The Consumer Financial Protection Bureau's new integrated disclosure regulations could pose problems for warehouse line providers along with their mortgage lender clients.
That's because loans could end up stuck on warehouse lines if originators can't find investors to buy blemished mortgages that don't precisely meet the stringent requirements that take effect in October.
"Some things will be curable and some things will not be curable, so if you get a loan that you close that goes to an investor that's not curable, it's not just a lender problem," said Les Acree, an executive vice president at originating lender Freedom Mortgage. "It's a lender problem and a warehouse lender problem because they've got a loan they can't get off their line."
The new regulations combine requirements from the Truth in Lending and Real Estate Settlement Procedures acts to create a set of integrated disclosures, also known as TRID. The disclosures aim to more accurately represent loan terms to consumers and hold originators to strict delivery timelines. But the mortgage industry's preparations for the new forms is an issue that could cloud the otherwise sunny outlook for warehouse lenders, which provide interim financing for mortgages being sold to secondary market investors.
It's unlikely that a minor TRID compliance issue would make a loan entirely unsalable,
A flaw in the new disclosure process appears unlikely to stop a loan sale completely, said attorney Wayne Watkinson, a partner at Levy and Watkinson in Woodbridge, N.J.
"You can sell a loan," even when there is an error, he said, and in some cases, there are ways to re-issue documentation up to 60 days after closing.
Regulation Z under the Truth in Lending Act governs when a creditor must provide a corrected Closing Disclosure, the form that replaces the current HUD-1 settlement statement and final TIL disclosure, said Jeanne Erickson, senior attorney in compliance services at Wolters Kluwer Financial Services in St. Cloud, Minnesota.
"If the Closing Disclosure becomes inaccurate because of an event that occurs within 30 days after consummation that causes the amount paid by the consumer to be inaccurate, the creditor has to provide corrected disclosures. The creditor will have 30 days to provide the corrected disclosure," she said. In the case of non-numeric clerical errors, the creditor will have 60 days to redisclose.
In any event, a well-capitalized lender can likely absorb the loss in the case of a one-off incident where a loan couldn't be sold. The bigger issue lies in delays associated with a loan sitting on a warehouse line too long, said Mike Vitali, senior vice president and chief compliance officer at LoanLogics.
"The only exposure from a warehouse lender standpoint would be if they went through the process [through closing and funding] and really screwed it up to the point where the end-investor wouldn't buy the loan off the line, but that risk is no different under current rule," he said.
If mainstream investors like Fannie Mae and Freddie Mac won't buy a flawed loan, so-called scratch and dent buyers who purchase them at a discount can step in, but the process takes more time. While originators end up paying for that extra time, it can still signal trouble for warehouse providers.
"The longer a loan sits on the line, the more there is potential for a problem," said James Reynolds III, managing partner at Reynolds Group, a Summit, N.J.-based due diligence and consulting firm.
TRID may cause a temporary slowdown in warehouse turn times, but the new disclosures will ultimately improve loan processing, said Steve Landes, president of warehouse lender NattyMac, a subsidiary of Stonegate Mortgage in Clearwater, Fla.
"There will be less need for returned wires because the lender's client really has gotten information about the loan upfront, prior to closing," he said.
Landes finds typically found funding took 12 or so days in the first quarter. Dwell times have tended to lengthen as volumes have increased and investors have gotten backed up in reviewing files.
Warehouse lenders that deal with small originators have the biggest worry, though these arrangements are already priced to take into account the additional risk of the lower economies of scale linked to volume, usage, duration and fees, Reynolds said.
For example, warehouse lenders serving "small-cap" mortgage companies with about $5 million to $10 million in capital and roughly $10 million to $20 million in monthly production look for a return on equity of around 30% and a net interest margin above 3%, Reynolds estimated.
But for a mid-cap originator with $10 million to $25 million in capital and $100 million in monthly production, warehouse lenders will take a lower return on equity of 15% to 20% and a net interest margin of 2.5% to 3%, he said.
And for large-cap originators with at least $50 million in capital and $1 billion in monthly production, warehouse providers look for return of equity of 10% to 15% and net interest margin of 1.5% to 2.5%.
On its own, TRID is unlikely to change those allocations and pricing.
"If it becomes more of a risky issue, you may see some pricing differentials but I don't think it's going to get there," said Chuck Klein, a managing partner at Mortgage Banking Solutions.
Warehouse lenders did not adjust pricing or capital allocations when other major mortgage rules went into effect, noted Ruth Lee, executive vice president at Titan Lenders Corp. in Denver, Colo. "I would expect they would not make a change related to TRID," she said.