One and a Half Rules and Two Compliance Dates: How to Mitigate the Risks of MDIA Compliance

By Chris Dye, Harland Financial Solutions

Is your institution ready to comply with the September interim final rule, issued pursuant to the Mortgage Disclosure Improvement Act of 2008 (MDIA), making significant changes to the Truth in Lending disclosure? What about the December revisions to the September rules? Or is your institution still dealing with new model privacy forms and risk-based pricing notices, or the myriad of other regulatory changes that occurred in 2010? Today’s compliance landscape is complex and rapidly changing. It may feel overwhelming, but there are strategies your institution can implement to ease that burden. The MDIA-mandated changes to the Truth in Lending Act and its implementing regulations present yet another hurdle for your institution.

Regulatory Overview
MDIA required the Federal Reserve Board to develop a new disclosure for mortgage loans in which the interest rate or payment could change; the disclosure had to include the maximum payment based on the maximum interest rate possible in the loan. The interim final regulations went well beyond that, and replaced the payment schedule in the Truth in Lending Disclosure with a new payment and interest rate summary table (“Table”) for all loans secured by real property or a dwelling. The regulations were published in September with a mandatory compliance date of January 30, 2011. In December, the Federal Reserve published additional rules clarifying certain portions of the September rule with a mandatory compliance date of October 1, 2011. The delayed compliance date is only effective for those items covered in the December revisions. Institutions must still comply with the September rule by January 30, 2011.

The layout of the Table and information disclosed within it is dependent upon the structure and features of each individual loan. Features like negative amortization, interest-only, balloons, introductory rates, the presence of periodic rate caps, escrows and mortgage insurance all affect the number of columns and rows and their respective headings. The regulations contain four model form tables, which if used properly, provide a safe harbor for compliance with these changes. Unfortunately, these model forms do not begin to capture the various possible disclosures available when complying with the rules.

The speed in which these changes were adopted and the complexity of the changes make compliance particularly daunting. The strategies listed below can help to streamline the implementation process, minimize potential business interruptions and reduce the risk of non-compliance.

Utilize Service Provider Resources
Chances are that your service providers are feeling the same time pressures that you are, but they probably have dedicated resources that you don’t have. Communication with your partners and an understanding of how and when they are implementing their regulatory response is critical to getting a handle on compliance. This is what you pay them for, so leverage their defined expertise to ensure that you are not underutilizing all available resources. Service providers can also be important sources of information about the underlying requirements of both the September rule and the December clarifying rule.

Simplify Product Offerings in the Short Term
Compliance with these new regulations is heavily dependent upon loan structures and features. Some loan products fit nicely into the provided model forms, while others are more complex. For example, a traditional fixed rate mortgage loan is a straightforward disclosure, and the model form in September rule demonstrates this. Instead of rushing to implement all of your lending products, consider offering only standard products in the short term, like simple, fixed-rate and adjustable rate mortgages. As time goes by, you can add more complex features like balloons and interest-only mortgage loans. As you roll out new product offerings, train and test those employees responsible for disclosures on both the actual disclosures themselves, as well as the operation of your origination software. Eventually, these rules will become second nature. In the meantime, however, consider creating compliant sample scenarios for training that employees can reference when those products go live and volume increases. Trial and error should occur long before a loan file gets into your regulator’s hands. A measured approach will reduce the probability of human error and any anxiety that employees have toward these changes.

Understand Effective Dates
Some erroneously insist that the December revisions have extended the mandatory compliance date for all of the September rules. The December rules were meant to clarify issues surrounding more complex loan structures like interest-only ARMs and construction permanent loans. But the new compliance date in those rules applies only to those items covered in the revisions. Compliance is delayed for these items; therefore, you can incorporate this reprise into your tiered rollout strategy. It’s important to understand what is covered in the revisions because it’s not a free pass. Creditors offering those types of loans must still comply with the requirements in the September rule. Your service providers will also be dealing with these changes, which may affect your approach. Get a clear understanding of what they are delaying, if anything, to decide on how to schedule incorporation of their services or products.

Conclusion
The proposal and implementation of the MDIA regulations feel eerily similar to the recent RESPA changes, leaving lenders with an overwhelming sense of unease. As with RESPA, eventually these changes will become a virtually seamless piece of your institution’s overall operations. In the meantime, use the tips above to mitigate the compliance risk and the risk of any interruptions in your processes early on. Constant change may become the new normal, and processes like these may become just another part of your everyday operations.

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