Most mortgage industry professionals agree that the proposed changes to the Consumer Financial Protection Bureau’s (CFPB) Know Before You Owe mortgage disclosure rule, also known as the TILA-RESPA Integrated Disclosures (TRID) rule, are a step in the right direction in that they adequately address certain previous ambiguities and do much to clarify certain aspects of the complex rule.
For example, the proposed changes related to the tolerance for total of payments and the increased detail regarding how the rule applies to construction-to-permanent loans, as well as the inclusion of all cooperatives (versus relying on state-specific definitions) under the rule, are generally considered “wins” for the industry, as they do much to clarify the regulation and are a direct result of industry feedback.
Where the proposed revisions fall short, however, is in the lack of specificity in outlining the processes for curing TRID-related technical issues in loans that are in production and post-origination. Investors have expressed deep concerns over the potential for loan buybacks resulting from TRID-related errors – thus, TRID has had somewhat of a chilling effect on the residential mortgage-backed securities market. Many industry experts say the bureau should have addressed these concerns in this proposed set of changes; however, the CFPB stated firmly in its July update that it is “not proposing additional cure provisions.”
“The bureau has spent substantial time considering industry requests to define further procedures for curing errors made in loan estimates or closing disclosures,” the bureau says in its 293-page document outlining the proposed revisions that was released in late July. “The bureau has worked steadily with industry to explain the cure provisions adopted in the TILA-RESPA Final Rule, as well as TILA’s existing provisions for cure. The bureau is concerned that further definition of cure provisions would not be practicable without substantially undermining incentives for compliance with the rule. The bureau believes that further defining cure provisions would be extraordinarily complex. Accordingly, the bureau is focusing this rulemaking process on facilitating compliance with the TILA-RESPA Rule in an expeditious manner so that all consumers receive disclosures that conform to the requirements of the rule.”
Comments on the proposal are due by Oct. 18. To find out more about how industry professionals perceive the proposed changes – and whether they feel it will bring about substantive improvement – MortgageOrb interviewed experts from across the industry to get their initial reactions. In this third and final installment, we interview Vince Wilson, compliance officer and assistant in-house counsel at mortgage document technology firm IDS; Michael Cremata, corporate counsel at mortgage closing data solutions provider ClosingCorp; and Kara Lamphere, chief compliance officer for mortgage lender Mid America Mortgage.
Q: At first glance, do you think these proposed changes go far enough to address the industry’s requests for greater clarity and direction? What areas of the TRID rule do you think could still use greater clarity, even if these proposed changes are adopted?
Wilson: In response to your first question, the amendments include changes that will, in general, make TRID clearer, but these are by no means everything the industry has been hoping for. The CFPB admitted this in the opening paragraphs of the supplementary information when it stated it was “not proposing to reopen major policy decisions” but is “proposing a few more substantive changes in a limited number of situations.” These amendments address many areas, but they are generally limited to formalizing previously informal direction from the CFPB, fixing errors in the official text and small edits to increase uniformity and reduce ambiguity.
The limited scope of these changes makes some sense when seen in the backdrop of TRID in general. The new regulatory scheme has been operative for less than a year. The industry is just starting to get “comfortable” with compliance, but there are still some that are struggling. In the mind of the CFPB, making broad policy changes this soon after TRID would be akin to Muhammad Ali unleashing a right hook just as Joe Frazier is getting to his knees.
Another reason why these amendments are not as comprehensive as many would like is the fact that the CFPB hasn’t had time to tackle the larger, more difficult issues. The CFPB has been putting out sizable amounts of information to help with compliance with the current rules, including the new e-regs website and webinars, in addition to fleshing out other regulatory rules, such as the new reporting requirements under the Home Mortgage Disclosure Act (HMDA). It could be it just hasn’t had the time to address other concerns surrounding TRID but wants to make the fixes it has addressed sooner rather than later.
With respect to your second question, one of the biggest areas that needed clarification but is not receiving any treatment is the calculation of title insurance fees and the inability to use the “simultaneous issue” rate in the closing disclosure (CD). Various groups have asked for these revisions to be made, but the CFPB has yet to fully address these concerns.
Cremata: Excluding those areas the CFPB specifically declined to address (i.e., additional cure provisions, secondary market liability and simultaneous issue rate), I think these changes do an excellent job of providing clarity on the sections of TRID that were most in need of it.
Lamphere: In some areas, such as construction and cash-to-close, the CFPB did showcase considerable thought in addressing these issues. However, there were other much-needed areas of consideration, which were either not addressed at all or barely touched on with no real clarity. The two at the forefront of my mind are deals with brokers changing lenders mid-stream and post-consummation issues. The bureau did not really address the issues around post-consummation CDs and what happens if the error is discovered after the 30- or 60-day mark. It touched on it but did not provide real clarity. The other item was not addressing broker applications when a file is moved from one lender to the next for various reasons.
