More To Know About “Know Before You Owe”: CFPB Acknowledges TRID Challenges and Announces July 2016 Notice of Proposed Rulemaking
By Jennifer Janeira Nagle and Hollee Watson
The TILA-RESPA Integrated Disclosure rule (“TRID”) went into effect on October 3, 2015, and has posed significant implementation challenges industry-wide. Those challenges have been articulated to the Consumer Financial Protection Bureau (“CFPB”) by industry participants, trade groups, and congressional leaders alike. In response, the CFPB has issued guidance in the form of letters, webinars, educational videos, guides, and factsheets. Notwithstanding this informal guidance, and despite the CFPB’s assurances that its initial compliance examinations would be “diagnostic and corrective, not punitive,” see December 29, 2015 Letter from CFPB Director Richard Cordray to the Mortgage Bankers Association, the mortgage industry continues to experience uncertainty and risk in its efforts to implement TRID’s sweeping changes to TILA and RESPA. See January 29, 2016 Mortgage Industry Trade Group Letter to CFPB; March 11, 2016 Sen. Bob Corker Letter to CFPB.
In the wake of pressure for more formal guidance, the CFPB recently announced that it will issue a Notice of Proposed Rulemaking (“NPRM”) on TRID in late July. In an April 28, 2016 letter to mortgage industry trade groups, Director Richard Cordray acknowledged that “the implementation of the Know Before You Owe rule poses many operational challenges” and that “there are places in the regulation text and commentary where adjustments would be useful for greater certainty and clarity.”
Currently, the scope of the NPRM is unknown but it will likely cue off of the CFPB’s informal guidance to date, given Director Cordray’s statement that “incorporating some of the Bureau’s existing informal guidance, whether provided through webinar, compliance guide, or otherwise, into the regulation text and commentary would be helpful.” Some of the topics informally addressed by the CFPB include:
- “Additional Information” Impact on Loan Estimate Triggers
- TRID provides that creditors must issue a Loan Estimate within three business days after they receive a complete “application.” An application is considered complete under TRID once a creditor collects six enumerated pieces of information, including items such as the borrower’s name, social security number, and the amount of credit sought. TRID expressly removed Regulation X’s previous “catch-all” application component of “whatever additional information it deems necessary in connection with the request for the extension of credit.” The removal of this provision, of course, has caused confusion as to whether creditors may request more information than the six items expressly set out by the Rule, and if so, when the clock starts for issuance of the Loan Estimate. To address this confusion, the CFPB clarified that, while a creditor may request and collect additional information, once the consumer submits – and the creditor receives – the six items set out in the Rule, the obligation to provide a Loan Estimate is triggered and the clock begins to run. See Small Entity Compliance Guide, §§ 6.5-6.6; Overview of the Rule Webinar. In other words, the deadlines for issuing Loan Estimates are not extended or otherwise modified by virtue of creditors’ self-imposed documentation requirements, but neither is a creditor prohibited from seeking such additional material.
- “Good Faith” Loan Estimates: Tolerance for Error
- As to determining whether a Loan Estimate is made in “good faith,” industry participants have understandably sought more clarity in connection with accuracy levels for Loan Estimate disclosures. In response, the CFPB has advised that the tolerance for error is virtually zero. Specifically, the CFPB has stated that, generally, a Loan Estimate is not made in good faith if the “charges paid by or imposed on the consumer” in the Closing Disclosure “exceed” the amount in the Loan Estimate “regardless of whether the creditor later discovers a technical error, miscalculation, or underestimate of a charge.” See Small Entity Compliance Guide, § 7.1. On the flip side, a Loan Estimate is generally deemed to be in good faith “if the creditor charges the consumer less than the amount disclosed on the Loan Estimate, without regard to any tolerance limitations.” Id.
- Additional Waiting Periods for Revised or Corrected Closing Disclosures
- Answering questions about the types of changes to a Closing Disclosure that trigger an additional three-business day waiting period before consummation, the CFPB provided that if, after delivery of the Closing Disclosure, but prior to consummation, the “disclosed APR becomes inaccurate,” “the loan product changes,” or “a prepayment penalty is added,” the creditor is required to provide a revised disclosure containing “all changed terms” and “ensure that the consumer receives [the revised Closing Disclosure] no later than three business days before consummation.” See Small Entity Compliance Guide, §12.2; Closing Factsheet. The CFPB has stressed that, while “[t]here has been much misinformation and mistaken commentary around this point, … [a]ny other changes in the days leading up to closing do not require a new 3-day review, although the lender will still have to provide an updated disclosure.” See Closing Factsheet.
- Standard for Assignee Liability
- In responding to concerns that investors will be reluctant to purchase loans where potential TRID violations loom in the early implementation stages, the CFPB advised that “there is no general TILA assignee liability unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.” See December 29, 2015 Letter from CFPB Director Richard Cordray to the Mortgage Bankers Association.
- Self-Corrective Mechanisms
- Regarding options available to industry participants to correct self-identified errors and limit exposure to potential liability, the CFPB advised that corrected closing disclosures may cure certain types of errors. The CFPB further noted that “statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate … .” Further, the CFPB advised that TILA’s curative provisions, codified in 15 U.S.C. § 1640, apply equally under TRID. See December 29, 2015 Letter from CFPB Director Richard Cordray to the Mortgage Bankers Association; see also Small Entity Compliance Guide, § 12 (discussing revisions and corrections to Closing Disclosures).
- Bona Fide Error Defense
- Faced with questions regarding potential liability for unintentional errors in the issuance of the new disclosures, the CFPB advised that TILA’s bona fide error defense is generally applicable under TRID. See December 29, 2015 Letter from CFPB Director Richard Cordray to the Mortgage Bankers Association. Of course, that defense has its limitations, such as that it is typically applicable only to errors of fact. In this regard, additional guidance would be beneficial.
These topics, among many others, have been prominently on the minds of industry participants. The informal guidance summarized above, however, has fallen short of providing the clarity and conclusiveness the industry is seeking. All eyes will now be on the CFPB to see what issues they carve out for more formal rulemaking in the NPRM.
The CFPB intends to host several meetings with industry trade groups before the NPRM is issued to gain a better understanding of the specific challenges that warrant attention in any proposed rule changes. We will continue to monitor this issue for new developments.
For additional information regarding TRID, please visit the K&L Gates Consumer Financial Services Watch Blog, as well as K&L Gates Hub, where you can view K&L Gates’ recent webinar titled The Mortgage Lifecycle: Litigation Hotspots From Origination Through Foreclosure – 2016, which covers, among other topics, potential TRID litigation hotspots.