If there’s one issue that can slip you up, it’s loan pricing discretion unmanaged, which naturally increases fair lending risk. In 2011, the Truth in Lending Act was amended with the MLO compensation rule, which prohibits financial institutions from providing financial incentives to an MLO based on the terms and conditions of a loan.

In July 2018, the Federal Reserve issued a new publication, Consumer Compliance Supervision Bulletin. In this publication, the issue of mortgage target pricing was briefly discussed. While the publication acknowledges that the MLO compensation rule has reduced fair lending risk, it has done so only at the mortgage loan originator level, and that risk still exists for mortgage pricing.

According to the publication, some financial institutions “that originate mortgage loans for the secondary market now set a “target price” for each mortgage loan originator. This means that the bank sets a specific profit margin target for the mortgage loan originator. This target price can be achieved with any combination of a higher interest rate and/or discretionary fees charged to the borrower. These target prices are based solely on discretion and not on the risk-related credit characteristics of the borrower. This arrangement may comply with Regulation Z as long as the bank does not vary the loan originator’s compensation based on different prices for borrowers. That is, the bank still complies with Regulation Z if it sets one compensation arrangement with one target price for each loan originator.”

Where the fair lending risk increases is when a financial institution’s MLOs have different target prices and the MLOs that have higher target prices serve minority areas. The publication mentions two such cases which were referred to the Department of Justice; one resulted in an enforcement action.

So, even though your financial institution may have a loan pricing policy, now might be a good time to review fair lending risks. The publication provides key steps in managing risk:

Check for compliance with Regulation Z with respect to financial incentives

Implement policies and procedures to control the risk that discretion could lead to a fair lending violation

Evaluate and managing the risk when the mortgage loan originators with the higher target prices tend to serve minority neighborhoods

Monitor pricing by race/ethnicity across mortgage loan originators, including the APR, interest rate, fees, and overages, using statistical analysis if there is sufficient volume

Consider mapping loans by target price

In addition, keep in mind that prudential regulators also provide clues as to how they will assess and measure fair lending and its risks. For instance, the FDIC in its Compliance Manual, covers pricing. Here are some of the questions asked:

Does the bank have a written loan policy that addresses pricing?

Does a review of the bank’s policies raise any overt or other potential fair lending concerns with respect to pricing?

Does the bank provide loan officers with a rate sheet, matrix, or written guidance for pricing loans?

Does the bank allow discretion in the setting of loan terms and conditions (including interest rates or fees) for residential real estate lending?

Does the bank track and monitor loan and pricing exceptions?

Are loan officers compensated based on pricing of loans?

Are controls in place to ensure consistency in pricing practices?

Do credit pricing systems or processes vary by product or lending channel?

Does the bank’s pricing vary by region, office, or branch?

Has the pricing process for any loan product changed since the previous compliance examination?

Or, if the FDIC is not your prudential regulator, do you know where to look online for examination procedures or guidance regarding pricing discretion? Take the time to review your financial institution’s policies and procedures, monitoring, documentation, range of discretion, and board of director/senior management oversight.

Mortgage Compliance Magazine wants to hear from you! Bring the talent in our industry to the forefront by submitting a nominee from your organization. From your submissions, we will select and showcase one Mortgage Compliance Professional of the Month from nominees in regulatory compliance from banks, credit unions, or mortgage companies. Get started here!

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Around the Industry:

Effective Now

The Office of National Drug Control Policy announced the designation of ten new areas across Kentucky, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, and West Virginia as High Intensity Drug Trafficking Areas (HIDTAs). This designation enables the 10 areas to receive Federal resources to further the coordination and development of drug control efforts among Federal, State, local, and tribal law enforcement officers, and allows local agencies to benefit from ongoing HIDTA initiatives that are working to reduce drug trafficking across the U.S.

MCM Q&A

Wanting to learn more about utilizing blockchain effectively and maintain compliance? Check out this article from the March issue.

Source:http://www.mortgagecompliancemagazine.com/weekly-newsline/loan-pricing-discretion-assess-your-compliance/

California

Military Families Financial Relief Act – The state of California amended its provisions relating to deferment of financial obligations for reservists by removing the requirement under the Military Families Financial Relief Act to provide a signed letter, under penalty of perjury, and instead require a written request. These provisions are effective on January 1, 2019 (AB 2521).

Connecticut

Consumer Credit Licenses – Connecticut has modified provisions under its Banking Law concerning consumer credit licenses. The new provisions expand the authority granted to the Banking Commissioner in various circumstances. The effective dates for these provisions range from July 1, 2018 to July 1, 2019 (HB 5490).

