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The Consumer Financial Protection Bureau (CFPB) recently finalized various updates to its mortgage disclosure rule, often referred to as “Know Before You Owe” or the TILA-RESPA Integrated Disclosures (TRID).  The updates were proposed approximately one year ago.  They include technical corrections, formal guidance, and a few substantive changes.  Some of the changes include:

  • Adding tolerance provisions for total payments that track existing TILA requirements regarding finance charges
  • Expanding the scope of certain exemptions for housing assistance loans
  • Applying TRID to all cooperative units, regardless of whether the cooperative units are classified as real property under state law
  • Providing guidance on sharing information with third parties

The new rule takes effect 60 days after publication in the Federal Register, but compliance is not mandatory until October 1, 2018.  A copy of the final rule is available here.

Notably absent from the final rule is guidance on the “black hole”—the period of time between issuing the Closing Disclosure and the actual closing date when, in certain instances, lenders may be prevented from resetting tolerances (and passing on closing cost increases to the borrower).  The amendments as originally proposed included a potential fix for this problem.  However, the CFPB decided not to adopt the fix based on conflicting comments that it received.  Instead, the CFPB issued a new proposed rule (with a new comment period) to address the “black hole” issue.  A copy of the proposed rule is available here.

The residential mortgage market underwent a significant regulatory change on October 3, 2015, when the TILA-RESPA Integrated Disclosure (TRID) rule went into effect.  TRID was promulgated by the Consumer Financial Protection Bureau (CFPB).  As the name implies, TRID combines the disclosure requirements of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).  These disclosures must be provided to consumers in connection with home mortgage loans.  TRID is more than a re-codification of existing regulations, however.  It is a major overhaul of the mortgage application and closing process.

The most visible change of TRID is the forms that must be provided to borrowers.  The Truth in Lending Statements, Good Faith Estimate, and HUD-1 Settlement Statement have been replaced by the “Loan Estimate” and “Closing Disclosure.”  The new forms are supposed to be more streamlined and easier for consumers to understand.  Behind those forms, however, is an almost 1900-page rule filled with new directives for mortgage lenders and other industry participants.

TRID imposes a significant compliance burden on the residential mortgage market.  So much so, in fact, that several industry groups requested a grace period from the CFPB.  They wanted a guaranty that good-faith violations would not be punished while the industry adjusts to the new regulations.  The CFPB declined to provide such a grace period, but indicated that it will initially focus on remedial actions rather than punishment.  However, CFPB Director Richard Cordray recently stated that many technology vendors have done a poor job implementing TRID.  This should concern any lender that relies on a third-party vendor for its mortgage loan origination software.  If the third-party vendor fails to comply with TRID, the lender will likely be held responsible.

Failure to comply with TRID can have significant consequences.  One potential consequence is an enforcement action by regulators.  This should come as no surprise.  What may be less obvious, however, is the risk of litigation from individual borrowers.  TRID greatly increases the risk of private lawsuits for disclosure violations.

The increased litigation risk is largely due to the fact that TRID blurs the line between TILA and RESPA.  TILA offers borrowers a private right of action.  RESPA generally does not.  Although TRID relies on both TILA and RESPA, the CFPB implemented the new rule entirely under Regulation Z (the regulation that implements TILA).  Therefore, the statutory remedies under TILA are now arguably available for any violation of TRID, including those provisions that derive from RESPA.  If courts accept this argument, TRID will effectively create a private right of action for numerous disclosure violations where none previously existed.

