By Joel Horn, president of Mortgage Spirit
The complex changes involving HUD’s reformed Good Faith Estimate (GFE) slated for Jan. 1, 2010, has left many mortgage originators uneasy. The significant change brings a lot of discord as many originators struggle to prepare for the challenging requirement to define their revenues in terms of a specific dollar amount instead of the current industry practice of defining their revenue in percentages. The transition takes time and must be handled with care.
While many originators resist changes dictated by the new “final rule” of the Real Estate Settlement Procedures Act (RESPA), such change is inevitable and it is imperative that they prepare by implementing a formal educational process. The training involved for the pending RESPA requirements should begin at least 90 days prior to the ruling going into effect. One of the best ways for the owner of a brokerage or mortgage banking organization to educate their entire staff is to follow a three-tiered, 90-day approach.
Phase 1: Introduction
Phase one takes place during the first 30 days and focuses on getting the staff accustomed to the technical aspects behind the new GFE. It is vital that this familiarization process has the full support from the top of the organization to holistically change the organization’s language and mindset. Making such a major change, where revenue discussions are about “dollar amounts” rather than the traditional “percentage points” will not happen any other way.
The staff should form a formal, ongoing training program that comprehensively explains the new standard three-page GFE and its overall impact on the organization and the organization’s customers. Encourage brainstorming, goal setting, team motivation and morale boosting among staff. For branches located outside the main office, bring meetings to them through WebEx presentations to ensure the training reaches everyone at once and the message and teachings are consistent.
Print and distribute a copy of the revised GFE for all staff and ask them to review the layout. Also, print and distribute a copy of the old GFE form to compare and contrast easily. Highlight major differences, explain each difference’s overall impact on the lending process and address any questions among your employees during this phase.
The curriculum behind these lessons should focus on fully explaining the GFE’s complicated categories: information that must match exactly or a “zero tolerance” for difference (i.e. revenue from origination, YSP, fees, discount points and transfer taxes) and information regarding HUD’s “10 percent tolerance” for difference (i.e. title fees, recording fees and other third-party fees). The mortgage company should also understand that certain information is exempt from the tolerance sliding scale, including prepaid property tax and insurance.
Do not assume the staff can educate themselves on these topics or you will find them unable to cope with the changes when they are implemented in 2010.
Phase 2: Learning how to communicate with borrowers
The second 30-day phase provides training for staff on how to communicate with borrowers about the new GFE form. Rather than making the mandatory training session something your employees loathe attending, trying to come up with entertaining and interactive methods to share the information. The company’s ongoing training sessions should incorporate role-playing and interactive gatherings into the curriculum during this phase.
Divide the staff up into groups of two (an originator and a “borrower”), providing borrower loan scenarios and forcing each originator to fully disclose his or her earnings. While this portion of the new GFE is highly uncomfortable, the full transparency behind the act will help build trust between the mortgage originator and the borrower, who may be more comfortable with the origination process as a result of the more candid and straightforward nature of the GFE form. If borrowers are more comfortable and less anxious, they tend to be more willing to stay with their original originator and keep the file in house.
This added pressure on the originator can produce a healthy trickle-down effect for the industry. With such increased oversight, HUD is taking active measures to streamline the disclosure process to ensure the borrower is shopping for the most appropriate loan. The state of the borrower parallels the state of the mortgage industry…it must begin with a healthy borrower to become a healthy industry.
Phase 3: Double disclosure process
The last 30-day phase calls for an extra hands-on activity for the originator. The originator should take the knowledge gained from the first two phases and apply it to his or her next business engagement, implementing both the old and new GFE requirements. This “double disclosure” process is the best way for a loan originator to grasp and comply with RESPA’s new guidelines before mandatory compliance on Jan. 1.
Practicing with the new GFE uncovers any questionable issues or problem areas before the new law is in effect and the onus is on the originator. When the law is finalized, if the “zero tolerance” information listed on the GFE does not match exactly with the information listed on the HUD-1 at closing, the originator will have to cure or return the difference. This means that the burden is on the originator or lending institution to hold the risk of any tolerance loss.
This third phase to the formal education process is by far the most important. It enables the loan originator to figure out all the kinks before the new risks are imposed. Although it is more time intensive (HUD estimates the new GFE is an added 10 minutes or more per loan), it is better to become fully conversant with the new form to avoid any unnecessary repercussions.
After January 2010, origination executives might consider performing spot audits or other systematic reviews to make sure that there are no problems with the documents after the legislation takes effect. It is beneficial to have constant checks and balances to ensure the company remains in full compliance.
It is crucial for mortgage companies to arm themselves with all the tools necessary to thrive under the new regulatory environment. By giving your organization a 90-day head start, you increase the odds of maintaining productivity and clearing away any confusion. Through a dedicated training program, your company begins thinking like a unified body and can better understand how to effectively and successfully operate in a completely new way.
Joel Horn is the president of Mortgage Spirit, a Denver-based boutique technology provider for the mortgage industry that offers profitability and revenue management technology. The company includes all RESPA reform considerations, maximizes the profitability of each loan and enables users to better manage the origination process in order to make loans more saleable in the secondary market under the new, more restrictive HUD environment. For more information, visit mortgagespirit.com.