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Consumer Financial Protection Bureau

Title Agents, Attorneys Should Prepare for Software/Hardware Changes to Accommodate Proposed Mortgage Disclosures

November 1, 2012

The Consumer Financial Protection Bureau’s (CFPB) proposed regulations and mortgage disclosure forms will require title professionals to update software and possibly invest in new hardware, while forcing improved communication with lending clients.

Mandated by the Dodd-Frank Act to simplify mortgage disclosures, the CFPB has proposed a new three-page Loan Estimate and five-page Closing Disclosure that will replace the current Truth-In-Lending (TIL), Good Faith Estimate (GFE) and HUD-1 Settlement Statement (HUD-1) disclosures. In July, the Bureau released the proposed disclosures and associated regulations. Deadline to comment on the proposal is Nov. 6. If you are a member of the Title Action Network, click here to comment. If you are not a Network member, please comment directly to the CFPB by clicking here.

In addition to merging disclosures, the CFPB has deviated from the traditional line-numbering system the industry has used for years on the HUD-1. The Bureau said it tested several different prototype formats for disclosing actual closing costs on the Closing Disclosure, including prototypes that were similar in format to the current HUD-1 with a similar three and four-digit line numbering system, and other prototypes that more closely matched the Loan Estimate. According to the CFPB, consumer participants performed better at identifying closing costs when using a format that closely matched the Loan Estimate.

During a Small Business Review Panel earlier this year, ALTA members requested line numbers from the current HUD-1 be retained, stating that using the revised line numbers in the integrated Closing Disclosure would significantly increase programming costs. Mary Schuster, president of op2 and a member of ALTA’s RESPA Task Force, said the line numbering change could be a programmer’s nightmare.

“The core line numberings and groupings did not change during the last RESPA Reform,” Schuster said. “The proposed Closing Disclosure groups fees by categories and are not tied to one spot on the form.”

Schuster used the 700 line on the current HUD-1 for the real estate agent’s commission as an example of how this will cause problems. This percentage is computed by the software and populated onto the line. However, because there’s not a fixed spot on the proposed form, the ability to automate the calculation will be lost.

“Settlement agents will lose efficiency, as this creates an opportunity for mistakes and makes closing more difficult because fees can be anywhere on the form,” Schuster said. “We need to provide thorough comments on the impact this will have.”

The Bureau seeks comment on whether the use of line numbers will lower software-related costs on industry, and the exact amount of the savings given the rest of the changes in the integrated closing disclosure contemplated by the proposal.

Implementation Cost

The CFPB estimates the total one-time costs of reading the relevant sections of the Federal Register, revising systems to provide the new disclosures, and training personnel for the Bureau respondents to be approximately $30.9 million, which corresponds to approximately 574,600 hours. Annualized over five years, this is an annual cost of $6.2 million. In calculating the total burden of providing Loan Estimates and Closing Disclosures, the Bureau assumes that Loan Estimates will be provided in response to applications for mortgages and Closing Disclosures will be provided three business days before mortgages are consummated. The Bureau further estimates entities will reissue on average two Loan Estimates per loan originated.

Responding to questions submitted by the House Committee on Small Business, Richard Cordray, the director of the Consumer Financial Protection Bureau, said its proposed regulations to simplify mortgage disclosures will likely result in equal or lower compliance costs for settlement agents and lenders. The CFPB estimated that the new disclosure forms would result in a one-time cost of more than $100 million. The committee asked Cordray who was responsible for the cost and whether settlement agents and lenders may pass some costs to consumers.

“This figure is an estimate of the direct costs to creditors, mortgage brokers and settlement agents,” Cordray said. “The bureau does not believe that adoption of the integrated disclosures would impose any direct costs on consumers. However … consumers may bear some of the costs of the new disclosures if covered persons pass through some or all of the costs that would be imposed on them. The Bureau estimates that any increased costs to consumers per origination would be small.” Cordray wrote that the cost burden “amounts to less than three dollars per origination when amortized over five years and spread across the estimated 8 million originations per year.”

ALTA believes the CFPB underestimates the financial implications the proposal will have on the industry. Just two years ago, the industry spent $157.4 million to comply with the new HUD-1, which was implemented Jan. 1, 2010. That reform cost the industry $13.7 million in software upgrades. ALTA projects these proposed regulations will cost the industry roughly $314.7 million.

Software/Hardware Upgrades

Leslie Wyatt, director of industry relations, research and development for SoftPro, said SoftPro does not plan to pass any of the costs associated with updating software onto its customers. Cost for regulatory updates to the software is included in the annual maintenance service fee.

“That being said, some vendors won't be able to absorb the costs of updating their software so soon after the 2010 RESPA changes,” Wyatt said. “They'll be forced to pass some of the costs they incur onto to their customers. This will most likely have a domino effect and force the agents to pass the costs onto the consumer through higher settlement fees. Agents will also have costs associated with training and implementation of their staff to consider as well. As far as an exact figure, that would depend on the size of the organization as well as the software that they are using.”

Bob Miller, chief executive officer of TSS Software Corp., said his users with a current software services subscription will receive the upgrade as part of the subscription and will not incur any additional software upgrade fees.

However, title agents and attorneys will more than likely incur costs associated with installation and potential hardware purchases. Agents with older hardware not designed to run the latest operating systems and software applications will certainly face hardware upgrade costs.

