Sweeping changes are coming to the mortgage closing process — and congressional lawmakers are working with the Consumer Financial Protection Bureau (CFPB) to enact a “hold-harmless” enforcement period for the real estate, mortgage and title and settlement services industries.
These efforts aim to give real estate professionals a temporary safe harbor from CFPB enforcement as they work to comply with the bureau’s TILA-RESPA Integrated Disclosures (TRID) rule, which takes effect Aug. 1.
Part of the CFPB’s “Know Before You Owe” initiative, TRID consolidates four existing disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) into two forms:
- A Loan Estimate (LE) that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application.
- A Closing Disclosure (CD) that must be provided to the consumer at least three business days prior to consummation.
These changes are expected to impact the length of time in which closings are conducted and allow for few or no last-minute changes to the transaction.
The CFPB released the final TRID rule in November 2013 and set an effective date for Aug. 1, giving the affected industries nearly two years to modify their processes, operations and systems so they are able to comply with the new regulations.
But many industry professionals have said that the complex, 1,800-page rule and all of the systems and operational changes needed to comply with it may require more time.
One bill, H.R. 2213, introduced by Reps. Steve Pearce, R-New Mexico, and Brad Sherman, D-California, would provide a reasonable hold-harmless period through the end of the year following TRID’s Aug. 1 effective date.
In another effort to intervene on the industry’s behalf, Reps. Andy Barr, R-Kentucky, and Carolyn Maloney, D-New York, submitted a letter to the CFPB asking for a hold-harmless period. And on May 14, leaders from several industries testified before the House Financial Services Committee’s Housing and Insurance Subcommittee to ask Congress to pass legislation that would implement the hold-harmless period until Dec. 31.
But so far, the CFPB has made no formal announcement that it will honor these requests.
Is there a precedent for the CFPB to create a “break in” period for the TRID rule? Yes. In 2010, the Department of Housing and Urban Development (HUD) took a similar approach when it finally wrapped up a five-year battle to reform RESPA and substantially revise the HUD-1 Settlement Statement and Good Faith Estimate. For the first few months of that new rule, HUD agreed not to take action against companies that made a good-faith effort to comply.
And the Dodd-Frank Act, which created the CFPB, gave the bureau some leeway to allow a trial implementation for rules that significantly impact the industries it regulates.
Although everyone in the industry agrees that most of the professionals involved in real estate closings should be working right now to prepare for the changes to come in August, all hope for a “break-in” period is not lost. Here are three perspectives, each from a different segment of the real estate industry, on why a lax enforcement period will be better for their industries — and better for homebuyers in the long run.
Real estate agents: Last-minute changes to transactions may be unavoidable.
Under the TRID rule, the Closing Disclosure (CD) must be provided to the buyer at least three days before closing. If there is a major change to the loan terms, such as a change from a fixed rate to an adjustable rate, or the APR increases or decreases by one-eighth of a percentage point or more, a new CD must be issued — triggering a new three-day period.
But according to Chris Polychron, president of the National Association of Realtors, because real estate transactions are complicated — and for most people, the most complex financial transaction and significant financial commitment they will experience in their lifetimes — last-minute changes may sometimes be unavoidable.
“No one can know for sure the degree to which this new rule will increase the number of delays until the rule takes effect and is implemented,” Polychron, who is also an executive broker at 1st Choice Realty in Hot Springs, Arkansas, testified at the House Financial Services Committee hearing.
In addition, because the CFPB made lenders ultimately responsible for the CD and its contents, many lenders have said they will be approving any changes to the CD — and because the ultimate lender is not present at the closing, an approval may need to be sought from the lender, who may be in a different time zone or thousands of miles away, Polychron pointed out.
“It is easy to see a scenario where an afternoon closing is carried over to the next day, and a related closing in the chain of transactions that are commonly associated with a property’s sale postponed as well,” he said. “Needless to say, this entire scenario could cost many parties significant time and money, as well as cause serious frustration.”
If the CFPB grants the industry a reprieve on enforcing the rule, “the industry and the CFPB can then collect data on problems and develop solutions to minimize costly and harmful impact on consumers,” Polychron testified. “This beta-testing period should provide enough time to collect data, identify unintended consequences and make the necessary changes.”
It also has the benefit of moving the full-fledged implementation from some of the busiest months for closings to the least busy months of January and February, Polychron added.
Mortgage lenders: We’re still waiting on loan processing systems
Mortgage lenders — and in particular, small community banks and credit unions — rely on third-party software vendors for regulatory compliance needs and the accompanying software updates and systems upgrades.
But an alarming number of banks are reporting that their vendors are not yet ready to provide the necessary updates to individual institutions, according to Cynthia Lowman, who testified in her capacity as chair of the American Bankers Association’s (ABA) Mortgage Markets Committee.
Lowman shared a recent ABA survey, which found that while a whopping 74 percent of banks are using a vendor or consultant to assist with TRID implementation, only 2 percent of their compliance systems were delivered by the end of April.
A startling 79 percent of ABA-member banks could not verify a precise delivery date or were told they would not receive systems before June. Another 21 percent said their vendors have told them to expect delivery by July.
“In fact, I have been informed by my vendor that parts of our third-party systems will not be available until after the deadline,” Lowman, who is also president of United Bank Mortgage Corp., in Grand Rapids, Michigan, said. “This means that as of the deadline, I will be able to take mortgage applications, but will not be able to close any loans where I do not have systems in place.
“Even when we do get these systems, banks must still implement the new processes and forms, train staff and test these changes for quality assurance before bringing them online.”
Additionally, about a quarter of the banks surveyed by ABA reported that their vendors “will not provide the necessary software for all the types of loans that banks plans to offer,” Lowman said.
“This means that these lenders will have to create specialized processes for these loans, integrate another vendor into their platforms or forgo the specialized products altogether,” she noted.
“The first two options will further delay compliance, and the third item is surely a loss for all consumers. Simply put, there is no realistic way that those banks can adequately prepare for the current Aug. 1 implementation. Banks that have not fully implemented by the deadline will have to curtail all mortgage lending until systems are in place, delivering a heavy blow to the mortgage market at a crucial time of the year.”
Title insurance industry: Cross-industry collaboration needs time to come together
Since November 2013, when the CFPB finalized the TRID rule, the bulk of the cross-industry education and training efforts have been led by the title insurance industry — specifically by the American Land Title Association (ALTA), which has been working for a year and a half to prepare not only its members, but other closing table partners like real estate agents and mortgage brokers, as well.
But while ALTA appreciates the CFPB’s 21-month lead-up to implementation, and has worked tirelessly to foster collaboration among all professionals involved in the real estate transaction, there may still be growing pains, testified Diane Evans, ALTA’s sitting present.
“We know from implementing past regulations that there will be a learning curve,” said Evans, who also serves as vice president at Land Title Guarantee Co. in Colorado. “Unforeseen issues will surface once the new forms are used in real homebuyer transactions. Just like with sports, no matter how much you practice, there are always going to be some adjustments you need to make during a game or match.
“This new rule completely changes the game in respect to the homebuying process. It will take greater collaboration between all the players — title and settlement agents, lenders, Realtors, attorneys, homebuilders, appraisers and others — to get deals completed efficiently and compliantly, with the ultimate goal of better serving the consumer. This will take time. It will take practice. It will require adjustments.”