Special Feature: New CFPB Proposed Rule Combining TILA/RESPA Disclosures
After years of discussion and analysis by industry groups, consumer advocates, regulators, and Congressional committees, the Consumer Financial Protection Bureau ("CFPB") has finally proposed a rule (the "Proposed Rule" or "Rule") that merges the Truth in Lending Act ("TILA") and Real Estate Settlement Procedures Act ("RESPA") mortgage loan disclosures. To make absolutely sure it happened this time around, in 2010 Congress directed that such an integrated disclosure be developed in no fewer than three separate sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "Dodd-Frank"). The rule was published in yesterday's Federal Register, with no substantive changes between that version and the version originally released on July 9.
Section 1032(f) of the Dodd-Frank Act provides that, by July 21, 2012, the Bureau "shall propose for public comment rules and model disclosures that combine the disclosures required under [TILA] and [sections 4 and 5 of RESPA] into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determines that any proposal issued by the [Board] and [HUD] carries out the same purpose." 12 U.S.C. 5532(f).
Section 1098(2) of the Dodd-Frank Act amended RESPA section 4(a) to require that the Bureau "publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this section and section 5, in conjunction with the disclosure requirements of [TILA] that, taken together, may apply to a transaction that is subject to both or either provisions of law." 12 U.S.C. 2603(a).
Section 1100A(5) of the Dodd-Frank Act amended TILA section 105(b) to require that the Bureau "publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this title in conjunction with the disclosure requirements of [RESPA] that, taken together, may apply to a transaction that is subject to both or either provisions of law." 15 U.S.C. 1604(b).
The Process for the Rule
Comment Period. CFPB released the Proposed Rule on July 9, 2012, posting it on its website, and it was just published in the Federal Register yesterday, August 23, 2012. There are two comment periods: (1) September 7, 2012 (60 days after release) for changes that would expand the definition of the Finance Charge (in §1026.4), on which other pending rules depend, and a temporary exemption for the Affected Title XIV Disclosures (defined below) (in §1026.1(c); and (2) November 6, 2012 (120 days after release) for the remainder of the Proposed Rule.
Final Effective Date. There is no deadline for the final integrated TILA/RESPA disclosure rule or its implementation. Because it is authorized under Title X of Dodd-Frank, it is not subject to the Jan. 21, 2013 final rule deadline for rules under Title XIV of Dodd-Frank. CFPB invites comment on a realistic implementation period.
But there are a number of disclosures required under Title XIV (the "Affected Title XIV Disclosures") that are to be provided to the consumer at or around the same time as the integrated disclosure that are subject to the Jan. 21, 2013 deadline. To deal with this deadline, CFPB is proposing to fold these disclosures into the integrated disclosure and exempt compliance with these disclosures until the integrated disclosure rule is effective and mandatory. These include disclosures relating to:
A. A warning regarding negative amortization features
B. State law anti-deficiency protections
C. Creditor's partial payment policy
D. Mandatory escrow accounts
E. Waiver of escrow at consummation
F. Monthly payment, including escrow, at initial and fully-indexed rate for variable rate loans
G. Repayment analysis to include amount of escrows for taxes and insurance
H. Settlement charges and fees and approximate amount of the wholesale rate of funds
I. Mortgage origination fees
J. Total interest as a percentage of principal
K. Optional disclosure of appraisal management company fee
Even though some of the Affected Title XIV Disclosures statutorily apply to open-end credit plans, transactions secured by dwellings that are not real property, and reverse mortgages, the CFPB is proposing to delay the Affected Title XIV Disclosures to the fullest extent those requirements could apply under the statutory provisions. The CFPB has indicated it will issue a final rule implementing the exemption before the statutory Jan. 21, 2013 deadline.
