Whitepaper: The Importance of Getting Fees Right Under TRID
The residential mortgage industry has weathered an unprecedented season of change over the past decade. Though much of the dust has settled, there are still some key areas in which businesses who are part of the residential mortgage production chain are left walking a fine line between gray areas. Missteps can result in costly consequences. The passage of the Dodd-Frank act and TRID have resulted in the lowest residential loan default rate since early 2008, but the combination of these laws has also made it harder for consumers to get mortgages, and compliance has resulted in significant cost increases for the producers of those loans.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform And Consumer Protection Act was implemented by Congress in 2010 " to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." The act includes about 200 pages of provisions directly relating to residential mortgages. With regard to residential home loans, its primary purposes are to ensure that lenders verify a borrower's ability to repay a proposed mortgage before the loan is actually made, to reduce the number of high-risk loans made, and to provide consumers with an understandable presentation of all costs associated with the mortgage they are considering.
As a result, even consumers more excellent credit and verifiable income are required to present a great deal of documentation than ever before, and would-be homeowners with average credit are finding mortgages out of reach, both through the upgraded requirements for documentation, and through exceptionally tight credit and rising interest rates from the Federal Reserve.
For mortgage producers, this all means significantly more paperwork and labor to maintain full compliance while closing residential home loans.
TILA-RESPA Integrated Disclosure Act (TRID)
As a result of the Dodd-Frank Act, Congress directed the Consumer Financial Protection Bureau (CFPB) to integrate two mortgage loan disclosures that were, until then, required by two separate Federal laws: the Truth In Lending Act (TILA, also known as Regulation Z) and the Real Estate Settlement Procedures Act (RESPA, also known as Regulation X). Because the two disclosures were developed independently, by two separate government agencies, they included redundant information, and were written in language that was inconsistent. TRID is the combined and streamlined version of the disclosure requirements, and its intent was to simplify the disclosure process and make the disclosures more timely and understandable for consumers.
Unfortunately, TRID has proven less clear than hoped when it was first published in December 2013. The CFPB followed the original publication with amendments in January and July 2015, technical corrections to those amendments in December 2015, and a correction to supplementary information in February 2016. An additional set of amendments is currently under consideration, in another effort to make TRID work efficiently and effectively for both borrowers and lenders, while achieving its original goal of reducing the number of residential home loans made to people who don't fully understand the costs and/or do not have a realistic ability to repay that loan.
Ability to Repay and Qualified Mortgage Standards
The Ability to Repay and Qualified Mortgage (QM) standards are provisions of TILA-RESPA, which defines what constitutes a QM, directly addresses sections of the Dodd-Frank Act, requiring lenders to make a reasonable "good faith" determination of a consumer's ability to repay, and provides consumers protection against liability for QMs. In order to be considered a QM, a residential loan must have points and fees which total no more than three percent of the loan amount; no risky features like negative amortization, interest-only, or balloon payments; and a maximum loan term of thirty years. In addition, a QM must meet the product feature requirements with a debt-to-income ratio of 43 percent of less; or is GSE-eligible; or a loan from a small creditor which is held in-portfolio, with consideration and verification of the borrower's debt-to-income ratio. While defining and verifying QMs has resulted in a lower default rate, it has also increased lenders' and producers' costs and liability, and reduced the number of mortgages they are able to produce each month.
Costly errors with fee disclosures
TRID requires that every applicant for a residential mortgage be provided a Loan Estimate form within three days of their application, which discloses fees the applicant will have to pay, and limits fee changes the lender can make. Certain changes require re-disclosure, which slows transactions and adds to production costs, while other changes can result in penalties and monetary cures.
The types of fee changes are divided into three categories: Zero Tolerance, which are fees the lender has control over, so the assumption is that they should be able to accurately state those fees; Ten Percent Cumulative Tolerance fees, which is the largest category, including fees for services the lender is not providing, but for which the lender can reasonably predict the fee, such as recording, or in cases where the lender recommends a service provider to the consumer; and Unlimited Tolerance fees, which the lender has no control over, such as services provided by a vendor of the consumer's own choice, and the lender is not accountable for fee changes.
The civil monetary penalties for TRID compliance violations are based on terms set forth in Dodd-Frank, with adjustments based on the Consumer Price Index (CPI), and they provide strong motivation to maintain compliance in every transaction. First tier violations, which apply to any TRID violation, incur fines of up to $5,000 per day. Second tier violations are those which are found to be caused by lack of due care or recklessness on the part of the processor, carry fines of up to $25,000 a day. Third tier violations are deliberate violations, caused by knowing disregard for the regulations, and fines can reach $100,000 for every day that the violation remains uncorrected.
- Under-Disclosure – Obviously, underestimating the amount of fees in the Zero Tolerance or Ten Percent Cumulative categories can result in compliance violations and steep fees, so it's critical the every party in the mortgage production chain take care to gather, verify, and double-check each fee with care, and to carefully track that process in order to prevent any violations that might stem from missing information.
- Padded Disclosure – At a cursory glance, it might seem like the best solution would simply be to over-estimate each fee, so there's no chance of under-disclosing. Unfortunately, the situation is more complex than that, and padding disclosures can also cause compliance violations and painful penalties. Because TRID requires lenders to exercise good faith and due diligence in providing the "best information reasonably available," and the most accurate estimate possible, a fee estimate that is knowingly padded is a violation. There is no tolerance cure required for too-high disclosures, but there are still those vicious civil monetary penalties to consider, and knowing violations incur tier three penalties. In addition, the CFPB can find lenders who knowingly pad fee disclosures to be acting in bad faith. Bad faith violations can be prosecuted as Unfair, Deceptive or Abusive Acts or Practices (UDAAP) and the statutory penalties can reach a staggering million dollars a day for willful violations. Padded fee estimates are not a safe or advisable way to protect against TRID violations at all.
- Get The Balance Right – Excluding willful violations, the best ways that providers can offer the most accurate estimates made in good faith all involve building a workflow that prompts every needed step, keeps the benchmarks and deadlines straight, and points out incomplete data. Documented policies and procedures, consistently followed by well-trained personnel using effective tools is the best defense against compliance violations of any kind. Maintaining an updated schedule for vendors on the List of Service Providers is critical. Monitoring the choices of each consumer and any changed circumstances also helps prevent any compliance errors due to oversight, which, while not willful, can still result in expensive cures or penalties.
Automated compliance support
Managing all the steps, forms, and deadlines required for full compliance can be a time-consuming process with plenty of opportunities to make a mistake which can be compounded as the transaction moves forward. The Easysoft Legal Software Real Estate Closing Solutions suite helps speed workflow and closings with accurate and consistent forms that require less labor to generate. Easysoft Legal Software is built on a relational database, which means data is entered just once, and any time that data is needed for a form, the software retrieves it and automatically puts it into the selected form; this saves time wasted on repetitive tasks and significantly reduces human errors in the final forms.
The Real Estate Closing Solutions suite is regularly updated for any regulatory changes, so forms are always compliant with the latest requirements. With a library of more than 200 commonly- used forms built-in, and shareable customized forms, it's easy to set up the most repetitive aspects of closing documentation for fast, automated generation.