Unpacking the redesigned URLA: What you need to know before March 1st

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Welcome to our Ellie Mae Open House. Instead of examining hardwood floors, closet space and kitchen layouts, we're taking you on a tour of what's happening across today's mortgage industry. During each episode, we'll hear from industry leaders and subject matter experts to give us an inside look into a hot topic, Cuttingedge technology or new trend that can help accelerate your digital journey. Thank you for joining us. Come on in.

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Hello and welcome to another episode of Ellie Mae Open House. My name is Ryan Murray, Product Marketing Manager at Ellie Mae, now Ice Mortgage Technology. And today I'll be your host. I'm joined by John Herring, Director of Product Management, also with Ice Mortgage Technology and we're here to discuss the new ERLA. We're having a casual conversation today to provide some background.

0:51
On the new ERLA, talk about what ICE Mortgage technology is doing to help its lenders prepare and what lenders should be doing to get themselves transitioned. Thanks for joining me today, John. Hey, Ryan, thanks for having me. Great to be here today. Talking about the subject that's been near and dear to my heart for a number of years. Actually, I've been working this for a while. Wonderful. Well, why don't you start us off by filling us in on your background in the industry?

1:19
Your current role with ICE Mortgage technology and how it relates to the new ERLA, yeah, happy to. So it's it's been my pleasure to been with Ellie May. Now ICE Mortgage Technologies for a little over 10 years. Prior to that, I actually worked on the industry side. I've done compliance and implemented major changes on the lender side of the fence. And a little over 10 years ago when Dodd Frank was coming into being, there was an opportunity to come join Ellie May.

1:49
And see a lot of those changes through on the platform side. So things like know before you owe and the ability to repay QM rules. So I joined Ellie Mae in a compliance capacity to help assist the product teams. Over the last couple of years I've actually transitioned into a new role where now I am the actual product owner for Encompass. Wonderful, really cool voyage from being someone who used the system from an origination perspective been in.

2:19
The industry a little over 20 years now and now to have the ability to help all of our clients implement these changes, it doesn't get bigger than than changing the Arla. The timing on making that transition I think was pretty timely.

2:34
Good. We'll set the stage for us. What are the motivating factors driving the change to the new ERLA and what are the major differences between the old and the new, Those great questions. I know a lot of people think about the announcements to update the ERLA going back a few years now, two to three years. But this is actually something that started, as I recall, closer to seven or eight years ago. And and it started with conversations with the Gse's about, hey, there's a lot of information.

3:04
We need today to underwrite loans in in a modern capacity, some of which are part of the application and some are not. We also seem to have some information as part of the application that we don't use anymore. You know, this is the voice of the GSC. So Once Upon a time, the make and model of the car you owned may have actually been a factor in whether or not you were going to get a mortgage loan. It hasn't been that way for a really long time. So you know, knowing the make and model of the car you own.

3:34
Is less important Knowing that you might have multiple forms of employment and multiple sources of income in this modern gig economy is actually much more useful to underwriting. When when when the prior Earl was created, there was no concept of cell phones or e-mail, so you didn't even have places to capture things like an e-mail address or a cell phone number, You know? It really is a modernization that's been a long time.

4:04
Coming and long overdue. So that really kind of drives the reason, you know, at the end of the day what you're trying to do is get the right information from that prospective borrower to be able to make that credit decision with the best information available and then be able to communicate that information.

4:24
To your other partners within the lending ecosystem. So whether it's an investor, it's a service or you know it really is all about increasing the quality of the information that can be captured and exchanged about each transaction. So that's the that's really the why that was some great insight. So explain to us what, what's Ellie may have been doing to get its customers ready.

4:51
You know, I'll talk about that in a moment. There was a second part to your question, which was what's changed. And I mentioned a couple of things like being able to capture more sources of income, e-mail addresses and phone numbers. That's not the extent of the changes that were made. Those are some good examples.

5:08
You know, I think one of the changes that I think is going to help underwriters a lot and is going to make it easier to make credit decisions is the way they've taken a lot of the same information you you've always collected, but now being able to actually associate it and put it together in a way that better tells the borrower story. And I'll use 2 examples. The first one comes to income. Historically, when you looked at incomes of the borrower or or multiple borrowers, you kind of threw everything.

