Investor risk on non-agency residential mortgage-backed securities for non-compliance with the TILA-RESPA Integrated Disclosure Rule is likely to be minimal.
Moody’s Investors Service recently issued a report indicating that third-party reviews on 300 loans subject to TRID revealed 90 percent had compliance violations.
But the bondholders on private-label RMBS aren’t likely face higher
risk as a result of the non-compliance issues — which so far appear to just be good-faith errors.
That is according to Fitch Ratings, which said,
the frequency of non-compliance issues will likely be initially elevated.
Fitch said its findings are based on initial due diligence samplings of prime jumbo mortgages.
The New York-based firm explained that RMBS investors are likely to be
exposed to statutory damages of $4,000 plus attorney’s fees.
“Additional actual damages will be difficult to prove and will be unlikely,” Fitch stated. “Class-action lawsuits, due to a relatively low limit on rewards, will be unlikely.”
The ratings agency said that borrowers probably won’t proactively hire attorneys to seek damages. As a result, defensive claims in non-judicial states or affirmative claims in any state will be unlikely.
Only in judicial foreclosures, where a borrower is already working with an attorney, will claims be likely.
Fitch noted that only a limited number of errors will be eligible for claims with a private right of action.
“While recognizing that judicial interpretation may ultimately vary in some cases, Fitch will rely on the CFPB’s public guidance on TRID liability and assume only errors outside of any allowed tolerance in the following seven areas will be likely to be rewarded statutory damages: (i) amount financed, (ii) finance charge, (iii) annual percentage rate, (iv) total of payments, (v) payment schedule, (vi) statement of security interest and (vii) maximum allowable payment for an adjustable rate mortgage,” the report stated.
But Fitch explained that uncured errors identified prior to securitization by third-party due-diligence firms for any of the seven
areas will be assumed to be apparent to investors and carry assignee liability.
Loans with uncured TRID errors within the seven areas will face the lowest assessment by Fitch. Pool-loss projections for this group will be adjusted to reflect $4,000 in likely statutory damages plus attorney fees and a moderate extension of foreclosure time lines for projected defaults in judicial foreclosure states.
Some uncured TRID errors for this group could result in
additional assumptions related to the risk of interest losses resulting from extended rescission periods in the first three years — though these projected losses are expected to be relatively modest.
The assessment of loans with errors in other TRID areas will be slightly better, while cured errors will be assessed even better, and no errors will earn the highest assessment. These groups will not receive adjustments to mortgage pool loss projections for uncured TRID errors.
