CFPB ‘Know Before You Owe’ Disclosure Requirements Hindering Revival of PLS Market

According to a recent article by National Mortgage News, Fitch Ratings has found that more than half of all home loans originated today have errors that are non-compliant with the "Know Before You Owe" disclosure rule that went into effect in October. Fitch estimates that approximately 5 to 10 percent of loans have major compliance issues, while only 25 to 30 percent are fully compliant. As stated in the article, “Because there are hundreds of variables to account for on the forms, compliance has become a near-impossible task. As a result, many investors are refusing to purchase loans without further guidance from the Consumer Financial Protection Bureau (“CFPB”).”

In the aftermath of the crisis, market participants are particularly adverse to the accepting even the most technical KBYO violations and putting themselves at risk that the loans are repurchased or they are indemnified for losses that may have nothing to do with the default of the loan. The fear of backlash from non-compliance is the latest hurdle that could slow issuance in the PLS market, where lenders are concerned about potential buybacks.

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