Category Archives: Mortgage Banking

URLA & ULDD – The Latest Compliance Challenges

One of the more pressing initiatives over the past year relates to the updates to the Uniform Residential Loan Application (URLA) and the Uniform Loan Delivery Dataset (ULDD). For the first time in about 20 years, the URLA is getting a major overhaul and it isn’t just cosmetic. The URLA has a whole new format, with new fields, data points, and requirements. With the initiatives going into effect in February 2020, it’s high time that lenders take a look at how they will impact the industry’s approach to loan quality going forward.


Before we jump into the implications of these two initiatives, let’s do a quick review of the ‘whats’ and ‘whys’. The URLA has seen virtually no changes for the past 20 or so years. Why is it being changed now? Good question. In short, it’s because this should have happened a long time ago. This change was inevitable. We can’t go on conducting business he way we did 20 years ago when our industry has changed so dramatically and technology has evolved so much. Think about what personal computing was 20 years ago, and where we were with data collection and analysis. We’re capable of so much more. Our industry needs to start implementing a way to leverage the technological capabilities that are now at our fingertips. And the ULDD and URLA help us do just that.



From a quality control (QC) and compliance perspective, the big stressors are about data integrity, which, technically speaking, isn’t terribly recent news. The new URLA enhances the type of data collected and the placement of that data within the loan application. That means anytime you deliver a dataset to the GSEs, you need to have that dataset in a specific format, one that’s been laid out and mapped out in a certain way. But more importantly, you need to make sure of the integrity of that data.

This is one thing that lenders regrettably forget. They’re so concerned with how to deliver the new data, that often they forget about the quality of the data itself. This can be a costly mistake, because data quality has been a big industry focus the last couple of years as both Fannie and Freddie have been very critical on data integrity issues. You also have CFPB, which monitors the industry for data integrity issues with HMDA. Now that they’re asking for new data, you can rest assured they’ll be checking to be sure that data is accurate, not merely delivered in the proper format.

A critical focus with the new URLA and the updated ULDD, with their enhanced data sets, is making sure that the data is accurate. A real push has been around how to perfect that data—where the systems are and who’s delivering the data. The LOSs are all getting up-to-date with providers creating testing models with the URLA included. Their goal is to have this fully integrated by sometime this summer with the new URLA being required in February of 2020. Lenders should rest assured that most LOS platforms will cover these updates. However, lenders do need to be prepared for an even deeper data integrity review. That’s how you eliminate the problems that come out of core data.

When it comes to the ULDD, one of the big changes is the capture and reporting of the new HMDA required data fields. So, it’s not only about making sure that data is in the right field or correct format, but even more importantly, making sure the data is accurate. One of the focal points for the ULDD changes is fair lending. If it’s important enough to add a way to collect this data, you can bet that accurately reporting your data is vital. So now that we’ve established that data integrity is of the utmost importance, we need to figure out how lenders can most effectively accomplish that.


The way lenders approach QC for ULDD and the new URLA will determine a lot about whether or not they thrive as the industry moves into more robust data collection and analysis.

Can lenders survive with their old processes when the ULDD and URLA go into effect? Sure. But I’m not sure for how long. Lenders that want to thrive and succeed in the new era need to be proactive in assuring data accuracy. If you’re still asking whether you should use technology to verify and validate data, or if you can get away with doing it manually utilizing the “stare and compare” method, the same process as they have for past 20 years, you should prepare for other more proactive lenders to pass you by.

Manual processes are risky and using technology to merely identify data integrity issues is short changing your potential for success. The real question you should be asking is whether the data in your system is accurate, and more importantly, how technology can help assure that data is accurate. Focus on the number of errors found within the data and identify the root cause of the data integrity issues. Then implement corrective action planning to track and correct these data issues once and for all. This will turbocharge your QC and risk management path into true proactive operations, a key component of industry leading lenders.

Using technology that requires manual processes, when a more advanced alternative exists, is risky. Lenders need as systemic a process as possible for data validation. One of the big things we see repeatedly is that lenders have all this data, all this information, but the systems don’t talk to each other. They receive an abundance of the required documents to support a mortgage loan, but often fail to obtain the digital data that created the document. One of the great things about utilizing the abundance of digital data that is at our fingertips is, when technology is utilized  to its full extent, this digital data allows systems to talk to each other. Otherwise, at some point along the manufacturing process, somebody needs to go back and review that actual document and verify that the data in that document was actually brought into the system accurately. It’s always best to use technology that enables all systems to communicate and share data. Otherwise, you’re risking errors and even fraud.

The appraisal is a good example of this data vs. document process. The vast majority of loans these days have some form of an appraisal to provide a verifiable opinion of value. Most all appraisals come with the actual XML data file attached. Some tech providers offer the ability  to conduct a form of data validation using that data file, and not require a person to handle the appraisal or input data points into the LOS. Without that technology, each data point is typically manually entered into the LOS by a loan processor. And of course, every time you key in a data field, you have an opportunity for error.

If you want to be proactive in improving data integrity, the key is to bring as many data fields as possible into your LOS in a digital  format. And if you bring in the data digitally from your actual source document, the appraisal in this case, you’ll know the data fields on that appraisal are 100 percent accurate. Authority documents can be used to help validate data fields from other documents referencing the appraised  value. Technology allows lenders to compare  and validate all the data within their LOS and other key documents to that authority document with a click of the button


Data quality has always been important, but the ULDD and URLA initiatives are only going to make it more so. It’s important for the lending community to be even more critical of their data integrity. Don’t make the unfortunately all-too- common mistake of believing that delivering data in accordance with the ULDD assures that your data is right. In reality, the ULDD makes sure all their data fields are there, but does not validate the data is accurate.

Financial risks are high when compromising data integrity. Inaccurate data can cause a multitude of problems, from delays in loan delivery, extended warehouse dwell times, and, in many cases, pricing adjustments. In the worst cases, repurchase obligations result. If you think the GSEs won’t say they don’t want to buy a loan because the data you provided doesn’t match what you indicated you were selling, guess again. It’s the worst-case scenario, but it happens. Regulators, like the CFPB, for example, aren’t going away anytime soon. They’re closely scrutinizing HMDA data and have already levied numerous fines, some in the millions, for data validation errors.

So, no matter what changes are coming in  May for the ULDD and in early 2020 for the URLA, a critical piece in preparation is to make sure your data is accurate. Technology can relieve a number of loan delivery headaches while bringing  a substantial reduction in overhead. You just need to decide whether you will accomplish your goals by reacting to market conditions, or by proactively managing them.

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Strategies for TRID Compliance and Eliminating Tolerance Cures

The CPFB’s TILA-REPSA Integrated Disclosure (TRID) Rule went into effect on October 3, 2015, following a two-year period of consternation and anticipation on the part of mortgage industry professionals, particularly lenders and originators. When the CFPB initially released the final rule on TRID in late 2013, the rule contained more than 1,900 pages.

