The industry has waited decades for a single disclosure regime to comply with the requirements of Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). Each time it seemed as if it might happen (for example, in the late 90s or around 2010). It never did, but the rule that some have referred to as the “holy grail” was finally mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd-Frank Act required the Consumer Financial Protection Bureau (CFPB) to issue a rule integrating the disclosures required under TILA and RESPA, which it did in November 2013 (Rule). The CFPB provided an implementation period of about 20 months, giving the Rule an effective date of August 1, 2015.
Now that only seven months remain before the effective date, it is imperative for all mortgage lenders to begin preparing for August 1, 2015, if they have not done so. This article provides the compliance professional with a brief overview of some of the major provisions of the Rule and discusses some issues you should consider as you implement the Rule.
The Rule is More than just a Change in Disclosures
The Rule’s single, integrated disclosure regime will replace the current disclosure for loans subject to the Rule, and, as a result, may streamline compliance in some ways. The Loan Estimate (LE) will replace the initial Truth in Lending disclosure and Good Faith Estimate. The Closing Disclosure (CD) will replace the final Truth in Lending disclosure and the HUD-1 settlement statement (HUD-1). Going from four disclosures to two, with one set of rules, should ease some of the difficulties with the duplicative and sometimes divergent disclosure regimes under the current TILA and RESPA rules.
But, the Rule also represents a significant compliance challenge. It is more than just a “swap out” of disclosures that you can rely on your vendor to implement. The Rule makes significant changes to the origination, processing, and closing of mortgage loans, and requires business decisions at all stages of the transactions. In addition, the Rule does not integrate the disclosures for all loans subject to TILA and RESPA. Instead, the CFPB left mortgage loans not covered by the Rule subject to their current disclosure requirements. The CFPB stated they will take up these other loans, such as home equity lines of credit and reverse mortgages, in future rulemakings. Therefore, instead of replacing the current duplicative disclosure regime under TILA and RESPA, it is better to consider the Rule as adding a new disclosure regime for mortgage lenders to add to their compliance responsibilities. For this reason, the Rule represents a significant implementation and ongoing compliance challenge.
The Rule is Long and Complex
Although the Rule is referred to by the CFPB and others as disclosure “simplification,” don’t let that fool you that the rules were also made simpler. The integrated disclosures are easier for consumers to understand and use, which the CFPB used extensive consumer testing to achieve. But the Rule is anything but simple. The Rule changes requirements from the time before an application is received through the time after consummation. The breadth and length of the Rule are extensive. It takes a substantial amount of time to review and understand, because of its length, detailed requirements, discussion, and examples.
As issued, it was 1,888 pages (I recommend you use the Federal Register version for meetings around the office, which was 637 pages). Much of this page count is made up of extensive discussion of the Rule’s provisions in the Preamble’s section-by-section analysis. The analysis provides summaries of public comments to the proposed provisions, the CFPB’s responses to the comments, and a description of the final rule provisions. The regulatory text and its commentary are also lengthy. For example, the Rule contains over 20 different samples and versions of the LE and CD. The Rule is also very specific about how to provide and complete the disclosures. For example, the Rule is strict about when additional pages are permitted to be added to the disclosures, and requires that certain numbers be rounded on the LE and CD. There are specific timing requirements for providing revised estimates based on changes in settlement charges, when interest rates are locked, and when revised estimates can be provided on the CD.
While the CFPB’s small entity compliance guides for the Rule provide a helpful overview of the Rule, they cannot and should not replace a thorough review of the Rule for your implementation. As the guide to the Rule states on its first pages:
“This guide summarizes the TILA-RESPA rule, but it is not a substitute for the rule. Only the rule and its Official Interpretations (also known as commentary) can provide complete and definitive information regarding its requirements.”
What does the Rule apply to?