The increased litigation risk under TRID has not gone unnoticed.  Several commenters pointed it out before the rule became final.  The CFPB did not share their concern, however.  In the final rule, the CFPB summarized the issue as follows:

 TILA provides for a private right of action, with statutory damages for some violations, whereas RESPA does not provide a private right of action related to the RESPA GFE and RESPA settlement statement requirements. Some industry commenters expressed concern that if the final rule implements the combined disclosure requirements in Regulation Z, consumers would bring lawsuits seeking TILA’s remedies for RESPA violations. These commenters, which included several trade associations, several title companies, two large banks, and a large non-bank lender, requested that the Bureau specify which provisions of the integrated disclosure rules relate to TILA requirements and which relate to RESPA requirements. One title industry trade association commenter suggested that the Bureau implement the TILA disclosure requirements in Regulation Z and the RESPA disclosure requirements in Regulation X to discourage litigation invoking TILA’s liability scheme for RESPA violations.

While the final regulations and official interpretations do not specify which provisions relate to TILA requirements and which relate to RESPA requirements, the section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provisions. As stated in part IV, above, the authority for the integrated disclosure provisions is based on specific disclosure mandates in TILA and RESPA, as well as certain rulemaking and exception authorities granted to the Bureau by TILA, RESPA, and the Dodd-Frank Act. The details of the Bureau’s use of such authority are described in the section-by-section analysis. The Bureau believes these detailed discussions of the statutory authority for each of the integrated disclosure provisions provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.

Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 79,757 (Dec. 31, 2013).

The CFPB’s proposed solution (looking to the section-by-section analysis to determine whether a provision is based on TILA or RESPA) may work better in theory than in practice.  The whole purpose of TRID was to integrate the disclosure regimes under TILA and RESPA in a way that created a better consumer experience.  To that end, Dodd-Frank gave the CFPB broad flexibility to modify or exempt statutory requirements based on the public interest.  The Bureau used that flexibility liberally.  As a result, it may be difficult to isolate a particular statutory basis for many of TRID’s requirements.

TILA is already a heavily litigated area of law, and a go-to statute for consumers trying to prevent or delay foreclosure.  TRID may add fuel to the fire.  Many in the residential mortgage industry fear that it will.  Indeed, their concern led the House of Representatives to pass a bipartisan bill creating a four-month grace period for any person who makes a good faith effort to comply with TRID.  The bill is now before the Senate, but even if it is eventually signed into law, it will only delay the litigation risk.

It’s unclear whether borrowers can bring new causes of action under TRID, but they will almost certainly try.  This may be the next frontier of consumer litigation.

Balch & Bingham LLP is hosting a seminar on Friday, November 13, to discuss the impact of TRID, and how to navigate the new sources of liability it imposes.  More information about the seminar can be found here, or by contacting Jonathan R. Grayson at (205)226-8796 or jgrayson@balch.com.

Please join Balch & Bingham on November 13 for an in-depth discussion about the newly-implemented TILA-RESPA Integrated Disclosure Rules (“TRID”).  This seminar will solely focus on post-implementation issues and managing the litigation risks arising from the new rules.

The event will include guest speaker, Richard Horn, a former Senior Counsel and Special Advisor at the Consumer Financial Protection Bureau (CFPB), who led the CFPB team that wrote the TRID rules. Balch attorneys Gregory C. Cook and Jason Tompkins ​will also speak on potential sources of liability under TRID and developing strategies to avoid TRID-related litigation.

When:
8:30 a.m. – 12:00 p.m.
November 13, 2015

Where:
Balch & Bingham’s Birmingham Office
1901 Sixth Avenue North, Ste. 1500
Birmingham, AL  35203

Please register by November 11 to attend. Register here: http://www.cvent.com/d/gfq7tl

Event Invitation_ November 13 2015 (1)
To view: So You’ve Implemented TRID, Now What?

The Consumer Financial Protection Bureau recently published the eighth edition of its Supervisory Highlights, in which the Bureau “shares recent supervisory observations” touching on several legal topics under its jurisdiction. One of the principal areas covered in this edition is mortgage servicing. Ensuring compliance with the CFPB mortgage servicing rules that went into effect on January 10, 2014 has been a “high priority” for the Bureau. The Supervisory Highlights details mortgage servicer violations in the areas of loss mitigation, foreclosure, periodic statement disclosures, and the Homeowners Protection Act.

