New compliance requirements don’t typically inspire the most innovative technology enhancements in the mortgage industry. But the upcoming overhaul of borrower disclosure forms has created an opportunity to re-engineer the way lenders and title companies execute mortgage closings, according to Document Systems Inc. CEO Dominic Iannitti.
The Consumer Financial Protection Bureau’s proposal to combine the final Truth in Lending Act disclosure and HUD-1 settlement statement into one document also includes a provision requiring delivery of this new “Closing Disclosure” three days prior to loan closing—which Iannitti says opens the door to provide additional disclosures at the same time.
“We’re seeing this particular new chapter in the workflow as being a great opportunity to deliver more of the closing documents upfront, perhaps even allowing for a complete review at that same three-day mark,” he said.
The types of documents that could be delivered prior to closing include state-specific disclosures, servicing transfer notifications, investor-specific notices and other documents that accompany the promissory note and mortgage or deed of trust.
“Those are documents that could be moved to this new phase and electronically acknowledged and e-signed,” Iannitti said. “I think arguably 60% to 70% of what is now in the closing package could easily be shifted to this new stage. What we can also do is provide all of the security instrument documentation for review and simply keep it from being e-signed.”
Current regulations require settlement agents to allow borrowers to review the HUD-1 disclosure one day before closing, but the document is typically given the day of closing. Lenders, meanwhile, must provide an updated TILA document three days before closing only when certain information on the disclosure changes. As regulators and advocacy groups continue to hammer the financial services industry, including mortgage companies, over consumer education and transparency issues, delivering the Closing Disclosure and other pertinent loan documents before closing would give borrowers more time to thoroughly review their loan terms before completing the transaction.
“How many times have we heard that through the last bubble there were so many borrowers who didn’t understand the transaction? If you look at the process, it’s easy to understand how that could happen,” Iannitti said. “There’s a stack of documents three-quarters of an inch high and you’ve got about 45 minutes to get this thing done. If education really is the issue, the borrower needs more time with the documentation.”
The concept of providing borrowers with closing disclosures before final settlement isn’t new. In 1998, a Federal Reserve and Department of Housing and Urban Development joint report to Congress recommended early delivery of the HUD-1 and TILA disclosure to allow consumers to study the disclosures in an unpressured environment. While the report did not result in new legislation at the time, subsequent actions, including the Dodd-Frank Act that created the CFPB and the mandate to overhaul the mortgage disclosures, would seem to support the effort.
The three-day disclosure “should afford consumers sufficient time to review, analyze, and question the information reflected in the disclosure, such that consumers are aware of and understand the transactions by the time consumers are required to obligate themselves,” the CFPB wrote its in July 2012 proposal to overhaul the disclosures.
In addition to the new Closing Disclosure, the CFPB has proposed combining the early TILA disclosure and Good Faith Estimate into a new document called the “Loan Estimate,” which must be delivered to borrowers three days after a lender receives a loan application. Doc prep technology vendors are already developing the necessary upgrades to their systems to ensure they can generate the new disclosures once they become mandatory.
The new forms are intended to be uniform across the mortgage industry to help borrowers compare loan options between lenders. The formatting requirements outlined in the CFPB’s 1,099-page proposal are so precise that vendors must ensure that certain boxes of information have rounded corners, while others have square corners.
But the requirement is more than just deploying new forms. Iannitti said his company is enhancing its DocMagic doc prep system to bridge the data gap between lenders and title companies.
“At the point that the Closing Disclosure goes out, there are fees that are typically the responsibility of the closing agent to determine and nail down and there are other fees that are associated with the lender,” he said. “The new document requires there to be a closer relationship from a data perspective between these two parties.”
The enhancements to the DocMagic platform will also provide borrowers better access to that information during the preclosing phase. “Our console that’s used today for managing electronic signing with respect to initial disclosures will be extended to handle this phase, as well as closing, so that we’ll ultimately be in a position to introduce the full e-closing suite,” he said.
The CFPB proposal requires lenders to retain evidence of their compliance with the disclosure regulations in a machine readable, electronic format. And combined with the short, three-day timeframe to deliver the Closing Disclosure, lenders and settlement agents are likely to rely on electronic delivery technology that can closely monitor and track when documents and delivered and reviewed by borrowers.
“If you were going to throw something like that out in the mail, it just wouldn’t be nearly as efficient as being able to deliver it electronically, precisely on time,” Iannitti said.
While the new disclosure requirements may be perceived as yet another compliance burden, Iannitti sees a broader opportunity, both with the preclosing delivery of loan documents and in the future, as a vehicle to promote fully paperless mortgages.
“This is just another regulatory change that is absolutely consistent with our final goal of the paperless mortgage and we’re going to get there,” he said. “This is going to be what I consider to be the single largest kick start to get us there.”