Auditors Find TRID Violations in 90% of Closed Loans
We are over 5 months into the CFPB TRID Disclosure Rules or “Know Before you Owe”. We have all seen multiple reports that applications for new loans are down. Many analysts attribute the decline to the new rules. Anecdotally, the “horror” stories of blown closings aren’t necessarily as bad as predicted. But the push and pull between lenders, borrowers, closing agents, buyers and sellers is everything that was advertised.
Moody’s Investors Services released a Credit Outlook Report at the end of 2015 which reported that third-party audit firms have found TRID violations in more than 90% of the loan files they have audited. Given the complex and detailed requirements of the rules, I am not sure that this was unexpected in the process. In fact, CFPB had previously announced that strict enforcement of the rules would not begin immediately. However, an unexpected consequence is occurring. Investors are refusing to purchase loans on the secondary market. This could cause troublesome long term effects because if the loans can’t be sold, securities can’t be issued and money for new loans won’t be available. This could stymie the housing market.
Investors are skittish to accept the deficient loans and point to the 2008-09 housing crash. They believe history will repeat itself. If there are deficient loans in a securitized tranche, an entire package will be at risk. There is concern about transferee liability. However, auditors are reporting that the most common TRID violations are minor and technical in nature. For example, title fees are not correctly labeled on the Closing Disclosure (“CD”). There must be a space between “Title” and a hyphen followed by “Settlement Agent Fee”. Usually, there is no space. In other words, the line item should read “Title – Settlement Agent Fee”. Instead, closing agents are showing it as “Title-Settlement Agent Fee”. Another example, the title company doesn’t show its file number on the CD.
CFPB Director Richard Cordary calls the reaction to these technical violations “akin to the panic that surrounding Y2K”. Is this a signal that the CFPB will not enforce these technical violations or that the rules will be re-written soon?
We are all still adapting to TRID. The software providers are still adapting and need to make their programs a little more nimble. Our office has found, and I expected this, that every closing will have at least one round peg for which we will have to force into a square hole. The rules will have to be adjusted for these and similar circumstances as we figure out the issues. The software platforms must adjust so that we can avoid some of the technical violations. We just need more time.