TRID Are you Aware?

Article by John Vong January 2015

28 January 2015

Since the early 1970’s, two Federal laws, the Truth in Lending Act (TILA) and Real Estate Settlement Proce-

dures Act (RESPA), have required lenders to provide two different disclosure forms to consumers applying for a residential mort-gage loan. Generally, two different forms have also been required at or shortly be-fore closing on the loans. Different Federal agencies developed the forms and pro-cedures under separate Federal statutes. While those documents were supposed to work together to provide a complete pic-ture of a loan transaction, inconsistencies in wording and content have challenged lenders and confused consumers.

While renovation of the disclosures and processes surrounding them has been considered from time-to-time over the past 30+ years, such a process often has seemed an insurmountable task for an in-dustry mired in the day-to-day challenges of generating mountains of disclosures

and documentation for mortgage loans. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law in 2010 and directed the Consumer Financial Protection Bureau (CFPB) to integrate the mortgage loan disclosures required under TILA and RE-SPA. On July 9, 2012, the CFPB issued for public comment an initial proposal of rules and model disclosures that integrated the TILA and RESPA disclosures. In November of 2013, the CFPB issued a final rule with new, integrated disclosures (TILA-RESPA Final Rule or the final rule), creating new forms to replace the old ones entirely. The final rule includes a detailed explanation of how the new forms (the Loan Estimate and the Closing Disclosure) should be filled out and used. Further technical amend-ments have been proposed; however, the planned implementation will be mandato-ry for loan applications received on or after August 1, 2015.

John Vong

The final rule includes a detailed explanation of how the new forms (the Loan Estimate and the Closing Disclosure) should be filled out and used.

TRID Are you Aware?

BY JOHN VONG

CHALLENGES OF TILA-RESPA INTEGRATED DISCLOSURES

The CFPB’s efforts towards ensuring a smooth transition have included spending more than a year performing extensive consumer and industry re-search, analyzing public comments, and conducting public outreach. After issuing the proposal, the CFPB conducted a large-scale quantitative study of the integrated disclosures with approximately 850 con-sumers. The results showed significantly better per-formance than the current separate disclosures un-der TILA and RESPA. Despite the CFPB’s best efforts to complete the arduous process of coordinating and synthesizing hundreds of data points and bringing consistency to procedures, numerous challenges still loom over TILA-RESPA Integrated Disclosure (TRID) implementation.

“It is clear from the structure of the new rules that the CFPB assumed that automation would begin to play a more central role in the residential mortgage settlement process,” states Donald Lampe, partner at Morrison & Foerster LLP. The new disclosure forms must be completed to exact specifications (down to the rounding of cents) and delivered on time, with extremely limited “variations” between initial disclo-sure and settlement disclosure. “In this respect, the new rule is similar to the RESPA disclosure reform rule that HUD promulgated in 2008 and 2009 (effec-tive January 1, 2010),” added Lampe. That rule intro-duced the requirement that fees and charges be dis-closed to consumers with high precision early in the process and propagated with minimal changes from an initial disclosure form to a final disclosure form. While the previous RESPA rule placed responsibility for preparation of the final forms on the settlement agent, the new rule holds the lender responsible for producing those forms. The new rule also imposes remedies and penalties for violations that did not ex-ist under the former RESPA disclosure regime. New calculations and concepts, such as a “page one” summary and cash to close, are additional require-ments for the new forms.

Technology has elevated and continues to im-prove the mortgage business. The ability to auto-mate processes adds efficiency and consistency that the industry can rely on for increased productivity. The mortgage lending industry already places a sig-

nificant emphasis on technology and automation to streamline its processes and, ultimately, to produce better quality and more compliant loans. With the new rules and subsequent enforcement, that trend will have to continue.

“When implemented correctly, technology allows organizations to scale operations with fewer resourc-es,” offers Jason Roth, senior vice president at Com-plianceEase. “While, in many industries, that scal-ability is most important for dealing with increasing volume, in the mortgage industry it is equally critical for keeping up with increasing regulatory complexity. In this way, the leverage that technology offers can be much greater for the mortgage industry than it is for other industries,” Roth adds.

Currently, fees are associated with HUD-1 settle-ment statement lines and grouped by categories. The new disclosures are alphabetized, with fees in a variety of sections, and they must move to differ-ent sections as appropriate. Lenders must complete the new forms with fees where they belong, based on the type of fee and how it is being charged. The controls that lenders have in place for current fee disclosures are generally not sufficient for TRID fee disclosures. If fees are not adequately controlled and accurately disclosed, there is potential for violations of not only the new TRID regulations but also fair lending and the Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP) requirements authorized under the Dodd-Frank Act.

