Stepping Up RESPA Readiness

Mortgage Technology Magazine

November 2009

Industry experts talk about how the mortgage industry can use technology to comply with the coming RESPA changes.

Effective Jan. 1, the mortgage industry is in store for a real big change. After over 20 years of debate, there will finally be dramatic changes made to RESPA that will force lenders to wake up and do things differently. Bruce Backer, president of decisioning vendor LoanSifter, Jason Marx, vice president and general manager, mortgage at compliance vendor Wolters Kluwer Financial Services, David Hultquist, marketing vice president at LOS Dorado, and David Shirk, chief information/compliance officer at midtier lender NetMore America, talked with our editor Tony Garritano about how technology can help lenders make a smooth transition.

David Shirk, NetMore America

There's always been a good-faith estimate and a settlement. Now there is some teeth to it. They have to be related to one another now.

Jason Marx, Wolters Kluwer

We vendors can build wonderful tools, but if they don't fit the lender's business model or needs, they're just wonderful tools.

DaviD Hultquist, Dorado

The very name good faith used to mean that my mind is not malicious. Now it means something much stronger.

Bruce Backer, LoanSifter

You can really have information overload. It can be confusing to see all this information. You have to be careful how you ... share it.

    MORTGAGE TECHNOLOGY: What's the basis for RESPA reform in January? What's the central theme that lenders need to be aware of?

    DAVID SHIRK: This change is a change that has been attempted many times in the past. It goes back to 1992 when YSP disclosure first came out. At that time, yield spread premium was — by law — required to be disclosed as paid outside of closing. Now — by law — you can't pay outside of closing. It's a total reversal of what we were doing with YSP.

    The response is designed to limit the ability for originators to shift the price when the market is fluctuating and the borrower is closing. In the past a borrower could come in and get a quote and get a good-faith estimate. But if they didn't lock, and they finally got ready to lock in the rate, the margins on that product might be entirely different.

    JASON MARX: At its core, it's about transparency for the borrower and the institution, and then for the borrower among various institutions as they are looking for a loan. That's where we work with lenders and servicers — it's really about providing that visibility into the process, which has been talked about for 20 some years.

    DAVID SHIRK: There's always been a good faith estimate and a settlement. Now there is some teeth to it. They have to be related to one another now. It's going to be very tricky managing the substantiation for the changes that we'll have to document and keep track of, and do it within the three days. That's going to be the big part. As a result, in today's environment, technology is the driver for compliance.

    DAVID HULTQUIST: You're right about the role of technology. For many years technology vendors have proposed that their products would bring greater efficiency or better productivity. The essential proposition of the LOS system is that it makes correct and compliant loans. That is the LOS' real purpose. It ensures compliance in the way that it tracks things from start to finish and makes that recordable and auditable. The essential function of the software is to produce and correct the loan rather than to make the loan officer productive or other sorts of things.

    BRUCE BACKER: The technology allows you to have a repeatable, predictable process. You can deal with any degree of variation. From a complexity standpoint, technology really levels the playing field. It allows you to handle these changes, I think very easily. Where people have gotten into trouble is they have legacy systems or they have solutions that have been an amalgamation of a couple different products. Those lenders have been struggling with getting ready for the RESPA changes, but most companies that we've talked to are very well prepared to have the technology in place to support this.

    In the regulation itself there are some inconsistencies. Historically — back in 1996 — HUD and the Federal Reserve Board had done an analysis and determined there was really an opportunity for a few different mortgage documents to come together so lenders can deliver a single document. However, we still haven't gotten to that point.

    MORTGAGE TECHNOLOGY: To Bruce's point, why can't there be a single, uniform document?

    JASON MARX: There's two related and changing dynamics in the marketplace. First, you've got compliance that has become central to the workflow. It is embedded in the tool and not just in the LOS, the entire workflow process from origination to close, to post- close and now with modifications and default processing into the servicing environment.

    That's one aspect. The other aspect is that it's been pushed forward into the workflow. Its' no longer good enough to catch it before it closes. It's got to be caught at point of application on the front end.

    DAVID HULTQUIST: That's very well put. The very name good faith used to imply my mind is not malicious at the time. Now it means something much more stronger than that. Now it means this is going to be right. That good faith has switched from being predeliberate fraud to have conscious, systematic, programmatic, steps in place to make this right in the end. That seems to me to be a much stronger test than good faith really. Well beyond.

