There was a time when companies that dealt with title, closing and settlement services were important, but somewhat invisible, players in the mortgage process. All that changed with the increased regulation under Dodd-Frank. Now, lenders are on the dime for the actions of their third-party vendors, and the delivery timing of the new Loan Estimate and Closing Disclosure mandated by TILA-RESPA means that title, closing and settlement services companies are critical to a compliant origination process.
The Consumer Financial Protection Bureau lit the fuse on the TILA-RESPA time bomb back in 2013, when it issued the Final Integrated Disclosure rule, after fielding industry comments for several years. But with an implementation deadline of Aug. 1, 2015, and other Dodd-Frank rules to deal with in the meantime, the fuse hissed along quietly until last summer.
That’s when the reality of having only 12 months left to make profound process changes started to sink in, and parts of the industry went into overdrive to adapt. But by January 2015, some lenders were still waiting for software from third-party vendors.
An article on respalawyer.com from Jan. 12, 2015, expressed the unease that many were feeling. “The TILA-RESPA Integrated Disclosure Rule’s implementation date is beginning to cause heightened concern and worry for those involved in the residential lending industry,” the article stated.
“One reason is the emerging news that a number of the third-party vendors engaged to write the loan originator system ‘LOS’ software may not be able to do so until April, May, June, or even worse, that some of the LOS systems that are rolled out may not be in compliance when the residential lender implements the LOS into their system.”
The basic intent of the rule seems innocuous enough — combining forms and increasing transparency to make it easier for the consumer. But with so many moving parts, changing the mortgage process is always more complicated than it first appears.
Some of TILA-RESPA’s biggest changes concern the delivery of information to consumers. On the front end, lenders have to deliver a Loan Estimate to consumers within three business days of their mortgage loan application. As the loan proceeds, consumers must get the Closing Disclosure three business days before closing. Simple, right? Not really.
Tim Anderson, director of eServices at DocMagic, echoed that concern. “Delivering a disclosure form is just the tip of the iceberg — it’s not the solution. Compliance happens all around the process; compliance is looking at and validating data all the way to closing. If you only map and worry about a single form, if you architect something to address a single issue, you miss the point that it’s an overall process that has to be changed.”
John Hollenbeck, executive vice president for First American Title Insurance Company, said that his company started preparing for the regulatory change as soon as the proposed rules were published, and he now feels confident they will be ready — two years later.
“We’ve dedicated resources from every level of the company,” Hollenbeck said. “The greatest challenge was developing an understanding and appreciation for the depth of the process changes that need to take place to implement the new TILA-RESPA Integrated Disclosures (TRID). It’s a true inflection point for our industry and requires a re-engineering of workflows for lenders and settlement service providers.”
Joe Mowery, president of LenderLive’s Settlement Services division, says the three-day delivery window is the greatest obstacle.
“TRID requires the lender to ensure the consumer receives the CD no later than three business days before loan consummation. Due to these timeline requirements, the industry seems to be preparing itself to send the CD to borrowers seven days in advance of the consummation,” Mowery said.
“Additionally, if there is a 1/8 of a percent change (for most loans) in APR, a change in loan product, or the addition of a prepayment penalty, any of these changes require the lender to provide a new CD and an additional three-business-day waiting period for the borrower. Imagine the delays that are forthcoming.”
And the stakes are high for everyone. Lenders could face civil penalties as high as $1 million per day if they delay disclosures “knowingly.” Even unintentional TILA-RESPA violations could cost lenders up to $5,000 a day.
“The onus for creating accurate closing disclosures falls 100% on the lender, with substantial penalties for mismanagement,” said Brian Benson, CEO of ClosingCorp.
With that kind of risk, the relationship between lenders and their vendor partners is undergoing a transformation. Both sides have to increase the transparency and communication of their actions.
“That is changing the way lenders are electing to interact with their provider networks, and there is a lot of work they must do to implement and manage that change,” Benson said. “The new rules will undoubtedly have an impact in vendor selection, lenders’ migration away from ABAs, their concern for fee standardization, and their general tolerance for complexity.”
Anderson agreed. “The new Combined Disclosure regulation is going to force lenders to connect to title agents at the time of application and prior to closing to ensure compliance,” he wrote in a HousingWire Closing Call blog. “With the faster and more accurate delivery requirement of the charges between the Loan Estimate and Closing Disclosure forms, constant and reliable communication will be key between lenders and title agents.”
