A summary of the mortgage industry during 2015 in one word is “TRID”; in two words, “TRID” and “Terror.” As 2016 commences, TRID may still be at the forefront of the industry, but perhaps for a different reason. This epic regulatory implementation has brought an important topic to light: vendor management. Since even before the date of implementation on October 3, the CFPB has made clear that TRID violations are unacceptable and the parties responsible – both lenders and their vendors – will be held accountable.
Lenders have voiced their concerns regarding TRID implementation, particularly for causing closing delays due to their current technology. Such lenders have claimed that closings have been drawn out to a sometimes 60-day-long process as a result of the TRID changes, which is much higher than the historical average of 42 to 47 days. However, the core of the problem is not the lengthening of the loan closing process, but rather the gaps in compliance brought on by updating current and implementing new vendor technology, as well as aligning partnerships with new technology vendors.
According to a Moody’s Investors Service report published on December 10, 2015, ninety percent of recent loans contained a TRID violation. Although the violations are largely technical, they could cause problems for a secondary market purchaser, particularly with a residential mortgage backed security, due to delays resulting from erroneous information.
Most of the mortgages originated since TRID was implemented have some variety, whether material or not, of a TRID violation. These violations can be attributed to poor TRID compliance efforts, which, in turn, can be traced back to challenges in partnerships between lenders and their technology vendors, and perhaps to new implementation of quality control processes related to TRID. Now, almost 100 days after implementation, evidence is building into a clearer picture that reveals technology vendor performance in supporting lenders through TRID changes is wrought with challenges. Technology vendors may not be completely to blame for the high rate of loans with TRID violations, but the industry needs to focus on vendors, partnerships, and strengthening technology processes.
To be fair, lenders have also voiced concerns regarding the challenges they have faced with their vendor partnerships. They too have noticed the same technological gaps and discrepancies that were found in Moody’s Investors Service report. Thus, in addition to purchasing and training on the TRID software provided by their technology vendors, lenders must dish out further funding for quality control teams to QC loans or for consultants to help them bridge the gaps.
Lenders are not the only ones raising concerns about compliance. During the Mortgage Bankers Association’s 2015 Annual Convention in October 2015, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray’s made several strong comments regarding vendor compliance. Cordray said that he was “disturbed” by the lack of preparedness among vendors, and went so far as to indicate that “greater attention to the unsatisfactory performance of these vendors” may be forthcoming.
Vendor oversight has been an emerging concern for the Federal Reserve over the last several years, and it seems that the TRID implementation has likewise made it a priority for the CFPB. TRID will likely be an area of Bureau concern in 2016, according to Lexology articles from several industry leaders and resources. Many are of the opinion that when the CFPB eventually pinpoints tangible consumer harm, the regulatory agency will likely enact remediation requirements dating back to October 3rd whenever it pinpoints tangible consumer harm. The Government Sponsored Entities (GSE’s) have indicated in letters to sellers and servicers that material interference with a loan’s resale value will be their standard for invoking remediation. According to these letters, Fannie Mae and Freddie Mac will not enact repurchase or other remedies unless a required form is not found or if “the lender’s failure to comply could be expected to impair [the respective GSE’s] ability to enforce the note or mortgage, or to impose assignee liability on [the respective GSE].”
Given Cordray’s comments and the letters from the GSEs, it becomes more and more likely with every release of post-TRID data that intervention by the CFPB to address the vendor concerns is likely coming. In fact, there is a general consensus among legal experts in the industry that the CFPB will likely begin examining lenders for compliance with its new integrated disclosure rule by mid-2016. Undoubtedly, 2016 will bear witness to a renewed fight by the CFPB against the technology vendors who have failed to soundly provide the support necessary to make TRID an easy and quiet success.
Despite the focus to be put on vendors in 2016, lenders need to stay vigilant as well. If the CFPB has made anything clear since the agency’s inception just over five years ago, it is that the CFPB is unwilling to accept any excuses for negative effects upon consumers. While vendors who inaccurately represented themselves as “prepared” and “vigilant” on the eve of TRID implementation may find themselves on the wrong side of CFPB regulation, there will also be a focus on lenders about their partnership with vendors, their oversight and management of vendors and their onboarding processes in picking these critical third parties for their TRID (and other regulatory compliance) needs.
Vendor oversight has been an issue that has been focused upon for the past few years, but it is emerging as even more of a hot button to regulators in the coming year. While technology vendors for the mortgage industry have found themselves under fire due to the high-profile nature of the TRID implementation period, lenders must remember that they are the entities fully and unquestionably under the purview of the CFPB, Office of the Comptroller of Currency (OCC), Federal Deposit Insurance Company (FDIC), and other state and federal regulators. As a result, it is likely that the CFPB, if it decides to act, will approach the problem from both the lender and the vendor side. The regulatory agencies will not seek out and regulate each technology vendor who may provide services for the mortgage industry in the future. Instead, they will laser in on mortgage industry participants and determine how to ensure that ill-prepared vendors do not find their way into the mortgage industry again.
Comfort to mortgage lenders in the post-TRID mortgage industry will mean prioritizing regulatory compliance in their business models and finding technology and compliance vendors upon which they can rely. It is too early to determine what the exact operational or market impacts will be upon the industry. Bank and non-bank lenders, as well as vendors, will continue to adjust and find more efficient processes and integrated solutions to serve consumers.
One proactive measure lenders can take to stay out of the CFPB’s crosshairs is to bring in a middle man that has a bird’s eye view of the situation through providing compliance and mortgage fulfillment services to a variety of lenders. This type of servicer will consult with the client and their technology vendors to close the compliance and technology gaps, thereby executing a successful TRID implementation. The author’s company has experienced the situation firsthand and found this to be the best approach for successful vendor management. Lenders will reach a full solution for any major regulatory action requiring technology updates by bringing in a consultant with a 50,000-foot vantage point to protect the lender through consultation and additional quality control solutions that cover the technology’s soft spots.
If the past five years are any indication, the industry can be confident that the CFPB will continue to identify and regulate lender shortcomings. Further, as exemplified through TRID implementation challenges, lenders must be proactive in their vendor management. In order to develop compliant and sustainable solutions, lenders must seek the services of reliable technology vendors as well as a third-party that can offer consultation between the lender and the vendor, as well as cover any compliance gaps that may remain.