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There may be a future for TRID securitizations yet

Despite lack of guidance from CFPB, SFIG due diligence grades provide clarity for investors

Investors are still not sold on the safety of the private label securitization market now that TRID is in the mix, despite the majority of the industry getting accustomed to the rules.

However, a new proposal from an industry group brings a possible solution to help get the secondary market moving again thanks to a clearer outline of how to rate TRID loans.  

The further the industry gets past the initial implementation of TRID, the more evidence there is of TRID errors, with little direction from the Consumer Financial Protection Bureau on what to do or even think about it. 

As a result, a lot of investors are opting out of TRID loans altogether. A new note from Standard & Poor's Rating Service stated, “Uncertainty around the liability that such exceptions place on mortgage assignees has stifled secondary market trading, increasing costs to lenders as the loans stay on warehouse lines longer.”

However, a solution is coming.

“More than six months after the rule's effective date, the market appears to be closer to a consensus regarding the impact of TRID violations on mortgage lenders and assignees. Several third-party due diligence review firms (TPRs) that are active members of the Structured Finance Industry Group (SFIG) formed a working group under SFIG's RMBS 3.0 Due Diligence and Data Disclosure project to develop a standardized approach regarding the scope of due diligence reviews and exception grading of loans with respect to TRID compliance,” the S&P report stated.

“With the assistance of certain SFIG-member law firms in a non-representative capacity, this working group presented a proposal, dated April 17, 2016, outlining the scope of the review for TRID compliance, the potential types of TRID exceptions observed, and the due diligence grades that the TPRs would assign to loans with such exceptions to the specified provisions,” the report stated.

With the new outline, S&P said it’s comfortable with the SFIG proposal and expects to treat grades determined consistent with the SFIG proposal in accordance with its due diligence criteria.

The Association of Mortgage Investors recently wrote a letter to CFPB Director Richard Cordray to express the mortgage investor community’s concerns over TRID, asking the bureau to open a new public comment period to address the concerns of mortgage investors, along with formal written guidance clarifying the liability for a violation of each individual TRID requirement, as well as the scope and applicability of TRID’s cure mechanisms.

When the Mortgage Bankers Association wrote a similar letter not too long ago, the bureau said, “If investors were to reject loans on the basis of formatting and other minor errors, as you indicate has been occurring, they would be rejecting loans for reasons unrelated to potential liability associated with the Know Before You Owe mortgage disclosures. Such decisions may be an overreaction to the initial implementation of the new rule.”

With little direction on what to do in regards to TRID from the CFPB, S&P said this new proposal from the Structured Finance Industry Group marks a significant step forward in developing a market consensus regarding the impact of TRID violations on mortgage lenders and assignees.

“As such, we will monitor any revisions to the SFIG proposal, other market developments, and legal interpretations of TRID, and may modify our position if we deem it warranted,” the S&P report said. 

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