In an effort to make the mortgage settlement process smoother for the borrower, TRID combined four disclosures into two. The Good Faith Estimate (GFE) and initial Truth-in-Lending disclosures combined to form the Loan Estimate, and the HUD-1 and final Truth-in-Lending disclosures combined to form the Closing Disclosure. At the same time, the CFPB shifted the onus of accurate settlement forms from the settlement service provider to the creditor, thus creating numerous compliance and quality control challenges for mortgage creditors.

It has been more than three years since TRID launched. The CFPB has made changes to the rule along the way, but lenders and originators still find it challenging to comply with parts of the TRID rule. Mortgage Compliance Magazine recently sat down with Belinda Kraus, Vice President of Risk and Compliance at Trelix™, an Altisource Business Unit, to discuss what challenges she is seeing in the industry and what to do about them.

MCM: Is there any way we could have seen this coming when TRID went into effect?

Belinda Kraus: In 2015, had you asked me to forecast quality control issues three and a half years into the future I would not have anticipated we would still be dealing with TRID issues. If I choose the top three quality control trends I currently see the industry struggling with, the top two relate to TRID compliance.

The first trend is in regards to fee tolerance violations on the Closing Disclosure. Documenting the Loan Estimate requires each fee to be placed in one of three different categories– a zero tolerance, 10 percent cumulative tolerance, or no tolerance bucket depending on the fee and whether or not the borrower is allowed to shop for the service provided. The zero tolerance and no tolerance categories sound as though they would have similar requirements; however, they are subject to two different thresholds. Zero tolerance refers to those fees or services that the creditor does not allow the borrower to shop for. The no tolerance category is unlimited, or those fees that the creditor does not have control over, meaning the borrower chose to shop and selected a third-party provider that was not recommended by the creditor. Keep in mind, though, creditors are always required to make a good faith effort to accurately estimate the fee utilizing the best information reasonably available at the time. The 10 percent cumulative tolerance bucket is for charges or fees that relate to recording of legal documentation and the third-party services the creditor recommended and the borrower selected. As the loan manufacturing process progresses, services and fees are selected causing fees to potentially move from one bucket to another. This is where the industry is getting tripped up and fee tolerance violations are occurring.

MCM: What can lenders do to counteract this?

Kraus: The best practice to curtailing TRID fee tolerance violations is to utilize industry compliance technology. Use it early and often. I recommend that lenders run the compliance tool a minimum of four times during the lifecycle of the manufacturing process. Run the tool before the borrower is given the Loan Estimate, run it on any revised Loan Estimates, run it before the Closing Disclosure is given to the borrower and again if there are any revisions to the Closing Disclosure. It is cheaper to run your compliance engine multiple times throughout the process than it is to continually pay tolerance violation fees.

MCM: What else are lenders still having trouble with as far as TRID compliance?

Kraus: The second TRID violation trend relates to the timing of the Loan Estimate and the creditor requesting the borrower’s intent to proceed. The rule specifies the borrower must receive the Loan Estimate first, and then the creditor can ask the borrower for their intent to proceed. How the creditor receives the intent to proceed is also dictated by the rule. Intent to proceed can be done verbally or as a written communication. The written communication can be in an email or a pre-printed form from the lender wherein the borrower signs indicating, “Yes, I have received the Loan Estimate, and now I’m indicating my intent to proceed with this loan.” Borrower silence is not indicative of an intent to proceed. The lender must ensure the intent to proceed communication received from the borrower is retained in the file. There are a couple of ways that this can happen, but the biggest hurdle can be retaining proof that the borrower received the Loan Estimate prior to the loan officer asking the borrower to give their intent to proceed.

MCM: Is technology the solution in this area as well?

Kraus: Yes. Utilizing technology is a way to ensure loan officers don’t put the cart before the horse. If you build a hard stop into your technology that requires proof of Loan Estimate delivery before unlocking the intent to proceed field, then the loan officer can’t get overzealous and do the whole process at once. The lender must retain a record of the intent to proceed. So, what happens if the loan officer received verbal intent to proceed? Program your technology to include a date and time stamp field in the notes section, so you can still prove the Loan Estimate was delivered before the loan officer received the intent to proceed from the borrower. The CFPB really wants to see those two distinct steps.

MCM: That takes care of the two common struggles with TRID compliance. What else have you seen the industry struggling with outside of TRID?

Kraus: The third most common compliance issue is erroneous income and asset calculations. The industry seems to continuously struggle with these calculations, which boggles my mind a bit since we have all of this great technology that can do the work for us. Even an Excel workbook can be programmed to accept data input that will complete the calculations.

MCM: That sounds like a simple enough solution. Is there more to it?

Kraus: A formulated spreadsheet in Excel is the simplest use of technology for this purpose, but technology continues to progress and now optical recognition is becoming more commonplace in the mortgage industry. Ideally, a lender automates as much of the manufacturing process as they can. If the loan officer can scan income and asset documentation into optical recognition software at the onset of the application process, errors will be reduced on the front end. It boils down to whether or not the lender can justify the cost of technology over the cost of correcting the errors that occur.


TRID 2.0 Compliance – What You Need to Know About Service Providers

When it comes to consumer shopping for third party settlement service providers, the TILA-RESPA Integrated Disclosure (TRID) rule contains several compliance requirements.  These requirements include specific disclosures and impact the fee tolerance thresholds.  This article addresses some common questions regarding the service provider shopping provisions.

What does it mean to “shop” for a service?

Page two of the loan estimate contains disclosures regarding the closing cost details of the transaction.  Under Loan Costs, sections B and C disclose those services that consumer may and may not shop for.  A consumer shops for a service provider when he/she she is free to select the provider of his/her choice.  Lenders may impose reasonable requirements on the service provider’s qualifications, such as ensuring the settlement provider is appropriately licensed. However, requiring that a provider use a certain type of software would not be considered a reasonable requirement. Any lender provider requirements should correspond to the ability of the provider to perform the service in a competent manner.

In contrast, a consumer is considered not to have the ability to shop for a provider if the lender selects the provider and offers the consumer no other alternative.  Note that if the lender limits the service provider choices to a list selected by the lender, the consumer is not considered able to shop.

Are lenders required to allow service provider shopping?

Lenders have considerable leeway in determining which services may or may not be shopped for.  On one end of the spectrum, a lender could select all settlement service providers and not allow any consumer shopping. Typically, lenders allow consumers to shop for some but not all service providers.  Note that state law may require that a borrower be able to select their own attorney, which would mean the borrower must be able to shop for that provider. And remember, fees for required services that may not be shopped for are subject to the zero-fee tolerance threshold.

What is the Written List of Service Providers?

If the consumer may shop for a settlement service provider, the lender must provide a written list of service providers (written list). The written list is a separate disclosure that must also be provided within three business days of receiving an application.

From a disclosure perspective, the written list must identify at least one provider per service that may be shopped for and include detailed contact information for each provider. The providers disclosed on the written list must correspond to those services disclosed on page two of the loan estimate, in section C. The written list must also state that the consumer is not required to select the provider disclosed on the written list. Note that the TRID rule provides a model form for the written list; however, lenders may create their own document but it must track the model form.  In addition to disclosing services the consumer may shop for on the written list, lenders may also disclose those services that may not be shopped for. And, the lender may include a statement that it is not endorsing any provider disclosed on the written list.

