(Editor’s note: This is part two of a three-part series gauging the industry’s initial reaction to proposed updates to the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule that were introduced in late July. To read part one, click here.)
Initial reactions to the proposed revisions to the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosures (TRID) rule – also known as the “Know Before You Owe” (KBYO) rule – continued to flow in this past week.
In addition to making numerous clarifications and technical corrections to the rule, which took effect last October, the bureau is proposing certain new provisions – for example, changing the rule so that it covers all cooperative units and adding new requirements pertaining to the sharing of borrower information among third parties.
All of the proposed changes are outlined in a 293-page document that was released by the bureau in late July. Comments on the proposal are due by Oct. 18.
This week, MortgageOrb interviewed compliance experts Richard Andreano Jr., partner with Ballard Spahr; John Levonick, director of regulatory compliance for Clayton Holdings; and Ruth Lee, senior director of mortgage services at MetaSource, to get their opinions on whether the proposed changes go far enough to address industry concerns.
Q: At first glance, do you think these proposed changes go far enough to address the industry’s requests for greater clarity and direction? What areas of the TRID rule do you think could still use greater clarity, even if these proposed changes are adopted?
Andreano: The proposal is viewed as a first step to have the CFPB start addressing concerns with the TRID rule. The CFPB’s decision not to address cures – or to formalize the guidance on liability provided in Director Richard Cordray’s Dec. 29, 2015, letter to the Mortgage Bankers Association (MBA) – is viewed as a significant shortcoming of the proposal.
Levonick: The CFPB did well in addressing many of the industry’s concerns through the specific proposed changes. What was not addressed, though, were elements of a specific piece of unofficial guidance: the director’s Dec. 29, 2015, letter to the MBA. That letter contained statements made by the director regarding the availability of statutory and class action damages for TRID violations. The director said that statutory damages are limited “by statute” for a “failure to provide a closed set of disclosures,” presumably referencing 15 U.S.C. Section 1638 and the traditional enumerated disclosure elements under TILA. But the letter failed to show how the new TRID disclosure elements fulfill the requirements of Section 1638 because Section 1638 definitions map to the old truth-in-lending disclosures, not the new closing disclosures.
Lee: Interestingly enough, in reading the summary, I believe the CFPB understates the importance of several clarifications to the market as “minor and technical corrections.” From a technical and operational perspective, these are pretty substantive for us, as we actually perform compliance testing on thousands of loans each month. Still, this is a huge step for the industry. We definitively want rule-based compliance rather than enforcement-based compliance. For the past several months, TRID compliance has settled into an uneasy consensus on many of the unclarified details using a patchwork of webinars, enforcement actions and industry urban legend. Many have relied on the “Google-fu” to ensure their position isn’t too far outside the herd. But reading a blog that says “I heard from a friend who has a friend who spoke to the CFPB on the phone” is enough to set any compliance officer’s teeth on edge. With respect to the second part of your question, the CFPB and the industry are in a Mexican standoff on how to cure technical errors – the CFPB has a tank, and we have a water gun. The CFPB has telegraphed it will not erode its position by making it easier for lenders to cure technical failures post-closing. However, the industry is stuck with a growing number of loans drifting around the secondary and falling into “scratch and dent.” Unfortunately, even “scratch and dent” buyers are often skittish about their true assignee liability and unwilling to buy.
Q: Which changes would you say are most helpful? Are there any that you would say are a “slam dunk” in terms of addressing the concerns raised?
Andreano: The proposal to address the so-called “black hole” issue is very helpful. The existing rule unintentionally limits the ability of a creditor to add or increase fees based on last-minute changes, even when the borrower requests changes on the eve of closing. The proposal would create greater flexibility for a creditor to revise fees based on changes but still protect the consumer from unsupported fee changes.
Levonick: In the most helpful category, I’d list the tolerance for total of payments, the inclusion of all cooperatives (versus relying on state-specific definitions), and the guidance around the nuances of construction loans. There isn’t one single thing that is a “slam dunk,” but in the aggregate, the numerous refinements give lenders more objective standards to meet in the manufacturing process, which will lead to fewer errors.