Loss Mitigation

Under Regulation X, a borrower in default may submit a loss mitigation application to the mortgage servicer in hopes of avoiding foreclosure. The mortgage servicer is required to notify the borrower within five days that it has received the application, and provide a list of any additional documents or information that may be required. CFPB examiners noted multiple violations of this rule. Mortgage servicers were cited for failing to send borrowers timely notice acknowledging receipt of a loss mitigation application, and requesting unnecessary or duplicative documents from borrowers. Servicers were also cited for misrepresenting the terms of a loan deferment plan, and for failing to honor a trial modification after the loan had been transferred. The Bureau noted that it was paying close attention to “the risks inherent in transferring loans in loss mitigation, including the risk that information is not accurately transferred between servicers.”

Foreclosure

Mortgage servicers were cited for sending foreclosure notices to borrowers who were current on their loans, or who had already been approved for a loss mitigation plan.

Periodic Statement Disclosures

Servicers were cited for failing to send periodic mortgage statements, or sending statements with incomplete or inaccurate transaction histories, in violation of Regulation Z. In certain cases, the problems were caused by software limitations or glitches.

Homeowners Protection Act

Servicers were cited for failing to automatically cancel private mortgage insurance after the borrower’s mortgage balance reached 78% of the original property value, as required by the Homeowners Protection Act.

The CFPB mortgage servicing rules can be complex, even for experienced servicers. To help ensure compliance, and to limit liability for potential violations, a mortgage servicer should consider the following:

  • Written policies, training, audits. As the Supervisory Highlights make clear, the CFPB expects mortgage servicers to develop written policies and procedures consistent with the mortgage servicing rules. In addition, the Bureau expects servicers to train their employees to follow the policies and procedures, and to conduct regular audits to help ensure compliance.
  • Computer systems. Software limitations or failures will not excuse a mortgage servicer from failing to comply with the mortgage servicing rules. Servicers should thoroughly vet third party vendors and products, and should audit IT systems regularly.
  • Corrections and Self-Reporting. If a systemic violation is discovered, fix it immediately. A mortgage servicer may also want to self-report a large-scale violation. The CFPB, as with most regulators, tends to be more lenient on companies that promptly remedy and self-report violations. This is true regardless of whether the violation is handled by the Supervision Office or results in an enforcement action. Of course, counsel should be consulted promptly after a violation is discovered.

Alabama law currently provides that real property sold at a foreclosure or execution sale may be redeemed up to one year after the sale date.  This one-year redemption period is set to change, however, for certain residential properties.  Recent legislation passed by the Alabama Legislature shortens the redemption period to 180 days “for residential property on which a homestead exemption was claimed in the tax year during which the sale occurred.”  For all other properties, the one-year redemption period remains in effect.

In addition to shortening the redemption period, Act 2015-79 establishes additional notice requirements for a foreclosure of homestead property.  The Act requires a mortgage holder to provide the following notice to the mortgagor by certified mail to the property address at least 30 days prior to the foreclosure sale:

Alabama law gives some persons who have an interest in property the right to redeem the property under certain circumstances.  Programs may also exist that help persons avoid or delay the foreclosure process.  An attorney should be consulted to help you understand these rights and programs as a part of the foreclosure process.

This language must also be included in the foreclosure notice that is published in the newspaper.  Failure to provide this notice will not affect the validity of the foreclosure sale, but the 180-redemption period will not begin to run until the notice is provided.

The Act has an effective date of January 1, 2016, but it does not apply to “[s]ales made under a power of sale contained in any mortgage or junior mortgage dated prior to the effective date.”  Out of an abundance of caution, foreclosing creditors may want to provide the statutory notice for all foreclosures of homestead property after January 1, 2016, regardless of when the mortgage is dated.  They may also consider providing the notice before foreclosing on any residential property, not just a homestead property.  If for no other reason, this would allow foreclosing creditors to utilize a single, uniform approach for all non-commercial foreclosures.