Richard Horn
Legal PLLC

Consumer Finance Regulation Blog

CFPB on Construction Lending under TRID

March 1, 2016

Clients and Friends,

The Consumer Financial Protection Bureau (CFPB) conducted a webinar on March 1, 2016, in which it addressed questions about how to disclose construction loans under the TILA-RESPA Integrated Disclosure rule (TRID). This was the first webinar since the effective date of TRID and the first guidance from the CFPB specifically addressing construction lending since the rule was issued in November 2013.

The webinar provided basic guidance on how to complete the TRID disclosures for a construction-to-permanent transaction as two separate transactions, or as one single combined transaction. The CFPB did not present any sample disclosure forms. Instead, the CFPB described the regulatory requirements verbally.

The CFPB posts links to the recordings of its TRID webinars, as well as an “index” of questions and answers from its webinars at this link: http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/tila-respa-disclosure-rule//

I have drafted a list of the questions, concise versions of the CFPB’s answers (including quotations as appropriate), and some of my thoughts on several of the CFPB’s answers. Please let me know if you’d like a copy of this document.

CFPB Notice on Prepaid Property Taxes

February 9, 2016

Clients and Friends,

I am writing to inform you that the CFPB will be publishing a Federal Register notice tomorrow, February 10, 2016, to confirm that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are not subject to the 0% tolerance category.

Some in the industry have taken a conservative view that these prepaid charges are subject to the 0% category, because 0% is the default category and the rule did not specifically place them in the 10% or “no tolerance” categories under section 1026.19(e)(3)(ii) or (iii). In support, they also cited a sentence in the preamble of the December 2013 Final Rule that said these charges are subject to tolerances. But the CFPB has stated in informal guidance that prepaid property taxes are subject to the “no tolerance” category, because they are charges “not required by the creditor” under 1026.19(e)(iii)(E). And I have also mentioned to some of you that the sentence of the preamble was missing a “not” and was actually intended to state that these charges are not subject to tolerances.

In this Federal Register notice, the CFPB confirmed its informal guidance and corrects this sentence of the preamble. Specifically, the CFPB’s notice states that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are considered “charges paid for third-party services not required by the creditor” under 1026.19(e)(3)(iii)(E). Accordingly, they are not subject to the 0% or 10% category. And the notice acknowledges that the sentence in the December 2013 Final Rule’s preamble that said such charges “are subject to tolerances” was missing a “not” due to a typographical error. The CFPB’s notice formally corrects this sentence of the preamble to read “are not subject to tolerances.”

You can access the pre-publication version of this notice

In this Federal Register notice, the CFPB confirmed its informal guidance and corrects this sentence of the preamble. Specifically, the CFPB’s notice states that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are considered “charges paid for third-party services not required by the creditor” under 1026.19(e)(3)(iii)(E). Accordingly, they are not subject to the 0% or 10% category. And the notice acknowledges that the sentence in the December 2013 Final Rule’s preamble that said such charges “are subject to tolerances” was missing a “not” due to a typographical error. The CFPB’s notice formally corrects this sentence of the preamble to read “are not subject to tolerances.”

You can access the pre-publication version of this notice here. It will be published and effective tomorrow, February 10, 2016.

Also, I want to let you know that the CFPB announced a webinar on disclosing construction loans under TRID, which will be on March 1 at 2pm Eastern. Here’s the link to register.

Please let me know if you have any questions.

CFPB Construction Loan TRID Fact Sheet

January 13, 2016

Clients and Friends,

I am writing to let you know that yesterday the CFPB issued a “fact sheet” regarding construction loans under TRID. You can find it here: http://files.consumerfinance.gov/f/201601_cfpb_know-before-you-owe-mortgage-disclosures-and-construction-loans.pdf

This fact sheet does not provide any new information regarding completion of the TRID disclosures for construction loans. It restates the applicability of TRID to construction loans, and the provisions of TRID and existing Regulation Z that are particular to construction loans. The only interesting part is this line at the end:

“The Bureau is considering additional guidance to facilitate compliance with the Know Before You Owe mortgage disclosure rule, including possibly a webinar on construction loan disclosures.”

I believe it is likely the CFPB will issue additional construction loan guidance in a webinar at some point in the future, because it is unlikely they would make such a statement without a plan in place to provide this guidance. Unfortunately, they did not address the timeframe for this guidance in the fact sheet. And the fact sheet does not state whether this guidance will include additional sample disclosures, which has been one of the major requests of industry.

Although there is confusion about completing the TRID disclosures for construction loans, it is certainly possible to disclose construction and construction-to-permanent transactions under TRID. I have assisted a number of lenders with this already. If you would like any assistance, please let me know.

The CFPB’s Letter about TRID Liability

January 4, 2016

Clients and Friends,

Happy New Year!  I hope you had a great holiday.  This holiday break, through the hard work of our friends at MBA, we received a gift from the CFPB.  In response to a letter from the MBA, on December 29, 2015, the CFPB provided a letter to the MBA that outlines the CFPB’s beliefs regarding cures and liability under TRID.  The letter also commits to engaging in a “robust dialogue” with the MBA and its members.

