Michael Barone and Scott Weintraub: The New 1003 and Mortgage March Madness

Michael Barone is Executive Director of Compliance for MQMR, Sherman Oaks, Calif. He oversees all compliance and regulatory guidance with MQMR’s clients and prospective clients. Scott Weintraub serves as Internal Audit Manager for MQMR. He brings nearly 20 years of experience in the mortgage origination and servicing industries, focusing on legal & regulatory compliance, Internal Audit management and organizational risk management.

March Madness has begun. Brackets have been completed, trash talk has been honed to perfection, and now it is time to sit back and enjoy the big dance. Unlike the NCAA basketball tournament, March Madness in the mortgage industry began very early in March and will last beyond the NCAA Championship game on April 5.

The ripple effects of the new Uniform Residential Mortgage Loan Application, or Form 1003, mandatory use date of March 1 will be felt for the duration of Mortgage March Madness, much like when 16-seed UMBC knocked No. 1 seeded Virginia out of the 2018 tournament in the first round. By adjusting their application best practices and keeping a keen eye out for upsets for the next few months, lenders can stop upsets before they happen and avoid a busted bracket.

Automatic Bids

Starting January 1, lenders were permitted to use the new 1003 when taking a loan application. However, with a mandatory use date of March 1, there are plenty of lenders that waited until mid to late February to begin using the new 1003. Borrowers that initially completed a loan application using the old 1003 have received automatic bids to Mortgage March Madness. These borrowers will need to continue to receive the old version of the 1003 throughout the origination process and when their loan closes, not the new version.

Upset Alert

Lenders need to be extremely careful that they remain consistent by using the same form 1003 within each loan file. Investors have stated they will not purchase loans with inconsistent 1003s, which would effectively bust a lender’s bracket. While this issue is currently unsettled, a foolproof game plan to avoid this situation altogether is to ensure loans have consistent 1003s. During Mortgage March Madness, a lender’s audit program provides the ultimate defense in identifying potential 1003 issues before they become a reality.

By auditing or testing loans during the mortgage process rather than after, lenders can stop upsets before they happen. At this point, lenders will have updated their operations to start each loan application with the new 1003, but lenders with automatic bids in their pipeline need to look at all loans in process to ensure the correct 1003 is being used at closing. Unlike basketball, official reviews cannot put time back on the clock to give lenders another chance at using the correct 1003.

In addition to testing, lenders also need to be on upset alert with their loan origination system. Any update an LOS runs in the next few months could inadvertently upset operations and cause unanticipated changes or mapping issues. To avoid this, lenders should carefully monitor LOS updates and test their systems to ensure they are capable of running with both 1003s active. After all, it is better to adjust the game plan mid-game and go for the “W,” rather than having to review the tape afterwards trying to identify the reasons behind the loss.

Adding to the Madness

Just as introduction of the First Four provided more March Madness to enjoy, the new 1003 adds to the madness for lenders. The new 1003 is laid out differently and asks for more information from the borrower than the old version. Operationally, lenders will need to implement new best practices to ensure the 1003 has been fully completed in an accurate manner. Additionally, lenders must ensure they are collecting the required HMDA data for reporting purposes. This is an especially pressing issue for lenders that are required to report their HMDA data quarterly.

Even if a lender does not report to HMDA quarterly, it is important to evaluate their HMDA data on at least a quarterly basis. Coaches do not wait until the last minute of the game to look at the score. Instead, they constantly monitor the game plan and adjust as necessary to make sure it is working. Buzzer beaters are nice, but there is a reason they are not part of the game plan – they don’t always work.

The new 1003 has also added to the madness in terms of the intake of information and placed a heavier burden on the loan officer to collect information upfront, which could change the way some lenders take an application. For lenders with an LOS that collects information and then aggregates it into a 1003, the application process will likely change very little. However, for lenders who have their borrowers fill out the 1003 explicitly, the application process will change immensely, and lenders need to monitor that change. In addition to auditing their systems and loans in process, lenders will need to audit their information collection process to ensure its functioning efficiently with the new 1003.

Avoiding Fouls

Once Mortgage March Madness is over and lenders have settled in and are playing their game with the new 1003, they will still need to avoid committing fouls. The new 1003 includes several versions translated into languages other than English. These translated forms make the risk of fouling much higher from a compliance standpoint. By providing borrowers the 1003 in a language other than English but every other form only in English, lenders put themselves at risk of being charged with a foul down the road, as the legal liabilities related to providing only the loan application in a language other than English are untold.

Currently, there are some states that require loan documents be provided in a language other than English, if requested. With the new 1003 being offered in languages other than English, lenders nationwide would benefit from implementing best practices related to documents in languages other than English. Do not block your borrowers from translated documents and get called for a foul; plant your feet early and avoid the call.

One Shining Moment

In a few months, Mortgage March Madness will be over, and lenders’ pipelines will no longer include loans using the old 1003. When that happens, many lenders will feel as if the confetti is falling down all around them as “One Shining Moment” plays on the jumbotron. Until then, lenders that want to minimize the risk of busting their bracket and originating loans ineligible for sale due to 1003 compliance issues can easily adjust their best practices and put together a winning game plan geared at avoiding upsets.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)