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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2016

Polish Those Defective Loans

Some investors are becoming experts at buying and curing mortgages with TRID errors

Polish Those Defective Loans

The Consumer Financial Protection Bureau (CFPB) has a worthwhile goal of providing consumers with a more predictable and transparent mortgage process. Unfortunately, in the nine months since the implementation of the CFPB’s Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure rule, known popularly as TRID, many originators are struggling to get loans purchased by traditional investors.

The TRID-related errors that are now appearing on many mortgage documents have taken the luster off of numerous home loans and made them difficult to sell on the secondary market. In response, savvy investors have found a way to benefit from buying these loans and curing the errors, which also assists small mortgage lenders who are most in need of this new market.

Lenders continue to retool their processes, systems and training to ensure ongoing compliance with TRID, which requires new documentation to be provided to homebuyers at the application and closing stages of the mortgage process. At the same time, many investors have enhanced their compliance-focused due diligence.

In response to regulatory uncertainty and potential liability, private investors continue to take a hard stance on TRID-document errors and what loans can or cannot be purchased. That has left many smaller mortgage bankers searching for a place in the secondary market to sell loans with TRID-related imperfections. As one might expect, warehouse banks are seeing extended loan turn-times on warehouse lines as a result.

Curing the problems

Investors’ hard-line stances on TRID errors have created new secondary-market challenges, particularly for independent mortgage bankers. Lenders are contending with the cost of loan extensions in their secondary-marketing departments, as loans undergo more strenuous compliance due-diligence reviews. In addition, they also are contending with the cost and liquidity impact of carrying defective TRID loans on their balance sheets when those loans don’t attract a secondary-market buyer. Often, these loans must be held on warehouse lines with less than preferential terms or funded from the company’s cash, as compared to loans without TRID issues.

Although many predicted that the volume of defective TRID loans would decrease as time went on, the opposite has occurred. TRID-defect volume is still quite high, mainly because it appears investors are not working with their correspondents to correct what are mostly proving to be minor errors.

The CFPB was clear before TRID, and since the rule has taken effect, that it would not punish companies that are making “good faith efforts” to comply with the regulation. The CFPB has acknowledged and continues to recognize the voluminous amount of work required to implement TRID. Many TRID issues are related to administrative errors, such as computation errors, mislabeled descriptors or the use of unacceptable abbreviations.

Recently, the CFPB agreed to rewrite a portion of the TRID rule to provide greater clarity for the industry, which was a huge overture by the CFPB and welcomed by many. In the meantime, lenders are doing their best to navigate the TRID waters and find investors willing to take loans with TRID errors.

Many of these TRID errors could easily be cured by sending a post-consummation revised Closing Disclosure form, or by sending a refund for errors that result in extra costs. To stay on the good side of the CFPB, however, mortgage companies must be willing to adjust their processes, systems and procedures to minimize future TRID errors.

It is not enough to simply concede a mistake was made, despite good-faith efforts. Those errors need to trigger corrective action within the organization to ensure they are corrected in all future loans. Lenders need to monitor the TRID process for errors and make adjustments where necessary as part of meeting the regulators’ expectations for good-faith efforts.

Automating the processes for complying with TRID requirements is one path to eliminating errors. An effective TRID-monitoring process should include automated systems that can do the following:

  • Assure the loan-closing date is at least three days after the Closing Disclosure form is delivered to the borrower, as required by TRID;
  • Maintain each string of data utilized in delivering the initial Loan Estimate form and the Closing Disclosure form for comparison; and
  • Compare the data strings to assure proper consumer disclosures.

Utilizing a fully electronic process, from application to closing, also will make it easier for lenders to comply with TRID requirements and still deliver the loan to the borrower by the expected closing date. In fact, TRID and the advancement of eClosings are both components of the CFPB’s “Know Before You Owe” initiative. Adopting an eMortgage strategy, then, puts a lender in a position to go above and beyond what the CFPB views as a good-faith effort.

Emerging market

Even as the industry continues to strive for TRID-accurate processes and disclosures, there are still lenders with TRID loans on their books and a desire to get them sold and off their balance sheets. Although TRID-loan errors can be fixed, private investors are still turning the loans away, which has created a new secondary market for these imperfect TRID loans.

Some companies in the mortgage industry have invested substantial resources to build out the expertise and processes to evaluate the unique risk TRID defects pose and to provide needed liquidity to the market. These new secondary-market entrants have been successful in this space by leveraging their years of expertise in buying whole loans that did not meet private investors’ overlay requirements.

By conducting a comparative analysis of disclosures to determine how to best cure the errors, investors are able to provide independent mortgage bankers with an outlet for their defective TRID loans — while keeping the consumer’s best interest at the forefront. There also is a significant upside for the borrower in this scenario as well. Because these investors are purchasing defective TRID loans with the intent to retain servicing rights for the life of the loan, borrowers avoid the issues associated with multiple loan-servicing transfers.

• • •

Although TRID has quite negatively impacted independent mortgage bankers’ liquidity in the short term, investors willing to purchase and cure TRID-defective loans are providing those lenders with a strategy for relief.

This emerging investor market will prove invaluable to lenders and brokers alike, as they attempt to gain their footing in the post-TRID world, all while remaining true to their consumer-first mandate.


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