The Rule applies generally to closed-end credit transactions secured by real property, other than reverse mortgage transactions. The Rule generally does not apply to open-end credit (i.e., home equity lines of credit) or mortgages secured by a dwelling that is not real property (i.e., mobile homes or house boats). The Rule also only applies to “creditors” as that term is defined under Regulation Z, and thus, generally does not apply to loans made by a creditor who makes five or fewer mortgages in a year.
In addition, the Rule applies to certain loans currently exempt under Regulation X – Real Estate Settlement Procedures Act (RESPA). These loans will require provision of the integrated disclosures, and include those secured by property of 25 acres or more, loans secured by vacant real property, and construction-only loans. The Rule also applies to loans secured by a consumer’s interest in a timeshare plan.
Significantly, loans not covered by the Rule remain subject to their current disclosure requirements. As noted above, this means that you must maintain all your systems, policies and procedures, and staff training to deal with the current disclosure requirements under TILA and RESPA if you originate these loans, such as HELOCs and reverse mortgages.
Under the Rule, there are two integrated disclosures: the LE provided at application and the CD provided at closing. As mentioned above, the LE integrates the GFE and the initial TIL, and the CD integrates the HUD-1 and the final TIL. These integrated disclosures will replace the current disclosures for loans subject to the Rule.
The LE, like the forms it replaces, must be provided by a lender within three business days of receiving a consumer’s application. It is a three-page document that explains in a clear and easy-to-use format the terms, costs, and risks of the loan. It combines information required on the GFE and TIL, such as the loan amount, interest rate, and APR. It also includes the appraisal notice required under the Equal Credit Opportunity Act and the servicing application disclosure required under RESPA. Note that the LE also contains new disclosures required by the Dodd-Frank Act (or added pursuant to the CFPB’s general rulemaking authority), such as total payments over five years (“In 5 Years”), and the total interest paid over the life of the loan as a percentage of the principal amount (“Total Interest Percentage” or “TIP”). Significantly, the LE generally requires itemization for closing costs, unlike the GFE which aggregated most categories of closing costs.
The CD, unlike the forms it replaces, must be received by the consumer for each transaction subject to the Rule at least three business days before consummation (more on this below). The creditor is responsible for the entire disclosure, including the RESPA content that was previously the responsibility of the settlement agent under RESPA. It is a five-page document that is designed to match the LE. It contains more detailed disclosures, however, because of its use in the later stage of the transaction. For example, it includes the additional information that must be disclosed pertaining to the time of payment and whether it is paid by the borrower, the seller, or a different party. The CD includes the TIP, but also integrates other new Dodd-Frank Act disclosures that are not on the LE. These include a disclosure about negative amortization, the lender’s partial payment policy, a disclosure with additional escrow account information, and a disclosure of whether the property might be subject to state anti-deficiency laws. Significantly, the CD uses the LE’s organization of closing costs, and thus, does not use the current three- and four-digit series or line numbers that are on the HUD-1. It uses the same letter categories of closing costs as the LE, and assigns two-digit line numbers to each line. Also, the CD uses fewer hard-coded lines than the HUD-1. Both of these changes will create a compliance challenge for industry.
In addition, the CD does not contain a comparison chart to display the tolerance calculation (the new tolerance requirements are discussed below), as does page 3 of the HUD-1. It will be important to demonstrate compliance with the tolerance requirements under Rule. Therefore, use of a separate worksheet will be important. Because the Rule requires rounding of certain settlement charges on the LE and revised estimates can be disclosed on the CD under certain circumstances, the tolerance calculations will be nearly impossible to complete by comparing the last LE and the CD. Instead, software will be necessary to ensure and demonstrate compliance with these requirements.
Revised Definition of Application
The Rule deletes the seventh open-ended item from the current definition of an application under Regulation X, which is, “any other information deemed necessary by the loan originator.” Under the new definition, an application will be considered to be received when you receive just the following six items:
- Social Security number to get a credit report;
- Property address;
- Estimate of the value of the property; and
- Mortgage loan amount sought.
