The implementation of the Consumer Financial Protection Bureau's (CFPB's) TILA-RESPA Integrated Disclosure (TRID) rule brought a number of both changes and headaches for originators, but what will be the impact on loan securitizations?
A residential mortgage-backed securities (RMBS) report from Morningstar Credit Ratings by Brian Sandler, AVP at Morningstar and Brian Grow, Managing Director at Morningstar, found that "potential errors related to a new residential mortgage disclosure rule are not a significant source of credit risk to securitizations."
Morningstar Credit Ratings' based its comfort with the potential credit risk attributed to TRID on discussions with parties who work closely with TRID such as investors, lenders, attorneys, and due-diligence firms.
According to the report, lenders are struggling to adopt the new disclosures into their current business practices.
"The implementation of the TRID rule has created challenges for some originators," Morningstar said. "Difficulties include more paperwork and language in the rule that alternates between being ambiguous and overbearing. The rule, also called Know Before You Owe, imposes detailed requirements for completing disclosures and deadlines for providing disclosures to borrowers. While TRID helps clarify disclosures for borrowers, some of the rule’s requirements, such as listing fees in alphabetical order or rounding numbers to certain decimal places, increase the likelihood for technical rule violations that do not hurt borrowers."
As a result of the TRID changes, lenders have made numerous clerical or formatting errors, which Morningstar believes are nonmaterial. In addition, the report found that originators are making meaningful errors as well that have to be cured.
"These difficulties have created uncertainty and concerns among lenders and investors," Morningstar stated.
Morningstar expects that only obvious errors on the face of documents, such as fee tolerance or disclosure timing violations, will result in assignee liability. The credit ratings agency said that a due-diligence firm should catch these types of material errors, so such violations can either be cured or the loans can be removed from the pool prior to securitization when a due-diligence review is performed on every loan in the pool.
"Under TRID, many violations can be cured with revised disclosures for up to 60 days after closing. While there has been ambiguity as to which types of violations can be cured postclosing, Morningstar does not view any violations that have been cured with revised disclosures and refund, if applicable, as material credit risks," the report explained.
Morningstar cautions that violations that cannot be cured after closing, such as failure to provide a loan estimate within three business days of application, may present a risk.
"Morningstar would not expect loans with uncured violations to make it into a securitization when due diligence is performed on every loan," the authors wrote. "Also, while Morningstar considers the grading provided by due-diligence firms, we consider other factors when evaluating the credit risk of TRID violations. Morningstar finds it helpful to learn: the provision violated; the cure method, if applicable; the party who cured the violation; and the number of days to cure from closing."
The lack of financial penalties is another aspect of TRID that limits the credit risk of rule violations to securitization that investors could face, Morningstar said.
The number of nonmaterial violations is expected to decline as originators refine their origination processes and become comfortable with TRID requirements, the report found. Since the rule went into effect, the number of violations has already declined. .
"The ambiguous regulations under TRID, as well as added paperwork, have created opportunities for errors. The CFPB has recognized the challenges in implementing TRID. Its letter states that examinations by regulators will be “corrective” rather than “punitive” regarding TRID violations for the first few months," the authors wrote. "Morningstar believes such examinations will contribute to reducing TRID violations, and that lenders will learn from their mistakes and improve their origination processes."
Click here to view the full report.