As they tackle new disclosure requirements in the New Year, mortgage servicers, lenders, and aggregators received welcomed news from the Consumer Financial Protection Bureau. In a letter to the Mortgage Bankers Association, CFPB Director Richard Cordray attempted to ease their concerns by clarifying that technical errors don't necessarily mean non-compliance with the TILA-RESPA Integrated Disclosure rule that went into effect on Oct. 3.
“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 wrote. Because “there inevitably will be inadvertent errors in the early days,” the CFPB’s initial examinations for compliance with the new rule “will be sensitive to the progress industry has made.”
Also known as the Know Before You Owe rule, the Dodd-Frank Act mandate requires new, easier to use and understand mortgage disclosure forms, including expanded loan estimates. New closing disclosures, detailing the final transaction, must be provided to homebuyers at least three business days before closing.
Many in the mortgage and real estate world have expressed a variety of concerns, among them fears of additional processing delays. The rule also increases the risk of erroneous information residential mortgage-backed securitized trusts could be held liable for.
The CFPB can impose civil money penalties of $5,000 per day per violation for noncompliance by lenders, $25,000 per day for reckless violations, and $1 million per day for knowing violations. RMBS trusts would not face direct penalties, but could face investor lawsuits if losses are tied to reporting errors.
“The huge operational challenge for the industry to implement and comply with TRID will likely cause a spike in compliance errors,” a May 2015 report by Moody’s analysts cautioned.
A subsequent report, in December 2015, found that lenders were indeed having trouble. A survey found that more than 90 percent of the first wave of residential mortgage loans subject to the rule had compliance violations, many of them technical in nature, including “the need to use the same spelling convention for counterparties or the absence of a required hyphen.” Independent third party review (TPR) companies that review the loan files backing a RMBS transaction, however, still viewed these violations as material because a secondary market purchaser, including RMBS trusts, could bear damages and costs from delayed foreclosures.
“These results suggest that some lenders are having difficulty complying with the rules, a credit negative because it increases the likelihood that loans with compliance violations will be included in future residential mortgage-backed securities (RMBS) pools,” wrote Yehudah Forster, author of the Moody’s report. “The extent to which such violations would increase losses for RMBS is still unclear without further interpretation by the courts or the CFBP. Furthermore, difficulty complying with TRID may result in delayed issuance of new securitizations owing to issuer concerns about including loans with compliance violations.”