By Richard A. Andreano, Jr., and Stanley D. Mabbitt
Elizabeth Warren's dream of a one-page mortgage disclosure form is officially dead. On July 9, 2012, the CFPB released its long-awaited proposed rule consolidating the application and closing disclosures required by the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) for mortgage loan transactions. The proposal is almost 1,100 pages and the application disclosure, labeled the "Loan Estimate," is three pages, while the closing disclosure, aptly labeled the "Closing Disclosure," is five pages.
The proposal follows months of review and comment on a series of prototype disclosure forms under the CFPB's "Know Before You Owe" initiative and, for the first time, provides a proposed regulatory framework to support the disclosure forms and detailed instructions on how to complete the forms.
On its website the CFPB provides a side-by-side comparison of the proposed mortgage disclosure forms and existing disclosures, and a version of the first page of the Loan Estimate form with references to the proposed rule and Official Interpretations (formerly, Official Staff Commentary on Regulation Z).
As proposed, the new disclosures would not apply to home-equity lines of credit, reverse mortgages, mortgages secured by a mobile home or by a dwelling that is not attached to real property, or loans made by a creditor who makes five or fewer mortgages in a year.
Highlights of the proposal are set forth below.
Comments on most aspects of the proposal are due by November 6, 2012. However, comments on two aspects of the proposal are due much earlier-by September 7, 2012. The two aspects are the proposal to delay the effective date for certain disclosures required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (contained in proposed amendments to Regulation Z section 1026.1) and the proposal to expand the fees that are included in the calculation of the finance charge and annual percentage rate (contained in proposed amendments to Regulation Z section 1026.4)
While the Dodd-Frank Act requires the CFPB to propose the integrated disclosures by July 21, 2012, it does not impose a deadline on adopting the integrated disclosures in final form. On the other hand, Title XIV of Dodd-Frank, which includes significant additional changes to existing RESPA and TILA disclosures as well as other mortgage-related changes, will become effective on January 21, 2013, if no final rule implementing those changes is adopted by that date. By delaying the effective date of the RESPA-TILA disclosure changes provided for in Title XIV, the CFPB plans to implement the changes together with the adoption of the final integrated disclosure forms. The approach will avoid requiring the industry to modify the existing disclosure forms to incorporate the Dodd-Frank Title XIV changes, and then shortly thereafter replace the forms with the integrated disclosure forms.
The proposed Loan Estimate combines "early" TILA disclosures with the good faith estimate disclosures of closing costs required under RESPA. The Loan Estimate would be a model form, and the proposal includes several versions of the form for various loan types. As proposed, the Loan Estimate must be delivered no later than the third business day after the creditor receives the consumer's application and no later than the seventh business day before consummation of the loan. (See below regarding the proposed change to the definition of "application.") A creditor may rely on a broker to deliver the Loan Estimate, but the creditor is still responsible for the accuracy of the form. Detailed instructions on completion of the Loan Estimate are set forth in the proposed rule and Official Interpretations.
Definition of "Application"
The proposal defines "application" as the submission of (1) the consumer's name, (2) income, (3) Social Security number to obtain a credit report (or other unique identifier if the consumer has no Social Security number), (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought. This is a departure from the current rule under Regulation X. In addition to the six specific items of information, Regulation X also permits the lender or broker to specify "any other information deemed necessary" in order to have an application that triggers the issuance of a good-faith estimate. The proposed Official Interpretations would make clear that, while the creditor may ask for additional information, receipt of the six specific pieces of information triggers the obligation to provide the Loan Estimate. This could result in the delivery of less-reliable early disclosures if, for example, the consumer fails to identify the desired loan program. If the creditor cannot require that information and is not able to promptly obtain the information from the consumer, the creditor would be forced to assume a loan program to produce timely disclosures. That can be remedied by the consumer's request for a change in loan program later, but the utility of the initial version of the disclosures as a comparison shopping tool is defeated.
Restrictions on Increases in Closing Costs
Under the proposal, the current 0-percent tolerance would be expanded to fees paid to an affiliate of the creditor or mortgage broker and fees paid to an unaffiliated third party if the consumer is not permitted to shop for the service provider.
The proposed rule provides that an estimate for third-party services and recording fees is in "good faith" if (1) the aggregate of those fees paid by or imposed on the consumer does not exceed the aggregate amount of the charges disclosed on the Loan Estimate by more than 10 percent, (2) the charge is not paid to an affiliate of the creditor, and (3) the creditor permits the consumer to shop for the service.
If a revised Loan Estimate is provided, fees and charges may increase only due to (1) "changed circumstances" affecting settlement charges, the consumer's eligibility for the loan, or the value of the property, (2) consumer requested changes, or (3) a lock event. The revised Loan Estimate must be provided within three business days of the receipt of the information establishing the basis for redisclosure.