This letter may be very helpful to the industry, including the secondary market.  However, I wanted to share several concerns that I have with you, which relate to the informal nature of the letter, as well as its potentially inaccurate or misleading statements regarding cures and liability.  I’ve summarized the letter and my concerns below.

Summary of the Letter.  The CFPB’s letter generally provides the industry, especially the secondary market, with its assurances that liability under TRID is limited for minor, technical violations, and that lenders “in many cases” can cure violations on the Loan Estimate using the Closing Disclosure.  The CFPB made the following points in its letter:

  1. The CFPB and other regulators will be focused on corrective and diagnostic, rather than punitive, examinations in the first few months.
  2. The GSEs and FHA will not conduct routine post-purchase file reviews for technical compliance, and not exercise contractual remedies for noncompliance with TRID for a period of time.
  3. Statutory damages, “consistent with existing Truth in Lending Act (TILA) principles,” would be assessed based on the final Closing Disclosure and not on the Loan Estimate, “meaning that a corrected closing disclosure could, in many cases, forestall any such private liability.”
  4. Recognizes the general cure provision under TILA section 130(b) and the “exception from liability” under TILA section 130(c) for unintentional, bona fide errors.
  5. There is no general assignee liability under TILA unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.
  6. TILA limits statutory damages apply to a closed set of disclosures under section 130(a).
  7. Formatting errors “and the like” are “unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure” of one of the disclosures that gives rise to statutory damages.
  8. The closed set of disclosures that give rise to statutory damages “do not include either the RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and the Total Interest Percentage.”
  9. The CFPB believes that the risk of private liability to investors for “good-faith formatting errors and the like” is “negligible.”
  10. The CFPB believes that if investors reject loans for formatting and other minor errors, they would be rejecting loans for reasons other than the potential liability under TRID.  The CFPB believes this may be an “overreaction” and its “assessment is that these concerns will dissipate as the industry gains experience” with the rule.

Concerns Regarding the Informal Format of the Letter.  The CFPB issued these statements regarding cures and liability under TRID in the form of an informal letter.  While this letter may weigh on the side of being helpful, it is uncertain how much deference, if any, a court would give to such an informal letter.  Even Director Cordray in a recent administrative proceeding described a letter issued by HUD regarding RESPA that HUD similarly did not publish in the Federal Register as “not in such a form as to be binding on any adjudicator.”  It would have been more helpful if the CFPB issued these statements in the form of an interpretive rule or a formal policy statement published in the Federal Register, or better yet, as amendments to the rule or its commentary.

Concerns Regarding Liability for the Loan Estimate.  The CFPB staked out a position that statutory damages under TILA section 130(a) would not apply to the Loan Estimate, which it says is based on “existing TILA principles.”  However, there are a few problems with this statement.

First, the CFPB does not provide any analysis backing up its conclusion.  Determining which liability under TILA applies is the purview of the courts.  When commenters asked the CFPB to specify which statutory liability applied to different provisions under TRID, the CFPB responded that courts can use the statutory authority described in the section-by-section analysis to determine liability.  In addition, there is some case law supporting the opposite position: that liability, including statutory damages, can apply to the initial TILA disclosures.

Second, previously under Regulation Z, the initial TIL was only an early version of the final TIL.  However, under TRID, the LE requirements are separate and distinct disclosure requirements from the CD, and contain several different disclosures, such as the In 5 Years disclosure.  And TILA appears to look to the CFPB’s regulations for the early disclosures, requiring them to be made “in accordance with regulations of the Bureau.”  Also, the Dodd-Frank Act added the integrated disclosure requirement to TILA.  Although the CFPB points to “existing TILA principles,” it is uncertain how courts will apply such TILA principles to the new disclosure requirements.  In addition, considering the CFPB’s stated goal for the Loan Estimate to aid consumer shopping, courts may find that Loan Estimate violations cannot be cured by a later Closing Disclosure, because the harm at the shopping stage cannot be cured by a later accurate disclosure.

In sum, it is uncertain how much a court would rely on the CFPB’s conclusory statement in the letter.  Courts have decades of their own precedent to rely on, and the preamble of the rule essentially directs courts to use the section-by-section analysis to come to a conclusion regarding liability.  And with entirely new regulatory requirements, it is uncertain how courts will assign statutory damages.  In light of this, arguably, it would have been more helpful if the CFPB, rather than providing a conclusory statement of uncertain value regarding how courts may apply liability under TILA, clarified how it believes lenders can cure violations of the Loan Estimate requirements in practice under TILA section 130(b).

