What should a creditor do if a loan has been pulled from a previous creditor due to a longer-term time and is submitted to the new one? To add complexity, what if the previous lender’s fees were lower and an appraisal has already been ordered? Would the new creditor have to match fees and use a previous creditor’s loan number, or would the consumer be committed to using the first creditor with a longer term time and potentially miss the closing date?

There’s nothing in the rule that says creditors can’t do that. But there are some tricks and traps along the way I think that are embedded in this question. One being, at a very high level, will your investor buy the loan? That’s always going to be question one. And wherever there’s doubt, the answer may be no. These could be portfolio loans and it may not matter. But one thing to always think about is what the secondary market will do and what sort of controls are they going to have in place. That’s a big threshold question for a lot of loans. Assuming that’s not an issue, then it becomes a regulatory question as to what happens when a loan ID has been assigned. That’s something that is in the rules. The Bureau has given some flexibility as to when brokers can avoid putting a loan ID on a loan when they don’t know who the creditor is going to be. This was a big question that came up very early in the implementation process that the brokers and wholesalers were very concerned about. There’s this provision, 1026.37(a)(12) if I’m not mistaken, which is the Loan Estimate disclosure rule that says the loan ID determined by the creditor has to go on the Loan Estimate and then it has to track basically through the Closing Disclosure. And there doesn’t seem to be a way to change that once it’s there. The first big question we had is if the broker is generating the Loan Estimate and this has to be a creditor’s ID, what if the broker can’t get it? The Bureau said in that instance, that it’s acceptable if the best information reasonably available doesn’t provide the loan ID because you don’t know who the creditor is going to be, then it can be blank, and it can be later filled in by the creditor. The same goes for the creditor’s name. If the creditor’s name is not known, the broker can leave it blank and issue a Loan Estimate. Once a Loan Estimate has been done in a creditor’s name, with the creditor’s loan ID, it’s a little less clear how, or if, that can change under the rules. One way to read the rule is you can say nothing prohibits you from issuing a revised Loan Estimate correcting information that has changed or is wrong. You wouldn’t have a changed circumstance event necessarily, where you’re re-disclosing estimates here; you’d be re-disclosing information. And I don’t think there’s anything in the rule that specifically says you’re not allowed to do that because you had a change in creditor. The alternative, of course, would be that creditor A denies the loan or the consumer withdraws and then applies with creditor B. That may be a cleaner way to do it, but the rule doesn’t seem to foreclose either. Your investors may read the rule more conservatively and say that it does, but in my reading of the rule, it doesn’t specifically say no. As far as estimates go, I think that’s where it would get trickier. If a broker has provided estimates and you don’t have a changed circumstance or other event that changes that specific estimate, then I think creditor B is still going to have to live with it. Whether or not there’s a valid change of circumstance or a borrower-requested change, anything like that that would allow you to re-disclose the estimate and reduce it, that’s always going to be fact-specific and it’s going to depend on what has changed and why and how you can document it. You will always have a record retention requirement where you have to show evidence of compliance. If you have a change event you’ll have to make note of it and you’ll have to explain it. And it has to be tied to a specific charge.

Answered By: Andy Arculin

Under the new rules, do brokers have to issue an LE for a specific creditor when they get the application, or can they shop the loan or application around to different creditors?

The rule specifically contemplates that brokers may not know who the creditor is going to be, as long as they’ve made a reasonable effort to determine who the creditor will be. If they don’t know that when they’re making the Loan Estimate, they can issue a blank estimate and then shop it to creditors. There’s flexibility in the rule for doing that. I think where this gets challenging is appetite to actually run with a loan that was made by a broker without a specific creditor in mind. That’s something people in wholesale lending might be skittish about or might not, depending on who the broker is and what your relationships are. And also, of course, secondary market investors—whether they would actually take a loan where a broker made the estimate with a blank name on it and then a creditor later picked it up. Generally, I think if you’re the creditor, the risk you have is that the estimates aren’t any good and you can’t change them. That’s probably your biggest risk. But if you’re willing to live with that, then that’s something you can certainly do.

Answered By: Andy Arculin

Can a secondary market purchaser be sued for anything I as a lender—or one of my vendors—get wrong?

