It had all the trappings of a traditional D.C. compromise: bipartisan congressional briefings, conference calls with industry leaders and some praise immediately following the announcement.
But make no mistake: the Consumer Financial Protection Bureau gave little ground in its pledge Wednesday to be “sensitive” to lenders that make a “good-faith effort” to comply with new mortgage disclosure rules that go into effect in August. The agency’s position was essentially the same as it was previously, and its statements fell short of a formal grace period that the industry and lawmakers had been demanding.
“This CFPB letter is a non-event,” said Richard Horn, one of the CFPB’s former team leaders who helped write the new disclosure rule. “They were probably going to give credit for good-faith efforts by lenders who complied with the rule anyway.”
Still, that didn’t stop some trade groups from declaring victory. The industry has been pushing for months to delay enforcement of the new disclosures, arguing that the two years lenders have had to get ready is insufficient. They successfully lobbied Congress to weigh in, with nearly 300 lawmakers signing a letter to the CFPB asking for examiners for a hold harmless period from Aug. 1 until Dec. 31.
“I believe the bureau has listened to the input of MBA as well as other stakeholders about how best to enforce TRID,” said Dave Stevens, the head of the Mortgage Bankers Association, in a statement. “With so many difficulties around integrating systems, the industry needs flexibility to ensure consumers do not incur costs or lose home sales due to unforeseen problems. This enforcement grace period is a win/win for the industry and consumers alike.”
But a closer reading of what the CFPB said on Wednesday shows that it did not grant a formal grace period. Instead, it simply said its examiners would take into account good-faith efforts to comply with the rule, using similar language in a blog post on its Website and in a separate letter from Director Richard Cordray to members of Congress.
“Our oversight of the implementation of the rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the rule on time,” said Cordray in his letter. “My statement here of this approach is intended to ease some of the concerns we have about this transition to new processes in the coming months that is consistent with the approach we took to implementation of the … mortgage rules in the early months after the effective dates in January 2014, which has worked out well.”
Cordray’s letter and the agency’s blog post never use the words “grace period,” nor do they define a good-faith effort or say how long any examiner flexibility would extend. Moreover, the CFPB’s position would not protect a bank from, for example, legal liability if a customer sued over the new disclosures.
“They didn’t put a lot of effort into this statement,” said Horn, who now runs his own law firm. “And they didn’t even attempt to put any parameters on the timeframe, or what would be considered ‘good faith efforts.’ Even HUD [the Department of Housing and Urban Development] did that for its revised RESPA rule in 2010, when they gave four months, and described good faith.”
Some lawmakers noticed the discrepancy between what they were asking for and how the CFPB responded.
“We are very disappointed the bureau has failed to provide necessary market certainty with a formal hold harmless period — especially given the massive bipartisan Congressional interest,” said Republican Reps. Blaine Luetkemeyer of Missouri and Randy Neugebauer of Texas. “That request was reiterated during a bipartisan meeting with Director Cordray yesterday afternoon. Today’s announcement falls far short of our expectations and runs contrary to the impression with which members were left yesterday. The bureau should expect vigorous oversight and attention from members of Congress in how its supervision efforts play out after August 1st’s effective date.”
Luetkemeyer and Neugebauer added that they would send letters to all the major financial trade groups “asking that they keep Congress informed of any and all disciplinary actions taken by the CFPB and other financial regulators on TRID implementation.”
The industry has long raised fears about the new disclosures, which combine the requirements of the Truth-in-Lending Act and the Real Estate Settlement and Procedures Act into a single disclosure, dubbed TRID for TILA-RESPA Integrated Disclosure. They worry that mistakes on the new disclosure could delay closings since certain changes to a loan could necessitate giving a borrower three more days to review the Closing Document.
Colgate Selden, who was on the original CFPB team that worked on TRID, said the agency still has the ability to cite a company years from now for violating the disclosures starting the first day the rule took effect.
“Enforcement can go in two years from now and see on Aug. 2 that a lender had TRID violations,” said Selden, now a counsel at Alston & Bird’s financial services and products group. “Even then, they should not be heavy-handed for early violations, assuming good faith efforts were being made to implement the rule.”
Larger industry concerns also remain, namely the wide-ranging legal liability that increases significantly since combining the two rules now gives consumers the right to file suit based on provisions in either TILA or RESPA.
“Borrowers can still sue for potential violations and there are tricky parts in here that can trip up lenders into a private right-of-action,” Horn said. “That can be far worse than the CFPB coming in with an enforcement action.”
The Consumer Bankers Association raised similar concerns on Wednesday.
“As the industry approaches the date for transition to the new mortgage disclosure rule, we applaud the director’s decision finally to recognize good faith compliance efforts, but we believe even greater protection from liability is warranted,” said Richard Hunt, the president and chief executive of the CBA, in a statement. “This is a colossal undertaking dependent on timely deliverables from outside vendors which requires significant testing and training.”
Regardless of how the industry interprets the CFPB’s statements, most observers said lenders are better off just making sure they’re in compliance by the Aug. 1 effective date.
“While the CFPB’s enforcement approach for good faith implementers is a positive development, industry should still attempt to fully comply, not only to receive these regulatory oversight considerations, but also to reduce private litigation risk,” Selden said. “The CFPB’s announcement will likely have no impact on private litigation that could occur based on August 1 rule violations.”