TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1085198
54 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT A Closer Look at TRID How could amendments to the TILA-RESPA Integrated Disclosure rule impact RMBS? By John V. Levonick and Scott McNulla A lthough it had been several years since the housing crisis, in the third quarter of 2015, residential mortgage- backed securitizations were still sailing into headwinds as the private label securitization market was still a fraction of its former self. Lenders were finally getting a firm footing after the Dodd-Frank based regulatory changes effective starting with loan applications received Janu- ary 10, 2014, most significantly introducing the Ability to Repay testing and modifying the fed- eral high-cost testing under the Home Ownership and Equity Protection Act. Lenders were preparing for the Truth in Lending Act-Real Estate Settlement Procedures Act (TILA- RESPA) Integrated Disclosure Rule (TRID), effective with loan applica- tions as of October 3, 2015. The 1,888 pages of TRID meticulously rewrote the mortgage disclosure process with thoughtful detail, with the intention of making the mortgage origination process more transparent with easier to under- stand disclosures for consumers. The new disclosure requirements, also referred to as Know Before You Owe, were developed by the Consumer Financial Protection Bureau (CFPB) to help consumers understand the loan terms, loan features, and charges to facilitate shopping for loans they were considering. Two new disclosures, the Loan Estimate and Closing Disclosure, replaced the existing Good Faith Estimate, Initial TIL Disclosure, Final TIL Disclosure and Settlement Statement. Lenders were unaware of the severity of the storm coming over the horizon. Despite the entirety of the mortgage origination industry focusing its efforts on defining the origination requirements of TRID, the secondary market was left to focus on defining the liability surrounding these new disclosure obligations that was not abundant- ly clear, specifically attempting to quantify the risk that the investor may face in the event that investor purchased a loan that contained a violation of TRID. The uncer- tainty surrounding the potential liability was compounded by the extreme scrutiny being placed on the disclosure timing and content that resulted in the perfect storm of compliance exceptions being identified on loans evaluated for secondary market acquisition. The loans being reviewed were evaluated under a microscope with every misstep by the originating lender rendering an exception on the loan cited by the third- party review (TPR), firms as a material exception that required remediation if remediation was available. It was more than a single rogue wave. The market liquid- ity for residential loans slowed to a standstill as aggregators, TPR firms, creditors, lawyers, and rat- ing agencies tried to distinguish between significant compliance exceptions and others that could be included in securitizations. Anyone on the boat at that time was sure to put on their life jacket while bracing against the waves and winds that effectively stopped forward progress and threatened to capsize the market. As a result, the Structured Finance Industry Group (SFIG), the trade association to the capital markets, through the SFIG RMBS 3.0 due Diligence, Data and Disclosure Workgroup took on the challenge of tying each and every provision of TRID to the specific liability provision of TILA. Their primary goal was to create a uni- form testing standard as a result of a consistent Truth-In-Lending Act liability interpretation according to their understanding of prevailing legal precedent and informal writ- ten guidance and webinars offered by the CFPB, as it applies to the Know Before You Owe/TILA RESPA Integrated Disclosure Rule. This workgroup included individuals representing prominent law firms, TPR due diligence com- panies, rating agencies, issuers, and other industry participants. This SFIG effort resulted in the first version of the RMBS 3.0 TRID Compliance Review Scope pub- lished on June 15, 2016, understand- ing that the conclusions set forth therein do not necessarily reflect how courts and regulators, includ- ing the CFPB, may view liability for TILA violations presently, or in the future. The first version of the SFIG TRID Compliance Review Scope proved to be the catalyst that the secondary market needed to confidently commence purchasing loans subject to TRID, providing much-needed liquidity to the origination market. Since June of 2016, the rating agencies, TPR firms, and the capital market investors have confidently followed the SFIG TRID Compliance Review Scope effectively placing the private label securitization marketplace back on a strong footing. On October 18, 2018, the SFIG RMBS 3.0 Due Diligence, Data