(This is the second in a two-part MortgageOrb series focused on the impact that the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosure rules are having on the mortgage industry thus far. To read Part 1, click here.)
Mortgage lenders and their technology partners continue to report closing delays resulting from the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules that took effect on Oct. 3.
Last week, reports from mortgage software provider Ellie Mae and the National Association of Realtors (NAR) revealed that the average number of days to close had increased by about five days in November and December, with TRID cited as a likely cause. Although there is mounting evidence that TRID is delaying closings and boosting operating costs for mortgage lenders, the following question remains: Will the industry adapt to TRID, or will longer closing timelines and increased operating costs become the “new normal”?
A bigger question, still, is whether TRID will be worth all of the effort and expense. Some lenders and closing agents are reporting that borrowers simply aren’t reading the new disclosures and, thus, are not taking advantage of the opportunities that the new forms present, including the ability to use the information for comparison-shopping purposes.
During a recent interview with MortgageOrb, David Green, founder, president and CEO of the StoneHill Group, says his firm has seen closings delayed by an average of five days since November, thus affirming NAR’s and Ellie Mae’s recent research. He says the average cost to originate a loan has gone up, as well.
“One reason for the delays is that many of our clients truly do not understand TRID,” Green says. “We have clients that are manipulating documents in order to avoid cure rates. Another reason is that borrowers are renegotiating their loans at the last minute, which, in many cases, causes another three-day waiting period.
“Meanwhile, there has still been little to no feedback from the CFPB about these issues,” Green adds. “The agency is unresponsive when you email them due to excessive volume of emails they’re receiving. Time is money, so the delays will translate into increased costs for lenders – which will be reflected in the pricing for the consumer. This will be unavoidable.”
Some lenders, however, say they saw closing times improve somewhat in December compared with November – a sign that lenders and their vendor partners are adapting.
“In November, we were probably greater than a five-business-day delay; however, in December, our staff and the closing agents seemed to get into a flow, and we moved under that time frame,” says Jeff Bode, president and owner of Mid America Mortgage Inc. “In January, we were probably sitting at a two-day delay.
“Obviously, there was a delay built into the process by law to allow the consumer time to review the closing information, which is going to slow the process down,” Bode explains. “However, it is the lender’s job to figure out how to manage the disclosures to provide the borrower assurances that the costs are correct while delivering them earlier to manage the borrowers closing needs.”
Bode says at his firm, they have already migrated to electronic disclosures and will soon be migrating to electronic closings, which will increase the velocity of the transaction.
“But the three-day wait after the closing disclosure is issued has been the most significant delay for us, up to this point,” he says. “I think as we get more operational experience, we will move our issuance of the closing disclosure forward, so other minor delays will be limited.”
Bode says there is no question that TRID has increased the average cost per loan for his organization; in fact, he says it increased his firm’s operational expenses starting in the third quarter of last year, as new technology and systems were being put into place.
“We underestimated our own difficulty in managing the process, and our technology was a little off, which compounded the problem,” he says. “Since then, we have reduced our technology problems and migrated employees from our compliance desk over to our group that buys correspondent TRID rejects. As we continue to improve our technology, we think our costs will get back to about 20 percent more than they were pre-TRID. We have not increased our margins to cover the costs; so, in our shop, the consumer is not paying for the increased costs. I think that is a function of the market being a little slower in the late fall and winter months.”
Penny Nelson, senior vice president of mortgage operations at originations outsourcer Altavera Mortgage Services, reports that TRID has been causing closing delays for clients of her firm, as well.
“We have seen delays usually at the time of reconciliation between the settlement agent and the lender’s closer,” Nelson tells MortgageOrb. “At that time, any disclosure timing issues, data input mistakes, omissions or previously un-addressed changes in fees or transaction terms can no longer be avoided. These late-stage reckonings are costly both in time delays, as files cycle back through the compliance department for solutions, and also in the cures necessary to create a compliant file. In some cases, the issues are severe enough that completing a compliant file is no longer possible, creating the need for an impossible decision. To date, we have not seen any statistics regarding non-curable compliance issues that are discovered at the closing stage.”
The top three factors related to TRID that are commonly observed in troubled files, Nelson says, include “confusion in the interpretation of various details of the regulation; lack of an integrated approach beginning at the time the loan estimate is issued and following through approval of the final closing disclosure; and lack of respect for the level of expertise and care needed to issue the initial and subsequent loan estimates, since every effort must produce a perfect result.”
“Our view of the industry would certainly indicate that significant resources have been and continue to be committed to addressing TRID requirements,” Nelson adds. “But in some cases, the best laid plans just haven’t worked out, and efforts continue in the search for perfection. This process may continue for some time as the results of upcoming CFPB audits provide additional information and clarification of expectations.”
Over at tax and flood services firm LERETA, John Walsh, CEO, says many of his lender customers “regularly discuss the challenges they face” with regard to TRID. He says the main challenge with TRID is that the new set of rules adds another layer of complexity to an already complex process.
“Estimating closing costs is enormously complex and constantly changing,” Walsh says. “Circumstances regularly change during the origination process. The cost of an appraisal can change because the property is complex. Property tax amounts can change because exemptions or other new factors are identified post-origination. Many other factors can and do change. The challenges imposed by TRID for tracking and disclosing each and every change make an already complex process more complex and more paper-intensive. It is not at all surprising that this is delaying closings, and a week delay is consistent with what we are hearing from our lending clients.”
Mark McElroy, CEO and president of e-closing technology firm Pavaso, has a slightly different view as to why TRID is delaying closings: He says it’s due more to the fact that lenders have had to completely revamp their processes.
