CFPB Responds to MBA, Says TRID Implementation Period Not ‘Punitive’

The Consumer Financial Protection Bureau, in direct response to concerns raised by the Mortgage Bankers Association, last week explicitly stated that it viewed the first months of implementation of its RESPA/TILA Integrated Disclosure rule as “corrective and diagnostic, rather than punitive.”  

In a Dec. 29 letter to MBA President and CEO David Stevens, CMB ( reponse to MBA TRID letter.pdf), CFPB Director Richard Cordray said he shared MBA concerns that investors might be rejecting TRID loans for minor errors out of concern that the CFPB had not provided an explicit safe harbor period following TRID’s Oct. 3 implementation.  

“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 said. “As with any change of this scale, despite the best efforts, there inevitable will be inadvertent errors in the early days. That is why the Bureau and the other regulators have made clear that our initial examination for compliance with the new rule will be sensitive to the progress industry has made. In particular, our examiners will be squarely focused on whether companies have made good faith efforts to come into compliance with the rule. All of the regulators have indicated that their examinations for compliance in the first few months of implementing the new rule will be corrective and diagnostic, rather than punitive.”

 “We want to thank the CFPB for spending the time to focus and send us this letter and address our members’ concerns especially in the middle of the holiday week,” Stevens said.  

The CFPB response resulted from a Dec. 21 MBA letter ( to CFPB re TRID Cure Guidance.pdf) in which Stevens detailed industry concerns over implementation of TRID, also known as “Know Before You Owe.”  

“Lingering misperceptions and technical ambiguities in the regulations have resulted in significant market disruptions in certain channels over the last month,” Stevens wrote. “We fear this disruption could develop into significant liquidity issues in the mortgage market without additional clarity conveyed to market participants by the Bureau as soon as possible.”  

The MBA letter noted many MBA members are reporting that some investors have put in place strict TRID compliance standards, resulting in very high fail rates on closed loans delivered for sale. In particular, MBA said the jumbo loan secondary market appears to be experiencing the most acute disruption, specifically for whole‐loan trading and private‐label securitizations.

“The reason is simple. Third party due diligence firms that are assigned by either ratings agencies or the investors themselves to perform quality assurance reviews on loans delivered into WLT, PLS and credit risk transfer pools are failing loan deliveries in large quantities,” MBA said. “These firms have taken an extremely conservative interpretation of several aspects of the KBYO rule and the physical disclosure display requirements. In addition, because a growing percentage of GSE loans sales are involved in CRTs that require third party due diligence reviews, the impact of high TRID fail rates is also being felt in the conforming (non‐jumbo) market.”  

MBA said many errors being identified are minor or technical in nature–issues with alignment or shading of forms, rounding errors, time stamps with the wrong time zone, or check boxes that are improperly completed on the Loan Estimate. Compounding these minor errors is investor uncertainty regarding whether, and under what conditions, a Closing Disclosure can cure or correct the Loan Estimate for those data fields that are not subject to either tolerances or re‐disclosures enumerated under the TRID rules.  

“The potential impact on the markets and consumers is troubling,” Stevens wrote. “Problems are most acute in the correspondent lending channel where several hundred smaller lenders sell loans to larger aggregators and investors…Each time a loan is rejected for purchase, an independent mortgage banker has a loan it cannot sell or must sell at a deep discount in a ‘scratch and dent’ market for ‘TRID‐failed’ loans that has not yet developed. Similarly, community banks and credit unions that rely on secondary market sales for their mortgage operations have only limited balance sheet capacity for long‐term fixed‐rate loans that their aggregators have rejected.”  

If these conditions persist, Stevens said, many lenders will experience liquidity issues as unsold or repurchased loans clog warehouse lines and balance sheets, noting that independent mortgage banks, community banks and credit unions together account for more than 50 percent of loans used for home purchases.  

“Although some lenders may have multiple investor options, these investors often have different standards in place for KBYO compliance,” Stevens wrote. “As a result, originators will not always be able to deliver loans to the investor with the best price (and hence the best rate for the consumer), and instead must deliver based on investors’ KBYO interpretations. For consumers, these dynamics will increase both the costs of origination and the interest rates they pay.”  

The letter also pointed out uncertainty in how Fannie Mae, Freddie Mac and HUD will view KBYO compliance. “For now the GSEs and HUD are honoring the grace periods but soon they will begin applying their own interpretations of KBYO to their own post‐close quality control, repurchase (GSE) and claims review (HUD) processes,” the letter said. “Moreover, compliance with TRID appears to be a ‘life of loan’ warranty for the GSEs. Should the GSEs and HUD choose to make interpretations as conservative as the third party due diligence firms and demand repurchase or indemnification, a very significant market ‘event’ cannot be ruled out.”  

The CFPB response attempted to assuage MBA concerns. In addition to the explicit safe harbor statement, the CFPB response addressed the following:

–The final Closing Disclosure can be corrected and address problems with the loan estimate;

–Formatting and similar errors are unlikely to give rise to private liability unless they interfere with clear and conspicuous disclosure of specific TILA disclosures;

–Certain disclosures, including Total Cash to Close and Total Interest Percentage, do not give rise to statutory and class action damages; and

–Risk of private liability to investors for good faith formatting and similar errors is likely negligible.

“Accordingly, the bureau believes that if investors were to reject loans on the basis of formatting and other minor errors, as you indicate has been occurring, they would be rejecting loans for reasons unrelated to potential liability associated with the Know Before You Owe mortgage disclosures,” Cordray wrote. “Such decisions may be an overreaction to the initial implementation of the new rule, and our assessment is that these concerns will dissipate as the industry gain experience with closing, loan purchases and examinations.”