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Keeping the devil out of the details: Ernst Publishing Co. ensures and guarantees that the fees lenders charge mortgage borrowers are 100 percent accurate--a role made even more important by new CFPB disclosure requirements taking effect on Aug. 1.

There are probably not many companies in the mortgage business that can boast record sales growth of 40 percent in 2013, followed by growth of about 25 percent in 2014 and that expect similar growth this year. But Ernst Publishing Co., Albany, New York, has managed to pull that off by providing what has to be one of the more mundane--"boring" even, according to senior management--but important services in the industry. [paragraph] Ernst was largely unknown to many in the industry until a few years ago and is still virtually anonymous to consumers. What Ernst does is ensure, as well as guarantee, that the fees lenders charge residential mortgage borrowers are 100 percent accurate. Those fees include everything from termite and radon inspection charges to title insurance premiums to local government recording fees and taxes. [paragraph] While that sounds simple enough, remember that there are thousands of local government entities--states, counties, cities, districts, etc.--around the United States, all with their own sets of fees. Large, national lenders may have more than 100,000 fees to manage across the country. And not only do those fees change constantly, those entities are under no obligation to inform anyone when they do.

Making sure those fees are correct is critically important to mortgage lenders, especially with more stringent reporting and disclosure requirements by the Consumer Financial Protection Bureau (CFPB) slated to take effect in August.

If lenders get it wrong, they risk overcharging the customer, which would be a major CFPB violation. And if they undercharge the customer, they have to make up the difference--which could total thousands of dollars in some extreme cases--or have the customer walk away from the closing table.

"The new rules require even more accuracy and will impose a high price on lenders that can't tell consumers exactly what they must pay when they get to the closing table," says Gregory E. Teal, Ernst's president and chief executive officer.

"Federal regulators have made it clear that they will enforce these new rules aggressively and require all players to keep audit trails to prove that they have compliant processes in place. Compliance is now the most critical part of the lending game. We have to be compliant every single time we interact with the borrower," Teal adds.

The name of the company is itself a misnomer. Ernst really doesn't publish anything--in hard-copy form, that is--anymore.

It got its name from the bulky three-ring binders it used to print and update every quarter that contained the fee schedule of every local government entity in the country that had anything to do with recording mortgage and real estate transactions.

Now, of course, Ernst's database is automated and available online.

But the company is still a family-owned and family-run business, started by the late Carl Ernst and his wife in 1989. The firm, which goes by Ernst Information Services today, or simply Ernst, is now headed by Teal, Carl Ernst's stepson.

Teal was the company's first chief technology officer and took over the company's day-to-day operations shortly before Carl died of cancer in 2010 at the age of 69.

Teal got his start at the company filling the binders, along with family members, in their garage. Today the company is located in downtown Albany, a block away from the imposing State Capitol building. It employs about 35 to 45 people, with about 20 to 25 in Albany, depending on projects the company is working on. Its customer service and sales operation is based in Half Moon Bay, California.

"What Carl did was to take about 3,800 different places and standardize the way they present the information so it's understandable to the financial institution," Teal says.

Today Ernst processes more than 150 million transactions in an average year and recently completed its one billionth deal.

It's most proud of a patent it received in 2013 for its Good Faith Estimate (GFE) Fee Monitoring Service, which alerts lenders and title agents of any fee changes and then recalculates those fees until the closing. The updated quotes are guaranteed to be accurate.

Ernst typically gets involved as soon as a prospective homebuyer and mortgage borrower completes a loan preapproval application, right through the loan closing and the post-closing auditing process. And there are few transactions where Ernst isn't involved--largely hidden though its involvement may be.

The company says nine out of 10 loan originators nationwide and the top-five title insurance underwriters are its clients, plus it partners with nearly every major loan origination system (LOS) provider. It also created and provides custom solutions for the top-five lenders in the business.

"We are used by everybody because they need our accuracy, our flexibility and our speed," says Teal. "We have taken all this disparate stuff and standardized it. One request in, one request out."

Indeed, management experts say that if you want a business that will be protected from prospective competitors, one of the things you need--other than doing what you do well and at a reasonable price--is a high barrier to entry. It's good when it is just too expensive, difficult or time-consuming for someone else to try to move into your space. If there is a company in the residential mortgage business that meets that description, it's probably Ernst.