Concerns Regarding Statutory Damages for New Dodd-Frank Act Disclosures.  Although the CFPB alleges in its letter that statutory damages will not apply to the new Dodd-Frank Act disclosures, this is not a completely accurate statement.  TILA limits the disclosures under TILA section 128 that are subject to statutory damages.  But some courts have interpreted this limitation not to apply to disclosure requirements under other statutory sections of TILA.  And the TRID rule contains new Dodd-Frank Act disclosures that were added to other sections of TILA, such as the Liability after Foreclosure disclosure and the Escrow Account disclosure.  While the CFPB refers to the Total Cash to Close and the Total Interest Percentage as examples, which were added by the Dodd-Frank Act to TILA section 128, it fails to account for the Dodd-Frank Act disclosures that were added to other sections of TILA.  Such disclosures may very well be subject to statutory liability.

Concerns Regarding Confusing Statements.  The CFPB’s letter does not provide the most accurate descriptions of TILA civil liability.  For example, the CFPB stated that formatting errors are “unlikely to give rise to private liability” unless it interferes with the clear and conspicuous disclosure of one of the disclosures that gives rise to statutory damages.  However, the CFPB’s statements may be misleading.  If statutory damages do not apply to a violation, then the borrower can still sue for his or her “actual damages” and attorney fees and costs.   The CFPB appears to be making an argument that if statutory damages do not apply, it is unlikely that a lawsuit would be successful for “actual damages.”  However, this ignores the fact that such a violation could still be the subject a lawsuit for “actual damages,” especially with untested new disclosure requirements, which would result in costs to defend such actions.

In addition, the CFPB described the bona fide error defense under TILA section 130(c) as an “exception from liability.”  However, this provision is best described as a defense to liability.  And this is not an easy defense to make in court, as it requires a lender to show that the error must be unintentional and clerical in nature, and that the lender regularly maintained procedures designed to avoid and prevent the error.  It is slightly misleading to characterize this as an exception, rather than a defense that must be shown in court.

Further, the CFPB describes the statutory damages provision throughout the letter as “statutory and class action damages.”  However, this is not an entirely accurate description of statutory damages under TILA, because the statutory damages provision under TILA section 130(a) provides for statutory damages for both individual and class action lawsuits.  It does not itself limit class action lawsuits to those provisions that are subject to statutory damages.

Conclusion.  It may be helpful to have this letter, and it definitely gives an insight into how the CFPB currently views liability under TRID.  For example, it may be helpful in administrative proceedings or regulatory examinations to have this letter, because it essentially describes formatting and other minor errors as immaterial.  In addition, there is the chance that courts may rely on the letter when analyzing the new regulatory disclosure regime.

But unfortunately the letter makes uncertain conclusions about how courts may determine liability under TILA without providing any analysis or acknowledgment of TRID’s new regulatory structure.  In addition, the letter is in a format that may not receive much deference, if any, from the courts, or the CFPB in the future.  In addition, there are potentially inaccurate and misleading statements in the letter of which you should be aware.  In spite of these shortcomings, this letter is a great first step in what will hopefully be a “robust dialogue” with the CFPB.  Hopefully, the continuing dialogue with MBA and other trade associations will convince the CFPB to provide such a statement in a formal document upon which industry can rely with greater certainty.

Please let me know if have any questions, or if you’d like any assistance with understanding the potential liability and cures available under TRID.

TRID Secondary Market Issues and Challenges

December 24, 2015

Clients and Friends,

I’ve been meaning to write for a while, but as you can imagine, it’s been an extremely busy Fall.  I did want to take a moment though to write about some of the recent news about TRID, as many of you have been asking me for my thoughts about it.  I also wanted to let you know about the TRID technical correction rule that the CFPB just published last week.

The Technical Correction Rule.   The CFPB published last Thursday a technical final rule making certain corrections to provisions that were amended by TRID.  This rule does not actually make any changes to the TRID rule as it was issued by the CFPB in November 2013.  It turns out that some of the amendments in the final rule to the regulatory text and commentary of 1026.17, .18, .22, and Appendix D were codified in the CFR incorrectly.   It appears that the GPO inadvertently deleted several existing provisions of Regulation Z and omitted provisions of the final rule from the CFR.  The CFPB published the final rule only to fix these errors, stating it is, “clarifying how the TILA–RESPA Final Rule should have been codified in the CFR, and preventing incorrect codification in the 2016 hard copy edition of the CFR.”  This final rule does not make any changes to the final rule as it was issued.  It is effective Dec. 24, 2015.  The rule can be accessed here: https://federalregister.gov/a/2015-32463.

There are two things to consider with this technical correction final rule.  First, there is a question, which the CFPB does not answer, of whether the inadvertent deletion of the existing commentary and regulatory text has any effect on loans that were originated during the period of Oct. 3 through Dec. 23.  Some of these provisions were significant, such as the provisions providing for an APR tolerance under 1026.22(a)(5).  Second, it appears that the CFPB can dedicate the resources to issue a final rule amending TRID when it believes it is necessary.  The industry should view this as an opportunity to inform the CFPB about other issues under TRID that it believes need regulatory amendments.

TRID Frustrations.  As I’m sure you’ve been reading and hearing, significant concerns have been raised about TRID disclosure violations and their effects on the sale of loans in the secondary market.  Many lenders have been publicly expressing frustration with TRID in news articles.