What are the fee tolerances for services that may be shopped for?

At the Loan Estimate stage, fees for services that may be shopped for are included in the 10 percent tolerance category. This tolerance may or may not shift at the closing disclosure stage, depending upon whether the consumer chooses a provider from the written list.

If the consumer selects a provider from the written list, the fee for that service remains in the 10 percent cumulative tolerance category. If the consumer selects a provider that is not on the written list, the fee for provider shifts to the no tolerance category.  As long as the service provider fee is disclosed on the written list is in good faith, increases in that fee will not be subject to any tolerance restrictions.  Because of the potential shift in tolerance, it’s important to monitor consumer shopping activity.

What are the consequences for failing to comply with the written list requirements?

Failure to comply with the written list requirements may result in changes to fee tolerances and may constitute a Regulation Z violation. If the lender fails to provide the written list, but the facts and circumstances indicate the consumer was permitted to shop, the fees for the service are subject to the 10% cumulative tolerance standard. However, if those fees are paid to the lender or an affiliate, they are subject to the zero tolerance standard. Note that even if the consumer is considered permitted to shop, failure to provide the written list would be considered a Reg Z violation.

With respect to errors or omissions on the written list, if the consumer is not prevented from shopping and the fees are not paid to the lender or an affiliate, the fees are subject to the 10% cumulative tolerance standard. If the error or omission does prevent the consumer from shopping, the charges are subject to the zero tolerance standard. Determining whether the error or omission prevents the consumer from shopping is based on all of the relevant facts and circumstances.

While TRID compliance often focuses on the loan estimate and the closing disclosure, it’s important to train staff on the written list of service provider requirements.  Potential shifts in tolerance thresholds and compliance violations can certainly add up over time.

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What Are PACE Loans ? … Why You Need to Know

CFPB indicates PACE regulations are on the horizon

The Consumer Financial Protection Bureau (CFPB) has issued an advance note of proposed rulemaking on Property Assessed Clean Energy (PACE) loans, signaling its intention to increase oversight on the divisive financing program.

PACE financing allows homeowners to pay for energy-efficient retrofitting through their property-tax assessments. In some states, these loans can take lien priority over the property’s primary mortgage — a rule that has drawn the ire of the mortgage industry. Another target of the mortgage industry’s criticism is that the PACE program faces fewer regulations than other types of financial services.

For a few years, mortgage and real estate industry groups have been urging the CFPB for tighter oversight of PACE loans. Nine trade organizations, including the American Bankers Association (ABA), the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) co-signed a letter to the CFPB this past October, asking for PACE-loan subordination to established lien priority standards, as well as incorporating the PACE program into the Truth in Lending Act’s “overall mortgage protections.”

It seems the CFPB has taken notice.

Specifically, the CFPB’s notice calls for mandating ability-to-repay requirements, which are currently in place for residential mortgages through the Truth in Lending Act. That mandate was put in place last year by the Economic Growth, Regulatory Relief and Consumer Protection Act, which eased regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Kathleen Kraninger, director of the CFPB, called the issuance “the next step in the Bureau’s efforts to implement the Economic Growth, Regulatory Relief and Consumer Protection Act as expeditiously as possible.”

New rules could hamper the rising popularity of PACE loans, which has mounted as buyers have become more interested in green-building and energy-efficiency strategies. The U.S. Department of Housing and Urban Development announced in 2016 that the Federal Housing Administration would guarantee mortgages accompanied by PACE liens, which helped the PACE program grow during the tail end of the Obama administration. That move, however, was met by widespread disapproval from the mortgage industry and the Trump administration reversed the policy in December 2017.


How to Make Your Mortgage Business Recession Proof

The mortgage industry has taken a beating in the past year.
Some lenders are expected to loosen their credit standard to improve profits.
But JPMorgan Chase is ceding market share — intentionally.
Anticipating recession, the bank has been reinforcing its mortgage business to make it recession-proof — even if it means sacrificing market share and profits in the near term.
“It is a tough time to be in the mortgage business,” Gordon Smith, the CEO of Consumer and Community Banking at JPMorgan Chase, said Tuesday at the bank’s investor day.

Indeed, the mortgage industry has taken a beating in the past year amid intensifying competition, rising costs, and dwindling home sales.

At JPMorgan Chase, one of the largest US residential mortgage lenders, originations fell 29% to $79 billion in 2018.

That in part caused mortgage production revenue to drop sharply to $370 million — less than half of the $640 million tally in 2017 and a third of the $850 million it earned in 2016. Overall mortgage fees declined 22% to $1.25 billion in 2018 from $1.61 billion in the previous year.

Because JPMorgan is the largest US bank, its every pivot and parry is closely watched by competitors and the business community writ large.

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But anyone expecting executives discussing these figures at the investor day to don a gloom-and-doom demeanor or unveil a battle plan to reclaim market share and profits were dearly disappointed.

To the contrary, JPMorgan signaled it was perfectly content to cede market share to competitors and in fact had done so on purpose.

“Where we’ve lost share, it’s been intentional,” the bank’s chief financial officer, Marianne Lake, said.

To what end? Count up the roughly dozen times senior execs said “recession” or “downturn” during their presentations and you get a clue as to what’s driving their strategy.

The bank is taking great pains to make its mortgage business recession-proof — even if it means sacrificing market share and profits in the near term.

“We’re not waiting for a recession and then to act on the recession,” Smith said. “We monitor credit performance hourly, daily, weekly, monthly.”

As Smith explained, JPMorgan has been preoccupied with “de-risking” its mortgage business. It has rebalanced its portfolio, focusing on prime loans to borrowers with top-notch credit scores.

So, while originations and revenue have fallen, so have delinquencies on the mortgages they hold or service. Their delinquency rate on servicing declined 28% in 2018, and the bank recovered more delinquent loans than it charged off — something that didn’t happen in the preceding four years.

JPMorgan 2019 investor day screen shot
JPMorgan Chase
This isn’t necessarily the tack every mortgage lender is taking. Moody’s wrote in a report this month that in the face of the industry’s economic headwinds, residential mortgage originators are expected to “loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances.”

Amid the loosening, Moody’s expects loan delinquencies, which have been hovering near postcrisis lows, to increase modestly over the coming year.

Much of this loosening will come from smaller companies that specialize in home lending, according to Warren Kornfeld, a senior vice president covering financial institutions at Moody’s. Global behemoths like JPMorgan have the flexibility, given their business diversity, to back off if they spot foreboding economic storm clouds.

“They have a greater ability to step back from a market if profitability and risk/reward opportunities are subpar,” Kornfeld said.

Grasping for profits by reaching down the credit spectrum is a double-edged sword. Looser lending standards mean a greater risk that some of those loans don’t get paid back and turn red on the income statement.

JPMorgan isn’t willing to let that happen.

“Given the expense, plus headline risk, banks really do not want to service delinquent loans, especially on loans that they own,” Kornfeld said. “The common thread in the market is that banks are focusing on their core customers with residential mortgage lending.”