Q: Which changes would you say are most helpful? Are there any that you would say are a “slam dunk” in terms of addressing the concerns raised?
Wilson: The closest thing to a “slam dunk” in these amendments would be applying a uniform definition to cooperative unit regardless of state law; the addition of tolerances for the “total of payments” disclosure; and, to a lesser degree, closing the “black hole” by allowing for a revised CD. Other important changes include guidance previously set forth in webinars, calls and other informal settings, including the use of abbreviated loan estimate (LE)/CD in simultaneous second-lien transactions, provisions regarding construction only and construction-to-permanent transactions, and clarifying the sharing of information with various parties to the closing. The helpfulness of many of these provisions is limited by the fact that they were already addressed in informal guidance and, accordingly, were previously implemented by most of the industry.
Cremata: I found a number of the amendments that the CFPB describes as “minor changes and technical corrections” to be tremendously helpful. Take, for instance, the proposed revision to comment 19(e)(1)(vi)-2, which clarifies that lenders do not need to itemize specific services on an LE if they know they are provided as part of a package of settlement services. This may not seem like much, but the current TRID rule provides very little guidance regarding the extent to which settlement services must be itemized or aggregated on an LE, and the way lenders choose to go about this can have significant compliance implications (particularly when the services are provided by an affiliate and thus held to zero tolerance). So, it is very welcome to see the CFPB clarify issues like this that the industry has not had clear answers on to date.
Lamphere: The bureau clarified the ability to use revised CDs to reset tolerances. This is a great lift to the industry to have this clarified. Previously, the industry was split on the allowance to reset tolerance baselines after the initial CD was provided. The bureau has clarified, if tied to a valid change of circumstance, a revised CD can reset tolerance baselines. In addition, escrow account disclosures and notices of transfer were new forms/disclosures under TRID. However, it was based on application date, which meant the servicer had to provide the hold disclosures/notices to some loans and not to others. The CFPB has agreed to have all escrow account disclosures and notices of transfer go on the new form regardless of application date.
Q: What about the fact that the bureau is not going to allow the issue of “cures” on the table – is that a mistake on the bureau’s part? And if so, why? What do you see as being the central problem with regard to how cures are defined under the current rule?
Wilson: I think some change to the current cure provisions would be helpful (particularly regarding technical errors, which do not affect the consumer), but the CFPB has essentially stated it has yet to figure out the right balance between leniency for lenders and compliance for consumers. This is the central difficulty with expanding cures. We don’t want consumers being blindsided by substantial fees that were not previously disclosed. On the other hand, without the ability to cure, a lender has little to no room for good-faith errors. This is particularly draconian when technical issues that have no bearing on the consumer whatsoever may result in liability and loss of reputation. The CFPB’s statement in these amendments seems to hint that, absent some unforeseen revelation regarding this balance, it is not intending to expand cure provisions but, instead, expects the industry to be precise the first time around.
Cremata: I’m still holding out hope that the bureau will continue working on this and perhaps provide additional cure provisions in future amendments. Although it did mention, in its rationale for not addressing this issue, the fact that it did not want to undermine incentives for compliance (which I think is a valid concern), it also cited the extraordinary complexity of devising additional cure provisions and implied that doing so might delay the issuance of this current batch of amendments. So I am optimistically interpreting this second part of the CFPB’s rationale as an indication that perhaps it has not completely closed the door on this issue and may introduce additional cure mechanisms in a future batch of amendments.
Lamphere: The bureau has proposed to allow cures to read as principal reductions where certain programs do not allow for cash back. This was an issue under the Good Faith Estimate/U.S. Department of Housing and Urban Development days and is a “nice to have” clarification under TRID.
Q: Do you see any potential increases in operating costs for lenders or third parties as a result of any of these changes? If so, which ones and why?
Wilson: Changes will always bring some increase in operating costs in the short term, mostly for retraining to ensure compliance. But because these amendments are not overly substantial, they should not result in significant medium- to longer-term cost increases.
Cremata: If there are any lenders or third parties whose tools or processes were predicated on a different interpretation of any of the sections these amendments address, then certainly there could be some costs associated with modifying those tools or processes. In general, though, I think most of the CFPB’s clarifications in these amendments are in line with what most people examining these issues thought TRID said already. It’s just nice to have certainty.
Lamphere: Yes, with regard to the cash-to-close table and the disclosure allowance to real estate agents. (See further details in my response to the next question.) The updates to the construction loans will also see needed updates.
Q: What are the potential impacts on software and systems (and the programming thereof) as a result of the changes?