And as I’m sure you’ve seen by now, Moody’s recently reported that it found TRID disclosure errors in 90% of a sample of loans.  The report said that many of these violations were “technical” in nature, such as incorrect spelling or the absence of a required hyphen, but it still raises significant concerns about the potential liability for investors from these violations.  Investors are kicking a lot of loans, many for minor, technical violations.  They are concerned that TILA is unforgiving in its liability scheme, and even technical violations can lead to assignee liability.

I’ve also been hearing about many other issues.  For example, many lenders have reportedly left construction-to-permanent lending because they do not know how to complete the disclosures for the product.  Also, lenders have called me complaining that their software still has programming errors, that there are difficulties understanding how the Calculating Cash to Close table appears for FHA and certain other products, about difficulties obtaining simultaneous issuance title insurance estimates, and misunderstandings about the settlement agent’s responsibilities to provide the seller’s CD under TRID.

These are real frustrations, and because they implicate the secondary market, they present real risks to consumers’ access to credit.

No CFPB Grace Period.  At the same time, it does not sound like the CFPB will be as “sensitive” as we would have hoped.  Director Cordray likened these frustrations to Y2K, and basically said it was much ado about nothing.  And the Deputy Assistant Director for originations in the CFPB’s Office of Supervision, Calvin Hagins, is reported to have stated at an industry conference that the CFPB will be examining for TRID compliance in 2016 and that, “there is no grace period from the bureau.”  Furthermore, the CFPB’s Fall Supervisory Highlights (http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2015/) noted several GFE and HUD-1 tolerance and accuracy errors, which I believe is a signal that the CFPB will be examining for these errors under TRID as well.

And the CFPB does not appear to understand the potential implications the TRID rule has for the secondary market and the nation’s residential housing market.  The CFPB’s good faith period does nothing to limit the potential civil liability under the rule for lenders and investors during this period.

The Industry Will Adjust.   The challenges that TRID presents are significant.  As one very smart person said even before the final rule was issued, this rule is a “sea change.”  This rule changes how things have been done for decades.  If anyone (including the CFPB) thought this would be easy, they severely miscalculated.  The rule represents a lot of change for the entire industry, including the secondary market.  At the same time, the statutory liability for the disclosure requirements has been meshed, resulting in uncertainties regarding the repercussions of these TRID violations and the cures that are available.

But I believe the industry will adjust to TRID.  There are lenders, title companies, and vendors that have put the necessary time and resources into this sea change and they are doing quite well.  For example, I’ve assisted a number of lenders with construction-to-permanent lending under TRID, allowing them to continue offering the product.  And many reports also state that some lenders have had success with TRID, and that technical violations are expected to diminish over time as programming fixes are implemented.

What should you be thinking about as we adjust to TRID?

Liability and Cure Issues.  Start thinking about the potential liability that exists for violations you’ve identified, and what cures are available.  The questions you will want to answer are whether a violation involves a material disclosure for rescission purposes, whether it has potential civil liability and assignee liability under TILA, and if so, if statutory damages or only actual damages available.  And start talking to your investors about what cures they may accept.  I think this will be one of the most important areas of TRID analysis in the coming months.

Prepare to Show Good Faith Efforts.  Start preparing now to demonstrate to your regulator your good faith efforts to implement and comply with TRID.  Although Mr. Hagins stated there will be no “grace period,” I believe that good faith efforts will still be taken into account in an exam, especially with respect to technical disclosure errors.  This means, among other things, ensuring you have updated policies and procedures and have conducted staff training.

And if you identify errors in your disclosures, think about how you are dealing with them.  If an error was caused by an LOS software glitch or another third party, document that fact.  Also, document discussions with the vendor or third party to show you made a good faith effort to prevent the error from occurring again.  And if software errors persist, think about how you will deal with that problem.  The CFPB’s April 2012 Service Provider Bulletin describes how the CFPB expects lenders to take “prompt action” to address identified problems with service providers.  And considering Director Cordray’s comments expressing concern about vendors and TRID at MBA’s Annual Convention this year, this may be an area that is of concern to them.

Grey Areas in the Rule.  There is no rule that can answer every single question, especially given the infinite variability of credit and real estate transactions.  In addition, the CFPB has not been forthcoming with official guidance during the implementation period, or after the effective date.  Therefore, it is not surprising that the industry is encountering grey areas and questions in the rule.  You should think carefully about the potential liability that is implicated and your course of action when these issues arise.

The CFPB does have an informal guidance function in which a staff person will provide informal, non-binding guidance over the phone.  But you may not want to contact the CFPB on your own for fear that you might self-identify that you’ve been out of compliance (remember, no grace period).  Instead, it may be best to contact the CFPB through counsel, which can do so without identifying you.  In addition, given the non-binding nature and the long wait times that may be involved, this may not be the most appropriate course of action.  Also, you may want to inquire with your investors or any of their published materials to ensure that they will accept your interpretation.

