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Does This Advocacy Group Have the TRID Answer?

writing-on-paperThe Structured Finance Industry Group's (SFIG's), a member-based, trade industry advocacy group focused on improving and strengthening the broader structured finance and securitization market, recently proposed an initiative that would standardize the framework for reviewing and grading loans for TILA-RESPA Integrated Disclosure (TRID) rule compliance.

Moody's Investor's Service followed up on Tuesday with a seal of approval for this proposal by noting in a report that it is adequate to address compliance risks that are likely to cause losses to residential mortgage-backed securitization (RMBS) trusts despite uncertainties. However, there was one grading provision in the SFIG's proposal that the rating's agency did not agree.

The SFIG said that the proposal will be incorporated in the RMBS 3.0 Green Papers and that the project will not supplant SFIG’s efforts to pursue a Consumer Financial Protection Bureau (CFPB) resolution to the current uncertainty related to TRID exceptions.

The draft "assumes TRID is interpreted by regulators and courts in accordance with the principles of liability set forth in a December 29, 2015 letter from Richard Cordray, the Director of the CFPB. The proposed exception grading and remediation does not necessarily reflect how courts and regulators, including the CFPB, may view liability for TRID violations in the future," SFIG stated in a release.

However, Moody's stated that it believes "that any risks to RMBS trusts from these positions are minimal over the long term. Furthermore, the SFIG proposal will likely benefit from the official guidance that the CFPB has signaled it will provide in July, as well as from feedback from other market participants."

The SFIG framework uses a grading scale to separate actual TRID violations from immaterial ones, Moody's said.

Moody's found that of the three possible grades for each section of the rule that a third-party review (TPR) firm will review:

  • EV1-A represents that no TRID violation has been determined to carry assignee liability;
  • EV2-B represents an immaterial violation that, while it may carry assignee liability, is nevertheless unlikely to cause losses to an RMBS trust because it would not carry statutory damages; and
  • EV3-C represents a material violation that is likely to carry assignee liability and statutory damages.

Moody's also determined that the impact of the letter from the CFPB will minimal, and the Bureau will issue a Notice of Proposed Rulemaking in July in response to SFIG's efforts.

"Although the Cordray Letter provided some clarity on a number of TRID compliance issues, the Cordray Letter is not an official interpretation published in the Federal Register and is not binding on the CFPB, other regulators, or courts," Moody's said. "SFIG caveats its framework with a notice that the proposal is an attempt to resolve compliance issues under TRID and that there is no guarantee how the CFPB or the courts will view the Cordray Letter. In tandem with designing the framework, SFIG has been leading the effort to encourage the CFPB to release an official interpretation of the TRID rule."

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