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TRID, Revisited with Richard Horn

If there’s one man to take the credit—or blame- depending on your feelings for TRID, it’s Richard Horn. Currently the head of his own law office, Horn was senior counsel and special advisor at the Consumer Financial Protection Bureau (CFPB) at the time TRID was formulated, and he led the way in the rule’s creation. Mortgage Compliance Magazine recently had a chat with Horn to talk about how TRID came into being and how it’s affected the mortgage industry in the year and a half since its implementation.

MCM: What thought processes went into the making of TRID?

Horn: TRID started from a place that was different from past disclosure rulemakings by other agencies. TRID started with a blank slate and asked what information would be important to consumers. In past disclosure rulemakings, the agencies would more simply list statutory disclosure requirements on a page. You’d have a bunch of attorneys in a room saying, “Okay, we have to get XYZ disclosures to a consumer. Let’s just list them in that order on the page,” and then they put it out for public comment.  For many disclosure rules, they wouldn’t give much consideration to information design or understandability of the form to consumers; it was really just about satisfying the statute. TRID was the complete opposite. The rulemaking team thought about the different kinds of consumers that would interact with the form, what would be important to them at the different stages of the transaction, and how the design would affect consumer understanding and engagement with the form. That was the thought process that went behind the design of the forms.

Essentially, we decided that to make sure the forms satisfied the statutory purpose—which was to aid consumers understanding their mortgage loans. And to ensure they achieved this purpose, rather than having a bunch of attorneys just assume they are understandable, the team actually put them through their paces with actual consumers and had the consumers tell us if they’re understandable. We did qualitative usability testing to watch actual consumers using the forms to see how they performed. That’s one thing I want to stress: The thought process wasn’t to see whether consumers liked the design of the form, that is, what their preference is. It was to see how they performed with the form—if they could understand what their payment would be in year 10 or year five or whether their loan amount may increase. To see if they could actually understand their transactions and compare loans.

The substantive rules behind the form, those could not start with a blank slate, because you had statutory requirements for timing and other aspects of the forms that the rule needed to comply with.  That didn’t lend itself to that kind of brainstorming, blank sheet way of thinking about the rule. We had specific statutory requirements to satisfy, so the design of the forms and the drafting of the rules were two different thought processes.

What kind of steps did you take to strike a balance between Dodd-Frank proponents at one end and mortgage industry advocates at the other?

Striking a balance is very important in rulemaking. From my perspective, rulemaking is about getting to the right answer, not about ideology. And I think more information gets you to the right answer. The public comment process combined with the Know Before You Owe process, where the CFPB posted the prototypes and was conducting consumer testing with every round to get feedback from the public all across the country in addition to the consumers and industry participants in the usability testing, that was a great source of feedback.  It helped the Bureau understand the potential benefits and harms to consumers from the rule, and to strike a balance between the rule requirements and their implementation and on-going compliance costs on the industry and the benefits to consumers. I think it’s about striking a balance. And the public comments and other ways to obtain information are very important for that process.

For example, the proposed rule would have required a new three-day waiting period in the event of essentially any change after the initial CD was provided. Many of the public comments came back and were very critical of that proposed requirement, stating that it would delay closings and that it would cause a domino effect in the real estate market. That was something that the CFPB weighed against the benefits to consumers of having an additional three-business-day waiting period to review any change. The final rule then narrowed the events that would trigger that additional three-day waiting period based on the public comments. That is a good example of how the CFPB tried to strike a balance.

The CFPB tried to strike a balance in the design of the forms as well. For example, the team decided not to use certain design elements that were potentially difficult to program, like radio buttons or graphics. In the end, the forms ended up being difficult to program because they were highly dynamic, but it was thought that the dynamic nature of the forms would be of great benefit to consumers in understanding their transactions, especially certain features of transactions that could cause risk to consumers, like adjustable rates and interest-only features, balloon payments, things like that.

Can you name some of the provisions discussed that didn’t make it into the public comment stage? Ideas cut early on?

I don’t think there are many ideas that would be unexpected or surprising to the industry that weren’t included in the proposal or addressed in the Know Before You Owe design phase, because the process was incredibly transparent—more transparent than other rulemakings by federal agencies have been in the past or subsequent CFPB rules. In other disclosure rulemakings, the agency typically works on the design of the forms behind a closed door and then issues the proposal, and that’s the first time that the industry has seen the designs that the agency is thinking about.

