Editor's note: This select print feature originally appeared in the March 2015 issue of MReport magazine.
Here are the Top Five Questions You Need to Ask Yourself Today
By Kris Stewart and Jeanne Erickson
The financial services industry has been waiting for the Dodd-Frank Truth in Lending Act and Real Estate Settlement Procedures Integrated Disclosure (TRID) rule since 2010. It has been a long journey since then, marked by extensive consumer testing by the Consumer Financial Protection Bureau, a proposed rule, a comment period, and months of education, planning, and preparation by vendors and originators. Ready or not, game time is upon us. The final rule was released in late 2013 and will take effect on August 1, 2015.
With mandatory compliance now just a few months away, the industry is faced with the reality that there is little time left to address implementation. The institutions that seem to be in the best position now are those that have been proactive and educated themselves, taking advantage of industry Webinars, conference calls, and briefings to get their arms around all of the requirements. Institutions with dedicated legal and compliance teams have likely invested significant resources in grasping the large amount of material related to these changes. Some larger institutions have conducted studies of the impact on their organizations and are likely in a good place in terms of readiness, but given the magnitude of this change and its impact on business processes and work flow, there are some critical questions mortgage originators will need to immediately ask themselves in order to determine whether they will be able to continue to operate come August.
Compliance and consulting subject matter experts across the industry have been engaging in conversations with originators and the regulators to ensure August 2015 readiness. Based on the many industry observations and conversations we have had, Wolters Kluwer Financial Services understands that implementation of a regulation as massive as the TILA-RESPA integrated disclosure rule presents a number of challenges.
Here are five key questions institutions should consider in assessing their level of readiness for the TILA RESPA Integrated Disclosure rule:
- Do I understand what the disclosure documents are and all of their unique requirements?
- What is the impact to my business process and workflow?
- What are the effects on my software systems?
- How are my vendors handling the changes, and what is their level of readiness?
- What is my training plan?
What are the TILA-RESPA Disclosure Documents and Requirements?
The TILA-RESPA integrated disclosure rule itself is primarily concerned with the creation and delivery of two new documents: the Loan Estimate, which replaces the current initial TIL and the GFE; and the Closing Disclosure, which replaces the closing TIL and HUD-1. Until you really dive in and understand the nuances in the regulation, it’s hard to imagine that implementing two documents can be such a big deal. These documents, however, are unlike others we have seen in recent years in some critical ways.
First, it’s important to understand that the CFPB conducted extensive consumer testing with these documents, so the final presentation of the documents—the content and the look and feel—are two critical components of this regulation.
The content that populates these disclosures is intended to be transaction-specific. This means that only information relative to the borrower’s transaction may be presented on the form. The result is that the presentation of information will vary based on the details of the loan. The regulation has a number of very detailed requirements related to the organization and presentation of this content, including the number of tables that must appear, the organization of fees (largely alphabetical in this case), and specific rules around bolding, rounding, and aggregating of information.
While these changes result in documents that are much more readily understood by consumers, it leads us to the second area to mention relative to documents: the extensive education (or re-education) process that goes with these changes. While it would be easy to look at this as just one more training hurdle to overcome, we think the CFPB intends these documents to really be a game changer in helping consumers be knowledgeable participants in the mortgage origination process. Lenders successful at helping all those within the origination cycle who deal with both the consumer and the documents to gain a deep understanding of these forms and their many variations, can truly provide a best-in-class customer experience. This is one time where compliance really can positively impact the bottom line of an institution by drawing in and retaining customers.
What is the impact to my business process and workflow?
There are a number of changes within this regulation, however, that will affect the lender’s operational practices in significant ways as well. For example, significant challenges involve determining which entities in a relationship will provide which requirements and the subsequent business processes needed to support those decisions. Additional considerations include working with the timing requirements of the regulation for the provision of the disclosures and the impact of this rule on the current closing process that many lenders have in place today with their settlement agents.
- On the front end of the process, there are key questions that need resolution between brokers and lenders:
- Who is doing the Loan Estimate?
- How will we work together moving forward?
- Does your present business relationship have clear terms on how to deal with things like workflow, re-disclosure, accuracy of fees, and the management of tolerance?
As with the current TILA and RESPA regulations, timing is a critical component in the revised regulation, and also a challenge. The Loan Estimate timing requirements are consistent with that of today’s disclosures (the Good Faith Estimate and Early TILA disclosure), which is to say that it is required within three business days of the application’s completion. New to the process is the requirement to provide the Closing Disclosure three business days prior to consummation, which represents a significant workflow change. The business day calculation also comes into play in determining the impact on when the closing can occur if there is the need to re-disclose. While there are some limited exceptions for closing without the three day requirement being met, the vast majority of closings will now be scheduled around the waiting periods required by the regulation.
Key questions between lenders and settlement agents include:
- Who is producing which documents?
- Have you worked out a method for exchange of data?
- Have you figured out how to ensure that the data exchange is managed to ensure privacy?
- Have you looked at your contractual relationships to make sure they support your new business expectations?
Another key business process that lenders will be working through is in changing the ways they may need to work with their settlement agents. Many institutions today rely on settlement agents to complete and provide the HUD-1. While that’s still permissible under the new rules in terms of providing the Closing Disclosure, the regulation makes clear that the lender is responsible for the accuracy of the disclosure and for ensuring that it is received by the borrower at least three business days prior to consummation.