In contrast, the CFPB has indicated that the Jan. 21, 2013 final rule deadline will not be delayed and that a final rule will be issued by that date for the following additional Title XIV disclosures:
- Notice of reset of hybrid arm
- Loan originator identifier requirement
- Waiver of escrow after consummation
- Notification of appraisals for higher-risk mortgages
- Notification of right to receive an appraisal copy
The Substance of the Rule
The Proposed Rule would substitute a new "Loan Estimate" disclosure for RESPA's Good Faith Estimate and the initial Truth in Lending disclosure, and a new "Closing Disclosure" for RESPA's HUD-1 Settlement Statement and the final Truth in Lending disclosure. These are the new "integrated disclosures." The proposed integrated disclosures are established in Regulation Z, while conforming changes are made to Regulation X. The key new sections of Regulation Z will be §1026.19(e) - setting forth the delivery, redelivery, and tolerance requirements for the Loan Estimate, §1026.19(f) - setting forth the delivery and refund requirements for the Closing Disclosure, §1026.37 - setting forth the content requirements of the Loan Estimate, and §1026.38 - setting forth the content requirements of the Closing Disclosure. Below, explained in question and answer format, are the principal requirements of the proposed rule.
What loans are subject to the integrated disclosures? To resolve the coverage differences between RESPA and TILA, the CFPB has proposed to apply the integrated disclosures to all closed-end consumer credit secured by real property, other than reverse mortgages and open-end loans, made by a "creditor."
Under this definition, loans not currently subject to RESPA, such as certain construction- only loans, loans on vacant land or on property of 25 or more acres, would be covered. (The CFPB has proposed to eliminate the 25 acre exemption from Regulation X altogether.) Conversely, loans on mobile homes and other loans secured by a dwelling but not real property, that are currently covered by Regulation Z, would not be subject to the integrated disclosure. Transactions secured by a consumer's interest in a timeshare plan would be covered by the integrated disclosures. Under Regulation Z, a "creditor" is a person who makes more than five loans per calendar year, so the integrated disclosures are inapplicable to persons making five or fewer loans per year, although RESPA still applies to those loans if they qualify as federally related mortgage loans under Regulation X.
When must the Loan Estimate be given? The Loan Estimate is required to be provided to the consumer within three business days of the creditor receiving an "application." Application is defined as the collection of the following six pieces of information: (1) consumer's name, (2) income, (3) social security number (SSN) to obtain a credit report, (4) property address, (5) an estimate of the value of the property or sales price on a purchase transaction, and (6) the mortgage loan amount sought. This definition differs from the current definition under RESPA because it omits the catch-all element: "any other information deemed necessary by the loan originator." A loan originator may collect additional information, but once these six pieces of information are collected, the Loan Estimate is triggered. If the consumer does not have an SSN, a Tax Identification Number (TIN) or other unique identifier may be substituted. "Business day" is any calendar day except a Sunday or a legal public holiday (New years, Martin Luther King Day, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas day). This is a change from Regulation X's current definition of "business day," which is "a day on which the offices of the business entity are open to the public for carrying on substantially all of the business entity's functions."
Consistent with the current TILA rules, the Loan Estimate must be delivered not later than the seventh business day before consummation of the transaction. A consumer who is mailed the disclosure is presumed to have received it in three business days after they are mailed. If given by any means other an in-person, including email, delivery is presumed three business days after they are delivered. This presumption may be rebutted with evidence that the consumer received the disclosure.
What if a mortgage broker is involved? A mortgage broker may deliver the Loan Estimate, but it must act as the creditor in every respect, including complying with all of proposed §1026.19(e) and assuming all related responsibilities and obligations. If a broker takes on this responsibility (by issuing any disclosures), then if it receives information that constitutes an application, it must provide the Loan Estimate timely. If later information or circumstances require a revised Loan Estimate, the broker is responsible for ensuring it is issued. If the broker issues the Loan Estimate in the creditor's place, the creditor remains responsible that §2601.19(e) is satisfied, timely. Delivery of duplicate disclosure does not satisfy the rule. If the broker gives an erroneous disclosure, the creditor is responsible and cannot just give a correct disclosure. The CFPB is seeking comment on a broker's ability to comply with Regulation Z.
