The Consumer Financial Protection Bureau’s TILA/RESPA Integrated Disclosure (TRID) was designed to provide more clarity to consumers, who have traditionally been underwhelmed with the process of closing a mortgage loan. A few have said that the new disclosures accomplish this, but others question it. Regardless of what the new rule did for consumers, its impact on the mortgage industry has been significant.
No one can argue against the fact that the mortgage industry has always had a problem communicating with its borrowers. Under federal law intended to provide more complete information, the industry has been driven to deliver pounds of paper disclosures to the borrower, few of which are ever read and even fewer of which are understood by consumers.
The fact is that prior to TRID, borrowers did not have a clear picture of what the loan would cost them to close until they were sitting at the closing table. There were often surprises, which were never pleasant for the borrower. In survey after survey it was made clear that mistakes at the closing table were the No. 1 complaint lodged by consumers against our industry. The CFPB stepped in to change that with its TRID rule.
Under TRID, lenders are required to disclose accurate costs within days of the borrower’s completion of the loan application process (as defined by CFPB). Then when the loan underwriting process is complete, lenders are tasked with disclosing again at least three days before the loan is closed. The numbers on the first disclosure, the Loan Estimate (LE), and the latter, the Closing Disclosure (CD), have to line up very well. And that’s where one of the most serious problems our industry faces with TRID becomes evident.
Making the Numbers Work
Failure to offer the borrower a CD that closely resembles the LE puts the lender in a precarious position. Redisclosure is only permitted if certain details of the deal change. If possible, this must occur at least three days prior to closing, possibly pushing out the close another three days. Redisclosure is costly, time consuming and irritating to consumers. It can cause problems with business referral partners who need to close real estate deals on a schedule in order to better serve borrowers who are in transition between residences. Perhaps most significantly, it opens up the lender to other TRID-related problems, like botched timelines, that could render the loan unsellable. If the lender makes an error on the CD and cannot redisclose, the lender must absorb the loss.
As you would expect, lenders have worked to avoid this by making certain that every cost and fee on the CD is known in advance so that it will always match up with the LE and preserve the timeline. Providing this kind of accuracy is as easy for smaller settlement services companies as it is for larger firms, but since lenders have traditionally not included them in their fee databases they have pushed them out of some deals in favor of larger title networks for which they already know the accurate fees in advance.
The result has been the dismantling of local business referral machinery that lenders have counted on for years to generate new business. This will almost certainly hurt lenders, who will now find it more difficult to secure business in markets in which they do not have a strong business, but it is definitely very bad for smaller settlement services businesses, which could be driven completely out of the business.
Some will argue that without an alternative, it’s far better to make fewer loans that you know you can sell than to make many loans that you may end up holding when TRID problems make them unsellable. The truth is that even if their loans are salable, lenders who do not have a good TRID solution will spend more money to close when they absorb losses due to incorrect LEs. Also, there is significant reputation risk from borrowers who feel that they are the victims of a “bait and switch” scam and report it to the CFPB.
What lenders really need is the ability to create “plug and play” title networks based on their own preferences that are capable of delivering guaranteed accurate fees in time for the LE that do not change when the CD is issued. Fortunately, technology currently exists to make this possible.
The Technology Required for a Workable Solution
Too often in our industry, we hear from bright mortgage technologists about the tools they would like to build, if they only get the right investment or the right backing or the time or the personnel. This is not the kind of technology we need to guarantee TRID compliance. Yet, the right kind of technology does exist and we talk about it in a recent white paper.
It is possible to give lenders the TRID compliance guarantee they need to operate in today’s highly regulated lending environment. It’s also possible to give smaller settlement services companies the technology they need to provide guaranteed accurate fees to lenders in time for disclosure to the borrower on the CD. When these technologies are combined, they provide a clear path to TRID compliance.