Conclusion.  In the end, we will adapt to this change.  Industry will find its new workflows and best practices.  Like many in the industry, I recognize the potential benefits of this rule to the public.

Unfortunately, if the CFPB does not provide adequate guidance or make necessary amendments, it only increases the costs for industry.  I am hopeful the CFPB will issue additional written, formal guidance or amendments to the rule’s commentary to address some of the most frequently asked questions about the rule, to give industry the clear rules of the road it needs.  I also believe industry should remain vigilant in asking the CFPB or Congress to implement some modification of the liability under the rule to allow for a true good faith or hold harmless period.

In the meantime, I am available to provide assistance in navigating the rough waters ahead.  All questions are good questions when it comes to TRID.  If you need assistance analyzing the potential liability or cures that are available for violations that have occurred, or help in understanding a regulatory requirement, please do not hesitate to reach out.

If I don’t talk to you before, please have a wonderful holiday season!

HMDA Final Rule Issued Today

October 16, 2015

Clients and Friends,

As you may have seen, the CFPB issued the final HMDA rule today.   http://www.consumerfinance.gov/newsroom/cfpb-finalizes-rule-to-improve-information-about-access-to-credit-in-the-mortgage-market/   I did very briefly review it tonight (it’s only 796 pages, a lightweight!).  Here are my initial impressions.

First, to issue this right after TRID becomes effective is really piling on.  The industry has yet to close loans under TRID, and that’s when the real TRID issues will come to light.  And the CFPB has acknowledged that TRID is still an ongoing implementation effort in its statement providing an informal grace period.  But the CFPB apparently expects lenders to start understanding the new HMDA requirements on top of tackling the lingering and new TRID issues.  One bright side is that the effective date is better than the industry was expecting and feared.  Data collection becomes effective Jan. 1, 2018, and reporting on Jan. 1, 2019.  But that means testing will need to happen in 2017. And it is unlikely the CFPB will delay the effective date of HMDA.  Considering the expected volume of ongoing work to adjust to TRID, it may be a good idea to at least start thinking about HMDA implementation, such as project staffing and timelines, to be ready to test in 2017.

Second, the final rule amends the scope of institutions subject to HMDA, expending its coverage of nondepository institutions .  It amends the current coverage tests to establish a minimum 25-loan test for closed-end loans and a 100-loan test for open-end loans for the preceding two calendar years, which applies both depository and nondepository institutions.  And the rule includes some other burdensome new requirements, such as quarterly reporting for large volume institutions and many new datapoints.

Third, the final rule does align some datapoints with TRID, such as by changing the proposed “points and fees” datapoint to the “total loan costs” under TRID, and requiring the general “lender credits” under TRID’s Closing Disclosure.  But there were some potential alignments of datapoints they left on the table, such as the alignment of the unique loan identifier with the TRID loan identification number.  In addition, the pricing data the CFPB included from TRID is confusing, such as only requiring reporting of the general Lender Credits line and not specific lender credits, which may affect how your loans appear.

Fourth, the privacy concerns are still concerning.  The CFPB basically punted the privacy issue and gave some soft statements about taking the input of the industry into a future balancing test for publicly reported data.  But they brushed aside concerns about data breaches and hacks of the government and lenders.  This is surprising considering the high profile breaches of other government agencies, such IRS and OPM.

Fifth, there are some improvements from the proposal with respect to certain datapoints and coverage.  The fact that the CFPB did not finalize some suspect data points, like the risk adjusted pre-discounted interest rate, is a positive for industry.   Also, the final rule narrows the coverage of commercial loans from the proposal, which is also a positive result.

Again, these are just my initial impressions from a very brief review.  I plan to work on a summary in the next week or so. Please let me know if you have any questions.

TRID Week 1 Developments

October 8, 2015

Clients and Friends,

I hope TRID week one is going well!  I wanted you to know about two recent TRID developments:

  1. Fannie Mae and Freddie Mac are providing a temporary transition period for TRID, similar to the CFPB.  The GSEs released similar letters on October 6, stating that they will not review loans for technical compliance with TRID until further announcement.  Please note that they will check whether the correct forms were used in connection with the loan.  In the letter, the GSEs stated that they will only exercise contractual remedies for noncompliance with TRID, including repurchase, in two circumstances: (1) the required form is not used, or (2) a particular provision would impair enforcement of the note or result in assignee liability, and a court, regulatory agency, or other authoritative body has determined that the practice violates TRID.
  2. The House of Representatives yesterday passed H.R. 3192, the Homebuyers Assistance Act, which provides for a statutory “hold harmless” period for TRID.  The bill would prevent enforcement or civil liability for noncompliance with TRID for loans originated before February 1, 2016, if acting in good faith to comply.  The vote was 303 to 121.  However, the day before, on October 6, the White House announced that the President’s senior advisers would recommend that he veto the bill if it passed.  The White House’s statement described the bill as an “unnecessary delay…of important consumer protections designed to eradicate opaque lending…and undercut the Nation’s financial stability.”  It remains to be seen whether the Senate will have a veto-proof majority.  But remember that back in 2012 the President held the Loan Estimate up at an event focusing on housing, stating, “so this is what a mortgage form should look like….  Simple, not complicated.  Informative, not confusing.  Terms are clear.  Fees are transparent.”  It would appear that the President is likely to follow through with this veto threat.

