TILA Slowing Down Day 1 Certainty Implementation?

Article By: Ben Giumarra, Spillane Consulting Associates, Inc.

Regulations are often blamed for stifling innovation – how many new and unique loan products have we seen lately? You see similar hesitation on new internal processes. Is Day 1 Certainty destined for the same fate? I think No.

Are you staying “up with” Day 1 Certainty changes? 9 out of 10 lenders are not. But the 10th lender will sound like a mad scientist when you ask them about it. It’s an interesting knowledge gap right now.

Let’s look at a couple of Truth-in-Lending rules and why I think they do NOT get in the way of rolling out Day 1. Hey, compliance isn’t a problem for a change!

But first, what exactly is Day 1 Certainty? It offers rep+warrant relief immediately at closing (“Day 1”) if lenders use Rocket-Mortgage-like technology to get certain items validated independently. This technology, “third-party data verification vendor reports”, is already on the market – Fannie and other investors already submit it – lenders are already using it. Here, for example, the borrower will provide the lender direct access to their bank records and the third party vendor report pulls all the necessary information automatically (without borrower or lender involvement). What’s new with Day 1 Certainty is that Fannie is agreeing to accept responsibility for any mistakes in those vendor reports. Previously, the lender would have remained responsible for the data integrity.

Benefits? Well it’s forcing you to do a “Rocket Mortgage” – which basically allows you to improve efficiency, improve the customer experience, and potentially close loans faster.

Okay, let’s dig into these two rules. These rules, again, should NOT stop anyone from rolling out Day 1 Certainty. When deciding whether to roll this out, other factors – like cost – should take priority.

Pre-Loan Estimate Verification Rule

This Rule prohibits a lender from requiring a consumer to “submit documents verifying information related to the consumer’s application before providing the [Loan Estimate].” TILA 1026.19(e)(2)(iii).

This is a poorly worded regulation, but has been clarified by regulators.

All this means is that we can’t refuse to provide a Loan Estimate until a borrower has provided us verifying documentation. But there’s nothing at all stopping us from requiring verifying documentation in order to go forward with an application or pre-approval …. of course, even if the borrower doesn’t provide that, they will still receive a Loan Estimate if the 6 pieces of an application exist. The same issue occurs with pre-approvals – Obviously, we can collect verifying documentation for pre-approvals and in that case no Loan Estimate has been delivered.

I have heard people wonder whether this Verification Rule limits the usefulness of Day 1 Certainty – the concern is that we have to wait to start the Day 1 process wait until sending a Loan Estimate. As you can see, that’s just not the case.

Pre-Intent to Proceed Fee Rule

So this rule, TILA 1026.19(e)(2)(i), prohibits lenders from collecting any fee other than for a credit report prior to the consumer providing Intent to Proceed. (And the borrower can provide a valid Intent to Proceed only after receiving a Loan Estimate).

So this Rule does slow us down a little – but it’s just a simple matter of structuring this correctly.

  • Are some of the costs for Day 1 Certainty expensive? Yes, absolutely they are.
  • Does every lender have some amount of fallout? Yes, of course.
  • But can we charge the borrower for this upfront? No, unfortunately we cannot.

So if we run vendor reports immediately (before receiving intent to proceed), this will speed up the process but come at a cost. The cost is that some borrowers will “fallout” and the lender will wind up paying for these costs.

Your considerations are as follows:

#1 – Accept the costs and run reports immediately. Hopefully this actually reduces your amount of fallout because borrowers know they’re already involved in the process.

#2 – Pass the cost on to the borrower as Section B fees paid at closing. But now are borrowers that don’t use Day 1 certainty paying fewer fees and isn’t that counter to what we want to accomplish?

#3 – Make sure your general origination charges are high enough across the board that you  don’t have to charge borrowers for these fees.

#4 – Delay running vendor reports until the borrower has provided intent to proceed. This should drastically reduce fallout risk. Taking it one step further, you could require payment for these items at that time prior to proceeding – therefore protecting against any remaining fallout.

For more information check out Fannie Mae’s Day 1 Certainty page.

In Other News

  • My colleague Paul says this article about Optimal Blue’s recent acquisition is interesting – I’ll take his word for it!
  • Fascinating speech about Boston’s housing market in national and global context given last week at the B&T’s mid-year conference by Albert Saiz, professor at MIT. Here’s a 2004 article of his covering similar topics – really cool stuff! He’s predicting that the U.S. will start to control housing market fluctuations aggressively through mortgage standards, e.g. by limiting the maximum LTV to 60% instead of 80%.

On My Mind …

Thoughts and prayers to the family of Tom Barnes, who passed away last week. Tom was an industry veteran who had been serving as Chairman at two community bank and a friend to many including us here at SCA. Read his obituary here. The funeral is today in Hampton, NH.

“I’d like to go out and have a good practice. That would be top of the list right now.”

-Bill Belichick   (when asked last week about what else the 5-time superbowl winner could hope to accomplish in his NFL career)



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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