Can fees be charged? As under RESPA's current rule, no fee may be imposed before delivery of the Loan Estimate and the consumer's indication of intent to proceed, except for a credit report fee. "Imposition" of a fee includes taking a credit card number, even with an agreement not to process the number till after the intent to proceed is communicated. A creditor may take a credit card number solely to charge for credit report fee, even if the creditor keeps it on file and receives separate authorization later for additional fees. As under current law, no fee may be charged to any person by the creditor for preparing or delivering the integrated disclosures, escrow statements, or other statements required by TILA.
Can a pre-Application worksheet be provided? A creditor or mortgage broker may give a preliminary written estimate before the Loan Estimate, but must include a conspicuous notice that it is not the Loan Estimate and that "Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan."
What disclosures does the Loan Estimate contain? The Loan Estimate contains virtually all the key features, terms, and costs of the loan, and incorporates additional disclosures required under Dodd-Frank, as noted above. Prior to releasing the Proposed Rule, the CFPB tested a number of prototype forms for consumer understanding in its "Know Before You Owe" process. Form H-24 is the resulting prescribed three-page form for the Loan Estimate. The first page is divided in three sections and summarizes "Loan Terms," "Projected Payments," and "Cash to Close." The second page is captioned "Closing Cost Details" and includes sections on "Loan Costs," "Other Costs," and "Total Costs," and includes tables for adjustable payment and adjustable rate loan information, as applicable. On the "Closing Cost Details" page, the creditor must identify the services for which the consumer is permitted to shop, in the Loan Estimate. If permitted, the creditor must provide a separate written list of available providers and include a statement that the consumer may choose a different one. A model list is provided at Form H-27. If only one provider is available, then need only identify one. The CFPB draws from the HUD FAQ guidance in this area. A creditor may say " this is not an endorsement" on the list, but inclusion on the list is deemed a "referral" to that provider. Thus, if a creditor puts an affiliate on the list, it must comply with RESPA's affiliated business arrangement rules.
The third page of the Loan Estimate provides contact information on the lender, broker and loan officer and an interesting disclosure to be used when comparing various loans on how much in total payments and how much in principal will be paid over the first five years of the loan. The APR is also shown on the third page, together with a "Total Interest Percentage" or "TIP" disclosure, which is the total amount of interest the borrower will pay over the loan term as a percentage of the loan amount. The CFPB is seeking comment on whether the TIP disclosure should be deleted as relatively unhelpful to the consumer. In addition, page three contains a number of brief disclosures including, among others, a disclosure about receiving a copy of the appraisal, whether the servicing is intended to be transferred, and whether taking the loan may result in loss of the protection of a state anti-deficiency law.
Is lender-paid compensation disclosed as a credit, as in the current RESPA GFE? No. The Loan Estimate only includes charges that are actually paid by the consumer. There is no recharacterization of lender-paid broker compensation as a credit to the consumer. GFE Blocks 1 and 2 are eliminated for §1026.19(e) loans so there is no need to follow different instructions for loans with a broker or loans without a broker.
Are charges itemized or still only disclosed in categories? The CFPB indicated that testing showed that consumers may question costs more readily if presented in itemized format, not just categories. So the Loan Estimate permits the creditor to list up to 13 component items in the Loan Costs section on page two, using a descriptive label for each component fee or charge (some lenders are prepared to do this, and need to itemize to comply with state law).
What is the tolerance for charges disclosed on the Loan Estimate? Fees paid to the creditor, the mortgage broker, or an affiliate of the creditor, are subject to a zero tolerance. For these items, the definition of "good faith" is strict compliance. In other words, any charge paid by the consumer that exceeds the amount originally estimated on the Loan Estimate disclosure was not provided in good faith. Expansion of this zero tolerance standard to creditor affiliates is new. This zero tolerance standard also applies to transfer taxes and fees paid to non-affiliates where the creditor does not permit the consumer to shop.
