Editor's note: This feature first appeared in the October issue of MReport, available now.
The mere mention of the “TRID” rule can elicit strong reactions from mortgage industry executives and compliance professionals. The rule can cause their blood pressure to rise, or, on the contrary, they can spark positive feelings associated with having accomplished a large project successfully. For those of you who have been focused on other parts of the mortgage industry the past few years, TRID is the Consumer Financial Protection Bureau’s (CFPB) rule that combined the mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, which was issued in November 2013 and became effective in October 2015 (also known as the TILA-RESPA Integrated Disclosure rule).
Clear as Mud?
Lately, one of the most talked-about issues with the rule is the CFPB’s recent rulemaking to amend it, often referred to as TRID 2.0, which was issued in July. Although the industry lobbied the CFPB heavily for this amendment rule, many in the industry have mixed feelings about the end result. The CFPB stated that the rule “will generally benefit consumers and industry alike by providing greater clarity for implementation going forward.” But there are many areas in which the CFPB’s amendments will cause more confusion. In addition, the CFPB did not fix one of the most vexing issues with the TRID rule, the infamous “Black Hole.”
A Matter of Time
One important issue for this new rule is its effective date. It is helpful that the industry is not required to comply with TRID 2.0 until October 1, 2018. This gives industry about a year to come into compliance with the changes, which is very helpful (this time period is required under the statute, so it was not due to the CFPB’s generosity). But the CFPB is allowing “optional compliance” beginning October 10, 2017, allowing the industry to implement provisions of the rule as it sees fit beginning on that date. The CFPB did not place limits on this optional compliance period, and it is not dependent on the application date of a particular loan, which means that lenders can phase in most changes in TRID 2.0 even during the course of a transaction. While this appears beneficial, it does complicate matters for some in the industry, such as secondary market investors, because they will not be able to tell from a loan file which provisions the lender implemented at which time. In addition, technology vendors, such as compliance software vendors, may experience issues with lenders implementing different parts of TRID 2.0 at different times.
Supervision of the TRID rule also comes into question in light of the TRID 2.0 rule. Based on the preamble of the rule, it appears that the CFPB’s “good faith” supervision period will be applied only to the TRID 2.0 rule in the future. The CFPB’s “good faith” period for the current rule will continue only for examinations with review periods before October 2016. This is a significant development for the industry, because compliance with TRID has become even more important for lenders.
Black Holes and Other Mysteries
The TRID 2.0 rule also does not provide any relaxation of or clarity regarding the TRID rule’s liability for violations, or any additional flexibility in curing violations. The CFPB was clear in the rule’s preamble that it would not address the “major policy decisions” that have concerned the industry, such as the disclosure of the simultaneous issuance of title insurance, the liability for violations, or the expansion of the available cures. The CFPB specifically stated with respect to the industry’s requests to expand the cure provisions under TRID, that it “would not be practicable without substantially undermining incentives for compliance with the rule,” and that it “would be extraordinarily complex.” Unfortunately, this means that these major issues facing the industry, including the secondary market, go unanswered in TRID 2.0 and are unlikely to be the topic of additional rulemaking under the CFPB’s current leadership.
Further, the CFPB’s final rule does not fix the infamous “Black Hole,” i.e., the time period in which a creditor cannot use a valid changed circumstance or other reason for revision for tolerance purposes using the closing disclosure (CD). Although the CFPB had proposed to add a new provision that would have allowed creditors to use any corrected CDs for tolerance purposes at any time, which would have eliminated the Black Hole, the CFPB stated that it did not intend this result. As a result of public comments to its proposal that supported this result, however, the CFPB issued a new proposed rule to clearly and intentionally eliminate the Black Hole. While it is a positive development that the CFPB has proposed a rule specifically dealing with this industry issue, its failure to fix the Black Hole in TRID 2.0 means that the industry will be dealing with this issue for quite some time longer. In fact, considering the recent weather events in the U.S., some lenders will most certainly face the Black Hole under the current rule.