The well-defined fee and section numbering that technology systems have been based upon for de-cades are gone with TRID. Along with system up-dates to produce new forms, the mechanisms that systems use to keep track of fees will need to be much more flexible than they have been. This will be particularly important because many types of fees cannot change once they have been disclosed to the consumer. Many legacy systems allow loan pro-cessors to arbitrarily add and update fees on disclo-sures. Fees in such systems are neither categorized nor tied back in any way to governing federal and state regulations. In the past, it was possible to rely upon known disclosure line numbers and sections to help ensure that regulatory controls were placed on fees according to their function.

Under TRID, that predictable organization is

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gone. Behind the scenes, technology systems will still need to know about every fee’s function and track how the fee amounts change over time in order to comply with TRID. This means that, for full imple-mentation of TRID, existing technology will need to be upgraded to accommodate the new rules. Be-cause most mortgage systems assume that the world of disclosures is as it has been for decades, there will be significant cost in reworking those assumptions to the new reality under TRID. For most systems, the change is unlikely to be a minor update. There are new pieces of information about fees and disclosures that may never have been stored or tracked before that now must be closely controlled.

CHALLENGES FOR TECHNOLOGY

Technology can only drive efficiency and quality under the new regulations when data speci-fications are designed to intelli-gently represent all necessary in-formation about transactions, and new workflows take into account all of the new requirements’ an-cillary effects. Changes to technology systems must go beyond merely collecting new fields to including new automated business rules and workflows. If hu-mans are still the main source of controls in a lender’s process, it is not likely that the lender will be able to scale their operation or to remain competitive as regulations become more complex. The new calcu-lations under TRID and the new document organi-zation present major technical challenges for many technology providers.

To fully automate TRID, for example, lenders will need to upgrade to new data formats such as Mort-gage Industry Standards Maintenance Organization (MISMO) version 3.3 and higher. Many of the mort-gage systems used by the industry are still on the MISMO 2.x standards, which were not designed for TRID and multiple disclosures. Some loan origination systems (LOS) rely on independent compliance tech-nology providers to perform the pre- and post-close audit to support compliance functions. Many compli-ance engines and document systems support, or are capable of supporting, both MISMO 2.x and 3.x.

To date, lending and settlement technology sys-tems have operated independently. The right hand does not always know what the left hand is doing. The industry doesn’t have an effective communi-cation network between lenders and settlement agents. This means that last minute changes in loan terms and/or fees, a very common occurrence, are not being relayed back to the lender in time to en-sure that the changes are performed in compliance with regulatory timing requirements. With the new requirement that lenders be held accountable for the timing, completeness, and accuracy of the clos-ing disclosure, this lack of seamless electronic com-munication and its effects will become a much more

critical issue.Technology solutions must

adapt by facilitating two-way communication with other sys-tems. Universal data standards such as MISMO will play a critical role in easing the technical bur-den of getting disparate systems to communicate with one another. Most importantly, however, data

about lending transactions must not be constrained to stay at rest, instead always being at liberty to keep other systems in the ecosystem up-to-date with the latest status of loan transactions. In selecting and im-plementing systems, lenders and settlement agents need to determine that capability and ask them-selves, ‘Does our technology adequately support multiple TRID disclosures as well as real-time audits of changes to those disclosures?’

NEW RISK ENVIRONMENTThe final rule and implementation of TRID creates

an elevated risk environment for lenders in an indus-try already at risk from fluctuating interest rates, nar-row loan demand, and lower margins. Operational risks continue to mount, particularly driven by exter-nal factors such as increasingly sophisticated cyber threats, expanding dependence on technology, and volatile regulatory requirements. The TILA-RESPA Final Rule increases those risks for lenders by intro-ducing singular accountability and liability for timing, accuracy, and completeness of disclosures.

Adding to the risk for lenders is some uncer-

Technology solutions must adapt by facilitating two-way communication

with other systems.

