Is Your Mortgage Technology Really TRID-Ready?

Transcription

1 Prepared by ComplianceEase September 2015

2 When the Consumer Financial Protection Bureau (CFPB) moved the effective date of the new TILA-RESPA Integrated Disclosure (TRID) rule from August 1 to October 3, 2015, most of the mortgage industry breathed a sigh of relief. Not only did this extension, according to American Bankers Association (ABA) President and CEO Frank Keating, help protect consumers from disruptions during a traditionally busy period for home purchases, 1 but it also gave lenders more time to test new required technology and to update policies and procedures. In order to further smooth the transition, more than 15 trade groups, including the ABA, American Land Title Association (ALTA) and Mortgage Bankers Association (MBA), have urged members of congress to support legislation that institutes a formal hold-harmless period, providing a temporary legal safe harbor until early 2016 from enforcement of the TRID rule, as long as a good faith effort is made to comply with the rule. At the time of this writing the relevant bills and resolutions were still in committee. While the timing has changed, the TRID rule has remained the same. TRID will still require lenders to replace the Good Faith Estimate and the initial TIL disclosure with the Loan Estimate (LE) and the Final TIL disclosure and the HUD-1 Settlement Statement with the Closing Disclosure (CD). Though that may sound simple enough, it means extensive workflow redesign for lenders, as well as loan officer and settlement services provider training, and realtor and borrower outreach and education. This white paper will examine: The technological challenges lenders will face and the potential cost of closing defects The top 10 questions lenders should ask their providers to ensure that their TRID solution is compliant A new technology solution that provides complete auditing of TRID disclosure timing, changed circumstances, and fee tolerances across all disclosures What a Lender s TRID Technology Needs to Do Under TRID, lenders will have significantly greater liability for the timing, completeness, and accuracy of the LE and CD. So it only makes sense that they re turning to technology to help automate and back-stop compliance. For the most part, TRID compliance will be measured against four criteria: 1. Were the disclosures provided on the proper forms (i.e., the LE and CD, for loan types that are subject to TRID) with all required numeric disclosures calculated correctly? 2. How were the disclosures delivered to the borrowers? 3. Were they delivered to and received by borrowers on time? 4. Was each fee on the LE disclosed in good faith with supporting reasons for changes and, if so, were those amounts within allowable tolerance with those on the CD? 1 1

3 While it is possible to manage this process manually, most lenders will rely on technology to automatically gather the data that goes into the LE from various vendors; compute the LE accurately; deliver it in a timely (and trackable) fashion to the borrower; and compare the LEs against the final CD to make sure that variances are within tolerance. Unfortunately, error rates are still high, even in a compliance-focused world. ComplianceEase s in-house research team analyzed loans audited by the ComplianceAnalyzer platform during the first half of They found that, without robust compliance controls in place, an estimated six percent of loans originated require a refund to the borrower due to underdisclosure under RESPA requirements and seventeen percent of loans have consumer APR or Finance Charge disclosures that exceed allowable TILA tolerances. The average reimbursement for loans requiring a refund is estimated to be $328. For loans with tolerance violations that go undetected and uncured, creating regulatory problems for lenders, ComplianceEase s research team estimates that borrowers are overcharged an average of $740. Under TRID, closing defects are about to get even more risky and expensive. In addition to reimbursement and possible administrative action by regulators, available penalties under current RESPA regulations, the new TRID rules also pull in TILA s allowance for private rights of action (lawsuits against lenders) and assignee liability risk. Further, the new TRID rule has a three-tiered civil money penalty that can range from $5,000 per day to $1 million per day for a lender that knowingly violates the law. Lenders will need a TRID solution that helps them produce higher quality loans and not add to the already high costs of origination, which according to the MBA reached $6,984 per loan in the second quarter of Connectivity, the ability to obtain and transmit accurate data in a timely fashion, will be extremely important because TRID will require many detailed, individual figures to be imported into the disclosure forms. One area where we see connectivity as a challenge is between the lender and the settlement agent. Because everything needs to be auditable, stare and compare isn t going to cut it. Proper connectivity allows last-minute changes to be detected, validated, and audited automatically in real time, so that CDs can be completed in a timely manner. Many existing mortgage technology systems were built to compare a single GFE to the final HUD-1 and have been updated to similarly compare a single LE to final CD. This is not what the TRID regulations call for and is not in line with how the CFPB is likely to examine loans. It is necessary for lenders to monitor all LE and CD delivery timing sequencing, fee changes, reasons for fee redisclosure, and tolerance between those fees that were disclosed in good faith with those on the CD. 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 TRID. So, if a lender s TRID solution is only comparing single disclosure, and is not monitoring revisions to individual fees and charges across all LEs throughout origination, there is high potential for significant violations under TRID, particularly given the current estimated tolerance failure rates discussed above. It s important to note that the disclosure tolerance errors introduced when reviewing only a limited set of disclosures can cut both ways, including leading a lender to believe that more money needs to be refunded to a borrower than is actually required. With historically thin margins in the mortgage industry, small errors can have a large impact on profits and competitiveness. A lender s technology should be compatible with Mortgage Industry Standards Maintenance Organization (MISMO) version 3.3 and the Uniform Closing Dataset (UCD) a critical element in getting disparate systems to communicate with each other. Some mortgage technology systems used by the industry have not yet upgraded 2

