June 6, 2016

TRID: Concerns, Compliance, & Caution

Lenders are worried about a lack of interest among investors to buy their residential mortgage loans.

Even before the TILA-RESPA Integrated Disclosure (TRID) came into effect in October of 2015, concerns about the new disclosure rules had been circulating wildly. The initial concerns stemmed around the notion that TRID will lead to increased costs and an increase home loan closing timelines.

But there's more to the story than that, including the inability for lenders to sell off many closed-end mortgage loans that have potential TRID violations.

TRID Overview

TRID, is implemented by regulations issued by the Consumer Financial Protection Bureau (CFPB), is now the new TILA-RESPA Integrated Disclosure. The main idea behind the new disclosure is to simplify the mortgage loan process for consumers, and to ensure all pertinent lender fees are clearly detailed and easy for consumers to understand.

The Integrated Disclosure is comprised of two parts: the Loan Estimate (LE) and the Closing Disclosure (CD). The new Loan Estimate document replaces the initial Truth-in-Lending disclosure and Good Faith Estimate, and the Closing Disclosure is now in place of the Final Truth-in-Lending Disclosure and HUD-1 Settlement Statement for the majority of closed-end mortgage loans.

Slowdown of Liquidity in the Secondary Market

Ever since the CFPB's new rule came into effect last year, there's been a major squeeze in liquidity of loan assets in the secondary market. Private loan securitization has pretty much come to a stop.

Lenders are highly concerned that investors will refuse to purchase certain home loans because the investors don't want to the potential liability associated with each loan's potential lack of compliance. Simply put, many lenders are nervous about liquidity shortfalls caused by investors refusal to buy loans with potential TRID issues.

The penalties for not complying with TRID regulations can be harsh.

Despite the fact that any liability created by TRID is limited and quantifiable, and statutory damages that an individual borrower can collect are capped at $4,000 and are not necessarily extended to borrowers for every type of violation, the bottom line is, it's up to investors to decide what they want to buy and how much to pay for it.

Many investors aren't interested in purchasing loan products that are considered non-compliant to TRID. But the fact of the matter is, even the most minute errors - including seemingly meaningless technical errors - will deem a loan non-compliant. Any firms that do not comply with TRID could face some heavy consequences enforced by CFPB. Penalties range from $5,000 to $1 million a day for known violations.

With the implementation of TRID, there is now a plethora of assignee liabilities when it comes to statutory damages and regulatory fines.

Director of CFPB Attempts to Quash Fears

Director Richard Cordray of the CFPB responded to a letter sent by the Mortgage Bankers Association (MBA) to the CFPB on December 21, 2015 in an effort to put investor concerns at bay.

Cordray explains that the TRID rule provisions allow certain errors post-closing to be corrected. He also explains that liability for damages would be analyzed with reference to the final closing disclosure issued, and not the loan estimate. As such, a corrected closing disclosure could very well thwart any private liability.

The response from Director Cordray also explains that the TRID rule doesn't change the underlying principles of liability under TILA or the Real Estate Settlement Procedures Act (RESPA).

Teaming Up With an Experienced Loan Sale Advisory is Critical

In an effort to ensure their loan portfolios are liquid, lenders need to tap into the services of a third party loan sale advisory firm with expertise in developing a viable solution over the long haul.

At Garnet Capital, we understand the challenges of selling mortgage loans to investors who may be hesitant to take on risk with potentially non-compliant products. With our expertise and experience, we can help you find the right buyers who are willing to pay competitive prices for your loan assets.

Find out more about our loan sale advisory services and register for our online portfolio auction system today.