TRID Readiness: CFPB Director Richard Cordray Pounces on Technology Vendors, but Lenders Still Liable
Nov 12, 2015
In a speech at the Mortgage Bankers Association (MBA) 2015 Annual Convention and Expo, held in San Diego, Richard Cordray, Director of CFPB, was “…Quite frankly, disturbed…” by reports of technology vendors not being able to update their software and systems in a timely manner for the October 3 implementation of the CFPB’s new TILA-RESPA Integrated Disclosures (TRID) rules, also known as “Know Before You Owe” rules. According to Cordray, the vendor delay created obstacles for lenders attempting to comply. He strongly urges financial regulators and lenders to pay more attention to the impact vendor errors and readiness can have on the lender’s ability to comply with the critical regulatory changes.
"Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date," Cordray said. "It may well be that all of the financial regulators, including the consumer bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace." …
Director Cordray is clearly starting to question whether some vendors are even qualified to provide the services they offer. Under Dodd-Frank, the CFPB can examine “service providers” of the entities that it supervises. In light of this circulating concern, the CFPB may be preparing to use its authority to take a “closer look” at “service providers” and other tools used to comply with TRID, in addition to its current supervision of bank and nonbank lenders. Despite the strong rhetoric, it’s unclear whether the CFPB will enforce its authority as it has in past actions against other types of vendors, and if you recall in 2012 the CFPB issued a bulletin specifically stating it would hold service providers of bank and nonbank lenders, including software vendors responsible for violations of the law. In effect, the agency could take action against lenders or vendors if consumers are delayed in obtaining loans.
Consider What is Next on the Horizon
Lenders and vendors who are generating FHA loans need to turn their sights to the swiftly upcoming June 27, 2016 mandate by which FHA will require receipt of all compliant appraisal files through the Electronic Appraisal Delivery (EAD) portal. While many lenders and vendors may be viewing EAD as largely similar to the Uniform Collateral Data Portal (UCDP) mandated in 2012 for the delivery of compliant appraisals to Fannie Mae and Freddie Mac; the importance of proactive adoption and appropriate testing periods in advance of the mandate shouldn’t be taken lightly. FHA is already well underway with their lender registration “waves” which are scheduled to continue up to the official mandate date.
Important Steps for Effective Vendor Oversight and Risk Assessment
With the myriad of regulations, provisions, and oversight agencies to comply with, lenders are struggling with understanding their responsibilities for oversight of third-party vendors who provide services to them. Clearly with the 2012 CFPB provision which specifically holds the lender accountable to ensure consumer fairness and the lender’s responsibility to oversee every vendor it uses be, “in a manner that ensures compliance with the Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm”, it’s even more essential for businesses to take control of and thoroughly evaluate their vendor relationship and management strategies throughout the process.
It’s obvious you want to focus on growth and not be burdened with more complex regulations and vendor oversight, but what’s the best approach for vendor oversight?
Establish and document comprehensive policies and procedures
Clearly define your processes and workflows
Identify and understand your risks as they relate to both internal and external sources, and what is “mission critical” as compared to a low risk function or service
Define all roles and responsibilities for creating a risk-based approach to vendor management
Create a process to continually review whether the documentation and actual operational activities meet your vendor management policy requirements
Document vendor responses on how mission critical concerns are addressed as compared to low risk concerns
Remain diligent on vendor-related compliance documentation and maintain an open dialog as changes arise from either organization
Test, Test, Test
By failing to prepare, you are preparing to fail. - Benjamin Franklin
TRID regulation is complex—requiring updates to loan origination systems, document preparations and standards, as well as title and settlement platforms. Regardless, not being ready and compliant is not an option. Cordray forewarns service providers and lenders, “Consumers are at a real disadvantage because they do not get to choose the service providers they deal with—the financial institution does. Consumers must not be hurt by unfair, deceptive, or abusive practices of service providers. Banks and nonbanks must manage these relationships carefully and can be held accountable if they break the law.”
While downplaying concerns by lenders claiming that the new closing disclosure rules will delay and disrupt closing, ultimately hurting businesses; instead, he pointedly stressed, “These claims reflect a failure or perhaps a refusal to understand what the rule actually says” and he further clarifies the rules’ necessity to avoid one of the abuses that led to the financial crisis, adding, “We are quite confident that the mortgage industry will be able to accommodate itself to these common-sense requirements.”
With the unsatisfactory performance of some vendors looming, he reminds mortgage bankers and technology vendors during the event, “Protecting consumers must be a priority for everyone in this room, and I believe you know that very well…”, and he emphasize the CFPB’s statutory mission is to ensure that financial markets operate with transparency, efficiency and fairness; and, “that consumers’ experience of the financial marketplace and the promise of the American Dream are one and the same.”
Cordray continued his speech on recently released bulletins, provisions, reporting requirements, and provided further clarity on additional regulations covering all the forms of credit, real estate, and other financial and financial-related markets that have been imposed to protect the consumer in the aftermath of the credit crisis. Though he did not identify specific technologies affecting the lender readiness, some experts said a few large loan-origination-system vendors were not prepared and haven’t delivered the required final upgrades. Bob Davis, an Executive Vice President at the American Bankers Association sent out a memo, just before the Oct. 3 deadline citing numerous technical malfunctions, late software deliveries, plus regulatory complexity and lack of clarity issues as a few of the critical compliance complicating the TRID implementation process.
Part of CFPB’s commitment to ensuring mortgage processes are more efficient and effective, he added, “As we move forward…we recently conducted a pilot project which found that those who closed their mortgage using an electronic platform showed higher measures of understanding, efficiency, and feeling empowered than borrowers who used only paper forms. The project was not part of a rulemaking process, but rather was initiated to promote best practices in the marketplace. Based on the results, we are strongly encouraging further industry action and innovation around ‘e-closings.’” Cordray’s speech focused on progress, clarifying CFPB expectations, and making the marketplace fairer and more transparent for all Americans. He emphasized strong, new rules designed to protect and support both consumers and responsible businesses; rules which would result in a mortgage market that is steadily recovering, where home values are increasing, and millions of homes are emerging from underwater status.
Though the TRID deadline is behind us, technology readiness and compliance will continue to remain at the forefront of industry evolution; and with that position will come potential financial risk. It’s more important than ever to identify the right partner and establish a “trust but verify” relationship. Equally imperative, is the need to invest in creating and implementing a comprehensive vendor management policy and the associated procedures to minimize future negative financial impact. If we can learn anything from Cordray’s speech, it is that regulators are even more focused on vendor management than ever before and will continue to issue enforcement orders for identified violations. As the industry continues to tackle these implementation challenges, Cordray left us with this in mind, “Indeed, within the next year we will be launching a formal ‘look-back process’ for certain rules.”
To read CFPB Director Cordray’s full speech, click here.
For more information on CFPB, visit www.consumerfinance.gov