Indiana

Consumer Credit Fees – The Indiana Department of Financial Institutions published its annual consumer credit fees schedule. These fees are effective from July 1, 2018 through June 30, 2019 (schedule).

Georgia

Anti-Money Laundering – Effective July 17, 2018 the Georgia Department of Banking and Finance adopted multiple provisions relating to mortgage lenders, brokers and servicers that include lenders and brokers that satisfy the definition of “loan or finance company” under the Bank Secrecy Act must have an anti-money laundering program; and various updates to its mortgage servicing standards (80-11-6).

Michigan

Notary Provisions – The state of Michigan amended its provisions relating to notaries that include performance of notarial acts; remote electronic notarization; and signature of notary public. These provisions are effective immediately and this act takes effect on September 30, 2018 (HB 5811).

Pennsylvania

Foreclosure Provisions – Effective December 17, 2018, Pennsylvania has enacted provisions regarding the foreclosure of vacant and abandoned properties (PA HB 653).

Rhode Island

Mediation Conference – The state of Rhode Island modified its provisions relating to mediation conference prior to mortgage foreclosure by extending certain sunset provisions as well as limiting the amounts a HUD-approved agency may receive for a mediation and filing fee. These provisions are effective immediately (HB 7385).

Electronic Recording Act – Effective July 1, 2019, the state of Rhode Island enacted provisions relating to its Uniform Real Property Electronic Recording Act (HB 7080).

Source: http://www.mortgagecompliancemagazine.com/regulatory/state-regulatory-updates/monthly-state-regulatory-update-august-2018/

Introduction to TRID 2.0

An explanation of what to expect with our video series, the purpose of TRID 2.0, and a quick overview of major clarifications of TRID 2.0 as well as how to test them inside DocMagic.

Rounding and Truncation on LE & CD

Friday, September 7th, 2018
In episode 2 we review the original TRID rule for disclosing precentages, DocMagic’s rule for disclosing decimal places, and we address rounding and truncating trailing zeroes.

Seller Credits

Tuesday, September 11th, 2018
In episode 3 of TRID Talks we will be going over seller credits: how to send in XML & enter into DocMagic Online as well as the impact and changes on forms when Seller Credit.

Trusts and Non-borrowers

Thursday, September 13th, 2018
TRID Talks episode 4 will be about Trusts. Topics covered in this episode include: rescindable transactions – borrower title owner no longer to appear on pg. 1, and borrowers as ‘individuals’.

Closing Costs Expiration Date

Tuesday, September 18th, 2018
TRID Talks episode 5 will cover Closing Costs Expiration Date (CCED) over ten days – how to get plan feature set and CCED on redisclosed LE when ‘Intent to Proceed Date’ is present.

Simultaneous, Subordinate Lien Loans

Thursday, September 20th, 2018
TRID Talks episode 6 addresses simultaneous, subordinate lien loans. We will explain the new flag and the consequence of the flag which equals true.

Construction/CTP Changes

Tuesday, September 25th, 2018
In episode 7 we’ll discuss after consummation contruction inspection and fees including: the integration update and the impact on LE & CD as well as all other construction/CTP changes.

Principal Reduction

Thursday, September 27th, 2018
In our final episode of TRID Talks we’ll discuss how to indicate principal reduction is specifically for a tolerance cure. Also, the impact on display of items on the LE & CD.

Source: https://www.docmagic.com/trid-talks?utm_campaign=TRID%20Talks&utm_source=hs_email&utm_medium=email&utm_content=65734978&_hsenc=p2ANqtz-8xa1B8fjYfZsguFKeMqn_sRNm9YT0oblZO62mmgsMLll6-CCYSmaliplDJFLyqhTqpygzlGyr45fgvc0rnLh0Tv9o8yg&_hsmi=65734978

As I have discussed in previous articles, the October 1^st mandatory compliance date for the 2017 TRID Rule is quickly approaching. I hope you have taken some time to review these requirements during this “Optional Compliance Period.” If not, you still have approximately three months to ensure your policies and procedures are up to standard with the new requirements before they become the new law of the land.

With this new wave of requirements comes a slew of technical revisions and clarifications that I like to describe as a “reboot” of the existing TRID Rule. Since the implementation of the original rule in October 2015, the industry has faced certain challenges with the disclosures for certain types of transactions such as construction loans and simultaneous subordinate lien loan closings in connection with a first lien purchase loan.

