In response to concerns raised by the Mortgage Bankers Association (MBA) that the new TILA-RESPA Integrated Disclosure (TRID) rules are resulting in a high number of loan defects – which, in turn, is causing loans to be rejected by investors – the Consumer Financial Protection Bureau (CFPB) has clarified that, in most cases, the defects can be readily “cured” and further that the bureau will be taking a soft stance on enforcement for the first few months following implementation.
Richard Cordray, director of the CFPB, in response to a letter from David Stevens, president and CEO of the MBA, says he, too, is concerned about reports that investors have been rejecting loans due to minor TRID errors.
“We recognize that the mortgage industry needs to make significant systems and operation changes to adjust to the new requirements and that implementation requires extensive coordination with third parties,” Cordray says in his letter to Stevens dated Dec. 29. “As with any change of this scale, despite the best efforts, there inevitably will be inadvertent errors in the early days.
“That is why the bureau and the other regulators have made clear that our initial examination for compliance with the new rule will be sensitive to the progress industry has made,” Cordray says. “In particular, our examiners will be squarely focused on whether companies have made good-faith efforts to come into compliance with the rule. All of the regulators have indicated that their examinations for compliance in the first few months of implementing the new rule will be corrective and diagnostic, rather than punitive.”
In his letter to Cordray, Stevens expressed concern that “lingering misperceptions and technical ambiguities in the regulations have resulted in significant market disruptions in certain channels over the last month.”
“We fear this disruption could develop into significant liquidity issues in the mortgage market without additional clarity conveyed to market participants by the bureau as soon as possible,” Stevens says.
Part of the problem is that investors have put in place strict TRID compliance standards, resulting in very high fail rates on closed loans delivered for sale. Making things even more complex is the fact that no two investors have the exact same standards.
The MBA says the jumbo market appears to be experiencing the most acute disruption, specifically for whole-loan trading and private-label securitizations.
“The reason is simple,” Stevens says in his letter to Cordray. “Third-party due diligence firms that are assigned by either ratings agencies or the investors themselves to perform quality assurance reviews on loans delivered into WLT, PLS and credit risk transfer pools are failing loan deliveries in large quantities. These firms have taken an extremely conservative interpretation of several aspects of the ‘Know Before You Owe’ (KBYO) rule and the physical disclosure display requirements. In addition, because a growing percentage of government-sponsored enterprise [GSE] loans sales are involved in credit risk transfers that require third-party due diligence reviews, the impact of high TRID fail rates is also being felt in the conforming (non-jumbo) market.”
Many of the TRID-related errors being identified are minor or technical in nature, the MBA reports. For example, there have been some problems with alignment or shading of forms, rounding errors, time stamps with the wrong time zone, or check boxes that are improperly completed on the loan estimate.
Compounding the problem is that investors aren’t sure what elements of a loan file can be “cured,” under what circumstances or when.
Stevens warns that if investors continue to reject loans based on TRID fears, lenders may soon start to experience liquidity issues.
“As a result, originators will not always be able to deliver loans to the investor with the best price – and, hence, the best rate for the consumer – and instead must deliver based on investors’ KBYO interpretations,” Stevens writes in his letter. “For consumers, these dynamics will increase both the costs of origination and the interest rates they pay.”
Adding yet more uncertainty is how Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD) will handle TRID compliance.
“For now, the GSEs and HUD are honoring the grace periods; but soon, they will begin applying their own interpretations of KBYO to their own post-close quality control, repurchase (GSE) and claims review (HUD) processes,” the MBA’s letter states. “Moreover, compliance with TRID appears to be a ‘life of loan’ warranty for the GSEs. Should the GSEs and HUD choose to make interpretations as conservative as the third-party due diligence firms and demand repurchase or indemnification, a very significant market ‘event’ cannot be ruled out.”
To help assuage the MBA’s concerns, the CFPB has added the following clarifications to its explicit safe harbor statement:
- The final closing disclosure can be corrected and reconciled with the loan estimate;
- Formatting and similar errors are unlikely to give rise to private liability unless they interfere with clear and conspicuous disclosure of specific TILA disclosures;
- Certain disclosures, including Total Cash to Close and Total Interest Percentage, do not give rise to statutory and class action damages; and
- Risk of private liability to investors for good-faith formatting and similar errors is likely negligible.
“Accordingly, the bureau believes that if investors were to reject loans on the basis of formatting and other minor errors â¦ they would be rejecting loans for reasons unrelated to potential liability associated with the ‘Know Before You Owe’ mortgage disclosures,” Cordray wrote. “Such decisions may be an overreaction to the initial implementation of the new rule, and our assessment is that these concerns will dissipate as the industry gains experience with closing, loan purchases and examinations.”