On October 3, 2015, the Consumer Financial Protection Bureau (CFPB) implemented
the “Know Before You Owe” (KBYO) regulation, otherwise known
as the TILA RESPA Integrated Disclosure (TRID) rule went into effect.
These new rules changed the disclosure requirements for mortgage lenders
and made lenders liable for erroneous disclosures. In December 2015, the Mortgage Bankers Association (MBA) asked the CFPB
to clarify the enforcement and implementation of the new rule.
 According to the MBA, some investors placed strict KBYO compliance standards
in place, rejecting loans that did not fully comply with KBYO requirements.
Moody’s reported that approximately 90% of a sample set of loans
failed to meet these new disclosure requirements. Many of these errors
are minor and technical such as rounding mistakes, missed check boxes,
or issues with time stamps. The impact of the new rules on investor behavior
has made it more difficult for lenders to sell loans, has decreased liquidity,
and could potentially increase the costs of origination and interest rates
In response to the MBA letter, CFPB Director Richard Cordray provided guidance
on the implementation of the new KBYO/TRID rule. The Director first noted that CFPB regulators were focused on good faith
efforts to come into compliance with the rule, and that its examinations
for compliance in the coming months would be corrective and diagnostic
rather than punitive. Similarly, the FHFA, GSEs and FHA will avoid exercising
contractual remedies and assigning administrative liability where a lender
is making good faith efforts to comply with the new rules.
Next, the Director clarified the procedures for correcting or curing violations
of the rule. The KBYO regulations allow lenders to issue corrected Closing
Disclosures, even after closing. This cure provision can correct non-numerical
clerical errors or violations of monetary tolerance limits. The guidance
stated that a corrected Closing Disclosure could generally forestall private
liability because under the Truth in Lending Act (TILA), liability for
statutory and class action damages would be assessed with reference to
the final Closing Disclosure issued, not the Loan Estimate. Therefore,
an accurate Closing Disclosure can correct technical errors in a Loan
Estimate. This clarification addresses the issue of investors rejecting
loans based on mistakes made in the Loan Estimate.
In addition to using Closing Disclosures to cure violations, the guidance
states that pre-existing TILA statutory cure provisions can correct certain
KBYO disclosure errors. Under TILA, a creditor can correct erroneous disclosures
if the creditor notifies the borrower of an error and makes the appropriate
adjustments to the account before the creditor receives a notice of violation
from the borrower. Moreover, TILA provides an exception for liability
from certain unintentional errors.
While TILA cure provisions can correct some violations of KBYO regulations,
the Director reiterated that fundamentally, liability under TILA or the
Real Estate Settlement Procedures Act (RESPA) remains the same. So for
non-high cost mortgages:
- There is no general TILA assignee liability unless the violation is apparent
on the face of the disclosure documents and the assignment is voluntary.
- By statute, TILA limits statutory damages for mortgage disclosures, in
both individual and class actions for failure to provide a closed-set
- Formatting errors are unlikely to give rise to private liability unless
the formatting interferes with the “clear and conspicuous”
requirement of certain TILA disclosures.
- The listed disclosures in section 130(a) of TILA (15 U.S.C. §1640(a))
that give rise to statutory and class action damages do not include the
RESPA disclosures or the new Dodd-Frank Act disclosures, including the
Total Cash to Close and Total Interest Percentage.
Overall, the guidance clarifies the scope and limitations of liability
and potential statutory damages arising from the implementation of these
new disclosure rules. The takeaway from the Director’s letter is
that the cure provisions under TILA and KBYO regulations and the limitation
on private liability under TILA, makes “the risk of private liability
to investors . . . negligible for good-faith formatting errors and the
like.” Therefore, investors should not reject loans based solely
on minor or technical errors.