TRID Liability Rule Will Be a Major Issue This Year

August 30, 2017 by David Basen

Seven months ago, the Consumer Financial Protection Bureau (“CFPB”) finally put in place a new regulation known in the mortgage industry as the “Know Before You Owe” rule. The new law is officially known as the TILA-RESPA Integrated Disclosure (TRID) rule and was initiated to replace separate and outdated disclosures under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”). Now that the regulation is fully implemented, it is important to understand the issues surrounding the law and what it means to a marketplace that has been uneasy about its effect.

While facing troubling delays with its implementation, the new rule and forms are a measured improvement for disclosing cost information relevant to the consumer’s decision-making process when considering a home loan. The new rule allowed vendors to supply lenders with the software required to create and issue the disclosures. During the early stages of implementation, banks reported a high level of errors being generated from the software. The errors are an apparent cause of delays and also resulted in many loans being rejected at the investor level.

The findings are worrisome to industry analysts who feel the rule may be causing investors to become more discerning when considering the types of loans they purchase. The problems began at implementation with technical issues resulting from particular software vendors. The CFPB was quick to acknowledge that many of the errors were not the fault of individual lenders and offered encouragement to lenders for addressing the issues with their vendors.

Though some mistakes were determined to be technical in nature, an early review of the process found that there were problems with the rule itself, as well as with a combination of players, including lenders, brokers, settlement agents, and vendors that create and enforce the issuance of the TRID disclosures. The CFPB is insistent that the process will continue to improve, but convincing a skeptical industry that the final rule will eventually become a perfect replacement for the old process, may be a more delicate undertaking.

The disclosures have always been about providing consumers with the intricate details that make up a mortgage. The passage of Dodd-Frank ensures that the industry would be forever changed with a myriad of new and complicated disclosure requirements and that these changes would continue to bog down an already overly complex process. It is a given that some lenders will be caught up in the disclosure web of violations, but how far damage goes is anyone’s guess. The TRID violations could be a burden for lenders who will fear sanctions from the CFPB, rejection from investors, or even worse, litigation from consumers that may tie up their loan portfolios indefinitely.

The CFPB continues to reassure an increasingly critical industry that their fears about the new rules are overstated. Regardless of their assurances, errors continue to pile up, and the worries about violations caused by the rule change are exposing the fact that the regulations may never work the way they were intended. Whatever the faults of the past, the new rule is final, and lenders will need to understand what is at stake and how to avoid the pitfalls that will cause so many industry professionals aggravation and closing delays.

The CFPB’s Response to Concerns

Apparently, the CFPB is giving leeway to companies for the technical issues they are experiencing with TRID implementation. The CFPB, the Office of Comptroller of the Currency, and the FDIC have all issued statements that support TRID and relay their expectations that lenders comply with the new regulations with a “good faith effort.” The agencies stated that during the early stages of TRID implementation, auditors would take into consideration the entire implementation plan of the lender, including the challenges faced with “technical problems.”

In another sign that the TRID rule has caused hiccups, other agencies such as Fannie Mae and Freddie Mac have issued statements that assure lenders that they will not conduct TRID technical compliance reviews “until further notice.” They also stated that they do not intend to exercise their right to “contractual remedies” or enforce the repurchase rule for loans that have disclosure errors.

In a letter from the Department of Housing and Urban Development, the agency stated that while it expects lenders to make good faith efforts to comply with TRID, it does not expect to include technical TRID compliance in its quality control reviews. The agency made sure to restate that it will still require lenders to maintain compliance with all federal, state, and local rule requirements that apply to mortgage applications.

Each of the agencies was sure to include in their statements that, while they will ease up on the review of technical violations of the rule, they would still require and ensure that the correct TRID forms and new disclosures are issued.

Questions Remain

Lenders have now received assurances from government oversight agencies that minor defects caused by TRID are not a concern, yet uncertainties remain. When Congress passed the mandate that TILA and RESPA disclosures be combined into TRID, they did not address the liability for violations. Congress authorized the CFPB to provide oversight and guidance to the industry regarding TRID, but failed to contemplate exactly how violations will create liability.