Read more:
Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing
JPMorgan Chase shared a slide with investors that explains why mortgage lenders are getting smoked
Home sales continue to get whacked, falling to a 3-year low, and an increase in mortgage delinquencies is looming
Rust-belt cities that got killed in the recession are making comeback, and they’ve become the best places for millennials to buy a home

The Latest Regulations on Your Appraisal and Evaluation Review Program

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was a law enacted in response to the savings and loan crisis of the 1980s. Interestingly, FIRREA accomplished significant changes in the areas of deposit insurance and federal regulation of the savings and loan industry at the time. Let’s hone our focus on the area of appraisals.

Reviewing the Old

No doubt, FIRREA has been around for quite some time. And, we have seen guidelines produced by federal regulators to ensure understanding and compliance of the requirements. Are you aware that FAQs were published in October 2018 to assist us as we deal with appraisals? While no new content was introduced with the FAQs, a review of the them may trigger for you a need to know more about this topic. Here are a few questions posed from the FAQs published by the FDIC, OCC, and FRB. To review the entire FAQ document, click here.

Question #6: What cost-effective actions can a smaller financial institution take to implement an appraisal and evaluation review program that meets the standards for independence in the agencies’ appraisal regulations?

Answer: A small financial institution with limited staff should implement practical safeguards for reviewing appraisals and evaluations when absolute lines of separation between the collateral valuation program and loan production process cannot be achieved. Small financial institutions could have loan officers, other employees, or directors review an appraisal or evaluation, but those individuals should be appropriately qualified, independent of the transaction, and should abstain from any vote or approval related to such loans.

To the extent that a financial institution is involved in real estate transactions that are complex, out of market, or otherwise exhibit elevated risk, management should assess the level of in-house expertise available to review appraisals or evaluations associated with these types of transactions. If the expertise is not available in-house, the financial institution may find it appropriate to evaluate alternatives, such as outsourcing of the review process, for ensuring that effective and independent reviews are performed.

For transactions subject to the IFR on Valuation Independence, institutions must comply with the provisions of that rule (See 12 CFR 1026.42(d)).

Question #8: Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially?

Answer: No. A financial institution may use an existing appraisal or evaluation to support the renewal of an existing loan at the financial institution when the market value conclusion within the appraisal or evaluation remains valid.

Validating the market value conclusion of the real property is a fact-specific determination, based on market conditions, property condition, and nature of the transaction. As described in the Valuation Guidelines, a financial institution should establish criteria for validating an existing appraisal or evaluation in its written valuation policies. The criteria should consider factors that could impact the market value conclusion in the existing appraisal or evaluation, such as: the volatility of the local market; changes in terms and availability of financing; natural disasters; supply of competing properties; improvements to the subject or competing properties; lack of maintenance on the subject or competing properties; changes in underlying economic and market assumptions, such as capitalization rates and lease terms; changes in zoning, building materials, or technology; environmental contamination; and the passage of time. Regarding this last factor, there is no provision in the agencies’ appraisal regulations specifying the useful life of an appraisal or evaluation.

The financial institution must also consider whether an appraisal or an evaluation is required for the transaction. The agencies’ appraisal regulations require an evaluation for transactions involving an existing extension of credit at the financial institution when either (1) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection after the transaction, even with the advancement of new money, or (2) there is no advancement of new money, other than funds necessary to cover reasonable closing costs. Alternatively, a financial institution could choose to obtain an appraisal, although only an evaluation is required. For example, an institution may choose to obtain an appraisal to achieve a higher level of risk management or to conform to internal policies.

In the context of renewal transactions, whether there has been a material change in market conditions may affect both whether an appraisal or evaluation is required and whether an existing appraisal or evaluation remains valid. A financial institution can assess whether there has been a “material change” in market conditions by considering the factors detailed above for validating an existing appraisal or evaluation. When there has been an obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection, the existing appraisal or evaluation is no longer valid. In such situations, if no new money is advanced, a financial institution must obtain a new evaluation, or may choose to satisfy the agencies’ appraisal regulations by obtaining a new appraisal.

However, if new money is advanced, a financial institution must obtain a new appraisal unless another exemption from the appraisal requirement applies. Refer to the following examples, assuming no other exemption from the appraisal requirement applies.

Example 1. A financial institution originated a revolving line of credit for a specified term, and at the end of the term, renews the line for another specified term with no new money advanced. The financial institution’s credit analysis concluded that there had been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an evaluation, rather than an appraisal, because no new money was advanced, even though the financial institution concluded there is a threat to the adequacy of the collateral protection. Alternatively, the financial institution could choose to obtain a new appraisal, although only an evaluation would be required.

Example 2. A financial institution originated an ADC loan and, at maturity, renewed the loan and advanced new money that exceeded the original credit commitment. The financial institution’s credit analysis concluded that a material change in market conditions or the physical aspects of the property threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an appraisal to support the transaction, because the financial institution advanced new money and concluded there is a threat to the adequacy of the real estate collateral protection.

Example 3. Consider the same scenario in Example 2 above; however, the financial institution’s credit analysis concluded that there had not been a material change in market conditions or physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, a financial institution could choose to obtain a new appraisal, but a new appraisal would not be required.

Example 4. A financial institution originated a balloon mortgage secured by a single-family residential property. At the end of the term, the financial institution renews the balance of the mortgage for another term, with no new money advanced. The financial institution’s credit analysis concluded that there had not been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require the financial institution to obtain an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, the financial institution could choose to obtain a new appraisal, although a new appraisal would not be required.

Financial institutions should consider the risk posed by transactions that do not require new appraisals or evaluations and may consider obtaining a new appraisal or evaluation based on the financial institution’s risk assessment. In addition, financial institutions making HPMLs must ensure compliance with the HPML Appraisal Rule, 12 CFR 1026.35(c)(2)(vii).

Question #20: May an appraisal be routed from one financial institution to another financial institution via the borrower?

Answer: A financial institution should not accept an appraisal from the borrower. However, the borrower can inform the financial institution that there is an existing appraisal. Prior to accepting an appraisal from another financial institution, the institution should confirm that the appraiser is independent of the transaction, the appraiser was engaged directly by the other financial institution, and the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable.

Knowing the New

In April 2018, the federal agencies (FDIC, OCC, FRB) jointly published an amended rule titled Real Estate Appraisals, with the following issues of which to be aware:

Under current thresholds, all real estate-related financial transactions with a value of $250,000 or less, as well as qualifying business loans secured by real estate that are $1 million or less, do not require appraisals. Qualifying business loans are business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
For real estate-related financial transactions at or below the applicable thresholds, the interagency appraisal regulations require financial institutions to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices, but does not need to be performed by a licensed or certified appraiser or meet the other Title XI appraisal standards.
The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal requirements.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was signed by the president on May 24, 2018. Title I, Improving Consumer Access to Mortgage Credit, covers many topics one of which amends FIRREA. Section 103 of the EGRRCPA added Section 1127 to the FIRREA, which details when an appraisal is NOT required:

The real property or interest in real property is located in a rural area, as described in section 1026.35(b)(2)(iv)(A) of Regulation Z;
Not later than 3 days after the date on which the Closing Disclosure relating to the federally related transaction is given to the consumer, you have contacted not fewer than 3 State certified appraisers or State licensed appraisers, as applicable, on the mortgage originator’s approved appraiser list in the market area and have documented that no State certified appraiser or State licensed appraiser, as applicable, was available within 5 business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments;
The transaction value is less than $400,000; and
The mortgage originator is subject to oversight by a Federal financial institution regulatory agency.