Amounts that the consumer actually pays for certain other charges may exceed the amounts disclosed on the Loan Estimate if the estimate is consistent with the best information available to the creditor at the time it is disclosed. The other charges include prepaid interest; property insurance premiums; amounts placed in escrow, impound, reserve, or similar accounts; and charges paid to third-party service providers that are selected by the consumer but are not disclosed on the written list of service providers provided by the creditor.
The proposed Closing Disclosure combines the final TILA disclosures with the closing cost disclosures of the current HUD-1 Settlement Statement under RESPA. As proposed, the consumer must receive the Closing Disclosure no later than three business days before consummation. The Closing Disclosure would be a model form, and the proposal includes several versions of the form for various loan types and transactions, including modifications of the Closing Disclosure for transactions that do or do not include sellers.
Under current requirements, the settlement agent is required to prepare the HUD-1 Settlement Statement, while the lender is responsible for the final TILA disclosures. In light of the consolidation of the two disclosures, the CFPB proposes alternatives to the responsibility for delivery of the Closing Disclosure. Under the first alternative, the creditor is responsible for delivering the Closing Disclosure to the consumer. Under the second alternative, the lender may rely on the settlement agent to deliver the disclosure. In either case, the lender will be responsible for the accuracy of the disclosure, which will present new operational challenges in connection with obtaining or verifying information relating to closing costs.
Changes After Delivery of Closing Disclosure
If the terms of the transaction change after delivery of the Closing Disclosure, the creditor would be required to deliver a revised Closing Disclosure reflecting the changed terms no later than three business days before closing. The proposal provides certain exceptions to this requirement. A redisclosure of a change resulting from negotiations between the consumer and the seller, or a change in the amount actually paid by the consumer that does not exceed $100, may be made at or before closing. Revised disclosures in connection with inaccuracies resulting from payments to a government entity must be delivered no later than the third business day after the event occurs, and no later than 30 days after consummation. Revised disclosures for non-numeric clerical errors must be disclosed as soon as reasonably practicable, but no later than 30 days after consummation.
In the integrated disclosure materials issued in February 2012 to obtain input from small business entities pursuant to the Small Business Regulatory Enforcement Fairness Act, the CFPB noted it was considering requiring that an updated Closing Disclosure be delivered to the borrower at least three business days after closing only if (1) the APR increases by more than 1/8 of a percent, (2) an adjustable-rate feature, prepayment penalty, negative amortization feature, interest-only feature, balloon payment, or demand feature is added to the loan, or (3) the amount needed to close increases beyond a to-be-determined tolerance.
In the supplementary information to the proposal, the CFPB notes that it had considered such an approach and advises as follows:
"The [CFPB] is concerned that this approach would allow significant increases in the cash needed to close the transaction without sufficient notice to consumers. Further, the [CFPB] has received feedback indicating that the APR estimates included in the early TILA disclosures typically change by more than 1/8 of 1 percent, such that most creditors provide corrected disclosures as a standard business practice, rather than analyzing the accuracy of the disclosed APR. Therefore, the [CFPB] believes that any additional burden associated with requiring the disclosure three business days before closing in all cases is small given current creditor practices."
Inclusive Finance Charge/APR
The CFPB proposes to amend the definition of "finance charge" for closed-end mortgage transactions to include (1) closing agent charges, (2) the "1026.4(c)(7)" charges (formerly "226.4(c)(7)" charges) that are currently excluded from the finance charge (other than late payment charges, seller's points, non-finance charges required to be paid into escrow, and properly disclosed property insurance), (3) credit life insurance premiums, (4) voluntary debt cancellation fees, and (5) security-interest charges.
The CFPB concedes that the inclusion of the additional charges in the finance charge may have an effect on the number of loans that qualify as higher-priced mortgages or HOEPA loans and that the proposed change has implications under other CFPB rulemakings, e.g., mandatory escrow accounts and appraisals for higher-risk mortgages, qualified mortgage/ability to repay. The CFPB solicits data regarding the effect of the more inclusive finance charge definition and changes that the CFPB may make to the triggers under other rules to lessen the effect.
The proposal would calculate the APR based on the more inclusive finance charge.
Preliminary Cost Estimates
The proposed rule permits the creditor or broker to provide a written estimate of loan terms or costs prior to application and delivery of the Loan Estimate. Such an estimate must contain a clear and conspicuous disclaimer advising the consumer that the actual rate, payment, and costs could be higher and that the consumer should get a Loan Estimate before choosing a loan.
The proposed rule requires creditors to keep records of the Loan Estimate and Closing Disclosure delivered to consumers in a standard electronic, machine-readable format. Evidence of the Loan Estimate must be retained for three years after the later of the date of consummation, the date disclosures are required to be made, or the date the action is required to be taken. Evidence of the Closing Disclosure must be retained for five years after consummation.
Copyright © 2012 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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