These simultaneous subordinate lien loans are commonly referred to as “piggyback” loans, as they are typically originated in order to assist with the down payment of the 1^st lien purchase loan. Per the clarifications by the new 2017 Rule, in a purchase transaction that involves a subordinate lien loan, if the Closing Disclosure for the first lien loan has all of the required disclosures related to the seller, then the settlement agent, or the financial institution acting as settlement agent, may provide the seller with only the first lien CD instead of both the 1^st and subordinate lien CDs. As such, the Seller’s Summaries of Transactions table does not have to be included, or can be left blank, for the subordinate lien loan disclosure.

You are also permitted to use the alternative disclosures for the subordinate lien transaction since the seller’s information is not necessary to be included on the subordinate lien disclosures. Keep in mind, if you use the alternative disclosure on the Loan Estimate, then you must also use the alternative disclosure tables for the Closing Disclosure. Prior to this clarification in the Final Rule, the alternative disclosures were optional only when a seller wasn’t involved. In this case, a seller is involved, but not specifically in connection with the subordinate lien transaction. This means you may also omit the seller’s name and address for the subordinate lien disclosures as it will already be reflected on the 1^st lien purchase disclosures.

However, there are some additional things to note as clarified by the 2017 Rule –

The disbursement date on the Closing Disclosure for a simultaneous subordinate lien transaction is the date that some or all of the loan amount is expected to be paid to the consumer or a third party other than the settlement agent

The simultaneous subordinate lien will also be disclosed as a purchase purpose even though you are not required to reflect seller information on the subordinate lien disclosures as previously mentioned

Funds from the subordinate lien transaction are included in the Adjustments and Other Credits Section of the Loan estimate for the 1^st lien disclosure, and are then disclosed under the Borrower’s Summaries of Transactions Table on page three of the 1^st lien Closing Disclosure

Additionally, if you’re using the standard disclosure, the sales price is not disclosed under the Borrower’s Summaries of Transactions table on the CD for simultaneous subordinate lien loan. Therefore, the sales price is also not included in the Calculating Cash to Close calculations on the Loan Estimate or Closing Disclosure for the simultaneous subordinate lien loan transaction.

As a result of the many technical clarifications and amended provisions imposed by the 2017 TRID Rule, it will be important for you to perform a review of your loan operating system to ensure your software is up-to-date with these revisions. As the creditor, you are ultimately responsible for the accuracy and timeliness of the disclosures. It will be you, and not your third party software vendor, that will be held responsible for compliance with the new rules. So, take these last couple of months of the “Optional Compliance Period” to test your system and ensure it is compliant.
Source:https://www.temenos.com/en/blog/2018/july/trid-2-0-the-reboot/

Karl Dahlgren is managing director of BAI, Chicago, a nonprofit independent organization that delivers actionable insights for the financial services industry.

In October 2015, the first iteration of TRID took effect, which integrated the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) disclosures and regulations, under the Know Before You Owe (KBYO) Mortgage Initiative.

Two years later, the Consumer Financial Protection Bureau issued amendments to TRID that will go into effect this year, impacting loan applications received on or after October 1. While this updated regulation will have a significant impact on the industry, it will not require massive adjustments to processes and procedures, new training models or changes in vendors or suppliers.

Yet, even a few years after the initial ruling has gone into effect, many lenders and service providers still experience confusion about compliance with the rule. The CFPB continues to publish additional amendments and clarifications in an attempt to address much of the industry’s confusion about unique situations requiring disclosures. The main issue the industry struggles with is that the ruling, despite its staggering length, cannot possibly address all of the different scenarios that lenders continue to encounter.

When facing the upcoming regulations, many lenders have been concerned or confused about the following frequently asked questions.

Title and Escrow Fees
Can all fees associated with title and all fees associated with escrow be combined into one line each?
On the loan estimate form, all fees associated with title costs and closing can be rolled into one line if the lender prefers to do so. It is important to note, however, that this is not mandatory; it is an optional way of disclosing.

Appraisal Costs Changed Because Property Type Changed
If a borrower did not describe the property type correctly, such as confusing a condo and a duplex, and the appraisal charge must be increased as a result, is this considered a change of circumstances? Would this require a change in circumstance form for the higher cost of the appraisal?

The TRID amendments and clarifications have not altered the current definition of a change in circumstance. The regulation implies that you have three days to send the loan estimate. That time is intended to allow the creditor to perform the necessary investigations and due diligence to gather the necessary information to make the loan estimate in good faith. If a situation such as the one described occurred after the loan estimate was prepared, this would be considered a change in circumstances. The lender would need to issue a revised loan estimate in this scenario.

