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Study a beautiful pointillist paining and the artist’s vision comes together through thousands of individual dots of vibrant color. The picture looks simple from afar, but underneath is tremendous complexity that cannot be underestimated.
It is a useful metaphor for the adoption of the Uniform Closing Dataset (UCD) as a standard industry dataset for the electronic communication of closing disclosure data.
The vision of the Uniform Mortgage Data Program is a clear and important one. Consider that the American housing market is now estimated to be the world’s largest asset class, worth $26 trillion, and according to the Aug. 20 issue of The Economist, mortgage debt is the biggest concentration of financial risk in the world.
Enhancing loan quality and consistency through uniform data standards is therefore in everyone’s interest, and especially so for Fannie Mae and Freddie Mac.
The GSEs have been communicating the pending changes to UCD requirements, sharing early timelines for implementation and setting expectations that by the beginning of the third quarter of 2017, all loans acquired by Fannie Mae or Freddie Mac must be accompanied by a standard UCD XML file submission. Yet, ensuring that the UCD adoption is successful cannot be up to the GSEs alone. It will require all mortgage industry stakeholders to play a role.
Experience with the Uniform Mortgage Data Program’s Uniform Collateral Data Portal (UCDP) and Uniform Loan Delivery Dataset (ULDD), as well as the recent implementation of the TILA-RESPA Integrated Disclosure (TRID) documentation changes, has taught us the value of examining potential issues closely ahead of implementation. It has also taught us that these exercises in change management go beyond the norm, and involve culture change in our industry. It is essential to work with all stakeholders on solutions and expect that unforeseen issues will come up and need to be addressed as changes move forward.
When contemplating compliance with new industry requirements, technology can pose both challenges and opportunities. For UCD specifically, there are seven issues that should be on everyone’s radar.
1. Lender-Seller Communication:
Electronically communicating the Consumer Financial Protection Bureau’s (CFPB’s) Closing Disclosure information through UCD XML file submission will require much closer communication between lenders and sellers than presently exists in the mortgage industry. With UCD, lenders will need to take responsibility for getting seller information around the transaction and communicating that information with the GSEs. Creating standard industry expectations for both parties’ roles in this collaborative communication will take time and certainly some trial and error to work out. Automating part of this process with technology will be important.
2. Data Validation:
When data is acquired from another organization, such as a lender acquiring data from a seller, the reliability of that data becomes a key concern. Without control over where the information came from and how it was submitted, it is impossible to verify the accuracy of that data. Because UCD submissions will include data from both the buyer and the seller, questions will certainly come up about where the responsibility for the accuracy of the data lies. Lenders are understandably concerned that they may be held liable for errors that originated with the seller’s documentation. In addition, when information is inconsistent, the determination will need to be made as to which party to the transaction will ultimately bear responsibility for investigating and resolving the inconsistencies. Automated systems for detecting problems and reconciling data will certainly help, but resolving certain inconsistencies may always require trained expert staff and some operational costs in both dollars and time.
Maturation of Industry Terminology: In order to improve credit risk management through more and higher quality data, UCD aims to turn a great deal of the free data in mortgage documentation into structured data through standard pull-down menus. However, all the pull-down menus for UCD offer an “other” category. Because the mortgage industry lacks common names for elements of loans, it is reasonable to expect that those using the new pull-down menus may select “other” more often than expected. The user may know a fee type by a common or customary name based upon the geographic location and will not realize that it is the same type of fee already listed as a choice in the pull-down menu. Until mortgage industry terminology matures to the point that there are standard consistent names, overuse of the “other” category will be a hindrance to the UCD’s goals.
3. False Negatives in Submissions:
The GSEs would like to see lenders initiate implementation and delivery of closing disclosure data earlier in their manufacturing process to allow them to provide feedback and correct any gaps within the data before closing. The challenge in the market is that information to create a closing disclosure is rarely complete enough two or more weeks before closing to pass submission tests. If lenders submit data knowing they have information missing because they have yet to collaborate with the settlement agent to obtain that information, it could introduce an operational impact from a high number of false negatives.
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4. System Requirements:
The GSEs have introduced UCD file validation programs and a certain amount of flexibility to help lenders and technology solution providers meet the requirements for a well-formed XML file that maps to MISMO V3.3.0 and the UCD data requirements. Yet system requirement needs will likely go beyond just what is required for closing. Consider that the UCD XML files will need to include a Casefile ID, either issued through Fannie Mae’s Desktop Underwriter program or assigned by the GSE upon submission of the UCD file. This ID will need to travel with the loan through its entire lifespan and must be included in the UCD file for any subsequent submissions of the file. A simple error, such as transferring the loan data into a system not equipped to handle the full Casefile ID character count, could lead to a loss of data and the ID becoming corrupted.
5. Human Factors:
Like all datasets, UCD is built around an assumption that the people contributing to the dataset follow standard processes. Human behavior is unpredictable, however, and there are many examples in the market today of practices that could cause issues in the smooth adoption of UCD. For example, settlement agents may change values and prepare a new closing disclosure late in the process, even when lenders are adamant that changes go back to them for approval. Without processes in place, such as optical character recognition scanning to help match the data collected to the data on the final closing document, such deviations from standard processes could create problems down the line.
6. Overall Data Complexity:
The UCD information is broader in scope than that of the ULDD and will be more complicated to consume and analyze to achieve the outcomes the GSEs are seeking, such as improved management of financial risk and fraud prevention. Once UCD data begins to be accepted, adjustments may need to be made to enable this complicated data to be utilized as intended. In particular, overall readiness to work with data in MISMO structure format will be vital.
Indeed, standardized datasets are critical to supporting the stability and security in the housing market going forward. Lenders are encouraged to gain a clear-eyed view of the complexity of the task at hand and the need for broad collaboration across organizations with a stake in the market, including leading competitors.
Meetings between lenders, technology developers, title companies and the government to exchange ideas and develop new solutions will certainly be necessary, just as it has been with other complex changes in the industry. In addition, the industry will need to leverage technological solutions, both new and already in place, to further enable data to move securely and reliably through various systems. The ability to automate certain new work created by UCD, such as examining all of the various documents generated in the loan process for consistency, will be necessary to keep loans affordable for borrowers and avoid lengthening the mortgage process.
At this point, lenders should be evaluating their operations and seeking to understand what changes they will need to support in order to consume seller furnished data.
They must study the movement of data and seek clarity on whether or not their provider community is ready to support that movement. Although there are many other changes competing for their technology resources, including those driven by the Home Mortgage Disclosure Act (HMDA), lenders must make UCD preparation a top priority as well.
Patience will certainly be needed as changes this complex may result in some unintended consequences as the UCD submission becomes mandatory. Finally, and most important of all, there will need to be a broad acceptance among all stakeholders that resolving all issues that may arise cannot be up to any single entity or even segment in the market. It will require everyone’s best efforts to make UCD work as intended.