Lee: The most helpful clarifications relate to the fees paid by the borrower or on behalf of the borrower, which are not within the sphere of control of the lender. These include property taxes (which were clarified by amendment), seller paid fees, transfer taxes and recording fees. Over the past few months, consumers have received an inestimable windfall due to repayment and cure of fees that have nothing to do with the lender’s compensation. One huge clarification is on construction-to-permanent loans. In my experience, the lack of rule-based guidance has chilled access to credit. Investors are very skittish about providing those products without clear direction on TRID compliance. The construction-to-permanent market is on fire – but without a broad investor market, access to credit is being synthetically altered by compliance risk rather than credit risk.
Q: What about the fact that the bureau is not going to allow issue of “cures” on the table – is that a mistake on the bureau’s part? And if so, why? What do you see as being the central problem with regard to how cures are defined under the current rule?
Andreano: The industry requested a period of time greater than the 60 days under the existing rule to cure errors regarding the good-faith standard, more clarity on what errors can be corrected under the various cure provisions, and more clarity on how to implement cures. For example, the cure provision that allows a creditor to correct non-numeric clerical errors is interpreted by some as not allowing a creditor to cure a typographical error in a license number or phone number. Others read the non-numeric limitation to apply to dollar or percentage amounts in the disclosures and not to items such as license or phone numbers. A problem with the 60-day limit to cure errors under the good-faith standard is that it is too short to provide for review of a purchased loan by an investor within the cure period. An important factor is that a creditor and investor may have different views on whether a particular disclosure was in error. A creditor may believe a loan is compliant at the time it sells the loan to an investor. By the time the investor reviews the loan, the cure period often is long expired, and the investor may require the creditor to repurchase the loan because the investor deemed a disclosure to be in error and no longer eligible to be cured. If the cure period were lengthened, the investor could simply require the creditor to cure the particular error, which a creditor often will do even if it disagrees with the investor simply to avoid a repurchase. If this continues, eventually, the resulting constraints on the ability to sell loans and costs to the industry will begin to adversely affect consumers.
Levonick: Clearly, based on what I’ve read, there was an expectation that the CFPB might have offered “cures.” But I do not see where that is coming from. TRID did not change anything as far as the TILA cure provisions of Section 130(b) and Section 130(c) are concerned – they still function as they did. Although TRID did create an affirmative obligation upon lenders to re-disclose the closing disclosure when certain errors were found, this is more of a supervisory “books and records” concern. The TRID requirement to re-disclose the closing disclosure effectively ensures that a lender has some skin in the game from a quality perspective and cannot merely sell away a loan with a disclosure error. If a lender or investor avails itself of Section 130(b) as a basis to re-disclose the closing disclosure to accurately reflect the terms of the transaction and make the consumer whole for any tolerance violations, the consumer may not have any incentive or ability to make a claim that he or she was harmed. This would effectively reduce the civil liability and potential for financial loss to the creditor or investor.
Lee: I believe the CFPB could provide greater direction and permissiveness on curing technical issues without eroding the integrity of KBYO. The industry is populated by humans – and technology is not infallible. When mistakes are made in good faith and they are not harmful to the consumer, it becomes punitive to the lender without providing much value to the consumer other than making the cost of credit higher.
Q: Do you see any potential increases in operating costs for lenders or third parties as a result of any of these changes? If so, which ones and why?
Andreano: There will be costs to implement the changes, but the industry understood that when it sought revisions to the rule, it would have to devote time and expense to implement the changes. More time is needed to fully assess the effects of the proposal, but in general, the greater clarity provided on various issues should actually help to reduce costs associated with various matters that are addressed.
Levonick: Lenders will have to enhance their quality control processes to assess the requirements and make any enhancements to their testing, so there will be training costs. Also, this will precipitate sizable technology updates (e.g., new versions of software from loan origination system [LOS] and doc vendors) – there will be costs with user acceptance testing, but this should not be overwhelming.
