As technology has advanced the daily tools used by professionals across sectors, new regulations and best practices have sprouted to prevent any misuse and mitigate a business’s liability.
The rule-making approach needs to be cognizant of the new possibilities and processes adopted by the title and mortgage industry. Still, regulators and lawmakers don’t always have a clear vision of that. As a result, outdated rules can stifle innovation and a seamless consumer experience.
How will regulatory bodies modernize in 2021?
Forced Updates can yield positive returns, high costs, and concerns
New regulations have also spurred on technology adoption. After the 2008 housing market meltdown, the TILA-RESPA Integrated Disclosure (TRID) rule, also known as “Know Before You Owe,” required mortgage lenders to update their origination systems to meet new standards by the October 2015 deadline.
Five years later, an assessment found that borrowers understood their loans better.
The new TRID disclosure forms improved:
- Finding important mortgage information
- Comparing the loan estimate to the final disclosure statement
- Comparing features and costs of different mortgage offers
However, it’s unclear if this encouraged borrowers to do more comparison shopping for mortgages.
The change wasn’t easy for the industry, and many describe it as painful. Lenders and closing companies reported incurring costs to train, update internal processes and implement new information technology systems to accommodate the rule change.
Concerns about an increase in the length of closings from origination to settlement because lenders lacked a truly integrated solution with the proper quality control checks. Shortly after the October deadline, the average time to close took three days longer, a total of 49 days, in November. Today, it’s about 55 days. Expectations on how long manual quality control reviews and “bolt-on” or “wrapper” technology solutions would be sustained were mixed. Other mortgage lending companies took advantage of the rule change to embrace a fully digital mortgage experience. Quicken Loans launched its online mortgage solution in November of 2015. Today, more and more online mortgage lenders occupy the top spots for originations.
Evaluating Regulatory Frameworks
Before leaving her position at the CFPB, Director Kathleen Kraninger led a Taskforce on Federal Consumer Financial Law and published a two-volume report of their findings and recommendations regarding how to improve regulations like TRID, Ability to Repay/QM, and remittance rules.
The principles serving as the foundation for the evaluation and proposed systemic changes to the current framework include consumer protection, information and education, competition and innovation, regulatory modernization, flexibility, inclusion, and access.
Rules-based regulation versus principles-based regulations
The report makes a clear delineation between two different forms of regulation: rules-based versus principles-based.
Principles-based regulations “rests on a set of principles of conduct and outcomes, but which then largely leaves the regulated parties and their enforcement agencies to decide how to most appropriately implement them.” This approach aims to accomplish the same broad objectives as rules-based regulation, but, unlike rules-based regulation, it doesn’t promulgate specific requirements on how to achieve those objectives.
Heath Tarbert, Chairman of the Commodities Futures Trading Commission, says, “Under [principles-based regulation], firms are responsible for finding the most efficient way of achieving regulatory objectives. It simply does so in a way that is often more efficient and less burdensome than rules-based regulation, leaving space for flexibility and innovation.”
Two examples of this include the CFPB’s authority to prohibit “unfair, deceptive, and abusive” acts and practices and the Federal Trade Commission’s role in preventing “unfair and deceptive” acts or practices. Both establish a framework for defining such behaviors and an appropriate scope of work to stop emerging threats to consumers.
The report also proposes that principles-based regulations may “reduce regulatory cost by offering multiple pathways to the accomplishment of the same regulatory end and otherwise permitting regulated parties to search for the most efficient and effective way of attaining the desired end.”
By contrast, criticisms of the move to rules-based regulations (like TRID) include:
- Expensive and time-consuming to update and amend
- Requires a much higher level of regulator knowledge to be effective
- Risks becoming obsolete in response to changes in technology, the economy, or consumer preferences
On the other hand, without clear guidelines, regulated communities accustomed to rules-based regulation may experience anxiety around the uncertainty of how principles will be enforced.
Opportunities for modernizing regulations
While the report focuses on federal regulations and agencies, state and local regulators also grapple with implementing regulations with either a rules-based or principles-based approach.
State laws on the adoption of remote online notarization demonstrate how various regulatory and notary commissioning authorities devise the execution of these laws. There is no standard approach, resulting in more prohibited rules in some jurisdictions and broader guidelines in others.
Among the more than 100 recommendations are a few to help modernize and streamline regulations:
- Identify opportunities to coordinate regulatory efforts and eliminate redundancies.
- Find opportunities for agencies to create a unified regulatory regime for new and innovative technologies providing services similar to banks.
- Consider the benefits and cost of preempting state law where conflicts can impede the provision of valuable products and services.
- Create more dialogue with state regulators, address knowledge gaps, and streamline regulations.
How changing regulations need to keep up with technology
Regulators aren’t fortune tellers. Technology moves faster than regulatory change, and policymakers intending to reduce consumer harm or market failure in the short term can end up hampering competition, innovation, and consumer choice.