Around the Industry:

Effective Now

Recently, the CFPB published the 2019 list of rural and underserved counties and a separate 2019 list that includes only rural counties. Also, note that the CFPB updated the rural and underserved areas website tool for 2019. The lists and the tool help creditors determine whether a property is located in a rural or underserved area for purposes of applying certain regulatory provisions related to mortgage loans.


Remember the Tom and Jerry cartoons from long ago? Well, check out one of the most read articles from 2018 regarding cybersecurity and see for yourself this cat and mouse game of secure authentication.


Changes to LO Compensation on the Horizon ?

The year 2019 will bring big changes to the financial services industry. Kathy Kraninger’s recent confirmation as Director of the Consumer Financial Protection Bureau understandably raises hopes that that this year will see a rebalancing of the key mortgage regulations to expand credit availability and maintain key protections for consumers, while lessening burdens on industry. The MBA has outlined many such changes in our responses to the Bureau’s requests for information or RFIs. That exercise also made clear that changes to the LO Comp rule should be the Bureau’s top priority this year.

Loan Originator Compensation (LO Comp)

The original impetus for the LO Comp rule was to protect consumers from steering. In the current regulatory environment, the harm associated with steering—borrowers agreeing to a loan they do not understand and cannot repay—is less likely. The LO Comp rule obviously plays a part in this, but so does the other regulatory actions adopted following the passage of the Dodd-Frank Act. After more than five years under the rule, it is clear that certain limited changes should be made to retain core consumer protections while enabling a more competitive and transparent market.

The LO Comp rule, while well-intentioned in conception, is causing serious problems for industry and consumers because of its overly-strict prohibitions on adjusting compensation, and the amorphous definition of what constitutes a “proxy” for a loan’s terms or conditions. These harms are felt when borrowers are unable to obtain lower interest rates from their lender of choice when shopping for a mortgage, or when lenders are unable to hold loan officers accountable for errors in the origination process.  Consumers are also harmed when lenders limit their participation in special programs designed to serve first-time and low- to moderate-income borrowers. Three important changes could address these problems:

Change One: The Bureau should allow loan originators to voluntarily lower their compensation in response to demonstrable competition in order to pass along the savings to the consumer.

The Bureau’s rule provides that a loan originator’s compensation may not be increased or decreased once loan terms have been offered to a consumer. This provision is designed to eliminate financial incentives for a loan officer to steer a consumer to a higher interest rate or a higher-cost loan.

However, the rule as implemented has the effect of prohibiting reductions in compensation that could otherwise be passed along to the consumer in the form of a lower-priced, more affordable loan. This also has the effect of reducing the consumer benefit that comes from shopping across multiple lenders in order to negotiate the best interest rates and other terms.

Currently, in such situations, a lender must decide between lowering the interest rate, fees, or discount points to meet the competition (and thus possibly originating an unprofitable loan with the fixed loan originator compensation), or declining to compete with other loan offers. The requirement to pay the loan originator full compensation for a discounted loan creates a strong economic disincentive for lenders to match interest rates. For the consumer, the result is a more expensive loan or the inconvenience and expense of switching lenders in the midst of the process. This anti-competitive feature impedes loan shopping and discourages price competition. Clearly this is contradictory to the stated aims of the Bureau’s Know Before You Owe/RESPA-TILA Integrated Disclosure rulemaking, which seeks to encourage shopping and empower the consumer to negotiate.

To address this unintended outcome, we urge the Bureau to amend the rule to permit lenders to respond to demonstrable price competition with other lenders by allowing the loan originator to voluntarily reduce his or her compensation in order to pass along the savings to the consumer. This change would significantly enhance competition in the marketplace, helping lenders to compete for more loans, while also benefiting consumers who may receive a lower interest rate or lower-cost loan offer.

Change Two: The Bureau should allow lenders to reduce a loan originator’s compensation when the originator makes an error.

The LO Comp rule currently prevents companies from holding their employees financially accountable for losses that result from mistakes or intentional noncompliance with company policy when they make an error on a particular loan. As it stands, a loan originator who is responsible for an error may not bear the cost of that mistake when the loan is originated. This result runs directly contrary to the central premise of the Dodd-Frank Act amendments to TILA that led to the LO Comp rule, compensation is the most effective way to incentivize loan originator behavior.

The inability to tie compensation to the quality of a loan originator’s work on a given loan severely restricts the creditor’s ability to manage its employees and disincentivize future errors. Effectively, the creditor is left with two extreme options in response to the mistake: fire the loan originator, or pay them full commission despite the error. This binary choice does not serve the interests of consumers, creditors, or loan originators. Ultimately, greater accountability on the part of loan originators will incentivize them to reduce errors and consistently comply with regulatory requirements and company policy, leading to a safer and more transparent market for consumers.

Change Three: Lenders should be allowed to alter loan compensation in order to offer loans made under state and local housing finance agency (HFA) programs.  

TILA now states that “no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).” The LO Comp Rule broadly prohibits compensation based on loan terms or proxies for loan terms, while providing a short list of expressly permissible compensation factors. In practice, this requirement is understood to forbid varying compensation for different loan types or products, including loans made under housing finance agency (HFA) programs.

However, the assistance provided through these programs is not without costs.  The robust underwriting, tax law-related paperwork, yield restrictions, and other program requirements make HFA loans more expensive to produce. HFAs also frequently cap lender compensation at levels below what a lender typically receives on a non-HFA loan. Covering these expenses is particularly difficult given that many HFA programs include limits on the interest rates, permissible compensation, and other fees that may be charged to borrowers. In the past, lenders would address this challenge by paying loan originators a smaller commission for an HFA loan than for a non-HFA loan. The inability to do so today reduces the ability of companies to offer HFA loans, particularly when producing these loans results in a loss. HFAs report that some lenders have left their programs and others have limited the volume of their participation. The Bureau should address this dilemma through an exemption in the LO Comp rule for HFA loans.

These loans encourage homeownership in a responsible and well-regulated manner. HFA programs provide participants with much-needed access to credit, along with housing counseling and financial education. HFA loans and partnerships with HFAs are important tools to ensure increased access to credit through Fannie Mae and Freddie Mac under the conservatorship of the Federal Housing Finance Agency. HFA programs are particularly important for first-time homebuyers and low- to moderate-income (“LMI”) families who are often underserved and encounter difficulty gaining access to credit elsewhere. In 2016, the latest year for which comprehensive data is available, the median borrower income for all HFA program loans was $49,598, 14 percent below the national median income for the year.

The inability to reduce loan originator compensation to offset HFA production costs under the current LO Comp Rule harms consumers by reducing the availability of these vital programs. Companies that wish to offer these loans do so at a loss. This has the effect of limiting the number of loans they can make and thereby reducing competition, and raising prices, for loans in LMI communities. The Bureau should address this by creating an exemption or alternative path to compliance loans made under local bond or HFA programs.

