PERSON OF THE WEEK: Scott K. Stucky is chief strategy officer of DocuTech Corp., a provider of compliance services and documentation technology for the mortgage banking industry. MortgageOrb recently interviewed Stucky to learn more about how lenders are coping thus far with implementation of the Consumer Financial Protection Bureau's (CFPB) new integrated disclosure rules and how close the industry is to finally realizing the true ‘end-to-end’ e-mortgage.
Q: The mortgage industry's stagnant growth is heavily impacted by forces outside of the industry, such as millennial student debt, changing demographics and changing perspectives on housing. How should lenders prepare for these changes, and what can they do to build a successful business in light of the changes?
Stucky: Lenders must anticipate the ramifications the mortgage industry will face as the millennial generation begins reaching the age and employment level of first-time home buyers. This generation faces many unique challenges, such as student debt. In 2014, the CFPB announced that student loan debt surpassed the $1 trillion mark.
With regard to making life-altering decisions, such as buying a home, millennials view taking on additional debt as burdensome and are often not able to qualify for loans based on the amount of student loan debt accrued over the years. In fact, seven out of 10 college graduates in 2012 had an average of $29,400 in student loan debt, according to the Project on Student Loan Debt, an initiative of the Institute for College Access and Success. As a result, millennials will not take out – or be unable to qualify for – additional loans to purchase a home.
Lenders can better prepare for these changes by taking a more proactive approach to borrower education and creating new programs to make purchasing a home affordable. Education can take the form of everything from best practices on budgeting and daily cashflow management to better informing borrowers of how the loan process works and what is contained in disclosures and closing documents.
Q: The CFPB will implement a new set of regulations on Aug. 1, requiring new consolidated disclosures and changing key processes in the loan closing procedure. What should lenders have already done to prepare, and what are the key milestones or areas of focus over the next eight months to ensure compliance?
Stucky: At this point, lenders should have already begun testing out new key processes with vendors to ensure that all software is up to date, particularly concentrated on loan closing procedures. In order to be fully prepared for Aug. 1, lenders should safeguard compliance by confirming that all vendor framework is updated and adheres to new sets of industry regulations. Moving into the second quarter, lenders should continue to run software tests to determine if specific areas of compliance need adjusting in order to be fully prepared for the Aug. 1 deadline.
Q: Which do you think presents greater challenges for lenders; implementing the new integrated disclosure rules on the front end (the new Loan Estimate) or pre-closing (Closing Disclosure)? Why?
Stucky: The Closing Disclosure presents a great challenge because lenders will have to change their procedures to accommodate the waiting periods and ensure compliance. These changes fundamentally change the first-lien closing process significantly. For example, the Closing Disclosure needs to be presented to the borrower no less than 72 hours before the loan closing. If the Closing Disclosure is being delivered via mail, the lender needs to allow three days for mailing, putting the advance time at six days prior to closing. Furthermore, the lender cannot change most of the fees; if they do, the borrower gets an additional three days to review the documents prior to closing. These are significant operational changes from the current practice.
Q: The Mortgage Industry Standards Maintenance Organization's (MISMO) 3.3 model is now live – what does the new version of the standard do for the industry?
Stucky: MISMO 3.3 will have minimal effect on the industry from a short-term perspective. However, as the standard sees stronger adoption by lenders and vendors, it will be another catalyst to encourage the adoption of electronic mortgage transactions. I expect this to continue to gain momentum throughout the remainder of this year.
Q: E-recording software continues to see rapid adoption among county recorders – how close are we to the true, end-to-end e-mortgage, and what do you see as being the last hurdles?
Stucky: We are closer than we have ever been before, and the industry is continuing to make progress in e-recording software adoption. In terms of being close to true end-to-end adoption of e-mortgages, they are present today and have been for a while. But obviously, e-recordings are still a very small portion of the market. I anticipate the adoption of e-recording software and e-mortgages will see an initial bump in growth in the second half of 2015 due to the cost savings and compliance benefits of using electronic disclosures, and significant adoption should be here by 2017.
Q: E-documents are playing a critical role in facilitating the new ‘assembly line’ or automated approach to building loans. How much do you think this will help lenders reduce gross loan defects moving forward? Considering there will always be some human intervention involved in the loan assembly process, by how much do you think e-docs will reduce the error rate?
Stucky: E-documents are playing an important part because the implementation of ‘smart documents’ (i.e. electronic loans) within loan origination systems (LOSs) eliminates any discrepancies between data in loan documents and systems of record. Data integrity is critical, not just from a time-savings and workflow standpoint, but also in preventing fraud and ensuring compliance.
By ensuring that data is shared between the document platform and the loan origination system, lenders can track where and when changes are made, restrict access to changing data and more easily report to the regulatory bodies.