The new generation of disclosures will not only bring about significant
changes for lenders, but for investors as well.
By Scott K. Stucky
Aug. 1, 2015, is a deadline every lender has circled on its calendar. On this day, every lender must begin using the new loan estimate and closing disclosure forms established by the Consumer Financial Protection Bureau (CFPB). While much ink has been spilled helping lenders understand the changes, there are implications for investors in the secondary market as well.
The truth is the entire mortgage industry is undergoing changes that will impact every facet from origination to secondary. The CFPB’s new integrated disclosures – and the regulations behind them – will push many lenders to adopt more digital document options and automated compliance tools. Additionally, investors and lenders together will have to navigate the implications of the waiting periods and required time frames related to disclosures and closings.
Navigating a new industry
Part of the fallout from the revised Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) can only be understood in light of the larger issues facing the industry. In addition to these changes, lenders have already endured significant transformation through the introduction of the CFPB, paired with qualified mortgage (QM) standards and new ability to repay requirements.
Additionally, the financial services industry is shifting toward figuring out how to serve a new generation amid worries that student debt and less importance placed on homeownership will stifle growth in the real estate market. David Stevens, president of the Mortgage Bankers Association (MBA), reports that the percentage of first-time borrowers is now at 35%, compared to the 40% to 45% documented in the past. In addition to the decreasing population of first-time home buyers, the CFPB has reported that student loan debt has surpassed the $1 trillion mark.
The changing demographics are complicated by regulatory changes that significantly reduce the types of loan products available. The new QM standards require a debt to income ratio of less than 43%, which is often unattainable for the generation making substantial payments – such as credit card or car payments – on top of student loan requirements. The challenge will continue to have a vast effect on the secondary market, and lenders must readjust.
Amidst all of this change, lenders are looking for ways to ensure that they can remain profitable with lower margins and lower volumes. One way they are doing this is by adopting more digital solutions, especially in documentation, a historically expensive and laborious process.
In the past, lenders have implied that investors’ reluctance to embrace electronic docwnents, signatures and filing have delayed their adoption of these models. However, the regulatory changes are pushing those same lenders to now adopt them, forcing investors to play catch-up.
Alleviating change
The first place many lenders look to go digital is in e-disclosures. Leveraging e-disclosures can serve as a competitive advantage in the market, particularly by taking advantage of electronic capabilities and lower overhead costs. Additionally, e-docs allow lenders to provide borrowers with suitable disclosure documents in a limited time – three business days – which is a non-negotiable regulation that comes with the reform.
Safeguarding compliance is one – if not the most – important component of surviving the reforms. In addition to providing lower costs, the digital trail of e-disclosures is critical for lenders to communicate with both lenders and regulators. When new information is added or a slight change is applied to a document, all records are automatically updated. A digital trail ensures that all parties have access to the most up-to-date information.
Adopting electronic documents creates the opportunity to leverage up-to-date technology to develop investor reports and eliminate redundant expenses to meet new demands.
For investors, e-disclosures can also provide increased security and data integrity, enabling lenders to prevent unauthorized access to documents. Additionally, an e-disclosure has the ability to significantly reduce the amount of time spent handling, checking and manually processing loan documents during the sale process.
Investors and secondary marketers need to work with their lenders to ensure that their systems can communicate and exchange disclosure data seamlessly. This becomes even more critical as lenders take the next step in electronic documents: implementing e-closings.
The capacity to electronically close a mortgage is comparable to an electronic disclosure process, and lenders will continue to find ways to integrate e-closings into their workflow. The secondary market is slowly coming up to speed with the tech-savvy borrower population, and lenders have the ability to meet the needs of borrowers by providing up to date e-documents.
By the same token, e-filing and edelivery of completed loan packages will only increase as both investors and lenders seek to cut excess time and waste from the mortgage workflow. Investors will also find that full – digital loan packages are easier to evaluate for compliance with guidelines and that e-delivery removes data integrity issues, as well as facilitates portfolio maintenance by providing more options for monitoring.
More than just documents
One thing to keep in mind is that the RESPA-TILA reform is more than just a new set of documents. Lenders and investors must also prepare for the quality control and compliance issues behind the disclosures. For example, lenders must provide accurate closing-cost estimates, and for all intents and purposes, those estimates are written in stone. Strict guidelines provide what little variation is allowed, and significant changes require another disclosure and a reset of a 72-hour waiting period. There is also a three day requirement for all loan document disclosures (both purchase and refinance) and a new seven-day advanced notice for all material changes to the new loan estimate form.
Of course, this impacts the timeline for lenders and investors. When a lender has to give a disclosure to the consumer that must be accurate, it means that the lender is, in effect, committing to that loan at that point.
Lenders, of course, are hesitant to lock themselves into a loan without some assurance from the secondary market that the loan is sellable. In essence, this means that the lender is going to be committed on a loan that’s not going to go to settlement until three days later.
Once again, digital systems will become the new standard. Lenders can use automated compliance tools and the electronic documents incorporating strong data integrity protections to ensure loans meet investor standards in addition to regulatory requirements. Pre-closing compliance checks and document management will become the standard, instead of today’s reliance on post closing compliance reviews.
The secondary market is changing and will never be the same. The market will not wait for your institution to adapt, and now is the time for the industry to prepare for a new era. Investors, upgrade your systems. Take the steps and create new opportunity by offering electronic solutions that match what lenders are doing to meet borrower and regulator demands.
Scott K. Stucky is chief strategy officer for DocuTech Corp., a provider of compliance services and documentation technology
for the mortgage industry. He can be reached at scotts@docutechcorp.com