For an industry inundated with a myriad of new rules and regulations since Dodd-Frank, uneasiness sets in whenever TRID issues arise. Lenders see a risky business ahead due to the TRID rule, with the possibility of consumer lawsuits, or rejections of loans on the secondary market. Lenders just do not know what will trigger a TRID violation.

Although the rule is designed to help make borrowers whole who may have been harmed by deceptive or defective practices, lenders are still concerned that minor violations will still trigger consumer protections that will allow a lawsuit to move forward. The CFPB continues to claim that they will provide consultations to lenders and the courts concerning the rules, but it does little to assuage the fears that permeate the marketplace.

TRID errors are having investors rethink the type of risk they are willing to accept when purchasing a mortgage. Primarily, if a borrower can sue a lender under TILA, the assignee will only be held liable if the defects are apparent on the disclosures. The term “apparent” refers to an incomplete disclosure, a disclosure that lists improper terms, or disclosures that do not use the appropriate form or format.

While some of these rules will lighten the fears of investors, the secondary mortgage market may still be affected until investors feel secure in the knowledge that the lender, and not the assignee, will be held accountable for TRID violations. However, after years of legal haggling over the changes, investors are still cautious about the rules and may feel that any defect, no matter how minimal, can and will affect a future sale of the mortgage. It is possible that contracts between lenders and investors will have to be rewritten so as to offer more security and indemnification to the investor from TRID violations and consumer blowback.

The CFPB Position

As the CFPB continues their campaign to calm industry leaders, Director Richard Cordray responded to a letter from David Stevens, President of the Mortgage Bankers Association. Responding to concerns detailed in Stevens’ letter, Cordray claims that he believes concerns over TRID violations are overblown, and the reaction from certain investors is an “overreaction” that will subside over time.

In his letter, Cordray reminds lenders and investors that although TRID changes how RESPA requirements are processed through TILA, the original liability for violations, and methods to cure them, remain intact. This is meant as a reassurance that assignees will not be held liable for minor technical violations created as a result of the new rule.

He went on to detail how that under the law, Congress limits statutory damages to failure to provide a closed-set of disclosures. This apparently refers to 15 U.S.C. § 1638 to only the APR and finance charge set of disclosures. Cordray contends that because of this, the risk to investors is “negligible” and that rejection of loans based on these minor disclosure defects would be unrelated to TRID violations. This also means that many of the minor errors can be corrected with the issuance of new disclosures, further limiting any monetary liability.

While addressing the investor’s direct liability under TILA, his comments cannot alter the facts that it is unknown how federal agencies will react to TILA violations. Under the False Claims Act, the federal government has jurisdiction for processing violations, and this may expose investors and secondary market players to unknown risks of prosecution or liability under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

Correcting Disclosure Violations

Under TRID, the CFPB has noted that there are mechanisms in place for lenders to cure disclosure issues before they become major violations. This will limit their liability as long as the lender or closing agent corrects the defects within 60 days of discovery. These protections were put in place before the issuance of the TRID rule.

Lenders need to provide for internal quality control measures to ensure they are quick to discover potential violations and correct the issues as soon as possible. While this may cut off liability under TRID and cure any CFPB issues, how the courts and justice system interpret the corrections is still unclear.

The CFPB has done a relatively good job at calming industry heads about the amount of liability TRID violations will cause. However, the secondary markets and lenders who supply them with mortgages are still wary of the CFPB’s promises. At this time, even with the assurances of the CFPB, there are still unknowns with how the violations, however minor, will be interpreted by courts for civil and even criminal liability.

These unsettling concerns are well founded due to the high number of defects still being produced. Until the CFPB can create some legal framework to indemnify investors completely from liability for origination errors, TRID will continue to cause uncertainty in the secondary markets.