The ESIGN Act is one example of how legal requirements quickly become outdated and impede financial services’ ability to streamline customer experiences. In 2000, when the ESIGN Act was first introduced, only 51% of households had computers. Today, nearly 89% of households have a computer.
Before consumers can receive electronic communication, institutions are required to disclose to consumers the hardware and software requirements to access and retain electronic records and the consumer’s consent to be given “in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide information that is the subject of consent.” Additional disclosures are required outlining the scope and withdrawal of consent. The act makes it more challenging to communicate to consumers in its current form and limits their ability to receive information electronically.
The ESIGN Modernization Act of 2020 has been proposed in the Senate to address the cumbersome process.
Privacy and Data security
The report also addresses concerns about privacy, data security, and control. Having the right information is vital in making the right business decisions. For lenders and other financial institutions, collecting the correct information to evaluate the risks a consumer possesses and the costs of safeguarding and controlling that data are top of mind.
While financial institutions aren’t the direct target of data privacy and security acts like the CCPA, more states are proposing laws like it, allowing consumers varying degrees of control over their data by consenting to its collection and use and the ability to opt-out of the sale of information to third parties.
Data is the most important asset for modern businesses, and the quality of that data can make or break a company, but privacy concerns prevent many consumers from willingly giving up information. While the intention of regulations on data may be admirable, they often “create artificial competitive advantages.” Both Google and Facebook experienced greater advertising reach and revenue growth after the GDPR went into effect because users often stay logged into these platforms while online. Meanwhile, smaller competitors using cookies to obtain browsing behavior were negatively affected.
The report asserts that privacy regulations should reduce harms by focusing on the consequences of information use. It also argues that since privacy harms are universal, there is no benefit in states crafting a patchwork of requirements.
In the face of the pandemic, technologies that were initially met with trepidation, like remote online notarization, have gained more interest. Several states have moved forward with bills to allow RON, but there is no federal standardization of rules overseeing the new method. Unfortunately, technology providers’ ability to innovate is often constrained by outdated regulations in legislation drafted decades ago, like the ESIGN Act.
As we become increasingly reliant on smartphones, the internet, and a constant connection to information, consumer buying patterns and preferences have changed. While some consumers avoid divulging information online, others are pleased with the convenience and personalization of online transactions.
Savvy consumers understand that free services like email, cloud storage, and online software applications are supported by advertising and the exchange of their personal data.
Despite the constant mining of online behavior and commerce, one-in-four people are digital buyers. Online shopping for homes is growing too. According to Redfin, 63 percent of buyers in November and December of 2020 made an offer on a home they hadn’t seen in person, and monthly views of 3D walk-throughs are up more than 500 percent since February 2020.
Closing or refinancing with remote online notarization is becoming more commonplace, and consumers report high satisfaction with the experience.
A part of that increase is attributed to market conditions like low inventory and high demand, the migration of remote workers, concerns about the spread of COVID-19, and the convenience of closing quickly.
While shopping for your home online and closing remotely won’t suit every consumer or every transaction, adopting the principles-based approach would benefit technology providers, lenders, title companies, and consumers. The SECURE Notarization Act would provide such a framework nationally for states without their own RON law.
Divided Responses to the Taskforce Report
Stakeholders in the real estate and housing industry largely applauded the task force and their recommendations to modernize and create more flexibility to serve contemporary consumers better.
Dan Berger, President, and CEO of National Association of Federally Insured Credit Unions told HousingWire, “In addition to their support for expanding credit union access in underserved areas, we were pleased to see support for our longstanding call to modernize ESIGN Act requirements, expanding the use of alternative data and minimizing examination overlap included in the taskforce’s report. We strongly encourage policymakers to move forward with these recommendations and several others that will provide regulatory relief to credit unions — allowing them to better serve their growing membership.”
Consumer advocate groups, however, denounced the recommendations. One joint statement published by Democracy Forward, National Association of Consumer Advocates, and U.S. Public Interest Research group described the task force as “unlawfully formed and operated” and “harmful to Americans struggling to weather the economic fallout of the ongoing pandemic.” It also accused the task force of developing the report without transparency and equal participation of all stakeholders and likened the results to “the fruit of a poisonous tree.”
A lawsuit was filed challenging the task force under the Federal Advisory Committee Act (FACA) in June of 2020. On February 25, 2021, a judge denied the partial motion to dismiss the case. In the ruling, the judge noted that the release of the report has not rendered the plaintiff’s claims to injury moot, and the plantiffs’ injuries may be redressed by either prohibiting the task force from relying on the report or by requiring them to add a disclaimer indicating that the report was created in violation of FACA.
With pending lawsuits, leadership changes at the CFPB, and a Biden administration likely to undo Trump-era mortgage rules, it’s unclear what the future of real estate regulations will hold. Hopefully, we’ll see a solution take root that accommodates the burgeoning digital closing options, empowers consumer choice, mitigates risky lending, and allows title, mortgage, and real estate professionals to grow their businesses effectively.