CFPB Disclosure Regime Could Force Smaller Lenders Out of Mortgages

WASHINGTON — Still reeling from underwriting guidelines that went into effect last year, some small lenders are worried that a new mortgage disclosure regime might be the thing that pushes them over the edge.

On its face, the Consumer Financial Protection Bureau's rule to merge various disclosure documents sounds simple enough. But it involves altering so many systems, many see it as an even bigger change than the "qualified mortgage" rule that caused financial institutions such consternation.

This "eats QM for breakfast," said Joshua Weinberg, a senior vice president at Lawrenceville, N.J.-based First Choice Bank, during a presentation last week at an American Bankers Association conference. "There are significantly more ramifications not just on the disclosure elements, but from the business process side."

The new disclosure rules, which combine requirements of the Truth-in-Lending Act and the Real Estate Settlement Procedures Act, are due to take effect Aug. 1, but many lenders are worried they won't be ready.

They may be the "nail in the coffin for smaller mortgage lenders," said Richard Andreano, a partner at the Ballard Spahr law firm. "After implementing the QM rule and the servicing rules, Respa/TILA has turned into the back-breaker."

At issue is a rule the CFPB finalized in November 2013 that created the TILA-Respa Integrated Disclosures (TRID). The new Loan Estimate and Closing Disclosure documents entail significant changes and are forcing lenders to update systems, among other things. One key change is that the rule opens up a private right of action under which lenders can be held liable for any errors in the new merged Closing Disclosure document. Private litigants can sue for damages and attorney fees, with a maximum statutory penalty of $4,000.

"That is why smaller banks are so worried. It doesn't take very many lawsuits to really feel the pain," said Donald Lampe, a partner at the Morrison & Foerster law firm in Washington.

As a result, some smaller lenders are looking to outsource their mortgage operations, according to Jacqueline Weed, vice president and director of correspondent/affinity lending at Embrace Home Loans in Newport, R.I.

"It is not only a regulatory change, it is a really a whole procedural change," she said in interview. "And the technology has to be modified to accommodate that change in procedure. It is a big deal for anybody, regardless of whether you are a bank, credit union or nonbank lender."

To some degree, outsourcing has already started to occur for small institutions, but several said it is going to get worse as the deadline looms ahead.

"The coming of TRID is going to accelerate that trend," Lampe said. "There is really no place at the table under TRID for small banks and credit unions. Given their relatively low loan volume, they cannot afford to comply because of the penalties."

To be sure, claims that new rules are going to drive small lenders out of business are nothing new. Many small banks said that when QM took effect in January 2014, they would quit the business. But so far, such dire predictions have not come to pass.

The CFPB also said it's been working with lenders to ensure the industry has time and opportunity to adapt to the new forms before they become mandatory.

"We have been doing extensive outreach, including through meetings, webinars and conferences," a spokesman said Tuesday. "We have also provided implementation support through online resources, including a small entity compliance guide, a guide to forms, and an illustrative timeline, in recognition that some lenders may need additional assistance."

The spokesman added that the industry is "driving technological change itself."

"For instance, the companies participating in our eClosing pilot are bringing their own innovative approaches to provide a better experience for consumers through technology, and we look forward to sharing the results of that collaborative work later this year," he said.

But Ron Haynie, senior vice president at the Independent Community Bankers of America, said it is the cumulative impact over time to watch.

Lenders "are asking the ultimate question: do I really want to be in the mortgage business or not?" he said. "People are really asking this question because of the TRID implementation and all the other rules that have come along."

Haynie noted that outsourcing is an attractive alternative, but banks and credit unions have to give up a lot of control over the processing and in some instances even discussing the mortgage with the borrower.

If they want to stay in the business, "they have to invest in technology and training to stay in the game and produce TRID compliance disclosures."

"You have to understand that the costs have gone up," Haynie said.

Embrace Home Loans launched an affinity program a year ago which is targeted at small and mid-size banks and credit unions. Under the affinity program, the bank's customer can file a mortgage application online or call Embrace for assistance.

"We help them place the marketing materials and advertise as it as ABC Bank's mortgage solution empowered by Embrace Home Loans," Weed said.

But because the community bank isn't the lender, the bank's staff can't discuss the mortgage with the borrower.

Embrace Home Loans has been the mortgage business for 32 years and it currently originates $3 billion in loans a year via its retail, correspondent and direct lending channels. It also offers traditional mortgage fulfillment outsourcing to banks that want to fund their own mortgages.

Weed said that there are other companies offering similar programs.

"We like to think our program is differentiated by a partnership that we create with the financial institution. And our ability to work with the firm and identify potential cross-sell opportunities. By taking a mortgage application you learn a lot about the customers' financial situation," she said.

As the deadline approaches, lenders are asking the CFPB for an extension of the deadline.

But Weinberg said lenders need to be focused on developing contingency plans for when the new disclosures do take effect.

He said his institution should be ready to issue the closing disclosure when the rules go into effect, but First Choice will make sure there is a vendor, such as a title provider, to back him up.

"It is going to be critical to know that I got business partners who can do it for me in case I can't," he said. "So if for whatever reason your system can't do it, start reaching out to your vendors and business partners now to see if they can."

The ABA, meanwhile, is surveying its members to get a feel for how prepared they are for implementing the TRID disclosures.

If small lenders do start exiting the mortgage business, it may prompt Congress to intervene, Andreano said.

"Even lawmakers that oppose changes to the Dodd-Frank Act might be receptive to tweaks that would lessen the impact on smaller institutions," he said.

The attorney also noted the real costs of originating a mortgage have been masked by low mortgage rates. Currently, lenders can cover the costs by charging a slightly higher rate on the loan.

But that will come to an end once interest rates begin to rise and normalize, he warned. And TRID makes loans more expensive.

"As rates go up, lenders won't be able to hide the costs and borrowers will have to come to the closing table with cash to pay the upfront fees," Andreano said. "This becomes a problem if the consumer can't afford a higher interest rate or can't come up with the cash."