Why Haven’t Loan Officers Been Told These Facts?

The Loan Estimate in Detail

It’s been six years since the Truth in Lending-Real Estate Settlement Procedures Act Integrated Disclosure Rule (TRID a.k.a. Know Before You Owe) went live. Yet still, regulators report significant levels of noncompliance in the preparation, delivery, and accuracy of the Loan Estimate (LE), Written List of Settlement Service Providers, and Closing Disclosure (CD).

In this series, the Journal will unpack some of the common compliance issues and a few challenges related to successfully implementing the Loan Estimate (LE) and Closing Disclosure (CD).

Up for a challenge? Test your knowledge of Regulation Z disclosure requirements.

Test 1
Regulation Z requires lenders to estimate and classify Private Mortgage Insurance (PMI) costs when determining good faith. On the Loan Estimate (LE), page 2, Closing Cost Details – under what Category and Subheading should the lender list PMI costs, and what is the allowable tolerance for variation at consummation?

  1. Loan Cost, Subheading B Services You Cannot Shop For – Zero tolerance for change
  2. Other Costs, Subheading F Prepaids – No specific tolerance
  3. Other Costs, Subheading G Initial Escrow Payment at Closing – No specific tolerance
  4. All of the above

Test 2
The lender provides a $500 gift card to applicants at closing. Is this permissible under Regulation Z, and if so, what impact does the gift card have on the TRID disclosures?

  1. Yes – The lender must account for the $500 gift card on both the LE and CD.
  2. No – Section 8 prohibits kickbacks for mortgages. The $500 is a thing of value in exchange for a mortgage loan.
  3. Yes- As per FNMA, the lender does not need to disclose gift cards for $500 or less on the LE or CD.
  4. No – Lenders may contribute to closing costs and prepaid expenses only. Regulation Z prohibits payment of cash or similar elements as part of the federally related mortgage loan settlement.

The integrity of the CD and LE are fundamental to the success of the Know Before You Owe implementation of the Dodd-Frank directive to the TILA Administrator (CFPB) to develop better financial disclosures.

For those of you who wish to geek out on the TILA, the section below, as amended by Dodd-Frank, contains the Congressional directive to the CFPB to come up with better financial disclosures. The CFPB implements the directive through Regulation Z’s, which spells out the LE and CD structure and use.

From the USC §1604. (TILA) Disclosure guidelines (a) Promulgation, contents, etc., of regulations. The Bureau shall prescribe regulations to carry out the purposes of this subchapter. (b) Model disclosure forms and clauses; publication, criteria, compliance, etc. The Bureau shall publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this subchapter (TILA) in conjunction with the disclosure requirements of the Real Estate Settlement Procedures Act of 1974 [12 U.S.C. 2601 et seq.] that, taken together, may apply to a transaction that is subject to both or either provisions of law. The purpose of such model disclosure shall be to facilitate compliance with the disclosure requirements of this subchapter (TILA) and the Real Estate Settlement Procedures Act of 1974, and to aid the borrower or lessee in understanding the transaction by utilizing readily understandable language to simplify the technical nature of the disclosures.

Early in the life of the CFPB, the Bureau hired experts from Kleimann Communication Group, Inc. to develop the TRID disclosures. Kleiman is a recognized communications expert specializing in plain and unambiguous language and has worked on various compliance projects. Kleiman, in describing what they do, states, “Using fewer words and compelling visuals, we organize information so that consumers understand the key message and can act upon it. We help develop disclosures that hit the mark.”

Lenders and individual Mortgage Loan Originators (MLO) could profit from better comprehending the problems inherent with the prior administration of the RESPA and TILA financial disclosures. A glimpse of the Kleiman 2012 Report to the CFPB titled, Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures helps gain an understanding that might improve lender and MLO compliance.

Kleiman declared that “The goals of the Mortgage Disclosure Project were clear from the start: comprehension, comparison, and choice.” In the report, Kleiman summarizes Congress’ sentiment surrounding the 2008 mortgage meltdown (paraphrased): “First, the housing crisis if nothing else, established that many consumers had not fully understood the terms of their loans—and that the disclosures used at the time were not working optimally. Second, Consumers, overwhelmed by the number of documents to sign, sometimes merely signed without reading the disclosures. If they read them, they did not understand the implications of what they read.”

In the report, Kleiman then described the high-level requirements of the LE.

Loan Estimate
Focused on four core questions:

  1. Can consumers understand the loan transaction, including costs and risks?
  2. Can consumers use the disclosure to compare the same loan products?
  3. Can consumers use the disclosure to compare different loan products?
  4. Can consumers use the disclosure to choose between loans and express a reasonable rationale for their choice?

The approach to the Closing Disclosure added two additional research questions:

  1. Can consumers compare the Loan Estimate and the Closing Disclosure to identify differences and the reasons for those differences?
  2. Can consumers use the Closing Disclosure alone to identify critical information?

Check back next week for the answers to Tests 1 and 2!


Behind the Scenes

The APR threshold test for the General Qualified Mortgage (QM) loan could present unexpected challenges to brokers and correspondents (third-party originators or TPO). TPO’s might calculate the APR differently than the lender accepting the loan. TPO’s using their own software to calculate the APR rather than using the lender’s platform must be especially vigilant.

Be aware that the lower the loan balance relative to the respective Higher-Priced Mortgage Loans (HPML) threshold, the more likely the lender calculated APR will range higher, possibly putting the loan’s APR over the HPML threshold.