The TRID rule really turned that on its head and tried to be as transparent as possible. The rulemaking process was really an open book to the public, and the public was submitting comments through the Know Before You Owe process in the thousands, even before the proposed rule was issued. I think there were something like 14,000 individual comments that were received on the design of the forms. And because the forms tried to explain or work with substantive issues, like the tolerances, that resulted in comments about substantive areas of the rule from the public. So, it was a very transparent process.

For example, before the proposal went through the Know Before You Owe process, there were a lot of design features that were posted publicly that didn’t make it into the proposal. There were attempts to explain the tolerance requirements on those early prototype forms. There were a lot of attempts at determining whether aggregated closing costs or itemized closing costs were more understandable to consumers in those early prototypes. A lot of the public feedback about those design elements was taken into account throughout the design phase and in consideration of the substantive regulatory requirements before the rule was actually proposed.

Just a couple months after TRID was implemented in 2015, Moody’s famously reported that the vast majority of new mortgages surveyed were in violation of TRID. What, in your mind, was the cause of that?

That’s a great question. I think there were a few causes. The rule was designed to require a great deal of specificity in how lenders complete the forms to ensure consumers receive forms that are standardized. That level of specificity was unexpected by some in the industry. Some technology companies, lenders, and title companies weren’t ready for how every pixel, every dot of ink on the page has a detailed regulatory requirement behind it. That led to some of the initial errors.

I think, in part, expectations about some of the procedural changes under the rule were off. Many of the substantive requirements of the rule appear similar to the previous rules, when an initial or revised Loan Estimate has to be provided, for example. But even though they appear similar, there are some changes to the underlying requirements that cause difficulty for the industry. For example, the three-day period for initial application disclosures is the same between the old rules and the TRID rule, but TRID changes the definition of “application,” which moves the starting point for that three-day period earlier in the process. Similarly, the tolerance requirements are very similar to the old tolerance requirements in terms of when a revised disclosure in the event of a changed circumstance needs to be provided, but the tolerance categories are expanded, so the frequency of instances in which lenders have to document and rely on changed circumstances has increased, which also creates a difficulty for the industry. This may have led to some of the violations.

Also, some technology providers were not ready in time for the industry to test and train on the software, which caused significant difficulties, because this rule relies heavily on technology. It’s also heavily dependent on software integrations between the different technology providers in the industry. If one provider is not ready in time to test, if a lender or title company is relying on integration with that one technology provider, that means they can’t test how the software will work in actual transactions. I think that also caused difficulties for the industry because there wasn’t sufficient time to conduct training on the software before the rule became effective, even with the delayed effective date.

Also, the CFPB was relatively silent on TRID until late in the game. It could have messaged earlier and more strongly to the industry how difficult TRID would be to implement. Perhaps some at the CFPB thought that TRID was only a swap of the disclosures and easy to implement, or did not fully understand the importance of the rule. I think the CFPB is now doing a better job talking about the implementation of its subsequent rules more frequently, like HMDA and its rulemakings in other product areas, as well.


We’re about a year and a half later now, and it seems like the mortgage industry has a firm grasp on TRID. Are there any issues surrounding the rule that still concern you?

Real estate and credit transactions are infinitely variable, so there will always be new scenarios that raise new questions under TRID. No matter how hard the very intelligent drafters of the rule tried, the TRID rule cannot answer every single question or address every single fact scenario that might come up. For example, there will be questions about how to disclose a particular fee or whether something is a tolerance violation.

There are also questions left unanswered in the rule that I think the CFPB didn’t anticipate causing compliance issues. The black hole, for one, is an issue where the rule and commentary have resulted in some different interpretations.  And the preamble really doesn’t discuss the black hole, so there is not a lot to go on. That’s something the industry is struggling with and I think will continue to struggle with until the CFPB fixes it. The CFPB’s proposed rule would amend the black hole provision, which they said they plan to finalize this spring. It remains to be seen how the final rule will come out on this issue, as there were some good issues raised in the public comment letters. I hope the CFPB will resolve the issue in a clear, balanced way.

Of some concern is that the proposal goes in some unexpected directions that might cause other issues for industry. For example, the disclosure of payoffs and construction costs on the standard form, the proposal would require many in the industry to disclose them in a way they are not currently, and in a way that I personally think would be confusing to consumers. There are other ways in which the proposed rule departs from common industry practices with the forms, or causes some legal concern, such as its taking away the model form status, which provides a legal safe harbor, of the sample forms in the rule. The proposed rule, although it might resolve some issues, might cause some new ones.

And I should also mention liability and cures, which the proposal didn’t address. If there is an economic downturn, will there be a wave of borrower lawsuits or repurchase demands? That’s a possibility.

