However, the firm notes that calculating the risk of defects became more complicated in the third quarter due to industry reassessments of the impact of the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosures rule.
Using the Fannie Mae loan defect taxonomy, the report analyzes post-closing quality control data from loan files and findings captured by the ACES Analytics benchmarking system.
“During the past nine months, investors and lenders have been able to clarify the impact of TRID-related errors on their operations and fine-tune the associated risks – both short and long term,” says Phil McCall, chief operating officer for ARMCO, in a statement.
The risk of defects falling within the “Legal/Regulatory/Compliance” category increased by more than 14% in the third quarter, compared with the previous quarter, according to the firm.
However, the risk of critical defects within that same category dropped to a 12-month low, comprising 22.69% of all critical defects. Changes in lender severity ratings related to TRID are the cause of this decrease, ARMCO says.
The risk of defects falling within the “Loan Package Documentation” category also dropped. In the third quarter, this category included about 32.5% of all reported defects – and it is the second highest defect category.
While this category is known to be problematic across the industry, these defects are generally curable and rarely affect loan salability.
The risk of defects was highest for the “Income/Employment” category. The miscalculation of income was the primary reason for critical defects in this category.
Avi Naider, CEO of ARMCO, says the findings of the report “demonstrate that while the industry as a whole is making progress in mitigating loan defects, there are still recurring trouble areas that must be addressed.”
“At the same time, as we passed the one year anniversary of the implementation date for TRID, it’s fascinating to see a complex picture emerging among our lender base,” Naider says in a statement. “Essentially, TRID defects still represent a large percentage of overall defects. Yet, lenders are concluding that minor TRID defects do not impact the saleability of their loans based on their experience in the marketplace.”
The report also notes that Fannie Mae has provided considerable guidance to lenders as to how defects are reported for “Credit Related Defects” and what causes a defect, the risk associated with a defect, and how to report these defects under a standardized platform.
To date, no similar guidance has been provided by the CFPB regarding TRID.
Ultimately, the report concludes, the CFPB should consider offering guidance and establishing standards pertaining to TRID defects, to avoid deviations in reporting of similar defects across industry lenders.
To view the full report, click here.