Mortgage Origination Overhaul Looms

By Phil Hall

Some dates have a special significance: they either bring about warm and happy feelings by the mere mention of their month and day (Feb. 14, Oct. 31, Dec. 25) or they generate less than pleasant emotions (April 15). It appears that Aug. 1 will fall into the latter category: That is the date when the residential mortgage process undergoes a change of dramatic proportions.

Beginning Aug. 1, two of the most complex pieces of financial legislation—the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA)—will be joined together, and the home loan origination process will be governed by a new set of integrated disclosure requirements. For many industry leaders, this is the single greatest overhaul of the origination process in modern times.

“We are overturning 40 years of law with this one regulation,” said Rod Alba, vice president and senior counsel for mortgage markets for the American Bankers Association (ABA). “We’re starting from zero and a lot of issues will be unanswered.”

New disclosures

What is the problem? Well, the crux of the RESPA-TILA Integrated Disclosures changes, as planned by the Consumer Financial Protection Bureau (CFPB), consolidates four documents into a pair of new disclosures: The early TILA disclosure and the good-faith estimate are going to be combined into a new disclosure called the Loan Estimate, while the final TILA disclosure and HUD-1 settlement statement are to be blended into a new form called the Closing Disclosure.

In concept, these changes were meant to simplify the loan documents that borrowers need to review and sign. But in reality, the changes encompass 1,888 pages of identifying requirements and more than 400 regulatory citation revisions.

“ABA has always backed and supported a simpler, more streamlined and integrated disclosure process,” said Alba. “We’re not sure their integration process gets us the simplification and improves consumer disclosures. In this simplification process, they managed to add paper to the consumers.”


The TILA-RESPA rule applies to most, but not all real property-secured credit transactions. Reverse mortgages, home equity lines of credit and chattel-dwelling loans including manufacturing housing are not covered. However, loans that are subject to TILA but not RESPA—including construction-only loans and loans that are secured by either vacant land of properties covering space spanning 25 acres and more—will now be subject to the requirements of the new integrated disclosure.

Beginning on Aug. 1, a lender is required to provide the Loan Estimate within three business days of receiving a loan application. The estimate needs to include a good-faith estimate of credit costs and the transaction terms. Lenders may not need to issue revisions to Loan Estimates if technical errors, miscalculations or underestimations of charges are discovered later, and they can only issue revisions of the Loan Estimate if certain situations bring about an increase in charges. And the delivery of the Loan Estimate sets off a seven-day waiting period before the loan can be formally closed.

The CFPB submitted the final rule on the TILA-RESPA changes for publication in the Federal Register on Nov. 20, 2013. Two changes were made in January—one revising the timing of the loan lock disclosure requirements and one related to new construction loans. While an outsider might assume more than enough time would be available for banks to enact the CFPB’s changes, it is not all that simple. For starters, the new rules come with extremely specific requirements that detail the production and delivery of the new disclosures.

System reconfiguration

“What this means to the industry is that every single disclosure and form related with mortgage transactions is going to change,” said Alba. “In some instances, the change is absolute; in other instances, the change is minute. But all of your systems will need to be revamped. This will force every bank to replace all of the compliance systems related to mortgages and all processes related to the origination phase of the transaction. It reconfigures the interaction between the bank and the consumer by changing the forms and the timing requirements and liabilities. The interface between the bank and the consumer changes to fit new rules that the CFPB is putting on the table.”

The new rules also change how many financial institutions function internally.

“This affects a lot of very different moving parts at the same time,” said Bruce Schultz, executive vice president for mortgage lending at Tulsa, Okla.-based SpiritBank. “There will need to be a lot of coordination between different departments, from credit administration and compliance to the lenders themselves. And this will require a lot of training and many meetings, along with close contact with our IT providers. Any lenders not doing that are making a critical error and will not be prepared. A lot of lenders are finding themselves in uncharted territory.”

A new day

From an operational standpoint, the TILA-RESPA changes are tricky because there is no gradual transition period. When July 31 ends at 11:59 p.m., it is literally and figuratively a new day for banks originating home loans.

“But you can’t use new forms until Aug. 1 and you can’t use the old one after Aug. 1,” Peter Doiron, senior vice president of residential lending at Thomaston Savings Bank in Thomaston, Conn.

“Changing the tires at 100 miles per hour often leads to accidents,” stated Joshua Weinberg, senior vice president of compliance at First Choice Loan Services Inc., headquartered in East Brunswick, N.J.

Contradictory regulations

There is also the problem of contradictory regulations. The CFPB’s rule changes do not synchronize with Federal Deposit Insurance Corp. (FDIC) regulations that governed banks for years.

“The CFPB is now dictating to us what is required for a complete application,” said Doiron. “The FDIC and Regulation B made the decision on closing a loan in 30 days. But that clock is different from the CFPB clock. Do we really want to run with two different clocks?”

There is also the issue of updating loan origination systems and other high-tech functions to meet the new requirements. For banks that do not build their own systems, the onus is on both them and their third-party providers to ensure that the current software will be up to date by Aug. 1.

“A lot of lenders are highly dependent on software vendors to make sure they have things right,” observed Schultz.

And there is no room whatsoever for error—the CFPB has promised to smite lenders with hefty penalties for compliance failures.

“Liability is going to be multiplied,” Alba added. “This adds huge risks for lenders.”

Rather than take those risks, lenders may decide to let potential business go by.

“If there are delays to the closing that involve circumstances that are unworkable to lenders, then those loans may be denied or otherwise prevented from closing,” said Weinberg.

Potential risks

Also being called into question are the potential risks from dealing with settlement agents.

“The changes manage to create a system by which the lender and settlement agent are somewhat separated,” Alba said. “Today’s rules generally require settlement costs be finalized and made available to the consumer at closing, or upon request, one day earlier. The settlement disclosures are provided by the settlement agent. Now, it is the lender that bears the responsibility of providing lender-related final disclosures to the consumer, and this must be done in final form three days before closing. We don’t know how ultimately it will be settled—many lenders are still determining how to proceed.”

While there has been a rather loud murmur across the financial services world about the demands on meeting the Aug. 1 deadline and the new requirements that lenders must meet, the CFPB it has made it clear that this process will not see any postponement in its schedule.

“Whether we like it or not, we’d better be ready because [CFPB Director Richard] Cordray said several times that Aug. 1 is Aug. 1, and Aug. 1 doesn’t change,” said Weinberg.

Phil Hall is a contributor to the ABA Banking Journal.