The TILA-RESPA Integrated Disclosure (TRID) Rule (Rule) presents an enormous regulatory change impacting not only lenders that originate and fund mortgage loans, but many vendors that provide products and services to these lenders. The scope includes loan origination systems (LOS), title companies, settlement agents, document preparation companies, and compliance companies. Technology companies that provide a myriad of compliance products and services to financial institutions, mortgage bankers, wholesale lenders, credit unions, community banks, mortgage brokers and hard-money lenders may find themselves in the exciting yet challenging position of having to implement the Rule on multiple levels, from providing the Loan Estimate, Closing Disclosure, and written list of settlement service providers to developing new workflows, and systems, and compliance audits and tests. Implementation on so many levels and in such a variety of formats involves a coordinated effort from many departments within the provider’s organization. To serve the industry successfully, implementation of the TRID Rule will be a company-wide undertaking that includes the compliance techs, software developers, forms programmers, marketing and sales teams as well as many others inside the company. This article offers a glimpse into efforts required of a mortgage technology provider, what has been gleaned so far, and how the end state may look, as companies ensure technology will be ready by the Rule’s effective date of August 1, 2015.
UNDERSTANDING THE RULE
Preparations for the implementation of this Rule have been underway for some time now, and many technology companies formed teams to begin assessing the needs and developing possible solutions long before the announcement of the final version of the Rule on November 20, 2013.
Preparing for a project of this scope requires numerous working parts and details, making it a daunting endeavor, to say the least. Many companies started getting ready for TRID implementation in a similar manner, by trying to get a solid understanding of the requirements before and after the nearly 1,900 page final Rule was published. Partners across the industry can attest to the challenge of this initial phase –reading and comprehending the Rule itself was a Herculean task, given that it fell on top of the regular demands of most operational, compliance, and legal professionals. Those tasked with interpreting the requirements and parleying them into practical objectives spent long hours at night, after working a full day at the office, and many weekends to read and absorb the volume of pages and details but to truly understand the Rule and its nuances.
Underlying this increased compliance intensity was the regulatory burnout that was already hanging over internal IT, development, and compliance departments from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank)regulations that became effective incrementally during 2012 and2013. Compliance is now a constant concern for everyone in the mortgage lending industry, and what feels like a “ramped up” level of intensity compared to the pace a few years ago is really the new base level required to meet the demands of current compliance standards.
What became clear from a cursory reading of the Rule was that compliance must be painstakingly precise. As part of the new Rule, charges and fees that currently fall under the 10% tolerance category under RESPA will be moved to the “zero-tolerance” category. The changes require creation and execution of programs to assure no margin for error in estimating certain fees and tightened tolerances for others. This specific precision and control applies not only to how fees and charges are ordered on Page 3 of the Closing Disclosure, but also how the Loan Estimate and Closing Disclosure (collectively, TRID forms) are formatted. Never before has a mortgage lending regulation required such precision of a disclosure before data even populates it. For example, the preamble to the Rule provides:
“For example, because form H-24 contains the heading of the Loan Terms table required under § 1026.37(b) in a black rounded tab (as form H-24 does for certain other headings required under § 1026.37), the black rounded tab on form H-24 is required to be used for the “Loan Terms” heading under § 1026.37(o) for federally related mortgage loans. A tab that uses a white background with black font, or that does not use rounded corners as illustrated on form H-24 would not comply with § 1026.37(b).”
In addition, a certain font style is required on the TRID forms; some areas require all capital letters; other information requires boldface type; and rounding rules vary among truncating at the decimal point, rounding to the nearest whole dollar, and rounding to two or three decimal points. Specific rules govern the use of addenda if there is insufficient space on the TRID forms to accommodate certain information.
THE IMPACT AND SCOPE OF IMPLEMENTATION
Once an understanding of the Rule was solid technology companies had to set about to build outlines and project plans to prepare for application to multiple mortgage products and services. It became obvious from the outset that with the implementation of TRID forms, a variety of new data validation and compliance audits would be needed, especially with respect to the new tighter tolerance levels. The critical components of validation need to include the technical aspects of the forms themselves enhancements for the auditing engines to accommodate a whole new series of checks and audits.
These objectives seemed clear, but technology companies have to also determine and address any other aspects of their business models that would be affected by the Rule implementation. In as much as they can assist in lessening the real impact of the Rule on the business model of their customers, what tools could they provide?
Once the real impact of the Rule on products and services is identified, to the next step was to define the scope of implementation efforts. The mortgage industry customer base spans loan originations of all types and programs across all 50 states, Washington, D.C., and the U.S. Territories. Mortgage lenders are processing huge volumes of loans that include such diverse types as conventional loans, government (e.g., FHA, VA, USDA), and housing agency loans, construction-to-permanent loans, buy downs, and bi-weekly loans. Programming the TRID forms to accommodate the breadth of loan types presented a seriously challenging project for each company.
An important requirement that arose early was the task of defining data requirements to enable completion of the TRID forms. Once data requirements were established, the they could be communicated to LOS partners. Additionally, investors’ policies and guidelines with respect to completion of the TRID forms had to be ascertained and accommodated. Will an investor permit the settlement agent to complete the Closing Disclosure like many do today with respect to the HUD-1 Statement?
Shortly after the Rule had been published, there was a kind of industry-wide pause during which many document providers were looking to their customers for feedback about the kinds of tools they might need to successfully use and support the TRID requirements – and those same customers, banks, credit unions, and mortgage lenders were looking back with the same expectations.
Compliance with the TRID rule will require the cooperation of both ends of the industry working in tandem. Many technology companies initiated a dialogue across their customer base to determine the extent to which technological solutions would be needed to complete certain portions of the TRID forms for our customers. Some also engaged customers to advise on or participate in the preparations and testing of systems.
