With the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosures (TRID), or “Know Before You Owe” rule now in effect for four months, it’s no secret that the sweeping change to the mortgage application process has impacted homebuying for all parties involved. Reports of compliance issues are quite common.
In December, Moody’s Investors Services released a credit outlook report in which its analysts estimated that several third-party firms found TRID violations in more than 90 percent of the loans they audited.
Now, the other shoe has dropped: With thousands of loans closed under the new regulatory regime now making their way to the secondary market, investors are refusing to buy them due to compliance problems and loan document errors.
The reasons why investors are rejecting these so-called “defective” or “scratch-and-dent” loans may surprise you, as some of the infractions are minor and technical in nature, according to two of the nation’s top RESPA compliance attorneys.
A roundtable seeking answers
Marx Sterbcow, managing attorney of the New Orleans-based law firm Sterbcow Law Group, and Rich Horn, the former CFPB attorney who helped write the TRID rule and now has his own firm in Washington, D.C., teamed up to publish a list of the top 10 reasons mortgage investors are rejecting TRID loans.
The list was discussed last month on a cross-industry trade group conference call involving the National Association of Realtors (NAR), the Real Estate Services Providers Council (RESPRO), the Mortgage Bankers Association (MBA), the American Land Title Association (ALTA) and others.
“The liability and risk environment were already high before TRID, and TRID has done nothing but escalate it,” said John Campbell, a research analyst at Stephens Inc. “If lenders and private investors aren’t willing to take on the risk of buying potentially tainted loans — loans that could put them at future risk one day — then the market loses funding sources and liquidity. There’s a grace period from the GSEs (government-sponsored enterprises) which helps, but that’s just one side of the market.”
Closing Disclosure
Here are the 10 reasons investors are refusing to purchase TRID loans, according to the attorneys, as well as some tips for how agents can help prevent these issues from happening.
Top 10 reasons investors are rejecting TRID loans
1. The Loan Estimate (LE) and Closing Disclosure (CD) bear the same date.
Under TRID rules, a creditor may not provide a revised LE on or after the date the creditor provides the consumer with the CD. Because the CD must be provided to the consumer no later than three business days before consummation, the consumer must receive a revised LE no later than four business days prior to consummation.
2. On the CD, title fees aren’t being input properly.
The regulatory text requires a space between “Title” and a hyphen, followed by “Settlement Agent Fee.” Some forms erroneously say, “Title-Settlement Agent Fee,” when they should say, “Title — Settlement Agent Fee.
3. Page 5 of the CD is missing certain contact information, such as the real estate agent or broker’s license number.
Some lenders preparing the CD are leaving this information off the form because it isn’t necessarily included on all sales contracts, which vary by state.
NAR is working with its state associations to educate agents on this issue and possibly include this information on all sales contracts. The attorneys noted that if an individual is not required to have a license number, you can leave that cell blank. You should be using your license identification number, not your NMLS identification number, which is typically only obtained by lenders and brokers.
4. The CFPB’s Office of Regulations stated in a webinar that if the alternative CD is used, there is no place to show subordinate financing on the alternative CD, and there is no requirement to do so.
Essentially, each transaction will have its own cash to close, and the settlement agent has to figure out the “master” cash to close.
5. On page 1 of the CD, the title company’s “file number” is not included.
This is the settlement agent’s file number “for identification purposes.” The CFPB has stated that it “may contain any alpha-numeric characters and need not be limited to numbers.”
Settlement agents are advised to use any number that they assign to the file in their own systems to identify it, and it may contain both letters and numbers.
6. Failure to meet legal disclosure requirements.
For example, the lender or bank sent the loan file to the investor with a copy of an executed, third-party authorization to release the nonpublic, personal information (NPPI) form to real estate agents, giving them access to a borrower’s CD.
Such forms are viewed as “insufficient” in the secondary market because they do not meet the disclosure requirements of some laws, including Regulation P and the Gramm-Leach-Bliley Act. Some state real estate associations, such as those in Louisiana and Texas, have created their own authorization forms, but Sterbcow cautioned that investors are rejecting them.
7. Some settlement agents are not providing sellers with the CD, or are providing the HUD-1 or ALTA Settlement Statement instead.
Those forms cannot replace the CD under the TRID rules.
8. Lenders are reporting that their settlement agents still do not understand the simultaneous issuance rules.
Therefore, they are getting estimates that do not comply.
9. Incorrect use of the “Optional” designation.
This designation is used for insurance, warranty, guarantee or event-coverage products disclosed under the “Other” category, such as optional owner’s title insurance, credit life insurance, debt suspension coverage, debt cancellation coverage, home warranties and similar products.
10. Fee names on the LE and CD do not match.
The attorneys cautioned that a title company or settlement agent can change the fee names if circumstances change, but those fee names should remain the same on both forms from then on.
Advice for agents
Although agents may view this list and think most of the errors don’t apply to them, Ken Trepeta, RESPRO’s president and executive director, painted a picture of how these issues may play out and impact the entire housing industry.
“If lenders can’t sell the loans to investors, they may go out of business — particularly small- and moderate-sized mortgage lenders and banks that cannot portfolio loans,” Trepeta said. “So there will be fewer options for consumers, and credit could be constrained.”
In addition, “if investors are nitpicking technical issues, it is just going to slow down the process further as people double- and triple-check everything before they allow a transaction to close,” Trepeta said. He anticipated this happening, and in his previous role as director of real estate services for NAR, he advised agents to add 15 days to their transaction timeline.
“It is also why I said people should not wait until closing to address issues, because every little thing is going to be scrutinized, and getting approvals for changes will take time and every change will require an approval,” he said.
“So everything needs to be done right the first time, even though there are cure provisions. Because of buybacks, robo-signing and all the lawsuits in the past, we are now in an era with zero tolerance for even minor errors or deviations.”
NAR President Tom Salomone agreed, adding that anticipating longer closing times “is still an important practice as the industry continues to adapt” to the TRID rule and new closing process.
“December’s existing-home sales are a reason for cautious optimism that the work to prepare for Know Before You Owe is paying off. Nonetheless, our data continues to show longer closing timeframes, and that remains a cause for concern,” Salomone said.
In particular, the sixth item on this list — concerning the use of third-party authorization forms to give agents access to a consumer’s CD — seems to be the biggest sticking point for the real estate side of the transaction. Trade associations are attempting to work with the CFPB to get some guidance on this issue.
Samuel Gilford, a spokesman for the CFPB, said the bureau is aware of the concern, but noted, “These privacy concerns existed before the Know Before You Owe mortgage disclosure rule and are governed by Regulation P, which was not changed by that rule.
“In general, real estate agents and their clients have historically been able to negotiate these legitimate privacy concerns, and we expect they will continue to do so,” Gilford said. “We would note that Regulation P contains various exceptions from prohibitions on sharing personal financial information, and continue to listen and gather information about whether the purposes expressed by residential real estate brokerages and their agents would meet any of those exceptions.”
[Inman Slideshow]