The rule’s rigidity makes HFA loans less available to consumers in LMI communities, a perverse result given that the rule was intended in part to protect LMI consumers from being steered into expensive loans with higher rates or fees. These unintended consequences need to be addressed. Similarly, CFPB has exempted loans directly originated by HFAs from the High-Cost mortgage rule and classified all HFAs as “small servicers” under its mortgage servicing rule, regardless of the size of their servicing portfolios.


The LO Comp Rule remains a top priority for MBA going into 2019. Industry and consumers would be better served if targeted changes were considered after five years of experience with the rule. We hope that Director Kraninger considers doing so at the beginning of her tenure.


The Latest Compliance Requirements for TRID and TRID 2.0

Although it had been several years since the housing crises, in the third quarter of 2015, residential mortgage backed securitizations were still sailing into headwinds as the private label securitization market was still a fraction of its former self. Lenders were finally getting a firm footing after the Dodd-Frank based regulatory changes effective starting with loan applications received January 10, 2014, most significantly introducing the Ability to Repay testing and modifying the federal high cost testing under the Home Ownership and Equity Protection Act.

Lenders were preparing for the TILA-RESPA Integrated Disclosure Rule (TRID), effective with loan applications as of October 3, 2015. The 1,888 pages of TRID meticulously rewrote the mortgage disclosure process with thoughtful detail, with the intention of making the mortgage origination process more transparent with easier to understand disclosures for consumers. The new disclosure requirements, also referred to as Know Before You Owe, were developed by the Consumer Financial Protection Bureau (CFPB) to help consumers understand the loan terms, loan features, and charges to facilitate shopping for loans they were considering. Two new disclosures, the Loan Estimate and Closing Disclosure, replaced the existing Good Faith Estimate, Initial TIL Disclosure, Final TIL Disclosure and Settlement Statement. Lenders were unaware of the severity of the storm coming over the horizon.

Despite the entirety of the mortgage origination industry focusing its efforts on defining the origination requirements of TRID, the secondary market was left to focus on defining the liability surrounding these new disclosure obligations that was not abundantly clear, specifically attempting to quantify the risk that the investor may face in the event that investor purchased a loan that contained a violation of TRID. The uncertainty surrounding the potential liability was compounded by the extreme scrutiny being placed on the disclosure timing and content that resulted in the perfect storm of compliance exceptions being identified on loans evaluated for secondary market acquisition.

The loans being reviewed were evaluated under a microscope with every misstep by the originating lender rendering an exception on the loan cited by the third-party review (TPR), firms as a material exception that required remediation, if remediation was available. It was more than a single rogue wave. The market liquidity for residential loans slowed to a standstill as aggregators, TPR firms, creditors, lawyers, and rating agencies tried to distinguish between significant compliance exceptions and others that could be included in securitizations. Anyone on the boat at that time was sure to put on their life jacket while bracing against the waves and winds that effectively stopped forward progress and threatened to capsize the market.

As a result, the Structured Finance Industry Group (SFIG), the trade association to the capital markets, through the SFIG RMBS 3.0 due Diligence, Data and Disclosure Workgroup took on the challenge of tying each and every provision of TRID to the specific liability provision of TILA with the primary goal of creating a uniform testing standard as a result of a consistent Truth-In-Lending Act liability interpretation according to their understanding of prevailing legal precedent and informal written guidance and webinars offered by the CFPB, as it applies to the Know Before You Owe/TILA RESPA Integrated Disclosure Rule.

This workgroup included individuals representing prominent law firms, TPR due diligence companies, rating agencies, issuers, and other industry participants. This SFIG effort resulted in the first version of the RMBS 3.0 TRID Compliance Review Scope© published on June 15, 2016, understanding that the conclusions set forth therein do not necessarily reflect how courts and regulators, including the CFPB, may view liability for TILA violations presently, or in the future. The first version of the SFIG TRID Compliance Review Scope proved to be the catalyst that the secondary market needed to confidently commence purchasing loans subject to TRID, providing much needed liquidity to the origination market. Since June of 2016, the rating agencies, TPR firms, and the capital market investors have confidently followed the SFIG TRID Compliance Review Scope effectively placing the private label securitization marketplace back on a strong footing.

On October 18, 2018, the SFIG RMBS 3.0 Due Diligence, Data and Disclosure Working Group published an updated version to the RMBS 3.0 TRID Compliance Review Scope© (v2) based on the Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (Regulation Z) as published in the Federal Register [82 FR 37656] on August 11, 2017, (with an optional compliance date of October 10, 2017, and a mandatory compliance date of October 1, 2018), the updates related to the Black Hole that were effective June 1, 2018, and the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted on May 24, 2018.

The RMBS 3.0 TRID Compliance Review Scope v2, as it reflects the amendments made by TRID 2.0, have included additional clarity. The guidance and clarifications made by the CFPB, with TRID 2.0 and the subsequent Black Hole Amendment, effectively reinforced the risk previously identified by the original RMBS 3.0 TRID Compliance Review Scope©, and now with 2.0, this reduced some testing requirements, reduced the materiality of certain tests, and the addition of a few tests. The impact of v2 will be fewer material compliance exceptions with the associated grading that would have otherwise, previously, prevented loans from being purchased by an investor, whereby the mortgage was targeted for a rated transaction.

SFIG, and its membership that participated in the drafting of the original RMBS 3.0 TRID Compliance Review Scope and in the updated v2 scope created a new standard in transparency in aiding the entire mortgage lending industry in translating and navigating the complicated mortgage lending regulatory regime with an eye toward building confidence in the secondary market ensuring that high quality mortgages can make their way into rated securitizations, thereby providing the necessary liquidity to the marketplace, and making homeownership a reality for more consumers.

Although over two years passed between the initial version of the SFIG RMBS 3.0 TRID Compliance Review Scope and the recently published v2, further refinements will be forthcoming in 2019, as SFIG continues the ongoing standardization of the TRID review scope while incorporating additional feedback from market participants, CFPB enforcement actions, regulatory clarifications, or caselaw. The v2 scope document is part of the ongoing output of the SFIG work groups to bring consistency to the due diligence reviews performed as part of securitization reviews.

In addition to working with market participants, SFIG is actively working directly with the CFPB to share the concerns and impediments to future securitizations based on regulatory uncertainty to attempt to obtain regulatory updates as well as informal guidance to ensure compliant loans are flowing into ongoing securitizations to foster a robust private label securitization for RMBS transactions.

There is a common reference regarding the calm before the storm, but the real calm comes after the storm has been faced. One would be remiss to think only smooth sailing lies ahead, but the winds have shifted and with the breeze at our backs and smooth water ahead, the SFIG workgroup strives to see the private label securitization of RMBS under full sail.


TRID 2.0 and Compliance Risk Mitigation Strategies

(As published in ABA Bank Compliance magazine in Janary 2019)

We’re now a few months past the mandatory effective date of “TRID 2.0,” and many mortgage lenders may be lulled into thinking it’s back to business as usual. However, with a regulatory initiative as massive as TRID, now is an ideal time to circle back and ensure your implementation efforts hit the mark, are in compliance, and that your disclosures match your actual policies and practice.

