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:
- The CFPB and other regulators will be focused on corrective and diagnostic, rather than punitive, examinations in the first few months.
- 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.
- 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.”
- 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.
- 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.
- TILA limits statutory damages apply to a closed set of disclosures under section 130(a).
- 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.
- 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.”
- The CFPB believes that the risk of private liability to investors for “good-faith formatting errors and the like” is “negligible.”
- 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.