The 60-day countdown has begun.
Banks and mortgage lenders are in the final stretch of preparing to deliver new mortgage disclosures to homebuyers starting Aug. 1, as required by the Consumer Financial Protection Bureau. The Dodd-Frank Act ordered the bureau to integrate the disclosures of the Truth-in-Lending Act and the Real Estate Settlement Procedures Act into one form, known as TRID, that is meant to help consumers more clearly understand the total costs of a home loan.
Still, insecurities abound. The chances of a mistake are high with a rule so rigid that it requires fees to be listed in alphabetical order, and the costs for violators will be steeper than ever. Massive, and expensive, technology changes are necessary to ensure compliance, bankers and mortgage lenders say.
Lenders are testing systems, training employees and ensuring compliance by third-party vendors. The major question mark is whether the many different parties involved in processing a home loan will all be on board by the deadline.
"We're training and educating our real estate agents, attorneys, title companies and preferred partners," said Andrew Chojnowski, chief operating officer of home lending at the $308.4 million-asset Federal Savings Bank in Chicago.
Robert Kelly, a senior vice president at Bank of America, in Charlotte, N.C., said the changes are an opportunity for lenders to become more efficient and competitive.
"It's a significant investment in technology, training and the amount of time we've spent engaging everyone in the industry from settlement agents to settlement-software providers to the Realtor community," Kelly said. "It's a very large impact on anyone involved in the mortgage business."
Starting Aug. 1 borrowers will be given two forms: a loan estimate within three days of applying for a mortgage, and a closing disclosure form three days before a loan closes. That means lenders will never again be able to close a loan on the same day as, or a day or two after, the approval.
The two new forms replace the current four: the initial and final Truth-in-Lending statements, the good-faith estimate and the HUD-1 settlement statement, which is used to itemize fees charged to borrowers.
Below are several major issues that banks and mortgage lenders are most nervous about.
Fear of Fines
Missteps could draw heavy fines, prompting loud concerns among mortgage industry players and a long-shot effort to delay part of the rule.
The CFPB can impose civil money penalties of $5,000 per day per violation for noncompliance, $25,000 per day for reckless violations and $1 million per day for knowing violations.
Bankers and real estate agents began lobbying Congress hard to extend the deadline. Last month 290 lawmakers urged the CFPB to wait until Dec. 31 to enforce the rule as long as institutions make a good-faith effort to comply.
"I don't think there's a realistic understanding of all the programming changes required by the rule, and how most banks are at the mercy of their software vendors," said Ferol Hettick, the director of compliance at the $12.2 billion-asset Trustmark National Bank in Jackson, Miss.
He was surprised that even lawmakers who are staunch supporters of the CFPB, and generally opposed leniency for banks, supported the effort to delay enforcement.
"Anytime you get [Rep.] Maxine Waters to sign a letter like that, it's like, 'Holy cow,' " Hettick said, referring to the California Democrat.
Yet most bankers are not counting on a reprieve and say they will be ready Aug. 1.
"It's definitely one of the biggest changes in 30 years, but it's not 'the sky is falling' mentality," Chojnowski said. "The entire housing industry will get through it together. This is going to be the new norm."
"Potential Lawsuit" Everywhere?
Exposure to lawsuits may be the bigger threat in the long run anyway.
Borrowers can sue lenders for as much as $4,000 for failing to properly provide certain disclosures on the new forms, such as the borrower's interest rate (which, given the new forms, is a highly unlikely scenario).
More important, noncompliance carries with it a private right of action. Individual borrowers will be able to sue lenders for actual damages, statutory damages in certain cases and attorney's fees, if institutions fail to comply with the new disclosures.
The old rules did not expose bankers to such liability, lawyers say.
Don Lampe, a partner at the law firm Morrison & Foerster LLP, sent shock waves through the mortgage industry when he told a group of lenders that "every closing is a potential lawsuit."
Though very few borrowers sue their mortgage lender or servicer, Lampe said he thinks the plaintiff's bar will have a field day finding errors in the new disclosures. But they are likely to do so only when a borrower goes into default and faces foreclosure, which is typically three years after they get a home loan.
"The real risk in TRID from a legal standpoint is private plaintiffs," Lampe said.
