The initial operational challenges for lenders to implement and comply with the new TILA-RESPA Integrated Disclosure Rule rule, along with the potential for increased costs in the event of non-compliance, raise the risk of losses for RMBS trusts, according to a report from Moody’s Investors Service.
TRID expands and replaces the current disclosure requirements of the Truth in Lending Act and the Real Estate Settlement and Practices Act. The new rule expands the scope of erroneous information for which secondary market purchasers, such as RMBS trusts, are liable. As set forth by the Consumer Financial Protection Bureau, the new rule goes into effect on Aug. 1, 2015.
“Just how much RMBS trusts will be liable for the errors of lenders will depend largely on the interpretation of the courts,” says Yehudah Forster, a Moody’s Vice President and Senior Credit Officer and author of the report “New TILA-RESPA Rule Will Heighten Possibility of Losses in US RMBS for Rule Violations.”
“The huge operational challenge for the industry to implement and comply with TRID will likely cause a spike in compliance errors,” says Forster.
Loans with uncured errors will have higher expected losses given the potential for increased legal costs and damages, the result of the expanded set of errors for which RMBS trusts could be held liable under TRID.
However, Moody’s believes that securitizations are unlikely to contain loans that violate TRID as long as they continue to follow post-crisis procedures by having a third party perform due diligence on 100% of the loans before closing to unearth any TRID violations.
“The risk of higher losses will be slight for issuers that adhere to these more stringent procedures put in place in the wake of the financial crisis,” says Forster.