Loan Products that banks choose to offer
In November 2013, pursuant to the Dodd-Frank reforms passed by Congress in the wake of the financial crisis, the Consumer Financial Protection Bureau (“CFPB”) adopted regulations integrating the disclosure mandates of the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”). The new integrated TILA-RESPA disclosures (“TRID”) were put into effect in October 2015, requiring lenders and loan servicers to, inter alia, give certain information to borrowers and assist delinquent borrowers in obtaining access to assistance, with the goal of helping consumers better understand their loan options. Unfortunately, a recent survey of bankers indicates that the new TRID disclosure requirements can slow processing of new loans and affect the loan products that banks choose to offer.
Mortgages can be complex and risk
Because mortgages can be complex and risky, and because the existing, overlapping disclosure forms were complicated and confusing for borrowers, the CFPB elected to create two new forms—the loan estimate and the closing disclosure—that blended those documents, using language intended to be easier for consumers to understand. In addition to adopting these new disclosure forms, the CFPB set forth specific timetables in which to provide these disclosures to borrowers: The loan estimate must be given to borrowers within three (3) business days of lender’s receipt of the borrower’s loan application, and the closing disclosure must be given to borrowers at least three (3) business days before the transaction is completed.
New requirements had an impact on loan products offered
After the new process had been in place for five months, the American Bankers Association (“ABA”) surveyed 584 bankers regarding their experiences with the new regulations and processes. As was expected, the new requirements had an impact on loan processing times and loan products being offered to customers.
The survey revealed the following:
- Many banks have been forced to eliminate certain products, such as construction loans, ARMs, home equity loans, etc., as the new rules do not give adequate direction regarding compliance.
- Over three-fourths of banks surveyed state that TRID has resulted in delays in loan closings, of anywhere from one (1) day to twenty (20) days
- Approximately one-quarter of banks related an increase in the total cost for the consumer to obtain a loan.
- About half of participating banks recounted that they have hired, or will have to hire, additional staff to comply with TRID.
- Months after the implementation of these new regulations, loan origination software (“LOS”) systems are still being updated and changed; 78% of responding banks reported they are still waiting for system updates, while 83% of those banks indicate that they are forced to use manual workarounds.
- 93% of banks responded that uploading and loan processing times had increased as a result of TRID.
- 94% of bankers hold the view that the TRID “good faith” grace period should be extended.
Perhaps the most significant impact of TRID has been in reduction of products and services offered to customers. For example, JP Morgan Chase recently announced that it has cut back on FHA lending. According to Chase CEO Jamie Dimon, “Currently, it simply is too costly and too risky to originate these kinds of mortgages. Part of the risk comes from the penalties that the government charges if you make a mistake.”
The new regulations are also affecting other industries. “As a mortgage broker, I am very aware of the time clock associated with the new disclosures. The cost of non-compliance could be profound,” said Phil Andrews, a loan officer with Coast Residential Funding, a mortgage brokerage located in Campbell, California. “As a result, I don’t provide verbal ‘estimates’ anymore. Everything is in writing, and tracked carefully, to assure compliance with the new rules.” Financial penalties in the event of violations could include $5,000 per day for a single violation, $25,000 per day for reckless violations, and $1 million per day for knowing violations.
If and when the CFPB articulates a consistent enforcement policy, and as the loan application and origination processes get smoothed out in the future as a result, the distortions in the costs of loan applications, the banks’ processing costs, and the reduction of choices in loan products resulting from the impact of TRID may be mitigated. Still, when asked about the survey results, ABA executive vice president Bob Davis said, “It’s clear from this survey and our discussion with bankers that TRID compliance remains a significant concern. Consumers are seeing the greatest impact due to increased loan costs, fewer choices and delayed closings—and that’s not what this rule was intended to do.” As matters stand, the current situation may yet be another example of the law of unintended consequences.