On November 20, the Consumer Financial Protection Bureau released the nearly 1,900-page final RESPA-TILA Integrated Disclosures Rule. The rule will be effective for applications received on or after August 1, 2015. The industry had urged the CFPB to provide a reasonable implementation period in view of the significant changes to systems and procedures necessary to implement the rule, on top of the implementation challenges presented by the other CFPB mortgage rules. It appears the efforts were successful; much shorter implementation periods had been rumored.
The Dodd-Frank Wall Street Reform Act (Dodd-Frank) directs the CFPB to issue rules that combine certain disclosures that consumers receive in applying for and closing on a residential mortgage loan, including disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The new disclosures are generally referred to as the "combined" or "integrated" disclosures.
The final rule mandates the use of two disclosures, the three-page Loan Estimate (which replaces the Good Faith Estimate (GFE) and the initial Truth in Lending Disclosure) and the five-page Closing Disclosure (which replaces the HUD-1 and final Truth in Lending Disclosure). In addition, the rule requires that the Closing Disclosure in most cases be received by the borrower at least three business days before closing. The rule also includes a number of substantive changes and additions to RESPA and TILA.
The final rule applies to most closed-end consumer mortgages. It does not apply to home-equity lines of credit, reverse mortgages, mortgages secured by mobile homes, or creditors that make five or fewer mortgages a year. Unlike many of the CFPB mortgage rules, the final rule does not otherwise include an exception for small creditors.
The Loan Estimate replaces both the GFE under RESPA and the initial Truth in Lending Disclosure under TILA. The Loan Estimate provides a summary of the contemplated loan terms, estimated loan costs, other estimated closing costs, and additional application disclosures. According to the CFPB, consumers will be able to utilize the Loan Estimate when comparing different loans.
Loan Estimate Triggers: If a consumer submits an application, the requirement to provide the Loan Estimate is triggered. An application is defined as the submission of six pieces of information: (1) the consumer's name, (2) the consumer's income, (3) the consumer's Social Security number to obtain a credit report (or other unique identifier if the consumer has no Social Security number), (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought. This is identical to the definition in the proposed rule, but a departure from the current rule under Regulation X, which allows creditors to specify "any other information deemed necessary" to trigger a GFE. Thus, consumers may not be required to provide additional information, such as the desired loan product, as a condition to provide a Loan Estimate.
Prior to receiving the six specific items of information, lenders may provide consumers with written estimates, but any pre-application written estimate must contain a disclaimer that it is not an official Loan Estimate.
Loan Estimate Timing: Once an application is received, the creditor has the obligation to ensure that the consumer is provided with a Loan Estimate within three business days of the consumer's application. Consistent with the current delivery requirements for the GFE and initial Truth in Lending Disclosure, the final rule uses the company-specific definition of "business day" for purposes of the three-business-day time frame to issue a Loan Estimate, which is any day that the company's offices are open to the public for conducting substantially all of the company's business. The CFPB had proposed changing to the special definition of "business day" used for purposes of the three-business-day rescission period and the waiting periods under TILA (that were added by the Mortgage Disclosure Improvement Act), under which Saturday generally is a business day. Industry comments noted that this would impose a significant burden, as companies typically are not open for business on Saturdays and, as a result, the time frame to issue the Loan Estimate in many cases would effectively be two business days.
Consistent with the existing requirements for the initial Truth in Lending Disclosure, the Loan Estimate must be provided to the consumer at least seven business days before consummation, and the special "business day" definition, which generally includes Saturdays, is used for purposes of this waiting period.
In instances where the creditor needs to provide a revised Loan Estimate, the revised Loan Estimate cannot be provided on or after the date the Closing Disclosure is provided. As a result, creditors must provide revised Loan Estimates at least four business days before consummation of the loan.
Who Prepares the Loan Estimate: The CFPB recognized that consumers may work with either a mortgage broker or directly with a creditor; therefore, either a mortgage broker or a creditor may provide the Loan Estimate. If a mortgage broker provides the Loan Estimate, the creditor maintains responsibility for compliance with all Loan Estimate requirements.
Loan Estimate Contents: The Loan Estimate is three pages long. The first page contains information identifying the borrower and loan, the loan terms, the projected monthly payments, the total estimated closing costs, and the total estimated cash needed to close. The second page breaks down the closing costs in more detail and includes information on prepaid and escrowed amounts, as well as detail on the cash needed to close. The third page includes a summary of loan costs over five years to provide for a comparison with other loan products, and required disclosures regarding the delivery of a copy of an appraisal to the borrower, whether the loan is assumable, whether homeowner's insurance is required, late payment fee information, and whether the loan servicing may be transferred. The third page also contains a signature block for consumers to confirm receipt of the disclosure.
Construction Loans: The final rule includes a concept under RESPA for delayed closings for construction loans. For transactions involving new construction, if the creditor expects that closing will occur more than 60 days after the Loan Estimate is provided, the creditor may issue revised disclosures any time prior to 60 days before consummation without regard to the limitations on revising the estimated costs, as long as the original Loan Estimate clearly states that revised disclosures may be issued at any time prior to 60 days before consummation.
The Closing Disclosure replaces both the HUD-1 under RESPA, and the final Truth in Lending Disclosure under TILA. The Closing Disclosure provides a summary of the actual loan terms, the loan costs, other settlement costs, and additional closing disclosures.
Closing Disclosure Timing: The creditor must provide the Closing Disclosure to the consumer at least three business days before the consumer closes on the loan. If there are changes to the Closing Disclosure between the time it is issued and closing, depending on the nature of the change, the creditor must provide an updated Closing Disclosure with another three-business-day waiting period, or simply provide an updated Closing Disclosure by closing. Consistent with the existing requirement to provide final Truth in Lending Disclosures to a consumer at least three business days before closing, the final rule uses the special definition of "business day," which is any day other than Sundays and certain legal public holidays.
