There is a lot of uncertainty in the mortgage industry these days. Mortgage lenders are on the hook for the CFPB’s August 1, 2015, deadline for implementation of the TILA-RESPA Integrated Disclosures. Their technology solutions have never been under more scrutiny. Chris Appie of Compliance Systems, Inc., (CSi) discusses current conditions and future prospects.
Q: How did you get into the mortgage industry?
CHRIS APPIE: I’d known since I was a child that I wanted to go law school, but once I got there I panicked because I never really thought much about what I would do after graduation. I’d never given much thought about what area of law I would focus on or what I’d want to do day in and day out. Financial law and secured transactions spoke to me, probably because those areas are relatively unpoliticized, and I decided to cut my teeth as an intern with an attorney whose practice focused almost exclusively on financial law. Around the time I was taking the bar exam I was given the opportunity to move to Grand Rapids and work with CSi. I remember at the time it was a tough choice, foregoing the courtroom, not engaging in any crazy profanity-laden depositions, but looking back it was the best decision of my professional life. I’ve been with CSi since 2003 and in that time have really got to know things from the bottom up. With compliance, especially in the area of real property and lending, the details are clearly where it’s at.
Q: Have the technology trends you initially saw back in the early 2000s become failed experiments, or did they become the industry standards?
CHRIS APPIE: You know, it’s interesting to see how the trends have played out. When I first began in the industry there was a huge technology push. I noticed there were a bunch of technology evangelists who were attempting to move the industry forward, but it seemed that being quick and nimble in the mortgage industry—and really the financial services industry as a whole—is a noticeably different experience than what other industries define as quick and nimble. When you think about it, there have been something like eight generations of the iPhone since it launched in 2007 and it’s not possible to understate the impact that technology is having. From boarding passes on a phone, to Uber, video conferencing like the Jetsons—it’s fantastic and it’s drastically changed the way we live many parts of our lives. Mortgage technology simply could not move that fast—even if we wanted to—this industry has its own pace for adaption and deployment. That said, even if the trend toward technological innovation has played out more slowly in our industry, it does feel like there is something in the water now—especially now that we’ve made it past the meltdown. It’s been exciting to see emerging technologies in areas like workflow automation, electronic signatures, closings and recordings, and in our case transaction data analytics. These things were ideas in the early 2000s and while they may not yet be industry standards, they are quickly becoming so. The mantra at CSi is that “it’s all about the data,” and this focus on data seems to becoming more consistent throughout the mortgage industry. That’s good news for technology advancement because once you have the data, you can use it an almost infinite number of ways to drive innovation.
Q: Why do you think the technology adaption and deployment rate has been slower in mortgage lending?
CHRIS APPIE: Before the financial crisis of 2008, I think, outside the technology evangelists, there was an “it’s not broke, so why fix it” mentality. In many regards this made sense: business was great and volumes high enough that it didn’t make business sense to invest in technology. The flaws, the workarounds, the extra steps, and ultimately the breaks in processes didn’t keep lenders from closing loans. Even just seven years out it is easy to forget how quickly things came apart and those industry participants that endured did so because they went into survival mode. Any technology improvements were postponed or eliminated to keep the dollars in the door. Since things have leveled out and we’re coming out of that terrible period, we’re seeing a return to technology. A lot of that is being driven by the evangelists of the early 2000s, but those folks now have the CFPB helping their case. As strange and uncomfortable as it is to say, the government via the CFPB is really pushing and moving the industry forward with a technology-driven focus that the industry seemed incapable of doing on its own.
Q: What’s new at CSi?
CHRIS APPIE: I’m not sure it’s new, but we’ve wrapped up development activity related to the TILA-RESPA Integrated Mortgage Disclosure (TRID) Rule and are working towards rolling that solution out to our Alliance Partners and clients. We delivered our TRID Solution to partners last August and are working with them on implementation. We’ve been very fortunate because the CFPB essentially killed the idea of document templates by the Final Rule it published. The Rule, all 1,888 pages of it, calls for things like assembling addendums but only when certain factors are met, payment and other tables with content that changes based on the loan product, and various other items. These requirements are so precise and complicated that supporting all loan products with the new disclosures has become a virtual business impossibility in the old paradigm of document templates. The feedback from our partners has been great—they are telling us that they’re well positioned, and we’re still a half year ahead of the August 1 effective date.
Another area we’re focusing on is risk management via data analysis. We’ve actually been focused on risk management through data analysis for almost 15 years, but we’ve often been put in the same bucket as forms vendors. Industry developments in the last couple of years are making the difference between CSi and forms vendors more obvious and quite frankly, we’re getting better at differentiating the value we provide. One of the things we’ve noticed when a lender begins switching to more technology-driven processes is that their management is concerned with letting go of tried-and-true processes. The key element to preventing these concerns from being roadblocks to technology is good risk management, including tools that analyze the transaction data and report errors. These solutions automatically ensure that loans are being processed in a compliant manner. I think that’s the pivot point we’re at right now and we are well positioned to take the next step forward.
