New TRID Rule Will Increase Risk of Losses for RMBS

Moody’s Investors Service released a report called, “New TILA-RESPA Rule Will Heighten Possibility of Losses in US RMBS for Rule Violations” revealing that initial challenges for lenders to implement and comply with the new TILA-RESPA Integrated Disclosure (TRID) rule, along with the potential high costs of lenders who do not comply, raise the risk of losses for residential mortgage-backed security (RMBS) trusts.

The TRID rule is set to go into effect August 1, 2015 and will dramatically affect the compliance side of the real estate market. The new rule will replace the current disclosure requirements of the Truth in Lending Act (TILA) and the Real Estate Settlement and Practices Act (RESPA) and will also broaden the amount of inaccurate information that secondary market purchasers, like RMBS trust, will be held accountable for.

As of now, RMBS trusts are only liable for finance charge errors from lenders, the APR, and certain other disclosures required by the TILA, but they are not liable for errors on itemized settlement charges and other disclosures required by the Real Estate Settlement and Practices Act (RESPA), the report says. TILA and RESPA currently require that lender provide an initial and final disclosure to consumers, and an assignee’s liability for errors depend on which law required the disclosure. TILA requires assignees to be liable for violations that are visible on the face of the disclosure statements, but RESPA does not.

"The huge operational challenge for the industry to implement and comply with TRID will likely cause a spike in compliance errors," said Yehudah Forster, a Moody's VP and senior credit officer and author of the report. "Just how much RMBS trusts will be liable for the errors of lenders will depend largely on the interpretation of the courts," Forster said.

Loans that violate the new TRID rules with uncured errors will have an increased chance of legal costs and damages if they default, the result of the expanded set of errors for which RMBS trusts could be held liable for, according to Moody’s report. After the rule goes into effect, companies will endure operational challenges in implementing TRID and will cause compliance errors to rise for at least the first few months.  Moody’s believes that as long as issuers perform due diligence on all loans, as they normally do in post-crisis private label RMBS transactions, securitizations will not likely have loans with uncured compliance errors because issuers will remove these loans from the RMBS pools prior to closing.

"The risk of higher losses will be slight for issuers that adhere to these more stringent procedures put in place in the wake of the financial crisis," Forster said.

To access the full report: Moodys.com