Vendor consolidation?
With more risk around third-party providers, and more cost to mitigate that risk, many lenders are choosing partners who have the will and resources to change their process. And that means that the new regulations are likely to speed up the vendor consolidation process that was already happening across the industry.
“Many banks and mortgage bankers to whom we have spoken will only be utilizing one title vendor because they are concerned about the integration timeline and do not want to be left shut down in whole or in part on or after Aug. 1, 2015, as a result of spreading their compliance across too many vendors,” the respalawyer blog reported on Jan. 12.
As always with new regulations, smaller companies are the least likely to have the resources to adapt in time, and are affected disproportionately.
“Title agencies hoping to gain business from large lending institutions will have to make investments in technology, security, quality control, procedure documentation and employee training,” HDEP International wrote in an article on the effect of the Dodd-Frank regulations.
“The initial investments alone will be high, and the ongoing maintenance expense to remain in compliance could significantly change the cost structure of all title companies. Many agents in smaller counties will be unable to afford these expenses without increasing their premiums.”
The report also said, “In addition to across-the-board premium increases, we expect that small agencies will consolidate into larger regional agencies, so the additional expenses mandated by lenders can be spread over a larger revenue base… Finally, some of the larger lenders will begin to evaluate acquiring title underwriters and larger regional agents…”
But even big lenders are facing a challenge. Wells Fargo worked with more than 17,000 title and settlement services companies in 2013, according to The Wall Street Journal. Ensuring even one change in the process with that many disparate elements is a monumental task.
Consumers get a mixed bag
The rules were designed to give consumers more timely and accurate information about their mortgage loan, but no good deed goes unpunished, and consumers will have to bear some of the burden as well. Closing times, for instance are going to get longer.
“Real estate agents must explain to their clients the timing requirements so that there are no unrealistic expectations,” Cynthia Blair, of Blair Cato Pickren Casterline said in a post on the American Land Title Association’s website in February. “Ultimately, it’s important to give the closing process enough time to happen. Fifteen- to 20-day closings are probably a thing of the past.”
Ken Trepeta, director of real estate services for the National Association of Realtors, explained that because lenders are liable for the delivery timing, they will have less flexibility. “As such, lenders are taking a conservative approach for good reason: a loan that has a potential RESPA/TILA error will at a minimum be difficult to sell on the secondary market. Lenders are not going to be very tolerant of last-minute changes,” he wrote on the ALTA website.
Long term, the regulations may also result in less options for consumers as they seek a mortgage loan.
“The cost of compliance is forcing a lot of people to consider whether it’s profitable to stay in mortgages,” DocMagic’s Anderson said. “The intent of the regulation was to provide the consumer more choices — if the end result is that we are reducing choice for the borrower, that’s not good for anybody.”
TILA-RESPA tidbits from the CFPB
1. The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.
2. The TILA-RESPA rule does not apply to HELOCs, reverse mortgages or mortgages secured by a mobile home.
3. The Good Faith Estimate has been combined with the initial Truth-in-Lending disclosure into the new Loan Estimate form.
4. “Business Day” for providing a Loan Estimate is a day on which the creditor’s office are open to the public. “Business Day” for counting days to ensure the consumer receives the Closing Disclosure on time means all calendar days except Sundays and legal public holidays.
5. Creditors may only use revised or corrected Loan Estimates when specific requirements are met. Creditors generally may not issue revisions to Loan Estimates because they later discover technical errors, miscalculations, or underestimations of charges. Creditors are permitted to issue revised Loan Estimates only in certain situations such as when changed circumstances result in increased charges.
6. An application means the submission of a consumer’s financial information for purposes of obtaining an extension of credit. An application consists of the submission of the following six pieces of information: the consumer’s name, income, Social Security number to obtain a credit report, the property address, an estimate of the value of the property and the mortgage loan amount sought.
7. Whether or not a Loan Estimate was made in good faith is determined by calculating the difference between the estimated charges originally provided in the Loan Estimate and the actual charges paid by or imposed on the consumer in the Closing Disclosure. Generally, if the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate, it is not in good faith, regardless of whether the creditor later discovers a technical error, miscalculation, or underestimation of a charge. However, a Loan Estimate is considered to be in good faith if the creditor charges the consumer less than the amount disclosed on the Loan Estimate, without regard to any tolerance limitations.
