Fitch: US Lenders, Title Insurers See Operational Risk in New Rules

NEW YORK & CHICAGO--(BUSINESS WIRE)-- US title insurers soon implementing the Consumer Finance Protection Bureau's (CFPB) new integrated disclosure forms for residential home closings face operational challenges that could result in some market share shifts following its implementation, says Fitch Ratings.

Glitches along the vendor chain as the new rules become effective on and after Oct. 3, 2015, could lead mortgage lenders to choose (or recommend) only the best prepared vendors. The revised disclosures and associated procedures are aimed at improving consumers' understanding of their loans and estimated closing costs.

The Truth in Lending Act and the Real Estate Settlement Procedures Act (TILA-RESPA) Integrated Disclosure (TRID) represents the most significant change to how mortgage lenders and title insurers perform closings since the US Department of Housing and Urban Development's (HUD) 2010 start to the Good Faith Estimate (GFE) form, which is the current standard used for disclosing estimates of borrowers' final loan and settlement terms. Several title industry parties recognize TRID as larger and more impactful than GFE. Investments in technology, education and testing to implement TRID have and will likely continue to boost expenses and trim profits for mortgage participants over the near term.

TRID replaces the GFE and Truth in Lending disclosures with a Loan Estimate form and replaces the HUD-1 Settlement Statement, currently used for matters such as itemizing closing fees, with a Closing Disclosure form. Both forms are intended to be easier to understand for consumers. The Loan Estimate basically locks in a set price and/or terms on most anticipated loan charges. It is expected that a failure to properly follow rules with the Closing Disclosure, such as needing to make changes within the 3-day window after delivery of the final document but before the closing date, could force a regeneration of document and delay closings. A survey by the American Land Title Association (ALTA), in April 2015 indicated that 87% of the 500 participants indicated they believe there will be closing delays despite also indicating that they feel ready for the enforcement deadline.

The bulk of the customer-facing responsibilities for properly executing a timely closing will continue fall on the shoulders of lenders. However, the related participants supporting lenders could face lost business if they fail to keep up with lenders' expectations for managing the new rule. A significant number of delays could cause a revenue blip for mortgage participants during the first quarter of 2016, when almost all closings in that calendar period would be executed under the new disclosures.

The top four US title insurers (Fidelity National Financial, First American Financial, Old Republic, Stewart Information Services) have invested heavily in ensuring a smooth transition once the legislation takes effect. However, several industry groups, including banking groups, have signaled a desire for CFPB leniency through exemptions to penalties and fines through good faith exemptions. These efforts signal some lack of confidence in preparedness. The original implementation date has already been moved back to Oct. 3 from Aug. 2 due to what the CFPB said was the correction of an administrative error, but it is also believed to have resulted from industry lobbying efforts.

Fitch believes there is a rising potential for market consolidation among title insurers as large-scale players tend to better provide resources to comply with the new and likely stringently enforced rules.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings