The August 2015 cutover to the new integrated disclosures is such a significant transition that it is hard right now to see how numerous logistical questions and issues will be resolved within the next nine months. The new forms fundamentally change so many underlying practices that many “what if” or “what about” scenarios remain unanswered.
Making this situation even less appealing is the regulatory fatigue that lenders’ internal IT, operations and compliance teams find themselves dealing with. In this current transition chaos, some lenders are assuming, perhaps hoping, that existing loan origination or doc prep systems will handle the new procedures with the lender filling in the gaps in technology with staff and manual support.
Even with the growing understanding that the new forms require a level of operational and system collaboration far greater than exists today, it is tempting to default to this choice when there are so many other business priorities competing for time and attention. But will a LOS or Doc Prep approach really work, and how long will it remain a viable option?
A lender utilizing this approach will be receiving documents and information from settlement agents and third parties and then manually entering the data into systems to complete the Closing Disclosure. This will rely heavily on an actual person to perform the task and necessitate the hiring of enough properly trained staff to accommodate the lender’s volume.
Methods to collect data might be a phone call, a form faxed in with changes marked up by hand, or an email with attachment. (Note that email presents a security risk due to personally identifiable information in the forms or documents being sent. While secure email solutions are being touted as a solution, they do not always address the full set of risks. This is not a consideration to be overlooked.) While it’s true that these methods are commonly used today, the difference is that with the new Closing Disclosure, the amount and frequency of this exchange is likely to go up significantly.
Where settlement agents before could handle lender changes coming to them, that process is now being reversed and all data flow will converge at the lender. The amount of intake a lender has to accommodate will be very high.
Aside from the labor costs, the two other drawbacks of a manual approach are: 1) the likelihood of human error and 2) slow processing time. With sufficient headcount, a lender may be able to achieve acceptable turnaround times, but the premium staffing required to deliver at that level simply increases processing costs even further. Errors are also more likely in a manual process. Since the Closing Disclosure allows for very few and narrow variances, even the most minor errors will be very detrimental if they cause the closing date to be re-scheduled. And in both cases, many LOS systems are not adequately addressing the workflow, comparision, analytics and data storage required to compare the multiple submissions in this process!
Nonetheless, there almost certainly will be lenders that decide to support the Closing Disclosure manually due to a lack of resources, expertise, or time to implement a more efficient and effective technology-based solution. Lenders should understand that this approach only delays the inevitable. The manual approach is not sustainable and at some point, sooner or later, lenders will have to put in place an automated solution.
This is not, however, just a labor arbitrage discussion. Should an internal solution strategy fail, the reputational risk and impact of fleeing customers, brokers and third-party originators as a result are a strong probability for the business.
After many conversations with lenders and independent title agents over the past several months one thing is abundantly clear: this is a collaboration problem we face together, not a content-creation one!
There are two ways to automate the collaboration needed to create the Closing Disclosure. The first approach extracts data from documents the settlement agent sends to the lender and automatically populates the appropriate fields in lender systems.
The second utilizes a direct data feed from settlement systems to the lender. In the forthcoming second part of this article, I will further discuss these two automated approaches.