The rule permits “strategically order[ing] information collection,” which means a lender can collect additional information before or at the same time as receiving all six pieces of information; however, you should keep two things in mind. First, while a lender can request additional information before collecting the so-called “sixth item,” it cannot require verifying information that’s described above. Second, once a lender has the sixth item, even if it hasn’t collected all of the additional information requested, it has received an “application” under the Rule. It then must provide the LE within three business days. This does not prohibit a lender from requesting the additional information during this three-day period, but the lender must provide the LE under this timeframe. You should review the online, paper, and telephone applications processes used at your lender to ensure compliance with the Rule’s new definition of application.
Mortgage brokers are permitted to provide the LE under the Rule. The Rule states that when a mortgage broker receives an application, either the broker or the lender must provide the LE. If the broker provides the LE, however, the lender is still ultimately responsible for the disclosure.
One of the questions you may have to answer if your lender does wholesale lending is whether you or the broker should provide the LE. The LE contains more information than the GFE, such as the APR and an itemized list of closing costs, which a mortgage broker would have to complete accurately. Lenders are also subject to stricter tolerance requirements under the Rule (discussed below). In addition, there remains the risk that much of the information on the LE could be subject to TILA civil liability, including information previously only required on the GFE and subject to administrative liability under RESPA. This is because the Rule relies on TILA statutory authority, as well as RESPA statutory authority, for many of the disclosure requirements. These are considerations that many lenders, and you as the compliance professional, will be faced with in the coming year.
New Tolerance Requirements
The rule has similar tolerance requirements to the current Regulation X under RESPA. It has the same 0% and 10% tolerance categories, as well as charges that are not subject to a specific percentage limitation. It also provides exceptions for “changed circumstances” and borrower-requested changes.
However, the Rule expands the “0% Category” to include: (1) charges for third-party services paid to affiliates of the lender or mortgage broker; and (2) charges for which the consumer is not permitted to shop for the provider. This expansion means that any required third-party service that is paid to an affiliate, or for which you do not allow the consumer to shop for a provider, cannot increase at all unless there is a valid “changed circumstance” or borrower-requested change, or the lender incurs the increase. These charges can include appraisal fees, affiliated title services, and others.
The “10% Category” is essentially the charges for third-party services for which the consumer was permitted to shop for a provider and selected a lender-identified provider (i.e., identified on the written list of providers), and recording fees. It is still based on the aggregate amount of these charges, like under the current rules. Note that owner’s title insurance is not subject to the 10% tolerance category, as it is under current Regulation X, because it is not required by the lender.
Also note that, similar to information on the new LE, though the tolerances under Regulation X were previously only subject to administrative liability under RESPA, under the Rule they may be subject to TILA civil liability. This means that lenders may be subject to borrower lawsuits under TILA for tolerance violations. Accordingly, it would be prudent to begin making arrangements with service providers to obtain precise estimates to ensure compliance with the Rule. Keep in mind that the Rule does not also provide an exemption from RESPA Section 8, which prohibits payments or kickbacks in exchange for referrals of settlement service business. Also, the retention of documentation of changed circumstances and borrower-requested changes will be important to demonstrate compliance with the tolerance requirements for examinations and any lawsuits.
Lenders and the Closing Disclosure
As noted above, lenders will be responsible for the CD. Under current rules, the lender is only responsible for the final TIL and the settlement agent is responsible for the HUD-1. The Rule does expressly permit lenders to rely on settlement agents to complete information on the CD and/or provide the CD. The Rule allows flexibility for lenders to determine how to best work with settlement agents to ensure compliance with the Rule and does not assign specific tasks to either party though the lender remains ultimately responsible for the CD. You should begin thinking about how this change in responsibility will affect your lender’s business processes, relationships with settlement agents, and policies and procedures. You must ensure the LE provided by mortgage brokers and the CD are provided in compliance with the Rule.