And I’ll briefly mention another topic that has been in the news.  The CFPB announced yesterday that it is considering a proposal to ban arbitration clauses that prevent consumers from class action lawsuits from contracts for consumer financial products and services.  For other arbitration clauses that remain permissible, the proposal would require the reporting to the CFPB of the arbitration claims filed and the awards, so the CFPB can monitor them for fairness, and publicly post them on its website.  This kicks off the SBREFA panel process for this proposed rulemaking, which the CFPB must complete before it issues a proposed rule.  Note that the Dodd-Frank Act already prohibited arbitration agreements in residential mortgage loan notes, which is implemented in Regulation Z.  Accordingly, the CFPB is not considering including an explicit exemption for residential mortgage lending from its proposal.

By the way, I’m speaking at ALTA’s Annual Convention today, in the TRID Solution Center.  Please stop by and say hello!

TRID Becomes Effective

October 3, 2015

Clients and Friends,

October 3 is finally upon us.  Happy TRID Day!  Someone recently said to me, this is the only “holiday” where you have to go to work.  If you are at work, I hope you are having an easy day. I am sure you are all exhausted from your implementation efforts.

After starting on this rule back on January 3, 2011 (with a completely different cast than the one that finished it) and seeing it through every stage of its development, including leading the final rule, it’s hard to believe the effective date is here.  Someone else recently said to me, you have made disclosure simpler, but more complex.  Although I believe this rule will benefit consumers and help them understand their loans, this is an incredibly complex rule.  And no rule can predict every factual scenario that can arise, especially given the infinite variability of credit and real estate transactions.

Please know that I stand ready to provide assistance in these early days of TRID.  Although TRID is now effective, this is only the beginning.  There will be new questions that come up that we could not have even predicted.  It is also a time to start thinking about the efficiencies you can find in this more complex (but simpler!) disclosure regime.  For example, the closing process is one area where the workflows will be exceedingly more difficult.  To attain customer satisfaction and reduce the risk of consumer complaints, being able to close on time and efficiently for the consumer will be essential.  So, this may be an area deserving attention.

I also want to briefly update you on some TRID issues and materials the CFPB has recently released, and point out some highlights.

CFPB Good Faith Period.  Cordray was on the Hill on Sept. 29 and was asked about providing a more formal good faith period than the informal “sensitivity” period that the CFPB announced a few months ago.  Cordray hinted about an upcoming announcement about a good faith period, but his statement indicated that it would be informal.  For example, he stated at one point, “I don’t think it’s appropriate for me to say ‘I won’t enforce the law’ when my job is to enforce the law, but I think what I have said to them is that we will be diagnostic, not punitive, during that early period.”

The CFPB announced on October 2 on its webpage that it has sent letters to trade associations acknowledging that the CFPB will provide an informal “grace period.”  You can find the press release here.  http://www.consumerfinance.gov/newsroom/cfpb-sends-industry-letter-on-know-before-you-owe-mortgage-disclosure-rule-compliance/  The letter also indicates that the other FFIEC agencies will follow the same approach.  The press release states that during initial exams, the CFPB will examine, “compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”  The announcement continues, stating that the CFPB expects industry to make “good faith efforts to comply with the rule’s requirements in a timely manner.”  The announcement states that examiners will consider, “the institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff; and, its handling of early technical problems or other implementation challenges.”  This confirms and expands on the CFPB’s previous statements about an informal grace period.  This is a positive development for the industry.

But while this announcement does provide some relief with respect to administrative enforcement, it does not eliminate the substantial risk of civil and assignee liability under the rule for lenders and the secondary market.  The TRID rule places a greater amount of information and requirements under TILA statutory authority, including requirements that were previously only subject to RESPA administrative authority under the previous rule.  And the forms still contain the TILA material disclosures, which affect rescission rights.  This brings with it the threat of borrower lawsuits based on disclosure violations and buybacks, and this risk continues even if the CFPB will only examine for CMS and good faith compliance.  So, please keep the foot on the gas, because good faith efforts are not enough to avoid a lawsuit or a buyback.

CFPB Guidance.  I have heard many complain about the fact that the CFPB has placed far fewer resources on TRID guidance than is really appropriate for a rule of this size and effect on the market.  This has unfortunately resulted in excessively long wait times for responses to regulatory inquiries.  And many have complained that when the response finally arrives, the CFPB staff person knows less about the rule or the market than they do, and cannot provide a definitive answer.  Start thinking about how you will handle issues that arise for a loan in the pipeline or worse, at the closing table.  You may not be able to wait a few weeks for a vague response from the CFPB.