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Together into one table. So whether it was wages, bonuses, Commission, overtime, rental income, you know, it all got kind of pulled into one area. And then as an underwriter you had gonna back it out and find out where all that income was coming from. So as an underwriter, not only are you trying to figure out what the sources of those income are, but then you're trying to recalculate it to make sure that you're calculating the income that you're able to qualify for. So you know, the more complex borrower.

6:08
Situations can definitely get much more difficult to underwrite if you don't know where the money's coming from, so you don't know how to calculate it correctly, you don't know how to qualify it correctly. So one of the big advantages I say and. And again, you're not changing the information you capture, but now you're capturing it in a way that it's very transparent.

6:27
This income comes from this source. So it's driving, driving efficiency, absolutely. And at the end of the day, why do we drive efficiency? Because it improves the borrower experience. You know, it means I can close loans better, faster with higher quality. The end of the day, that's what we all want.

6:46
Close more loans, close them better, close them more efficiently. So you know I can recognize cost savings and and throughput of of of funds so, so that right there just being able to more transparently know what the income source is and and and how it was derived. I think it's going to help folks out a lot. A second area that the the GSC spent an amount of time on was just looking at what I'm dealing with borrowers that already own real estate, they own other rental properties historically.

7:16
There was challenge in knowing which properties still have mortgages on them, which ones were income producing versus not so. So that area has been overhauled as well to give better insight into exactly what the cash flow.

7:32
Of each property that borrower may own is and that's not the extent of it. I mean these are very much technical in the weeds details of examples of things that have changed. Probably the single biggest change is the focus of the form. Historically if you look at the, the legacy loan application information that was known by the lender, information that was known by the borrower.

7:58
Information that had to be coordinated between lender and borrower was kind of placed all around the form and places. You know the very top of the form starts with hyper technical legal language about Community property that I don't think most originators much less most consumers knew exactly what was being asked by the questions to talking then about loan information and property information and then getting into personal information and.

8:26
And employment and income and housing expenses and liabilities. But but the point is you couldn't just put it in front of a consumer and say here give me this information, You really had to walk them through it with the new application, they separated information that the borrower should be able to readily provide by themself in its own group of pages, its own forms and then information that the lender is likely going to have to assist the borrower with.

8:56
Exist on their own pages. You really do have a way now of posing the questions to the borrower in a way that they should be able to provide that information with with minimal input from the lender or the loan originator. You know, they've taken out a lot of the legalese. They made it very plain language. They increased the amount of white space. They gave the borrower the ability to say, hey, this section, these questions you're asking don't apply to me. For example, maybe I don't own any.

9:26
In real estate. So now there's a way of just checking a box that says not applicable that actually in of itself has its own benefit. It brings to the table because today when you look at an application and you see there's a real estate owned section and nothing's filled out, it may mean that the loan originator asked the borrower these questions.

9:45
And the borrower said, no, I don't own any property or it could be. I asked the questions. I never got a response or the loan originator never asked. There's no way of knowing the information is blank in all three of those situations. So there's no way really of knowing well, is it not applicable? Was it asked and answered? Not asked, not answered. So now you've got these sections with this ability to say that does not apply, which is a more proactive indicator, more positive.

10:16
That says Okay. The question about real estate on was asked and it was affirmatively answered, no, I don't own any real estate. So it takes some of the doubt and some of the ambiguity out of the information that the underwriter is going to be reviewing. Yeah, so. So it sounds to me it's it's a better.

10:35
It's a better borrower experience and it sounds like the questions are laid out in a more logical fashion. Absolutely. Yeah. I think it's, it's a better experience all the way around. It's better for the borrower, it's better for the originator, it's better for the underwriter, which means ultimately it's going to be better for the investor of the servicer. You know, whether you're selling directly to the GSC's or you're selling to aggregators overall is, is going to be a better way of collecting this borrower.

