On August 1, 2015, the TILA-RESPA Integrated Mortgage Disclosure Rule takes effect. Widely considered the most significant regulatory overhaul to the mortgage disclosure process in recent memory, the Rule not only changes the documents consumers will receive in a mortgage transaction, it presents sweeping changes to the loan closing process.
The Consumer Financial Protection Bureau’s (CFPB) “Know Before You Owe” project was initiated in 2012 to simplify the existing forms and documents received by consumers. The intent was to make the documents easier for both consumers and the industry to understand, allow comparison shopping for consumers and avoid costly surprises for the consumers at the closing table.
The CFPB’s Final Rule, totaling 1,888 pages, was issued in November 2013, and resulted in two new forms: a Loan Estimate and a Closing Disclosure. The Loan Estimate replaces the early Truth in Lending statement and Good Faith Estimate, and it must be provided within three days of a lender’s receipt of a mortgage loan application. The three-page document will include terms and estimated costs that consumers can use to comparison shop. The new five-page Closing Disclosure’s format is modeled after the Loan Estimate to support direct comparison by the consumer between what was disclosed and what will be required at closing. This form must be given to borrowers three days before closing, and it replaces the final Truth in Lending Statement and the HUD-1 settlement statement.
The mortgage industry is no stranger to regulatory changes. So what’s the big deal? Well, it’s not just 2 disclosures! Let’s look at some of the technology challenges in creating the two new disclosures. The Model Forms must be followed exactly, and the Rule requires that many of the sections can be presented to borrower(s) only when certain features apply to the loan.
For example, the Adjustable Payment and Adjustable Interest Rate tables can only appear if the feature(s) apply to the transaction. There are several YES/NO questions that cannot be checkboxes. The Projected Payments table can have 1-4 columns depending on the number of payment changes, but cannot have blank columns. Normally, in templates, the variable data is simply white space, allowing for the maximum data length required. If the data is shorter there would be blank space, which again is not allowed by the CFPB. The bigger problem is when the data is larger than the allotted white space.
Again, focusing on the consumer, the CFPB added a number of visual enhancements to the formatting of the documents. These include bullet points, shading and rounded corners on the section headings and bold print and underscores to draw attention to critical data. The CFPB eliminated the line numbers and required the fees to be presented alphabetically.
There was some pushback to the CFPB as some perceived these requirements as a technology challenge or barriers to implementations. Some providers questioned if the requirements could be met at all. This is part of the overall problem in the mortgage industry. We are resistant to change. We don’t challenge ourselves. What the CFPB was asking for was a better visual representation of the information for the consumer. We see this type of enhancement everyday outside the mortgage industry. The questions should be: How can we resolve this conundrum? How can we accomplish this?
Resolve: As a noun, it means a firm determination to do something and as a verb it means to find a solution. Well it can’t be done with templates! One provider said they were going to limit the number of loan product offerings and they could accomplish this with about 70 templates for each of the disclosures. This is not a solution!
In any case, this is not a trivial task. Compliance Systems (CSi) has spent significant hours on this project in the last 2 years. To prepare for the TILA-RESPA changes, CSi’s legal staff has read and analyzed the entire 1,888-page Final Rule to identify the required changes to CSi’s warranted transaction risk management solution and evaluated how the rules will impact the industry. Our decision, some years back, to focus on the data to determine the documents required to perfect the transaction and then build the documents dynamically, allowed CSi to send the first TILA/RESPA beta version to our partners last August so they could start their implementation while we continued to enhance our solution. We don’t anticipate any obstacles.
CSi is also working directly with the CFPB to clarify the new requirements and the CFPB’s expectations for compliance. CSi has participated in CFPB technology vendor roundtables, sought guidance directly from the CFPB’s lead TILA-RESPA attorneys, and collaborated on implementation challenges to ensure compliant integration.
So, what will change? In the past, the lender was responsible for the collection of information and preparing all the documents, like the GFE and initial TILA, and prior to closing a preliminary HUD-1 and TILA. The Settlement Agent (SA) would then prepare the final HUD-1 and TILA. Typically, if there were differences, the consumer and/or the lender did not find out until sitting down at the closing table. Rarely was there the opportunity to change anything.
The closing process next August will be different. The Lender is ultimately responsible for ensuring that the data on the Loan Estimate and the Closing Disclosure is in sync within designated tolerance limits and correctly portrayed in the documents. I see 3 likely scenarios with some possible variations.
1.) The Lender produces both the Loan Estimate and the Closing Disclosure, internally or through a doc prep provider. This will require the SA to provide fee information, etc. and allow the Lender final approval.
2.) The Settlement Agent produces the Closing Disclosure, as well as other closing documents. But the Lender will require control over the final document.
3.) A third party provider, like eLynx, emerges that will provide a consumer portal and a collaborative platform between the Lender and the Settlement Agent. This platform would support e-signatures, e-delivery and e-vault; all the components for a true electronic mortgage.
An article in the M Report stated “Overall more lenders, large and small, now understand that no matter what the final rules look like, their experiences in 2010 prove that there is no reason to hold back on technology. Many are starting to finally acknowledge that they will grow more dependent on technology partnerships to maintain compliance.”
There are no provisions for a staggered implementation date, and after the final ruling the CFPB recommended that lenders not adopt them until August 2015. An extensive study conducted by the CFPB confirmed the benefits of the new forms.
There are distinct differences in the implementation of the Final Rule compared to previous rules. First, the CFPB allowed a significant amount of time, over 20 months, before adoption. Secondly, there was noteworthy dialogue between the CFPB and the industry. Finally, the e-closing Pilot is sure to present some additional dialogue. This all will result in clarifications and possible minor changes to the final ruling and will continue throughout the time leading up to implementation.
If you haven’t seriously addressed this problem until now, you have lost considerable time and probably will not make the deadline. The CFPB gave the industry 20 months to integrate. At this point, only 10 months remain. Compliance Systems is ready! Will you be ready?
About The Author
Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is an industry thought leader and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at email@example.com.