“Lenders will seek title companies with secure IT infrastructures and the ability to electronically exchange data,” Miller said. “Alternatively, agents could move to secure Web-based software or a hosted environment with minimal or no additional hardware costs.

Title professionals also must consider the time and expense of training staff in order to get up to speed with the software updates. Wyatt said this involves a two-step training process.

“They'll first need to train their staff on the new rules and regulations to be sure they have a full understanding of what will be required of them to be compliant with the final rule,” she said. “Secondly, they will need to then train them on how to implement the new regulations within their updated software packages. Keep in mind that agents won't be able to start training staff on the software updates until their vendor has had enough time update, test and send out the updated software to their agents. I would say in total, agents would be looking at a minimum of two to three days per employee for training.”

Communicating With Lenders

Moving forward with the new regulations, it will be essential for title companies increase communication with lender clients. One way to achieve this is for title companies to integrate their title and closing software platforms with lenders’ loan origination software (LOS). Wyatt points to two areas in the proposed rule that highlights this need. First is the question of who will prepare the form. The CFPB has proposed two options. Either the lender can prepare the entire form or they can share the responsibility with the settlement agent.

“The shared responsibility option creates the need for the systems to communicate with each other,” Wyatt said “If a lender is going to generate a portion of the form from within their LOS system, then the settlement agent's system must have functionality to electronically accept that data into their file. Without this bridge, the settlement agent would have to rekey the loan data into their title software, adding additional processing time to each file the settlement agent works on.”

A big issue is that many large lenders use “home-grown” custom LOS systems, which will force the title and closing software vendors to work with them on a one-on-one basis.

“It will take a lot of time to research and spec out the requirement for each integration,” Wyatt said. “In addition, we'll also need to integrate with the ‘off-the-shelf’ loan origination software products as well. Depending on the implementation timeline provided by the CFPB and the software provider that a title company is using, they may or may not have this capability by the mandatory implementation date of the final rule.”

Miller agreed that integrating with a lender’s LOS system improves efficiency, but added it’s not critical because data exchange can happen in many ways. It isn’t reliant solely with lenders’ loan origination software.

“We will likely see data flowing in multiple directions, through various portals, and lenders’ loan origination software will be just one piece of the data exchange process,” Miller said.

The second reason to have increased communication with lender clients is that the proposed rule requires lenders to retain the information on both the Loan Disclosure form and the final Closing Disclosure form in a machine-readable format. As a result, software vendors will need to provide integrations for settlement agents to electronically send the final Closing Disclosure form data to lenders. Wyatt said this will require extensive research, communication with the lending community and a significant period of time to scope and code these integrations.

“The proposed rule however neglects to define a single protocol for use, exposing software providers and integrators to significant additional expense in integrating to multiple protocols,” she added.

Miller doesn’t think title companies will have any issues importing and/or exporting data in machine-readable format if they take advantage of software applications designed for this purpose.

“With lenders assuming the burden of risk, title companies must respond accordingly by eliminating as much potential for error as possible,” he said. “This is especially true of smaller organizations that have thus far muddled through with limited technology. Any company that operates on the premise that it will only accept and return documents is inviting problems. Electronic data interchange is a central feature of the technological paradigm shift now facing title companies.”

Calculating Cost

Marvin Stone, senior vice president of business integration at Stewart Lender Services, suggested title professionals go through a checklist in order to decipher how the regulations could impact revenue. He said it’s key for ALTA members to consider implementation and operational costs.

Implementation costs are comprised of technology (software upgrades) and training. Stone said agents will need to consider hardware requirements along with a software implementation fee from a vendor.

“You’ll also have to allocate your time and resources or your staff to implement and work through the details,” Stone said.

Agents must also consider how they will securely transmit and store the new documents.

“You will need a secure means or process to establish workflow with your lender,” Stone said. “It’s interesting that we rely on email every day, but email is perhaps not the best workflow with lenders in regard to disclosures. This may require a new system or may be a part of your current title production system that will need to be enhanced.”

In addition, training will be required. This does not only comprise closers and back office support, but also training of lender partners and educating them on new workflows.

While these are one-time implementation costs, operational costs are not as clear and vary based on location, mix of customers and how they will want to handle the Closing Disclosure.

The proposal may result in more workflow back and forth with the lender or the possibility of pre-closing calls from consumers with questions about the Closing Disclosure.

“Title agents may have to start taking phone calls that they haven’t had to handle before,” Stone said.

Key to smaller operations will be the impact on other work. Stone said agents should think about additional keying of new lender data from Loan Estimate onto Closing Disclosure; how often and how long pre-calls could take; possibility of the increase of redisclosures; monthly cost or transactional costs for systems not already in place; and possibility of various work streams dependent on how lender handles disclosure delivery.

“Agents should create a checklist of possible costs,” Stone said. “It’s important to talk to your lenders and find out how they will want to handle the closing disclosure.”

Additionally, since certain loan transactions such as reverse mortgages, home equity lines of credit or mortgages secured by a mobile home or by a dwelling that is not attached to land are not covered by the proposed rule, existing computer systems to generate GFEs and HUD-1s will need to be maintained. While we don’t know what the final form will look like and the associated regulations that will dictate who provides the disclosure to consumers, it’s important title professionals remain engaged during this process.

Miller urged title agents to “support and take full advantage of work the American Land Title Association and many state land title associations are doing to keep members informed as new details emerge in connection with this complex regulatory scheme.”

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