Defining Draw Fees
What is considered a “draw fee” under the new updates? Draw fees would also be synonymous with inspection fees if the lender requires an inspection before advancing more funds. There are several different terminologies for this fee used in different parts of the country. The small entity guides use “inspection and handling fees.”

Lender Paid Loans
How are most lenders disclosing a lender-paid loan? Does any lender-paid credit have to be disclosed at the time of the loan estimate?

Lenders may show the lender credit on the loan estimate and the item purchased by the loan credit, or they may decide not to disclose the cost of an item the lender-paid credit will pay for in the loan disclosure. The charge and the specific lender credit would need to be shown on the closing disclosure.
Source:https://www.mba.org/publications/insights/archive/mba-insights-archive/2018/trid-faqs-how-to-deal-with-most-common-concerns-about-upcoming-regulatory-update

The latest version of TRID provided the industry with much-needed clarification on a number of issues and practices facing lenders as they react and operationalize workflow to be in compliance with the revised rules of engagement. As a private-label fulfillment resource, my company has had the opportunity to speak with our clients in depth about our joint interpretation of the revised regulation and its impact on the origination process. As we all know, the original rule had many clear mandates, but left certain areas very gray.

From our viewpoint, the 2017 rule (TRID 2.0) broadly contained seven major changes and clarifications and five areas where the rule fell short of what the industry requested to be addressed.

Major Changes and Clarifications

TOP (Total of Payments) Calculation

Under TRID 1.0, there were different opinions on how the TOP calculation should be calculated. The 2017 rule provides clarification that TOP can exclude charges for principal, interest, mortgage insurance, or loan costs that are offset by another party through a specific credit. However, general credits,  may not be used to offset amounts for the purpose of TOP.

Tolerance Guidance in Conjunction with Good Faith Requirements

TRID 2.0 validates that the best information reasonably available standards apply to fees subject to 10 percent tolerance and allowable variations. The 2017 rule explains that if a charge subject to the 10 percent cumulative tolerance standards was omitted from the loan estimate (LE) but charged at consummation, it’s allowable if the sum of all charges subject to the tolerance is in good faith. For example, the lender must disclose the fee for services the lender requires. However, the lender is not required to provide a detailed breakdown of all related fees that are not explicitly required by the creditor, but may be charged to the consumer that are needed to perform the settlement services required by the creditor.

TRID 2.0 also explains that this standard applies to property taxes, property insurance (including homeowner’s insurance), amounts placed in escrow, impound, reserve or similar accounts, prepaid interest, and third-party services not required by the creditor, so long as the charges (or omission of charges) were estimated on the best information reasonably available.

Settlement Service Provider List (SSPL) Modifications and Good Faith Requirements

The 2017 rule provides that whether a consumer is permitted to shop is determined by the relevant facts and circumstances. It also identifies the tolerance standard for when the lender permits shopping for settlement services, but fails to provide the written SSPL. If a creditor fails to provide the written list to the consumer, but the facts and circumstances indicate the consumer was permitted to shop for the settlement service, the charges for which the consumer is permitted to shop are subject to 10 percent cumulative tolerance standard. However, if those charges are paid to the creditor or an affiliate, they are subject to 0 percent tolerance. Errors or omissions on the written list or untimely delivery of the written list may also impact tolerance standards. If the error or omission does not prevent the consumer from shopping, the charges are not to the creditor or an affiliate, and the consumer is otherwise considered to have shopped, the charges are subject to the 10 percent cumulative tolerance. If the error or omission does prevent the consumer from shopping, the charges are subject to the 0 percent tolerance standard.
Source:http://www.mortgagecompliancemagazine.com/regulatory/sizing-new-trid-rule-changed-didnt-remains-air/

We’re starting to see rising supply & flat/declining prices.

Our good friend John Rubino over at DollarCollapse.com just released an analysis titled US Housing Bubble Enters Stage Two: Suddenly Motivated Sellers.

He reminds us that housing bubbles follow a predictable progression:

Stage One: Mania – Prices rise at an accelerating rate as factors like excess central bank liquidity/loose credit/hot foreign money drive a virtuous bidding cycle well above sustainably affordable levels.

Stage Two: Peak – Increasingly jittery owners attempt to sell out before the party ends. Supply jumps as prices stagnate.