This is why I believe it is important to continue pressing the CFPB for more definitive, written guidance on certain aspects of the rule, such as the “black hole” and construction-to-permanent lending, and I look forward to working together on that front.

Consumer Materials.  It is useful to review the CFPB’s consumer materials about the rule, to understand the CFPB’s objectives for the rule and how consumers might understand their new rights and the lender’s obligations.  The CFPB updated its Know Before You Owe webpage to focus on the TRID rule.  The page includes a consumer-oriented video about the new rule.  http://www.consumerfinance.gov/know-before-you-owe/.

Remember those website links on the bottom of page 1 of the Loan Estimate and on page 5 of the Closing Disclosure?  The CFPB updated those pages as well.  The links take consumers to disclosure-specific pages in its Owning a Home suite of pages.  Yes, this is the same Owning a Home that contains their poorly conceived and executed “Rate Checker Tool,” or as it is officially known, “Explore interest rates.”

The Loan Estimate page is: http://www.consumerfinance.gov/owning-a-home/mortgage-estimate/.  The Closing Disclosure page is: www.consumerfinance.gov/owning-a-home/mortgage-closing/.  These pages include “interactive” samples of the Loan Estimate and Closing Disclosure, with clickable short explanations of different parts of the disclosures.  Interestingly, the CFPB’s interactive disclosures do not explain each part of the disclosure, including the Principal and Interest payment or the components of the Projected Payments table.  The unexplained areas may be sources of questions from consumers.

The Owning a Home pages are also updated to reflect the new rules, which are here: http://www.consumerfinance.gov/owning-a-home/.  Some of the highlights include:

  • Information about the new definition of “application.”  The page states, “you just need to provide six key pieces of information to begin your loan application,” and listing the six items in the definition of “application.”
  • Encouragement for consumers to shop between lenders, stating, “your best bargaining chip is usually having Loan Estimates from other lenders in hand…Getting Loan Estimates from multiple lenders increases your bargaining power.”
  • Telling consumers to “shop for title insurance and other closing services,” and that, “research suggests that borrowers who shop around for closing services could save as much as $500 on title services alone.”  The page continues, “that’s $500 that you can put toward new paint, furniture, and other improvements to make your new home feel more your own.”  The page also explains that “state laws may require different title insurance disclosures,” but that the totals between the disclosures should match.
  • Information about submitting consumer complaints because of cost increases.  The page describes some possible reasons why cost estimates may increase, including a description of “changed circumstances.”  Notably, the page also tells consumers to submit complaints if they receive a revised disclosure with invalid cost increases.  The page states, “if you think your lender has revised your Loan Estimate for a reason that’s not valid, call your lender and ask them to explain. You can also submit a complaint to the CFPB.”
  • Please let me know if you have any questions.
  • Supervision Materials.  Finally, the CFPB’s Supervision staff updated its Readiness Guide and Supervision and Examination Manual to reflect TRID’s October 3 effective date.  These can be found here: www.consumerfinance.gov/guidance and http://www.consumerfinance.gov/guidance/supervision/manual/.   The examination manual for TRID essentially is merely a summary of the rule, which does not contain much information about the disclosures themselves.  But for those of you still uneasy about rebaselining using the Closing Disclosure, notably, the TILA exam procedures acknowledge this ability on page 43.

Please let me know if you have any questions.

CFPB Issues Final Rule Delaying TRID to October 3

July 21, 2015

Clients and Friends,

I’m writing to inform you that the CFPB this afternoon issued the final rule delaying the TRID effective date to October 3, 2015.  Please find the link to the blog post announcing the final rule here: http://www.consumerfinance.gov/blog/the-know-before-you-owe-mortgage-rule-will-take-effect-october-3-2015/.  The press release is available here:  http://www.consumerfinance.gov/newsroom/cfpb-finalizes-two-month-extension-of-know-before-you-owe-effective-date/.

I plan to review the final rule and to follow up with any important information.  But I wanted you to know about the delay to October 3, 2015 as soon as possible.

Please let me know if you have any questions.

Director Cordray Testifies about TRID on Capitol Hill and the CFPB’s eClosing Forum

July 20, 2015

Clients and Friends,

Given the timing of this email on a Monday morning, let’s call this email my “bagel briefing.”  And in this bagel briefing, there are two events from last week that I wanted to highlight for you: CFPB Director Cordray’s Senate Banking Committee testimony on TRID, and the CFPB’s announcement of an eClosing Forum.

 

Director Cordray’s Testimony on TRID

Last week, on Wednesday, July 15, CFPB Director Cordray testified in front of the Senate Banking Committee at its hearing on the CFPB’s Semi-Annual Report to Congress. TRID came up a few times.  The testimony during the question and answer portion touched upon the rule’s effective date, the requested “good faith” period, and the length of the rule and disclosures.  Below is a summary, with some key takeaways.

