Massive Increases In Mortgage Defects Under TRID
Since the implementation of the TILA-RESPA Integrated Disclosure Rule (TRID, a.k.a. the Know Before You Owe mortgage rule), both Fannie Mae and the Federal Housing Authority (FHA) have developed their own taxonomies for mortgage defects, and severity scales. Fannie Mae’s system includes 12 categories, and a more simplified severity scale. FHA’s taxonomy includes nine defect categories, and four levels of defect severity. The most critical defects are ones that would result in a loan that cannot perform, such as incorrect or incomplete information on a borrower’s liability or income, or the eligibility or appraised value of the property being financed.
The most recent Mortgage QC Industry Trends Report by ACES Risk Management (ARMCO) evaluated post-closing QC data from approximately 60 lenders and 50,000 unique loan transactions from 2015 and the first quarter of 2016, using the Fannie Mae taxonomy for defects. Overall, the study found that while critical mortgage defects dropped below one percent in the second quarter of 2015, that trend has reversed itself in the final quarter of 2015, since the implementation of TRID, and hitting 1.92 percent in the first quarter of 2016.
Lower Defect Rate in Loan Package Documentation And Appraisals
Although the study found that defect rates in the categories of Loan Package Documentation and Appraisals are dropping with each quarter, they still represented nearly 27 percent of all mortgage defects in Q1 2016. One of the most common deficiencies identified by the lenders in the study is omissions and errors in the Closing Disclosure (CD).
Defect Rate in Legal/Regulatory/Compliance Categories Nearly Doubles
Unsurprisingly, as the criteria for legal compliance changed through the implementation of TRID, the number of defects stemming from compliance errors skyrocketed from 23.19 percent in Q1 of 2015 to 37.28 percent in Q4, and a staggering 49.96 percent in Q1 of 2016.
During the same time period as TRID implementation, the Consumer Financial Protection Bureau (CFPB) amended its regulations so that lenders could be held liable for compliance errors committed by third-party services contracted by the lenders. In an attempt to protect themselves, many lenders attempted to produce TRID-compliant documentation in-house. Most of the compliance defects cited in the study were attributed to the challenges of moving responsibility to the lenders for producing and distributing the correct disclosure documents to all interested parties on a new, more demanding, set of deadlines, rather than risking liability for mistakes that might be made by settlement agents, who had performed these tasks previously.
Settling On Even Keel
As lenders began to analyze their own post-TRID transactions, along with various industry-wide studies, more and more lenders have arrived at the conclusion that closing documentation is more efficiently handled by settlement agents, although lenders have begun choosing production partners with greater scrutiny than ever before. In most cases, lenders will require service providers to follow ALTA Best Practices
in handling their work, and many now require an ALTA Best Practices certification or Attestation Report from a CPA firm. Although regulatory consequences for non-critical errors have not yet become severe, pressure to achieve greater compliance is steadily increasing, and as the industry settles on even keel again, stronger regulatory enforcement for non-compliance seems inevitable.
Achieving Reliable Compliance
Improving and maintaining documentation compliance is faster and simpler with Easy Soft’s Real Estate Closing Solutions Suite, which features centralized data entry and automated forms completion for ease and accuracy. The EasyCDF module directly addresses TRID reporting requirements, and a library of more than 200 additional real estate closing forms offers the most commonly-needed forms, and allows you to create custom forms and share them with your work group. EasyHUD streamlines HUD loan closings with automated GFE-HUD comparisons and closing forms, itemization for VA Loan lenders, and with disbursement ledger and check preparation and 1099-S filing. Try the desktop version of Easysoft Real Estate Closing Solutions Suite free, and enjoy streamlined compliance.