CFPB Finalizes Amendments To TILA/RESPA Integrated Disclosures Rule and Loan Originator Rule

The Consumer Financial Protection Bureau recently promulgated its first final rule of 2015, a series of minor amendments to the TILA/RESPA integrated disclosures (TRID) rule. The substantive changes to the TRID rule are an extension of the time period to issue a revised Loan Estimate when an interest rate moves from floating to locked, and a provision for disclosing that a creditor has reserved its right to issue a revised Loan Estimate for loans funding new construction.

As originally adopted, the TRID rule required creditors to provide a revised Loan Estimate the very same day that a consumer locked a floating rate. This differed from the general requirement under the TRID rule, which required creditors to issue a revised Loan Estimate no later than three business days after learning of a change that necessitated a revision.

The industry advised the CFPB that the requirement to issue a revised Loan Estimate on the date of the rate lock would not only present significant operational burdens, but also would result in changes to lock-in policies that would be adverse to consumers. In short, creditors would have to set deadlines to lock rates very early in the day if a revised Loan Estimate had to be issued on the date of the lock.

When the CFPB proposed in October 2014 to revise the time frame, it proposed to require creditors to issue a revised Loan Estimate no later than the business day after the consumer locked the rate. The industry advised the CFPB the time frame still would present operational burdens and result in unfavorable changes to lock-in policies. In the end, the CFPB amended the TRID rule to allow three business days for creditors to prepare and provide a revised Loan Estimate when the rate moves from floating to locked.

The second of two substantive amendments to the TRID rule applies only in the context of loans for new home construction where consummation is expected to occur at least 60 days after the creditor issues the initial Loan Estimate. For these loans, the TRID rule permits a creditor to reserve the right to issue a revised Loan Estimate any time prior to 60 days before consummation, as long as the creditor includes a statement to this effect in the Loan Estimate. For most loans, however, the Loan Estimate will be a standard form that cannot be revised except as expressly permitted by the TRID rule; the original TRID rule did not provide for where in the Loan Estimate such a statement could be included. As indicated in the preamble to the October 2014 proposed rule, the CFPB’s failure to provide a space for this statement in the original TRID rule was an oversight. The amendment allows for the statement to be included in the “Other Considerations” section on page 3 of the Loan Estimate.

The final rule also includes a conforming change to the loan originator provisions in Regulation Z section 1026.36. Among various requirements, the loan originator provisions require certain loan originator identification information (name and NMLSR ID) to be included in specified loan documents. When the CFPB originally adopted the requirement, it decided not to require that the information be included in the existing TILA and RESPA disclosures. The CFPB knew that the existing disclosures would soon be replaced by the disclosures under the TRID rule, and it decided not to require that the existing disclosures be modified to provide for the disclosure of this information. The conforming change revises the disclosure requirement to provide for the loan originator identification information to be included in the disclosures under the TRID rule.

The balance of the final rule is comprised of non-substantive corrections to the TRID rule. The amendments, including the single addition to the loan originator rule, will become effective on the same date as the TRID rule—August 1, 2015.

Richard J. Andreano, Jr., and Ryan J. Richardson 

ABA Seeks Removal of Mortgage Rate Calculator from CFPB Website

The American Bankers Association has sent a letter to the CFPB urging it to take down from its website its new mortgage interest rate calculator tool. The CFPB launched the new tool earlier this month, in conjunction with its highly publicized report that found nearly half of consumers do not shop among multiple lenders before applying for a mortgage loan.

The CFPB’s “Rate Checker” tool allows a consumer to enter information about his or her location, credit profile, desired loan amount, and collateral value. Pairing this information with data from financial institutions (via a private research firm), the Rate Checker purports to display the prevailing interest rates for which the consumer may qualify, as well as the number of financial institutions offering those rates to consumers with the consumer’s profile.

The ABA believes the tool should be removed and reconsidered based on its concerns, which include the following:

  • The calculator is not an adequate shopping comparison tool for consumers because the interest rate figure it provides excludes significant transactional costs and interest prepayments in the form of points.
  • There is a high potential for inaccuracy because the calculator does not include a broad enough sample of lenders to generate an accurate rate in any one area or locality.
  • It is uncertain whether the CFPB has the quality control safeguards in place to guarantee the reliability and integrity of the reported data.
  • The pricing yielded by the tool is questionable because it is unclear if the pricing factors employed in the calculator are weighed in a fashion that is representative of lender underwriting standards across all markets and industry segments.
  • The calculator currently allows options for only three loan types and overlooks various types of products that allow for customized lending in which community banks often specialize.
  • The calculations generated by the tool will appear to consumers as officially sanctioned prices, and possibly as interest rate caps, and consumers will incorrectly perceive them as entitlements of the interest rates they ought to be receiving.
  • The CFPB did not provide an opportunity for comment on the tool, thereby undermining the credibility of the project.

