Lenders and vendors breathed a sigh of relief when the Consumer Financial Protection Bureau this week released its long-awaited procedures for examining compliance with the new integrated mortgage-disclosure rules — but it was a brief celebration.
Though the document contained no bombshells, the CFPB has still left plenty of gray areas, industry observers said.
"I didn't think they answered questions lenders were asking," said risk management consultant Becky Walzak. "They didn't tackle the big issues."
Among the biggest outstanding questions is how lenders should adhere to the disclosure regulations on loans with extenuating circumstances, such as when a borrower requests a last-minute delay to the closing date that results in a fee to extend the interest rate lock — particularly if the delay is requested after the lender delivers the Closing Disclosure.
"We continue to think this is an example of the complexity of compliance that justifies a more formal hold-harmless period," said Scott Olson, executive director of the Community Home Lenders Association.
Even if they aren't the norm, incidents like a delayed closing are realistic situations that lenders must prepare for, said Phil McCall, chief operating officer of technology vendor ACES Risk Management.
"I have seen no further clarification of that in the updates and it is going to come up," he said.
The CFPB did not respond to multiple requests for comment.
The CFPB's "Supervision and Examination Manual" dictates how auditors examine compliance with consumer financial protection laws. The update released Tuesday spells out the procedures for reviewing compliance with the Truth-in-Lending Act/Real Estate Settlement Procedures Act Integrated Disclosures, also known as TRID.
Some lenders and vendors are concerned the CFPB's promise to be "sensitive" to lenders making "good-faith efforts" to comply at the rule's outset is not enough to preclude early enforcement actions. But others said the release of the exam procedures, less than three weeks before the rule's implementation date, suggests the bureau still needs time to gear up for the rule and, barring a blatant violation, probably won't act early on.
"I would be shocked if we saw examinations with monetary penalties before the rule had been out for 90 days unless you saw true noncompliance," said McCall.
Lenders would like more compliance guidance for such situations, but the lack of other major changes is helpful in that it doesn't require mortgage businesses to make any big operational adjustments ahead of TRID's Oct. 3 implementation date, said Rick Roque, managing director of retail lending at Michigan Mutual, a national retail and wholesale lender based in Port Huron, Mich.
"The content wasn't surprising, I was thankful," he said. The exam guidelines are "a good thorough background of what to expect in the event of an audit," said Roque.
But he said he wished that the CFPB hadn't issued updates that had to be reviewed so close to the implementation date as they have added to operational preparations for compliance. Gearing up for TRID's implementation is slowing closings at least temporarily and making planning and budgeting challenging, he said.
"It's two weeks-plus before the implementation of the rule, and we're already seeing turn-times slow down," Roque said. He added that the expenditure for compliance has been relatively large for a family-owned, midtier lender-servicer like his company, which he estimates has spent well over $1 million on TRID preparations.
TRID also is likely to impose more costs on lenders if they represent closing expenses outside tolerances, he added.
The new TRID exam guidelines stress at least one nuance of the CFPB's expectations related to remuneration of closing costs outside tolerances, said Deborah Hoffman, chief legal officer at Digital Risk LLC.
"While not new information, there is a critical piece of information that should be highlighted," she said, referring to a passage that reads, "The rule revises the tolerance limits on fee increases for certain settlement costs and restricts fees and certain actions taken before the consumer has received the Loan Estimate and indicated the intent to proceed with the transaction."
Lenders may not realize it's not just about the Loan Estimate and Closing Disclosures being within tolerances, but it's also about early representations of costs and fees of any kind matching later ones, she said.
"The importance here is that if tolerance limits are in place governing actions and addition of certain fees, should they be warranted, before the consumer has received the forms, then the lender may have to take a hit and pay for the fees out of pocket," said Hoffman.
This might add to lenders' costs, but exam violations could be even more expensive. And with the examination and readiness guidelines still leaving some in the industry puzzled and the lack of a formal grace period, many fear that a number of painful lessons are on the way.
"It's pretty easy to hear when you talk to people in the industry the frustration they have that there are a lot of gray areas in the new rules," said Gavin Ales, DocMagic Inc.'s chief compliance officer. "There's a perception in the industry that the CFPB is filling out the gray areas through enforcement actions."