Editor's note: This select print feature appeared in the August 2015 issue of DS News.
By Richard Horn
The Consumer Financial Protection Bureau (CFPB) gave the mortgage industry quite the surprise on June 24 of this year. With only 27 working days until the August 1 effective date of the TILA-RESPA Integrated Disclosure rule (or “TRID” for short), it proposed to delay the rule’s effective date to October 3. The reason? The agency that holds the industry to the fire for compliance with its regulations missed one of its own compliance requirements for the TRID rule. The CFPB dubbed its mistake as an “administrative error.” But this administrative error had serious consequences, both good and bad, for the industry. Some are TRIDiculously happy; others are stuck TRIDing water on their project plans. And the proposed delay has repercussions for not only TRID, but for the CFPB’s future mortgage rulemakings as well.
The TRID rule is a 1,888-page rule that integrates the disclosures under TILA and RESPA, and in the process completely overhauls the mortgage origination process. It integrates the current application and closing disclosures (the Good Faith Estimate, HUD-1 settlement statement, and the initial and final Truth in Lending statements) into two new disclosures: the Loan Estimate and Closing Disclosure. The rule also changes the definition of “application” that applies to the disclosure requirements, makes lenders responsible for the Closing Disclosure, and imposes new accuracy, timing, and provision requirements for these disclosures. The disclosures are also drastically different from the current disclosures. For example, the disclosures use a completely new payment schedule, the Loan Estimate itemizes closing costs, the new Closing Disclosures does not use the current HUD-1 line numbers, and there are new disclosures required by the Dodd-Frank Act. As some in the industry have said, this rule eats the CFPB’s previous Title XIV rules for lunch.
What was the CFPB’s so-called “administrative error?” It missed a deadline under the Congressional Review Act (CRA) to submit a report on the TRID rule to Congress and the Government Accountability Office. Under the CRA, “major rules,” defined in part as rules that have an annual effect on the economy of at least $100 million, cannot take effect until 60 days after this report is submitted. During this period, Congress has the chance to prevent the rule from taking effect by a joint resolution of the House and Senate. The CFPB failed to submit this report. It discovered its error and then submitted the report on June 16. This means the earliest possible effective date for the TRID rule is now August 15.
As a result of the CFPB’s administrative error, the CFPB had to delay the effective date of the TRID rule by at least two weeks to August 15. But the CFPB took this opportunity to turn what could have been an embarrassing episode into some positive press for the agency. It issued a proposed rule on June 24, 2014 to delay the TRID rule’s effective date until October 3, 2015 (but also sought comment on the August 15 date).
Considering that the industry was already 19 months into the 20-month implementation period, in which project plans, staffing plans, technology planning, third party contracts, and importantly, staff vacations may have been planned for months to over a year, the delay had serious consequences for companies that had been diligently working towards August 1, 2015. Operational challenges from changing all of these timeframes at the last minute are tricky. This is especially true considering the final effective date is not known. The CFPB did not provide a date by which they expect to let industry know the final effective date. And because they issued a proposed rule to delay the effective date, the public was permitted to submit comments to the CFPB on the delay, which the CFPB has to review. Reviewing hundreds of comment letters takes time (This Author can speak from personal experience reviewing the almost 3,000 comment letters to the proposed TRID rule). Consequently, it may not be until mid-July that we know what the final effective date will be, which is only a month before the August 15 date on which the agency sought comment. It puts many companies that were aiming for August 1 in quite the TRID pickle.
In its proposed rule, the CFPB stated that it decided to seek comment on a longer delay than August 15 because it was concerned that a mid-August effective date could pose operational challenges, and it learned of delays in software updates from technology vendors resulting in a limited amount of time for software testing. Also, in its initial June 17 announcement of the delay, Director Cordray expressed concerns about “consumers and providers whose families will be busy with the transition to the new school year at that time.”
But these are things the CFPB has been hearing about since TRID was issued. So, some are validly asking the question, “why now,” especially with only 27 working days left before the effective date. Some say the CFPB did this on purpose to save face after mounting political pressure. After 19 months of stating that it would not delay TRID, and mounting pressure from the industry and Congress, the CFPB may have needed some cover for finally relenting. Others say it is an indication of the CFPB paying scant attention to TRID. The CFPB leadership has been noticeably less vocal about the TRID rule than its previous Title XIV rules, including the Servicing rule and Ability-to-Repay/Qualified Mortgage rules. And the focus of an agency does come from the top down. After discovering its error, the agency may have been concerned about the potential for public criticism of its mistake, especially with its own tough treatment of compliance violations by the industry. By proposing to delay the TRID rule by two months, rather than the required two weeks, the agency was able to redirect public criticism of its own compliance violation to the drafting of comment letters supporting the CFPB’s proposed delay. This appears to have happened, as the majority of the letters already submitted appear to be supportive of the delay.
But whatever the reason for the administrative error or the delay, what does it mean for the industry? Importantly, the delay means the industry will have additional time to test its software. The TRID rule requires thousands of new data fields and calculations for the disclosures. And lenders need to make sure their loan origination software systems and document production software work seamlessly to properly complete the forms. Also, the TRID rule requires new integrations with the software of the title insurance industry, because the TRID rule assigns responsibility for the new Closing Disclosure, including its itemized list of settlement charges, to lenders.
Unfortunately many third-party lender software vendors have only very recently released or not yet released fully functional software updates to their customers. And the software integrations, which are vitally important to the successful implementation of the TRID rule, cannot be fully tested until all of the lender software vendors release their software updates. The effective date delay will allow the industry additional time to test these software integrations.
In addition, the effective date delay allows industry to obtain additional guidance form the CFPB. Many questions remain about the application of the TRID rule to the infinitely variable sets of facts that come up in individual real estate and credit transactions. Also, important questions about how the TRID rule affects the mortgage servicing industry have yet to be asked or answered. For example, does the new definition of “application” under the TRID rule include consumers’ loss mitigation applications under the CFPB’s Servicing Rule? The new TRID definition only includes six items, the name, income, social security number, the property address, estimate of the value of the property, and the mortgage loan amount sought. Arguably if a servicer obtains this information in a loss mitigation application, the need to provide the integrated disclosures could be triggered. In addition, the datasets for loans originated under the TRID rule may be different from those under the current rule, which servicers may need to take into account.
How does this proposed TRID delay affect the implementation of future CFPB rules? It definitely opens the door to the possibility of effective date delays. For example, the CFPB’s forthcoming Home Mortgage Disclosure Act (HMDA) rulemaking is heavily dependent on technology. Considering that the CFPB proposed to delay the effective date of the TRID rule because of its learning of software delays, the CFPB could delay whatever effective date it finalizes for the HMDA rule in the event of software delays. This also could apply to other implementations that are software dependent, including the CFPB’s proposed changes to the periodic statement requirements. The industry may want to focus on flexible project plans for the CFPB’s future rulemakings that provide breathing room for effective date delays, and the CFPB’s administrative errors.