The changes that require the creditor to provide an updated Closing Disclosure and an additional three-business-day waiting period are: (1) changes to the APR greater than 1/8 of a percent (or 1/4 of a percent for loans with irregular payments or periods), (2) changes to the loan product, or (3) the addition of a prepayment penalty. Less-significant changes can be disclosed on an updated Closing Disclosure without the need for an additional three-business-day waiting period. The proposed rule would have required a new three-business-day waiting period in many more cases when the Closing Disclosure was updated. The CFPB responded to industry comments that the proposed approach would require the rescheduling of many closings. The final rule approach is intended to limit circumstances in which a new waiting period is required to situations with more significant changes.
Who Provides the Closing Disclosure: Under the final rule, the creditor is responsible for delivering the Closing Disclosure form to the consumer. A creditor may use settlement agents to provide the disclosure, provided the settlement agent complies with the requirements of the rule, and the creditor must ensure that the Closing Disclosure is provided in accordance with the rule.
Closing Disclosure Contents: The Closing Disclosure is five pages long. The first page is similar to the first page of the Loan Estimate, and contains information identifying the borrower and loan, the loan terms, the projected monthly payments, and the total closing costs and total cash needed to close.
The second page contains an itemization of closing costs and other costs to close the loan, including whether each particular cost is paid by the borrower, seller, or another party. The third page includes a calculation of the cash needed to close and a summary of the borrower's transaction and seller's transaction.
The fourth and fifth pages contain additional loan disclosures and contact information for the creditor, brokers, and settlement agent. The additional disclosures address:
- Whether the loan is assumable
- Whether it has a demand feature
- Whether there is a negative amortization feature
- Late payment fee information
- The ability to refinance the loan
- Whether servicing of the loan may be transferred
- The responsibility of the creditor to deliver a copy of the appraisal to the borrower
- Escrow requirements
- Whether the lender accepts partial payments
- Tax deductibility
- Loan contract details
- Borrower liability after foreclosure
The fifth page also includes a calculation of the total payments, finance charges, amount financed, and total interest percentage over the term of the loan. Finally, the fifth page also contains a signature block for consumers to confirm receipt of the disclosure.
The CFPB had requested comments on whether it should include the total interest percentage item in the Closing Disclosure. While the disclosure is provided for in Dodd-Frank, the CFPB was concerned that the disclosure might not be useful for consumers and could create confusion. Although the industry generally opposed the inclusion of the total interest percentage item, based on consumer testing and other comments, the CFPB decided to include the item. But it did not include in the Closing Disclosure the proposed approximate cost of funds item, which was based on the Dodd-Frank requirement for the disclosure to include the wholesale cost of funds. The CFPB had requested comment on whether the disclosure should be part of the Closing Disclosure, and the industry generally opposed the inclusion of the item. The CFPB noted that consumer testing suggested that consumers did not understand the disclosure and that it did not provide a meaningful benefit to consumers.
Restrictions on Increases in Closing Costs
The final rule limits the circumstances in which borrowers may be required to pay more for settlement services than the amount stated on the Loan Estimate. Unless an exception applies, charges for the following services cannot increase: (1) the creditor's or mortgage broker's charges for its own services, (2) charges for services provided by an affiliate of the creditor or mortgage broker, and (3) charges for services for which the creditor or mortgage broker does not permit the consumer to shop for the provider. Charges for other services can increase, but generally not by more than 10 percent, in the absence of an exception. If a service is not required by the creditor, there is no restriction on cost increases.
The exceptions include situations when: (1) the consumer asks for a change, (2) the consumer chooses a service provider that was not identified by the creditor, (3) information provided at application was inaccurate or becomes inaccurate, or (4) the Loan Estimate expires.
This approach differs from the current tolerances under RESPA. Currently, charges for services provided by an affiliate of the creditor or mortgage broker and for services for which the consumer may not shop for the provider are subject to the 10-percent tolerance.
Inclusive Finance Charge/APR Dropped
The proposed rule revived a prior Federal Reserve Board proposal to expand the definition of the finance charge, which is then used to calculate the APR, to include a number of additional charges. The expanded APR would have included, among other things, closing agent charges, title agent charges, credit life insurance premiums, voluntary debt cancellation fees, and security-interest charges.
Industry commenters generally opposed the expansion of the APR, noting various issues including costs of implementation, implementation burdens in view of all of the other regulatory changes, and implications under TILA and other law requirements tied to the APR. The CFPB decided not to adopt the expanded APR at this time. The CFPB stated in a blog post that: "The change might have cost [the] industry a lot and might have affected the types of loans available to consumers. A number of other mortgage rules are about to go into effect that might make these effects even bigger." The CFPB did go on to say that it will continue to review this issue as part of its obligation under Dodd-Frank to review the mortgage rulemakings after five years.
The final rule generally requires creditors to retain records evidencing compliance with the Loan Estimate and Closing Disclosure requirements for three years from the later of closing or when the disclosure is required. Consistent with existing RESPA requirements, a creditor must, however, retain the Closing Disclosure and all related documents for five years after closing.
The proposed rule would have required creditors to keep records of the Loan Estimate and Closing Disclosure in a standard electronic, machine-readable format. The CFPB removed this provision from the final rule, acknowledging in a blog post that "the data standard we were proposing wasn't specific enough." The CFPB still believes that requiring the retention of records in such format is a "good idea" and will study the matter further.
Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which publishes CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.
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