In one of the most anticipated actions of the Consumer Financial Protection Bureau’s “Know Before You Owe” campaign, on July 9, 2012, the CFPB published 1,099 pages of a proposed regulation to combine mortgage disclosure forms required under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”). As the Dodd-Frank Wall Street Reform and Consumer Protection Act charged the CFPB with creating combined disclosure forms and proposing regulations implementing such forms by July 21, 2012, the Bureau met that deadline with a few weeks to spare. Now mortgage companies, title insurance and settlement agents, real estate brokers, and all other interested parties are digging in to the proposed regulations in an attempt to understand how the Bureau’s proposed changes could impact their businesses. Industry participants should have plenty of time to digest the proposed regulations; public comments on the proposed changes to the calculation of the finance charge are due on September 7, 2012, while all other comments on the proposed combined disclosures are due on November 6, 2012.
I. Loan Estimate
The Bureau is proposing to add the new combined mortgage disclosure requirements to Section 1026.19 of TILA regulations, as well as add two sections to TILA regulations that would dictate detailed line-by-line instructions for completion of the disclosure forms. Notably, for all closed-end consumer credit transactions secured by real estate, other than reverse mortgages, creditors would be required to provide a Loan Estimate disclosure within three business days of receiving an application. While the timing of providing this disclosure is generally the same as is required for providing a Good Faith Estimate (“GFE”) and initial TILA disclosure, the proposed regulation would change the definition of “application” to remove the catch-all provision that currently permits lenders to collect any other information the lender deems necessary to make a credit decision before issuing the GFE. As the Bureau has expressed concern that lenders are using the current definition of “application” to delay the issuance of early disclosures, the proposed definition would require creditors to issue the combined Loan Estimate disclosure within three “business days” (which would be defined as all calendar days except Sunday and legal public holidays) of receiving six pieces of information: the borrower’s name, income, social security number, the property address, an estimate of the value of the property, and the mortgage loan amount sought. In addition, in a change from current GFE requirements, a creditor would be required to provide a Loan Estimate disclosure no later than the seventh business day before closing, although a consumer could waive such a waiting period after receiving the disclosure in the case of a bona fide personal financial emergency.
With regard to the Loan Estimate form, the proposed disclosure is a three page document that combines a summary of loan terms and projected payments with a detailed disclosure of estimated closing costs and other cash needed to close a loan, as well as a streamlined summary of certain disclosures regarding the transaction. While the structure of the form and the detailed itemization of loan terms and closing costs are significantly different from the GFE, certain of the proposed regulations mirror current RESPA requirements. For instance, the proposed regulations maintain the requirement to provide a written list of settlement service providers to assist consumers in shopping for settlement services required by a creditor in a closed-end, real estate-secured consumer credit transaction.
The provision of a written list also would be tied to restrictions on the change in closing costs disclosed as part of the proposed Loan Estimate. Mortgage lenders know such restrictions as tolerances under the current RESPA regulations. Although the proposed regulations would characterize such restrictions as estimating closing costs in “good faith,” rather than tolerances, the end result is the same; mortgage lenders would continue to be held accountable for changes in certain closing costs based on the amounts disclosed on the proposed Loan Estimate. Those standards, however, would be stricter under the proposed regulations; any third party services obtained from lender-affiliated companies or non-affiliated companies selected by the lender, absent changed circumstances permitting the revision of the Loan Estimate, could not exceed at closing the amount disclosed on the Loan Estimate. Any such excess would need to be credited back to the borrower by the creditor. With these stricter standards and the proposal by the CFPB to essentially define a “good faith estimate” as the disclosure of the actual amount charged to a consumer at closing (with limited exceptions), the legal issue of whether the CFPB has the statutory authority to impose these restrictions on lenders, as well as the subsequent requirement to refund the excess fees, is, once again, ripe for discussion.