I think this is really something that has to be explored by courts. The easy answer is no. The violation has to be apparent on the face of the disclosure, which I tried to talk about earlier. What does that mean for the TILA disclosures? It typically means you can look at the documents that were received with the assignment and the disclosure and discover that there’s a violation. The finance charge was done wrong, it was understated, and therefore you’re liable as the assignee, because you should have caught it in your QC. That’s fairly straightforward. But with RESPA there was no liability, either for lenders or for assignees, other than just enforcement against lenders. So what happens now? These new disclosures all have a private right of action, or presumably do. There are some questions that will need to be litigated about where private rights exist and where they don’t, but I think you can probably assume for now that a violation of basically anything on the disclosure form will at least give someone an opportunity to file a lawsuit that could potentially carry liability. The question is really what violations will become apparent on the face of the disclosure? In the past, if you look at case law about TILA assignee liability, issues like timing have been dismissed. Courts have said you can’t determine whether or not the disclosure was given within the timing requirement based on the face of the disclosure; therefore, there won’t be any assignee liability for timing violation. But I think it’s less clear here, not because assignees are supposed to have a crystal ball, but there are disclosures that say the date issued is X, and it’s supposed to be the date the disclosure was delivered or placed in the mail. For the closing disclosure, it’s supposed to be when it was provided to the consumer. It’s questionable whether the court may change its tune on issues like that. Other things like the RESPA tolerances have never really fully been explored by courts because the issues never come up. There’s been TILA disclosure and TILA tolerances but not RESPA tolerances, meaning you’ve made a disclosure of an estimated settlement service and violated the good faith standard because you charged the consumer more than the estimate and you didn’t refund the money back. With those types of issues, it’s really unclear what courts are going to do. The CFPB didn’t even tell us whether there were prior rights of action within the rule, let alone address those types of questions. To be fair, I don’t think they really could have. Those are statutory questions courts will have to hash out. It will probably be years before courts of appeals have gotten those types of issues and decided them. Even then, they may not agree.

Answered By: Andy Arculin

Do you believe that there will be a flood of lawsuits after October 3rd? Assuming not, why do you think secondary market purchasers are going to be so risk averse?

I don’t think there’s going to be a flood of lawsuits right after October 3rd. I think the market will probably look a lot like it does today, which is generally a performing market. People don’t tend to file lawsuits for TILA disclosure violations when they’re happy with their loan. That’s a given. There haven’t been a whole lot of them recently. But if there’s a point in time where loans are not performing as well, I think you would see more. Before I went to the CFPB, I worked with another firm in Washington D.C. and I did a lot of litigation in this space, most of it class-action litigation on issues like TILA and RESPA. Class-action lawyers are not necessarily out there defending someone who is going through a foreclosure. In a lot of cases—and this may just be my jaded viewpoint shining through—they are looking for a payday and looking to basically file a lawsuit, find a class rep, find a violation that can be tried on a class-wide basis and file a lawsuit. There are limitations on TILA that make TILA less common than something like RESPA Section 8, where you get three times the amount of the settlement service for each kickback. Here you have a million dollar cap plus fees and costs. But in my opinion, something like the co-op issue is a good example, where you have an entire class of transactions that is either covered or it’s not, and the market has gone in a certain direction because they think that’s what the bureau wants them to do, even though if you really looked at state law, it may say a cooperative share is personal property, not real property; therefore, it’s not covered. I could see someone filing a class-action on that theory, saying that there’s a violation of the TILA disclosure rules because they used the wrong form and trying it on a class-wide basis, and maybe even winning. I think there’s a risk of lawsuits like that. There’s also just the general risk of liability. In other context, if there’s a market downturn, lawsuits like that may gain traction. I think we all hope the market doesn’t take a turn for the worse, but it could. If you’re an investor who’s planning on holding this loan for X number of years, you don’t have a crystal ball and you’re not willing to take on the risk. You simply don’t want someone else’s problem to become yours.

Answered By: Andy Arculin

There was a recent article that pointed to investor concern related to TRID liability. How will TRID affect the secondary market?

The secondary market is going to be concerned about any compliance issue, whether it’s TRID related or the ones that I talked about. To the extent that there becomes more either litigation or regulatory actions around TRID, I think you’ll see the secondary market take notice. I don’t think TRID is going to be a yawner from a compliance perspective, but we have a little bit of a window here to see what happens. Stay tuned, however, I don’t think TRID is going to be without incident and we are already seeing some casualties.

Answered By: Brian Levy

Has there been any success in negotiating a materiality standard with regard to breaches of reps and warrants, especially as to TRID matters?

There have been some successes in negotiating a materiality standard. Typically, where I’ve seen it most successfully done is by including the materiality standard in the repurchase demand section, or the remedy section. It’s always helpful to have materiality in the actual rep and warrant also, but it helps and it’s important to have materiality language in the remedy section. I don’t have any specific examples of this being done in connection with TRID issues or liability, other than what we discussed earlier in the presentation which is the “substantial compliance with law” language being a concern of the rating agencies. So “material compliance with law” would be similarly concerning to the rating agencies. I would suggest trying to limit the liability in the remedy section, as opposed to in the rep and warrant section.

Answered By: Amanda Raines Lawrence

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