Section 1026.19(e) of the Proposed Rule permits the sum of all charges for creditor-required settlement services where the creditor permits the consumer to shop for a provider other than those identified by the creditor, and recording fees, to increase by 10% for purposes of determining good faith.
No specific tolerance applies to (1) prepaid interest, (2) property insurance premiums, (3) escrow amounts, and (4) charges to third party service providers selected by the consumer that are not on the creditor's written list of providers. An estimate of these charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount actually paid by the consumer exceeds the amount disclosed on the Loan Estimate.
Are there circumstances where the costs may legitimately change? As under the current RESPA rule, the foregoing tolerances are subject to legitimate cost revisions when an unexpected event occurs, such as a changed circumstance or a change request by the consumer. Changed circumstances is defined in the Proposed Rule a little differently, however, from Regulation X, as follows: (i) an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction, (ii) information specific to the consumer or transaction that the creditor relied upon when providing the disclosures and that was inaccurate or subsequently changed, or (iii) new information specific to the consumer or transaction that was not relied on when providing the disclosure. A charge may also be subject to change because a changed circumstance, as defined in (i) to (iii) above, affected the consumer's creditworthiness or the value of the security for the loan.
As under the current RESPA rules, charges may change caused by a consumer's requested revisions to the credit terms or the settlement. Interest rate dependent terms (interest rate, discount points and lender credits) may also change until locked in by the consumer.
As under current RESPA rules, the creditor may provide a revised Loan Estimate disclosure within three business days of receiving information sufficient to establish that one of the reasons for revision (changed circumstances, consumer requested change, rate lock) applies. A creditor may not, however, provide a consumer with a revised Loan Estimate and the disclosure of a loan's actual costs (the Closing Disclosure) at the same time (on same business day). The revised Loan Estimate must be provided at least one day before the Closing Disclosure.
May a revised Loan Estimate be provided when a charge is increased by a changed circumstance, even though it is under the applicable 10% aggregate tolerance? There is a troublesome example in the proposed Commentary on changed circumstances in .19(e)(iv)(A). In that example, a creditor provides a $400 estimate of title fees, included in the category subject to an aggregate 10% tolerance, subject to changes for changed circumstances, etc. An unreleased lien is discovered and the title company must perform additional work to release the lien. But the additional cost amounts to only a 5% increase over the sum of all fees included in the category. A changed circumstance has occurred (new information), but costs have not increased by more than 10%. Therefore, if the creditor issues revised disclosures, when the Closing Disclosure is delivered, the actual title fees of $500 may not be compared to the revised title fees of $500; they must be compared to the originally estimated title fees of $400. This is a concern and should be commented on. If a true changed circumstance occurs, the revised disclosure should be the new baseline for the 10% aggregate tolerance. Otherwise, the creditor is losing the benefit of the changed circumstance exception just because the change was less than 10%. This also appears inconsistent with HUD's current FAQ guidance on changed circumstances under RESPA.
Is it still permissible to disclose an "average charge" for a particular third party item? The "average charge" provisions of Regulation X will continue under the new integrated disclosure rule. The CFPB has recognized that the rule has always been less than effective under RESPA because of the requirement that the total amount of average charges paid by consumers may not exceed the total amount paid for those settlement services overall. This makes the average charge approach ineffective because a creditor cannot actually average costs over time, and must instead operate at a loss. To address this, the Proposed Rule would allow a creditor to refund excess amounts or factor in excesses when determining the average charge for next period or by establishing a rolling monthly period of re-evaluation. A lender may thus re-calculate the average amount every month, even if it collects more for settlement services than the total amount paid over time. A statistically accurate and reliable method is needed for adjusting the average charge based on prospective analysis.
When must the Closing Disclosure be given and who must give it?Except for timeshares, the creditor shall ensure that the consumer receives the Closing Disclosure no later than three business days before consummation. For timeshares, the Closing Disclosure must be provided at consummation. The creditor is responsible for delivering the Closing Disclosure. Alternatively, the CFPB is proposing that the settlement agent may deliver the Closing Disclosure provided it complies with all requirements of §1026.19(f) as if it were the creditor. The creditor would also remain responsible for compliance.