11:05
Information and still stay within the confines of making sure that you're taking applications in ways that comply with the Equal Credit Opportunity Act. People tend to forget that there's limits on what you can ask a borrower when they apply for a loan. The further your questions stray from what's on the official loan application, the more risk your entity takes because someone may say that you know you're asking questions that maybe you shouldn't.

11:34
Or could intentionally or unintentionally cause a difference in treatment between borrowers, even though people don't put the paper in front of the borrower anymore and say, hey fill this out, you know, most of it's done online, most of it's being done through point of sale solutions or websites over call centers, what have you. At the end of the day, the questions you're asking, the information you're trying to gather is the same. What what do you think is the biggest impact for lenders to adopt the new form?

12:04
And and can you elaborate on some of the things that they should be doing to get themselves ready that's a good one. And and it actually it's going to tie back to another question you asked earlier around what Ellie Mays been doing to prepare our customers and and and not just our customers. So many loans come through our platform that end up being sold to aggregators or sold to the Gse's half the loans originated in the US touch our platform in one way or another whether it's because Encompass is the loan originated.

12:34
System or a IQ is being used to extract data from the application and compare it to documents that have been provided. So it's a big deal for us. I like to say we make it a big deal so our clients don't have to make it as big of one. That's not to say that customers don't need to be testing, you know, doing production pilots, getting familiar with the changes. All that has to happen a main reason for.

13:04
That is, the existing loan application has been there for so long that most people that have originated alone before could probably take the application looking at the paper upside down, you know, facing the other direction and be able to walk a borrower through it because you've done it so many times. It's muscle memory. You instinctively today know where to go look for information. Oh, if I want to look at the income, I need to go look at page two. If I want to look at the liabilities, I need to go to look at page two if I have too many liabilities.

13:35
I need to go find the pages in the back where the overflow liabilities are presented. The new form being much more dynamic means that if I have more liabilities than fit on page two, I don't stop and move them to page 5-6 and seven. I just continue. My liabilities continue to Page 3. They continue to page 4 however many I need to capture based on that borrowers information.

14:01
So it's much more dynamic when you actually generate that paper output form. So things are still going to be in the same sequential order, but you can't be guaranteed that it's going to be on page three. If you go look for page three, page three may or may not have what you need based on the borrower's length of employment or liability or other things that could cause things to move down to further pages. From a data input perspective, we took an approach of let's try to make this as much of A.

14:31
Non event as possible. So from a data flow perspective knowing that I have these screens I go to to input this information, a lot of that is very consistent with what we've always done. We kept the borrower pair structure so it's easier to put in information for a borrower and a Co borrower on the same screen instead of having to go to different screens for different borrowers. You know when I'm working with my credit reports, all that is the same when I'm working with my employment.

15:01
Records, my mortgage records, all of that is consistent with what we've are always done. We do all the heavy lifting when it comes to generating the form. So the data entry is the same. We do the dynamic presentation when generating the output form to make sure things go where they're supposed to be. Loan originator never has to think about that. They just can focus on whatever data entry is there they need to do for that particular borrower situation, you know likewise if you're using our consumer Connect product.

15:31
And you've got borrowers taking or submitting their applications online. They're just going to continue to provide information. It's a little bit different. You know, now when I ask you about your employment, I'm going to ask you about your income at the same time, as opposed to employment in one section and income in another. They're now joined together as sort of one thing. So even from a consumer perspective, the way that you're gathering the information should flow a little better because it flows better and taking the application to begin.

16:02
So that being said, if I was still wearing my lender hat 10 years ago and I was getting ready to implement this thing, I think the first thing I would do is educate myself on what my technology provider is doing whether that's release notes, if they're providing any kind of training. Obviously you know for example we are take advantage of it even if you're doing it from a train the trainer perspective the the more you can understand what's changing and.

16:31
Why it's changing The better position you're going to be. If you need to make any tweaks because of the particular configuration your company has, or maybe you've done some customization and you've created some of your own screens to do different data entry, well, those may need to be adjusted or tweaked.

16:50
In order to continue to work with the new flow of information being presented. So definitely getting up to speed on on how things are being supported, what's different, you know what's my delta analysis between the old and the new. I'll give a quick shout out to our teams because one of the great tools that we've made available to customers is a data file comparison that says here's the old information, here's the new, here are the fields in the system it maps to whether it's an existing.

