The comment period for the proposed revisions to the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosures (TRID) rule officially closed on Oct. 18, and the bureau is now in the process of reviewing the reams of feedback it received from the industry. Following its reviews of the many comment letters, the bureau is expected to deliver a revised final rule by April 2017. Lenders will have 120 days to implement the revised rule after it takes effect.
However, the revisions are not anticipated to create any major headaches for lenders; that is to say, they won’t create the same degree of disruption that implementation of the original rule caused when it took effect on Oct. 3, 2015.
In fact, most lenders agree that the bulk of the changes this time around are basically clarifications of the existing rule – some of which are very helpful. In addition, Richard Cordray, director of the CFPB, during the Mortgage Bankers Association’s (MBA) recent Convention and Expo in Boston, reiterated that the bureau will continue to be lenient – in terms of enforcement – on lenders that are found to be making a good-faith effort to comply with the revised rule for a period after it takes effect.
“As I told you last year, in our examination work around compliance with this rule, we and the other regulators have pledged to be sensitive to the progress made by lenders that are squarely focused on making good-faith efforts to come into compliance with the rule on time,” Cordray said during the October conference. “We have also said that our approach would be diagnostic and corrective, not punitive. That is precisely what we are doing. What this means is that we will be evaluating a company’s compliance management system and overall efforts to come into compliance, as well as conducting transaction testing – looking at loan files – which is, of course, necessary to be diagnostic. If violations are identified, we will work with the entity to determine the root cause of the issue and determine what corrective actions are necessary. As a routine part of our review, we will assess whether tolerance violations have occurred, and where found, we will require reimbursement to consumers as a remedial measure.”
Cordray added that since the original rule took effect over a year ago, lenders have adjusted to it more smoothly than the industry as a whole had anticipated.
“I am happy to report that our initial examinations seem to indicate, just as we expected, that lenders did, in fact, make good-faith efforts to comply with the rules, and generally, we are finding that consumers are receiving timely and accurate loan estimates [LEs] and closing disclosures [CDs],” he said, adding that, in general, home buyers are pleased with the new forms.
But the areas of the revised rule where the CFPB declined to provide further clarification have irked – or, at least, disappointed – some in the industry. In its comment letter to the CFPB on the proposed revisions, the MBA stated that “clarifying language is still needed” on the subject of how to go about “curing” loans that include minor or immaterial defects stemming from TRID.
“Such clarifications are needed to avoid unnecessary disruptions in the secondary marketplace that cause undue increases in costs and reduce the availability of credit to consumers,” the MBA wrote in its comment letter dated Oct. 18. “The clarifications we propose would allow correction of certain numeric errors, apply the current Truth in Lending Act correction provisions to Know Before You Owe [KBYO] disclosures where there is no overcharge to a consumer, and reiterate the availability of the closing disclosure to correct errors on the loan estimate. MBA strongly believes these changes will work to incent compliance and avoid consumer confusion and harm for the reasons explained.”
So, just how can the industry deal with this lack of a path for curing defects? Because the CFPB won’t do it, it is now incumbent upon the industry’s due diligence firms and their legal teams to interpret – and reinterpret – until they find what they think is the appropriate reaction. During a panel session titled “One Year Later: KBYO/TRID,” held during the recent MBA conference, John Levonick, director and legal regulatory counsel in compliance services for Clayton Holdings, said the lack of a path for curing TRID errors has been a major factor in how his firm goes about conducting due diligence testing on TRID loans on behalf of its clients.
“Looking back on the past year of TRID, we’ve come an awfully long way as an industry in terms of defining TRID and understanding its elements and, from the perspective of my organization, attempting to enforce TRID,” Levonick said during the panel session. He added, however, that so far, there is no standard way to “check on the accuracy” of how well TRID was applied to a loan – which, he said, is partly a function of how well TRID was interpreted by the lender.
As such, the due diligence industry has been in the unique position of determining whether TRID loans are being underwritten properly. “What is accurate, what is not accurate, what is permissible, what is not permissible – in the oversight of loan sales,” Levonick said, adding that how his firm reviews loans for TRID compliance depends on the type of client.
“A traditional review can take multiple forms – you’ve got pre-close and post-close QC, where our firm will be engaged to review loans for the benefit of a creditor,” he explained. “That creditor has a distinct obligation to meet. Thus, it has to meet certain standards.
“A second type of review is due diligence – which is more about the review of assets as assets change hands,” he said. “To ensure that the assets that are trading hands meet the stipulated terms – coupon, average term, average FICO, credit, collateral, quality, etc. – TRID is now part of that, too.
“It is incumbent on my organization to look at who our customer is, what the purpose of the review is, what are they trying to accomplish, and what the ultimate disposition of the asset is,” Levonick explained. “The answer to those questions will determine the type of TRID review that the customer will get.”
Levonick said when TRID was first rolled out last October, his firm’s first task was to conduct a “significant review” of the rule and then figure out “how to turn the subjective requirements of TRID into objective testing metrics.”
That, he said, was “no small task.”
In building a comprehensive TRID testing mechanism, he said, “A lot of the assumptions were based on the liability that was created.
“Prior to TRID, an investor was primarily concerned with liability because they did not want to suffer 100 percent loss severity on the loan, and they did not want to suffer the potential for class action lawsuits,” he said. “So, liability is tied to terms like HOEPA violations, state high costs, anti-predatory – nice objective testing metrics for the due diligence industry to meet. Now that we have TRID, we have to test certain elements of the TRID requirement – and find the level of materiality associated with that error.”
Levonick said although reports released in the months following implementation indicated that TRID compliance reviews showed about 90% of loans contained TRID-related errors, those reports were including every little immaterial error. Although the CFPB has declined to address the topic of cures as it relates to numerical errors in an LE, it has stated that minor clerical errors in the language that is used in the forms can be freely corrected for accuracy.
“The hard part is determining what the materiality and severity is for a particular error,” Levonick said, adding that the new rule “required all the due diligence firms to significantly expand the number of errors they might possibly detect in loan files.”
Despite the fact that the CFPB decided not to address the topic of cures, most people in the industry agree that a majority of the changes that have been delivered will be helpful in that they clarify certain complex aspects of the rule. During the panel session, Richard J. Andreano, a partner with Ballard Spahr LLP, reviewed the proposed revisions and provided an analysis of just how well each issue had been clarified, from an industry perspective.
“Cooperatives were a bit of a pain [under the original TRID rule],” Andreano said. “The TRID rule deviated from all other Truth in Lending rules in that it was secured by a dwelling, and it did not matter if that dwelling was real property or not – as long as it was a dwelling, it triggered a lot of the mortgage rules. TRID was different in that it referred to real property. The problem is that cooperatives, in a lot of cases, are a stock interest in an organization and are, thus, not considered real estate under applicable state law. So, you could have someone in one state getting the TRID rule disclosures because their state considered a cooperative real property, while a borrower in another state would get the old disclosures – and that did not make a lot of sense. It was also difficult for the industry from an operational standpoint. So, the [CFPB] finally proposed that cooperatives under the TRID rule are real property. So, that’s a helpful change.”
Also speaking on the panel session were Ken Markison, vice president and regulatory counsel for the MBA, who basically reviewed the CFPB’s most recent comment letter to the CFPB regarding the proposed changes and where sticking points remain; and John Vong, president of mortgage compliance software firm ComplianceEase, who gave an update on what lenders can expect during TRID compliance exams on both the federal and state levels, including how the standard lending examination format has been updated and what they can do to prepare for those exams.