In a recent letter to Mortgage Bankers Association President/CEO David Stevens, CFPB Director Richard Cordray attempted to soothe compliance concerns over the new Know Before You Owe mortgage disclosure rules. However, some observers said a note from Cordray on the matter is simply not enough.
"The most important part of the letter is that it might be helpful to investors who are just skittish, but it doesn't have any real force of law," Andrew Arculin, a lawyer at Venable LLP in Washington, told CU Times. "Typically liability under a statute is not something that an agency gets to decide. It's something that Congress has put in place and for the courts to interpret."
In the letter, Cordray said if investors rejected loans based on formatting errors, "they would be rejecting loans for reasons unrelated to potential liability associated" with the new disclosure rules. He added that there are "cure provisions" that allow for the "issuance of a corrected closing disclosure, even after closing."
This could be problematic, according to Arculin.
"They seem to be saying that creditors and lenders shouldn't be worried about a loan estimate because you could always cure it with a closing disclosure," he said. "I think that's a dangerous thing for the CFPB to say. Especially considering not all these disclosures are subject to a real cure, meaning not everything is subject to a tolerance, you can't just give the consumer a credit and cure everything. As a matter of fact, in many cases you don't have to."
The CFPB chief pointed out that while the KBYO rule integrated TILA/RESPA disclosures, it did not change the prior, fundamental principles of liability under the existing TILA or RESPA laws.
"What they said in the letter is accurate, as far as I understand the statute," Arculin said. "But, that doesn't mean that a court is always going to agree with it or there isn't some nuance that's missed."
Arculin added that the bureau is trying to remind the industry that not everything is subject to statutory damage.
"In their view, a lot of this hoopla about litigation risk and liability might be overblown," he said.
Tim Pryor, a credit union attorney and consultant for the Pittsford, N.Y.-based WT Pryor Consulting, told CU Times that he does not see the new rule causing a problem for credit unions.
"I don't think that there's a serious legal risk as long, as Cordray says, this is implemented in good faith. I think the message for credit unions is good faith," Pryor said. "The concern, like the mortgage bankers have pointed out, is how our due diligence service providers to the investors are going to respond."
Pryor added that the real purpose of the letter is to "ease up on their reviews of these things and focus on the more important issues like good faith compliance."
Only certain TILA statute sections that are implemented under the disclosure rules give rise to statutory damages, Arculin added.
"At least they don't appear to under the TILA liability structure, however that hasn't been litigated yet," he said. "So the courts haven't had a chance to weigh in."
Keeping in mind the industry's current struggle to get the legal requirements right, Arculin concluded, "It's a different ballgame. The secondary market isn't comfortable just because the director of the CFPB says we're only looking at good faith efforts at compliance when they are examining. They want something more that would actually give their purchasers some peace of mind. This probably helps give purchasers some peace of mind, it's just not nearly enough."
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