4 and will be using workarounds. This is unfortunate because MISMO 3.3 and UCD are more compatible with TRID than legacy file formats. Ten Questions Lenders Should Ask Their TRID Solution Providers With the extended TRID effective date, lenders still have a small window to make their final preparations for the dramatic change in workflow approaching. How to know if a solution is really TRID-ready? Lenders need to press for answers to the following key questions from their mortgage technology providers: 1. What is the scope of the offering: end-to-end TRID compliance, including generation of all compliant disclosures from origination to closing, or just select parts of the process? 2. Is the offering MISMO 3.3 and UCD ready? 3. Have MISMO data formats been extended to include all necessary data points for TRID compliance? 4. Does it provide real-time connectivity with major vendors? 5. Does it test for disclosure delivery and receipt timing, fee variance, valid changed circumstances and re-disclosure requirements, loan product features comparison, projected payments table, and APR and amount financed calculations? ComplianceAnalyzer is integrated with more than 30 industry-leading service providers, including top loan origination and loan document generation systems. 6. Will compliance with federal and state consumer credit laws and regulations based on lender s license types and exemptions be audited throughout origination? 7. How will the solution handle and flag last-minute changes at the closing table and workflow for revised CDs? 8. Will the system architecture support the special requirements of TRID, such as time stamping of all relevant fee, disclosure, and change of circumstance events? 9. Does it compare and retain each and every disclosure and revised disclosure with every fee change tied to a documented change in circumstance that is allowed by TRID? 10. Are system results capable of being reproduced easily and audited later by lenders, investors, and regulators (like banking agencies and the CFPB)? If a provider is unable to answer any of these questions, they are not truly TRID-ready. 3

5 Compliance on Day One In addition to TRID compliance, ComplianceAnalyzer continues to audit for: Qualified Mortgage (QM) Home Ownership and Equity Protection Act (Sections 32, 35) NMLS ID verification (SAFE Act) State and municipal high cost / anti-predatory laws and regulations Loan originator compensation restrictions State license-based consumer lending and licensing laws and regulations Secondary market investors and GSEs compliance guidelines Lenders internal compliance policies ComplianceAnalyzer with TRID Monitor can quickly and definitively answer today s most important industry questions: is this loan TRID compliant and how can I prove it? ComplianceAnalyzer with TRID Monitor can audit all of the new TRID documents from the initial LE through to the final CD to ensure compliance and to detect and help correct fee tolerance issues. Depending on a lender s workflow needs, lenders can use ComplianceAnalyzer with TRID Monitor to monitor changes in fees and terms throughout the origination and closing processes, ensuring that every changed fee is paired with an allowable reason for the change. TRID Monitor audits tolerance across all disclosures (once a CD has been entered) and changed circumstances, and tracks post-consummation disclosures, including those requiring reimbursement to the borrower. ComplianceAnalyzer with TRID Monitor: Reviews new disclosures, renders a compliance decision in seconds, and displays findings with an easy-to-read risk score and tolerance analysis, backed by regulatory citations and narrative explanations. Monitors all disclosed fees throughout the origination process to determine if changes are allowable under TRID and if re-disclosure is permitted and/or required. Audits all disclosure timing requirements, tracking dates, and delivery methods. Tracks allowable reasons for re-disclosure to automatically compare disclosed fees and terms from Initial and Revised Loan Estimates to those on the Closing Disclosure(s). Audits final closing documents, alerting lenders to closing table changes that create compliance issues and calculating refund and deadline for remediation. In addition, ComplianceAnalyzer with TRID Monitor provides a comprehensive, independent third-party audit report that is evidence of TRID compliance. As a third-party audit, this report may carry greater weight with secondary market investors and regulators than TRID reviews performed by a lender s own personnel or origination, underwriting, or pricing systems. Lenders still have time to prepare for TRID, which should include testing their technology, as well as educating and training all staff on the revised policies and procedures for the new workflow. And given the new operational challenges (e.g., connectivity and data transfer) and enhanced liability for TRID violations, ongoing vendor management may lead to more lenders shortening their lists of approved title and settlement agents. But choosing the right TRID solution is the first and most important step toward compliance. 4

6 About ComplianceEase ComplianceEase, a division of LogicEase Solutions Inc., headquartered in the Silicon Valley region of the San Francisco Bay Area, is a leading provider of risk management solutions to the financial services industry. ComplianceEase s patented platform includes ComplianceAnalyzer - the mortgage industry s most adopted automated compliance solution. ComplianceEase combines regulatory expertise with innovative technology to power end-to-end risk management solutions that help financial institutions improve compliance controls and increase profitability. The company s growing client base includes financial institutions, service providers, law firms, GSEs and three of the top five mortgage lenders in the US. ComplianceEase s automated compliance solutions have also been adopted as e-exam tools by banking and mortgage regulators, through the Conference of State Bank Supervisors (CSBS). For more information visit or call Ease LogicEase Solutions Inc. All Rights Reserved. 5