When CFPB Director Richard Cordray likened TRID concerns to the Y2K fuss, he missed the fact that the long-term impact of the rule is not yet a foregone conclusion.
By Debbie Hoffman and Laura Williamson
TRID is clearly a hot topic in the mortgage industry. The Know Before You Owe regulatory changes, including the TILA-RESPA Integrated Disclosure (TRID), have been thoroughly discussed by thousands of industry participants and been the subject of multitudes of panels, headlines, and articles. While Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) alluded in a December speech that TRID concerns were overblown when he compared it to Y2K, much of the conversation focused on the various loan operating system (LOS) updates that technology vendors could offer lenders seeking TRID compliance. Now that the dust of implementation has settled, it is apparent that lenders have survived the short-term effects of TRID through technology and manpower, but sole reliance on these two factors is proving to be unsustainable. In order to maintain a sustainable operation for the long haul in this post-TRID environment, lenders must leverage a consultant or third party with the expertise to view a full solution at the 50,000-foot level.
Richard Cordray, certainly TRID has not been the dead stop on lending that some predicted; however, it has also surely not been an easy change for the industry. The implementation of the TRID rule in 2015 has fallen somewhere in the middle, where the short-term effects have been survivable, but interim solutions are not sustainable. Thus, the issue at hand is not short-term survivability, but long-term viability.
Lenders, mortgage brokers, as well as both settlement and real estate agents, have survived the initial hurdles. Homes continue to be sold as mortgage loans are closed, and the consumer reaction has not swung forcefully either negative or positive. However, uncertainty, challenges, and complications remain.
Even though the change was expected, not one person in the mortgage industry wanted to see the 25 percent decline in mortgage applications that followed the TRID implementation date in October. After this date, mortgage application rates were unusually volatile but leveled out by mid-November, thereby proving that the concern would not be whether consumers were comfortable with the new functionality of entering a mortgage, but instead whether the mortgage industry would be able to facilitate these mortgages in a timely and lawful way.
The Technology Quick-fix May Not Stand the Test of Time
Within two months prior to TRID implementation, lenders, settlement agents, and real estate professionals began expressing material concerns regarding the length of closings. They argued that, as a result of TRID changes, closings were inching toward a 60-day period from application to closing rather than the recent historical average of 42 and 47 days. Although this claim is not yet proven, given that the October closing data in Ellie Mae’s Origination Insight Report showed the average length of a closing remained at 46 days during October, lenders’ concerns are not unfounded. Many lenders strongly agree that TRID is causing closing delays due to current technology. Several lenders are experiencing delays because they do not yet have the proper TRID checks in place in their existing LOS or they have invested in a “bolt-on” or “wrapper” technology and are working through integration and quality control.
The key challenge in reaching a sustainable solution to TRID is the technology driving the closing. Lenders must fully integrate TRID into their LOS in order to be TRID compliant, which is an extremely intense and expensive undertaking. So instead, many lenders opt to leverage “bolt-on” or “wrapper” technologies. These solutions are external technologies that lay on top of and outside of an existing LOS and are capable of integrating TRID requirements. However, these solutions are not foolproof, causing lenders to allot human labor to perform quality control on the technologies’ soft spots. For those lenders that utilize a Legacy LOS, full TRID integration may not even be an option. In fact, some lenders draw concern as to whether a “bolt-on” or “wrapper” will be a possibility for their system.
Yes, the TRID implementation may be survivable at present, but for many industry participants it will not be for very long. Companies must expend substantial manual effort to solve for technological issues. Further, this effort is mostly being drawn from quality control departments that oversee all QC efforts, thereby diluting energies that should be focused on loan quality. Thus, when considering how lenders are currently faring and expect to perform in coming months or years, the answer is mixed.
Digital Risk, LLC, has seen this situation firsthand and found the TRID compliance gaps between lenders’ LOSs and the bolt-ons and wrappers provided by technology vendors. The company found that the best approach to reaching a full solution is consulting with clients and their technology vendors to close the gaps and execute a successful TRID implementation. In addition, the company is able to further protect the lender by providing quality control solutions to cover the technology’s soft spots. This kind of consultation closes technology and compliance gaps, relinquishes QC teams back to their intended function, and enables lenders to reach a sustainable and compliant operation.
The Burden Falls Disproportionately on Community Lenders
A fact that has been inextricably linked with TRID from the beginning is that community lenders have struggled with the impact more than their larger, more resource-laden counterparts. A handful of “big banks” have been able to fully integrate TRID in their LOS, while a majority of these banks are working with bolt-on and wrapper technology vendors. As for community banks, the picture is not as bright. At the 2015 year-end, Cordray sent a response letter to the Mortgage Bankers Association (MBA) clarifying that defects can be readily “cured” in most cases, and the Bureau will take a soft stance on enforcement in the first few months following the implementation date. While demands regarding the grace period were semi-successful in ensuring that good-faith efforts would be appreciated and early shortcomings would be understood, TRID risk remains high in the minds of most community lender executives.
