TRID Secondary Market Issues and Challenges

Clients and Friends,

I’ve been meaning to write for a while, but as you can imagine, it’s been an extremely busy Fall.  I did want to take a moment though to write about some of the recent news about TRID, as many of you have been asking me for my thoughts about it.  I also wanted to let you know about the TRID technical correction rule that the CFPB just published last week.

The Technical Correction Rule.   The CFPB published last Thursday a technical final rule making certain corrections to provisions that were amended by TRID.  This rule does not actually make any changes to the TRID rule as it was issued by the CFPB in November 2013.  It turns out that some of the amendments in the final rule to the regulatory text and commentary of 1026.17, .18, .22, and Appendix D were codified in the CFR incorrectly.   It appears that the GPO inadvertently deleted several existing provisions of Regulation Z and omitted provisions of the final rule from the CFR.  The CFPB published the final rule only to fix these errors, stating it is, “clarifying how the TILA–RESPA Final Rule should have been codified in the CFR, and preventing incorrect codification in the 2016 hard copy edition of the CFR.”  This final rule does not make any changes to the final rule as it was issued.  It is effective Dec. 24, 2015.  The rule can be accessed here: https://federalregister.gov/a/2015-32463.

There are two things to consider with this technical correction final rule.  First, there is a question, which the CFPB does not answer, of whether the inadvertent deletion of the existing commentary and regulatory text has any effect on loans that were originated during the period of Oct. 3 through Dec. 23.  Some of these provisions were significant, such as the provisions providing for an APR tolerance under 1026.22(a)(5).  Second, it appears that the CFPB can dedicate the resources to issue a final rule amending TRID when it believes it is necessary.  The industry should view this as an opportunity to inform the CFPB about other issues under TRID that it believes need regulatory amendments.

TRID Frustrations.  As I’m sure you’ve been reading and hearing, significant concerns have been raised about TRID disclosure violations and their effects on the sale of loans in the secondary market.  Many lenders have been publicly expressing frustration with TRID in news articles.

And as I’m sure you’ve seen by now, Moody’s recently reported that it found TRID disclosure errors in 90% of a sample of loans.  The report said that many of these violations were “technical” in nature, such as incorrect spelling or the absence of a required hyphen, but it still raises significant concerns about the potential liability for investors from these violations.  Investors are kicking a lot of loans, many for minor, technical violations.  They are concerned that TILA is unforgiving in its liability scheme, and even technical violations can lead to assignee liability.

I’ve also been hearing about many other issues.  For example, many lenders have reportedly left construction-to-permanent lending because they do not know how to complete the disclosures for the product.  Also, lenders have called me complaining that their software still has programming errors, that there are difficulties understanding how the Calculating Cash to Close table appears for FHA and certain other products, about difficulties obtaining simultaneous issuance title insurance estimates, and misunderstandings about the settlement agent’s responsibilities to provide the seller’s CD under TRID.

These are real frustrations, and because they implicate the secondary market, they present real risks to consumers’ access to credit.

No CFPB Grace Period.  At the same time, it does not sound like the CFPB will be as “sensitive” as we would have hoped.  Director Cordray likened these frustrations to Y2K, and basically said it was much ado about nothing.  And the Deputy Assistant Director for originations in the CFPB’s Office of Supervision, Calvin Hagins, is reported to have stated at an industry conference that the CFPB will be examining for TRID compliance in 2016 and that, “there is no grace period from the bureau.”  Furthermore, the CFPB’s Fall Supervisory Highlights (http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2015/) noted several GFE and HUD-1 tolerance and accuracy errors, which I believe is a signal that the CFPB will be examining for these errors under TRID as well.

And the CFPB does not appear to understand the potential implications the TRID rule has for the secondary market and the nation’s residential housing market.  The CFPB’s good faith period does nothing to limit the potential civil liability under the rule for lenders and investors during this period.