    DAVID SHIRK: Well, from a lender's perspective when you are talking to technologists, they always say they are prepared. They don't want to admit they aren't. The complexity of the model is enormous. I don't think the regulators are paying attention to that level of complexity. They have to come to believe that technologists can do anything. Of course technologists can but whether it can be applied in way that's meaningful is a totally different story. We have transparency, but transparency to what?

    What we need the consumers to understand is what the costs are going to be. What we have now is an obligation to tell consumers what their costs might be given the limited amount of information that we have. And then tell them over and over again within three days, every time they bring up another document that tells us they didn't represent with good faith to us. Now, many borrowers are going to bring to us everything they need and we will be able to give them a good-faith estimate that will be accurate and we'll be able to close with it. But there are going to be those that will go to a broker that will get a good-faith estimate and then that broker is

going to want to find another lender that will offer them a different opportunity. The new lender is going to have to live with the old lender's quote even though there may be something else about the transaction that would be more favorable.

    But beyond that, we are now beholden to all our service providers to actually deliver at the price that they tell us. In particular, if an appraiser goes out and decides there's something about the property that's odd and they want to charge us more money, we've got to have that information upfront.

    JASON MARX: The regulatory frame- work is the other aspect of this that needs to be considered. Not only is it complex for a lender, as a provider into the space of compliance, it's an issue of unintended consequences. So, RESPA is still not final. There are FAQs coming out all the time. Every time as an industry we think we understood it at number seven, the FAQ number eight comes out, which really forces everyone to go back and rework the prior work to make sure what you did the first time was right.

    We do that as a compliance provider. That's the core of what we do. Every lender has to go and reassess the process and what you thought you had operationally from a workflow perspective on Tuesday may be very different on Wednesday when interpretation comes out with what the regulation really means.

    DAVID HULTQUIST: I think the frequency of the FAQ releases is evidence of the level of complexity and the level of consideration that went into the drafting. I think there are a lot of good things about it. I think there are a lot of things that nobody thought about at the time that they were drafted, and that's always the case. But this is such a significant change.

    BRUCE BACKER: I don't know that there's much testing with consumers either in terms of how they would react to the information provided. You can really have information overload. It can be confusing to see all this information. You have to be careful how you layer information and share it with the consumer. The consumer who gets frustrated or thinks it's too complicated will skip over it and you will miss the whole intent of the disclosure. It seems that we would have been better off with additional consumer testing.

    DAVID SHIRK: Exactly. I think that the other issue is that this requires you to constantly redisclose within three days of the time the data changes. That's an overload to some consumers.

    MORTGAGE TECHNOLOGY: So, can technology play a part in simplifying compliance?

    BRUCE BACKER: Because it is so complicated and because it is a moving target, and it really won't be done even when it's done, technology is the only way lenders have a chance of implementing it and responding to variations as time goes on. It is so complicated and people want a lot from lenders. Perhaps the regulators do oversimplify how someone does architect the system to meet these challenges, but they expect that lenders have the technology in place already.

    JASON MARX: I think at the same time, you have many lenders that were taking a wait-and-see approach. There was a big industry backlash against this when it was first proposed. HUD has come out and said recently, that this is happening Jan. 1. Lenders have to really go back and look at the entire workflow. Now you've got the added pressure of time. You've got lenders that are just now looking at it. It's going to be very difficult for them to be in compliance on Jan. 1 without significant effort and pain in order to get there.

    DAVID SHIRK: I think a lot of lenders are dependent on their technology vendors in order to know what course of action to take. Technologists know what they are going to build, but that's not always shared with the lender. Some of the vendors still don't have the technology available. They are promising it will be there, though. The lender can't do much until they know under what construct they have to work it.

    JASON MARX: It really is about dialogue. The technology providers can't do this in a vacuum without input from lenders who actually say this is how I'm going to consume this technology and leverage it in my workflow. We vendors can build wonderful tools, but if they don't fit the lender's business model or needs, they're just wonderful tools. It's about having tools that are flexible and configurable.

    BRUCE BACKER: It does all start with workflow. If you don't know the workflow, you can't begin to attack the technology unless it's a very generic solution. Even then, you have to have highly customizable software that can be adapted to a lender's particular workflow. Nonetheless, you still have to have that same core understanding about what's going to happen. It really is a dialogue that needs to happen between the lender and vendor.