(This is the third in a multi-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. To read Part 2, click here.)
The Consumer Financial Protection Bureau’s (CFPB) new TILA-RESPA Integrated Disclosure (TRID) rules continue to wreak havoc on mortgage lenders’ operations. Four months following implementation, there is growing evidence that the complex regulation is delaying closings, boosting origination costs and, perhaps worst of all, causing some investors to reject – or at least temporarily suspend – the acquisition of new loans subject to TRID out of fear of potential loan defects and the risk of buybacks.
At this point, the main question regarding TRID is whether the mortgage industry can successfully adapt to this new regulation or if it will continue to struggle with it. The answer can vary considerably: Some mortgage lenders and lender associations are saying that TRID is nothing short of a disaster from which the industry may never bounce back; delayed closings, increased fees to keep rates locked, higher operational costs, increased regulatory scrutiny and increased risk could end up being the “new normal” for mortgage lenders moving forward.
On the other hand, most mortgage vendors – in particular, mortgage technology firms – generally have a relatively optimistic view. Yes, TRID is a major headache for them, too, but it is potentially a competitive differentiator: Only those lenders with the best technology and the best compliance teams will successfully interpret and implement TRID.
Technology vendors have a unique perspective of TRID in that they can see the variations in lender effectiveness in dealing with the new regulation. They see some lenders trying to deal with TRID simply by “throwing bodies” at the problem, rather than making significant investment in new technologies. Other lenders may have made the investment in new software and systems but failed to properly interpret the new rules and, thus, have, so far, failed to properly update their processes.
What almost all mortgage technology vendors seem to agree on is that TRID is manageable and can be successfully implemented, but it’s just going to take the mortgage industry more time to figure out how.
“It will take some time for mortgage production to adopt the technology required to accomplish TRID in a more streamlined manner,” Dave Petro, senior vice president of risk management solutions provider ClosingCorp, tells MortgageOrb.
“I think it will take many lenders 12 to 18 months to work through the selection and implementation of new technology that is TRID ready.”
The one thing no one can deny, however, is that TRID has been delaying a high percentage of closings since its implementation on Oct. 3, 2015. Recent reports from mortgage technology provider Ellie Mae and the National Association of Realtors show that closings have been delayed by an average of three to five days since the new rules went into effect.
Petro says from what he has seen at his firm so far, a delay of “five business days seems about right.”
“Many lenders employ technology solutions that weren’t ready for TRID or easily adaptable to the workflow and document requirements as defined by TRID,” Petro says. “In many cases, lenders have enacted manual processes and work-arounds that have required hiring or transferring additional workers into the mortgage origination and fulfillment process to accomplish the new TRID requirements. Fee reconciliation is a prime example. Sit on any post-TRID industry forum and a major portion of the discussion is about the challenges in fee reconciliation. The increase in manual steps in the new TRID workflow can result in errors and re-work that may contribute to delays in closing.”
Jason Roth, chief technology officer of mortgage compliance technology firm ComplianceEase, says his firm recently conducted an analysis of 200,000 loans with application dates in September and October 2015 to determine the difference in time to close between loans made pre-TRID and those made post-TRID.
“That data shows that time to close is, on average, approximately 3.4 days longer under TRID,” Roth reports. “So, there’s no denying that TRID has delayed closings.”
Roth says though it is “difficult to pinpoint the exact reasons why” TRID is delaying closings, “the data indicates delays [are occurring] at various points in the loan process.”
“First, the time to deliver the initial disclosure package (i.e., initial truth in lending/good-faith estimate [TIL/GFE] for pre-TRID versus the initial loan estimate for TRID) shows that lenders are taking slightly longer to issue the loan estimate than they did the TIL/GFE,” Roth explains. “This could mean that lenders are taking more time to make sure that the initial disclosures are correct due to the stricter fee accuracy requirements under TRID.
“In addition, the median time from initial closing disclosure to closing is five days, though 25 percent of the TRID loans applied for in October had seven days or more between the initial closing disclosure and the closing,” Roth continues. “We would have expected the median to be closer to three days – the minimum required is three business days – so this suggests that lenders may also be leaving themselves extra time before closing to manage the closing process and also in case circumstances change at the last minute.”
Over at mortgage technology company Calyx Software, Dennis Boggs, executive vice president, reports that in his day-to-day discussions with clients, most are reporting that timelines for closings have gotten longer.
“Whether it’s three days or five days varies from lender to lender based on the processes they have in place and how well they manage their workflow and vendor collaboration,” Boggs tells MortgageOrb. “But, we have also heard from a large minority that they have not experienced delays in closing – they just have to do a lot more work to get to the finish line in the same time frame.”
Fred Gooch, general counsel and vice president of compliance for e-document technology firm DocuTech, agrees that although some lenders are having problems with TRID that are resulting in delays, some lenders have not had much difficulty at all.
