New Rule Déjà Vu

0415_NewRuleDejaVu_770

Mortgage disclosure rules deadline prompts complex changes in systems, procedures and training

By Mary Thorson

Almost everything in mortgage disclosures is changing, while new regulatory complexity once again reigns. With four months to “TRID Day,” thousands of community banks nationwide are busy preparing to meet the August deadline for implementing new mortgage disclosure regulations. By now, regulatory experts say, community banks should be working closely with the loan operating system vendors, digging deep into the nitty-gritty details of the new rules, checking for compliance gaps and preparing to train staff.

The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Consumer Financial Protection Bureau to integrate separate Truth in Lending Act and RESPA mortgage lending disclosures. In response, the CFPB issued its TILA-RESPA Integrated Disclosure Rule in November 2013, with an implementation date of Aug. 1, 2015. The so-called TRID Rule will replace current mortgage disclosures under TILA and RESPA for covered loans with a single, integrated disclosure. A new Loan Estimate process will replace the initial TILA disclosure and the current Good Faith Estimate disclosure. A Closing Disclosure will replace the final TILA disclosure and the HUD-1 settlement statement (HUD-1).

The TRID Rule generally applies to closed-end credit transactions secured by real property, other than reverse mortgage transactions. It generally does not apply to open-ended credit, such as home equity lines of credit or mortgages secured by a dwelling that is not real property, such as a mobile home.

Determining which new disclosures to provide and when to provide it starting in August has been fraught with complexity, costs, uncertainty and stress for community bank mortgage lenders. In December, to get a pulse on community banks’ headway on TRID Rule compliance, ICBA conducted a member poll through its ICBA NewsWatch Today newsletter. Roughly half the community banks polled felt they were on track to overcome the challenges of meeting the rule’s compliance deadline. Other respondents expressed significant concerns about meeting the deadline.

ICBA has worked with the CFPB to find ways to reduce the complex rule’s impact on community banks. As a result, under a recent revision to the final rule, the bureau will now permit creditors to provide a revised Loan Estimate within three business days after a consumer locks in a floating interest rate, as advocated by ICBA in its November 2014 comment letter. Without the change, creditors would have been required to provide a revised estimate the same day a loan applicant locked in the floating interest rate.


ICBA also has continued to work with the CFPB to give community banks more flexibility in implementing the disclosures, including proposing a grace period beyond Aug. 1 to give banks more time to adopt and thoroughly understand the changes. “We think, with the magnitude of the changes, it’s reasonable for the CFPB to take an ‘advisory’ approach for a period—say, 90 days—to allow the industry to adjust before enforcement begins,” explains Ron Haynie, ICBA’s senior vice president of mortgage finance policy and executive vice president of mortgage services.

Despite its statutory goal of disclosure simplification, the TRID Rule goes beyond a change of forms or even changes in loan operating systems. Haynie recognizes the significant role of automation and also sees the bigger picture of the disclosure changes. “Unlike past changes that were remedied with a new mortgage disclosure form,” he says, “the TRID Rule changes span workflow, procedures and a community bank’s coordination with its external partners, such as title agents and Realtors.

“We can’t urge community banks strongly enough to take a very broad view of the impact of the TRID Rule and to identify all of the areas in which it will affect their banks’ mortgage lending operations.”

Imposing wholesale change

Certainly, some key elements of the mortgage disclosure changes can be achieved by loan operating systems, but the issues involving compliance are much broader, says Kris Stewart, principal regulatory consultant and senior manager for compliance consulting services with Wolters Kluwer Financial Services in Minneapolis. “The workflow management process both inside and outside of the bank, no matter what size the institution, is a big part of TRID Rule implementation,” Stewart says. She advises community banks to take advantage of webinars, conference calls and briefings with their software vendors about the issue.

Understandably, community banks with higher-volume mortgage lending are seeking out more information from their software system providers, says Jay Jennings, director of legal compliance at D+H, a software and core systems provider in Lake Mary, Fla. “Lenders with the most robust lending are experiencing the greatest impact, and the more highly automated a lender is, the greater the desire to have less disruption to the automated flow,” he says.

