On July9, 2012, the CFPB issued its proposed rule creating new mortgage loan disclosure forms. These forms, when finalized, will replace the current disclosure forms given to borrowers under the Truth in Lending Act (“T1LA”) and the Real Estate Settlement Procedures Act (“RESPA”). The first of these forms, given shortly after a borrower submits an application, is called the “Loan Estimate.” And the second disclosure form, given prior to the actual closing of a loan, is called the “Closing Disclosure.” (Examples of these proposed forms appear at the end of this newsletter.)
Background
For more than 30 years, lenders have been required to provide two different disclosure forms to borrowers when they apply for a mortgage loan. In the same fashion, lenders have also been required to provide two different forms at or shortly before the closing of a residential mortgage loan. These forms were developed by two different agencies under two different federal statutes: the Truth in Lending Act and the Real Estate Settlement Procedures Act. The content of these forms has always overlapped and the language has been inconsistent. It is not surprising, therefore, that mortgage loan applicants have been confused and that lenders have found it both burdensome and confusing to try to explain the different forms.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“D-F Act”) directed the CFPB to combine and streamline these forms. The CFPB has conducted an extensive study of the mortgage lending process and is now proposing a new rule to combine these forms.
The first new form (the Loan Estimate) is designed to provide disclosures that will help consumers understand certain key features, costs, and risks associated with the mortgage for which they are applying. This form must be provided to applicants within three business days after they submit a loan application. The second form (the Closing Disclosure) is designed to provide disclosures that will help borrowers understand the costs of the mortgage transaction. This second form must be provided to borrowers three days before they close on their mortgage loan.
The proposed forms have generally received favorable reviews for the clear language and design that they feature. The proposed forms reconcile the differences between the existing forms and combine several other disclosures mandated by the D-F Act. The goal of the CFPB is to provide more information to help consumers decide whether they can afford a particular loan and to compare the cost of different loan offers.
Summary of the Proposed Rule
The proposed rule applies to most consumer mortgages. It does not apply to home-equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or a dwelling that is not attached to land.
The Loan Estimate. The Loan Estimate form replaces two current federal forms. It takes the place of the Good Faith Estimate under RESPA and the “early” Truth in Lending disclosure under TILA. The proposed rule contains detailed instructions for each line of the Loan Estimate form, and there are sample forms for use with different types of loan products. Certain new disclosures contained in the Loan Estimate form incorporate changes required by the D-F Act.
The Loan Estimate form must be given to a borrower within three business days after receiving an application for a mortgage loan. The proposed rule clarifies what constitutes an “application” for these purposes. With the exception of a fee to obtain a consumer’s credit report, lenders generally cannot charge any fees until the consumers have been given the Loan Estimate form and the consumers have communicated their intent to proceed with the transaction.
The Closing Disclosure. The Closing Disclosure form will take the place of the current HUD-1 required under RESPA, and it ~vill also replace the final Truth in Lending disclosure required under TILA. As is the case with the Loan Estimate, the proposed rule contains detailed instructions on how each line on the Closing Disclosure form should be completed. The Closing Disclosure also contains new disclosures required by the D-F Act and a detailed accounting of the settlement transaction.
Consumers must receive the Closing Disclosure form at least three business days before the loan closes. Generally, if changes occur between the time the Closing Disclosure form is given and the time the loan actually closes, the consumer must be provided a new form. When that happens, the consumer must be given three additional business days to review the modified form before closing. However, the proposed rule provides an exception for some of the more common changes. These include changes resulting from negotiations between the buyer and the seller after a final walk-through. There is also an exception for minor changes that result in less than a $100 increase in costs.
The CFPB is proposing two alternatives for providing consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure, and under the second option, the lender could rely on a settlement agent to provide the form. However, under the second option, the lender would still be responsible for the accuracy of the form. The CFPB is seeking comment as to which of these alternatives is preferable.
Limits on Closing Cost Increases. Similar to existing law, the proposed rule would restrict those situations where consumers could be required to pay more for settlement services than the amount stated on their Loan Estimate form. Unless an exception applies, charges for the following services could not increase: (l) the lender’s charges for its own services; (2) charges for services provided by an affiliate; (3) charges for services for which the lender does not permit the consumer to shop. Also unless an exception applies, charges for other services generally could not increase by more than 10%. The rule proposes the following exceptions: (1) when the consumer asks for a change; (2) when the consumer chooses a service provider that was not selected by the lender; (3) when information provided in an application was inaccurate or becomes inaccurate; or (4) when the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days.
APR Changes. The proposed rule redefines the way the Annual Percentage Rate (“APR”’) is calculated. Under the rule, the APR will encompass almost all of the up-front costs of a mortgage loan. In the mind of the CFPB this new approach to APR calculation will make it easier for consumers to compare loan offers and make it easier for lenders to calculate the APR. While this sounds like a simple change, the consequent effect on the calculation of “Finance Charge” and “APR” will have a wide-reaching impact on a number of other consumer protection regulatory features.
Recordkeeping. The proposed rule requires lenders to keep records of the Loan Estimate and the Closing Disclosure forms that they provide consumers in a standard electronic format which will facilitate compliance monitoring by the lender’s regulators. The proposed rule holds out the possibility that “smaller” lenders might be exempt from this requirement, but gives no guidance as to what will constitute a “smaller” lender.
Effective Date. The CFPB is seeking comment on when the proposed rule should become final. Because of the importance of these new disclosures to consumers, the CFPB wants to make the rule effective as soon as possible. However the CFPB understands that the changes proposed will cause extensive revisions to a lender’s software and significant training issues for a lender’s staff: The rule itself will need to be finalized by January21, 2013, with a possible implementation deadline of some time in the not very distant future.
At our upcoming Quarterly Meeting, we have plans to conduct a panel discussion that will include a review of the attached new disclosure forms, as well as a discussion of certain key regulatory changes that will have an impact on your bank’s loan products and offerings that go well beyond simply providing new mortgage loan disclosure forms. (Please see related articles that address certain of these changes.)
