A Challenge for Mortgage Compliance and Risk Management

June 17, 2021, marked a great day in American history as President Biden signed the Juneteenth National Independence Day Act into law. The last sitting president to initiate a new federal holiday was President Reagan, who signed the law honoring Martin Luther King Jr.’s birthday in November 1982. Both presidents made history, highlighting the importance of equality and moving us forward as a nation. Nonetheless, there were some challenges with implementation at financial institutions, especially mortgage lenders, in areas like compliance and risk management.  

Related: Creating Reliable Risk Assessments

 President Biden’s administration signed the bill into law on Thursday, June 17, with immediate celebration on Saturday, June 19—less than 48 hours later. It was an exciting development. It also had a significant impact on many financial institutions that were caught off guard. FIs found themselves quickly managing change without guidance from a primary federal regulator. Not only was there a new, unexpected holiday, but because the holiday fell on a Saturday, it was unclear whether it was to be observed Friday, June 18, or Saturday, June 19.  

This had an impact on disclosures, with considerations for business continuity and vendor management. 

The Challenges of Quickly Adapting Mortgage Programs to a New Holiday 

The Truth in Lending Act and Regulation Z provide two different definitions of “business day.” There are “general business days” and “specific business days,” and these business day definitions are applied differently with respect to certain requirements.  

Many FIs asked for guidance from the Consumer Financial Protection Bureau (CFPB) and the banking regulators on how to proceed operationally with the change, but by the end of business Friday there were still no real answers. 

That left FIs dealing with the challenges of a new federal holiday they hadn’t planned for. For mortgage lenders, that includes TRID disclosures, TILA (Reg. Z’s rescission dates), BCP, and Vendors: 

Truth in Lending/Real Estate Settlement Procedures Integrated Disclosure (TRID) Rule 

Business Days 

TRID defined specific waiting period, or business days, for delivery of accurate Loan Estimate (LE) and Closing (CD) disclosures.    

Under 12 CFR § 1026.19(e)(1)(iii), the creditor shall deliver or place in the mail the disclosures required under paragraph (e)(1)(i) of this section not later than the third business day after the creditor receives the consumer's application, as defined in § 1026.2(a)(3), and not later than seven business days before the loan is consummated. 

Under 12 CFR §1026.19(f)(1)(ii), the creditor shall ensure that the consumer receives the disclosures required under paragraph (f)(1)(i) of this section no later than three business days before. 

Challenge: Under the TRID requirements, Juneteenth National Independence Day would be considered a specific business day to be excluded when determining the waiting period prior to consummation. FIs were operating business as usual all week. As a result, disclosures may have been delivered assuming both Friday the 18th and/or Saturday the 19th were business days. Understandably, we could now have potential compliance risk for loan estimates (LEs) and closing disclosures (CDs) due to dates not being recognized as business days.   

Response: FIs need to assess the potential risk impact and their tolerance for it. Questions to be considered: 

• Do you honor the LEs and CDs that were delivered prior to the passage of the law to eliminate the impact to the borrower? This might mean issues with incorrect dates on the disclosures provided to the borrower.   
• Do you redisclose and risk borrower discontent, economic impact, and complaints from the borrower for the sake of compliance accuracy? This is definitely a tone-from-the-top decision that ties back to the FI’s risk tolerance.     

Recission Timing 

Juneteenth National Independence Day would be considered a Specific Business Day to be excluded when counting days to determine the proper rescission period. 

Under 12 CFR § 1026.15(a)(3), the consumer may exercise the right to rescind until midnight of the third business day following the occurrence that gave rise to the right to rescind. For purposes of this right of rescission, business days are considered to be Specific Business Days, that is, all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. 

Challenge: When trying to determine the rescission date, what is the best practice for midnight of the third day, when an FI is not clear if the official holiday is Friday, June 18 or Saturday, June 19?  

Response: Senior Management needs to make a decision and communicate it throughout the FI. Implementing a consistent strategy will provide direction.   

Similar to the disclosures with TRID, the borrower impact needs to be considered. Focusing on the impact may be the best consideration. 