“We can’t urge community banks strongly enough to take a very broad view of the impact of the TRID Rule and to identify all of the areas in which it will affect their banks’ mortgage lending operations.”
—Ron Haynie, ICBA’s senior vice president of mortgage finance policy

In addition to loan software system changes, Jennings adds, “this regulatory change goes beyond swapping out disclosures. There is a need for banks to understand their product roadmap. Who does what now? Who will be doing that after Aug. 1?”

Melissa Kozicki, director of compliance with Mortgage Builder Software Inc. in Southfield, Mich., agrees. “The technology and controls, while very complicated, are still probably the easier part of a bank’s implementation,” she says. “Each bank has a greater challenge to look at internal processes and determine how things will be done differently now or why they do not need to change.”

One myth surrounding the TRID Rule changes is that banks could not begin to work on their compliance implementation without the final changes being made to their loan operating systems, Kozicki says. The banks that are ahead of the game are those that began looking early at the potential changes to policies, procedures, workflow and training.

“Later, when the final rule was announced, they were able to quickly turn those potential changes that had been identified into an action plan,” she says.

“Internally, community banks need to look at their business process, procedures and resource allocations to evaluate how TRID Rule requirements will affect them,” Stewart says. “Also, third parties are part of the workflow—maybe now more than ever.”

Settlement agents, typically providing the HUD settlement statement for the closing, need to be knowledgeable about a bank’s mortgage workflow process beginning Aug. 1, Stewart says. When the Closing Disclosure replaces the final TILA disclosure and the closing RESPA documents, however, mortgage lenders will be responsible for the accuracy of those documents presented to borrowers. Meanwhile, the regulatory penalties for missteps under TILA are very different from those under RESPA, and reliance issues in compliance work have always been a challenge.

Haynie notes that community banks must broaden their view of who should be included in workflow decisions and who should be involved in compliance training. For instance, he says, “Maybe the closing agent will prepare a document for closing or maybe the bank will, but the bank clearly has liability now, and it must make a good decision about how that process will look.”
ICBA has been in discussions with other trade associations, such as those of title and closing agents, to talk about how this regulatory change may affect their relationships with community banks, Haynie points out.

Keys to implementation

Because the TRID Rule will impose significant changes to the origination, processing and closing of mortgage loans, it will require business decisions at all stages of the mortgage lending process. But the rule’s changes also embody different dynamics than most regulatory changes seen in the past. Instead of exchanging one set of rules for another, the TRID Rule brings new requirements, a need for a transition process for a certain body of loan transactions, and an ability to maintain existing rules for a handful of loans not covered by the rule.

According to Jennings, these dynamics present some unique challenges. Community banks, he says, will be challenged to do these three things before the compliance changeover to the TRID Rule:

  1. Finish the pipeline of loans that were initiated before Aug. 1;
  2. Transition to the new TRID disclosure requirements for covered loans beginning Aug. 1; and
  3. Maintain certain disclosure and documentation functions to support loan types not covered by the TRID changes. For these reasons, to support their operational and resourcing decisions in the future, community banks should be evaluating now what kind of mortgages they expect to provide starting Aug. 1.

“With the addition of the TRID Rule and the maintenance of the old TILA and RESPA disclosures for certain loans, banks may want to consider whether a change in a business process might better accommodate the disclosure requirements,”
Jennings says.

Meanwhile, Stewart describes a framework of four activities for community banks to consider undertaking to implement the TRID Rule:

  • Use so-called GAP analysis—looking at what the rule requires and what operations it affects, such as systems, products, procedures, policies, resource allocations and third parties;
  • Deploy project planning toward meeting the compliance deadline;
  • Document the process to track deadline progress; and
  • Communicate with vendors to understand system changes and updates.

“Communication with your vendor is key,” says Kozicki. “We have been holding weekly calls with the compliance staff of all of our customers for more than a year so that they can express their needs, concerns and challenges to us regarding this new rule. If a bank has not spoken to its vendor about this change, it definitely should do so.”

Reading the regulation and changing policies and procedures are necessary steps but not sufficient to ensure successful compliance, Kozicki says. Staff training will also be critical, she adds. “This compliance change will be very ‘hands-on.’ As an example, one thing my team did was an exercise in completing the new forms. We worked through different loan situations and challenged ourselves to complete the forms by hand with the information given.

“It’s one thing to read about regulatory requirements and quite another to make them work on the ground.”


Mary Thorson, a former Federal Reserve managing examiner and compliance consultant, is a financial writer in Virginia.