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Some lenders struggle with new mortgage disclosure rules

Morethan six months after the implementation date for new mortgage disclosurerules, some lenders are still struggling to comply.

OnMarch 13, W.J. Bradley MortgageCapital LLC shutteredits doors, and media reports suggest a contributing factor was trouble with theConsumer Financial Protection Bureau's new rule governing mortgage documents,known as TILA-RESPA Integrated Disclosure, or TRID, which went into effect onOct. 3, 2015.

Representativesfrom the company could not be reached. Trade publication Inside MortgageFinance reported W.J. Bradley's crisis began when declined topurchase $30 million worth of jumbos due to TRID errors. The loans thenreportedly sat on the nonbank lender's warehouse line until margin calls forcedits closure. As a warehouse lender to W.J. Bradley, 'smortgage unit seized the loans and is now selling them in the scratch-and-dentmarket, the publication reported, citing an investor in the space. NationalMortgage News also reportedTRID problems led to W.J. Bradley's demise.

Thesaga represents a long fall for W.J. Bradley, which was the nation's No. 54mortgage lender in 2013, with $5.03 billion of funded loans, according to HMDAdata compiled by Federal Financial Institutions Examination Council and listedon SNL.com. The lender's originations tumbled in 2014 to $2.93 billion. TheCFPB's new regulations regarding the Qualified Mortgage standard took effect inJanuary 2014.

JPMorganChase declined to comment, and Texas Capital did not respond to messagesseeking comment.

TheCFPB has said it would not pursue enforcement actions for minor violations aslenders transition to the new rules, and it appears the regulator has abidedthat promise, said Guy Cecala, CEO of Inside Mortgage Finance.

"Mostpeople are calling this investor-driven," Cecala said. "The investorsare so skittish of running across any new liability that they're just rejectingloans."

Cecalasaid the rejections are generally over minor details that can be corrected. Butafter the government has aggressively pursued False Claims Act litigation forcrisis-era mortgages — even ones with minor errors — investors want perfection.

"Thewhole regulatory environment has shown lenders will be fined for a variety ofissues — particularly any that harm the consumer. And this falls within thatarea," Cecala said.

Hesaid it remains unclear whether other nonbank lenders could fail due to TRIDerrors. But even if it does not sink the company, issues with TRID compliancecan still cause lenders problems.

RajeshBhat, CEO of Roostify, a mortgage software service company, said many lendersare paying homeowners due to TRID errors rather than risk noncompliance.

"Let'ssay there's a big gap between what's on the closing statement and what's thefinal cost, the lenders are paying for that and making less on a loan to remaincompliant," Bhat said.

Whilethe CFPB has not cracked down on TRID enforcement, industry participants arepushing the agency to offer clearer guidance.

OnMarch 17, the Structured Finance Industry Group issued a draft proposal tostandardize what counts as a TRID error and how lenders can remediate them,among other issues. After taking comments, the group plans to include theproposal as part of its "green papers" series on reforming andresurrecting the RMBS market. Fitch Ratings applauded the draft proposal,saying due diligence on loans in RMBS has shown numerous TRID compliance issuesbut that they appear to be minor ones made in good faith.

"Theambiguity in the rule and a lack of judicial precedent has caused uncertaintyon how to assess the materiality of the errors and how to resolve them,"Fitch analysts wrote.

However,it does not appear as if the regulator is keen on further clarifying howlenders can stay in compliance with TRID.

Duringa March 9 speech at a conference hosted by the Consumer Bankers Association,CFPB Director Richard Cordray downplayed any market disruption wrought by theTRID rule. He said industry fears that the rule would paralyze the mortgagemarket have proven unfounded, as were similar doomsday scenarios ahead of theQualified Mortgage standard.

"Weare keeping a close eye on many transitional issues that lenders and othershave faced in the past five months, but home purchase mortgages remain on therise, and the housing market now is finally making a positive contribution tothe ongoing recovery of the American economy," Cordray said, according toprepared remarks.

Andthe CFPB might not need to issue guidance, as some industry participants reportproblems with TRID are waning. Both Cecala and Bhat said lenders appear to behaving fewer issues with TRID compliance in recent weeks.

Duringa March 8 conference call to discuss earnings, management for said the companyexperienced a tough fourth quarter due, in part, to a turnaround effort in thecompany's structured settlement payments business. But its mortgage operationswere also slower than expected, which management attributed to TRID.

"Inthe fourth quarter, the home lending business suffered from the operationalimpact of implementing new TRID requirements, and that, too, is behind us,"said Stewart Stockdale, CEO of the company, according to a transcript of thecall.