Article by: Ben Giumarra, Spillane Consulting Associates, Inc
You’re checking (and re-checking) your Closing Disclosures to avoid any errors and to fix any that do occur post-closing. They’re finally looking a lot better, but you’re now seeing plenty of problems with Seller CDs, which are provided directly by closing agents. Do we worry about this or not? Let’s talk this through now so you can have an intelligent and confident conversation with regulators if this ever comes up in an exam, rather than have an exchange similar to the McMaster the streetsweeper’s testimony in the Hernandez murder trial last week (which was bizarre, to say the least, if you happened to catch it).Regulatory Language
Let’s start with the regulatory language. All the regulation says is that “the settlement agent shall provide the [Seller’s Closing Disclosure.” It also requires the lender to collect a copy of the Seller’s CD. See TILA 1026.19(f)(4).
So far, that seems pretty helpful for us as lenders. Sounds like we can let the closing agent take care of this!
But the counterargument comes from our general vendor management obligations and the fact that lenders are seemingly always held accountable for any misconduct by service providers. The most recent CFPB bulletin on the topic states, for example:
“However, the mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility for complying with Federal consumer financial law to avoid consumer harm. A service provider that is unfamiliar with the legal requirements applicable to the products or services being offered, or that does not make efforts to implement those requirements carefully and effectively, or that exhibits weak internal controls, can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship.”
Three Different Approaches
Everyone’s reading the same regulations (above), but three different approaches/interpretations have evolved in how to handle the Seller’s CD.
First Approach – “Not my problem”
It is completely the closing agent’s responsibility – it says so in the TRID Rule! Under this interpretation, the lender will ignore even glaring mistakes on the Seller’s CD and will only review to ensure a copy actually exists in the file.
Second Approach – “Worry Wart”
Under this approach, the lender considers itself to be directly responsible for ensuring compliance by any of its chosen vendors. Here the lender will closely monitor Seller’s CDs for compliance and require that closing agents fix any mistakes found. Taking it a step further, this lender might even require the opportunity to approve the Seller’s CD before closing. Hopefully this “scorched earth” policy will result in better performance after the initial period of closing agents getting accustomed to your expectations, but you’ll likely need to develop a process for this all because it is going to be a lot of work!
Third Approach – “Balanced” (aka Goldilocks)
Here the lender does not consider itself directly responsible for the Seller’s CD, but exercises reasonable diligence in monitoring the compliance responsibilities of its closing agents. Here, the lender will pass along notices of errors on occasion but will not spend too much effort following up.This lender might (but might not) audit a percentage of Seller’s CDs and will not ignore any serious errors it otherwise happens to find. It will alert closing agents of any mistakes found and encourage the closing agent to provided corrected disclosures, but will not go so far as demanding proof. The standard language in such letter may say “During a routine loan review, we noticed what may be errors in the Seller’s CD. These are described below. We recommend that you investigate and take appropriate action, such as providing a revised disclosure. Should you provide a revised disclosure, please send us a copy so that we can update our records. We welcome any other feedback, related to this transaction or in general.” Of course, this lender won’t sweat it if closing agents don’t respond — and might only even use this letter with serious mistakes.
Under this balanced approach, a lender will handle egregious or repeated mistakes on a case-by-case basis. And in truly extreme circumstances, which I wouldn’t expect to ever happen in practice, this lender’s official policy would be to suspend business with a closing agent. (This is as opposed to the First Approach where the lender’s response to a regulator would be: “It’s none of our concern. There’s nothing a closing agent could do regarding these seller disclosures that would cause us to stop doing business with them.”)
It’s probably obvious which approach I lean towards – but what about you?
Bonus Seller CD Tips
No matter what approach you adopt above, consider these extra and somewhat related points:
Lenders should, at bare minimum, ensure sellers actually do receive a CD. Maybe it’s awful and full of mistakes, but at least make sure closing agents are providing a Closing Disclosure (or that the seller is getting a copy of a combined CD). And I mean “Closing Disclosure” – not a HUD-1, ALTA settlement statement, or anything else!
Reviewing Seller’s CD is often helpful for monitoring or post-closing purposes beyond just fixing Seller CDs themselves. This can highlight errors on the Borrower’s CD or call attention to a problem with disbursement of loan proceeds.
In Other News
Fascinating article on MISMO, OCR technology, mortgage data verification, and other mortgage technology byRachael Sokolowski (explained well enough that even I kind of get it)
We’re signing lenders up for HMDA training sessions (standard package includes preliminary strategic meeting), helping prepare policies & procedures, heading up HMDA “task forces“, and working alongside clients to make sure they’re “system ready” for HMDA 2018 — will you give us a chance to help you with this transition?
On My Mind …
An excerpt from Brett King’s “Bank 3.0”:
The fact is that Internet, mobile apps, social media and other such innovations of the last 20 years are not special anymore…. So when you are looking at your strategy for your bank and figuring out how quickly or holistically to integrate these technologies into your channel strategy, think about this. This is the way banking will be done from this day forward, without exception. We’re never going back to a world without internet banking access, mobile phones, social media and multitouch. Thus, it just doesn’t make sense to put off investment in these most basic of technologies that lay the foundation for the very future of banking. I’ts not like you can avoid the investment sometime in the future, or that you shouldn’t take every opportunity to learn about them now, because they’re absolutely critical for future revenue and engagement.
“Engaging in discovery and making little bets is a way to complement more linear, procedural thinking. No one can take their eye off their core business or responsibilities, but anyone can spend a portion of their time and energies using little bets to discover, test, and improve new ideas.” – Peter Sims
Note: Try reading this and Spillane Consulting Associates, Inc.’s other newsletters in their, new blog.
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.
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