Cordray faced a question about the CFPB’s response to a letter from over 200 members of Congress requesting a “hold harmless” period for TRID.  Cordray defended the original TRID effective date, stating that the CFPB “finalized the rule in November of 2013” providing “a 21-month implementation date, a long implementation date in response to what we heard from industry.”  He sounded upset as he stated despite the “long” implementation period, industry was not entirely ready for August 1, 2015.  “Nonetheless, as we get toward the end of it, some people aren’t ready,” he said.  He then noted the CFPB’s proposed delay, stating that it was evidence of Congressional oversight of the CFPB, before noting that it was caused by the CFPB’s “administrative error.”

Regarding the CFPB’s “administrative error,” Cordray stated that the CFPB had to, “in the end…due to an error on our part…back up the implementation date further out of the summer sale season.”  But he said that because of feedback, the CFPB is considering moving the effective date back to October.  He suggested that, based on the CFPB’s experience from implementation of the Title XIV rules, industry would find it inconvenient to move the date further out to January, because of other end-of-year systems work.

Cordray also discussed how the CFPB would initially approach supervision for compliance with TRID.  He stated that the CFPB has “worked with the other agencies to get an agreement, which we have, that the early examination of this will be diagnostic and corrective.”  He stated that “for the first period, which may last many months,” they would not look to be “punitive.”

Director Cordray was also asked about the length of the integrated disclosures.  He responded that, “the rule that actually implemented these forms is lengthy.  I wish it weren’t, but it is lengthy.”  He continued discussing the disclosures, stating that they were not the one-page disclosures that Senator Warren had wanted, stating that “we’re at five and three pages…it is the executive summary of the whole transaction.”  He defended the length, stating that the CFPB conducted consumer testing and that the forms are “much easier, and more accessible, and more understandable,” and that, “these are not lengthy forms.”  Interestingly, he also stated that, “we’re looking to try and do electronic closings and push the industry in that direction, which they want to go anyway, so that a lot of paper gets taken off and you can really focus on the key forms here.”

There are a few key takeaways here.  Regarding the CFPB’s proposal to delay the effective date, it appears unlikely that the TRID rule will be delayed until January, as some commenters to the proposal requested.  Cordray’s statements indicate that some in the industry have successfully convinced the CFPB that a January effective date would be disruptive to other operations.  Also, Cordray appears to believe still that the implementation period was “long,” and to fault the industry for not being ready, so he is unlikely to push the date back much further than the proposed October 3 effective date.

Significantly, Cordray’s statements provided more specificity regarding the CFPB’s announced “good faith” period.  Cordray’s statement that during this period, examinations will be “diagnostic and corrective,” rather than “punitive,” provides more information.  But, although Cordray skillfully credited the delayed effective date to Congressional oversight, it is still quite apparent that his “good faith” period does not provide industry with the “hold harmless” period Congress had actually requested.  While his reference to “punitive” likely means the CFPB will not seek civil money penalties, “corrective action” could include all of the other tools of the CFPB’s trade.  For example, this could still leave the door open to enforcement actions ordering restitution to consumers.  It would be unlike the CFPB not to seek redress for consumers, a UDAAP claim, and a strongly worded press release, if it viewed consumers as having been harmed.  Even without a civil money penalty, a TRID violation could be costly and result in reputational risk.

Director Cordray also indicated that the CFPB has obtained agreements with other “agencies” to follow this same approach, which is positive.  However, he did not specify which agencies.  Was he referring to the federal banking agencies, or state regulators that have the authority to enforce TRID under state law?  Hopefully the CFPB will address this with more specificity at some point, perhaps in the delay final rule.

And although Cordray stated this “sensitive” period could last for “many months,” that sounded more like he was telling a fairy tale than describing a “good faith” period that could affect the operations of U.S. mortgage market.  It would be more helpful to have a fixed, defined period.  But, it appears to me that the CFPB may want to retain discretion and flexibility with respect to the length of the period, so that they can make adjustments based on what they’re seeing in examinations.

Forum on eClosing

The CFPB announced last week a “Know Before You Owe Forum on eClosing,” which will take place on Wednesday, August 5 at 1 p.m. EDT.  The forum will focus on the “Know Before You Owe initiative on eClosing.”  It will “feature remarks from Director Richard Cordray, as well as a panel discussion with consumer groups, industry representatives, and members of the public.”  It is likely that the CFPB will announce the results (or at least some) of its eClosing Pilot Project.

Notably, the date of this forum, which must have been planned well in advance of the proposed TRID delay, would have coincided with the original TRID effective date.  This timing, and Director Cordray’s testimony on the hill about looking to “push the industry” in the direction of electronic closings, shows the CFPB’s very strong interest in electronic closings.  And you may remember that the CFPB also focused on electronic closings in its field hearing back in November 2013 that announced the CFPB’s issuance of TRID.  In that field hearing, the CFPB also announced its work on electronic closings.  All of this indicates that the CFPB likely views TRID as only a step towards a larger goal, electronic closings.  It will be interesting to see if Cordray provides any information during this forum about how, and when, he plans to “push” the industry towards electronic closings, especially after such an arduous implementation of TRID.

Please let me know if you have any questions, or if you’d like to discuss.