Moves by lenders to adapt their processes with the TILA-RESPA integrated disclosure rule in mind appear to have staunched the increase in loan application defects, according to a report from ACES Risk Management.
The overall critical defect rate dropped to 1.63% in the second quarter of 2016 from 1.92% a quarter earlier, ARMCO noted in its Mortgage QC Industry Trends report. While this ended a three-quarter period in which this rate rose following the implementation of TRID, it was still well above the critical defect rate of 0.77% reported in the third quarter of 2015.
“TRID-related defects continue to be the leading area of concern in post-closing reviews; however, corrective action planning taken by the lending community has produced positive results that can now be visualized in the Q2 data,” Phil McCall, chief operating officer at ARMCO, said in the report.
Case in point: The defect rate for the legal, regulatory and compliance issues category fell to 34% from 50% in the first quarter of 2016. Again, this represented the first decline since the third quarter of 2015, but remained at a historically elevated level.
ARMCO reported that many lenders have been working with their loan origination system personnel and external vendors in the six months following TRID to handle the causes of data errors frequently seen during the implementation of the rule.
“As legal/regulatory/compliance defects are beginning to trend down in Q2, lenders are attributing at least part of this success to a deeper comfort level with the secondary market reviews/findings,” ARMCO wrote in the report.
But while the trend has pointed toward improvement in this area on a quarterly basis, ARMCO did find that the rate edged up slightly in June to 32.48% from 30.46% in May.
One area where defects rose sharply was in the income and employment category. In the second quarter, these represented 9.8% of all defects, a 70% increase from the quarter before.
Contributing factors to this increase include instances where the income or employment information is different from what is in the automated underwriting system or cases where the income documentation did not meet investor guidelines or the specifications of the AUS. Another contributor was situations where the verbal verifications of employment were not completed in the time required by the investor.