TRID Enforcement Ramping Up
By: Greggory B. Oberg, Esq.
Costly TRID Technicalities are Coming: A Deep Dive on CD Contact Information
As many of you are aware, the honeymoon is over when it comes to TRID. A friend of the blog, Ben Giumarra, presented some statistics on this point during the MMBA conference a few months back, based on the FDIC's 2019 Supervisory Highlights publication. In that report, the FDIC outlined the proportion of Level 2 and Level 3 violations, which represent the most severe categories of findings. A full quarter of all violations found in the examination cycle related to TRID. Some estimates have pegged the number as high as 40% of all examination findings as TRID related, when considering the less significant Level 1 violations (not present in FDIC Report).
But this is just the latest evidence of a ramp up in TRID enforcement--both in terms of depth of scrutiny and potential for monetary sanctions. Typically, a Level 3 violation comes with 5 figure restitution.
Commentators and (to the extent you can survey them) auditors have been waiving the red flag on TRID examination risk since before TRID 2.0 came into effect. Now they have empirical evidence of this point, and those of us who have NOT taken this risk seriously are behind the curve.
In short, TRID IS COMING.
Why the Increase in TRID Violations?
In conversations I've had, there seems to be two primary theories are posited to explain the uptick in violations. Consensus seems to say that either A) lenders got lazy in the age of automation and are simply making more mistakes as they increase reliance on automated tools not fully understood by the staff; or B) the regulators gave a grace period, either benevolently with the understanding of the seismic shift TRID represents, or simply because they also have a learning curve.
The first theory can be disposed of relatively quickly; although there are some grains of truth in the background. Sure, on an institutional level--particularly in smaller institutions and non-depository lenders--compliance may simply be lacking. Institutions are relying on tools like Encompass, LoneStar, and Optimal Blue to generate TRID disclosures and set pricing and fees for Good Faith purposes. When you rely on a tool blindly to do its job, you lose the understanding of what it is doing sometimes. I think it's very fair to state that automation has sometimes led to an exodus of old school knowledge in favor of technology solutions and staff geared towards managing these tools. But this cannot fully explain why the industry as a whole is seeing more violations on TRID.
Note-A related theory is that lenders have simply stopped caring as much in the age of Trump, supposing that enforcement generally is on the decline. The FDIC focus on TRID in examinations, as evidenced by the previously-unprecedented Supervisory Highlights statistics, seems to indicate lenders may have overplayed their hand if they were banking on a kinder, gentler [insert your regulator here].
My vote goes with Theory Two; regulators just needed ~4 years to get their heads around this thing too.
Regulators Picking Up Steam
TRID is something analogous to String Theory for Mortgages in my mind; in that it both describes the movements of the mortgage market in the macroscopic scale, and defines the movement of minuscule (or technical) elements of a mortgage transaction at the loan-level. Much like String Theory, then, TRID attempts to unify those two realms--the traditional physics of mortgage being the macro scale, and the quantum mechanics of mortgages being the nuts and bolts of how individual transactions are executed.
As with physics, the traditional/macro model evolved first, followed by the micro elements of disclosure. TRID was designed to bridge that chasm, and industry did about as well at accepting it as scientists did with String Theory. I would contend that previous exam cycle enforcement of TRID focused on the understandable--the big picture items of traditional disclosure regimes--by necessity due to the depth of understanding required to enforce the more granular, micro, and technical elements of TRID.
Moving forward, it seems FDIC is strongly signaling a willingness (and ability) to wield a bigger sword for smaller problems when it comes to TRID. As opposed to previous cycles, items not directly impacting on costs to the consumer will be taking center stage as federal regulators begin the push to compel TRID compliance from a slow-to-change industry.
No Harm, No Foul?
One of the harder concepts to grasp from TRID is that it's not all about costs and timelines. It's also--or maybe even primarily--about communication and diligence. Lenders give statutorily prescribed disclosures in a uniform manner across the country specifically to effectuate the congressional intent of encouraging informed consumer financial choice.
Maybe no element is more core to the ability of the applicant(s) to shop around, ask questions, and fully understand the legal and financial ramifications of their mortgage transaction than the Contact Information provided for the material parties to the transaction on the Closing Disclosure.
Consumers lose the ability to meaningfully interact in their mortgage transaction when they are not provided with the information needed to speak to whomever is the appropriate party to solve their question. Under 12 C.F.R. §1026.38(r), lenders are required to disclose the following for each material party to the transaction:
Name of the legal entity performing the applicable role in the transaction;
A mailing address for the entity named in (1);
The NMLS number of the entity originating the loan (if applicable);
The name of the natural person at the entity described in (1) deemed the "primary contact for the consumer"
The NMLS number of the individual named in (4);
The Email Address of the person named in (4); and
The phone number of the person named in (4).
TRID guidance and legislative history tells us that the CFPB contemplated that ability to contact an actual person at each of the transaction participants is necessary for full disclosure and resolution of consumer concerns. They reason that each party may/will have a different piece of the transaction, and that contact with the party primarily responsible for a function facilitates full and fair disclosure of financial terms.
So, what's the harm? It's the consumers' inability to ask questions they may have. Sure, it's speculative, but the harm is well founded in the TRID rule and TILA statute. The theory goes that the consumer might have acted differently had they been able to ask all the questions they wanted to without the undue burden of bouncing line-to-line to find a person who has information. Very similar to the spirit of the loss mitigation rules in the 2016 Mortgage Servicing Rules.
But more important than the harm, is the fact that failure to include any of the above-mentioned information is per-se a violation of TRID. Furthermore, it would not likely be deemed "curable" as the timing element in the intent of disclosure relates to the ability to ask pre-consummation questions. The harm is thus already done once the loan is closed.
Little, technical issues like these may have flown under the radar previously, but I think it's fair to assume the honeymoon is over, and the real enforcement will begin with your next examination. One final note to those of you who are state regulated, lest you think this article centering on federal regulators is inapplicable to your institution; state regulators usually lag about 1 examination cycle behind federal, and take their cues from Interagency Examination Guidance. Given that the FDIC uptick is for 2018 examinations, that "1 cycle lag" may have already expired.
Seriously guys, TRID IS COMING (it actually is this time, I'm not just doing my best Ned Stark impression).