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TRID problems on secondary market won't soon go away, expert says

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray in April signaled that the bureau planned to engage in formal rule-making to clarify ambiguities in the consumer-protection rules under TRID that have led to some disruption in the secondary mortgage market. Daniel Goodwin, director of mortgage policy for The Structured Finance Industry Group (SFIG), spoke with Scotsman Guide News about why he expects TRID-related problems to continue for some time.

Is TRID still causing problems in the secondary market through documentation or procedural errors, or has this issue already started going away as lenders adjust to the new rules?

Daniel GoodwinNo, we are still hearing of a substantial amount of problems in loans being closed, even up to today.

What sort of problems have we seen?

There is a wide range of problems because of the ambiguities in the rule. Other than significant failures, which are clearly failures under the rule as written, we’ll also see technical errors, like improper shading, or font sizes,  or fee disclosures labeled in one way on the Loan Estimation form and another way in the Closing Disclosure form. While technical and clerical errors, those are still violations under the rule.  

What has been the practical effect of this on the market?

If we think about splitting the market into two segments, there is the private-label securities market and the GSE [government-sponsored enterprise] market. Under the private-label market, it has created a lot of confusion among the investors in both private-label securities and in mortgage whole loans. We’re hearing that loans are taking longer to be reviewed by due-diligence firms because of the difficulty in applying the TRID rules and then determining how to handicap remediation.

We are also seeing that loans are sitting in warehouse lines for longer than they would otherwise, often triggering some kind of curtailment payment because they have been in there for a long time. In the worst cases, we are hearing of loans that are starting to be traded as scratch-and-dent loans [considered risky and sold at a discount] because they have some kind of TRID violation that the erstwhile purchaser is not sure can be remediated, and they will put those loans back to the original seller, and the seller will be forced to move those in a scratch-and-dent market.

On the securities side, the rating agencies are starting to come out with changes to their modes of analysis in terms of expected losses, to take into account how each rating agency is interpreting the TRID rules. That is inevitably causing some delay in getting some deals done and some difficulty in determining whether or not investors will be assigned liability.

An industry group has been working on a methodology to grade the severity of the errors. How is that effort going?

It has been an industry effort under SFIG to come up with a standardized grading system and suggested remediation. We have been making a lot of progress. Remediation assumes that the courts and the other regulatory bodies, and that we [the industry], are interpreting the implementation of the rule and the enforcement of the rule consistent with what Director Cordray laid out in the letter to the MBA [Mortgage Bankers Association] back in December.

Of course, in the absence of formal rule-making, there is no real guarantee that the courts or the regulators are going to interpret [TRID] in exactly that way. So, although we are suggesting remediation, the remediation is really dependent on formalizing that rule-making. As many others have, we have been reaching out to the CFPB, not only asking for guidance, but also how it would be helpful to provide guidance where we are seeing frequent errors.  

Do you think the CFPB’s recently announced plans to clean up the rule makes this all a moot point?

Until the rule is actually cleaned  up, no, it is not a moot point. Any guidance that the CFPB could give in an official capacity would be constructive. We applaud that they have come out and said that they are going to reopen the rule. We think that will help work toward clarifying a lot of this stuff. Don’t get me wrong. I think that is a very positive step, but until the rules are really clarified, none of this becomes moot.

I am picking up that you think this could be a continuing problem for some time.

I do believe this will continue for a while, until the rule-making is codified. The other thing that is worth mentioning is that the GSEs have been buying loans, and they have stated that they would not be doing prepurchase review for TRID exceptions during an implementation phase. If you were to extrapolate the error rate that we are seeing on privately purchased loans to the GSEs, we also think those would also turn up a significant amount of errors. We would encourage the examination of those loans to make sure that any problems are being picked up, and to make sure that any consumer protections are in place and that the consumers are being looked out for.  


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