By Chris Gillock
One of the more gnarly bits of jargon created by the Consumer Financial Protection Bureau is TRID, which stands for T(ruth in Lending Act and) R(eal Estate Settlement Procedures Act) I(ntegrated) D(isclosures). TRID replaces four separate disclosures with two new integrated disclosures related to the interest rates and closing costs associated with mortgages; the new rules were effective on October 3, 2015. The CFPB felt that the existing disclosures were both incomplete and confusing; the revised disclosure requirements are supposed to increase transparency and eliminate abusive practices on the part of mortgage lenders. The CFPB has dubbed the new program “Know Before You Owe.” Sounds great, right?
Well, maybe not so much.
To comply, mortgage lenders have to upgrade software in order to produce the new disclosure forms and assure that the information in those forms is accurate. In addition, the CFPB has micro-managed this disclosure down to a sub-atomic level. For example, all fees have to be listed in alphabetical order; fail to do so and you are in violation of the rules even if the cost data is completely accurate. The CFPB also issued rules regarding the proper use of hyphens in disclosures. Also, misspelling a counter-party’s name is a violation of the rules.
This would all be silly nonsense except for one thing – if you violate the disclosure rules, you will pay up, big time. The CFPB can impose civil money penalties of $5,000 per day PER VIOLATION for noncompliance, $25,000 per day for reckless violations and $1 million per day for knowing violations. While Fannie Mae, Freddie Mac and the FHA have given lenders a grace period for technical compliance with TRID, the market is very nervous about the potential for penalties. Moody’s Investors Service pointed out the scope of the problem early this month – their review of a sample of 300 loans made after October 3 from a dozen lenders found that 90% had TRID compliance violations!!
The FUD (Fear Uncertainty and Doubt) factor is gumming up the mortgage market. It took 50 days to close a mortgage in November, up from under 40 days in February 2016. There is mass confusion at the closing table with the various parties to the transaction arguing about how the new forms should be filled out. Mortgage bankers/brokers that immediately sell closed mortgages on the secondary market are getting loans kicked back by lenders that buy and package loans into mortgage-backed securities; many loan buyers are cutting back on their purchases due to their fears regarding TRID violations. This has an impact on the independent mortgage bankers that now originate over half of the mortgages in the country. The new compliance rules add $250 – $1,000 to the cost of every loan according to Andrew Liput, CEO of Secure Insight (a mortgage industry compliance firm). Other industry observers claim that TRID has reduced the sale of existing home loans by 20% in November and October. The industry is hoping that this mess will sort itself out when the new compliance software is deployed and the players get used to the new procedures. We will see.
So, once again, the CFPB has managed to constrain credit and disrupt a major lending market in the name of marginally improving disclosure to consumers. One can’t help but think that the CFPB is issuing these rules just to extract rapacious settlements from the mortgage industry. The benefits to the consumer are debatable; the pain to the lenders is real.