Lenders may respond by simply tightening credit, he said.
"It's going to push the industry to overemphasize credit quality because the best way to limit the risk of litigation is to make loans that do not go into default and do not create an opportunity for a legal challenge," Lampe said.
More lawsuits could come from investors, too. They might bring claims against a lender for compliance violations, though some analysts believe this risk is fairly small.
Huge Tech Challenge ...
Banks and mortgage lenders have to incorporate the new disclosures into the daily flow of how loans are originated, processed and closed. This is a hard task.
The TRID rule creates hundreds of data points that have to be included in the disclosure documents, then checked and verified to ensure compliance. The fees in particular are a huge sticking point because there is 'zero tolerance' for changing fees for services that the borrower cannot shop around for elsewhere. But others have a 10% tolerance. Failing to properly disclose changes in fees, some of which can be corrected within 30 to 60 days through re-disclosure, could result in the lender paying the borrower for differences.
"Lenders are concerned about the zero tolerance [fees] because it just increases the chances that you will have a violation and may have to give money back to the consumer," said Jed Mayk, a partner at the law firm Hudson Cook LLP.
Brian Benson, the CEO of Closing Corp., a San Diego firm that provides data on closing costs, said getting into the nitty-gritty of the data is overwhelming. His firm tracks everything from local recording fees to the so-called mansion tax in New York City.
"It's as much about efficiency as tolerance," Benson said. "If you incur a tolerance violation you may spend $150 in administrative costs to give a consumer a $3 refund."
... Adds to Cost Concerns
Brian Hale, the CEO of Stearns Lending in Santa Ana, Calif., the largest wholesale mortgage lender in the U.S., said lenders' conversion costs will be exorbitant in the many millions of dollars. But they are hard to quantify because they involve systems changes and training.
"The cost of swapping out technologies, changing workflows, training everyone and moving who does what is stunning," Hale said. "Many have been in denial about the immense impact this has. This is not just a change in the form, it affects workflow, costs, people, technology, policy and procedure and how you originate a loan."
When officials at his company last year began discussing in detail the changes that would be necessary, "you felt ill and didn't want to be in the room anymore," Hale said.
However, lenders cannot pass the costs of complying with the rule on to consumers, Bank of America's Kelly said.
The mortgage application fee has to be disclosed up front.
"The CFPB's view was that 'Know Before You Owe,' [the CFPB's step-by-step guide for consumers] drives competitiveness among lenders," Kelly said. "I wouldn't anticipate a wide swing in costs that consumers are going to see."
Some lenders will have to eat more costs than others.
John Vong, the co-founder and president of ComplianceEase, a Burlingame, Calif., software company that updates 20 different loan operating systems currently in use, said 15% of all mortgages that his firm reviews now fail the Respa rule. Retail and wholesale lenders have better controls than loans originated by third-party vendors, he said.
"When you consistently get an error rate over 10%, it means an investor or [bank] aggregator may not buy the loan," Vong said. "If the lender has to eat the differences" in disclosures to borrowers, "it eats into their profit."
Getting Everyone in Line
Closing a loan currently is often described as a mad rush on the final day. Title agents and settlement service providers typically use email, phone calls and faxes to fill in data that are given to borrowers at the closing table.
But that will all change, replaced by an interactive online collaboration between lenders and the settlement agents at closing time. Final fees and other data will have to be ready 10 days before a loan closes (in case a borrower needs to receive the documents by mail). Lenders also must have an audit trail and quality checks to reduce errors.
"It's a whole new way of interacting with the customer," said Gerardo Caceres, the client delivery executive at Real EC Technologies, a unit of Black Knight Financial Services, which has created an open technology platform called Closing Insight to connect lenders, including Bank of America and Wells Fargo, with more than 15,000 mortgage industry service providers.
For those reasons, the new deadline demands a lot of coordination of, and training for, players inside and outside banks.
Hettick at Trustmark, which has more than 200 branches in five states, is planning to mail letters this week to closing agents explaining that they must certify that they are prepared for the disclosures.
He is concerned about training more than 1,000 employees because some of the software releases will not be available until mid-June, bucking up against training in July. As a result, the bank is doing webcasts for some branches rather than in-person training.