- Barbara S. Mishkin


CFPB Proposes Amendments to ‘Small Creditor,’ ‘Rural’ Exemptions

The CFPB recently proposed amendments to the portions of Regulation Z governing mortgages made by small creditors. In the same notice, the CFPB also proposed amendments to Regulation Z’s definition of the term “rural,” which controls certain special permissions for small creditors operating predominantly in areas that satisfy the definition. The proposed amendments follow the CFPB’s May 2013 announcement that it intended to study potential adjustments to the terms “rural” and “underserved,” as well as its May 2014 request for comments regarding the small creditor loan origination threshold. Comments on the proposed amendments are due on or before March 30, 2015, and the Bureau proposes that the amendments would become effective January 1, 2016.

Three of the CFPB’s major mortgage rules feature special provisions and exemptions for small creditors. The escrow rule exempts certain small creditors from the requirement to establish escrow accounts for certain higher-priced mortgages; the ability-to-repay (ATR) rule includes three varieties of qualified mortgages—two permanent, one temporary—that are available only to small creditors; and the Home Ownership and Equity Protection Act (HOEPA) rule exempts small creditors from its prohibition on balloon payment features for certain high-cost mortgages.

Both the current rule and the proposed rule define a small creditor, generally, according to two thresholds—loan origination and asset size. Currently, a small creditor is one which

  • originates, together with any affiliates, 500 or fewer covered transactions annually (subject to certain exceptions, covered transactions are first-lien consumer credit transactions secured by a dwelling); and
  • holds assets totaling less than $2 billion, as adjusted annually for inflation (the dollar amount for 2015 is set at $2.060 billion).

The amendments propose to define a small creditor as one which

  • originates, together with any affiliates, 2,000 or fewer first-lien covered transactions annually, excluding loans that were not transferred by the creditor or its affiliates; and
  • holds, together with any mortgage-originating affiliates, assets totaling less than $2 billion, as adjusted annually for inflation.

According to the CFPB, these amendments serve two main goals. First, the higher origination threshold (and the exclusion of loans that are not transferred) should ease the rules’ implicit limitations on smaller creditors’ ability to provide credit to qualified borrowers. Second, the reconfigured asset-size threshold should prevent larger creditors from using creative organizational structures to take advantage of the special provisions intended only for their smaller counterparts.

The most significant effect of the proposed changes to the small creditor thresholds may be to the three qualified mortgage categories under the ATR rule that are available only to such creditors. The small creditor qualified mortgage categories are:

  • The category for loans that small creditors retain in portfolio, which are not subject to the strict 43 percent debt-to-income limit that applies to the general qualified mortgage
  • The category for loans with balloon payments made by small creditors that operate predominantly in rural or underserved areas (balloon payments are prohibited for qualified mortgages made by non-small creditors)
  • The temporary category for loans with balloon payments made by small creditors regardless of whether they operate predominantly in rural or underserved areas

The CFPB proposes to extend the sunset of the temporary balloon-payment qualified mortgage by roughly three months, from January 10, 2016, to April 1, 2016.

Regulation Z’s definition of a “rural” area is relevant not only to the permanent balloon-payment qualified mortgage for small creditors, but to several other CFPB rules, as well. The exception from the requirement to maintain an escrow account with a higher-priced mortgage loan is available for small creditors operating predominantly in rural or underserved areas, subject to certain conditions. Also, while balloon payment features generally are prohibited with HOEPA loans (also known as “high-cost loans”), small creditors operating predominantly in rural or underserved areas may make HOEPA loans with balloon payment features, subject to certain conditions. As a practical matter, however, few creditors are likely to make HOEPA loans.

Currently, Regulation Z designates “rural” areas by county. A county is considered “rural” if it is neither a metropolitan statistical area nor in a micropolitan statistical area adjacent to a metropolitan statistical area. The CFPB publishes on its website a list of rural counties on which the industry may rely. This approach has been the subject of substantial criticism, including, among other things, that it excludes rural portions of counties that also include urban areas.

