Although it had been several years since the housing crises, in the third quarter of 2015, residential mortgage backed securitizations were still sailing into headwinds as the private label securitization market was still a fraction of its former self. Lenders were finally getting a firm footing after the Dodd-Frank based regulatory changes effective starting with loan applications received January 10, 2014, most significantly introducing the Ability to Repay testing and modifying the federal high cost testing under HOEPA.
Lenders were preparing for the TILA-RESPA Integrated Disclosure Rule, known as TRID, effective with loan applications as of October 3, 2015. The 1,888 pages of TRID meticulously rewrote the mortgage disclosure process with thoughtful detail, with the intention of making the mortgage origination process more transparent with easier to understand disclosures for consumers. The new disclosure requirements, also referred to as Know Before You Owe, were developed by the Consumer Financial Protection Bureau to help consumers understand the loan terms, loan features, and charges to facilitate shopping for loans they were considering. Two new disclosures, the Loan Estimate and Closing Disclosure, replaced the existing Good Faith Estimate, Initial TIL Disclosure, Final TIL Disclosure and Settlement Statement. Lenders were unaware of the severity of the storm coming over the horizon.
Despite the entirety of the mortgage origination industry focusing its efforts on defining the origination requirements of TRID, the Secondary Market was left to focus on defining the liability surrounding these new disclosure obligations that was not abundantly clear, specifically attempting to quantify the risk that the investor may face in the event that investor purchased a loan that contained a violation of TRID. The uncertainty surrounding the potential liability was compounded by the extreme scrutiny being placed on the disclosure timing and content that resulted in the perfect storm of compliance exceptions being identified on loans evaluated for secondary market acquisition.
The loans being reviewed were evaluated under a microscope with every misstep by the originating lender rendering an exception on the loan cited by the third-party review, (“TPR”), firms as a material exception that required remediation, if remediation was available. It was more than a single rogue wave. The market liquidity for residential loans slowed to a standstill as aggregators, TPR firms, creditors, lawyers, and rating agencies tried to distinguish between significant compliance exceptions and others that could be included in securitizations. Anyone on the boat at that time was sure to put on their life jacket while bracing against the waves and winds that effectively stopped forward progress and threatened to capsize the market.
As a result, the Structured Finance Industry Group (SFIG), the trade association to the capital markets, through the SFIG RMBS 3.0 Due Diligence, Data and Disclosure Workgroup took on the challenge of tying each and every provision of TRID to the specific liability provision of TILA with the primary goal of creating a uniform testing standard as a result of a consistent Truth-In-Lending Act liability interpretation according to their understanding of prevailing legal precedent and informal written guidance and webinars offered by the CFPB, as it applies to the Know Before You Owe/TILA RESPA Integrated Disclosure Rule
This workgroup included individuals representing prominent law firms, TPR due diligence companies, rating agencies, issuers and other industry participants. This SFIG effort resulted in the first version of the RMBS 3.0 TRID Compliance Review Scope © published on June 15, 2016, understanding that the conclusions set forth therein do not necessarily reflect how courts and regulators, including the CFPB, may view liability for TILA violations presently, or in the future. The first version of the SFIG TRID Compliance Review Scope proved to be the catalyst that the Secondary Market needed to confidently commence purchasing loans subject to TRID, providing much needed liquidity to the origination market. Since June of 2016, the rating agencies, TPR firms and the capital market investors have confidently followed the SFIG TRID Compliance Review Scope effectively placing the private label securitization marketplace back on a strong footing.
On October 18, 2018, the SFIG RMBS 3.0 Due Diligence, Data and Disclosure Working Group published an updated version to the RMBS 3.0 TRID Compliance Review Scope © (v2) based on the Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (Regulation Z) as published in the Federal Register [82 FR 37656] on August 11, 2017, (with an optional compliance date of October 10, 2017, and a mandatory compliance date of October 1, 2018), the updates related to the “Black Hole” that were effective June 1, 2018, and the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted on May 24, 2018.
The RMBS 3.0 TRID Compliance Review Scope v2, as it reflects the amendments made by TRID 2.0, have include additional clarity. The guidance and clarifications made by the CFPB, with TRID 2.0 and the subsequent “Black Hole Amendment”, effectively reinforced the risk previously identified by the original RMBS 3.0 TRID Compliance Review Scope ©, and now with 2.0, this reduced some testing requirements, reduced the materiality of certain tests, and the addition of a few tests. The impact of v2 will be fewer material compliance exceptions with the associated grading that would have otherwise, previously, prevented loans from being purchased by an investor, whereby the mortgage was targeted for a rated transaction.
SFIG, and its membership that participated in the drafting of the original RMBS 3.0 TRID Compliance Review Scope and in the updated v2 scope created a new standard in transparency in aiding the entire mortgage lending industry in translating and navigating the complicated mortgage lending regulatory regime with an eye toward building confidence in the Secondary Market ensuring that high quality mortgages can make their way into rated securitizations, thereby providing the necessary liquidity to the marketplace, and making homeownership a reality for more consumers.
Although over two years passed between the initial version of the SFIG RMBS 3.0 TRID Compliance Review Scope and the recently published v2, further refinements will be forthcoming in 2019, as SFIG continues the ongoing standardization of the TRID review scope while incorporating additional feedback from market participants, CFPB enforcement actions, regulatory clarifications, or caselaw. The v2 scope document is part of the ongoing output of the SFIG work groups to bring consistency to the due diligence reviews performed as part of securitization reviews.
In addition to working with market participants, SFIG is actively working directly with the CFPB to share the concerns and impediments to future securitizations based on regulatory uncertainty to attempt to obtain regulatory updates as well as informal guidance to ensure compliant loans are flowing into ongoing securitizations to foster a robust private label securitization for RMBS transactions.
There is a common reference regarding the calm before the storm, but the real calm comes after the storm has been faced. One would be remiss to think only smooth sailing lies ahead, but the winds have shifted and with the breeze at our backs and smooth water ahead, the SFIG workgroup strives to see the private label securitization of RMBS under full sail.