By Carole Hawkins, [email protected]
The new consumer rule is 1,888 pages long.
At a large bank like Wells Fargo, it will affect how 30,000 mortgages per month are put together.
At Bank of America, a project team of 200 employees worked full-time for “two years heads down in a dead sprint to get ready.”
At mortgage software company Black Knight Financial Services, the rule has caused one of the largest updates to their product line in 15 years.
The new rule requires coordinated change between mortgage lenders and every mortgage broker, settlement agent, real estate agent and vendor involved in a home loan across the country.
After Oct. 2 to homebuyers, it will mean two new forms.
One, an estimate, the other, a final “bill” for a home mortgage.
If all goes well, the two will closely match and be easy to understand.
Great news for consumers who have found themselves overwhelmed by the cryptic documents signed at closing. It’s the entire idea behind TILA-RESPA Integrated Disclosure, or TRID.
It’s not the government’s first effort at making mortgages more transparent.
Regulation falls short
for five decades
The new federal rule has its genesis in two laws, now decades old, TILA and RESPA.
The 1968 Truth in Lending Act (TILA) requires lenders to disclose in advance the costs for obtaining credit, such as interest charges.
The 1974 Real Estate Settlement Procedures Act (RESPA) requires a written estimate of all fees connected to a mortgage — appraisals, inspections, title services, etc. — to prevent cost-inflating kickbacks between companies.
The disclosures required by the two laws overlap and the actual documents issued to consumers are confusing. Noncompliance penalties are modest for one of the disclosures and difficult to enforce for the other.
It allowed for industry mischief.
A 2002 HUD/Federal Reserve study found that when borrowers bought a house, the RESPA-required Good Faith Estimate form often did not match the final charges that appeared on their HUD-1 closing form.
Frequently, charges were substantially higher than estimated amounts. Even the brokers’ and lenders’ own fees often included ones that had not been on the original estimate.
Then, the 2008 subprime mortgage meltdown hit.
Afterward, the thinking by Congress was people had not fully understood the mortgages they’d been sold and that was at least partly to blame for the crisis. A slew of new regulations followed, many mandated by the Dodd-Frank Act.
Making mortgage
disclosures real
Today’s TRID rule is actually the final puzzle piece in a series of regulatory changes that began in 2010. Their goal: Give people real estimates of what a mortgage would cost, not ballpark figures that changed at the closing table. And, give estimates to borrowers early in the process and in a common format across every home loan, so people could comparison shop.
The first rule went into effect Jan. 1, 2010.
The fees on the Good Faith Estimate form would be regrouped into categories according to how easy they were to estimate. Tolerances were set as to how much the fees within each category could vary at closing.
One group — which included fees charged by the lender —couldn’t change at all.
Another group — which included fees for services a borrower did not shop for, for example, a third-party title company chosen by the bank — could vary by 10 percent.
And the last group — fees the borrower did shop for — could vary at will.
The rule was established by HUD. But in 2012 a new agency created by Dodd-Frank, the Consumer Financial Protection Bureau, took over its enforcement.
The change brought hefty fines with it. The new consumer bureau is empowered to collect fines from $5,000 to $1 million per day for violations of any consumer financial law.
Mortgage disclosure rules had teeth.
In November 2013, the CFPB issued a “final rule,” which would integrate the various disclosures and make them understandable to consumers.
The Good Faith Estimate and the TILA-required Truth in Lending form, were collapsed into one new form — the Loan Estimate. The final Truth in Lending form (if any updates had been issued) and the HUD-1 closing statement were combined in another new form — the Closing Disclosure.
The Closing Disclosure has to be completed and delivered to a borrower three days before closing, not at the closing table.
Its format matches the Loan Estimate line for line. That means the mortgage estimate and the final “bill” could be easily compared, so any differences between them would be obvious to borrowers.
With this final rule, the gauntlet would be thrown down. Mortgage estimates had to be real, there would be fines if they weren’t and consumers would know.
Banks drive change
The CFPB set a date of Aug. 1, (recently extended to Oct. 3) for the new forms to go into effect. The industry had two years. Lenders would find themselves at the center of the storm.
CFPB spokesman Sam Gilford said the final rule doesn’t make the lenders any more liable than they were under TILA and RESPA.
But, it does make lenders the sole party distributing the new forms to borrowers. Until now, settlement agents had filled out the HUD-1 closing form, while lenders sent out the estimates.
The way the lenders see it, being the ones to deliver the closing document will drive responsibility for its contents in their direction. That includes fees charged by parties other than the lender — title agents, mortgage brokers, appraisers, inspectors, local governments.
“You can’t unscramble an egg,” said Ken Markison, regulatory counsel for the Mortgage Bankers Association.
Tracking the story
of the loan
Black Knight Financial Services got a detailed look at what the new rule demanded, as one of the companies that designed software to help banks comply. The Jacksonville-based company’s customers include the nation’s top 25 mortgage lenders.
Today, the pathway from a Good Faith Estimate to a HUD-1 is filled with emails and faxes passed back and forth between lenders and settlement agents, items crossed out and numbers that change without people really knowing why, said Dan Sogorka, president of Black Knight Financial’s RealEC Technologies division. Data might be incorrect, missing or provided very late.
Under the Good Faith Estimate, lenders had reported in good faith and within three days of a loan application, what they knew about fees at that point in time. With the new Loan Estimate, they’ll have to do better.
“Instead of saying that a fee is going to be about $300, we say, it’s going to be $348,” Sogorka said.
The key to getting it accurate and quick was to automate.
Normally, both lenders and settlement agents collaborate to collect the information for the estimate and closing forms. But lenders use lender software and settlement agents use settlement software. The systems had to talk to each other.
