For mortgage lenders the latest worry on the regulatory front is something called TRID, a new set of guidelines that are about to change the mortgage industry – and with change create new opportunities for some lenders and dangers for others.
The new TILA-RESPA Integrated Disclosure rule from the Consumer Financial Protection Bureau (CFPB) -- aka "TRID" – was first published in 2013 in an effort to modernize loan disclosures and closing information. Under TRID, the government came up with new forms to replace the old documents established the Real Estate Settlement Procedures Act of 1974 (RESPA) and the Truth in Lending Act (TILA). It also established a rule which said that mortgage borrowers must have closing numbers three days before settlement. That same rule provided that if there were material changes to the loan then lenders would have to issue a new three-day disclosure – even if it meant closing delays.
"The CFPB went to great lengths to protect consumers from taking on loans they didn’t clearly understand -- the 2013 TRID guidelines ran 1,888 pages," said Rick Sharga, executive vice president at Auction.com. "The unintended consequences of imposing this massive set of regulations could be that it may become more difficult for borrowers to get loans, take longer for the loans to close, and potentially increase the costs consumers pay for their mortgages.”
The good news was that the new regulations did not go into effect instantly. Instead, their implementation was delayed until August 2015. When the deadline rolled around it was then pushed back until October so that lenders and closing agents would have more time to train employees and install needed software.
Bugs & Delays
By and large most lenders were well prepared for the new regulations, known generally as the “Know Before You Owe” standards. According to a member survey by the Mortgage Bankers Association, "two-thirds of the companies say they are ready for Know Before You Owe and with little or no worry. However, one-third of the respondents indicate that they have had insufficient time to test and integrate systems and train their employees."
The result, said the MBA, was that the October "implementation date and lack of a formal compliance grace period could put consumers at risk of missed closings, blown rate locks, and other potential costs."
Of course, it's not just consumers who are at risk, failure to adhere to the October deadline could subject lenders to potentially huge fines – up to $1 million for a knowing violation.
Congress Steps In
To avoid the problem of over-zealous enforcement, in early October the House passed legislation that would create a safe harbor until February 2016. By a vote of 303 to 121, the House passed the so-called Homebuyers Assistance Act (HR 3192), a bill which says that until then lenders who act in "good faith" cannot be penalized for TRID errors. At this writing the legislation has yet to be passed by the Senate and potentially could face a White House veto, however delaying enforcement for a few months actually makes a lot of sense.
It's true that the TRID rules were first published in 2013 and that lenders and lawyers have had plenty of time to study the new standards. It's true that the August 2015 start date was pushed back to October. It's also true that most lenders are ready and able to deal with the new standards. That said, the TRID rule is so complex that even with the best of intentions mistakes are possible, including some that will inevitably stem from software glitches and employee confusion.
According to the American Bankers Association, "the most immediate worry expressed by member banks is that compliance vendors and Loan Origination System (LOS) providers have been severely late in delivering software systems required to comply with the rule. In a few instances, these systems will not be delivered until after compliance deadlines have passed. Other banks state that only portions of the systems needed for full compliance have arrived, with other installments to be delivered later. Only 60 percent of bank report having received production versions of systems by September 1. In almost all instances, banks report that they have had inadequate time to properly install and test the software."
It's notable that the proposed Homebuyers Assistance Act does not delay TRID's introduction or change its standards. Borrowers will still get the new forms and the three-day disclosure requirement remains in place. Instead, if passed the bill merely allows additional time for lenders and software vendors to test their systems in the real world, to see what happens with actual loans and to fix their systems as needed.
But what about the future? Could lenders face ruin under TRID?
Given thousands of banks, nonbanks, mortgage bankers, and mortgage brokers the odds are overwhelming that someone, somewhere will fail to follow the rules and rack up big fines under TRID.
Will TRID create a repeat of the financial meltdown with big lenders again paying out more than $140 billion to settle federal claims? That's unlikely, given Dodd-Frank standards and toughened investor requirements.
It's notable that lenders such as Wells Fargo, JP Morgan Chase and Prospect Mortgage are already leaving segments of the mortgage marketplace, at least in part because of regulatory concerns. This does not mean they will stop making mortgages, merely that they will be more selective in the products they offer and how they market them. Given changing regulatory standards, that's a path likely to be followed by many lenders.
However, the fact that some lenders change market preferences does not mean loan demand has disappeared. As traditional players shift their focus, look for new players such as nonbanks and credit unions to capture the business left behind – a huge business which still can be very profitable.