Reprinted With Permission from Ballard Spahr
Materials recently released by the Consumer Financial Protection Bureau provide significant insight into its stance on the rules that will govern integrated mortgage disclosure. Issued in the context of Small Business Regulatory Enforcement Fairness Act (SBREFA) requirements, they offer a window on the CFPB’s thinking on changes to the tolerances applicable to settlement cost estimates and the delivery requirements for settlement disclosures.
Since last summer, the CFPB has been issuing prototype mortgage loan disclosures based on the directive under the Dodd-Frank Wall Street Reform and Consumer Protection Act that it propose by July 21, 2012, rules and model disclosures that combine the disclosures required under the Truth in Lending Act and Real Estate Settlement Procedures Act. The CFPB first issued prototype application disclosures, which it calls the “Loan Estimate,” and more recently began issuing prototype closing disclosures, which it calls the “Settlement Disclosure.”
When the CFPB issued the newest versions of the prototype disclosures this week, we discussed it on our blog. Significantly, in issuing prototype disclosures the CFPB did not address what changes it is considering to the existing TILA and RESPA rules that govern the respective disclosures under the statutes. The industry criticized the approach of the CFPB, noting that it is difficult to comment on the prototype disclosures without knowing the rules that will govern the disclosures.
Dodd-Frank requires the CFPB to consider, as part of its rulemaking process, the potential effect of rules on small business entities pursuant to SBREFA requirements. Under the requirements, the CFPB will form a small business entity panel to address the integrated disclosures and accompanying rules. To provide guidance to small business entities, the CFPB released materials that address not only the prototype disclosures, but the thinking of the CFPB on important issues regarding the rules that will govern the disclosures.
Tolerance Changes
The CFPB is considering applying RESPA’s zero-percent tolerance to the estimated charges of service providers that are affiliated with the lender and the estimated charges of service providers selected by the lender (including a provider chosen by the consumer if the consumer must select from a list provided by the lender). Under current RESPA rules, estimates of charges for services of parties selected by the lender are subject to the 10-percent tolerance on charges. There is no current special rule for the estimates of charges for service providers that are affiliates of the lender—the estimated charges for such providers are subject to the 10-percent tolerance if the providers are selected by the lender, or are identified by the lender and voluntarily selected by the consumer.
Decrease Need to Issue Revised Cost Estimates
Under current RESPA rules, a lender must issue a revised GFE within three business days of learning of a changed circumstance in order to increase an estimated fee or fees subject to the 10-percent tolerance based on the change. As a result, a lender may need to issue multiple revised GFEs. The CFPB advises that the proposals under consideration would not require a lender to reissue a Loan Estimate with every cost increase—a lender could wait to issue a new Loan Estimate “until the costs subject to the 10 percent [tolerance] limitation increase based on valid changes in circumstance by more than 10 percent in total.”
Responsibility for Settlement Disclosure
Currently, the creditor must provide the final TILA disclosure and the settlement agent is responsible for the HUD-1 Settlement Statement. The CFPB is considering two alternatives for delivery of the integrated Settlement Disclosure:
The lender would be solely responsible for delivering the Settlement Disclosure to the consumer.
The lender would be responsible for preparing the TILA-required information on the Settlement Disclosure, and the settlement agent would be responsible for preparing the RESPA-required information. Both the lender and the settlement agent would be jointly responsible for providing the consumer with an integrated Settlement Disclosure three business days before closing.
The CFPB notes that Dodd-Frank adds a requirement for the lender to disclose in the initial and final TILA disclosures the aggregate settlement costs and, therefore, the lender already will have settlement cost disclosure obligations.
Timing for Delivery of Settlement Disclosure
The CFPB is considering a requirement that the integrated Settlement Disclosure be delivered three business days before closing in most cases, with limited exceptions (such as to reflect an adjustment to recording fees). The CFPB also may require that a Settlement Disclosure be reissued, along with another three-day waiting period, if (a) the APR increases by more than one-eighth of a percent, (b) an adjustable-rate feature, prepayment penalty, negative amortization feature, interest-only feature, balloon payment or demand feature is added to the loan, or (c) the amount needed to close increases beyond a to-be-determined tolerance.
TILA-RESPA Rule Timing
The CFPB addresses the effective date provisions of Dodd-Frank Title XIV. Under the provisions, (a) regulations required by Title XIV must be final by January 21, 2013, and take effect not later than 12 months after the respective final regulation is issued, and (b) any section of Title XIV for which final rules are not issued by January 21, 2013, becomes effective on that date. Additionally, the rules for the integrated TILA-RESPA mortgage disclosures must be issued by January 21, 2013, and become effective not later than January 24, 2014. The CFPB advises that “it may not be possible to issue a final TILA-RESPA rule by January 21, 2013.” As a result, the CFPB also advises that it “is considering a proposal to use its authority under TILA, RESPA, and the Dodd-Frank Act to exempt lenders from compliance with the Title XIV disclosure requirements temporarily until the TILA-RESPA disclosure rule takes effect.”
Expanded Finance Charge/APR
The CFPB is considering removing many of the exclusions of fees from the finance charge and, as a result, the annual percentage rate, as was proposed by the Federal Reserve Board in August of 2009. The CFPB does not expressly advise whether it would also propose an increase in high-cost loan triggers tied to the annual percentage rate. The failure of the Fed to provide for such increases in connection with its August 2009 proposal drew criticism from the industry.
Trigger for Loan Estimate
Currently the items that trigger the need to provide a GFE and initial TILA disclosure are (a) the borrower’s name, (b) the borrower’s monthly income, (c) the borrower’s Social Security number to obtain a credit report, (d) the property address, (e) an estimate of the value of the property, (f) the loan amount sought, and (g) any other information deemed necessary by the lender. The CFPB states that because of the final item, the current rules allow a lender to delay providing a GFE while it gathers more information about the property or the consumer’s assets and liabilities and that the CFPB is considering eliminating the final item. However, positions stated by HUD staff in publicly issued FAQs limit the ability of lenders to do so, as lenders may not require a borrower to provide consents to verify income, employment or deposits, or to provide supplemental documentation to verify information in an application, before providing a GFE. (The CFPB advises that the proposals under consideration would incorporate the FAQ guidance into “the regulation or official commentary to Regulation Z., as necessary and appropriate.”)
Electronic Data Retention
The CFPB is considering a requirement that lenders maintain standardized, machine-readable, electronic versions of the Settlement Disclosure and any reasons for changes to the information provided in the disclosure for a period to be determined. (Currently, a final TILA disclosure must be retained for two years, the HUD-1 Settlement Statement must be retained for five years, and documentation of the reason(s) for reissuing a GFE must be retained for three years.) The CFPB is assessing whether to exempt small entities from such an electronic data retention requirement.
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