CFPB Warning: Cordray 'Disturbed by Reports' of TRID Implementation

In what seemed to us to be a very long speech for him, Richard Cordray, Director of the Consumer Financial Protection Bureau spoke of three major changes that had affected his audience over the past few years.  He spoke to members of the Mortgage Bankers Association (MBA) at their annual convention in San Diego, touching on the qualified mortgage (QM) rule, the recent implementation of the new TILA-RESPA Integrated Disclosure (TRID) rule and forms, and last week release of final rules for reporting under the Home Mortgage Disclosure Act (HMDA).  He also elaborated on a recent Bureau bulletin about marketing services agreements (MSAs.)

It was his remarks on TRID implementation that pricked up a few ears.  Cordray said the Bureau had recognized the significant changes the industry would have to make to adjust to the new forms and timelines and the need for coordination with third parties and so allowed for a nearly two year implementation period - "Which was toward the outer limit of what industry requested."  Even so, he conceded, it has become apparent that the process did not go as smoothly as hoped.  Then he said, "Quite frankly, I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely.  Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date.  It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace."

This morning Richard J. Andrea no, Jr. a partner in the Ballard & Spahr law firm which monitors CFPB activity interpreted Cordray's remarks as a "Warning to vendors" on TRID compliance.  Andreano said "He indicated that not only the CFPB but all of the financial regulators might 'need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.'  Director Cordray's remarks suggest that the CFPB may be questioning whether various vendors are qualified to provide the services they offer and is preparing to use its supervisory and enforcement authority as to 'servicer providers' to take a closer look.  (Under Dodd-Frank, the CFPB can examine "service providers" to entities that it supervises.)"

Andreano also criticized Cordray for "downplaying concerns" from lenders that TRID is hurting business because of the need to delay closings when changes trigger the need for new disclosures.  "It appears the Director does not fully appreciate that the concerns expressed by lenders largely do not involve the limited situations that require a revised Closing Disclosure with a new waiting period.  Rather, lenders mainly are concerned (1) with last minute changes that can delay the delivery of the initial Closing Disclosure, which can delay a closing, and (2) that depending on the circumstances, they may not be able to reset the tolerances with a Closing Disclosure."

In additional comments about TRID Cordray went on to say that CFPB recognizes that the mortgage industry "Has already dedicated substantial resources to understand the rules, adapt systems, and train personnel.  We know that you are just trying to get it right and that there is no particular advantage to playing fast and loose with these disclosures."  He said that the Bureau and other regulators have made it clear that initial compliance examinations will be sensitive to progress made.  In particular examiners will be squarely focused on whether good-faith efforts have been made toward compliance, the same approach they had taken in oversight of the QM rule. 

The QM rule had generated "scary predictions" about doubled mortgage costs, reduced volume and the demise of community banks and credit unions.  Some enjoyed describing the QM rule as the "Quitting Mortgages" rule, he said. 

QM has now been in place for almost two years, and none of those anxious concerns have come true the Director said.  The recently released 2014 HMDA data confirms in fact the very opposite.  In the first year of the new rules, "home purchase mortgages increased by 4.6 percent.  For jumbo loans, most of which are non-QM loans, the rate of increase was substantially higher and, so far as we can tell, there has yet to be a single case brought against a lender for making such a loan.  The overall upward trend appears to have accelerated over the first half of this year.  And while we saw minor consolidation in some parts of the mortgage market, there is no evidence of any mass exodus, as the doomsayers predicted." After adjusting for merger activity, the number of lenders that reported having originated mortgages showed an increase in 2014 and there was also a year-over-year increase in the number of community banks and credit unions that originated home-purchase mortgages.  

Regarding MSAs, Cordray said that in CFPB's experience many necessarily involve substantial legal and compliance risk for the parties to the agreements. Those risks appear to be greater and less capable of being controlled through monitoring than industry participants may have recognized in the past and appear to create opportunities to pay or accept illegal compensation for referrals of settlement services.  It is inherently difficult to monitor activities that are performed in turn by a wide range of individuals in view of the strong financial incentives and pressures that exist in the mortgage and settlement service markets,

"In sum, the Bureau's experience in this area gives rise to grave concerns about the use of MSAs in ways that evade the requirements of RESPA.  In consequence, we have reiterated that a more careful consideration of legal and compliance risk arising from these agreements would be in order for anyone that participates in the mortgage industry, including but not limited to lenders, brokers, title companies, and real estate professionals.  This review is especially warranted insofar as whistleblower complaints about legal violations with MSAs have been increasing.  Our enforcement actions against companies and individuals for violations of RESPA have resulted in more than $75 million in penalties to date, almost all of that arising from the payment of improper kickbacks and referral fees.  We will remain active in scrutinizing the use of such agreements and related arrangements in the course of our enforcement and supervision work," Cordray said.

He went on to state that bulletins like the MSA one last week are the Bureau's  way of trying to make crystal clear its expectations.  "We intend for everyone to pay careful attention to what we are saying and act accordingly.  We do not want to play "gotcha" with industry.  We want industry to follow the rules - because that is good for consumers, honest businesses, and the economy as a whole."

Cordray said the last major assignment that Congress gave CFPB with respect to the mortgage market was to update the reporting requirements of the HMDA.  CFPB met this statutory mandate last week, finalizing the new HMDA rule which provides for more robust HMDA data.

The new data, he said, will make it easier to identify new consumer protection concerns as they develop, and to assess whether consumers have equal and fair access to mortgages. He cited the current optional nature of data on home equity lines of credit, the lack of information to identify seniors who are frequent targets for costly loans and shoddy home improvements and the lack of information on rates and fees.  "These and other gaps can hinder everyone's ability to determine whether borrowers have access to affordable loans or to identify discriminatory targeting of borrowers for riskier or higher-priced loans."

The new rule has modified certain existing data elements to further the purposes of the statute and align with industry standards or other regulations; added a set of new data elements that Congress required; and used the Bureau's discretionary authority to add some other data elements to further understanding of specific markets or practices.  Because this means yet another round of implementation for lenders on top of the two previous changes CFPB is allowing more than two years to bring most provisions on line - until January 2018 - with the first reports containing new data not due until early in 2019.

The Bureau is also trying to build a better collection system, in many instances aligning definitions with current industry standards - the MISMO standards.  It is also working with other federal agencies to modernize the data submission process to collect information more efficiently, reducing paper and eventually saving the industry an estimated $30 to $60 million each year.  The final rule also exempts institutions small institutions and rural institutions - reducing those that must comply with HMDA reporting by approximately 1,400.  

Cordray concluded by noting the "dazzling changes" in the mortgage market over the last decade.  "It has gone from being the overheated, increasingly irresponsible market that blew up the largest economy in the world, to retrenching dramatically into an overly tight and restrictive market where many good, creditworthy applicants cannot qualify for reasonable loans.  Lack of effective regulation that fostered a race to the bottom in underwriting standards has been replaced by strong new rules designed to protect and support both consumers and responsible businesses.  The result is a mortgage market that is steadily recovering, with home values increasing in many areas and millions of homes emerging from their previous underwater status."