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As the industry braces for TILA-RESPA Integrated Disclosure rule (TRID) to finally be implemented, mortgage bankers must put a plan in place to manage vendor liability and risk within the context of the new rule.
Several aspects of TILA-RESPA will be left open to interpretation. While a variety of interpretations are acceptable, banks need to make sure they fully understand every individual vendor’s appetite for risk to ensure alignment. There may be variation from one vendor to the next, so banks must be proactive in learning how their vendor interprets various sections of the rule, and how they put those interpretations into the functionality. For instance, will they take a conservative approach or design the software to work in various ways based on the lender’s policies and legal counsel. It is important for lenders to make sure their interpretations and appetite for risk are aligned with each specific vendor.
Following are three key areas affected by unintended consequences, and suggestions on how banks manage them successfully.
The Problem Areas:
- Loan estimate disclosures: The objective of this rule is to simplify direct comparisons, but while the guidelines are extremely prescriptive in some areas, there is still room for varying valid interpretations so anticipate discrepancies. Vendors may choose different methods to disclose lender or seller paid fees in particular. Lenders should be making sure they understand the nuances and are comfortable with the functionality delivered by their software vendors. Make sure you know not only what the vendor is doing, but why.
- Closing process: This is a seemingly small yet very important item. There is discrepancy within the rule regarding the disclosure of lender credits in the Borrower’s Transaction Summary. This is a known issue that the CFPB is expected to reconcile at some point, but in the meantime vendors have had to make a decision on how to move forward so that lenders can test and train their users. Vendors may use varying approaches to determine how to get the numbers to balance in this section so maintaining an open dialogue with vendors will be critical.
- Product offering changes: Another consequence of the roll out of TILA-RESPA are changes in product offerings. We are already seeing some investors and aggregators announcing that they will no longer purchase certain products due to uncertainty regarding how to disclose these products. Lenders need to make sure that their loan origination software (LOS) continues to support their product line.
How to Avoid Falling Victim to Unintended TILA-RESPA consequences:
There are two fundamental ways banks can steer clear of problems associated with the above challenges:
- Making sure your vendors define risk the same as you do. After all, you don’t want your vendors making decisions on your behalf when it comes to risk appetite!
- Understanding exactly how your LOS operates to make sure it can support all of the products you need, and can be appropriately flexible when changes are made.
When it comes to resetting tolerances after a Closing Disclosure is issued, don’t assume that everything is automated in the LOS or that your vendor’s interpretation is the same as yours. It is crucial that mortgage bankers have detailed knowledge of what the system will do automatically and where it will require user input. Understanding exactly how this works is important in the event there is a valid change right before closing that causes a delay. The mechanism to reset tolerances with a Closing Disclosure is complicated and still being interpreted in differing ways. One thing everyone agrees on is that if closing is delayed more than a few days tolerances can not be reset so banks need to work with vendors to make sure they aren’t left to unknowingly absorb the costs associated with a delay, or start over, both of which will cut into already tight origination margins.
Banks also need to diligently study “liability after foreclosure” laws that vary from one state to the next and detail how the consumer will be protected in the event of a foreclosure. Getting a legal opinion in each state is not an insignificant cost, but originating banks need to think of it as an important investment avoiding future liability and problems.
TILA-RESPA is injecting new complexity into the business of mortgage origination, but by knowing where the potential pitfalls are and understanding where to be proactive, banks can avoid costly mistakes and stay on the right side of the new regulations.
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