“Based on our observations, TRID delays are an issue with some lenders, but we’ve seen most lenders handle the changes smoothly – many are reporting little to no delays,” Gooch says. “For those lenders experiencing delays, the issue is often one of not having all of the right technological tools needed to handle the workflow. TRID impacted so many areas – documents, LOS databases, settlement services and compliance – that a breakdown in any one area impacts the whole.”
Gooch says those lenders that have not yet experienced significant delays “have done a few things particularly well.”
“First, they embraced paperless workflow wherever possible,” he says. “This helped counter some of the natural delays built into the TRID waiting periods by reducing the time spent sending physical documents back and forth between lenders and borrowers. Second, the lenders who have not seen delays worked very closely with their partners to test, retest and test again all of the new workflows prior to the TRID implementation deadline.
“While we may see more tweaks from the CFPB based on clarifications to rule interpretations, lenders and their technology partners should be in a place where they can quickly identify potential roadblocks to work through them much more efficiently,” Gooch tells MortgageOrb. “Finally, we have found that lenders who use lender/settlement services collaboration portals can finalize the fees with the settlement agents much quicker and with increased accuracy. However, simplicity in the portal and a familiar workflow has benefited lenders the most.”
Mortgage technology vendors also have varying opinions as to whether the additional costs borne by lenders in complying with TRID will ultimately be passed on to consumers.
“There’s no doubt that many lenders made significant investments in operations and technology to prepare for TRID,” Roth says. “But personally, I’m not sure that there are ongoing operating costs that can realistically be passed along to consumers.
“If the right technology is in place, lenders can avoid significant increases in ongoing operational costs through advances such as electronic disclosures and loan documents, and continuous monitoring of all changes in loan terms and fees to reduce the need for increased human oversight,” Roth adds. “I expect, as time goes by, more lenders will implement technology to help them get ahead of broader industry trends, allowing them to keep consumer costs down. Lenders won’t be able to remain competitive for very long if their solution is to simply accept overhead and waste and attempt to pass those along as costs to consumers.”
Petro agrees that although TRID might boost operating costs for lenders in the near term, those costs will start to come down once they have a better handle on the new regulation.
“I think over time, the lenders that invest in technology and select strong partners will see production costs driven lower once they fully leverage their new technology solutions,” Petro says. “The mortgage industry has seen many advances associated with TRID. This includes automated delivery of rates and fees for the loan estimate, optical character recognition and other technologies for direct input to processing and underwriting, and Web-based reconciliation portals for settlement agents. Most lenders have yet to employ these technological advancements that are designed to streamline workflow and automate compliance with TRID. The evolution of automation in the mortgage industry will be the driving force of lowering origination costs for lenders and, ultimately, consumers.”
Some, however, say that mortgage lenders will have no choice but to pass at least some of the additional cost on to consumers.
“With TRID’s implementation, the CFPB is able to achieve its objective – but it is costing the real estate agents and lenders,” says Pramod Karachur, a project manager with mortgage technology firm IndiSoft. “Lenders and other related agencies are always trying to reduce their costs. The use of effective technology will help reduce the variable cost, but the fixed cost of an additional $300 to $500 that will be needed to lock interest rates longer, depending on the size of the loan, will have to be passed on to the homeowner. While everyone frowns on the additional cost, over time, the industry will see it as just a part of doing business and adapt as they continue originating loans.”
So, for how much longer will all of these challenges with TRID persist? As mentioned earlier, this is the big question facing the industry.
“While TRID has been a major challenge, it’s one that lenders and their vendor partners have the ability to solve,” Boggs says. “Just think of all the new rules that have been implemented since the housing crash – the first RESPA reform, the loan officer compensation rules and the qualified mortgage rules – they’re now second nature. In the long term, the same thing will happen with TRID, and it will simply be the way the industry does business. Over time, automating more parts of the process, versus manual work, will address the cost issues.”
“With RESPA reform in 2010, there were short-term challenges throughout the first six months or so as everyone adjusted to the new rules (i.e., volume was deliberately slowed, the loan process was more careful and measured, etc.),” Roth adds. “We’re seeing the same thing right now with TRID, but, if our experience with RESPA reform is any indication, these challenges will not continue in the long term. Economies of learning will help the industry as a whole. Automation and other technology will reduce the time and cost for lenders. And, as regulatory exams under TRID begin, gray areas will be clarified and regulators will be able to provide practical guidance on what is needed to comply – reducing uncertainty and increasing confidence so that everyone can get back to business as usual.”
“The mortgage industry, as a whole, made a huge investment in people, processes and technology to become compliant with TRID,” concludes Petro. “For lenders who made the required changes through investments in technology and work hard with their partners, the ongoing challenges will be less than those who built manual processes and still need to make an investment in technology to support their mortgage business for the long term. But, let’s keep things in perspective: TRID is the most impactful legislation on standard workflows in decades. Anyone spending 10 minutes in the trenches can see how difficult this is and how hard the industry is working. This will be a marathon, not a sprint. The finish line is better transparency and a better consumer experience. It’s hard to argue that this isn’t a challenge worth tackling.”