Q: The TRID Solution is your answer to the Integrated Disclosure Rule?
CHRIS APPIE: Yes. CSi’s TRID Solution is built on the dynamic content assembly and data analytics that drive all of our technology components. The TRID Solution expands on that technology to satisfy the disclosure requirements of the rule while also establishing the future platform for analyzing, assembling, disclosing, and transmitting transaction data for mortgage lenders. We determined that it was critical to create the technical capacity to address the evolving playing field, so we have intentionally built out new technologies that can be used outside the new Loan Estimate and Closing Disclosure that we can capitalize on when new rules come down the pike. The new “special” documentation requirements will likely not remain unique to the new disclosures. After all, the CFPB determined that this data content and format was of benefit to consumers for its clarity, and it was preferred by consumers who participated in testing. The Integrated Disclosure may be the first example of lending content that has to morph itself so precisely to meet the legal requirements on the regulation, but now that we’ve proven it can be done, these kinds of content display and presentation requirements will likely become the norm.
Q: If lenders have the solutions to stay compliant with the Integrated Disclosure, will they be ready for the next “regulatory needle” they have to thread?
CHRIS APPIE: Not necessarily. Unfortunately, some industry players have relied on bare-bones implementations for so long that the technology infrastructure is not already in place to execute the requirements of the Integrated Disclosure Rule without significant new investment of time and capital. Because of cost to develop this infrastructure, many of these players may be compliant but we’re seeing that they are not complete. Many are resorting to shortcuts based on old document paradigms that will be cumbersome, if not outright unsustainable for lenders to implement while others are outright limiting the loan products they can support because they do not have the requisite technology to support all products. Even if they can sidestep challenges on these particular compliance standards, it’s a problem that will only compound itself going forward.
Q: What do you see are the biggest obstacles facing the industry?
CHRIS APPIE: It’s easy to point to the regulatory obstacles; they’ve always been there in one form or another. It’s a mountain we’ll never stop climbing. That said, the CFPB’s focus on consumer protection may have created some headaches for us but at the end of the day I appreciate where they are going.
In terms of new obstacles, I think that the shift in the home buying patterns of the so-called Millennials is a particularly challenging development. This is a generation with more college graduates than any other, and at the same time it’s a generation that’s putting off marriage longer than any other. The studies I’ve seen consistently point to a main reason for this delay in marriage: they don’t feel economically prepared for it. They have higher levels of student loan debt and unemployment than Generation X or the Baby Boomers had at the same ages. All this matters because of the strong correlation between marriage and home ownership. Millennials are less likely to be homeowners than the young adults from previous generations. The result is that significant numbers of Millennials either rent or live with their parents. About a third of Millennials lived with their parents last year, which is more interesting when you consider that the share of Millennials living at home has gone up even among those who have jobs. So what factors are at play here, and when can we expect this group to enter the mortgage market?
Experian published a report last year that showed Millennials have an average credit score of 628, suggesting that this group faces challenges when they look for mortgage loans. That said, with both Fannie and Freddie both now offering programs for borrowers with as little as 3% down, clearly the market recognizes the issue and is moving towards solutions to make credit available for first-time home buyers. It’s also worth noting that the relative lateness of the labor market recovery may be impacting this group’s decision to put down roots. The flexibility of renting may seem like the better choice when looking for job opportunities. There are a lot of forces at play with this that mortgage lenders can’t control but will impact business.
Q: What do you see as the biggest challenge to overcome, industry-wise?
CHRIS APPIE: I think the industry is still working to apply the right technology models to address problems that are only now coming into focus. We need to be ready for creative application. You know, it’s not practical to satisfy the letter of the Rule—present this data like this, present some other data like that—and call it a day. The spirit of the Rule is more encompassing. You have to be ready to present any transaction data in any way that you’re asked to present it.
Beyond that, there’s a cultural problem, if you will, that hangs us up on implementation. There’s a perception that there isn’t any time to do it better, or it’s the wrong time to examine those processes and make improvements. The CFPB is changing that for us whether we like it or not. And realistically, I’m not sure that there’s such a thing as the perfect time. We’re always trying to balance competing interests and priorities, and if getting to the right technology model helps at all with beefing up overall confidence in the industry, then the time for that is now.
Now, we know that this is easier said than done. That’s why we have to be ready to approach these problems differently. For example, we have has partnered with eLynx out of Cincinnati to give folks that are not using one of our supported LOS systems the ability to use the new integrated disclosures without doing a full LOS conversion. This system will allow clients to pass up a MISMO 3.3 (UCD) dataset and the solution will deliver back fully warranted Loan Estimate and Closing Disclosures for any loan type. We’re really excited about this because it provides a path forward for folks that are on a legacy system that does not have a document solution in place prior to the August date.
Chris Appie is an attorney and Vice President of Products at Compliance Systems, Inc. (CSi). CSi is a provider of financial transaction technology and expertise serving over 1400 financial institutions across the United States. When he’s not keeping up with the CFPB he’s trying to keep his four kids under control in grocery stores and other public places. He can be reached via email at email@example.com.