For example, Page 5 of the Closing Disclosure requires the lender to check one of two boxes regarding whether or not state law protects the borrower from liability for any unpaid balance on the loan if the lender forecloses on the borrower’s property and the foreclosure does not cover the amount of unpaid balance on the loan. What the industry learned from RESPA 2010 (when the GFE and HUD-1 forms changed) and the Mortgage Disclosure Improvement Act (MDIA) (when the TILA statements changed) is that many customers expect technology to do most of the heavy lifting when it comes to the completion of forms and disclosures.
CHOOSING THE RIGHT TECHNOLOGY
Based on the Rule’s requirements, the documentation varies widely based on the terms and conditions present in the transaction. The Loan Estimate disclosure alone offers two variations of page one, four variations of page two, and four variations of page three. With respect to the Closing Disclosure, the Rule provides for three variations of page one, one page two, one page three, four variations of page four, and four variations of page five.
Depending on the loan transaction, Page 2 of the Loan Estimate and Page 4 of the Closing Disclosure may include both the Adjustable Payment (AP) Table and Adjustable Interest Rate (AIR) Table, one of the tables, or neither table. In addition, depending on whether additional lines are needed to complete certain sections of the Loan Costs on Page 3 of the Closing Disclosure, new lines may be added as long as the same number of lines that are added are removed from one or more sections on Page 3. The variations might be resolved with templates for the TRID forms or they could be created dynamically based on the loan data. Either way, technology would be used to meet the need.
Because of the numerous permutations associated with the TRID forms, the technology needed to implement the Rule needed to be nimble, agile, and flexible. It needs to be nimble to populate (and not populate) the AP and/or AIR Tables and the correct number of fee lines on Page 3 of the Closing Disclosure. The technology also needs to be agile so that the current GFE, HUD-1 Statement, TILA Statement and Itemization of Amount Financed will be available for loan packages for certain loan transactions, but be suppressed for almost all types of closed-end transactions. Finally, the technology needs to be flexible to enable communication between the lender and settlement agent in any format, regardless of whether the settlement agent is using archaic systems and/or an older version of MISMO.
The demands for nimbleness, agility, and flexibility required technology providers to look at critical core components of products and services for the ability to develop scalable tools and workflow processes for their customers. Organic or outsourced resources had to be identified to ensure clients would be in compliance with mortgage lending laws regardless of the variety of mortgage products and services. The practical requirements of doing business in this environment can also be a competitive advantage. Crafting a solution that enables clients to comply with any and all new regulations is of paramount importance for technology companies wishing to maximize service and business opportunities.
With respect to communications between the lender and settlement agent, there are potential challenges to retro-fit or integrate systems of title companies that might be working with older platforms or systems, including systems that may be operating with an older version of the MISMO data set. A seamless back-end API that enables title or closing companies to exchange data with lenders is optimal for operational effectiveness and compliance. Some technology providers have sought to implement that level of cooperation and communication through solutions allowing loan data to flow in any direction;from any format to any other format; and mapping to any title company without any data degradation going in either direction.
Electronic communication and eSign are a critical tools for the delivery of the TRID forms and for satisfying the Rule’s stringent timing requirements. As the Rule permits the lender to rely on evidence of actual receipt rather than the “mailbox” rule (in which the borrower is considered to have received the disclosure three business days after it is delivered or placed in the mail or e-mail), electronic delivery can result in shaving a significant number of days to get to the closing table. As the revised Closing Disclosure requires revised delivery timelines and modified tolerance levels, even the most minor errors will be very troublesome if the outcome is a rescheduled closing date. In addition to saving time, an eSign audit trail, which captures the borrower(s)’ consent, eDelivery and eSign events, can provide lenders with the documentation necessary to evidence compliance with the stringent timing requirements of the Rule.
Last, but not least, the Rule provides for document retention requirements. The Closing Disclosure (and all documents related to the Closing Disclosure) must be retained for five years after consummation, and for all other evidence of compliance with the Rule (including the Loan Estimate), creditors must maintain records for three years after consummation of the transaction. Lenders need to be aware of these requirements and ensure technology systems offer the capability of storing the TRID forms and other associated documentation in compliance with the Rule.
GETTING IT RIGHT
Understanding the Rule is a relatively straightforward task; implementing the Rule and the TRID forms correctly under numerous scenarios is the toughest part. To ensure mortgage industry players “get it right” before the Rule’s effective date of August 1, 2015, efforts to implement the Rule need to include: (1) conducting in-depth internal testing; (2) having a select group of a technology company’s customers perform multi-phased, targeted beta testing of the TRID forms; and (3) engage internal or external compliance technicians for robust reviews and feedback about consistency with the Rule’s requirements, including recommendations for additional testing of the TRID forms and operational procedures, if needed.
While the effort required to prepare systems and software solutions to handle TRID regulations has been difficult and lengthy for technology companies serving the mortgage industry, there is an underlying upside that cannot be overlooked. Based on the Rule’s requirements, it is evident the right path to compliance comes in the form of an electronic solution. As stated by the CFPB, it is lenders who bear the responsibility for compliance with the TRID Rule at the end of the day. Electronic audits, electronic delivery, and electronic storage solutions are the logical and viable route to a better process for borrowers (and lenders). Many lenders will no doubt search for cost-effective ways to comply with TRID’s timing requirements and ultimately turn to a technological process as a solution for compliance. It’s no doubt an exciting time to be in this industry.
Melanie A. Feliciano is Chief Legal Officer of DocMagic, Inc., and Editor-in-Chief of DocMagic’s compliance newsletter, The Compliance Wizard. She can be reached at firstname.lastname@example.org.