CFPB Clarifies TRID Rules To Address Investor Fears Over Quality

In response to concerns raised by the Mortgage Bankers Association (MBA) that the new TILA-RESPA Integrated Disclosure (TRID) rules are resulting in a high number of loan defects - which, in turn, is causing loans to be rejected by investors - the Consumer Financial Protection Bureau (CFPB) has clarified that, in most cases, the defects can be readily “cured” and, further, that the bureau will be taking a soft stance on enforcement for the months following implementation.

Richard Cordray, director of the CFPB, in response to a letter from David Stevens, president and CEO of the MBA, says he, too, is concerned about reports that investors have been rejecting loans due to minor TRID errors.

“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 says in his letter to Stevens dated Dec. 29, 2015. “As with any change of this scale, despite the best efforts, there inevitably 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 [the] industry has made,” Cordray says. “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.”

In his letter to Cordray, Stevens expressed concern that “lingering misperceptions and technical ambiguities in the regulations have resulted in significant market disruptions in certain channels [in recent months].”

“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,” Stevens says.

Part of the problem is that investors have put in place strict TRID compliance standards, resulting in very high fail rates on closed loans delivered for sale. Making things even more complex is the fact that no two investors have the exact same standards.

The MBA says the jumbo market appears to be experiencing the most acute disruption, specifically for whole-loan trading (WLT) and private-label securitizations (PLS).

“The reason is simple,” Stevens says in his letter to Cordray. “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. These firms have taken an extremely conservative interpretation of several aspects of the ‘Know Before You Owe’ (KBYO) rule and the physical disclosure display requirements. In addition, because a growing percentage of government-sponsored enterprise [GSE] loans sales are involved in credit risk transfers that require third-party due diligence reviews, the impact of high TRID fail rates is also being felt in the conforming (non-jumbo) market.”

Many of the TRID-related errors being identified are minor or technical in nature, the MBA reports. For example, there have been some problems 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 the problem is that investors aren’t sure what elements of a loan file can be “cured,” under what circumstances or when.

Stevens warns that if investors continue to reject loans based on TRID fears, lenders may soon start to experience liquidity issues.

“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,” Stevens writes in his letter. “For consumers, these dynamics will increase both the costs of origination and the interest rates they pay.”

Adding yet more uncertainty is how Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD) will handle TRID 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 MBA’s letter states. “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.”

To help assuage the MBA’s concerns, the CFPB has added the following clarifications to its explicit safe harbor statement:

“Accordingly, the bureau believes that if investors were to reject loans on the basis of formatting and other minor errors … 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 gains experience with closing, loan purchases and examinations.”


Mid America Mortgage Seeks To Buy TRID ‘Scratch And Dent’ Loans

Mid America Mortgage Inc. reports that it is seeking to purchase “scratch and dent” mortgages with defects related to the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosure (TRID) rules, even if the loans have been rejected by investors.

“With TRID now in effect for two months, loans with the new disclosures have begun making their way to investors and [are being] rejected for purchase due to minor TRID infractions to more significant errors,” says Jeff Bode, owner and CEO of Mid America, in a December 2015 press release. “It is to be expected, with a change this voluminous, to have errors during the first months of loans. While the industry has diligently striven to have systems in place, training delivered and testing fully vetted, errors cannot be completely avoided.

“Mid America feels confident in its ability to cure these defects while providing lenders with an outlet for investor-rejected TRID loans,” Bode adds.

Reportedly, there are more than a dozen different types of potential defects related to TRID. Some of the more common ones include the following:


Commerzbank Sues Four U.S. Banks Over Losses On Mortgage-Backed Securities

German lender Commerzbank AG is reportedly suing four U.S. banks for almost $2 billion in losses related to mortgage-backed securities.

According to a recent report in the Wall Street Journal, the German bank is accusing the four banks - Deutsche Bank AG’s U.S. unit, Deutsche Bank National Trust Co., Bank of New York Mellon Corp., Wells Fargo NA, and HSBC Bank USA NA - of failing to properly monitor losses on residential mortgage-backed securities for which they acted as trustees on behalf of Commerzbank.

In each of the lawsuits, Commerzbank accuses the bank in question of breaching “contractual and fiduciary duties.”

The mortgage-backed securities were purchased between 2005 and 2007. The securities lost almost their entire value when the financial crisis hit in 2008. Commerzbank is making a last attempt to recoup before the claims lapse.


