TRID’s Long-Term Impact on Future Loan Offerings 2016 marks the beginning of the “Competitive Compliance Age” By Wes Miller
JANUARY 2016 n National Mortgage Professional Magazine n
TRID has changed many things in the mortgage industry, resulting in the need for new technologies, processes and procedures. There is no question; the regulation changed how a mortgage closing is conducted. There is one question, however, that needs answering, and it is one that not many people are asking yet: How will TRID affect the mortgage industry five years from now? Ten years? Fifteen? To answer this question, one needs to understand that the power players in this industry are not limited to the regulators. The regulators have power to enforce the rules, but ultimately aren’t the ones “driving the bus.” As Sam Walton, the founder of Walmart, once famously said: “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” Mortgage investors are the ultimate consumers of a loan product and TRID has changed the way they view loan risk. This shift in awareness will result in massive changes for the industry. Some of these changes include the fact that there is debate over the governmentsponsored enterprises (GSEs) exiting residential mortgage-backed securities (RMBS) by 2018, to lower risk for taxpayers and to attract private capital back into the market. TRID has created such turmoil in the marketplace. However, private investors have taken serious notice. These parties have remained mistrustful of RMBS since their experience back in 2008 and do not look favorably on additional risk sets. At best, they will be very guarded. This wariness will only worsen as non-compliant loans enter the secondary market. The Consumer Financial Protection Bureau (CFPB) has issued a letter to the Mortgage Bankers Association (MBA) with many reassuring points on this subject, one of the key ones being that errors in the Loan Estimate could be corrected in the Closing Disclosure. Richard Horn, previous senior counsel to the CFPB, expressed many concerns about this letter in his newsletter: l The CFPB issued these statements regarding cures and liability under TRID in the form of an informal letter. While this letter may weigh on the side of being helpful, it is uncertain how much deference, if any, a court would give to such an informal letter. l Determining which liability under TILA applies is the purview of the courts. When commenters asked the
CFPB to specify which statutory liability applied to different provisions under TRID, the CFPB responded that courts can use the statutory authority described in the section-by-section analysis to determine liability. In addition, there is some case law supporting the opposite position: that liability, including statutory damages, can apply to the initial TILA disclosures. l Courts may find that Loan Estimate violations cannot be cured by a later Closing Disclosure, because the harm at the shopping stage cannot be cured by a later accurate disclosure. To attract private label investors, the mortgage closing industry will have to wrap their TRID loans in something more protective than a QM sticker. Investors are beginning to demand additional representations and warrants. They want to see proof of compliance at a granular, technical level. Those that can provide the private mortgage investor with proof that these representations and warrants are true will have a significant competitive edge in the years to come. Private mortgage investors will, essentially, demand a better loan product. And the number one rule in sales is that the customer is always right. In an open letter to the Federal Housing Finance Agency (FHFA), the MBA advocated for the use of up-front risk sharing models. These models would derisk loans before they are packaged into RMBS, following the adage that an ounce
of prevention is worth a pound of cure. This approach would have substantial benefits, including, but not limited to: Credit risk competition with the viable outcome of increased access to mortgage credit to homebuyers, risk dispersed from the GSEs and of course private capital being restored to the RMBS market. The naturally ensuing question is simple, but is one that has stumped the industry since the RMBS market originated: how exactly does one “de-risk” a loan? The sarcastic rejoinder, many would argue, is such a task is impossible or it would have been done already. Technology, however, is continually overhauling the impossible into the imaginable, the imaginable into the feasible and the feasible into the standard. To believe something is impossible for an extended length of time is dangerous for businesses. De-risking a loan would require all communications, between the participating entities to be documented. It would require data verification on the official loan forms, ensuring that it is correct on all counts and all iterations. It would require proof that the Loan Estimate and the Closing Disclosure were delivered to the homebuyer as per the timing requirements. It would require evidence that funds were distributed to appropriate parties. These requirements and more would have to be followed for every loan in a securitized pool, in order to attract the mostly sidelined private label security (PLS) market in any sizeable quantity.
Remember, this was the group that arguably lost the most during the 2008 mortgage crisis. They need serious assurances to be motivated. However, if the industry relies on a human being to manually compare hundreds of pages of documents, the reality is that there will be errors. The cost of origination is already too high in the current mortgage landscape; consumers are paying too much and the margins aren’t what they should be. In order to make home buying affordable for everyone participating on a loan, all of these problems have to be replaced with technological advances. The long-term impact of such technologies will create increased competition for credit risk, giving investors more confidence to buy and more options to choose from. This is not an argument saying that the industry needs to return to the days of subprime loans. The future of mortgages will be dependent on using superior technology to validate and verify consumer-centric data and matching that data to investor criteria, ensuring a oneto-one match for risk vs. yield. This increased appetite will cause a shift in the secondary market’s dynamic. In the current setting, the RMBS market operates much like a restaurant that offers only one entrée. It is limited by the type of loan risk the mortgage industry produces. When more risk options are introduced, however, the private investor will begin to demand a variety of specific types of risk with different yield options. They will select the loan type they prefer from specific criteria, as if choosing ingredients to be included in a recipe. As a result, the market will begin catering to the mortgage investor’s preferences. This will set a precedent for a new type of mortgage supply chain that generates these types of loan risks, so they can be delivered to private RMBS investors. TRID has set in motion a wave of awareness among private mortgage investors. These entities are the ones who drive the mortgage market, by the simple fact they are the loan’s ultimate consumer. They will drive the mortgage industry to generate specific types of loan risk. They will change how a loan is originated. The long-term impact of TRID will drive the mortgage industry into the age of competitive compliance. Wes Miller is CEO and co-founder of ATS Secured, a new technology category for the real estate closing industry. Miller has extensive experience in developing and marketing both core and ancillary financial products. Wes has been recognized for his success in sales, customer service and training support staff.