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Relying on vendors who are using outdated data schema standards will cause loss of

data integrity.

tainty regarding enforcement of the new TRID rules. When the Dodd-Frank Act was passed by the U.S. Congress, there wasn’t clear direction regarding whether TILA or RESPA should take precedence for enforcement. TILA and RESPA have very different li-ability structures. Under TILA, there is a private right of action for violations that can include attorney’s fees and costs. For failure to properly provide certain disclosures, statutory penalties may be imposed up to $4,000. However, there is no private right of action for violations of the RESPA disclosure requirements. The CFPB has enforcement jurisdiction for both TILA and RESPA, which includes the ability to impose pen-alties. Depending on the circumstances, penalties could include $5,000 per day for a single violation, $25,000 per day for violations shown to be reck-less, and $1 million per day for committing violations knowingly.

It is unclear now, but may be-come clearer as actions are ad-ministered, how violations will be adjudicated. If a disclosure is not provided timely or information on the Closing Disclosure is not portrayed accurately, the responsible company could face a lawsuit under Truth in Lending, or, it could face a CFPB enforce-ment action under RESPA.

COLLABORATION WITH SETTLEMENT AGENTS AND OTHER PARTIES

TRID requires process changes to the loan origi-nation life-cycle, particularly in the way that lenders approach the closing of loans. Under the new rule, the closing process needs to be at least three days ahead to meet the Closing Disclosure timing require-ment. Now that lenders are in control and liable for closing, any error may have a substantial impact on all parties, especially in a purchase transaction. Last minute changes will impact not only the borrower, but the seller and other related parties.

The big question is who is doing what: which par-ty is performing the re-disclosure and which party is providing the refund if the borrower is over charged? The responsibilities and requirements of lenders need to be spelled out in the closing instructions. Before August 2015, all of these processes need to

be put into place with the thousands of settlement agents that lenders work with.

Historically, there has been some concern among lenders about the extremely common lack of syn-chronization between systems of record and final binding HUD-1 disclosures. Because lenders are now responsible for the accuracy of the new Closing Disclosure, this gap must be addressed.

DATA STANDARDS AND TECHNOLOGYWhen lenders talk with their document prepara-

tion vendors about the forthcoming changes, they may hear, ‘Don’t worry about integration because the LOS is going to upgrade.’ This is good news,

unless the lender’s LOS vendor says, ‘Don’t worry about inte-gration because the document preparation company is going to upgrade.’ When this happens, it’s up to lenders to figure out how to leverage updated data stan-dards such as MISMO to collect and process the new information required under TRID.

Relying on vendors who are using outdated data schema standards will cause loss of data integrity. It elevates the potential for errors, particularly those that stem from different fee names used in LOSs, compliance engines, a document engines, clos-ing systems, and other providers in the ecosystem. Moreover, during a post-close quality control audit, will an auditor really be able to reconstruct what hap-pened in the transaction and recalculate the APR without an available Itemization of Amount Financed document?

Lenders must fully understand all of their tech-nology providers’ TRID implementation plans and deployment timelines because those providers’ sys-tems must all work together.

RECOGNIZING AND MITIGATING IMPACT TO THE INDUSTRY

Small and mid-tier banks and mortgage compa-nies will feel the greatest impact to internal process-es and vendor management. Large institutions have been preparing for TRID for at least the past year and have had the luxury of more resources to build mod-

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els, employ testing environments, and implement changes to policies and procedures. There is early evidence of impact on the industry due to lost pro-ductivity, increased cost, trial and error with vendors, and the prospect of uncaught compliance violations.

Management of the process and resulting chang-es is key to a successful TRID rollout. Take action now to establish an action plan, including these areas:

• Planning; • Workflow assessment; • Vendor surveys;• Change management;• System/technology upgrades; • Testing; • Education on requirements; and• Training for both internal and external

workforce.

Lenders should plan to train their entire workforce and partners (real estate and settlement agents), as well as provide education to the general public (ap-plicants) on the new documents and procedures to maintain an effective closing experience. Finally, implementation timing will be important to plan in advance. It is essential to achieve a successful imple-mentation before August 1, 2015, with full capabili-ties operational several months before the effective date.

Existing documents (GFE, TIL, and HUD-1) and the procedures supporting them have been in place for over 30 years; even borrowers are quite famil-iar with these forms. The challenges of ‘turning the tide’ of such an entrenched process are formidable; however, a viable solution is possible through effec-tive and meaningful use of technology; planning and fostering execution that addresses the broad aspects of the regulatory and operational requirements; and robust change management to support continuity.

Mr. Vong is responsible for the day-to-day operations of Compliance Ease and leads the implementation of the Board of Directors' strategies and policies. John can be reached at: J.Vong@complianceease.com

MCM

32 January 2015