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.
"We seek formal written guidance clarifying the liability for a violation of each individual TRID requirement, as well as, the scope and applicability of TRID's cure mechanisms," AMI Director Chris Katopis said in the letter. The group is asking the agency to open a new public comment period.
TRID was designed to ensure consumers have more certainty about the costs and fees in a home loan. It expands the amount of potentially erroneous information that the purchaser of a whole loan or loan securitization could be liable for. It took effect in October. The AMI's letter includes specific examples of violations that concern investors; all of the examples involve numerical values, but do not affect the borrower’s final costs. "The biggest hurdle to overcome at the present is the narrow scope of 1026.19(f)(2)(iv)," or clerical corrections, the letter states.
While the CFPB 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.
For now, TRID concerns are only impacting loans that are not eligible for sale to Fannie Mae and Freddie Mac, which represent a small portion of the U.S. housing finance market. But the AMI believes that agency loans could also undergo scrutiny should they experience delinquencies.
"The GSEs [government-sponsored enterprises] at that point may decide to review TRID documentation and penalize lenders who made even small clerical errors in the disclosures," the letter states. "Therefore, how to handle TRID errors, the ability to make corrections and how to reduce resulting liability will be issues that the industry will need to deal with in the years to come."
Fitch Ratings has estimated that more than half of all home loans originated today have minor errors that are not TRID compliant. Roughly 5% to 10% have major compliance problems, while just 25% to 30% are fully compliant, Fitch said.
Nevertheless, the ratings agency believes that the market disruption caused by mortgages that fail to comply with the rule is out of proportion to the amount of risk posed to mortgage bond investors. In a report published March 21, it said that investors will likely only be exposed to maximum statutory damages of $4,000 plus attorney's fees. It noted that there could be consumer claims in defense of foreclosure in states where foreclosure must be approved by a court. However, it is less likely that compliance failure will result in such claims in nonjudicial states.