The CFPB proposes to amend the definition of a “rural” area to include both rural counties and all census blocks—a more finite geographical unit—that are not designated as “urban.” The CFPB does not propose to amend the definition of an “underserved” area, having concluded that the proposed amendment to “rural” should sufficiently allay any concerns regarding availability of the relevant exemptions.

The remaining proposed amendments would modify a lender’s timeline for determining whether it qualifies as a small creditor and whether, for purposes of the allowable exemptions, it is operating predominantly in a rural or underserved area. Most notably, the CFPB proposes to adjust the allowable look-back period for determining whether a lender is operating predominately in a rural or underserved area. Currently, lenders may look back to any of the last three years; in other words, if data confirms that a lender operated predominantly in a rural or underserved area in any of the last three calendar years, it may continue to operate as such this calendar year. The CFPB explained that it adopted this approach out of concern for volatility in the concepts of “rural” and “underserved” during the period that the CFPB reexamined them. Based on its proposed approach to the definition of a “rural” area, along with a new grace period (discussed below) that is also proposed, the CFPB decided to propose revising the look-back period to only the preceding year.

The CFPB also proposes to install a three-month grace period following the expiration of a lender’s status as a small creditor or as a creditor operating predominantly in a rural or underserved area. If, during a calendar year, a creditor exceeds the loan origination or asset size thresholds necessary to retain status as a small creditor for the following calendar year, it may continue to operate as a small creditor in relation to applications received before April 1 of the following year. Likewise, if a creditor no longer has operated predominantly in a rural or underserved area within the preceding calendar year, it may continue to operate as such in relation to applications received before April 1 of the following year.

- Richard J. Andreano, Jr., and Ryan J. Richardson


Deed of Trust Assignment without Debt Transfer Does Not Trigger TILA Notification Obligation, Maryland District Court Rules 

The mere assignment of a deed of trust without a transfer of the underlying mortgage debt does not trigger a lender's obligation under the Truth in Lending Act (TILA) to notify the borrower of the assignment, according to a decision of the U.S. District Court for the District of Maryland.

In Barr v. Flagstar Bank, the plaintiffs alleged that the lender failed to comply with Section 1641(g) of TILA, which requires lenders to notify borrowers within 30 days that their mortgage loan has been sold or transferred to a third party. The lender argued that Section 1641(g) did not apply because the plaintiffs alleged that only the deed of trust—not the underlying debt—had been assigned. The court agreed, and dismissed the borrowers' claims.

The court ruled that the plain language of Section 1641(g) requires disclosure when a new creditor acquires a borrower's "mortgage loan" or "debt." Section 1641(g), however, makes no mention of instruments that secure debt, such as a deed of trust. In addition, the definition of "mortgage loan" distinguishes between the debt and the security instrument, further supporting the conclusion that disclosure is required for assignments of one but not the other, the court observed.

The court rejected the borrowers' argument that Section 1641(g) applies to assignments of deeds of trust "because the security instrument is the 'operative document which enables the true secured party to foreclose.'" This argument is contrary to the plain language of Section 1641(g), the court found.

Finally, the court rejected the plaintiffs' insistence that adherence to the statute’s plain language would gut TILA’s purpose. The court concluded that "if [TILA] is intended to protect the consumer by increasing transparency in consumer credit transactions, then limiting disclosure to transfers of the debt underlying that transaction furthers that goal," since the borrower "makes payments on the loan to the holder of that debt, not to the holder of the security instrument." Because the concepts of debt and security for debt are distinct, "both in theory and within the clear language of Section 1641(g)," the court granted Flagstar's motion to dismiss.

- Robert A. Scott, Lennon B. Haas, and Steven D. Burt


South Carolina Lowers Criminal Background Fees for Control Persons

The South Carolina Board of Financial Institutions has decreased the fees required for a criminal background check for control persons. Effective February 2, 2015, South Carolina Law Enforcement Division and FBI background checks for control persons will be $53.25. Note that the South Carolina criminal background check fees must be completed outside of the NMLS, and that the fees are in addition to the NMLS processing fee for the FBI criminal background check that is processed by the NMLS.

Check the state agency website for further information.

 - Marc D. Patterson


Copyright © 2015 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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