What disclosures does the Closing Disclosure contain? Form H-25 is the prescribed five-page form for the Closing Disclosure. In many respects, it is the mirror image of the Loan Estimate, but with the actual, not estimated, terms, costs, features, and payments information on the loan. In the "Cash to Close" section, it has a comparison of the "Estimated" and "Actual" charges and a "Did This Change?" column. The last two pages contain a number of the Title XIV Affected Disclosures, referenced above, including, among others, a negative amortization warning, a statement on the lender's partial payment policy, escrow account information, a more fulsome statement about the potential loss, if applicable, of state anti-deficiency law protection. The traditional TILA disclosures of amount financed and APR are included, as well as a disclosure required by Dodd-Frank of the lender's wholesale cost of funds, labeled "Approximate Cost of Funds." For purposes of this last disclosure, the "Approximate Cost of Funds" is proposed to mean either the most recent ten-year Treasury constant maturity rate or the creditor's actual cost of borrowing the funds used to extend the credit, at the creditor's option. The CFPB is soliciting comment, among other things, on whether this disclosure is too confusing and unhelpful to consumers and should be deleted, using the CFPB's exception authority.
Must a revised Closing Disclosure be given if charges change? If the amount actually paid by the consumer does not exceed the amount disclosed by more than $100, then a revised Closing Disclosure may be delivered at or before consummation, rather than three business days before closing. Also, the three-business-day period does not apply for late changes that arise from negotiations between the seller and the consumer. If an event after closing occurs resulting in an increase in costs to a government entity, the creditor may give a revised disclosure within three business days, provided the consumer receives the corrected disclosure no later than 30 days after consummation. Corrections of non-numeric technical or clerical errors in a Closing Disclosure is not a violation if a correction is provided as soon as reasonably practicable and no later than 30 days after consummation.
Are refunds of excess charges permitted? Yes. The Closing Disclosure must state the dollar amount of any excess in closing costs above the limitations on increases in closing costs permitted under the tolerance rules. The creditor or closing agent must refund to the consumer any such excess at closing or as soon as reasonably practicable and within 30 days to avoid a violation.
How has the Finance Charge disclosure changed? The traditional TILA disclosures of amount financed and finance charge are omitted from the Loan Estimate and downplayed in the Closing Disclosure. But the Finance Charge (which impacts the APR) remains a significant disclosure because it is used to determine whether a loan price reaches or exceeds certain price thresholds for various purposes, including the right of rescission. Following up on the Federal Reserve Board's previous proposals to amend the Finance Charge in 2009, the CFPB is proposing an "all in" approach to the Finance Charge, which, the CFPB asserts, will make the APR better reflect the true cost of credit. This would apply to all closed end loans secured by real property or a dwelling (which is broader than the loan to which the new integrated disclosure applies). Under the proposal, the following fees that currently are specifically excluded from the finance charge would be included for closed-end credit transactions secured by real property or a dwelling: (i) closing agent charges, (ii) application fees charged to all applicants for credit (whether or not credit was extended), (iii) taxes or fees required by law and paid to public officials relating to security interests, (iv) premiums for insurance obtained in lieu of perfecting a security interest, (v) taxes imposed as a condition of recording the instruments securing the evidence of indebtedness, and (vi) various real-estate related fees, such as lender required title insurance and appraisal and survey fees (the so-called "4(c)(7) charges"). Voluntary credit insurance premiums and voluntary debt cancellation charges or premiums are additional charges that are not currently included in the finance charge, but that would be included for closed-end credit transactions secured by real property or a dwelling under the more inclusive finance charge. The Finance Charge still would not include charges or fees paid in a comparable cash transaction, or late fees and similar default or delinquency charges, seller's points, amounts paid to escrow if not otherwise in the Finance Charge, and premiums for property and liability insurance under certain conditions. The CFPB intends to develop supplemental educational materials to explain how to use the Finance Charge and the APR in comparing loan costs over the long term.
