MoodyÕ: TRID violations found in 90% of recently reviewed mortgages

Errors running rampant, credit negative for mortgage bonds

Despite Consumer Financial Protection Bureau Director Richard Cordray’s recent proclamation that the October implementation of the CFPB’s new TILA-RESPA Integrated Disclosures rule was akin to the unfounded panic that surrounded Y2K, a new report from Moody’s Investors Service finds that TRID compliance violations are running rampant among newly originated loans.

In a new report on the impact on TRID on residential mortgage-backed securities, Moody’s analysts write that several third-party firms have reviewed a number of recent mortgage loans for TRID compliance and found violations in more than 90% of the loans.

According to the report, authored by Moody’s analysts Yehudah Forster and Lima Ekram, the loan audits revealed that many of the TRID compliance violations are “only technical” in nature, but the analysts write that the violations, no matter how small, indicate that some lenders are having difficulty complying with the TRID rules.

Those results fly directly in the face of Cordray’s recent statements about the implementation of TRID.

In a recent speech at the Consumer Federation of America Financial Services Conference, Cordray said that the housing industry’s concerns about TRID appear to have been overblown.

“When our ‘Know Before You Owe’ mortgage disclosure rule took effect two months ago, some again asserted that its implementation would paralyze the market. In fact, applications for home purchase mortgages were up 22% year-over-year in October,” Cordary said, according to his prepared remarks. 

“Reports from participants across the market seem to be indicating that implementation of the new rule is going fairly smoothly,” Cordray continued. “So it seems that these anxieties were much like the errant predictions of technological disaster stemming from Y2K, which of course never materialized.”

But Moody’s report shows that Cordray’s opinion may be out of touch with what lenders are actually seeing on the TRID frontlines.

According to Moody’s report, many of the observed TRID compliance violations were technical, but compliance violations are compliance violations no matter how small they are.

“Many of the violations were reportedly technical in nature, such as the need to use the same spelling convention for counterparties or the absence of a required hyphen,” the Moody’s analysts write.

“However, the (third-party review) firms still believed the violations were material because the extent to which a secondary market purchaser, such as an RMBS trust, would bear damages or costs from delayed foreclosures is still unclear without further court or CFPB interpretation,” the report continues.

In the eyes of the Moody’s analysts, the abundance of TRID compliance violations is a credit negative for mortgage bonds because it increases the likelihood that loans with compliance violations will be included in future RMBS pools.

“The extent to which such violations would increase losses for RMBS is still unclear without further interpretation by the courts or the CFPB,” the analysts write.

The analysts also suggest that difficulty complying with TRID could result in the delayed issuance of new securitizations, because RMBS issuers may have concerns about including loans with compliance violations.

“TRID arguably expands the amount of erroneous information for which a secondary market purchaser, including an RMBS trust, is liable,” the analysts write.

According to the report, the third-party firms’ “informal feedback” was based on reviews of around 300 loans from more than a dozen lenders, whose identities were not revealed to the Moody’s analysts.

“Nevertheless, the fact that all the TPR firms told us that such a large portion of the loans had notable violations is significant,” the analysts write.

The Moody’s analysts write that they expect the number of technical violations to decline over the next several months as lenders adjust their loan origination systems to comply with the rule’s nuances, but note that that the mortgage landscape is far different than it was before Oct. 3, when TRID took effect.

“Even if TRID confers assignee liability for technical violations, such as those listed, the risk of significant damage from them is low,” the analysts write.

“We believe it is unlikely that courts will hold up a foreclosure or award damages for these kinds of violations,” the analysts continue.

“Furthermore, a transaction would be protected from this risk if features such as representations and warranties or indemnification required a creditworthy entity to reimburse the RMBS trust for any losses resulting from violations of the rule,” the analysts conclude. “On the other hand, we believe that violations related to incorrect settlement fees, which previously did not carry assignee liability under the Real Estate Settlement Procedures Act, now carry higher risk under TRID.”

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