Business Continuity Plan (BCP) 

FIs should consider the impact COVID had on operations and delivery.  Had an “event” like this been considered and planned for?  If so, did lessons learned in 2020—the year of unexpected disruptions—aid in planning for the unexpected?  If nothing else, this is an opportunity to capture the unexpected and plan for the impacts of unintended consequences.   

Challenge: The two biggest challenges included possibly delivery interruptions and vendors unable to adjust to the changes to disclosures and processes. 

• Possible delivery interruptions: How do you address and adapt to processes that may be impacted, including loan disclosures, appraisals, loan closings, and funds? Processes may not happen, be delayed, or may require manual processes. 

• Vendor non-performance. Vendor solutions may have been unable to adapt or allow manual overrides for dates and process flow. Our goal in compliance and risk is to find ways to make things easier for our customers and teammates and eliminate disruptions. What is the plan if automation is no longer able to adapt? Quick change often limits the ability to adjust. A plan for this “what if” is essential.  

Response:  

• Create new testing scenarios in your BCP.  This should be common practice after the last 18 months. Be creative. Plan for the unexpected: test it, manage it, and have a plan for success. Most of all, make sure to document the plan—all phases of it. 
• Ensure your critical vendors have provided their plan. Their plans will help to build yours and help the FI to make key decisions in managing potential challenges.  

Vendor Management  

Today’s process and delivery are interconnected to the third parties a FI works with.  It is important to understand how they can adapt to overnight changes. They support your FI and need the flexibility to pivot.   

In most lending processes, a vendor is needed at every stage.  Do you really understand how they will help you and what each of you expects in the relationship?  Friday, June 18 brought lots of mixed messages and uncertainty with business days. When was the observed holiday with Juneteenth falling on a Saturday?  Historically speaking, if a federal holiday falls on a Saturday, it is usually observed the Friday before. If it falls on a Sunday, the observed federal holiday is usually the Monday right after.  

Challenge:  

• Possible delivery interruptions & accurate completion of loan disclosures. Most loan solutions have stages for compliance built in—especially around dates.  This helps ensure consistent delivery of accurate disclosures and dating application and loan closing.  With a new federal holiday enacted and implemented within 24 hours, were your solutions able to react? Could you override dates if needed? Can you easily readjust fees, etc., to align with changes? 

• Investors. It might be hard to imagine them as vendors, but investors are a third-party partner your FI works with to provide lending services. Your FI most likely followed investors’ underwriting guidelines to ensure a sale. Their team will likely audit your file prior to or shortly after buying the loan from you. Do you know if they have clauses in the SLAs based on regulatory issues that will allow them to reject the loan? Do they align with your compliance programs to avoid regulatory issues like the ones impacting TRID and recission? Are they allowed to determine the date your FI will follow?  What if you use multiple investors and none are consistent? 

Response:  Vendor management is a team sport. Bring the expertise in where it is needed. Consider a compliance review of contracts and SLAs, where you dig in to understand what is being offered to cover the compliance requirements. Consider the different guidance on dates, timing, and definitions is staggering in loan compliance. 

Have a clear idea and structure for all third parties. Anyone you work with to help deliver a service is a vendor. If the vendor is not operational or the tool being utilized is unable to make quick adjustments, can you still deliver services and help customers consistently to avoid risk and compliance issues? 

Lessons Learned from Quick Implementation of Juneteenth 

Adding a new federal holiday to the calendar is a reminder that not every business disruption is caused by a negative event. Any change—good or bad—can require your FI to adjust its practices. The important thing is to have plans in place and be prepared to adapt to all kinds of change. 

This is especially true when it comes to consumer-facing issues. As FIs (and regulators) move quickly to adapt to changes, one key business and risk management practice resonates: If your process is focused on what’s best for the applicant/customer, consideration might be given to potential challenges. (i.e., discourse dates that are no longer correct under the rules, vendors that may not support needs). 

The good news for FIs is that compliance and risk can be managed. Financial institutions with good programs, which include clearly defined policies and procedures, BCP plans that have actional plans, and vendor management, are well-positioned to adapt quickly and mitigate risk.