In December, CFBP Director Richard Cordray sent a letter to the mortgage industry, reassuring lenders that TRID violations will probably not lead mortgage investors to reject loans.
CFPB’s Letter About TRID Is Concerning
BuckleySandler issued a special alert about the document, raising concerns about its implications.
The Letter Is Informal
While perhaps helpful in gauging what the CFPB regards as minor or trivial errors, this letter is not an amendment to TRID. As such, it remains to be seen whether the courts and/or RMBS investors will act as Cordray predicts. As BuckleySandler put it, “It would not appear that Director Cordray’s statements are binding on the CFPB, other regulators, or courts.”
The Letter Won’t Dictate Investors’ Behaviors
Though the CFPB created the Know Before You Owe rule, it cannot control how other entities react to it. Cordray’s assertion that the risk of technical TRID violations to private investors is “negligible” does not take into account how wary this particular group is when it comes to error-ridden loans.
According to BuckleySandler, “Unfortunately, Director Cordray’s letter does not—and cannot—address what may be the primary deterrent for secondary market purchasers and securitizers of mortgage loans: the risk that any TRID violation—no matter how minor or technical—will violate unqualified contractual representations that the loans were originated in ‘compliance with law.’”
A risk is a risk. Investors don’t talk to homebuyers, but if they buy the loan they are liable for the errors that occur in the mortgage supply chain. To truly assuage investors’ concerns, the CFPB would need to state formally that technical errors are not violations.
Some TRID Violations Could Be Incurable At the CD Stage
Cordray reassured the industry the Closing Disclosure will eliminate violations inherent in the Loan Estimate, therefore redeeming the quality of the loan and exonerating the lender from the violation. However, some errors could be embedded in the loan by the time the CD is created.
The Dangerous Fantasy of TRID Risk Delegation
TRID is a complex rule change, but one of the clearest aspects of the law is that lenders are held liable for loan violations. Yet, some title and settlement agents have reported lenders are asking them to “indemnify the lender for any missteps in the Closing Disclosure or the closing,” according to this article in the Legal Description.
Richard Horn, former senior counsel to the CFPB, said, “Lenders who have settlement agents provide the CD may want to be covered since they are trusting someone else to comply with a requirement for which they have liability.”
But indemnity clauses may end up causing more harm than good for lenders, according to Mike Flynn in the Legal Description article. “Because you chose to delegate those crucial functions to a third party, the regulator may hold you to a higher standard, or as high a standard, because you are the one that assumed the choice of delegating to a third party that you have an obligation to control and manage.”
In other words, the very act of delegating risk creates more risk. As margins for error continue to shrink, this may not be an advisable or even feasible option, especially for community banks as they may not be able to afford the costs of third party management.
“Probably” Doesn’t Cut it Anymore for TRID Liability
With no way around liability and the distinct possibility that TRID violations will create repurchase and indemnification risks, lenders’ backs are against the wall. They don’t have the luxury of gambling on loan compliance management—the price of probability is too high.
This is why the industry needs a way to quantify loan compliance, so risks can be truly known and out in the open.
ATS Secured can measure the accuracy of a loan file and thus its inherent risk, or lack thereof. The ATS Secured Network provides an audit log for every action and communication on the loan from everyone who touches the file, generating an accurate and detailed compliance grade at a granular, technical level. These audit log reports can be used as evidence of the originated loan’s compliance.
The ATS Secured Network also creates transparency in the loan file by allowing appropriate parties to view the necessary documents and data. This helps mitigate violations as they occur instead of having to eliminate them later in the CD. More consensus around the data equals less risk later on.
The Know Before You Owe rule was enacted to help homebuyers understand exactly what a mortgage will cost them. ATS Secured can help lenders in the same way. By managing technical violations as they occur, you can diminish the risks of liability, repurchases and indemnification down the road.
Don’t pay the price of probability. Be proactive in your risk mitigation and eliminate errors as they occur, before they become liabilities.
Want to make your mortgage process easier and more accurate? Contact ATS Secured today.