For months, the mortgage industry has been bracing itself for the implementation of the Consumer Financial Protection Bureau's (CFPB) TILA-RESPA Integrated Disclosure rule (TRID), which will have a sweeping effect on lenders, settlement agents, brokers and consumers.
In accordance with CFPB requirements, lenders will replace prior borrower disclosures with a new loan estimate form and closing disclosure form. These forms were designed by the bureau to give consumers more time to review the total cost of their mortgage and ensure they are completely informed as to the associated fees.
Although the new forms will help increase transparency for consumers, TRID has been creating a panic in the mortgage industry due to the fact that it has required lenders and their partners to change their processes and upgrade their systems. Knowing the challenges that lenders would face in incorporating these changes, the CFPB earlier this year issued an informal grace period for enforcement of TRID that will probably run until the end of this year. Lenders found to be in violation of the rules but that are making a ‘good faith effort’ to comply will likely be spared enforcement action.
The Grace Period
This grace period was instituted as a result of pressure from both the mortgage industry and a coalition of elected officials from Congress who expressed concern that the new rules could have a negative impact on the still-recovering housing industry. Mirroring the approach it took with implementation of the Title XIV mortgage rules in the early months of 2014, the bureau announced the grace period in July, when the rules were still scheduled to go into effect on Aug. 1 (as we all know, the Aug. 1 implementation date was pushed to Oct. 1 due to a CFPB ‘administrative error’).
‘â�¦our oversight of the implementation of the rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time,’ Richard Cordray stated in a letter to Congress. ‘This good faith grace period is one that the industry reached a consensus on and will be open ended to allow for flexibility as lenders and the mortgage industry become acclimated to the rule.’
To allow stakeholders and the CFPB to test the effective operation of TRID, Congress passed H.R.2213, which prevents enforcement of TRID requirements and the filing of any related lawsuit if 1) the person has made a good-faith effort to comply with the requirements and 2) the conduct alleged to be in violation of the requirements occurred on or before Dec. 31.Â Â
The Mortgage Bankers Association (MBA) was on the forefront of persuading the CFPB to adopt a grace period for the industry. It argued that the complexity of the rules far exceeds that of other rules implemented by regulatory agencies. In addition, there is more coordination required between lenders, brokers and settlement agents, and that requires new technology to facilitate communication between all parties during the mortgage application, underwriting and closing periods.
Another major factor supporting the grace period is that lenders are not able to actually use the new disclosure forms until the Oct. 3 implementation date. Therefore, lenders have been unable to test the new processes and software in a live environment, which, in turn, would give them the opportunity to troubleshoot.
The legal basis that supports the CFPB's decision in issuing the grace period stems from Section 105(a) of TILA, Section 19(a) of RESPA and Section 1022(b)(1) of the Dodd-Frank Act.Â In general, these sections provide authority for the bureau to ‘provide for such adjustments and exceptions for all or any class of transactions the Bureau judges are necessary or proper to effectuate â�¦ or facilitate compliance.’Â Â
‘The MBA welcomes the news that the CFPB will recognize the good-faith efforts of lenders to comply with TRID by delaying enforcement for a period after the new rules go into effect,’ says David Stevens, president and CEO of the MBA.Â ‘I believe the bureau has listened to the input of MBA, as well as other stakeholders about how best to enforce TRID.
This grace period should, in theory, protect lenders from regulatory actions against non-compliance with the integrated disclosures. However, some have been critical of the CFPB for not instituting a more formalized grace period with a set start date and end date. Others have criticized the bureau for being vague about enforcement in general and question how it will go about handling enforcement of the new rules. The American Bankers Association (ABA) said this grace period, due to its informality, only provides limited assurances to bankers in their efforts to comply. In advocating for restrained enforcement, the ABA pointed to data showing that many lenders and vendors would not be ready by the Oct. 1 deadline.
Many in the industry have advocated for a longer grace period so that lenders have more time to test their processes and systems. The MBA has said it supports the current grace period but says that should circumstances warrant it, the bureau should be willing to extend.
‘We don't know how disruptive or [not] this implementation will be,’ Stevens says, adding that the grace period should last, at a minimum, through to the end of the year.
Prior to the original Aug. 1 implementation date, Chris Polychron, president of the National Association of Realtors, was pushing for a five-month grace period.
‘A five-month testing period will provide enough time for everyone to get it right and ensure the rule works effectively for consumers, who shouldn't have to bear the burdens of the industry conforming to the new regulatory requirements,’ Polychron says.
With regard to delaying the effective date from Aug. 1 to Oct. 3, the MBA says it was a good choice because there are fewer mortgage applications processed during a weekend, and having the effective date fall on a Saturday allows lenders to switch over to new systems and commence utilization of the new forms on a non-business day.
Though many lenders welcomed the delay, there were a few who were negatively affected because their systems were prepared and programmed for an Aug. 1 effective date and they had to update accordingly.Â
So What Does 'Good Faith' Really Mean?
A cloud of uncertainty is surrounding the statements made by Richard Cordray, director of the CFPB, when he announced the grace period. In a letter to the Federal Financial Institutions Examination Council (FFIEC), 18 trade groups requested that the regulators overseeing the mortgage industry provide guidance on how enforcement will play out under TRID once it becomes effective.
In particular, the groups want the CFPB to explain specifically what it means when it says regulators will be ‘sensitive to good-faith efforts’ of lenders in complying with TRID. Part of the basis for this request is the fact that although the CFPB authored TRID, it will be enforced by a variety of regulators.
‘We urge the Federal Financial Institutions Examination Council to provide needed certainty by articulating precise policies for examining and supervising financial institutions for the initial months after the TRID implementation,’ the Sept. 8 letter says.
Pushing For A Formalized Grace Period
As Congress returns to Capitol Hill, the mortgage industry is pushing for a formalized grace period. The Mortgage Action Alliance has issued a call to action, urging its members to contact their members of Congress in support of legislation that would provide a temporary enforcement grace period and legal safe harbor to ensure smooth implementation of TRID.
In addition, Congress is considering two bills, H.R.3192 and S.1711, which provide similar safe harbor and protection to lenders through Feb. 1, 2016 and Jan. 1, 2016, respectively. The MBA and other groups advocating for a formalized grace period share the sentiment that a temporary legal safe harbor will ensure TRID will be implemented in an orderly manner.
On its face, the grace period gives the industry greater confidence and more time to properly implement TRID and put the new integrated disclosures to use. At the same time, because the grace period is indefinite and no one knows for sure how the CFPB will handle enforcement, industry professionals will continue to have nightmares and headaches.
The CFPB should heed the calls from lobbying groups and establish a more definitive grace period and legal safe harbor for lenders. This will help to ensure proper implementation of the new disclosures which, in turn, will ensure that consumers have a smoother, simpler home buying process.
Debbie K. Hoffman is chief legal officer of Digital Risk, a provider of quality control, valuation and fulfillment solutions.
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