Also, as lenders consider different product types, like when they expand their non-QM programs, the disclosure of more interesting products might become an issue. Lenders should ensure they do sufficient disclosure testing. Also, consider that we might be in an era of rising interest rates, and possibly deregulation with legislation or changes in CFPB leadership on the horizon. If that happens, some loan products could potentially become more prevalent. The disclosure rules could be an issue for industry as they start to offer different kinds of products that they weren’t before.

Now that the dust has settled, do you think the rule has accomplished what it was created to do? How do you measure its success or failure?

There are some early consumer surveys that the industry has done that show that consumers were reaping some benefit from the rule. Some of the surveys show that consumers have a high level of satisfaction with the forms, that they were reporting that they were shopping for closing costs more often with the forms. A study by ALTA showed that consumers were reviewing their closing disclosures more frequently than they reviewed the HUD-1. Without a full detailed study about how consumers were using the old forms in comparison to the new forms in actual transactions, I think it would be difficult to say for sure what effects there were, whether there were improvements in consumer shopping or decision making, but I think those early studies by the industry are positive. My hope is that the CFPB conducts a full review of the rule under the Dodd-Frank Act that examines changes in consumer performance in actual transactions under the old disclosure regime in comparison to the TRID rule.

The forms were designed in part to help consumers shop for loans, but they’re also designed to help consumers understand when things changed at closing and ask questions about those changes. I think that that’s an important area that I hope there’s more study on, because that shock at the closing table is harmful to consumers. There’s a recent study showing that consumers are still experiencing surprises are the closing table. My hope is that consumers are identifying the changes between their estimated and final forms and asking questions about them.

I should also mention that when the bureau did the quantitative validation study, one of the questions in the study was an open-ended question where consumers were given a choice between two loans. Neither was clearly a better loan. The question asked consumers to choose a loan and explain why they chose that loan. The idea was that the new forms might aid in that decision-making process by making more factors clearer to the consumer than the old forms. For the final rule, the team looked at how many answers consumers gave as reasons for their choice of a loan. The theory was that for the old loans, maybe the consumer would give one reason, but for the new loans, maybe they’d give three or four. That could be an indication that consumers were finding more useful information on the new forms than the old forms, and that’s pretty much what the data showed. There was a statistically significant increase in the number of reasons given by consumers for their loan choice with the TRID forms versus the old forms.

That was as far as the team could take the analysis at that time. An interesting area of future study might be about the quality or the accuracy of the consumers’ reasons or decisions. That’s something that I hope the CFPB studies more, especially if there’s a way to study that in actual transactions by conducting a survey or some other research methodology. I think that would be a fascinating way to show whether the forms are having the intended benefit.

If you could single-handedly amend or revise TRID, what changes would you like to see?

A couple changes. I would make the black hole provision clearer. I think that’s caused challenges for the industry. Obviously, the CFPB has proposed to amend that provision, so we might see a positive change to it, but that’s something that I would change right now if I could.

I get a lot of questions from clients about very particular situations or very technical questions about the rule, where I’ll go back and read the rule or the commentary and say, “That’s a great question, and the commentary should have been drafted in a way to address it” or “There should be a new comment provision.” I’m always doing this sort of rehashing of the drafting of the rule. This happens to me like 20 times a week, where I wish I could go back and put my CFPB hat on and make those changes.

Even with the design of the forms, I think in some ways some of the closing costs are probably aggregated on the closing disclosure to the point where it’s not helpful or understandable to some consumers. For example, homeowner’s insurance is aggregated, and there’s not great support in the plain language of the rule to itemize, say, flood insurance separate from the home insurance line. Recording fees are aggregated. I might go back and revisit those aspects of the rule.

Probably every attorney out there who is now in private practice and who is interpreting some rule that they drafted comes across those questions, and so I think it’s not particular to TRID or consumer finance regulation, for that matter. I think it’s just particular to the rulemaking process.

Is there anything else our readers should know?

A couple things. I think the industry should begin considering how the TRID data under the HMDA rule will look when they do their Fair Lending analyses. The HMDA rule pulls data on the loan costs and the lender credits. But with the different way things can be disclosed on the CD, and different disclosure preferences between lenders, we could see some interesting issues in the Fair Lending analyses.

And then there’s training. I think that every lender’s staff could use updated training, especially after the proposed rule is finalized and some of the disclose requirements might change. And also for new staff that comes in, so your staff knows how detailed these rule requirements are and how important they are. That’s something that gets missed at some institutions, and training is something the CFPB expects in a CMS, which could cause problems in an exam. Also consider that the most minor violation could cause an issue that affects the sale of the loan. That’s something that the industry needs to make sure its staff understands.

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