What is the impact of an "all-in" Finance Charge or APR? As the CFPB recognizes, an "all in" Finance Charge and APR will increase the number of loans that reach or exceed thresholds in other regulations that compare these disclosures with certain benchmarks. For example, HOEPA thresholds (points and fees as well as APOR comparison, including now for purchase money loans as well as refinances); escrow requirements for first lien higher priced mortgages (APR compared with APOR), appraisals for higher risk mortgages (APR compared to APOR), and ability to pay rules (QM can only have points and fees of 3% or below, which is based on the Finance Charge definition). An "all in" Finance Charge and APR will also have an impact on state law high cost thresholds. The Federal Reserve Board previously proposed two alternative means of reconciling an expanded definition of Finance Charge with existing thresholds for APR or points and fees. One means was to replace the APR with a "transaction coverage rate" (TCR) as a transaction specific metric that a creditor may compare to APOR. This TCR would only consider fees retained by the lender, broker, or affiliate of either. Alternatively the Board proposed to amend treatment of certain fees for HOEPA purposes. The CFPB has proposed language to adopt the TCR and to exclude the additional charges from the HOEPA points and fees test in the 2012 HOEPA proposal, which was released the same day as the TILA/RESPA proposed rule.
What is the record retention requirement for the integrated disclosures? A creditor is to retain evidence of compliance of §1026.19(e) and (f) for three years after the later of the date of consummation, the date disclosures are required to be made, or the date action is required to be taken. This increases the existing TILA records retention requirement of 2 years. Records must be maintained that establish that the creditor performed required actions, not just provided disclosures, including differentiating between affiliated and independent third parties for determining the applicable tolerances for settlement charges (for purposes of determining "good faith" under §1026.19(e)(3), for reasons for revisions, and for calculating average charges. RESPA's 5 year requirement for keeping the HUD Settlement Statement is adopted for the Closing Disclosure under §1026.19(f). Under RESPA, the originator did not have to keep these records if it sold the servicing, but under the Proposed Rule, the creditor must keep these records for 5 years, whether or not it sells the servicing.
Significantly, the creditor must retain evidence of compliance in electronic, machine readable format, probably XML. Because this may be burdensome for small businesses, an alternative is proposed that a class of small creditors be exempted from this requirement based on either entity size or number of loans originated.
Does a creditor have to disclose its policy on the receipt of partial payments? Yes. The Closing Disclosure includes this disclosure and under new §1026.39, after closing, when a person becomes a new creditor, it must disclose its partial payment policy for all loans subject to §1026.19(f) (closed end transactions secured by real estate other than reverse mortgages). So the post-consummation disclosure requirement will mirror the pre-consummation requirement. This post-closing disclosure is integrated with the disclosure of identity of new mortgage creditor (the "Section 404" disclosure).
What is the liability for violations of the integrated disclosures? Because the integrated disclosures are established under Regulation Z, it appears the civil liability scheme for TILA disclosure violations would apply. That scheme for residential real estate loans is set forth in Section 130 of TILA and, with respect to high cost loans, Section 131. Under Section 130, in the case of an individual action relating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, violations may result in liability for actual damages plus up to $4,000 in statutory damages. If the violations are "in connection with the disclosures referred to in TILA Section 128," these statutory damages are only for violations of specific disclosures required under Section 128, such as finance charge, amount financed, etc. It remains to be seen how the CFPB or a court will construe a violation of the integrated disclosure requirements under this section. Under Section 131, assignees are generally liable for disclosures that are apparent on the face of the disclosures. In addition, the "material disclosures" that are required to be given timely to avoid extended rescission rights were not modified by the Proposed Rule. Again, it remains to be seen whether the integrated disclosures will be deemed "material disclosures" for purposes of rescission.