Black Knight Financial built Closing Insight, a web-based portal that integrates with lender databases on one end and settlement databases on the other.
The online application hosts a page that looks like the TRID documents. Both the lender and the settlement agent update the file in real time.
The software has to not only collect data about the mortgage, but send an alert when a change is made, a tolerance is exceeded, or a deadline looms. Comment fields explain what happened, and changes are tracked, in case of audit by regulators.
Bank of America is one of the lenders that will use the new product.
“We see a huge benefit in that it helps us to demonstrate the accuracy of the fees,” said Ben Harpenau, business control manager for the bank. “We can show that collaboration back and forth between us and settlement agents.”
Lenders and settlement agents had to, not only automate communication between them, said Sorgorka, but update their own internal systems for TRID.
“All of the core technology systems that are used in the industry were involved,” he said.
Over two years it took thousands and thousands of hours of design work.
There were other changes, too. Not just to software, but to the steps taken when a loan is put together.
To get real estimates within the required three days of a loan application, lenders decided to prescreen the vendors they work with. Many lenders now require certifications to show a vendor follows best-practices and is TRID-ready.
Getting a loan to the closing table will entail “a process that’s really new for the industry,” said Judy Hughes, head of Home Lending Administration at EverBank.
When a loan application is initially approved, the lender will now reach out to the settlement agent almost immediately to learn what line items are normal, since real estate laws, taxes, fees and other customs in the mortgage transaction vary by region.
About nine days from closing, the bank and the settlement agent will jointly approve the final disclosure before the bank sends it to the borrower.
“(TRID) is something that impacts the entire transaction process,” said Hughes. “I certainly believe many of the lenders are spending thousands and thousands of hours — as have we — to ensure our associates are ready and to educate consumers.”
The consumers she’s referring to aren’t necessarily homebuyers, but the Realtors who represent them. In the U.S. there are about 2 million of them, according to the National Association of Realtors.
Now, train everybody
Up until now, many Dodd-Frank changes have not required Realtors to be involved, said Harpenau. With TRID, agents will have to help home buyers be comfortable with the new forms. That has meant getting agents comfortable first. It’s one of the reasons TRID became such a big effort.
“The (disclosure) documents are basically the bookends of the mortgage and real estate transaction,” Harpenau said. “With the documents changing, it puts the real estate agent right in the middle of all this.”
Bank of America has held training sessions for Realtors at conferences across the country. It also publishes a monthly newsletter that’s aimed at settlement agents.
The impression Realtors have of TRID has largely been positive.
Christy Budnick said she’s looking forward to it — at least in theory.
“Any time a consumer can be better educated, I think it makes for a better transaction all the way around,” said Budnick, broker and executive vice president at Berkshire Hathaway HomeServices Florida Network Realty.
Today, papers for a 2 p.m. closing might not show up until noon, or even 2 p.m., she said. If anything is wrong, there’s no wiggle room to correct it.
“It really creates a stressful situation right at the end,” Budnick said.
In order to pull off TRID though, some things will change logistically.
It’s likely agents will no longer write 30-day contracts for their home-buying clients. That’s because it will probably take more than 30 days to get a loan approved, Budnick said. If the loan isn’t ready by the time the purchase contract expires, the consumer loses the right to buy the home.
TRID lengthens the loan timeline by introducing two new waiting periods. The first is a 10-day period after the loan application, so the borrower can comparison shop.
The second is the three-day period before closing, allowed so the borrower may review the Closing Disclosure. The second waiting period extends to as long as 10 days by regulation if the disclosure is mailed, and if the mailing occurs over a holiday weekend.
“It makes a 30-day time frame virtually impossible,” Budnick said. “If you write a 30-day contract, you’re setting false expectations. You’re going to have to put extensions in place.”
Changing tires on a car running down the road
Another logistical issue will be the actual switch to the TRID forms, said Valerie Saunders, a Jacksonville-based mortgage broker who also runs a title company.
“The No. 1 problem is that you can’t test anything,” she said. “We’re not allowed to use these forms until the day they go into effect.”
Settlement agents are familiar with the categories and line items on the current HUD-1 form, a form that’s been used for 40 years. The descriptions of fees on the HUD-1 have historically never been uniform — for example one bank may charge an underwriting fee, while another bank calls it an administrative fee.
It’s a bit mysterious which line items lenders will want to use on the new forms, Saunders said.
When the Good Faith Estimate form was updated in 2010, it took the industry about four to six months to get comfortable, Saunders said.
With TRID, the change is more extensive. An Oct. 3 launch date means the first closings using the TRID forms will kick in near the holidays. “It’s going to be painful,” she said.
Settlement agents may not get to try out TRID on real life closings until Oct. 3. But behind the scenes, there has been extensive work performing closings using test scenarios.
At Black Knight Financial, testing is where the vast majority of thousands of hours and millions of dollars for TRID have been spent, said Sogorka. Now close to the finish line, the work will continue 24/7 right up until the day of launch.
The software has already been moved eight times onto the servers where it will eventually go live. There, clients have tested and coders have fixed glitches.
It’s a “practice-makes-perfect methodology” to ensure Oct. 3 — though significant — will be something of a non-event, said Don Smith, chief technology officer for Real EC Technologies.
At midnight Oct. 2 the company will make a quiet configuration change. It will be as simple as when clocks everywhere ticked past midnight during the Jan. 1, 2000, Y2K change-over, a software fix that allowed computers to recognize a year greater than 1999.
“It will essentially mean throwing a switch,” Smith said. “Then, TRID will become a living thing.”