Without a doubt, the most prominent frustration among banks and lenders of all sizes is that the entities ultimately legally responsible for TRID compliance are not the source of the TRID gaps and failures that have arisen since implementation. Technology vendors are indispensable resources for community lenders, yet produce mixed results on TRID changes.
To be sure, vendors are facing the same obstacles of the lenders they serve—the rules are complex, and everything needs to be programmed in a user-digestible, but legally sound way. However, community lenders are themselves shouldering the consequences of mistakes. The OCC was quick to announce that examinations for TRID compliance would commence in 2016, although an exact date was not initially specified. Because the OCC has oversight authority for any bank with assets under $10 billion, this announcement understandably sounded alarms among community banks.
In the aftermath of TRID, the executives of these banks have been vocal and honest about the struggles they have faced with the vendors they depend on. Technological gaps and inconsistencies have been common in the TRID software that these banks bought and trained on, which results in further costs surrounding proper consultation and quality control support.
TRID has effectively brought to the attention of the CFPB an issue that will only get more prominent in the mortgage industry as time goes on. As lenders engage in more efforts to bring millennials into the housing market, the availability and efficiency of lender technology will be emphasized. Vendors are an integral part of technology development in any industry, but community lenders in particular will not have the financial or human resources to develop and manage such technology in-house.
The upcoming year, as always, will be an adjustment to the mortgage lending world as it adapts to a new status quo. Mortgage lending is an indispensable part of most community bank portfolios; as compliance costs rise with every regulatory change and vendors begin to increase risk as they come under CFPB scrutiny, a wave of mergers and acquisitions at the community bank level would not be entirely unexpected. Again, although community lenders are currently surviving TRID implementation, the situation is not sustainable.
Lenders Are Not Alone in Their Struggle
The effects of TRID are by no means limited to lenders, however. Settlement agents, mortgage brokers, and real estate agents are facing new obstacles in the origination process. The rules governing the new Loan Estimate and Closing Disclosure mandate an increased degree of accuracy in the mortgage process from beginning to end. As a result, these parties have lost a considerable amount of the flexibility they once had.
For settlement agents, the issue is in the details. One of the goals of TRID is to make the initial Loan Estimate mirror the final Closing Disclosure as closely as possible. As such, the quotes provided by these settlement agencies are under increased scrutiny by lenders who must pay any increase in fees that are unfounded. The quoting process is further complicated for settlement agencies by the CFPB’s specific calculation method. For example, title insurance premiums vary widely among jurisdictions, and this has an effect on values such as “cash to close.” Estimating these values in the initial Loan Estimate and maintaining them throughout the closing process will require repetition and experience before the process is perfected.
TRID has presented a logistical concern for mortgage brokers. The TRID rules clearly state that a mortgage broker has three days to deliver a Loan Estimate to a consumer once the application information is collected. As it is not uncommon for a broker to reach out to three or four lenders on a consumer’s behalf, estimates must be requested from lenders quickly to ensure a Loan Estimate will be generated in time. Such mortgage shopping is widely considered to be a benefit for the consumer, but critics argue that consumers may miss out on competitive loan offers that arrive even a day late. Providing late estimates would put a mortgage broker out of compliance with TRID—something that is clearly unsustainable should a broker wish to stay in business.
The New Normal
For lenders, comfort in the post-TRID mortgage industry will mean prioritizing regulatory compliance in their business models and finding technology and compliance vendors upon which they can rely. It is too early to determine what the exact operational or market impacts will be upon the industry; bank, and non-bank lenders, as well as vendors, will continue to adjust and find more efficient processes and integrated solutions to serve consumers. Notwithstanding, if the past five years are any indication, the industry can be confident that the CFPB will continue to identify and regulate lender shortcomings.
Well-funded lenders with the resources available to invest in adequate technology and comprehensive consultative services will be able to navigate these changes with few issues, however smaller lenders may be priced out of these resources, and the impact of TRID and future regulation may be more pronounced. Compliant and trustworthy vendors may be the determining factor for future analysis. With well-executed and affordable product and service selections, vendors and third parties can level the playing field by bridging the compliance gap between community and big banks.
Other industry professionals, such as brokers and settlement agents, will continue to feel the trickle-down effects of this regulation, and will need to adjust accordingly. The adaptability and understanding of these professionals will be key for lenders looking to successfully navigate future regulatory changes. Even as master service agreements disappear, these relationships should be appropriately maintained.
As with any sweeping regulatory implementation, successful innovation and navigation through compliance requirements are the keys to maintaining sustainable operations. Although industry participants are surviving TRID short-term, only those who can integrate the regulation in a compliant and sustainable manner will remain competitive in the market down the road.