WASHINGTON — The implementation of new mortgage disclosure requirements by the Consumer Financial Protection Bureau has been a significant transition for all lenders, but the compliance process has been particularly thorny for wholesale lenders.
The rules, which as of Oct. 3 replaced four previous disclosures from the Truth in Lending Act and Real Estate Settlement Procedures Act with two new "integrated disclosures," put a premium on accuracy and require that borrowers have three days to review a final "closing disclosure" before closing. (The new disclosure policy is commonly known as TRID.)
But the complications with upgrading software in order to produce the new forms and ensuring that estimated loan pricing in the disclosure is accurate, among other things, have been magnified in wholesale loan transactions, where there are three parties to the loan transaction instead of just two.
"Wholesale is a weak link in the [CFPB] rule, because the rule says the least about the interaction that exists between the" wholesale lender and the mortgage broker, said Robert Lotstein, managing attorney of Lotstein Legal in Washington.
Issues have included mortgage brokers providing information on the initial Loan Estimate disclosure that does not completely align with the wholesale lender's pricing. Meanwhile, brokers, who typically work with several wholesale lenders, have run into the challenge that not all lenders view the CFPB rules the same way.
"They all are interpreting and implementing it differently," said Rocke Andrews, president of the National Association of Mortgage Brokers and owner of Lending Arizona, a mortgage brokerage firm in Tucson.
Lotstein said if the wholesaler spots errors regarding fees in the Loan Estimate it can bring the process to a halt. In some cases, he said, after the broker has approved a borrower's application the wholesale lender will reject the loan over errors in the disclosure, forcing the broker to shop for another wholesaler to close the loan.
"Some of our clients doing wholesale are slowing down production to deal with these issues," Lotstein said.
Previously, the title or settlement company was responsible for the accuracy of the HUD-1 settlement statement, which has been replaced by the CFPB's Closing Disclosure. Under the prior rules, if fees or the interest rate changed before settlement, the title company made the changes, updated the HUD-1 on its software and simply printed out a new one.
"In this new world, the lender has the responsibility for the borrower's Closing Disclosure," Lotstein said. Now the title company has to communicate with the lender to make last-minute changes, and the lender has to update the final disclosure and send the new version to the title company. "It is going to take time for people to get comfortable with these new roles," he said.
There have also been issues with making enhancements to loan origination software that brokers use to submit loan data that wholesalers use to complete the Closing Disclosure. "If it takes too long to complete the Closing Disclosure, [the loan] will get rejected and the borrower has to start all over again," Andrews said.
Yet he stressed that it may only take a few months for lenders and brokers to adapt to the new process. "It is a little bit of a stumble but is not going to be a major issue," he said.
Don Frommeyer, NAMB's chief executive, said that all parties involved in wholesale loan transactions are trying to be meticulous in preparing the Loan Estimate and Closing Disclosure. But at the same time they feel the time pressure imposed by the new rules. Even though a borrower must have three days to review the Closing Disclosure, the window for the lender to complete and send the form may be 10 days if the borrower is receiving the CD by mail.
"Yes, there are hiccups," Frommeyer said. "Loan origination software was not calculating the numbers correctly. They were trying to work that out." Yet, he added, when he recently attended a conference in Salt Lake City none of the 40 lenders in attendance mentioned a problem with implementing the new disclosure requirements.
Brokers deal with multiple wholesalers and many of these lenders have different methods of managing and interpreting TRID requirements. But a wholesaler may get more business from a particular broker than before if the latter finds the lender's compliance process to be efficient.
Some wholesalers have adjusted their process for compiling closing documents to make up for the CFPB requirements, such as expediting the issuance of the Closing Disclosure to ensure compliance with the three-day deadline.
For example, United Wholesale Mortgage in Troy, Mich., will issue the Closing Disclosure before the underwriter has issued a "clear to close" notice, even though other lenders interpret the CFPB rule to mean that the CD cannot be sent to the borrower until that notice has been sent and the approval is final.
"At UWM, we have compiled a checklist of the items that must be satisfied to issue the CD," a company spokesman said. "Once these items have been satisfied, we will automatically issue the CD to the borrower, even if the file has not received the clear to close."
United also uses E-sign technology to get the borrowers to sign the documents.
Mat Ishbia, the company's president and chief executive, said interest from brokers in using UWM to close loans has grown sharply since TRID went into effect. Whereas brokers used to send half of their business to the company, Ishbia said, "Now they are sending us 90% of their business.
"We are having our best closing month in November since March," he said.