Kroll Bond Rating Agency added its voice to the chorus of credit rating agencies downplaying the risks of mortgages that fail to comply with new consumer disclosure rules.
The TILA/RESPA integrated disclosure rules, which took effect in October, was intended to simplify the disclosure of mortgage terms and to give consumers a sufficient window of time to understand them, in order to make an informed borrowing decision. But compliance is proving so difficult that it is having a chilling effect on the market for mortgage bonds; investors are concerned about their potential liability for purchasing loans that fail to comply.
While the Consumer Finance Protection Bureau has provided an informal grace period for good-faith efforts for lenders to comply with TRID, investors are still concerned that errors could prompt investors to bring a "private right of action" under the Truth in Lending Act.
In a report published Wednesday, KBRA said that the potential assignee liability stemming from TRID violations is "both limited and quantifiable." As a result, the ratings agency would not decline to rate a mortgage securitization based solely on whether a pool contained TRID-eligible loans that failed to fully comply with TRID.
Furthermore, KBRA does not expect that transactions involving TRID-eligible loans would be subject to a ratings cap. In other words, such a transaction would potentially receive its highest credit rating, AAA.
Morningstar has taken a similar position. In a report published last week, it said that potential errors related to a new residential mortgage disclosure rule are "not a significant source of credit risk to securitizations."
Morningstar's general view is that only violations relating to the timing of disclosure delivery cannot be properly cured. "A due-diligence firm should catch these types of material errors, so Morningstar expects such violations to be cured or the loans to be removed from the pool prior to securitization when a due-diligence review is performed on every loan in the pool," the report states.
It notes that, under TRID, many violations can be cured with revised disclosures for up to 60 days after closing.
Fitch Ratings also believes that the market disruption caused by mortgages that fail to comply with new consumer disclosure rules is out of proportion to the amount of risk posed to mortgage bond investors. In a report published in March, the ratings agency said that investors will likely only be exposed to maximum statutory damages of $4,000 plus attorney's fees.
Some of the biggest investors in mortgage bonds are asking the Consumer Finance Protection Bureau for additional clarification about their liability for purchases of loans that fail to comply with a new disclosure rule.
In a March 30 letter to CFPB Director Richard Cordray, the Association of Mortgage Investors said that the "Know Before You Owe" rule, commonly known as TRID, has "resulted in a climate of legal uncertainty" and is "chilling" private investment in the U.S. mortgage market.