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to replace separate and outdated disclosures under the Real Estate Settlement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
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
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
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
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.
For more information on this matter, please contact
Jaspreet Kaur, Esq.