Under Dodd-Frank, the CFPB implemented the Ability to Repay/Qualified Mortgage (ATR/QM) rule which states that mortgage lenders must make, “a reasonable, good faith determination” of each borrower’s ability to repay the proposed loan. The ATR portion of the rule was designed to prevent borrowers from obtaining loans they could not afford; the QM portion of the rule provides lenders a safe harbor from lawsuits alleging that the lender failed to verify the borrower’s ability to repay the loan.

The CFPB rule also allows any loan eligible for purchase by the GSEs to achieve QM status. This exemption from the rule, which expires in January of 2021, allows the GSEs—and no one else—to make QM loans for borrower with debt-to-income (DTI) ratios greater than 43%.

Since the inception of the QM Patch in 2014, the share of loans guaranteed by the GSEs with DTIs in excess of 43 percent has increased to nearly 28 percent of their combined portfolio. Large-scale innovation has been limited to the GSEs, whose new product offerings or underwriting advances automatically achieve ATR compliance via QM safe harbor status.

The sudden expiration of the Patch will affect high-DTI borrowers, many of whom are low- and moderate-income borrowers who will face higher borrowing costs or be shut out from getting a mortgage. A significant portion of borrowers who qualified for a QM loan with the GSEs are likely to shift to FHA loans, potentially straining resources or increasing risk backed by taxpayers.

In the short-term, the CFPB should provide guidance to reduce ambiguity in Appendix Q in order to provide clarity for lenders, issuers, and investors on how to calculate a borrower’s DTI. Over the longer-term, the QM rule must provide consistent rules for all market participants, with no special rules or exemptions for the GSEs. Transitioning away from the Patch in a smooth and transparent manner will enable access to credit at rate for creditworthy borrowers independent of the GSEs current underwriting guidelines.

“After the October 2015 effective date of TRID, the secondary market initially was left to focus on defining the liability surrounding new disclosure obligations that was not abundantly clear. Since June of 2016, the rating agencies, TPR firms, and the capital market investors have confidently followed the Structured Finance Association’s TRID Compliance Review Scope effectively placing the private label securitization marketplace back on a strong footing.” – Scott McNulla, AMC and John Levonick, Pepper Hamilton

The Structured Finance Association originally published its TRID Compliance Review Scope© documentation in 2016 to facilitate uniform testing standards resulting from a consistent interpretation of Truth-In-Lending Act liability. This interpretation was drafted by subject matter experts at SFIG member firms, according to our understanding of prevailing legal precedent and informal written guidance and webinars offered by the CFPB as it applies to the Know Before You Owe / Truth In Lending Act  (TILA)– Real Estate Settlement Procedures Act Integrated Disclosure (RESPA) or TRID Rule (78 FR 79730, as amended) across third-party review (TPR) firms.

Since then, the CFPB published additional clarifications to Regulation Z in 2017. Additionally, in 2018, the CFPB published an amendment to the earlier TRID Rule, which provided clarifications around the so-called “black hole” timing requirements of the Loan Estimate and the Closing Disclosure. Finally, it also includes a limited number of updates related to regulatory changes resulting from the passage of S. 2155 in 2018.

The underlying premise of this documentation remains the same: to establish a best practices approach to pre-securitization testing logic that will drive the due diligence conducted by TPRs. However, the conclusions set forth in the document do not necessarily reflect how courts and regulators, including the CFPB, may view liability for TILA violations, presently or in the future. The Structured Finance Association and its membership continue to work with the CFPB toward the goal of providing formal guidance for the benefit of the consumer, primary, and secondary mortgage markets.

The TRID Compliance Review Scope is available at no cost to individuals of Structured Finance Association member firms, or for purchase by non-members. The TRID Compliance Review Scope will continue to be reviewed and updated by the Association and is subject to the same protocols as other Association work streams and work product.

Click here to see sample of the Structured Finance Association’s TRID Compliance Review Scope. In order to receive a free copy of the most recent TRID Grid, please email [email protected].

“RMBS 3.0 is an initiative established to reinvigorate the private label residential mortgage-backed securities market through an open discussion among a broad cross-section of market participants, focusing on representations & warranties, repurchase governance and other enforcement mechanisms, due diligence and data & disclosure issues, and roles & responsibilities of transaction parties that promote a better functioning marketplace.” -From “Introduction” Section of Sixth Edition of the Structured Finance Association RMBS 3.0 Green Papers

Private label securitization remains a fraction of its pre-crisis issuance. This is not only due to regulatory impediments, but also, in part, driven by fundamental flaws in PLS structures that were laid bare by the events of the financial crisis. Efforts to address legislative and regulatory issues were matched by efforts from industry stakeholders to address certain pre-crisis contractual practices through an open discussion among a broad cross-section of market participants.

The industry took up that challenge under the Structured Finance Association’s RMBS 3.0 initiative. Market participants tackled the difficult but critical task of creating—where possible–standardized representations, warranties and repurchase enforcement mechanisms, and address other integral parts of the RMBS issuance process. Critically, RMBS 3.0 also recognized that structural frameworks may vary to some degree, reflecting different market practices that arise from individual goals; a “one size fits all” set of standards may not be appropriate for many reasons.

Participants—including issuers, investors, rating agencies, diligence firms, law firms, trustees, servicers, and the entire ecosystem of stakeholders in the securitization market—sought to clarify differences in alternative standards in a centralized and easily comprehensible manner to improve transparency across RMBS transactions. Finally, in some instances, participants in RMBS 3.0 drafted or endorsed model contractual provisions, that can be used wholesale or as a guide on a voluntary basis by interested parties.