The Rule also requires lenders to ensure that the CD is received by consumers at least three business days before consummation. This applies to the entire CD, including all of the information that is currently provided on the HUD-1, such as the itemized list of settlement charges. As such, much of the very detailed and specific content with respect to the settlement of the transaction must be provided much earlier in the process. If the CD is not provided to the borrower in person, the “mailbox rule” applies, and it is considered to have been received by the consumer three business days after it is delivered or placed in the mail. Lenders relying on the mailbox rule will have to mail the first CD a full week before consummation. This is a significant change in processes for closing loans which will require earlier communication between third parties, including settlement agents.
Note that if one of the following disclosures on the CD becomes inaccurate before consummation, the lender is required to provide a corrected CD and an additional three-business day waiting period:
- The APR becomes inaccurate, as defined in 12 C.F.R. § 1026.22;
- The loan product is changed, causing the loan product information disclosed on the CD to become inaccurate; or
- Prepayment penalty is added.
Other changes only require redisclosure at or before consummation. You should consider whether you have policies and procedures in place to identify these three changes to ensure compliance with the redisclosure rules.
Also, lenders will generally need to make threshold business decisions about how they will complete the CD, and whether and how they will work with settlement agents. It will be important to make these decisions early to determine how to best reduce a lender’s compliance risk. As with other provisions of the Rule, lenders may face borrower lawsuits under TILA for violations of some of the CD requirements, unlike for the HUD-1 under RESPA.
A Plan for Interpretive Guidance
The Rule regulatory text and commentary cannot possibly answer every question that may arise during implementation or after the effective date. While the Rule’s preamble may be helpful in answering certain interpretive questions, it would be unwise to expect it to answer every question that may arise during your implementation. Therefore, you will need to have a plan to obtain interpretive guidance.
The CFPB is providing informal interpretive guidance using publicly-held webinars on the Rule (as well as verbally through staff telephone calls). The CFPB has answered about 70 questions in its public webinars on the Rule. The webinars are recorded and archived so you can play them back later, which will be helpful to check whether they have answered a question that has come up during your implementation. This is different from the method the Department of Housing and Urban Development (HUD) used to provide guidance when it issued its final rule revising the GFE and the HUD-1. HUD issued an informal frequently asked questions (FAQs) document, which it posted and updated on its website. While industry commentators can weigh the advantages and disadvantages of each agency’s methods for providing publicly available guidance, it is important for you, the practitioner, to plan around the resources that will be available from the CFPB. For example, the CFPB has not transcribed its webinars, and thus, there is no written record of questions and answers published by the CFPB. You may want to obtain some other form of documentation of the questions and answers provided on the CFPB webinars to use internally and to cite when dealing with business partners. Also, there has been about a month or more in between the CFPB’s webinars on the Rule, and with seven months remaining before the effective date, you may need a quicker, timelier source of guidance. This will ensure your implementation is as efficient as possible.
The Rule requires significant changes to the way you are currently doing business. You should begin now, if you have not already, to be ready for the August 1, 2015 effective date. It is doubtful that the CFPB will delay this effective date. The CFPB provided a 20-month implementation period which it stated was, “a reasonable implementation period.” The CFPB also stated that, with this period, it believes “the overall costs and burdens on the industry – and, ultimately, consumers – will be mitigated most effectively.” More recently, CFPB Director Cordray stated that the effective date provides “a very reasonable timeframe – 21 months – for industry to implement these changes,” and that their goal is “that everyone will be ready to implement the new disclosure system come August 2015.” It is apparent that the CFPB believes the Rule’s implementation period was the right amount of time. It would be prudent to work towards the effective date and not rely on a delay. I hope this article provides you with a good footing to start or continue your work and be ready on August 1, 2015.
Richard is a partner in Dentons’ Capital Markets practice. He joined the firm from the US Consumer Financial Protection Bureau (CFPB). Richard can be reached at: email@example.com