Wilson: There will certainly need to be appreciable changes to software and systems as a result of these changes. Lucky for IDS, we have already implemented a number of these changes after the underlying informal guidance was issued. I know others in the industry are still working on implementation, and this will only add to the workload. There will need to be significant changes to programming, mostly related to calculations, formatting, logic and other specifics, but most of these will have little effect on loan officers.
Lamphere: The bureau has added a new tolerance to the mix, which holds the lender accountable for understating the total of payments by more than 0.5% or $100, whichever is greater. Listing an amount greater is not a violation. This will require an update to systems to account for this new tolerance.
The bureau has also tackled the difficult issue of the cash-to-close table. This clarity was much needed to help the consumer truly understand the cash needed at closing. The updates to this will require programming updates to both loan operating systems and document preparation vendor software. Although the costs may be hefty to lenders and vendors, the reward is worth it. It becomes very time-consuming to loan officers and frustrating to borrowers to receive one disclosure with an amount of cash to bring and another message the amount is actually different. Lenders will also be allowed to provide a copy of disclosures to real estate agents, but there will be modifications required in order to share those with the real estate agents.
The bureau stated a lender could group similar fees obtained through a package as one line on the written list of service providers. For instance, if the LE lists five title fees that come as a package of fees from one provider, the lender would only have to list title once on the provider list. What makes this interesting is the lack of noise around this issue from the industry. Most, not all, systems had this effectively handled to break out the fees, and there was very little noise other than the seemingly odd look to a consumer and the lack of necessity to have each fee separately broken out to list the exact same provider.
Q: Do you think these changes will help allay investor fears over TRID defects, and if so, to what degree? Where might concerns remain?
Wilson: Investors certainly ratcheted up scrutiny with the advent of TRID, but as the industry has become more familiar, we have seen substantial, incremental increases in confidence. I would expect that investor confidence will continue to increase as the rules are clarified and as the industry gets more comfortable with TRID in general. The single largest concern for investors will likely remain the ambiguity between TILA and RESPA regarding a private right of action for substantive violations. Although this has been less of an issue than many feared, coming into TRID, the risk of liability and harm to reputation will remain until legislation or the CFPB provides clearer direction on violations and TILA/RESPA overlap.
Cremata: I think they will help to reduce the number of gray areas where investors couldn’t be sure, even after examining the loans, whether a defect existed. I think that’s honestly a marginal benefit, though. What investors really wanted to see were clarifications as to which TRID violations they could be held directly liable for and which ones could subject them to private liability. Unfortunately, they did not get that.
Lamphere: In some areas, yes, they will allay fears. The fact a revised CD can reset baselines is a huge lift and should see some loosening from investors. However, the post-consummation issue and other items remain, which will keep investors very conservative.
Q: Do you think the bureau will step up its enforcement of TRID violations after these rules are finalized?
Wilson: I wouldn’t be able to say what the CFPB will or will not do, especially with regard to enforcement. That being said, there should be some comfort in the fact that most of these changes clarify and codify practices the CFPB has already tacitly sanctioned and that the industry has, by and large, already implemented. Given this fact, it is unlikely that we will see a sizable effect in enforcement.
Cremata: Not significantly, no. At least, not with respect to the items specifically addressed in these amendments. The CFPB’s main focus has obviously been on preventing consumer harm, and the bulk of these amendments relates to issues that, frankly, don’t seem to pose a significant risk of consumer harm. We certainly may see the CFPB being less “sympathetic” if violations of these provisions are discovered as part of an investigation into more systemic compliance concerns, but I don’t think any of the items addressed in here are likely to be specific targets of CFPB enforcement efforts themselves.
Lamphere: Yes, this was clarity and likely comes with an expectation that we should all now be completely prepared for TRID and examinations. The bureau has a history of setting policy through penalty.
Q: Do you think the bureau will need to update TRID again in the future? If so, why?
Wilson: There will certainly be a need to update TRID in the future. The industry evolves; rules need to change to encourage useful innovation and curb harmful permutation. New developments in the industry will usually evoke and sometimes require further information from the CFPB. We already know the current changes do not answer all of the questions out there, so even if the industry maintains the status quo, there will be a need to address existing industry concerns. I believe the CFPB will, at the very least, continue the process of providing informal guidance that it then turns into official guidance as time passes.
Cremata: I know there will be continued pressure on the CFPB to address the issues of secondary market liability and additional cure mechanisms, as these are the issues the industry, as a whole, wanted to see in these amendments and yet they are not addressed. Whether the CFPB will, in fact, issue further amendments to address these issues, however, is less certain. Particularly with respect to secondary market liability, I think the CFPB feels it is not its place to decide such issues, and any resolution should come from Congress or the courts.
Lamphere: It will need to but probably won’t do so, at least anytime soon. With the HMDA rules upcoming and its other hot topics, it will likely see this clarification as putting the issue to bed.