Preparing today for tomorrow’s uniform closing dataset mandate.
It has been nearly eight years since the housing market collapsed and the mortgage industry has rebounded slowly. It is now on the path to building a foundation for long-term success. Part of this success can be attributed to how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac reconstructed the requirements for loan data. Together, they established a common approach and protocol for the capture of electronic loan data, and ultimately created a new normal for the mortgage lifecycle with the Uniform Mortgage Data Program (UMDP).
The Uniform Closing Dataset (UCD), announced in December 2016, and scheduled to take effect on September 25, 2017, is the next step in realizing the GSEs’ streamlined vision for the mortgage process. The UCD is designed to provide a common industry standard for future loan deliveries to Fannie Mae and Freddie Mac as part of the Consumer Financial Protection Bureau’s (CFPB) Closing Disclosure. Because it allows information on CFPB Closing Disclosure forms to be communicated electronically, the process allows for greater accuracy, consistency, and clarity on loan transactions. Lenders that start the UCD implementation and training process early stand to gain significant operational efficiencies.
Flattening the Learning Curve
One of the significant improvements with the UCD is the ability to expedite and streamline the process to get additional third-party information. It is fair to say there will be an advantage to lenders who already control the Closing Disclosure process, as they already have access to needed data. Others that rely on third parties for this information will be behind the curve and need to take additional steps to determine “what” information they’re going to be able to obtain, as well as “how” and “when.”
For example, for a realtor or settlement agent, being able to add information not normally included in a closing disclosure, such as the NMLS ID and state license number, becomes very beneficial to lenders from a third-party due diligence perspective.
Additionally, lenders not already familiar with using the alternative form of the Closing Disclosure, specifically the version that is intended only for refinances, may face a steeper learning curve with the new format. Training lenders on the various versions, as well as the nuances that are different from the standard Closing Disclosure, is imperative for a smooth transition process.
To implement the UCD successfully, lenders must not only understand the regulation and the form, but also understand the concepts behind exchanging this data. Lenders should encourage their teams to educate themselves on why each piece of information is important and necessary to the updated process. Having this background will help ensure they’ve got the right information beyond what is seen on the loan document on hand. If they just rely on what they’re seeing on paper, they are missing a significant part of the requirement.
A prime example of this is the calculation of points and fees for purposes of determining whether or not a loan’s costs remain below the thresholds for High Cost Loans and Ability to Repay Qualified Mortgages. While the Closing Disclosure may reflect closings costs and payees, it does not, for example, identify when a payee is an affiliate of the lender. That determination is a critical piece in assessing whether or not a fee is included in the calculated points and fees total. To this end, the GSEs will need to leverage the information contained within the UCD to identify which fees to include in the points and fees total and lenders, through their systems, will be responsible for identifying those fees that are included in the points and fees total beyond what is shown on the Closing Disclosure.
Electronically communicating the CFPB’s Closing Disclosure information through UCD submission will require extreme attention to detail and much closer communication between sellers and lenders than currently exists in the mortgage industry. With UCD, lenders will need to take responsibility for getting seller information around the transaction and communicate the accuracy of the data in the loan files.
Fortunately, the new integrations from the GSEs allow lenders to test Closing Disclosure data against the UCD specification for completeness, validity, data consistency, calculation accuracy and purchase eligibility. This helps lenders identify and correct errors earlier, which will give them confidence that their closing data aligns with the UCD standards well ahead of the September deadline.
Across the industry, many are already taking steps to prepare for these changes. For instance, at Ellie Mae we’ve already integrated UCD into our product road map, and are working with both Fannie Mae and Freddie Mac so that lenders can deliver the UCD dataset and the embedded Closing Disclosure document without ever having to leave their origination system. Likewise, the Mortgage Industry Standards Maintenance Organization (MISMO) provides great resources in terms of understanding what the GSEs will require of all lenders come September, and how you can integrate the necessary additional data points to your LOS or other systems of record that you may not be capturing today.
The GSEs have heard some lenders express concern about the new UCD mandate and the impact it could have on loan delivery. They have gone out of their way to work with lenders to try to head off potential issues to minimize this impact. However, this will be an iterative process. Over time, the expectations around data quality will continue to increase, and lenders will continue to refine their processes and improve their data collection.
The GSEs recognize there will be an adjustment period to this new process, and are willing to work with lenders to ensure loans are processed correctly. But at the same time, lenders are encouraged to proactively test out their loan origination systems that integrate with Fannie Mae’s and Freddie Mac’s UCD tools to make sure they seamlessly deliver UCD compliance well ahead of the September deadline.
Today, the whole name of the game in the secondary market is transparency. Secondary buyers want greater assurance about the quality of the loans that are being sold and purchased. Transparency is significantly increased through the Closing Disclosure since it contains sensitive, critical information such as seller furnished data, and provides additional insight into the entire loan origination process.
By improving the accuracy and consistency of the data concerning the borrower, the loan and the property, lenders will provide more certainty to the GSEs regarding a loan’s eligibility for sale in the secondary market. Also, by leveraging technological advances, the industry will gain significant operational efficiencies, and continue the process of building a sustainable future for the mortgage finance system.
But to fully understand the potential transparency benefits of the UCD mandate, we need to start by looking back five years when Fannie Mae and Freddie Mac introduced the Uniform Appraisal Dataset (UAD) under the UMDP. Once the UAD went into effect, it not only standardized appraisals, but gave the GSEs a great deal of information about property values both in subject properties securing the mortgage loans, as well as other properties that were used in determining value via appraisal reports.
As a direct result of having this additional property data, both GSEs announced the introduction of appraisal waivers —Fannie Mae’s is known as the Property Inspection Waiver (PIW) and Freddie Mac’s is the Automated Collateral Evaluation (ACE). Getting an appraisal waived is consequential for both the borrower and lender. Borrowers can save anywhere from $500 to $1,500, while lenders save a tremendous amount of time while still achieving their due diligence requirements. While it is unknown at this time how many transactions will gain the benefit of utilizing an appraisal waiver, it is clear that those who can will have a benefit in reduced closing costs and likely a reduced amount of time needed to close their loan.
Additionally, back when “Know Before You Owe” was initially proposed, the rule had within it a concept that the Closing Disclosure had to be provided in a “machine-readable format.” This triggered many questions about what that term specifically meant from a regulatory standpoint. Flash forward to when the GSEs shared their plans around UCD with the CFPB and how ultimately the machine-readable format requirement was dropped from the published final rule; so in effect the idea of having this machine-readable format came off the table as a regulatory requirement and became an industry requirement leaving the industry with greater flexibility in determining how to solve the issue of being able to gather electronic data representing the contents of the Closing Disclosure. Similarly, UCD will provide greater transparency into the loan closing data for all parties involved.
As the UCD submission becomes mandatory, having solutions in place ahead of the required effective date allows lenders to have the proper time to transition and incorporate the new closing data submission into their loan origination process. By preparing for the upcoming UCD changes early, lenders will gain the operational efficiency benefits sooner and reduce the risk of disruption to their business.