Know Before You Owe (KBYO), the new mortgage disclosure regulation, does not take effect until August 2015. So why talk about it now? This change in mortgage disclosures is sweeping, and, in many respects, bigger than the Qualified Mortgage (QM) and Ability to Repay (ATR) Rules. Its complexity and broad range poses significant challenges for mortgage originators.
First things first: Know Before You Owe, a product of the Dodd-Frank legislation, introduces two new disclosures: the Loan Estimate and the Closing Disclosure. The Loan Estimate is designed to provide disclosures that help borrowers understand the key features, costs, and risks of the mortgage loan for which they are applying. It must be issued within three days of loan application. So far so good; this is the same requirement that is in place today for the Truth-in-Lending (TIL) and Good Faith Estimates (GFE). The big change, however, is that the Loan Estimate replaces the TIL and GFE forms that every lender (and every borrower that has taken out at least one mortgage) knows well.
The Closing Disclosure is designed to provide information that helps borrowers understand all of the costs of the transaction. It must be received by the borrower three business days prior to the closing date. The HUD-1 and TIL that is due at closing is replaced by the Closing Disclosure. These forms, too, are familiar to every lender and seasoned borrower.
The implications of KBYO are broad and touch every corner of the mortgage origination process. So, in setting priorities in the areas of people, process and technology, where should lenders focus first? The short answer is technology. While QM and ATR were technologically challenging — with some platforms managing them better than others – KBYO is even more so because of the way it handles the costs borrowers typically encounter when taking out a mortgage loan. Dealing with KBYO is a major undertaking.
People, both internal and external, should be the second focus for KBYO implementation. Mortgage teams must re-learn and translate all they know from the Truth-in-Lending, Good Faith Estimate and HUD-1 forms. Every mortgage lender knows them well and can explain them thoroughly. As of August 1, 2015 these forms become a part of mortgage history. Training staff well is a critical first step, because the next step is educating borrowers. First-time borrowers, of course, are unaffected. Since they have never seen a TIL, GFE or HUD-1, they will not be surprised by the new disclosures. Repeat borrowers are another story altogether, especially those who have financed or refinanced a home more than once. The Loan Estimate and the Closing Disclosure will be completely foreign to them, so it will be essential to have a well-trained and well-prepared lending staff to put them at ease.
Know Before You Owe affects mortgage origination in a number of ways, so process should be the third area of concentration. It is important to have the right technology (and trained people) in place before tackling processes. Technology drives the flow of most mortgage operations and the right technology is essential to refining the processes needed to address the new regulations.
While 16 months may seem like a long time from now, objects on the horizon are closer than they appear. Now is the time to get to know Know Before You Owe, and to start making sure that your mortgage technology is ready when – or better yet, before – this complex and sweeping regulation takes effect.