The Industry Will Adjust.   The challenges that TRID presents are significant.  As one very smart person said even before the final rule was issued, this rule is a “sea change.”  This rule changes how things have been done for decades.  If anyone (including the CFPB) thought this would be easy, they severely miscalculated.  The rule represents a lot of change for the entire industry, including the secondary market.  At the same time, the statutory liability for the disclosure requirements has been meshed, resulting in uncertainties regarding the repercussions of these TRID violations and the cures that are available.

But I believe the industry will adjust to TRID.  There are lenders, title companies, and vendors that have put the necessary time and resources into this sea change and they are doing quite well.  For example, I’ve assisted a number of lenders with construction-to-permanent lending under TRID, allowing them to continue offering the product.  And many reports also state that some lenders have had success with TRID, and that technical violations are expected to diminish over time as programming fixes are implemented.

What should you be thinking about as we adjust to TRID?

Liability and Cure Issues.  Start thinking about the potential liability that exists for violations you’ve identified, and what cures are available.  The questions you will want to answer are whether a violation involves a material disclosure for rescission purposes, whether it has potential civil liability and assignee liability under TILA, and if so, if statutory damages or only actual damages available.  And start talking to your investors about what cures they may accept.  I think this will be one of the most important areas of TRID analysis in the coming months.

Prepare to Show Good Faith Efforts.  Start preparing now to demonstrate to your regulator your good faith efforts to implement and comply with TRID.  Although Mr. Hagins stated there will be no “grace period,” I believe that good faith efforts will still be taken into account in an exam, especially with respect to technical disclosure errors.  This means, among other things, ensuring you have updated policies and procedures and have conducted staff training.

And if you identify errors in your disclosures, think about how you are dealing with them.  If an error was caused by an LOS software glitch or another third party, document that fact.  Also, document discussions with the vendor or third party to show you made a good faith effort to prevent the error from occurring again.  And if software errors persist, think about how you will deal with that problem.  The CFPB’s April 2012 Service Provider Bulletin describes how the CFPB expects lenders to take “prompt action” to address identified problems with service providers.  And considering Director Cordray’s comments expressing concern about vendors and TRID at MBA’s Annual Convention this year, this may be an area that is of concern to them.

Grey Areas in the Rule.  There is no rule that can answer every single question, especially given the infinite variability of credit and real estate transactions.  In addition, the CFPB has not been forthcoming with official guidance during the implementation period, or after the effective date.  Therefore, it is not surprising that the industry is encountering grey areas and questions in the rule.  You should think carefully about the potential liability that is implicated and your course of action when these issues arise.

The CFPB does have an informal guidance function in which a staff person will provide informal, non-binding guidance over the phone.  But you may not want to contact the CFPB on your own for fear that you might self-identify that you’ve been out of compliance (remember, no grace period).  Instead, it may be best to contact the CFPB through counsel, which can do so without identifying you.  In addition, given the non-binding nature and the long wait times that may be involved, this may not be the most appropriate course of action.  Also, you may want to inquire with your investors or any of their published materials to ensure that they will accept your interpretation.

Conclusion.  In the end, we will adapt to this change.  Industry will find its new workflows and best practices.  Like many in the industry, I recognize the potential benefits of this rule to the public.

Unfortunately, if the CFPB does not provide adequate guidance or make necessary amendments, it only increases the costs for industry.  I am hopeful the CFPB will issue additional written, formal guidance or amendments to the rule’s commentary to address some of the most frequently asked questions about the rule, to give industry the clear rules of the road it needs.  I also believe industry should remain vigilant in asking the CFPB or Congress to implement some modification of the liability under the rule to allow for a true good faith or hold harmless period.

In the meantime, I am available to provide assistance in navigating the rough waters ahead.  All questions are good questions when it comes to TRID.  If you need assistance analyzing the potential liability or cures that are available for violations that have occurred, or help in understanding a regulatory requirement, please do not hesitate to reach out.

If I don’t talk to you before, please have a wonderful holiday season!