Stage Three: Bust – As inventory builds, sellers start having to lower prices. This begins a vicious cycle: buyers go on strike not wanting to catch a falling knife, causing sellers to drop prices further.

Rubino cites recent statistics that may indicate the US national housing market is finally entering Stage Two after a rip-roaring decade of recovery since the bursting of the 2007 housing bubble:

the supply of homes for sale during the “all important” spring market rose at 3x last year’s rate,

30 of America’s 100 largest cities now have more inventory than they did a year ago, and

mortgage applications for new homes dropped 9% YoY.

Taken together, these suggest that residential housing supply is increasing as sales slow, exactly what you’d expect to see in the transition from Stage One to Stage Two.

If that’s indeed what’s happening, Rubino warns the following comes next:

Stage Two’s deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they’re listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble-price checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps” to plunge, forcing subsequent sellers to cut even further.

Sales volumes contract, mortgage bankers and realtors get laid off. Then the last year’s (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, et voila, we’re back in 2008.

Source: https://seekingalpha.com/article/4187673-trouble-ahead-housing-market

Source: https://www.cnbc.com/2018/07/24/southern-california-home-sales-crash-a-warning-sign-to-the-nation.html

It’s almost impossible to start any trend article on mortgage lending without recognizing a recent statistic that has far-reaching implications for the mortgage industry. $8,957. That’s the cost to originate a loan in the first quarter of 2018, according to a study by the MBA. That figure rose almost $500 from the fourth quarter of 2017.

What else happened in Q1? Mortgage bankers lost money for the first time since Q1 of 2014.

Now consider the top trends this year that have to do with advanced technologies that financial services firms need to stay competitive with digital-first challengers in the market. So, what is the first and most important trend for mortgage lenders? According to The Financial Brand, financial institutions worldwide are making “massive investments in digital transformation” to try to make up for outdated legacy banking infrastructure that can’t keep up with the expectations of digitally savvy customers.

While You Were Pivoting

Digital-only entities are taking the market by storm and scooping up the customers and the profits even as the global banking attempts to pivot to becoming more tech-savvy. The fact that mortgage origination costs keep hitting new peaks is a sign that the mortgage industry as a whole is even further behind its other financial services counterparts.

That’s why an aggressive and thoughtful focus on digital transformation for mortgage lenders is more important now than ever before. Digital lenders like Quicken and a growing field of disruptive startups are already focused on fast processes and online experiences. A recent whitepaper from financial analyst firm Celent concluded that a fully end-to-end digital mortgage is possible within the next five years. So making sure that lending institutions get started on the right foot with the right plan is critical.

A Proven Plan

What does it take to get there? It is a relief to know there are proven ways to start and maintain a digital transformation journey.

Celent suggests that taking a phased approach to technology implementation can provide fast initial benefits, lower project risk and spread out costs. First on the firm’s technology to-do list is digital document capture. But just any digital document capture solution isn’t likely to provide the benefits truly needed to move the needle on lowering costs and showing quick return on investment.

Lenders who want to make the most impactful first step in their transformation should look for a solution that combines OCR and intelligent capture technology and offers the following capabilities:

Automatically sorts (classifies) all incoming documents, regardless of type and format

Captures specific data without defining templates, zones, anchors or specific keywords

Reconciles captured data against your LOS to ensure consistency, accuracy, and completeness

Easily and quickly integrates with your LOS or other line of business systems, or may be leveraged as a standalone solution

These capabilities eliminate paper-based processes, reduce human touch-points, and eliminate the need to manually classify documents and hand-key data from even the most complex, diverse document types. With over 500 pages in the typical mortgage file, it’s easy to see how lenders have accomplished major cost reductions in areas like paper, file storage and printing costs.

Information accuracy and transparency are also improved, reducing the risk of critical loan defects and compliance issues. And reduced cycle times allow lenders to process more loans and make better profits, while increasing the satisfaction of the borrower, who invariably wants to close her loan as quickly as possible.

Clearing the Obstacles

Document capture is just the first key technology identified by Celent, so lenders shouldn’t stop there if they want to push for end-to-end mortgage lending. According to a 2017 survey, the top five barriers to digital transformation for financial institutions are teams that lack the right skillset, integration problems between new and existing technology and data, a lack flexibility and speed in processes, outdated technology and a lack of collaboration between IT and business units.

With the right plan and the right solution, these obstacles are easier to remove than you might think.

Source: http://themreport.com/daily-dose/07-25-2018/mortgage-lenders-need-tech