Lenders can make tolerance violations a thing of the past with the right data and technology tools.
(TheNicheReport) -- It certainly isn’t an easy time for lenders; that fact is inarguable. With tightening regulations and additional legislation still to come, they must adapt to an environment that not only continues to change, but is completely unpredictable. Despite the indisputable challenges, too many lenders are wasting time, energy and manpower using antiquated methods that should be handled by technology.
Ignoring new innovations and tools is dangerous for lenders’ businesses – they risk costly mistakes at every point in the loan origination process. In a business that relies heavily on referrals from satisfied customers, lenders that do not update their procedures lose the opportunity to provide borrowers with a smooth, pleasant customer experience. In today’s competitive marketplace, they absolutely cannot afford to disregard the importance of creating a simplified and more positive process for consumers while reducing overhead costs.
Currently, one of lenders’ most significant concerns are the more stringent RESPA regulations regarding good faith estimates (GFE). Lenders must present GFEs within three days of receiving a loan application, meaning they must generate these estimates more quickly than ever before. Many lenders continue to gather the necessary data using outdated tables and spreadsheets, resulting in one of two problems: they either overdisclose or underdisclose. In today’s environment lenders are well aware that they are not using the most current closing services, recording fee and transfer tax data, which makes tolerance violations inevitable. Yet, given the extreme time restraints, managing accurate, up-to-date data simply is not their highest priority. Lenders who decide to “play it safe” and overdisclose now are realizing that in reality, this method leads to missed opportunities and the loss of a competitive edge.
Eliminate costly violations at every turn
The high-tech world in which we live means there is no longer any reason for a lender to watch money fly out the window in the form of tolerance violations. Based on our evaluation of the market, we found that lenders not utilizing the latest technology still typically incur $375,000 or more in RESPA tolerance violations each year. These expenditures, which lenders have come to expect, can be avoided almost entirely.
Unable to manage and maintain closing service provider rates and their constant changes, lenders must enlist the help of a data provider that undergoes the painstaking process of updating rate content by working directly with the service providers, performing error testing analysis and then delivering that information. A data provider can give a lender instant access to a comprehensive network of service providers from across the country – removing all of the work that requires so much manpower and costly overhead to maintain.
Many lenders also continue to leave themselves exposed in the area of transfer taxes, which are held to zero tolerance. Today, when approximately 60 percent of all transactions are refinances, keeping accurate recording fee estimates poses a challenge, and errors become more frequent when transfer taxes are not taken into consideration in certain geographic locations. In reality, there are numerous triggers that can create a variance in the transfer tax amount; for example, if the payoff of a previous loan to a new loan at the point of application is estimated to be higher than the actual demand reflects, the tax would increase. Without the assistance of technology, lenders are having difficulty solving this issue. However, they can avoid fees altogether by using technology that automatically updates information and can calculate an accurate transfer tax response for any transaction.
The economic downturn has left countless consumers with damaged credit, and for loan-qualifying purposes it has now become commonplace for an individual to be added or removed from the loan application. For example, a spouse with unhurt credit might refinance in his or her name, as opposed to having both names listed on the application, or someone might be removed in the case of a divorce. Transfer tax errors are also made when an additional person is added to a title to help the borrower following his or her job loss and subsequent income decrease. Each of these circumstances can generate a taxable event that lenders often do not account for – a costly mistake they pay for in fines.
Another common situation that forces lenders to pay unnecessary cures occurs when borrowers are required to pay off a credit card or some form of debt to qualify for a loan. Many times this requires the release of additional liens or the recording of documents, such as a Power of Attorney, that were identified at the time of application. While these events each present a rightful change in circumstance, lenders often do not possess the technology or manpower to update their files and re-disclose them to the borrower, and in the end must pay the cure on the HUD-1 for their tolerance violation. When a file is ready to draw loan documents, it is essential for lenders to have a system in place capable of quickly re-verifying transfer tax and recording fees, making the necessary changes and updating GFE disclosures to avoid expensive violations.
Prepare for now and the future
While it is clear that regulatory change already significantly impacts lenders, they must institute adequate support for their businesses in preparation for the inevitable changes still to come. The Consumer Financial Protection Bureau (CFPB) is working to refine its regulations aimed at protecting consumers as they navigate this process; unfortunately, this could likely mean even tighter limitations and heightened oversight for lenders.
The CFPB could potentially hold lenders to higher standards for GFEs as well. For example, there has been mention of holding affiliated providers to zero tolerance from the former 10 percent tolerance for accuracy. In addition, the proposed form changes seem to remove the “Charges that can change” category, which typically houses the “buyer selected” providers list on the HUD-1 comparison. That alteration would make lenders accountable for all quotes, regardless of whether the borrower selected the provider. While new rules are largely just speculation at this point, what we do know is that lenders will need to position themselves to adapt quickly. They can best prepare their organizations by deploying the technology sooner rather than later, ensuring they are already using the best data and tools available in advance of additional legislative changes.
Lenders should also rely on technology in an effort to improve document retention, as the presence of an audit trail for every loan file, from start through closing, is now essential. Lenders must find improved means to maintain documents and provide date-stamped records showing the items within every quote, the reasoning behind them and a clear demonstration of any changes. This level of detail is now required, and lenders can only create a truly accurate, complete audit trail through automation.
Save money, improve your business
Lenders are in the business of originations, yet in today’s complex environment it has become increasingly difficult for them to focus on their core competencies and deliver the best service. Without the manpower to handle data management and provide the real-time service provider rates needed, many lenders have resigned themselves to the fact that tolerance violations are an inevitable cost of doing business, but this does not have to be the case. Technological solutions are available today that reduce overhead costs, lessen the number of human “touches” each loan file requires, and enable lenders to operate more accurately from start to finish, resulting in the successful outcome of regulatory audits.
In the midst of an evolving and recovering industry, lenders must commit to making the considerable changes necessary not only to stay in business, but to thrive. While a technology investment is typically never a quick decision, a preliminary ROI will show the longer lenders wait to render a decision, the more they lose in fines and operational expenses each day. By removing obsolete practices and replacing them with technology, lenders can accommodate today’s need for accurate data, accelerated processes and satisfied borrowers.
Cathy Blaszyk is vice president of lender services for La Jolla, Calif.-based ClosingCorp, an independent real estate data and technology company that develops online data services for mortgage lenders, real estate professionals and consumers to expedite closing activities.