
Industry fatigued by new regulations
Already besieged by other complicated regulatory changes such as the Ability-to-Repay/Qualified (ATR/QM) Mortgage Rule, many of the nation’s largest lenders only now are able to devote the time and resources needed to digest the CFPB’s 1,888-page rule and its accompanying 400 regulatory citation changes, and develop a plan of action. At the same time, many smaller, community-based banks and credit unions are in the same boat, but are even more challenged by smaller staffs and budgets.
“Every signal we have been given from the bureau is that, ‘we have given you plenty of time to get ready.’ But there has simply been too much change. Everyone is just brain-exhausted. The fatigue level among compliance people is incredible,” Griffin said.
TRID is not the only rule the mortgage lending industry has had to wrestle with in the last year, said Ron Haynie, executive vice president of mortgage services at the Independent Community Bankers of America (ICBA).
“There has been a massive overhaul of all mortgage regulations, and the combination of these regulatory changes makes it difficult to comply with everything in time,” Haynie said.
Even large lenders with significant resources and full compliance staffs “have been slow to understand that this is not a document change,” said Kris Stewart, principal regulatory consultant and senior manager of compliance professional services for Wolters Kluwer Financial Services, a compliance management solutions provider.
“I don’t know anyone who isn’t ready,” Stewart said, “but as some banks and lenders are just now starting to get their heads around this, the deadline may feel more tight because of testing and training due to all of the cleanup from all of the regulations that went into effect in January of last year.”
Although most large, national lenders easily can absorb the cost and effort of preparing for implementation, “smaller banks and credit unions that serve millions of homebuyers will be pressed to comply with a system that is so computer- and Internet-driven, it will become harder and harder for these kinds of lenders to comply, much less compete,” Baird said.
“The companies I deal with — the more regional companies and smaller lenders — have to make business decisions about how to spend their money, and with so many other regulations they have had to learn to comply with, they aren’t going to spend money to implement these changes until they have to,” he said. “They have 30 other things to deal with right now, and maybe thought, ‘This is something I don’t have to worry about until two years from now.’”
Others say they are not aware of any of these challenges. Following a recent RESPA-TILA integration forum and lender networking event hosted by the American Land Title Association (ALTA) and the Mortgage Bankers Association, ALTA president Diane Evans said: “Everyone left the room with some pretty intense discussion about collaboration and communication. It is going to take all of us to make the transition into this new paradigm shift. I think the most important thing we can continue to do in the title industry is train and give our members the tools they need to reach out to their lenders, large or small, and have discussions about the change that is coming. We have developed the tools and resources to have conversations with smaller lenders and community banks to help them and local agents meet the challenges of the new integrated forms. That is what our members have done for years — collaborate with local lenders and provide solutions in local markets. I think we at ALTA have stepped in front of that curve and started to move forward faster than some others have.”
Nevertheless, there is definitely concern that many lending institutions of all sizes, at least up until very recently, “were not getting that this was going to really fundamentally change the way they close loans,” said Ken Trepeta, director of real estate services at the National Association of Realtors (NAR).
“I have been hearing since the fall [of 2014] that there is a fear that your average lender and smaller mortgage lender was treating it as a software issue,” Trepeta said.
Perceptions and predictions vary
If the worst-case scenario of companies not having the software needed to process loan applications plays out, some say mortgage lending could grind to a screeching halt, which will have significant ramifications for both consumers and all of the providers involved in the mortgage lending process.
“They won’t make loans or take applications,” Haynie said. “If a bank is not ready to do it, they will not be able to take applications. You cannot use the old forms after that date.”
Stewart said she is optimistic that most companies will be ready, but she warned that the penalties for non-compliance “are not something you want to mess with.” Failure to comply could result in unprecedented fines and penalties, costing banks thousands of dollars every day, lost business and substantial regulatory and reputational risks, she said.
“Some of the customers I have been talking with, worst-case scenarios may be reducing their products and offering more typical standard, products that are ready to go,” Stewart said.
Perhaps most optimistic of all was Sogorka, who said: “We’ve been through new regulations before, and over time, everyone realizes that these are good things to do in general. The way we look at it is Aug. 1 is not the end, but the beginning. People will go out in August and continue getting better and use it as a way to provide a better consumer experience.”
The countdown is on
As everyone continues to work on these issues with the hope of being ready for the Aug. 1 deadline, they are mindful that the CFPB has been firm about the Aug. 1 deadline and is highly unlikely to delay implementation.
“We haven’t heard any indication from the CFPB that this is a possibility, so it is really not part of the conversation,” ALTA Board Member Cynthia Blair said. “For us, the conversation is what we need to do to be sure the title industry is ready.”
Some are hopeful that the bureau will cut the industry some slack and delay enforcement of the regulations for a certain period of time, such as the Department of Housing and Urban Development (HUD) did for six months in 2010 with the RESPA reform rule.
“Just as other agencies did for previous rules that proved difficult to assimilate for some period of time following their effective date, what I hope will happen is the CFPB will not vigorously enforce this if they see lenders have made a good-faith attempt to comply,” Baird said.
In a recent appearance before the House Financial Services Committee, CFPB Director Richard Cordray twice was asked whether the bureau would consider a restrained enforcement period after Aug. 1. Although he maintained that the industry had plenty of time to prepare for implementation, he did not rule out such a move by the CFPB.
But Alba added that even if the CFPB grants such a reprieve, “there will still be a legal question out there if you follow a rule or methodology within those six months that later turned out to be wrong because of an agency advisory. We don’t want that situation to happen.
“Banks will do everything they can to comply, but this is a logistical nightmare,” Alba added. “What we have here is an absolute overhaul of the infrastructure that is required for every mortgage loan in America. It’s not taking a month to figure out, for example, a change to line 101. Basically, we took 40 years of regulation and legal concepts and threw them all out the window, and we’re starting from scratch.”
As the implementation deadline draws near, October Research will continue to examine these issues and report on the concerns of all parties involved. Stay with us for all the information you need to know, and share your thoughts and concerns with us by emailing our editorial director, Chris Freeman, at [email protected].