Watershed moment

For Ernst Publishing Co., the watershed event that pushed it into the mortgage industry spotlight was the publication of new final rules under the Real Estate Settlement Procedures Act (RESPA) in 2010.

Until then, Teal says, lenders were not held accountable if they quoted incorrect fees to borrowers. In 2010, the Department of Housing and Urban Development (HUD) required lenders to disclose recording fees, taxes, title premiums and settlement charges. Under stricter RESPA enforcement, lenders had to make up the difference if they underquoted a fee.

"When enforcement of that came through, the banks were being held accountable for our line items and we were one of the few companies who [had a handle on fees], which is when we kind of took off," Teal says.

"All of a sudden we were a had-to-have," he says.

Currently, the fee-data end of the business is largely controlled by Ernst and San Diego-based ClosingCorp, plus a handful of smaller outfits.

Enforcement of RESPA rules is now the purview of the CFPB. Effective Aug. 1, the CFPB's new Loan Estimate and Closing Disclosure forms will replace the Good Faith Estimate, Truth-in-Lending and HUD-1 disclosures that are used today.

In addition, there's a new "three-day rule" that requires that the borrower receive the Loan Estimate three full business days after a loan application and the Closing Disclosure form three business days prior to consummation of each transaction.

Teal says the new rules mandate even more stringent tolerances, with additional disclosure requirements. The object of the rule is to make it easier for consumers to shop for mortgages and protect them from costly surprises at closing.

Like many bodies charged with enforcement responsibilities, the CFPB hasn't exactly been welcomed with open arms by many in the mortgage industry. Yet it's definitely been a boon to Ernst's business.

The agency's new mandates are probably the biggest reason for the company's dramatic growth in revenue over the past two years and going forward as lenders gear up for implementation and compliance. As a privately held company, Ernst doesn't disclose revenue or profit figures.

Good for consumers and good for business

"The CFPB regulations have been good for us," Teal admits, but "it's also been good for the industry. It forces the industry to get it right and help the consumer. The fact that my business has grown because of that is also good for the industry itself."

Stewart Title Guaranty Co., Houston, one of the largest U.S. title companies, "partners with Ernst as an important part of our process to provide in a timely manner the cost of title insurance, settlement services, recording fees and transfer taxes to our lending customers and our network of policy-issuing offices for compliance," says Stewart Morris Jr., vice chairman of Stewart Title.

"One important component of the new process and technology is the ability to ensure accuracy of closing-related fees and the ability to ascertain the accurate fees and costs earlier in the process."

Teal has written several op-ed pieces in industry publications that articulate his belief that stricter government regulations are good for the industry for the simple reason that they're good for consumers.

"No other industry is under as much pressure as mortgage lenders to tell the truth and nothing but the truth," Teal wrote in an October 2014 HousingWire article. "It's a fact that our industry has found it difficult to earn consumers' loyalty," he said, citing data that "97 percent of home loan borrowers go to a different lender for their next loan, and referral business from past customers is dismally low.

"Federal regulators are driving mortgage lenders to pay more attention to the consumer's experience and that is a very good thing, for these experiences determine the level of trust they have in us and our businesses," he wrote. "The more they trust us, the more often they will return to us for future loans and refer their friends and families."

And, of course, one of the ways to build trust and loyalty is to provide borrowers with accurate information on exactly how much their loan will cost them, both from the start and frequently throughout the process.

Keeping lenders and borrowers safe

Obtaining the cost information that Ernst provides and guaranteeing its accuracy can be a daunting process--one the company's been able to perfect over the course of the past 25 years.

There are thousands of individual districts, each with their own set of fees, which change all the time. These governmental bodies are not mandated to notify anyone when they do make a change in their fee structure. Yet Ernst guarantees the fees quoted to borrowers by their lenders will be accurate.

To stay on top of these changes, Ernst's eight-person research department contacts county and local offices and courthouses every day via email, fax and telephone to stay on top of them. Many smaller entities don't even have Internet access.

"It's a constant [effort]--chasing down the information," says Jan Clark, the company's vice president of sales and marketing. Ernst processes between 8,000 and 10,000 fee changes a year at the local level. It then verifies that the fees are correct two or three times before it loads them into its system.

"There are so many moving parts to all loans today that there are many places to make a mistake," says Joe Parsons, senior loan officer at PFS Funding, a small mortgage banker in Dublin, California.

