If you’re in the mortgage lending industry, you know that change is the status quo. With multiple, overlapping layers of industry oversight and the government controlling the largest secondary market investors, changing rules and regulations are just part of the game. Most are minor, but lately, as in over the last five years, we come upon changes that can really shake things up.
Most recently it was the Consumer Financial Protection Bureau’s TILA/RESPA Integrated Disclosure rule (TRID). The Bureau reformatted a couple of disclosures and changed the timelines for distributing them to borrowers. Sounds simple, but it took the better part of three years for lenders and technology providers to make the necessary changes.
And those were just a couple of disclosures. What’s going to happen when the industry’s most important document undergoes changes? We’re about to find out.
A new 1003. What could go wrong?
Fannie Mae and Freddie Mac have redesigned the Uniform Residential Loan Application (URLA or Form 1003). As part of that process, the GSEs developed a corresponding Uniform Loan Application Dataset, and created a new Desktop Underwriter Specification (DU Spec) for submitting the redesigned Form 1003 data to DU. In other words, they changed everything.
Fannie Mae says the new documents will support changes in mortgage industry credit, underwriting, eligibility policies, and regulatory requirements. The new 1003 also includes 94 new data points, bringing the total number of fields up to 236, which is 129% bigger than the old form.
On the surface this looks like just another form change, so some lenders may be thinking this is just another problem for their document provider or loan origination system developer. Those two things are true. Yet there is a third that is just as true. Lenders have plenty of work to do internally to prepare for their people and their processes for this change.
URLA is much more than a document change, and here are five reasons why.
1) Internal policy and procedural changes
The new 1003 will require the lender to gather more borrower information than ever before. Whether the lender acquires this data online through a digital point of sale, or in the branch, a new process will be required to capture the information and quality control the results.
Some of the new information required in the 13 sections of the new 1003 is focused on borrower demographics. Some borrowers won’t feel comfortable about providing this information online. The loan officer may have to take a more active role in gathering it, which could change and elongate timelines and unbalance workloads.
Someone is going to have to think this through inside the lender’s shop, make some decisions, draft new policies, plan the training and then deliver it in advance of the new form coming online.
2) Borrower experience
It’s no secret that borrowers already feel they are being asked for too much personal information when applying for a loan. Without an internal and external training and communications plan and predetermined processes in place, the additional information requirements will make this perception worse and negatively impact the overall borrower experience.
We know borrowers don’t like to be asked for information more than once. With 30% more information required on the application because of the new 1003, the risk of lenders not having enough information to complete the form, or the possibility of missing questions, increases. Further troubling is the situation for repeat borrowers, as having to backtrack and request information that wasn’t required when they applied for their previous loan is a precarious ask.
It’s not clear yet how borrowers will respond to the changes, but lenders need to take time to plan out their responses to possible borrower concerns. Failure to do so could result in more abandoned applications and a declining Pull-Through rate.
3) Investors, processors, and underwriting
The underwriting, processing and secondary marketing departments will have to process more data for each loan with the new forms. While some of this may pass through, like Home Mortgage Disclosure Data (HMDA) demographic fields, others may impact how non-government or non-QM investors view the deals.
With more demographic information available to regulators and consumer groups, it’s not yet clear what the impact will be if a lender chooses to deny an applicant.
For post-close QC, more data means more chance of error and increased processing time and expense.
4) Secondary market considerations
While it’s reasonable to assume that any secondary market investor will take a loan package that includes the new form, there are different elements to consider should the lender decide to sell the loan digitally.
If the investor does not also standardize on the new MISMO format, it may be more difficult, time consuming or expensive for the lender to sell loans. It’s possible that the lender’s technology can solve for this, but it opens the door for errors if the technology is not used correctly.
Again, this may require lenders to develop new processes, design new training and bring their staff up to speed.
It’s not yet clear what these changes will do to the lender’s loan application process. In its online FAQ document, Fannie Mae responds to this question by reminding the industry that it doesn’t prescribe how the lender handles its loan application relationship nor how the lender should interact with the applicant or process loan applications.
While this leaves unanswered questions, what’s obvious is that the additional information required to submit a loan for automated underwriting and purchase by the GSE is going to require more time to get the application completed correctly. Either that or they are going to have to push this work back to the borrower and risk degrading the experience and sacrificing borrower satisfaction.
Whatever lenders choose to do, the time to get it done is already upon us.
Big changes already on the horizon
In January, Fannie was working to build out the Desktop Underwriter and EarlyCheck test environments to accept the new DU Spec MISMO v3.4 submissions. The company says that work is now complete. Starting in July, lenders may begin submitting the new forms for loan applications. Both DU and EarlyCheck will accept the new file format.
By February of next year, all lenders will be required to use the new 1003 for all new loans. Twelve months later, in February 2021, Fannie Mae will no longer accept the old 1003 or DU submissions using the 3.2 Flat File or older MISMO formats.
What can lenders do to prepare? First, meet with your partners and find out where they are in the transition process. Second, develop and implement your individual URLA launch plan that includes people, process and internal and external communication and training elements. Your teams and your borrowers need to be ready. We expect this change to be more significant for the industry overall than TRID. Those that don’t take this change seriously may learn that truth the hard way.