What are the effects on my software systems?
As is often the case, this issue is the 800-pound gorilla when it comes to the impact of the TRID requirements. For now, we will limit ourselves to two topics: dual systems and data requirements. Both of these represent areas that lenders will want to be aware of as they work closely with their third-party technology vendors.
What we mean by “dual systems” is the need for the loan origination and documentation systems to support both the new disclosures, as well as the existing ones. For loans in flight as of August 1, 2015, they will need to be completed under the old rules, including providing the HUD-1 and closing TIL as they exist today. For most closed-end consumer mortgages, applications received on or after August 1, 2015, are subject to the new rules, which includes the new Loan Estimate and Closing Disclosure. There are transactions that are not subject to the new disclosures, such as home equity lines of credit, reverse mortgages, and/or mortgages secured by a mobile home or by a dwelling that is not attached to real property. These loans will continue to use the current disclosure forms required by TILA and RESPA today.
The new forms also present a number of new data and rule requirements. There are new calculations that are needed to support some of the disclosures such as best and worst case examples of payment changes resulting from variable conditions within the loan. The variability of the forms is resulting in newly identified data elements. The data standards to support the new Loan Estimate and the Closing Disclosure will exist in MISMO version 3.3 and later. Fannie Mae and Freddie Mac jointly issued their final version of their Uniform Closing Dataset that has 899 distinct elements for just the closing disclosure. Of these elements, 827 are identified as CFPB form requirements, and 72 are identified as GSE requirements. And, while we’re talking about data elements, keep in mind that many loan origination systems today are built around the HUD line number structure. For the new disclosures, that concept is gone. Internal systems will likely continue to manage fees in the HUD numbering scheme fashion. They will need to output to a form that no longer carries that distinction, but rather presents the fees alphabetically within specified categories.
Finally, don’t overlook the systems that you use to gather applications. As mentioned above the definition of an application has changed and thus, the systems that support the application process must be reviewed and perhaps revised.
How are my vendors handling the changes, and what is their level of readiness?
Ask yourself right now, do I understand where my vendors really are in terms of preparation for these changes? Every day we seem to be hearing of institutions being shocked to find out their vendor is not as far along in the implementation process as they had thought. Time is of the essence now with only a few months left to go. At this point, you should be meeting with your vendors and they should be demonstrating with production samples what you can expect to see on August 1. It is time to go beyond PowerPoint presentations and concepts. It is time for you to invite your vendors for a “show-and-tell” session. Your ability to meet your customers needs is at stake, and you need to have the confidence that your partners are far enough along in their solution development to convince you that they are well along the path of being able to produce a final product for you to review. If they are not, you may still have time to pursue a plan B. But you won’t have that luxury for long—the implementation date is fast approaching.
What is my training plan?
Employee readiness is an integral part of a successful TILA-RESPA implementation. Consider the needs of your particular organization and who you are training. Have you thought about some of the extended players that influence the transaction, such as real estate agents, brokers, title agents, local attorneys who may get involved on behalf of a customer? What about your customers themselves. What’s new for them? Some of these changes will mean new processes. Are you thinking about how to get customers over the learning curve?
Once all the business decisions are made, it will be important to complete any role-specific training based on the requirements gathered during your own internal impact analysis. Develop and deliver hands-on training for applicable front–line operations and back-house operations staff to assist in understanding TILA-RESPA’s impact on individual workflows. For example, the TRID regulation redefines what it means to take an application by eliminating a catch-all. There are now just six pieces of information that determine what is an application. Once a creditor has those six pieces of information, the application is considered “received.” Once received, the timing
requirements jump into play. So, lenders must review their current
application processes and consider whether to “sequence” the gathering of these six items to ensure that it doesn’t have an “application” before it intends to have an application. This is a crucial component to be addressed by any lender’s workflow assessment.
When developing a training plan, start with a broad-based regulatory overview of the new rule and its impact on current practices. You will likely need to provide your front–line operations, back-house operations, customer support and sales groups, along with executive management and the Board of Directors, with a general understanding of the required documentation, process, and system changes triggered by the new rule. You may also consider providing additional guidance to help your institution address some of the new operational requirements.
For the next phase of your training, focus on your own financial institution’s products and features. Take a deep-dive review of the Loan Estimate and Closing Disclosure. Your objectives will be to give key members of your organization a detailed understanding of the required documents and compliant field data that drives the dynamic requirement for the regulation. Consider who needs to understand the forms and how to explain them.
Make Your Changes Now and Relax Come August
The CFPB has been deeply engaged within industry discussions since the proposal was published and it is fair to expect that the Bureau will continue to oversee how the industry measures up to TRID rule standards and evaluate what changes, if any, may be needed in the future. The materials and guides that the CFPB has created are user-friendly, and it has provided a number of venues for discussions with vendors and creditors. How much your organization has taken advantage of the available resources will determine how prepared you feel for business to continue uninterrupted on and after August 1st. One thing is clear: given all of the time the CFPB has given the industry to prepare and all of the resources it has invested in education and discussions with impacted institutions, there will be little tolerance for non-compliance. There are no signs that exceptions will be made for originators who are not prepared. The good news is there is still time to act, there is just no time to delay. Be sure to address your questions now, understand the process implications now, and assess the readiness of your technologies, so that you can keep the focus on your customers and grow your business safely and profitably.