"In California, for example, there is a county transfer tax on sale. It amounts to $1.10 per $1,000 transferred. It is customarily paid by the seller, but if the loan officer neglects to enter it on the Good Faith Estimate, he or she will have to pay it," says Parsons.

"This becomes even more critical for those communities that have an additional city transfer tax," Parsons says. "In the city of Oakland, for instance, there is a $15 per $1,000 tax, usually split between buyer and seller. A $400,000 home would have a total tax of $6,000. The loan officer would have to pay that if he or she neglected to disclose it. I have seen that happen more than once."

"We keep the lender safe, we build the trust with their borrower and we stand behind what we are giving them," Clark says. "So if there's a mistake, it falls on us."

If it weren't for Ernst, lenders would have to do all this themselves. While that might be doable if you're a small local bank or credit union that only makes loans in your backyard, it would be a data nightmare for a regional or national lender.

"Ernst provides immediate and accurate quotes around both title and state-based fees which are used on our upfront disclosures," says Michael Lane, senior vice president and director of residential mortgage administration at Fifth Third Bank, Cincinnati.

"Using their tool helps to reduce or eliminate underquoting those fees and, as a result, limits the exposure to cures. Our relationship with Ernst provides continuity in an environment where fees set by local municipalities, counties and states are subject to changes with little notice," says Lane.

Ernst typically charges anywhere from $1 to $3 per loan throughout the entire process, which includes the guarantee, says Clark. She says the company has been wrong "very, very few times."

Getting the fees right is only part of the battle, however. Making sure that mortgages and deeds are filed in the right places, and therefore that the fees are calculated correctly, is not as easy as it sounds.

A house that gets its mail addressed to "Cincinnati, OH," for example, doesn't necessarily mean that's where the property is registered and gets taxed.

This is more common than one would think. For example, Teal points out that 10,000 ZIP codes cross county lines. "And if those two counties happen to have different taxing rates and you didn't pick the right one, you can get messed up," he says.

Clark cites the example of the Westwood neighborhood of Los Angeles. The Los Angeles County recorder's office knows Westwood for tax purposes as Culver City, not Westwood. But if a lender entered the name Westwood in recording documents, it wouldn't calculate the taxes correctly. Ernst takes the neighborhood names and maps them correctly to the recording and tax district where they are supposed to go.

That kind of mistake can be very costly if it happens in a high-priced area. Clark says one lender had to pay $243,000 in taxes on a property because it incorrectly registered a home in Malibu in the wrong place.

Teal notes that some places on Long Island, New York, have their own sets of fees on top of state and county taxes that could be as much as 5 percent of the value of the property. And if the value of the property is in the millions of dollars and the lender doesn't get it right, it's going to cost a lot of money.

"And there are lenders to this day that don't know about those additional fees, which could amount to tens of thousands of dollars--enough for someone to walk away [from the deal at the closing]," he says.

Looking for the next disruptors

But just because Ernst provides a service today that few other companies can provide doesn't mean it can simply rest on its laurels and retain a dominant market position.

"We go out into the field, talk to our customers, figure out what the problem is and try to solve it," Teal says.

"That was always Carl's push: Stay in front of your customers, find out what they need and how you can help them. And if you do that, you'll probably make some money in the process and have a successful company."

Company executives are also always on the lookout for what Teal calls "disruptors" that could potentially change the way it does business and how its data will be utilized.

One of the things it's working on currently is mobile technology. Ernst's data is used not only by underwriters and loan processors back at the office, it's also needed by real estate agents and loan officers out in the field. That latter group needs access to the latest data in order to quote an accurate estimated closing cost to the consumer.

"Some lenders check with us multiple times during the loan process to make sure there haven't been any changes during the process," Teal notes. "When we started, we changed the books quarterly; now it has to be instantaneous." IVB

George Yacik is a Stratford, Connecticut-based financial writer covering mortgages and consumer loans. He is a former vice president of SMR Research Corporation, Hackettstown, New Jersey, and a former editor at American Banker and The Bond Buyer. He can be reached at
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Title Annotation:PROFILE
Comment:Keeping the devil out of the details: Ernst Publishing Co. ensures and guarantees that the fees lenders charge mortgage borrowers are 100 percent accurate--a role made even more important by new CFPB disclosure requirements taking effect on Aug. 1.(PROFILE)
Author:Yacik, George
Publication:Mortgage Banking
Geographic Code:1U9CA
Date:Mar 1, 2015
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