In a letter to CFPB Director Richard Cordray, the Association of Mortgage Investors said the “Know Before You Owe” rule is discouraging investors from investing in the mortgage market.
“The recent evidence is that the Rule, while extremely well-intentioned, has resulted in a climate of legal uncertainty and is chilling private investment in the U.S. mortgage market,” the AMI wrote. “We urge the Bureau to open a new public comment period to address the concerns of mortgage investors. We seek formal written guidance clarifying the liability for violation of each individual TRID requirement, as well as the scope and applicability of TRID’s cure mechanisms.”
The AMI stated that it was concerned primarily about “the Rule’s impact and consequences, whether unforeseen, on mortgage availability and affordability.” One of the association’s greatest concerns about the rule was its perceived vagueness. The AMI demanded clarification on whether the statutory authority for each TRID requirement fell under TILA or RESPA.
“Without clarification, investors will generally interpret the regulation in a strict manner, identifying any deviation from the rule as a material error that exposes an investor to full TILA liability,” the letter stated. “…Generally, increased liability risk will result in additional costs that will ultimately be passed on to borrowers. We believe that it has already resulted in lower loan origination.”
According to the AMI, the current uncertainty about the scope of the rule has a myriad of adverse consequences for the industry.
“It is not simply the probability of a lawsuit or potential legal costs – although those are certainly factors – there is reputational risk; increased transaction and operational costs; and, post-crisis, there is little corporate tolerance for any legal or regulatory risks,” the letter stated.
The negative impact of the rule was evident almost immediately after it went into effect in October, the AMI said.
“Many such examples have been reported in the press. First, Moody’s Investors Service recently reported that TRID compliance violations are running rampant among newly originated loans,” the letter stated. “Analysts also report 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. Second, origination volumes for November 2015 were markedly down, especially in California.”
The association also fears an expansion of the rule in the future.
“Some have stated that this is a minor concern because it only affects loans outside of the agency standards – and that is currently a small market,” the AMI wrote. “But it could have an outsized impact on the origination of loans that do not meet agency standards. This means that it will particularly impact lending for borrowers with few other options. Eventually, we believe that even agency loans could also undergo scrutiny should they experience delinquencies. The GSEs at that point may decide to review TRID documentation and penalize lenders who made even small clerical errors in the disclosures. Therefore, how to handle TRID errors, the ability to make corrections, and how to reduce resulting liability will be issues that the industry will need to deal with in the years to come.”
An industry group is urging the Consumer Financial Protection Bureau to rethink TRID, insisting that the rule is having an adverse effect on the mortgage market.