The Next Compliance Tsunami

In the four years since Dodd-Frank went into effect, lenders have faced one compliance wave after another. Qualified Mortgage/Ability to Repay, Originator Compensation, Appraisal Practices – the list goes on.

But it’s not over yet. On August 1, 2015, integrated disclosure reform will sweep the industry and overhaul processes that we have just finally become accustomed to.

Toppling the disclosure and good faith estimate (GFE) reform of 2010, next year, the CFPB has finalized plans to implement integrated disclosures under the Truth in Lending Act (TILA) and Real Estate Settlement Procedure Act (RESPA), commonly referred to as the RESPA-TILA rule. As industry professionals, we acknowledge that the rule should provide borrowers with a clearer, more detailed explanation of the financial implications of their mortgage. Prior to its inception, the document was tested in a large study involving more than 850 consumers nationwide, and reception was favorable from lenders and consumer groups alike.

But the reforms involve more than just a new disclosure document. The rules behind RESPA and TILA mean that lenders will have to strengthen business processes to stay ahead of the curve and maybe to even stay in business. What is seemingly a simple outward-facing document for borrowers will actually encompass several moving parts, and it’s important that the industry stays informed on what this means.

A Comprehensive Overview on Change

As the new disclosure rules loom, some lenders question if their processes and infrastructure are up to speed to accommodate the changes occurring right before their eyes. Identifying and understanding the modifications that will affect operational, technological, service and training verticals of our businesses are important and must be thoughtfully considered.

It’s tempting for lenders to put off something that is a year away and focus on more immediate concerns. QuestSoft’s annual compliance survey over the years shows that lenders usually push off longer-term compliance needs simply to comply with pressing rules – but is it worth the risk? Creating internal procedures to deliver disclosures and loan documents as early as possible can help vendors develop a competitive advantage.

We now know that RESPA-TILA reform will deliver a variety of moving parts in regard to the way we advance processes and deliver products, and it’s essential to evaluate your current vendors and systems to see what changes might be needed. Lenders must work with any vendor that touches on documents or compliance to ensure the systems are ready for testing no later than the spring of 2015.

But the reform is more than just a new set of documents. Lenders must also prepare for the quality control and compliance issues behind the disclosures. The same is true with closing costs. Lenders are restricted in how much actual closing costs can vary from the initial estimate. Significant changes require another disclosure and a reset of the 72hour waiting period.

Additionally, RESPA-TILA changes look very inviting to consumers, yet to complete the forms, lenders must track and include more than 2,000 data combinations that are located within the new documents. Planning ahead is important, as there will now be a three-day requirement for all loan document disclosures (both purchase and refinance) and a new seven day advanced notice for all material changes to the Loan Estimate.  Being caught under disclosure delays will directly affect closings, relator relations and the very ability of a homebuyer to move in and maybe ever own a home if the rate locks and deal falls through because of your mistakes.

What’s the impact of this? Take for example a simple Adjustable Rate Mortgage (ARM). This product will require careful calculation of all the correct terms and possible adjustments. If the lender makes a mistake and has to re-disclose the terms, there is a new 72-hour waiting period to close, potentially impacting lock rates or closing costs. There is a real possibility that legal action may be brought if your operations are not efficient or operating properly.

Pre-Funding Compliance Testing Saves Headaches

How can lenders ensure compliance with RESPA-TILA, as well as the hundreds of other regulations already on the books? Lenders can protect themselves from a post-funding audit and expensive cure by ensuring pre-funding compliance. The process of correcting compliance issues before the closing table will enable originators to close loans confidently and accurately – bypassing audit setbacks. If an audit is unavoidable, the originator can comply with auditors’ requests knowing that their loans were efficiently streamlined to guarantee compliance and accuracy.

With today’s regulations, corrections cannot be made post-closing on compliance and disclosure issues. Pre-closing corrections, working in tandem with third party verifications, result in a manageable origination process, and are also easy to adopt and implement.   The value of post-closing compliance is greatly diminishing in this new regulatory environment.  We are definitely not operating in the same world as five or ten years ago.

Truth be told, the industry is changing and we need to keep up. However, some may claim that the regulations are too harsh. Is the lending community being spread so thin with their time that they are unable to efficiently revise their business processes? Are the demands placed by regulators so high that restructuring is simply not worth compliance prevention?

‘The regulatory game’ is one that requires consistency and lender obligation. Lenders must comply with changes and inform borrowers, or they will be out of the game – permanently. The good news is that there’s still time to prepare for the next wave. Before the end of the year, it is a good idea to consider updating your LOS partners and testing environments.  Get a firm grip of timeframes for RESPA/TILA implementation from your vendors.  Establish your education and testing plans.  And finally, use this requirement as a competitive advantage by strategically establishing the three day rule in your operations. This way, when August 1, 2015 comes along, to your realtors and borrowers, it will be just another day in the life of a great mortgage company.

As disclosure reform continues to have an effect on our industry, we can leverage the change to get a firm grasp on the influx of upcoming regulations and prepare to strengthen compliance automation to decrease the risk of failure.

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