17:20
Field that we've carried over because the definition has not changed or it's the net new field because the question has changed or the way you capture the information has changed or instead of being a single field, it's now a table of repeatable options because there can be more than one group of options. So getting familiar with those changes and then testing, I am a huge proponent of doing production testing and and now there's as of.

17:50
Anywhere in one of 2020, we are in what's called the open use. That means any lender without prior approval from the GSE's can start using the new loan application. Make sure your investors are on board, You know, make sure you've worked out with The Who you're selling these loans to on the secondary market, whether or not they're ready to take some of your production loans, Most of them are or should be very shortly. But I would start maybe you know maybe with one of my branches, you know.

18:20
My offices, maybe I have a call center. I would take one of those locations and I would say okay this group of originators or or this branch. We're going to start using the new loan application and we're going to work with the borrowers. We're going to let them know, hey, we're you know adopting this, this new industry change. So we're going to be working with you on this new application should be nothing negative, no impact to you other than you know the way that you answer these questions might look a little different than if you had a.

18:50
Applied, say, three months ago. And then run that loan just, you know, just like you would with one that you're manufacturing today and used it to learn, ah, ah okay. If I'm dealing with credits that are coming from earnest money or maybe it's net proceeds from the sale of a home, I need to treat that as both an asset for the other asset table. But then I need to treat it as a credit when I'm qualifying the borrower in order to make my cash.

19:20
Close balance, you know that's that's an example of 1 change that we've seen. You know I'm going to urge the industry to have a little bit of patience. You know even with tread even with ATR, QM, big changes like this, as much as the industry will work together to make them a non event, there's always going to be something, something's going to change, something's going to learn. Hopefully it won't be like tread where we have to actually wait for laws to be made and have a multi year path for corrections or fixes to be.

19:50
Made in this case, if the GSCC something isn't working, it should be relatively easy to make adjustments, whether it's to the a US engines or it's to the data format in order to to to smooth that over. I don't think that's going to happen for common use cases, but maybe some of the atypical situations that you don't see every day you may run into something where the feedback doesn't look like quite what you would expect. But there will be a little bit of a learning curve and a little bit of adjustment probably over the course of the next year. I don't think it's going to be.

20:20
Anything major, anything show stoppers, certainly nothing that would be a detriment to, to the consumer, but definitely just have that little bit of grain in the back of your head that says I might have to make some adjustments or tweaks down the road. Yeah. And John you already mentioned this open production began on January 1st and mandatory implementations coming up on March 1st. So you know, you mentioned internal piloting and and testing, you know for those listeners that are probably listening to this podcast in mid January.

20:50
Anywhere who might feel like they need to play catch up. How do you think they should prioritize their time between now and March 1st to catch up and feel comfortable? The two areas I would focus the most on are your Los and your POS, particularly if you're using a third party point of sale system. That tends to be where information needs to be consistent between what's being collected upfront by the consumer and what's going into the system of record.

21:20
Things like credit report and mortgage insurance and services that you're going to order as part of manufacturing alone, those are really unchanged. You know if anything, many of those services now could have access to more rich data than they would have had access to previously under the legacy loan application.

21:41
But for the most part they have all the information they need in order to issue a mortgage insurance certificate or be able to process a credit report. So those things really haven't been impacted. The area where I see the most change really is in that point of sale is that point of sale system collecting the right information and passing the right information into the system of record. The other one is in your your document output, you want to make sure that the paper version.

22:11
The form is consistent with the information you captured and what you're expected to be doing now shameless plug for us but if you're using ICE mortgage technology docs, we've taken care of all that. It's what you put in the system is what you're going to get when you generate the form and and.

22:27
Again, we'll take care of the pagination and dynamic nature of the information going on the output form. And I and I'd like to think that most doc prep providers have probably been ready for the loan application for at least the last year. You know, most of us were prepared to go live last July and when the GSC's were asked to delay, you know, it's kind of a no harm, no foul for us. We were ready and and so you know, a lot of this has been kind of out there for a while.

