Fitch: TRID Non-Compliance Risk Modest for Investors

January 21, 2016

The risk of lender non-compliance with new mortgage disclosure requirements is expected to be modest for private-label U.S. residential mortgage-backed security (RMBS) investors, according to Fitch Ratings.

Although the frequency of non-compliance issues will likely be elevated initially as lenders implement the new changes, those non-compliance issues are not likely to translate into higher risk for bondholders.

The Consumer Financial Protection Board (CFPB) introduced the new requirements as part of the TILA-RESPA Integrated Disclosure (TRID) rule for residential mortgage loan applications received on or after Oct. 3, 2015. Initial due diligence sampling of prime jumbo mortgages in the secondary market has indicated a high level of compliance issues thus far, most of which appear to be good-faith errors.

While Fitch remains in discussions with market participants on this developing issue, Fitch currently expects to make the following assumptions when assessing the risk TRID errors pose to RMBS investors:

  • RMBS investors will only be exposed to statutory damages of $4,000 plus attorney's fees. Additional actual damages will be difficult to prove and will be unlikely. Class action lawsuits, due to a relatively low limit on rewards, will be unlikely.
  • Borrowers will be unlikely to proactively hire attorneys to seek damages; thus, defensive claims in non-judicial states or affirmative claims in any state will be unlikely. Claims will only be likely in defense of foreclosure in judicial states when a borrower is already working with an attorney.
  • A limited number of errors will be eligible for claims with a private right of action. While recognizing that judicial interpretation may ultimately vary in some cases, Fitch will rely on the CFPB's public guidance on TRID liability and assume only errors outside of any allowed tolerance in the following seven areas will be likely to be rewarded statutory damages:
    1. amount financed
    2. finance charge
    3. annual percentage rate
    4. total of payments
    5. payment schedule
    6. statement of security interest
    7. maximum allowable payment for an adjustable rate mortgage.
  • Uncured errors identified in the seven areas noted above by a third party due diligence firm prior to securitization will be assumed to be 'apparent on its face' to investors and will therefore carry assignee liability.

While Fitch has not finalized its guidance to due diligence firms for the grading of the errors, Fitch currently expects to request that uncured TRID errors within the seven areas noted above be assigned a grade of 'D'; uncured errors in any other TRID area be assigned a grade of 'C'; any identified error that is cured prior to securitization be assigned a grade of 'B' and loans without any issue be assigned an 'A'.

Fitch expects to only adjust its mortgage pool loss projections for uncured TRID errors with a grade of 'D'. For these loans, Fitch will likely assume statutory damages of $4,000 plus attorney's fees and a modest extension in foreclosure timelines for projected defaults in a judicial foreclosure state. Some uncured TRID errors with a grade of 'D' may also be eligible for extended rescission periods, in which case Fitch may make additional assumptions related to the risk of interest losses resulting from a rescission in the first three years. As a percentage of the overall projected mortgage pool losses, Fitch expects these adjustments to be relatively modest.

Fitch currently expects few uncured TRID errors that are likely to be eligible for damages to remain in the final securitized pool. To the extent present, investors will benefit from modestly higher credit enhancement to help mitigate the risk. Additionally, for transactions with sufficient representations and warranties frameworks, RMBS investors will also potentially benefit from the representations by the issuer intended to protect them from losses related to compliance issues.

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