This article will review the TRID 2.0 amendments with an eye towards a few disclosure requirements that represent potential compliance risk. It will also discuss potential enhancements to TRID and future regulatory change. Could TRID 3.0 be on the horizon?

Setting the Stage

Compliance with the July 2017 amendments to the TILA-RESPA Integrated Disclosure (TRID) rule became mandatory on October 1, 2018. Dubbed TRID 2.0, these amendments provide technical corrections, clarifications and substantive changes to the original TRID rule that went into effect in October 2015.

At this juncture, much has been said and written about TRID 2.0 implementation. From a regulatory perspective, the Bureau of Consumer Financial Protection (“bureau”) itself has chimed in. The TRID 2.0 final rule contains a preamble that spans hundreds of pages and offers detailed discussion regarding compliance expectations. In addition, the bureau updated both the Small Entity Guide and the Guide to Forms to reflect the TRID 2.0 changes.
Clearly the industry is well-positioned to know “what” TRID compliance requires. Now the tide turns to managing the “how” and ensuring steps are taken to limit the risk of noncompliance.

TRID 2.0 Compliance Risk

Cooperative Units: TRID 2.0 provides much-needed clarification regarding mortgage loans secured by a cooperative unit. It creates a uniform rule whereby all closed-end consumer credit transactions (other than reverse mortgages) secured by a cooperative unit are covered—regardless of whether the unit is considered real or personal property under state law. Most TRID loans secured by a cooperative unit now trigger a Loan Estimate, a Closing Disclosure, the Special Information Booklet, and the record retention requirements.

Risk Management Considerations:  If you classify a cooperative unit as personal property for other purposes, ensure that your workflows and software systems are updated for TRID coverage. Also verify that staff is trained and understands the TRID impact on loans secured by a cooperative unit. Finally, ensure that you do not mix and match disclosures, for example, providing a non-TRID Good Faith Estimate or other early disclosure with a TRID Closing Disclosure.

Subordinate Lien Housing Assistance Loans: Currently, certain housing assistance loans may be exempt from TRID if six specific criteria are satisfied. TRID 2.0 modifies one of the criteria regarding costs payable by the consumer. The modification provides that transfer taxes, along with recording, application, and housing counseling fees, may be payable by the consumer. In addition, recording fees and transfer taxes are now excluded from the one percent cap on total costs payable by the consumer at consummation.

Risk Management Considerations:  If relying on an exemption from TRID, ensure that evidence of compliance is retained documenting the limit on the types of costs payable by the consumer and adherence to the cap on total costs payable by the consumer. This documentation should be retained in the loan file for examiner review and is not required to be provided to the consumer.

Also, verify that your organization has determined which Truth-in-Lending disclosures it will provide for such housing assistance loans. Although housing assistance loans may be exempt from TRID disclosures, they are nonetheless federally related mortgage loans that are otherwise covered by Regulation Z. This means that the “Fed Box” disclosures as outlined in section 1026.18 of Regulation Z would apply. In lieu of the “Fed Box” disclosures, lenders have the option of providing the TRID disclosures.

Right of Rescission: TRID 2.0 clarifies that with respect to the Closing Disclosure, only disclose the consumer’s name and mailing address under “Borrower.” The Commentary now specifically provides that the term “consumer” is limited to parties to whom the credit is offered or extended. While other parties to the transaction may have rescission rights because they’ve offered property as security for a loan, those rights do not create “borrower” status.

Risk Management Considerations:  Although not necessarily a new concept, ensure that staff is trained to understand the difference between a “borrower” and a party with   rescission rights only. Labeling a party with just rescission rights as a “borrower” may infer repayment obligations and could be deemed deceptive.

Remember that rescission provisions are independent of the TRID disclosure timing requirements. Those with the right of rescission have three business days to rescind the transaction, typically starting from the date the final Closing Disclosure is provided. Ensure your closing workflows and timelines reflect the three-day right of rescission.

Fees and Tolerances: TRID 2.0 clarifies that for purposes of meeting the “good faith” standard, certain charges paid to an affiliate of the creditor are an unlimited tolerance item. These certain charges are prepaid interest, property insurance premiums, amounts placed in impound accounts, charges paid to a third-party service provided selected by the consumer that were not included on the lender’s Written List of Providers, and charges for third-party services that are not required by the lender.  Note that while subject to unlimited tolerance standards, the above charges must be disclosed in good faith using the best information reasonably available.

In addition, TRID 2.0 addresses the tolerance threshold for a non-compliant Written List of Providers. TRID requires that the providers disclosed on the written list correspond to the required settlement services for which the consumer may shop, as disclosed on the Loan Estimate. If you fail to provide a compliant, Written List of Providers, fees that would have otherwise been in the “no tolerance” category because the borrower selected their own provider, will instead fall in the 10 percent category and, potentially, the zero percent category if paid to an affiliate.

Risk Management: Regularly train staff on the importance of disclosing fees that are legitimate, using the best information reasonably available. Tolerance violations may trigger costly cure provisions. In addition, failure to disclose fees and/or disclose a compliant, Written List of Providers could be deemed a Regulation Z violation.

Post Consummation Notices:  As required pursuant to other Regulation Z provisions, certain loans trigger a notice in connection with the cancellation of an escrow account and a disclosure regarding the partial payment acceptance policy in a mortgage loan transfer notice.  TRID 2.0 clarifies that if such post-consummation notices are required, they must be provided regardless of the loan application date. Previously, the post-consummation notices were only required for covered transactions if the application was received on or after October 3, 2015 (TRID effective date).

Risk Management Consideration:  Verify that workflows and documentation systems are updated to address the post-consummation notices for all covered loans, regardless of the application date.

Total of Payments Tolerance: TRID 2.0 now subjects the Total of Payments (TOP) disclosure to tolerance testing. The Total of Payments disclosure will be considered accurate if the amount disclosed is overstated or if the amount is understated by no more than $100. This is the same accuracy standard used in calculating and disclosing the finance charge.

Risk Management Consideration:  Ensure that you regularly perform tolerance testing. Understatements of the TOP that are greater than $100 violate Regulation Z and may extend the right of rescission time period.

Numerical Rounding: TRID 2.0 provides for a new requirement when rounding percentages.  Disclosures involving a percentage must be rounded at three decimal places, with all trailing zeroes to the right of the decimal place dropped. So, for example, a 2.4999% APR will be rounded to and disclosed as 2.5%, while a 7.000% APR will be disclosed as 7%. With respect to dollar amounts, several disclosures must be rounded to the nearest whole dollar. And when it comes to disclosures involving a zero amount, note that in the “final” column of the Cash to Close table, if the calculation yields a zero, that should be disclosed as a single digit—i.e. $0, not $0.00.  However, for prepaid interest in the “Other Costs” table—if no prepaid interest will be collected at consummation, the amount should be disclosed as “$0.00.”

Risk Management Consideration: It’s a picky point, but the rounding provisions do vary within the TRID rule and within the Loan Estimate versus the Closing Disclosure. Ensure that your systems are generating figures that reflect the proper rounding requirements, and periodically audit your calculations.

Tolerance Cures and Principal Curtailments: TRID 2.0 clarifies how principal curtailments (reductions) may be disclosed, and it allows for the disclosure of such a reduction instead of a lender credit when providing a tolerance cure. Such principal reductions may be disclosed in the Summaries of Transactions table on the standard Closing Disclosure or in the Payoffs and Payments table on the alternative Closing Disclosure. In either case, curing the violation with a principal reduction will trigger additional disclosures.

Risk Management Consideration: There is some confusion over whether a principal reduction should be disclosed on line K4 or K5-7 of the Summaries of Transactions table. This confusion stems from the fact that one regulatory provision covers both line K4 and K5-7, and it doesn’t specify use of one line over the other or prohibit the use of one line over the other. However, given the “adjustments” title prior to lines K5-7, it seems these lines should be limited to contractual adjustments between borrower and seller and principal reductions should be disclosed on line K4. Confirm with your compliance team and documentation provider how your organization will handle the principal reduction disclosure. .

Revised Disclosures: TRID 2.0 addresses both revised Loan Estimates and revised Closing Disclosures. With respect to the Loan Estimate, if you issue a revision after the consumer indicates an intent to proceed with the transaction, you do not need to complete the expiration of closing costs date and time fields on that revised Loan Estimate.

In addition, TRID 2.0 makes clear that a revised estimate may be provided merely for informational purposes versus a revised estimate used to reset fee tolerances. Note, however, that any revised Loan Estimate—whether to reset tolerances or for informational purposes—must update all fee disclosures using the best information reasonably available.

On the Closing Disclosure side, if the Closing Disclosure becomes inaccurate post‐closing, and the only reason for the inaccuracy is due to per diem interest, then a corrected Closing Disclosure is not required. If the Closing Disclosure is inaccurate post‐closing for reasons other than the per diem interest, and the per diem interest is likewise inaccurate, then the per diem must be accurately disclosed on the corrected Closing Disclosure.

Finally, in addition to TRID 2.0, the Bureau issued a final rule closing the “Black Hole” when using a Closing Disclosure to reset fees. Here’s the scenario: Once the initial Closing Disclosure has been issued, a revised Loan Estimate can’t be issued. The Closing Disclosure may be used to reset tolerances. However, the revision of fees must be done within three business days of learning of the event that triggered the revision.  Furthermore, a disclosure that revises fees must be provided no later than four business days prior to consummation. The “black hole” is the gap between the end of the three business days period after learning of a change event, and the start of the four business days period prior to consummation. To make a long story short, the  “Black Hole” final rule removes the four business days prior to consummation limitation when using a Closing Disclosure to reset tolerances.

Risk Management Consideration: If you provide an informational revised Loan Estimate, ensure that the entire revised estimate is updated. Also monitor change events and the impact on fees carefully. Ensure staff understands that a Closing Disclosure may be used to reset tolerances without regard to the four business days prior to consummation limitation. Resetting tolerances where permitted can help avoid implementing cure provisions and potential Regulation Z violations.

On the Horizon

While TRID 2.0 provided a fairly good clean-up of TRID 1.0, areas of uncertainty and contention remain. At the top of the list are construction loans. TRID 2.0 does provide much needed guidance regarding how to disclose a construction loan, including updates to Appendix D and a section dedicated to compliance in the Small Entity Guide. However, many in the industry continue to struggle with disclosure of such loans. Lenders are asking the Bureau for an exemption from TRID requirements for single-family residential construction loans. Citing consumer confusion and disclosure burden that is forcing many lenders out of the construction loan market, the industry is asking that at a minimum, the Bureau reduce liability enforcement.  From there, lenders hope the Bureau would consider adopting a more streamlined disclosure process whereby lenders can disclose basic information using a format of their choosing.

Along the lines of enforcement, the industry is also asking that the Bureau expand the ability to cure minor TRID errors. While TRID does provide measures for revising fees and resetting tolerances, many believe provisions to “fix” a problem are too burdensome and complex and must be simplified. The industry is also requesting an amendment that would extend the time to cure a violation after consummation. Such an extension would provide lenders more time to carefully review loan documentation post-consummation and make necessary corrections and refunds. While the Bureau may consider such requests, there is regulatory concern that additional cure provisions could reduce the incentive to comply with the TRID rule.
Needless to say, the industry hasn’t heard the last word on TRID as compliance requirements and expectations will continue to evolve. There is talk of repealing the Dodd-Frank Act altogether and thereby repealing TRID. Despite the new administration and a change in the bureau’s leadership, this might be wishful thinking at best. Institutions have dedicated significant resources toward TRID compliance, and who knows what might take its place if it were repealed. In the meantime, organizations should understand that compliance implementation is an ongoing process requiring continuous document review, policy and procedure audit and staff training. And despite political rumblings, institutions must stay the course and carefully manage TRID compliance and risk.



Sue Burt is a senior compliance consulting specialist with Wolters Kluwer. Her thorough knowledge of the bank regulatory environment is based on more than 30 years of industry experience. In her role with Wolters Kluwer, Burt uses her expertise to assist financial institutions in addressing compliance and other operational risk management issues.


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Buyback Risks Are Shifting – Mortgage Compliance

Virtually every step in the mortgage process has been impacted by new and evolving regulations, with hefty fines imposed for noncompliance. The sheer breadth of loan quality problems continues to adversely affect manufacturing productivity and production costs.

We can all surely remember when lenders were simply doing post-close audits on loan samples as required by the government-sponsored enterprises. Then TRID came along, putting any lender that produced an inaccurate disclosure at risk, followed by the new Home Mortgage Disclosure Act requirements — and things got even tougher.

But the demands for loan quality aren’t just coming from regulators and the GSEs. Your secondary market partners and investors don’t want to be left holding the bag if the loans you create have quality issues. Gone are the days of “ship and hope.” When investors buy loans, there’s a huge liability attached. Investor scrutiny has increased so much, in fact, that investor requirements can seem as strict as regulators’. This has heightened the quality mandate and placed more emphasis on post-closing, shipping and delivery.

Whether you realize it or not, the game has changed. The slow accumulation of new requirements and mandates created by the GSEs, TRID, HMDA, investors — as well as the onset of other risks such as False Claims Act charges and class action lawsuits — have pushed the stakes so high that conventional approaches to loan quality do not apply. That means lenders can no longer ensure loan quality by looking backwards, through post-close sampled audits or any other method. They need to address loan quality issues where they happen — in production.

Loan quality is now a loan-by-loan event that is best performed as loans are created, not after the fact. The regtech market is taking off because lenders are realizing they need to tackle loan quality issues as they happen, from the very point they begin gathering information to create a loan file. Regtech enables lenders to electronically view, validate and verify all the loan data and documentation as it’s introduced, lowering risk and saving money by increasing both processor and underwriter productivity.

The bottom line is that lenders just don’t have the luxury of going back in time to fix bad loans after they’ve already closed. Nor can they simply hope that their loan origination systems or staff caught every problem. Today’s loans must be done right the first time. The game has changed, and lenders need to play it differently before it’s too late.

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