22:58
Just now people are starting to really get their hands on and start getting ready for that March 1st effective date. You mentioned that that extension last July or to change the date from July. What do you have to say to lenders who think despite industry volume and the continuation of the pandemic that we're going to see another delay?

23:19
There's a great thing people say, you know, hope is not a is is not a plan. If I was a Batten man and I'm a little bit of 1 at this point, I don't think there's a lot of drivers out there that would cause delay. Even with things like COVID, you know, we're talking about, you know, applications that these days are typically taken online.

23:41
Or or taken over the phone doesn't happen face to face as much as it used to, right? That By far that's a minority use case. So the biggest impact of Kovat is challenges in training your your teams.

23:54
Not as easy to put everybody in one room together and and train them together in person, but this might actually be one of those situations where virtual training put something on the screen and we can interact with it together through, you know, technologies like zoom might actually make it easier to learn this than sitting in a room together and someone pointing to an overhead projector or a PowerPoint slide that they've put together. I think there are.

24:24
Great education opportunities out there today. I know certainly and and again not not to beat our own horses, but you know all regs has some great education materials out there. You know, not not only to train the trainer, but if you want to, you know, set up virtual courses for all of your employees. We're more than happy to to help accommodate that from a political position, a GSC position. The GSC's are committed to seeing this go live in March 1st Again, for them this has been.

24:52
You know, I think probably coming up on, on close to a 910 year journey and they're eager to see the benefits come out of this that this is going to bring. And and they very well know where the technology providers are. You know they've been working with us with other providers over the course of the last year to do things like test cases and certifications. Both of them published lists of who has completed their testing and certification on their websites. So you know they're very much aware.

25:23
That the technology providers are ready and really now incumbent upon the lenders to do their training and do their implementation. I would imagine a lot of lenders are just eager to get past it. You know change is always a little rough. It's a little hard to do. I think if on the other end of this momentary pinch of pain, if it results in better underwriting, more efficiency in in closing loans faster and clearer and better with higher quality that that little bit of pinches is going to be worth it.

25:53
If it means at the end of the day you're giving the borrower a better experience, that's great. So before we we end the podcast today, I I just want to get some feedback from you. Your perspective after we get through March 1st and earlier our customers, our lenders have this implemented. What are some of the other big changes you see on the horizon? You know I think the back the the next big thing coming down the Pike and it's going to come really quickly after the early effective date is going to be the changes happening.

26:22
In the qualified mortgage space and again I think most of this is for the good, the new definition for qualified mortgage is going to make it so more borrowers can qualify for a qualified mortgage without having a strict cap on their debt to income ratio. They're certainly going to have to be some some adjustments even though it's kind of.

26:44
You know, loosening of standards, although not, you know, not completely moving away from them, just kind of being a little bit more flexible for consumers. You know, I think it's going to be a good thing, but there is going to be a little bit of a learning curve. There is going to be some technology changes that are going to need to happen in order to to facilitate that. I anticipate those changes are probably going to happen between April and June of this year. So if you think about it, you know right after March, in fact I know we're already rolling into our change.

27:14
Made our assessment of the rule, we've come up with our list of impacted areas and now it's putting together the detailed plans of exactly what we're going to change and what release vehicle it's going to be in etcetera. But I but I think that's going to be sort of the next challenge for the industry and while we're doing that I would be remiss if I didn't mention.

27:34
While all that's going on, everybody's also trying to get to E close, including the signing of electronic notes that can be sold on the secondary market. I know we did another podcast on that. Hopefully folks have had a chance to go check that out and hear about what we're doing there. But while all this is going on, people are adjusting to ERLA and getting ready for the QM changes. I think they're also going to be trying to put into production, whether it's a hybrid E closing or it's an electronic note, particularly with.

28:04
All the notarization changes that are happening across the country in the background, while all these other flashier topics have been going on, you know, I think that's going to be the big game changer this year as well. Well, I appreciate your time today, John, and your insight into Erla. Appreciate our listeners. Thanks for listening and joining us today. This has been another episode of Ellie Mae, Open House. Our pleasure. Take care everybody and look forward to joining you soon. Thanks John. Appreciate it.