“The root causes of these issues are not necessarily related to the complexity of the ruling itself,” McElroy says. “In a nutshell, the industry is performing a 40-year-old process in a completely different business environment and experiencing the inefficiency of that model. Real estate closings have typically relied on the ability of the title company to act as the coordinator of all aspects of the deal, which they were very good at historically. The ruling changed the liability structure and shifted it to the lender, which, in turn, forced the lender to assume the duties once performed by the title company. This single change is akin to replacing 40 years of experience with one month of experience and has introduced what we feel are unnecessary compliance steps and poor coordination.
“The change itself is likely the right answer, but with such a major shift in business flow, the industry needs to understand that a new and different business model is required,” McElroy adds. “This new model will take a holistic view of the process, which includes the activities of all the stakeholders, presents itself as one process and requires all parties to operate in a central location. This, ultimately, was the reason Pavaso was born and currently serves this purpose reducing the amount of time to close.”
Nancy Alley, vice president of strategic planning for Simplifile, a provider of collaboration, e-recording and post-closing solutions to mortgage lenders, agrees that TRID is about much more than just implementing the new disclosures; it has required lenders to completely rethink their processes.
“With lenders taking on the responsibility of disclosing to the borrower, a paradigm shift has occurred, requiring efficient collaboration between the lender and settlement agent to ensure a timely and compliant closing,” Alley tells MortgageOrb. “One of the TRID buzzwords has been ‘collaboration,’ and the concept has been met with skepticism. Yet, how would a lender properly disclose without collaboration with the settlement agent?
“One of the misperceptions is that collaboration is a choice, but in reality, the choice is whether to collaborate electronically or manually,” Alley adds. “The microscope has never been more focused – or the downside risk ever higher. Many lenders chose to let the dust settle, to see how TRID impacted their operations, and initially solved for this process manually, leveraging email and phone to finalize disclosure data. However, as any manual process is limited by the amount of human resources and time, the result is either time delays or increased staffing costs. Now that we have four months of experience, progressive lenders seem to be gravitating toward electronic collaboration, seeking a systemic, scalable and auditable solution. The key is helping both lender and agent adopt electronic collaboration during an industry sea change.”
One major question that remains in the back of most mortgage executives’ minds, as they work through the challenges presented by TRID, is how the CFPB will handle the issue of enforcement with regard to TRID. In Part 1 of this series, Mary Kladde, CEO and president of mortgage due diligence firm Titan Lenders Corp., says her firm is seeing a high number of errors related to TRID in loan files that have been reviewed since November.
“In the capacity of executing whole loan purchase review for investors, I can tell you we are seeing extremely high fail rates in TRID compliance in correspondent submissions,” Kladde tells MortgageOrb. “Fail rates are impacted by investor interpretation of TRID. We have a couple of clients with 30 percent to 40 percent fail rates, while another has an 80 percent fail rate.”
The CFPB has issued what is being called a “grace period” for enforcement, stating that it will go easy on lenders that are making a “good faith effort” to comply with the new rules, even if they do have some TRID-related errors in loan files. The CFPB, however, has been vague about what constitutes a “good faith” effort and has not specified how long the grace period will last.
Ruth Lee, executive vice president of sales, marketing and business development at Titan Lenders, tells MortgageOrb that at her firm, “We are seeing some very interesting interpretations related to the ‘good faith’ grace period from the CFPB.”
“Richard Horn, the attorney who drafted TRID for the CFPB, sent out a recent email noting Calvin Hagins, deputy assistant director for originations in the CFPB’s office of supervision, reportedly stated at an industry conference that the CFPB will surveil TRID compliance in 2016 and that there is ‘no grace period from the bureau,'” Lee says.
“And, we can confirm the industry has adopted the mixed message in true form – with some leaning heavily on the notion of a ‘grace period’ and others taking a bright line stance, which, from a production standpoint, is like pointing a gun at cashflow,” she adds. “Of importance to liquidity, that hurts the middle market much more than the big banks – and considering the retraction from the origination market of said big banks, in the end, it will impact the consumer’s access to loans. For those loans originated with even the smallest technical defects, the coming months will expose how hard-lined that stance will really be from investors and the CFPB.”
Regardless of how the CFPB handles enforcement, lenders will continue to work the bugs out of their processes – and as a result, closing timelines are expected to improve.
“Some lenders will never get it completely right, but I think most will adapt to it,” Bode says. “Without question, this increases the complexity of the process, but as title companies and third-party vendors get more familiar with ‘Know Before You Owe,’ these challenges will subside.”
“We believe this can easily be fixed without large IT projects and elongated re-engineering efforts, but the community must understand and accept that a new model is required,” McElroy says. “Until the industry as a whole begins looking at this a different way, the problems will mount, the expenses will rise, and profits will dry up – ultimately creating opportunity for those who see it differently and shift market share accordingly.
“The industry is experiencing the negative effects of a dynamic environment using a status quo approach and will continue to do so until the pain is so great they have no other choice,” McElroy adds. “We are seeing companies recognizing this today and acknowledging that it is possible to change the model without a complete overhaul.”
“TRID will continue to create challenges as long as the CFPB continues to ignore the industry’s requests for guidance, or until the courts determine what can and cannot be done,” Green says. “However, I do not think the delays will continue to the extent we’re seeing today. As lenders become more confident and better processes are put in place, the issues will diminish.
“But, we desperately need more guidance from the CFPB,” Green adds. “Without it, lenders are going by trial and error.”