Mortgage Application Fraud Risk Continues To Decrease

The risk of fraud in mortgage applications decreased 1.3% in November compared with October and decreased 8.2% compared with November 2014, according to First American Financial Solutions’ (FAMS) Loan Application Defect Index.

It was the fourth month in a row that the index decreased on a month-over-month basis.

The index, which estimates the level of potential fraud in mortgage applications submitted by consumers, has fallen almost 5% through September, October and November and is now well below the level seen in 2011 to 2013. What’s more, the risk of defects is down 23.5% from the high point of risk in October 2013, FAMS says in its report.

The risk of defects in applications for refinances decreased 2.9% compared with October and decreased 10.7% compared with November 2014. The risk of defects in applications for purchases was flat month over month but down 8.6% compared with November 2014.

It should be noted that not all loan application defects are necessarily indicative of fraud - some are simply errors on the part of borrowers. Automated underwriting has greatly reduced the degree of such errors and will likely continue to do so.

FAMS points out that because the market continues to shift from a refinance market to a purchase market, the rate of defect risk on refinance transactions continues to decrease at a faster rate.

Moreover, from the high point of risk in late 2013 to November, the risk of defects on applications for refinances had decreased 33%, whereas the risk for applications for purchases had decreased 18.3%.

“While fraudulent and misrepresentative loan applications are continuing to decline, a few large markets remain at risk,” says Mark Fleming, chief economist at First American, in a statement. “In particular, the concentration of risk in Florida is a concern. All the major metropolitan areas in Florida are above the national average, and Miami ranks second among the top 100 markets nationally. Luckily, while the risk of loan defects in Florida is significantly higher than the national average, the risk is following the same downward trend as the national average. In fact, fraud and misrepresentation risk is down seven percent over the last three months.”


Report: 90% Of Mortgages Sampled Have TRID Violations

A recent report from Moody’s shows that more than 90% of the mortgages originated since the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules went into effect on Oct. 3, 2015, contain violations; however, many of the errors are only technical in nature.

The December report’s findings are based on third-party reviews of about 300 loans from random, unidentified lenders. Some of the new forms included wrong spelling conventions for counterparties’ names - such as not including a hyphen in someone’s last name. Though such errors might seem immaterial in nature, they could be enough to get the attention of regulators. Worse, they could potentially result in lawsuits and mortgage buybacks should borrowers go into default.

However, Moody’s adds that “the extent to which a secondary market purchaser, such as a [residential mortgage-backed securities] trust, would bear damages or costs from delayed foreclosures is still unclear without further court or CFPB interpretation.”

The firm’s report is in contrast with recent comments made by Richard Cordray, director of the CFPB, to the effect that implementation of TRID has, thus far, gone smoothly and that lender fears and concerns over the new rules were overblown.

During the Consumer Federation of America convention held Dec. 3 in Washington, D.C., Cordray compared the fears and concerns over TRID with the fears and concerns that were raised by the American public during the lead-up to Y2K in 2000.

“Reports from participants across the market seem to be indicating that implementation of the new rule is going fairly smoothly,” Cordray said. “So, it seems that these anxieties were much like the errant predictions of technological disaster stemming from Y2K, which, of course, never materialized.”

Regardless of how the CFPB handles enforcement of TRID violations, it appears the new set of rules is going to have a permanent impact on the industry in terms of operational costs. In a recent statement, David Stevens, president and CEO of the Mortgage Bankers Association (MBA), applauded lenders’ “Herculean” efforts “in preparing for, and executing, the new Know Before You Owe disclosures in a manner that has insulated the vast majority of borrowers from any adverse impact.”

Stevens says now that the “costly system changes, staff training and business partner education” stage has passed, lenders are deploying “massive amounts of human capital to address vendor issues, inconsistent investor interpretations and inadequate preparation by some settlement service providers” in order to address the “unknown potential compliance risk.”

“We recognize that the current situation is not sustainable and that further clarity from the CFPB is essential to bring efficiency to the closing process,” Stevens says in his letter to MBA members. “[The] MBA is actively engaged with lenders, investors, vendors and third-party diligence companies to identify common TRID compliance problems arising from unclear rules, inconsistent interpretations of the rules and unanticipated transactional issues.”

Stevens adds that the MBA has shared the preliminary results of its findings on TRID with the CFPB and that the association hopes to “obtain better guidance from the CFPB, expanded cure opportunities for minor TRID issues and more consistent application of TRID by investors.”

Secondary Market

CFPB Clarifies TRID Rules To Address Investor Fears Over Quality











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