Six weeks after new rules governing mortgage loan documents went into effect, lenders, vendors and servicers are all still scrambling to adapt, particularly when it comes to their software.
The Department of Housing and Urban Development (HUD) is still issuing clarifications and interpretations of the law, forcing software vendors to make repeated changes to their programs and wreaking havoc with a system that leaves little margin for error.
“It’s causing some real operational difficulties for lenders,” Susan Quilty, principal of Dracut banking consulting firm Quilty & Assoc., told Banker & Tradesman.
Last fall, HUD declared a 120-day moratorium on enforcement of rules violations to give lenders and brokers time to adjust. But that grace period ends in April, and industry experts report that confusion still reigns.
The Real Estate Settlement Procedures Act (RESPA) changed two important documents in the mortgage process, the Good Faith Estimate (GFE) and the HUD1. The GFE is provided to borrowers prior to the loan being issued, and the HUD1 is a settlement document required by HUD.
Under the new rules, costs which were formerly itemized are now lumped together. For some charges, final fees cannot vary from the original estimate. For others they can vary no more than 10 percent. The changes were intended to make sure borrowers had a clear picture of closing costs so they could more easily compare competing offers and weren’t cheated by unscrupulous lenders or brokers.
But given the complex nature of real estate transactions, lumping costs together creates many opportunities for fees to end up assigned to the wrong category, which can result in differences between final and estimated costs.
Richard Hogan, a legislative counsel for New England title insurer CATIC, said title insurance was often mis-categorized by lending software. Incorrectly grouping owners’ and lenders’ policies is a common mistake that can mean a variance of $1,000 from the estimate, he said.
“The lender is making a good-faith effort to comply, they’re accurately putting the estimated dollar amount in the GFE, so they’re not trying to fool anybody, but because they’re in the wrong box,” it can still cause problems at settlement, Hogan said.
Though vendors have been responsive to lender’s concerns, many have struggled to cope, according to Quilty.
“I think the smaller vendors are realizing that they may not have been as prepared as they’d like to have been,” Quilty said. One of her clients had to fill out forms by hand for a time because their software was so badly out of line, she said.
Even when the new software is up and running, different lenders often have different interpretations of how to comply with the new rules in light of their own lending guidelines. Vendors are attempting to make software flexible enough to accommodate a client’s unique system, but such an approach may require more training for end users.
Ted Hicks, director of the product management group for California-based mortgage loan origination and processing software firm Calyx, said his company has implemented new features allowing individual clients to customize software to their own guidelines. This often requires a visit from members of the company’s professional services team for training and setup, Hicks said.
But even with increased flexibility written in, many issues remain unclear, and vendors have had to provide frequent patches, updates and service packs to accommodate the new rules.
“It’s unfortunate, because we’re a month and a half in, and [HUD is] still doing clarifications,” said Lisa Hehman, a product manager for Florida’s MortgageFlex Systems, another mortgage software company. “And sometimes it’s like, well, we read it the way you wrote it, and now we’re having to go out and make modifications. Unfortunately there’s existing loans where there’s nothing we can do until we can get our modifications out into the system.”
The differing interpretations of the rules are particularly taxing for mortgage brokers, who deal with many different lenders, including outside investors, and may feel pressure to bow to their views in order to close a deal.
“There are a few lenders out there who say, ‘complete it this way,’ and then someone else will say, ‘complete it that way,’” said Jaclynn Sulfaro, president of the Massachusetts Mortgage Association. “I had an issue with a lender who said, if the rate is not locked, don’t include a date, put in ‘N/A,’” she said. “That’s not even allowed on our software.”
Such quibbles can present significant compliance issues. One investor suggested to Sulfaro that she disclose her yield spread premium in a manner that she believed to be “absolutely not allowed.” Her group is currently working with the division of banks to get guidance on how to resolve such conflicts.
The industry may have brought some share of these troubles on themselves. Though there were a few leaders sounding the warning and offering training on RESPA issues last year, according to Quilty, for the most part there was no urgency.
“Everyone basically waited,” Quilty said. “[Lenders] waited for their vendors, brokers who table-fund waited for lenders to tell them what to do. …Everyone was kind of hoping that since it was such a major change it would have been acknowledged that more time was needed.”
Some hope the industry’s current transition woes will teach them a valuable lesson, as they anticipate further regulatory changes to the Truth in Lending Act that may impact loan disclosures later this year.
“The thought of going through and doing any of this again is very traumatizing,” said Hehman.
