Sean M. McNaboe
Uncertainty can be the bane of business planning and execution. For the mortgage industry, the TILA-RESPA Integrated Disclosure rule (TRID) has been a source of acute uncertainty. Amid unanswered questions about the rule, common mistakes can contribute to technical violations, exposure to unknown levels of enforcement, and weaker demand on the secondary mortgage market.
Background: Unfinished Business
Regulators have acknowledged that the rule, issued in November 2013 and effective in October 2015, now needs to be revised for greater clarity. The Consumer Financial Protection Bureau (CFPB) has proposed a series of changes to TRID and asked for industry comment before finalizing revised rules (exactly when is unclear).
The 1,888-page TRID rule has already been the largest-scale regulatory change to operations that lenders have ever faced. It also represents an unprecedented scale of rulemaking for the CFPB. For both industry and regulator, the ride has hardly been smooth over the past three years.
The “Know Before You Owe” rule, as the CFPB calls it, created new forms for mortgage applications, as well as requirements affecting any changes to loan costs and estimates, the timing of disclosures, and other matters that can arise during the loan origination process. The CFPB’s aim is to give consumers readily understandable information as they make mortgage decisions.
For mortgage originators, however, it has been three years of revamping operations to meet unclear guidance, working day-to-day as best they can under TRID, and now facing another round of changes to systems and procedures. The devil is in the details—and that may continue to be the case for quite some time, no matter what the new provisions have to say
Common Mistakes Can Become Technical Violations
At a technical level, there are dozens of areas in which common mistakes during loan origination could lead to findings of technical violations under TRID, as currently in effect. Many of these technical violations do not appear to violate the spirit of the regulation, which is increased clarity for the consumer as to the terms and costs of the mortgage loan they are taking out. However, the CFPB has been unwilling to give written guidance as to the severity level for these violations, stating only that good faith efforts to comply with the rule’s requirements in a timely manner will be taken into consideration. To say this ambiguity has left the industry unsettled would be an understatement.
Enforcement is Unpredictable
What is certain is that disclosing loan details and fees incorrectly exposes the lender to regulatory risk; it is a regulatory requirement to get them right. It is also certain that the risk is compounded each time it recurs—and lenders may be handling large volumes of loans. But for the common mistakes above it has yet to be determined whether errors will be treated lightly or severely.
Only when precedents are set in the process of enforcing TRID will the severity of enforcement begin to be understood. That may take until late 2016 or early 2017, which is when CFPB examinations are expected to begin in earnest.
On paper, remediation under TRID is tied to non-compliance in five key areas: instances of late initial loan estimates, the accuracy of estimated fees, failure to properly disclose changed fees, changed circumstance disclosure timing, and provision of the settlement services providers list. Going forward, however, regulatory violations carry a higher price tag.
Additionally, non-compliance can now trigger private right of action for actual damages and statutory damages in certain cases. Most notable are the statutory penalties of up to $4,000 for failure to properly provide certain disclosures, including those for a borrower’s interest rate and annual percentage rate (APR). Also, under the Dodd-Frank financial reform law, the CFPB can impose civil money penalties of $5,000 per day per violation, $25,000 per day for reckless violations, and $1 million per day for knowing violations.
The CFPB is not expected to make an official statement about its enforcement intent, and even precedents that might be set will not guarantee uniform treatment on a case-by-case basis. Nor should much clarity be expected soon on the implications of private entities’ new right to sue.
The CFPB has gone on the record as saying it will evaluate whether the lender has made a good faith effort at complying, but this gives lenders little comfort. As a measuring stick, “good faith effort” is too vague. And the rule is written so broadly that penalties could run in the hundreds of dollars—or in the millions of dollars
Secondary Market Catches a Chill
All of this uncertainty permeates into the secondary market of investors buying loans. If it is unclear during potential investors’ due diligence which error might constitute a material violation in a loan, any error could get marked as a violation, and the loan could become unsaleable.
In turn, market liquidity is hindered. Smaller banks, in particular, may not be able to afford to keep loans on their books. If lenders are not confident of properly disclosing certain types of loans such as construction loans, they may simply sit that particular market out for now. The potential result is a tightening of consumers’ access to credit.
Another Variable: Third-party Providers
Yet another source of uncertainty: Any lender’s path forward will likely be taken along with third parties, such as providers of document management applications, loan origination systems, and other software and services. Once TRID is revised, how quickly will these providers update their systems, software, and services? How much time will lenders, then, have to test their updates, relative to their own systems and procedures? Keep in mind that it’s not just a question of testing the update, but also of doing regression testing on the rest of the system to ensure that the new features do not “break” existing features.
In the October 2015 implementation of TRID, meeting the schedule set was a big challenge for lenders, even though they had significant lead time. Now, they may have less lead time, in addition to their current, real-time production issues with TRID.
Advice in Challenging Times
At this time, no one can actually project when the revised rule will be finalized—nor how long lenders will get to implement it. What to do in the meantime?
Where any particular aspect of the regulation is unclear, take a consistent approach that follows the spirit of the rule. On the other hand, if something is clear in the regulation, just get it right—being particularly alert to areas that you might deem unimportant. Lacking clarity about the focus of enforcement and its degree of severity, the answer is always technical precision.
And when it comes to third-party service providers, actively engage with them as partners. Don’t sit waiting for their updates. Reach out, engage with them, and be ready with robust testing built into your compliance system.
The umbrella that will cover you best is documentation. Document testing, results, and any corrective actions taken. Document uncertainties and decisions taken that embody the spirit of TRID. Even if a regulator disputes a lender’s interpretation, there is a better chance of avoiding penalties if that interpretation is made in the spirit of the regulation and equally applied across the board.
A closing note: While this article focuses on regulatory challenges, no lender can afford to forget the importance of customer experience as this process moves forward. Generally, recent media reports show borrowers expressing mixed feelings about borrowing under TRID rules. Hitches in implementing the next round of changes could impact customers as well as your regulatory risk profile.
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Treliant Risk Advisors, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the 2016 Outlook issue. To subscribe to our quarterly newsletter, please Contact Us.