Lee: There should not be any major increases in operating costs for lenders or third parties. Rather, there should be a slight improvement in the cost of compliance. One of the primary factors is the delay and analysis in compliance surrounding technical uncertainty and the risk associated with said uncertainties. We spend hours talking about the definition of the word “is” and assignee liability and the risk of making a flawed assumption. The industry clearly wants to “get it right,” but without clear direction, uneasiness continues to rule.
Q: What are the potential impacts on software and systems (and the programming thereof) as a result of the changes?
Andreano: Software systems will need to be revised to implement the proposed changes, and the most difficult changes to implement will likely be the ones associated with the very cumbersome calculation of the cash to close. It is not clear what benefits, if any, consumers receive by seeing various elements of a cumbersome cash to close calculation rather than simply seeing a disclosure of the amount of cash that the creditor believes the consumer will need to close the loan. Consumers like to eat sausage and not see it being made.
Levonick: See my previous answer.
Lee: The impact to our software and systems will be negligible, as many of these changes are made within our third-party software vendor’s system. The primary impact will be on interpretation of findings, which is more manual in our world. As it relates to LOS impact, it can be across the board, depending on the configurability and flexibility of the system.
Q: Do you think these changes will help allay investor fears over TRID defects and, if so, to what degree? Where might concerns remain?
Andreano: The proposed cure to the “black hole” will likely reduce objections by investors to changes made by the creditor based on last-minute events or circumstances. But unless the CFPB lengthens the cure period for errors related to the good-faith standard, clarifies what errors can be cured under the various cure provisions, clarifies how to implement cures, and provides more formal guidance on liability, investors will continue to have significant concerns with TRID rule defects, no matter how small.
Levonick: There will be a reduction in the number of defects found in the origination process. The severity of, or the materiality of, defects that continue to exist in the process is a lingering concern. So, too, are how the CFPB will enforce the rules, how courts will interpret the specific defect and what the financial exposure will be to the parties involved based on those interpretations.
Lee: Absolutely. Any clarification will only improve investor confidence. Clear direction is critical, and this was an important first step.
Q: Do you think the bureau will step up its enforcement of TRID violations after these rules are finalized?
Andreano: The CFPB staff indicated that one of the supervisory focuses for 2016 would be TRID rule compliance – although, for institutions that have made good-faith efforts to comply with the TRID rule, the assessment would center on an evaluation of the institution’s compliance management system and overall efforts to comply with the rule. An important issue for the industry is whether the CFPB will be lenient on prior disclosure practices in the areas being modified by the proposal. Expect industry representatives to request leniency for past practices in the areas addressed by the proposal, given the lack of clarity under the existing rule.
Levonick: Yes, it is only a matter of time before the CFPB begins to enforce TRID, but I would expect that it would be a top-down approach: targeting the most egregious and inexcusable TRID violations first, for a period of time.
Lee: Absolutely. I believe the CFPB has clear intentions of increased surveillance on TRID compliance. It has been a marquee initiative and cuts at the heart of the consumer’s interaction with his or her lender. And clearly, the industry has responded by taking this so seriously.
Q: Do you think the bureau will need to update TRID again in the future? If so, why?
Andreano: The CFPB indicated that the current effort to revise the TRID rule would be limited in scope. It appears the CFPB was setting expectations so that the industry understood the proposal would not address all of the issues that have been raised, particularly given the expedited time frame for the rulemaking. As a result, in the various meetings that the CFPB held with industry representatives after it announced the rulemaking, the industry focused its requests for changes on the most important items, such as the black hole. The CFPB indicated that it would incorporate into the proposal guidance from the various staff webinars on the rule, and address a few other issues, but that it would not be proposing widespread changes. And that is, in fact, the approach that the CFPB took with the proposal. Once the rulemaking is completed, the industry likely will ask the CFPB to address issues not covered by the proposal, particularly the cure provisions and liability for TRID rule errors. And it should be expected that the industry will identify additional areas in need of clarification. This is common with any significant rulemaking, as it often takes years to spot most of the “bugs.”
Lee: There is a truism in the mortgage industry – we are always changing and adapting. The CFPB will always have to tweak the rule to adapt to evolving products and circumstances. Ideally, we are building a meaningful partnership with the CFPB to ensure we are being heard and not ruled by the laws of unintended consequences.