Speaking of HUD

With the Jan. 1 deadline looming for RESPA changes to take effect, there’s been a lot of discussion at eLynx about current industry dynamics related to HUD reform. Recently Kristen Hausfeld, an eLynx business analyst, and Michael Pelfrey, vice president of sales, shared what they’ve learned in working with lenders to prepare for the impending changes. Here are some of the highlights from that conversation…

If this conversation resonates with you, you’re not alone. It’s clear that this problem is too complex for any one party to solve on their own. Because the environment is in flux and there are so many concurrent issues, we’ll have to come up with an initial solution, and then keep refining it as things change. eLynx is working on a solution that will help lenders and underwriters collaborate electronically to make HUD-1 reconciliation easy. To learn more about it, register to download the eHUD product sheet. Note: On the registration form under "Area of Interest," please select eLynx product sheet: eHUD   Kristen Hausfeld is a business analyst at eLynx. She works with lenders to evaluate their existing procedures and tools, and recommends ways to streamline processes, enhance collaboration and reduce risk. As vice president of sales for eLynx, Michael Pelfrey directs all sales and account management activities throughout the nation. In addition, he contributes to clients’ marketing strategies and executions by mapping technology roadmaps to identify and implement new solution applications to meet clients’ specific needs.

As all manner of regulation reform unfolds around us, lenders have been busy adjusting their processes to remain compliant. What are their biggest concerns? Kristen: Lenders need to mitigate risk and fraud. They’re on the hook if the HUD is out of tolerance. Michael: Not only that, but lenders are feeling the pressure to write quality loans so that they can be sure those loans will sell on the secondary market. Without income from the secondary market, they could run out of money to lend. Much of the risk that needs to be mitigated stems from the quality of the loan data. If the data is inaccurate—that is, if those fees do not match and the HUD is out of compliance—then the bank can’t sell the loan. If they can’t sell it, then they have to carry it on the books, and it becomes a liability. If there aren’t enough deposits to offset the liabilities, then there’s potential for the lender to become insolvent. The lender could fall out of compliance with the ratios the government has set and be shut down. On top of that, the secondary market has changed so much. Fannie, Freddie and FHA are practically the only buyers now, and their profiles are far more rigid than the Wall Street buyers’ were. They are scrutinizing loans very closely. The broader impact is that loans that used to rush through the system now potentially will not close or will have to be rescheduled, and lenders are curious to see how that affects their production. When you play it out like that, suddenly the quality of the loan data becomes a very big issue, a huge risk. Kristen: That’s why the audit trail and online reporting functions of eHUD are so important. Lenders will be able to track the course of the data from beginning to end so that they’ll have proof to show the investors later. What are lenders doing to prepare for HUD reform? What adjustments are they making to their workflows to accommodate the changes? Kristen: Because there have been so many regulatory changes in the past several months—and things keep changing—most lenders are only just now starting to dig into HUD reform, so they haven’t gotten as far as making any actual changes. They’re really looking for help and ideas. It’s more complex than anyone anticipated. Most of them are saying they can’t move quickly enough, and don’t have the time or resources to put efficient processes in place by Jan. 1. Michael: I’m hearing a lot of people say that dealing with all the changes has been a “just in time” proposition. They’re putting solutions in place at the last minute. Nobody likes running their business that way, but there’s been so much regulatory impact that they simply don’t have the bandwidth to keep up with it all. Now that we’ve made it through this last round of changes that took place on July 30, the focus is starting to shift to the RESPA. People are finally starting to look at what they have to do to accommodate the new RESPA rules, and it’s a huge undertaking. One thing they’re doing is building other parties’ fees into their data repositories so they can track what those final fees are and whether they match with the last copy of the disclosures (TIL, GFE, etc.). Before they can adapt their workflows, they have to decide what changes they must make to their process when a settlement agent sends a fee that’s out of tolerance. What should happen is that the system should coordinate with the agent to reconcile the fees, but as a result, they might need to redisclose to the consumer. That’s at least a three-day delay in closing. That delay might result in the need to recalculate taxes; the agent has to redraw its fee schedule. That delay could trigger a new cycle of reconciliation. And on and on… Those are clearly significant additional steps in workflow and impact to the consumer that the lender has to consider. Companies are already pressed to squeeze the maximum amount of productivity out of a minimum number of people. How are they using technology to solve the problem? Kristen: A lot of them are already working with eLynx. Most are going to move to eCN, which will cut down on the amount of system integration they have to do. Instead of having to write a separate integration for each of the different title underwriters and settlement agents they work with, lenders only have to integrate to eCN. For some, HUD reconciliation is the impetus for adopting eCN because they know that collaborating and sharing data is the fastest, most accurate way to get the job done. And eCN will not only provide an online workspace to reconcile, but there will also be an audit trail that proves what everyone approved and agreed to. Michael: The changes necessary within the lenders’ origination, underwriting and post-close workflows are huge, but technology will be at the core. Half of the process is driven by fees and data that are collaborated on by agents and others. All of those have to be documented and reconciled on the HUD. Today that is a painful, difficult, stare-and-compare process. eCN will automate that manual process. And the audit trail Kristen mentioned is critical because it can be used later, during secondary market sales, as proof of compliance for reconciliation and delivery. What roadblocks are they running into? Michael: As they think through the workflow, the automation, what changes need to be made in their systems to accommodate the additions to the process, lenders are already feeling overwhelmed and don’t think they can get it all done. So time is a bit of an issue. But the bigger issue is that the regulatory environment continues to change rapidly. It’s very difficult to know that they’re building a viable solution when the problem, by definition, keeps changing. What best practices are emerging? Kristen: Moving to an online model is key because right now it’s all done via fax and/or email with no audit trail. To be able to go back and look at the history of the HUD negotiation is a huge step forward. Michael: There are a couple things I’m seeing that are serving lenders well: Pragmatism: Some lenders are taking a pragmatic approach and realizing they can’t fix this in one effort. Instead they’ve broken it down and are working on it one regulatory initiative at a time. In that way, they can make steady progress. Collaboration: This is the first time I’ve seen people in this industry truly coming together and saying, “There are ways we can work together to fix the problem, and we both are better as a result.” What has stood out for you during this process of coming up with a HUD solution? Kristen: The most notable thing out of all of this is that lenders, title underwriters and settlement agents are more collaborative than ever before. Dealing with HUD reform is their number one priority, and they want to work together to figure this out. Michael: I agree. In talking to lenders about HUD, the reality is that they are open to working together. Whereas lenders and settlement partners used to be reluctant to relinquish control over the transaction, there now appears to be an honest, partner-driven effort to come up with something that benefits everyone.