In less than one year, the new RESPA/TILA integrated disclosure final rule will take effect, impacting all aspects of lenders' origination processes and technology.
Most lenders are generally aware of the new rule. But it is important to realize that this rule is not merely a consolidation of the good-faith estimate, truth-in-lending disclosure and the settlement statement (HUD-1) into two new material disclosures, the loan estimate and closing disclosure.
A major concern is the risk associated with communication between ancillary third-party service providers (and their disparate technologies) and lenders' software systems of record.
Lenders must control the fee-naming conventions and fee applications in order to create a standard proprietary dataset within their origination practice and to reduce operational and loan level risk. While MISMO and the Uniform Closing Dataset provide some standardization, there will be additional fields and metadata concerns that lenders will need to address.
For large national and regional lenders, managing fee tables is not a new challenge. Currently, with the traditional numbered sections on the HUD-1, minor variations in fee names are common. Lenders have the ability to reconcile the difference in fee name based on several factors: analysis of the descriptive fee, the implicit nature of the services by vendor type and the fee placement in the HUD-1 section and the specific amount.
But with the retirement of the HUD-1 and its numbered sections, together with the new fee alphabetization requirement in the new disclosures, fee reconciliation between the loan estimate and the closing disclosure will prove to be particularly difficult without fee standardization. Indeed, without a standard proprietary dataset, lenders assessing the risk associated with the determination of the relevant fee threshold categorization/application will be exposed to considerable financial and regulatory risk.
Today, settlement agents typically create the HUD-1 and set the fee names (other than lender fees), leaving the impact on the relevant TILA fee tolerances up to the lender. Under the new rule, however, lenders are explicitly responsible for the accuracy of the Closing Disclosure (a hybrid of the Final TIL and HUD-1).
As of Aug. 1, 2015 lenders will most likely want to control the creation of the closing disclosure and require settlement agents to provide timely and accurate fees, using the lenders’ specific fee naming conventions.
Clearly, lenders must dictate the naming conventions and the fee applicability through a standard proprietary dataset to all third-party service providers so as to ensure accurate and consistent calculations. That will result in properly disclosed loans reflecting loan terms consistent with the categorization that the lender intended at the time of commitment.
For example, lenders will be able to avoid high-cost or higher priced mortgage loans, or affirm qualified mortgage or qualified residential mortgage categorizations.
Any fee confusion between the lender and third party service providers — such as the product and pricing engine, compliance vendors or settlement agents — can negatively impact material calculations and tolerance buckets, leading to financial risk for lenders such as having to absorb fees or reimburse the borrower. Additionally, lenders may be liable for costs associated with a regulatory enforcement action and loan salability or "put-back" issues.
Digging below the surface, it is clear that the implications of the new rule will have far reaching consequences. Savvy lenders are taking steps now to ensure a smooth transition.
John Levonick is a mortgage industry compliance executive at Accenture.