Keep an eye on the lender calculated APR and get that number at the earliest date. APR calculations are not black and white. Should the lender use different finance charges or terms than the originator when calculating APR, you could find the loan unexpectedly crossing the HPML threshold. Additionally, downstream changes to the terms might be enough to put the APR over the lender’s calculated HPML threshold.

Non-HPML QM loans have a nonrebuttable presumption of compliance. This nonrebuttable presumption of compliance with the ATR is known as a Safe Harbor. “Safe Harbor” is a term used in the law and is defined in Black’s law dictionary as, “The provision in a law or agreement that will protect from any liability or penalty as long as set conditions have been met.” Due to the rebuttable presumption of compliance (no Safe Harbor) on HPMLs meeting the General Qualified Mortgages rubric, many lenders and investors avoid originating HPML.

Primarily, a rebuttable presumption of compliance means the complainant can challenge the lender’s ability to repay determination in court. Thus, HPML originations introduce the specter of court proceedings and possible adjudication of the lender’s compliance with the TILA requirement to make a “reasonable” determination of a borrower’s ability to repay. Such uncertainties exceed the risk tolerance of many lenders.

The HPML thresholds are as follows.

1.5 or more percentage points for a conforming first mortgage
2.5 or more percentage points for a jumbo first mortgage
3.5 or more percentage points for a subordinate mortgage

Suppose a third-party originator like a correspondent or broker calculates the APR as a non-HPML QM loan. The broker submits the loan to the lender. The lender uses different finance charges or even a different formula to calculate the APR. Although the broker calculated the APR as non-HPML, the lender calculates the APR as over the HPML threshold. The lender would likely act in the following way: – demand the broker either reduce the APR by dropping the rate and or finance charges, price the loan as an HPML, or accept a decline.

Next week, the Journal will unpack some of the more nebulous aspects of the APR calculation that might lead to surprise HPML designations.


Tip of the Week

Project Management Skills for Loan Origination

Last week, the Journal argued for the benefits of adopting specific project management skills to the loan manufacture. There are different types of project management approaches. Which approach to use generally revolves around the degree of project uncertainty (how to achieve the objectives) and product uncertainty (the specific deliverables or objectives the project must accomplish).

In mortgage origination, the high-level requirements generally tend to be well defined. Stakeholders have a relatively clear idea as to the project schedule, budget, and scope. For example, “We want to close on November 22. We can put 20% down. We will consider 15, 20, and 30 year fixed rate terms.” Simple. Although many loan originations seem easy on the surface, residential loan transactions can get complex. The product (deliverables) might be well defined and agreed upon by the stakeholders, but the process of getting there (the project) is not.

In our series on Project Management for Loan Originators, the Journal will focus on more predictable transactions. Predictable transactions allow for a more stable process, making for a better way to learn project management fundamentals.

Why are Project Management skills valuable to the originator? For many MLOs, your success depends on the goodwill engendered by successful outcomes. The MLO must realize that stakeholders are not always transparent in their requirements. It’s not enough to close on time. The stakeholders must also approve of the way the Mortgage Loan Originator handled the process. To the extent that the stakeholder is delighted with the loan and loan process, it creates fertile ground for future business. Consequently, stakeholder management is at the top of our list for essential project skills.

Effective stakeholder management requires that we first identify the stakeholders to the transaction and then assess which of the identified stakeholders the MLO must successfully engage. The MLO uses stakeholder analysis to identify which stakeholders are key stakeholders and which are not. The key stakeholders are those who define the project as a success or failure and those who have the power to help or hinder the successful loan manufacture. These key stakeholders must be satisfied for the MLO to magnify any successes and leverage the transaction for future business.

Executed simultaneously with the stakeholder identification is comprehending the high-level transaction requirements. In project management, this process of identifying the high-level transaction requirements and comprehending project objectives is called Developing a Project Charter. For example, the purchase and sales agreement or escrow instructions constitute the project charter on purchase transactions. On the other hand, refinance transactions are usually less formal. Thus, the lender captures the high-level requirements within the completed loan application and Loan Estimate.

Deliberate or formal project management processes are appropriate when dealing with high-stakes transactions and when the project presents complexities to those leading the process. The MLO acts as the project manager. The advantages of treating complexities with deliberate project management techniques are manifold—for example, stakeholder engagement sufferers from less than carefully planned communications. Successfully collecting requirements that define the success criteria then suffer because of poor communications. The ambiguity surrounding the stakeholder expectations then leads to stakeholder dissatisfaction. There are many interdependent processes that the MLO must consider and manage to provide supremely satisfying loan manufacture.

Because it’s easy to lose sight of the forest for the trees, the loan manufacture often feels like doing non-project work. Consequently, MLOs manage the stakeholder relationships and communications as though they were routine. But, of course, some routines work well some of the time—accordingly, the MLO experiences “hit-or-miss” stakeholder successes. However, one thing you can count on, the perspective is often entirely different for other stakeholders, most notably the applicants, whose expectations and efforts the MLO must efficiently manage. These expectations and requirements are unique – the MLO must elicit the unique success criteria to develop the success targets.

Simultaneously with the stakeholder identification is comprehending the high-level transaction requirements. The MLO collects the high-level requirements from stakeholders and, importantly, key stakeholders leading to more precise success criteria. Success criteria are the bulls-eye for a job well done as defined by key stakeholders.

Projects have unique needs, and so does every loan manufacture. The recognition of the loan manufacture as a project invites and enables the MLO to view the loan process differently, recognizing specific processes that may contribute to better outcomes.

Next week the Journal unpacks the rudiments of collecting high-level requirements and correctly identifying stakeholders.

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