There has been a mostly positive reaction among settlement agents over the news that Wells Fargo, the nation's No. 1 mortgage originator, plans to create and deliver the new Closing Disclosure to the consumer. The bank said in a communication to its settlement agents it is taking this action because Wells Fargo will have the legal liability associated with issuing the disclosure.
The new disclosure is set to be implemented on Aug. 1, 2015, and its creation is part of the Dodd-Frank Act's merger of the rules governing the Real Estate Settlement Procedures Act and the Truth in Lending Act.
"The lenders definitely feel that they are responsible for ultimately collecting and disclosing accurate fees and insuring that they adhere to all of the new tolerances and that disclosures are generated appropriately and at the right time," said Dan Sogorka, who is the president of RealEC Technologies, which is a part of Black Knight Financial. They also need to maintain evidence of compliance and some may feel that can happen with the current process, he continued.
Current practice is for the settlement agent to create the HUD-1 form. While Wells Fargo is out front in this issue, other lenders are still examining it and among the options they are considering is no change from what is being done currently.
This announcement, said Brian Benson, the CEO of ClosingCorp., "clearly has alarms ringing in compliance officer offices throughout the nation.
"Wells is generally regarded as a torch bearer for analysis and was known to have invested quite a bit of time studying this issue, so many lenders were waiting to see which way they would go on this."
ClosingCorp, which is headquartered in San Diego and whose primary product is called SmartGFE, a technology designed to take the guess work out of filling in fees on the GFE, was seeing a sizeable surge in interest both before and after the Wells announcement as lenders began to consider the practical burden of meeting the time and accuracy demands and their increased liability and exposure, Benson continued. Wells Fargo's actions "hit the nail on the head" for what most of the rest of the industry already knew, but they hadn't yet addressed.
"It is having an impact in vendor selection, their migration away from affiliated business arrangements, their concern for fee standardization, and their general tolerance for complexity. Conversations that were proceeding slowly with my team are suddenly being treated with urgency; they have done the math and talked to their peers out in industry, and they are telling us that they need our services to have the peace of mind that they will get to August 2015 in good standing," Benson said.
A small sampling of industry executives found most are still working through the matter. Only Freedom Mortgage of Mount Laurel, N.J., said it "expects to behave similarly [to Wells Fargo]. However, we have not established a time line," according to a statement from CEO Stan Middleman, who declined to make any further comment.
One industry executive who wished not to be identified because this matter is still under consideration at the institution said that the institution wants to support the people it works with and give them various options that meet the way they want to do business; that might include preparing the documents itself.
An attempt to reach Wells Fargo for comment was not returned by press time.
Black Knight, whose Real EC unit is based in Houston, is working with Wells Fargo and other lenders along with the various title insurance production platforms on this new disclosure as well as working on ways they all can change the consumer experience, said Sogorka.
The entire disclosure and closing process has to be redesigned from how it done today. But because there are so many moving parts (including other parties in a purchase transaction like the real estate agent) "focusing on any one single component is not going to get you where you need to be nor get us where we need to be collectively as an industry," Sogorka said.
Black Knight is bringing all of these parties to the table and work on getting any friction in the process eliminated. "We have to make the process work for everybody. If there are a certain number of lenders who say we want the settlement agent to continue to generate (the closing disclosure), as long as they can hit the regulatory requirements, that's probably OK."
But the larger lenders are indicating they are not comfortable with the settlement agent handling the closing disclosure, so it is likely Wells is leading the parade.
For some of the smaller lenders, things such as the increased cost related to upgrading technology to handle the disclosure could leave them relying on the status quo when August 2015 comes around.
But that could boomerang on them. There are more expenses to get into compliance, but if there is a problem, the fines are greater, Sokorga said. "They need to focus on leveraging technology and working with the right business partners hand-in-hand to put together the right process to protect everybody along the value chain."
From the closing agent perspective, the reaction to what Wells Fargo is doing has been a mixed bag.
The few title industry members that responded to an American Land Title Association post on LinkedIn about this tended to be happy that Wells Fargo is taking the initiative regarding this change.
Consumers are free to choose their own closing agents and one poster expressed concern that having the lender prepare the documents could impact on the consumer's ability to work with the closing agent of their choice.
There has been a task force set up by ALTA to discuss the RESPA-TILA merger, where this has been a hot topic of discussion.
The mixed reaction by its membership is understandable, said Michelle Korsmo, the chief executive of ALTA. "It's a change in the way business happens and so until you have time to really think through how it will affect your business, there is cause to be skeptical."
Wells Fargo has done an informational meeting with settlement agents and there was a two-way discussion about why the lender is taking this action combined with ALTA member concerns about the proposal, she said.
What she has found is that after discussion and where it addresses the liability issue, settlement agents understand why Wells Fargo made this decision.
The new form is such a radical change in the disclosure process that everyone is a little nervous about making sure the document is delivered properly, while still serving the needs of the homebuyer and making sure their business-to-business relationships with industry service providers is working well, Korsmo continued.
When it comes to the disclosure process, which can vary from company to company, "getting everybody on one page would be useful. But at the same time [loan closing] practices are very local," she said, pointing out that things are done differently in each state (in some states, an attorney handles the closing) and in some cases done differently depending on which part of the state you are in.
Furthermore, each lender has its own loan closing instructions that are different from the competition's. The biggest lesson from the implementation of the qualified mortgage rule for settlement agents is to follow those closing instructions closely," Korsmo noted.
When it comes to having proof that the disclosure complies with the law, ALTA is telling its members to work with the lender to ensure there is a record of the accuracy of the disclosure and when the customer received the disclosure. They need to have "a trail to provide evidence of compliance, regardless of it being the lender or the settlement company providing that information," Korsmo said.
A key point to remember in the process is that many purchase transactions are interlinked with one or two other home sale transactions; typically the buyer is selling his or her old home and the seller is buying his or her next one. So if the timing requirements of delivering the closing disclosure is missed, other transactions could be affected, she pointed out.
With all the changes happening to the process, lenders are being conservative in their approach, said Gregory Teal, the president and CEO of Ernst Publishing Co., an Albany, N.Y-based provider of data used to populate the GFE.
"In our area of expertise — third-party fees — we see that this rule requires an accounting of very subtle differences and enhanced levels of granularity. With that in mind, we are being asked by many in the industry to work directly with their compliance departments and provide assistance in interpreting the various rule enhancements, such as identifying the actual taxing authority and determining who is responsible for each tax-related item delineated on the disclosure forms. The rule demands that this information be specific and prevents lenders from simply showing the total amount due."
"This will, initially, make the process a little more cumbersome and there will be levels of nuance not accounted for that will need to be fleshed out in this new process over the first year or so of rule enforcement. Ultimately, I believe, the lender and the industry will provide a more accurate and easily readable disclosure for both the loan estimate and the closing disclosure," Teal said.
The work going on right now by the industry in combining RESPA and TILA is a change to enhance the consumer experience when it comes to getting a mortgage.
The next 10 months will put a lot of pressure on settlement agents, Korsmo said. But ALTA and its members have been working on creating new processes since the Consumer Financial Protection Bureau unveiled the disclosure last November.
Going forward through to next August, the focus for settlement service providers should be on training their employees as well as conducting educational classes for real estate agents, she said.
It is all about the creating the best customer experience possible.
"When I talk to my employees and my business partners, I talk about August 2015 is not the end, that's not the goal line. That is really the beginning. And if we keep working together, we can make a better consumer experience," Sokorga stated.
Korsmo added, "In order for this to be a good experience for the consumer, it's all got to work well."