II. Closing Disclosure
Following the Loan Estimate, the proposed regulations offer two alternatives for providing the Closing Disclosure to a borrower no later than three business days before closing. Given the combination of loan terms and closing costs on the proposed disclosure, the CFPB is asking the public for comments on whether the creditor should be solely responsible for completing and providing this form to the borrower, or whether the settlement agent should have the option to provide the Closing Disclosure when the creditor would maintain ultimate responsibility for providing the disclosure. The proposed regulations are written to present two alternative regulatory provisions reflecting these options. (Note that the settlement agent would have sole responsibility for providing a seller with a Closing Disclosure reflecting the seller’s side of the transaction no later than the date of closing.) Although the proposed regulations would permit consumers to waive the three business day waiting period after receiving the disclosure in the case of a bona fide personal financial emergency, in all other cases, if the Closing Disclosure is revised and reissued to the borrower, a new three business day waiting period would apply before closing, except in certain circumstances, including changes resulting from buyer and seller negotiations and fee changes of less than $100.
With regard to the Closing Disclosure form, the proposed disclosure is a five page document that would: (1) repeat the first page of the Loan Estimate as the first page of the Closing Disclosure; (2) include a detailed itemization of closing costs similar to the current HUD-1 Settlement Statement (“HUD-1”), but with categories of fees grouped to match the structure of the proposed Loan Estimate; (3) summarize the borrower’s cash needed to close, which would factor in impermissible changes to closing costs; (4) provide a summary of both the borrower’s side and the seller’s side (if applicable) of the transaction similar to the current HUD-1; and (5) include two pages of loan disclosures and transaction-specific calculations, such as escrow account disclosures and the calculation of the annual percentage rate (“APR”) and finance charge.
III. Other Proposed Changes
In addition to proposing combined disclosure forms and regulations implementing those forms, the CFPB’s proposed regulation includes other changes to RESPA and TILA, including the removal of the RESPA exemption for loans secured by properties of 25 acres or more and an overhaul to the calculation of the finance charge. With regard to the later proposal, the CFPB is proposing to remove most of the exclusions that allow lenders to exclude certain fees from the calculation of the finance charge and revise the calculation to match the statutory language under TILA.
Notably, under the TILA regulations, a fee or charge is included in the finance charge if it is “payable directly or indirectly by the consumer” to whom credit is extended and “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” With the proposed amendments, exclusions for certain real estate-related fees would be removed from the calculation, which means fees for services like title searches, document preparation, appraisals, credit reports, and notaries would be included as part of the finance charge. That said, the proposed regulation would continue to exclude fees or charges paid in comparable cash transactions, late fees and similar default or delinquency charges, seller’s points, amounts required to be paid into escrow accounts if the amounts would not otherwise be included in the finance charge, and premiums for property and liability insurance if certain conditions are met. As this revised calculation could result in higher APRs and more “high-cost” loans or cause loans to fail the three-point test under the definitions of “qualified mortgage” and “qualified residential mortgage,” the Bureau is imposing a September 7, 2012 public comment deadline on the finance charge proposal. This will allow the agency to consider these comments together with other comments submitted in response to the CFPB’s separately-proposed changes to the Home Ownership and Equity Protection Act.
The proposed regulations also would add a partial exemption to the RESPA regulations to exempt federally-related mortgage loans that are closed-end, real estate-secured consumer credit transactions from certain provisions of the RESPA regulations, including Section 1024.7 governing the GFE and Section 1024.8 governing the HUD-1. Reverse mortgages, however, would remain subject to the GFE and HUD-1 requirements. In fact, the CFPB proposes to incorporate reverse mortgage-specific Frequently Asked Questions issued by the U.S. Department of Housing and Urban Development into the regulatory instructions for preparation of the GFE and HUD-1.
IV. What’s Next
We will continue to review and analyze the CFPB’s proposed regulation and provide a more-detailed discussion of the Bureau’s proposals in the near future. In the meantime, while the proposed disclosure forms are substantially different from the current GFE and HUD-1, many of the regulatory requirements behind the disclosures, like timing, collection of up-front fees, restrictions on revisions to the disclosures, and fee tolerances, appear to be similar to the processes that mortgage lenders have in place. Thus, industry participants should keep these differences and similarities in mind as they review the proposed regulations and weigh the important impact the changes could have on the origination and closing of mortgage loans, as well as the technology and other systems lenders use in their businesses. Significant time and attention have gone into the proposals announced by the CFPB, and if modifications are to be made to the proposed regulations, it will be important for mortgage lenders and all other settlement service providers to submit detailed public comments outlining the consequences of the Bureau’s proposals. Please contact us if you have questions about the CFPB’s proposed mortgage disclosure regulations or if we can assist you in working through the implications of the proposed regulations for your business.