Comments on the new proposed rule are due by October 10. The industry should understand that it is not certain whether or not the CFPB will eliminate the Black Hole. The CFPB raised concerns about consumer harms from allowing creditors to re-baseline the tolerances using the CD. The CFPB raised concerns with creditors providing the CD very early to avoid any timing issues with closing, allowing “could allow creditors to pass more costs on to consumers,” and “information overload” from receiving more CDs. It is important for the industry to submit comments on the proposed rule, and it would be helpful for the comments to specifically address how consumers may benefit from the elimination of the Black Hole.
There have also been questions in the industry regarding how privacy laws, including the Gramm-Leach-Bliley Act (GLBA), work with the TRID rule. In particular, the industry has questioned whether the consumer’s and seller’s closing disclosures can be shared with each other, their real estate agents, or other third parties. While the CFPB provided some general guidance in the preamble regarding how the CDs can be shared under the GLBA, it did not provide formal guidance in the rule permitting such sharing with real estate agents or other third parties involved in the transaction. This preamble language does not provide much certainty to the industry. And in another area—the provision of separate closing disclosures to the borrower and seller—the CFPB has also increased the level of uncertainty. The CFPB added commentary to the rule that allows lenders and settlement agents to modify the CDs to separate borrower and seller information in essentially any way they choose, including omitting parts of the forms. This new commentary appears to allow flexibility in creating new versions of separate closing disclosures, which may make it harder for the secondary market and others to analyze whether the format of a separate closing disclosure is in compliance.
Item by Item
The CFPB also has some confusing language in the preamble regarding the level of itemization required on the Loan Estimate under the “Can Shop For” category of charges and the Written List of Service Providers. In the preamble of TRID 2.0, the CFPB notes that the Written List of Service Providers and the Loan Estimate require the itemization of services required by the creditor but then states that this does not include certain “related fees” that are “ancillary” to the required service. The CFPB provided an example of lender’s title insurance, which it states is a required service that must be disclosed, but that related services such as a title search fee or notary fee are not required to be itemized. However, the CFPB does not state how a creditor should disclose such fees when the creditor knows they will be charged to the consumer, which is frequently the case. It appears from the preamble that the CFPB does not consider such services to be required by the creditor, but the CFPB did not state whether such services should then be disclosed under the “Other” category of “Other Costs” or whether they should be treated as non-required services for tolerance purposes. As a result of this guidance, the CFPB has created more confusion than certainty regarding how such frequently imposed charges should be disclosed.
In addition, while the CFPB clarified certain aspects regarding the category of charges that are not subject to the tolerance requirements, the CFPB amended TRID to create a new condition that charges must be “bona fide” for them to fall in this category. The CFPB defined the new bona fide standard as “lawful and for services that are actually performed.” It appears that creditors will soon need to document that such charges are “lawful” and for “services that are actually performed.” Does this mean that creditors must analyze the legality of each charge under state law, as well as document that the service was actually performed to ensure the charge is not subject to the tolerances? This new provision creates more uncertainty.
Locked and Loaned
The CFPB also added commentary to the rule that requires creditors to provide a revised Loan Estimate whenever the interest rate is first locked, regardless of whether the interest rate or the interest rate-dependent terms have changed. This may represent a change from how many in the industry were interpreting the existing rule. The provision requiring a revised disclosure in the event of a rate lock exists in the tolerance rules, which only require a revised disclosure when a creditor wants to impose increased charges on the borrower. It doesn’t appear under the current rule that a revised disclosure is required for all rate locks. As a result, this revised provision may represent a new compliance burden for industry.
As you can see, although the CFPB billed the TRID 2.0 rule as providing clarity and certainty for the industry, it actually may create more confusion and uncertainty for certain areas of the rule. Although the industry may disagree about whether the TRID rule is achieving its intended benefits for consumers of greater clarity of loan terms and costs, one thing it can agree on is that, at least in the areas described above, TRID 2.0 has not achieved greater clarity for the industry.
Richard Horn is Founding Attorney of Richard Horn Legal, PLLC and is a former CFPB attorney who led the rule integrating the mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act into the TILA-RESPA integrated disclosures. Horn has extensive experience and expertise as a former Senior Counsel and Special Advisor at the CFPB and Senior Attorney at the FDIC. Richard Horn Legal, PLLC specializes in consumer financial services regulation, with a focus on residential mortgage compliance.