Since October 3, 2015, which was the effective date of the TILA-RESPA Integrated Disclosure Rules (TRID), banks and members of the mortgage industry have continued to work hard to implement TRID. But for those who have attempted to seek liquidity by selling mortgage loans in the secondary market, the transition to TRID has not been smooth.  Quality control vendors and private investors have been rejecting mortgage loans originated under TRID for a variety of violations, including technical violations, mainly due to uncertainty regarding the TRID liability framework.

At the end of December, the Director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, issued a letter responding to concerns expressed by the Mortgage Bankers Association regarding violations of TRID. Director Cordray believes that private investors who reject loans based on “formatting and other minor errors” are overreacting and that private investors have “negligible” risk in buying loans that have good-faith formatting errors and the like. But for many in the mortgage industry who have experienced voluminous repurchases and litigation for alleged loan defects, the reaction of private investors to TRID seems to be a prudent assessment of risk. In particular, banks, mortgage lenders, and securitization trustees have faced large fines and claims for violations of the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act for allegedly breaching contractual representations and warranties in secondary market sales of mortgage loans. Moreover, Director Cordray’s letter does not provide much comfort since the letter was not issued as an official interpretation under either Section 130(f) of the Truth in Lending Act (TILA) or Section 19 of the Real Estate Settlement Procedures Act (RESPA). For those with exposure to TRID liability, the bottom line is that Cordray’s letter is not binding on courts or regulators and it does not provide concrete relief to the secondary market regarding TRID liability.

Current State of TRID Liability
In reviewing its liability exposure, a market participant should break down its risk analysis into the following: (i) regulatory risk; (ii) borrower risk; and (iii) contractual risk. Regulatory risk is the risk that a regulator or government-sponsored agency will penalize a lender for non-compliance with the TRID rules. Borrower risk is the risk that a borrower can seek statutory or actual damages from a lender or assignee for a violation of the TRID rules. Contractual risk is the risk that another market participant that purchases the loans can seek contractual remedies from the seller of the loans for failure to comply with the TRID rules.

Regulatory Risk
The CFPB, OCC, and FDIC have issued statements stating that for initial TRID examinations, their examiners will review a lender’s “implementation plan, including actions to update policies, procedures and processes, its training of appropriate staff, and its handling of early technical problems” in order to assess whether a lender has attempted in good faith to comply with TRID. The regulators expect good faith efforts to comply and will take that into account in its examination ratings. Similarly, Fannie Mae, Freddie Mac, and HUD have issued similar statements that they will not conduct compliance reviews of loan files for technical compliance until further notice. Each of these governmental agencies has indicated that initially they will not be strict and technical in their review for compliance, which should provide lenders with some breathing room in terms of compliance with the rules.

Borrower Risk
The CFPB, however, has declined to provide an official interpretation as to the scope of a borrower’s private right of action against lenders and assignees for violations of the TRID rules. Historically, borrowers could sue for violations of TILA, but not for violations of RESPA’s mortgage disclosure requirements.  However, once TRID combined the disclosure requirements from both statutes, it became unclear whether the CFPB would interpret the private right of action to be limited to TILA disclosure violations.

Director Cordray stated in his letter that TRID does not “change the prior, fundamental principles of liability under either TILA or RESPA.” This statement seems to mean that borrowers could not sue for violations of the RESPA mortgage disclosure requirements. In addition, it would also seem to limit a borrower to only filing suit for violations of the mortgage disclosure requirements in Part B of TILA, but not for Part A.

Director Cordray went on to state that TILA limits the liability of purchasers of mortgage loans to violations that are “apparent on the face of the disclosure statement provided in connection with the transaction.” Under TILA, a violation is “apparent on the face of the disclosure” if (1) “the disclosure can be determined to be incomplete or inaccurate by a comparison among [a] the disclosure statement, [b] any itemization of the amount financed, [c] the note, or [d] any other disclosure of disbursement;” or (2) “the disclosure statement does not use the terms or format required to be used by [TILA].”

The statutory provisions of TILA contain several limitations on private suits and damages. Statutory damages for certain TILA violations can be up to: (i) $4,000 in an individual suit; and (ii) the lesser of $1 million or 1% of the creditor’s net worth in a class action. A borrower can also sue for actual damages and attorney’s fees if the borrower can show actual harm resulting from the TILA violation. Director Cordray stated, however, that statutory damages are limited to the failure to provide a closed set of disclosures. This seems to indicate that statutory damages are only applicable to violations of mortgage disclosure requirements set forth in 15 U.S.C. Section 1638, which includes the disclosure of the annual percentage rate and the finance charge. Director Cordray also stated that any RESPA disclosures incorporated into TRID or Dodd-Frank Act disclosures added to Section 1638 are not subject to statutory and class action damages.

Contractual Risk
In the current secondary market for mortgage loans, the contractual representation that the mortgage loan has been “originated in compliance with all laws and regulations” is currently a non-negotiable representation in that purchasers are not willing to qualify this contractual representation in any way. This means that purchasers want the ability to “put” a loan back to the seller, even if the violation is a technical or minor violation. Director Cordray has suggested that lenders and investors should take advantage of the cure provisions under TRID, which makes it possible to avoid liability by curing certain types of violations. Practically speaking, this means that purchasers and investors of loans must make sure that they perform detailed quality control reviews that identify and address the errors promptly in order to take advantage of the cure provisions. This is because TRID’s cure provisions are generally conditioned on prompt corrective action, which requires corrections within 60 days of either consummation or discovery, depending on the cure provision. However, this ability to cure does not change whether an investor is willing to purchase the loan. In the current market, investors are refusing to buy the loan until the loan has been cured.

The cure provisions are not available for every kind of violation under TRID, however. A creditor can cure “non-numeric clerical errors” on the closing disclosure if the correction is done within 60 days of consummation. A creditor can cure incorrect closing costs by refunding excess amounts to the consumer and providing a corrected closing disclosure no later than 60 days of consummation.  In addition, a lender and investor can avoid civil, administrative, and criminal liability under TILA for any failure to comply with any requirement imposed under Part B of TILA if the creditor or assignee notifies the consumer of the error “within 60 days of discovery and makes whatever adjustments in the appropriate account as are necessary to ensure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.” Finally, a creditor that can show by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error may be able to avoid civil liability. These provisions are subject to court interpretation and are not bright-line rules that provide certainty to lenders and assignees.

Takeaway
While Director Cordray’s remarks were helpful and provide some guidance to the market regarding his intentions, they are not enough to relieve the current market’s concerns regarding TRID liability. Unless his remarks become an official interpretation, a conservative market participant may not be willing to purchase mortgage loans with technical violations, notwithstanding Director Cordray’s assessment that the risk is negligible.

For more information, contact Faye Ricci. Miller Nash Graham & Dunn attorneys routinely advise financial institutions of all sizes throughout the western United States in a wide range of areas, including mergers and acquisitions, SEC reporting and compliance, bank operations and regulatory compliance, loan documentation, and litigation.