United States: "Know Before You Owe" Deadline Disclosure

In November of 2013, the CFPB issued its final rule to combine consumer TILA and RESPA disclosures for mortgage loans as required by the Dodd Frank Act. Early on in its existence, the Bureau made the combined "know before you owe" disclosures a focal point of its mortgage rulemakings, publishing a series of prototype disclosures for public comment beginning in 2011 and conducting multiple rounds of consumer testing. Rightly or wrongly, the CFPB believes that the new forms will provide better information in a clear format that will help consumers understand the terms and costs of the loan product being offered and allow for easier comparison shopping.

The new disclosure documents replace the initial and loan closing disclosures under TILA and the GFE and HUD-1 under RESPA and consist of two forms: (1) the Loan Estimate and (2) the Closing Disclosure. The Loan Estimate is designed to help consumers understand the key features, risks and costs of the mortgage loan for which they are applying. The Closing Disclosure aims to provide details about the actual, final costs and terms of the loan. Use of the CFPB forms is mandatory and almost all changes are prohibited.

The final rules are lengthy, detailed and technical as to format, content and delivery of the disclosures. In this article, we will give an overview of the new requirements and highlight some of the things we have gleaned from the rule, commentary and compliance guides published by the CFPB.

Scope and Effective Date. Use of the combined disclosures will be required for most closed-end consumer mortgage loans where the application was received on or after August 1, 2015. Exempt are home equity lines of credit, reverse mortgages, mobile home only loans (no real property), lenders who make 5 or fewer mortgage loans a year, and certain no-interest second mortgage loans for things like down payment assistance, property rehab, energy efficiency improvements and foreclosure avoidance.

The Loan Estimate. The Loan Estimate combines the information previously disclosed in the early TILA disclosure and the GFE and includes additional information such as the ECOA appraisal notice and the RESPA servicing notice. It can be provided by either a broker or by the creditor, but if provided by a broker, the creditor remains liable for the disclosure and compliance with the rule. Lenders that work through brokers will need to be able to manage that risk.

Timing. The Loan Estimate must be provided no later than 3 business days after an application is received and not less than 7 business days prior to consummation of the loan. The final rule clarifies that a completed application consists of the consumer's name, income information, social security number (for credit report purposes), property address, estimated value of the property, and the loan amount being applied for. The existing TILA and RESPA rules allow for a seventh element of any other information required by the creditor in order to complete the application. The new rule eliminates that extra "catch-all" item.

The definition of "business day" is similar to the existing rules; so, for purposes of the initial three day period, business day will continue to mean a day on which the creditor is open to the public for substantially all business functions. However, for purposes of the seven day waiting period, business day will include all calendar days except Sundays and legal public holidays. A waiver of the seven business day waiting period is permitted for bona fide personal financial emergencies with a proper waiver form that is not pre-printed, describes the emergency, waives the waiting period, and is dated and signed by all consumers who are primarily liable for the loan.

Content. There are some significant differences in the new disclosures over the current forms. For example, while the GFE lumps all origination charges into a single figure, the Loan Estimate requires an itemization of the individual components of the origination charges. So, charges such as an underwriting fee, application fee or processing fee will be itemized, with a subtotal of all such amounts. Points paid to lower the rate must be itemized and shown as a percentage of the loan amount and a dollar amount. If points are not paid, the disclosure space must stay blank (and not shown as a "0"). Loan level pricing adjustments that are passed on to the consumer as a charge at closing rather than an adjustment in the interest rate must also be itemized. Subtotals and itemizations of individual charges are also required for third party charges under the headings "Services You Can Shop For" and "Services You Cannot Shop For." The individual charges must be labeled in a way that describes each item and listed alphabetically.

Broker compensation will be disclosed differently than on the current GFE. While the GFE requires broker compensation to be shown as both a charge to the consumer and a credit from the lender, creditor-paid broker compensation paid indirectly by the borrower through the interest rate will not be disclosed on the Loan Estimate. Broker compensation paid directly by the consumer to the broker will be disclosed as an itemized component of the origination charges and will also be disclosed on the Closing Disclosure as a Borrower-Paid charge. On the Closing Disclosure, broker compensation paid by the creditor will be shown in the "Paid by Others" column.

The old standard "Fed box" disclosures of APR, Finance Charge, Amount Financed, and Total of Payments are, apparently, not all that important any longer and will be moved to the last page of the Loan Estimate. Fortunately for lenders, the CFPB did not adopt requirements to disclose the lender's average cost of funds used in making the loan or the "all-inclusive" APR that would have included closing costs and fees for things like credit insurance premiums in the calculation. The latter could have significantly increased the number of loans that would be considered to be higher priced or HOEPA high cost loans and decreased the number of loans that would be considered to be qualified mortgages, unless the CFPB also changed those thresholds. However, the CFPB warned that it may reconsider this item later in its normal regulation review process.

The final rule allows a creditor to provide written estimates and information using its own forms prior to providing the Loan Estimate (for example, in connection with a pre-qualification or for general information purposes to prospective applicants). However, the lender's estimate must contain a conspicuous disclosure using model disclosure language at the top of the first page to distinguish the lender's information from the official Loan Estimate and must avoid using headings, format or content similar to the official form.

Limit on Fees. A creditor may not charge a fee to a consumer, other than for a credit report, until the Loan Estimate has been provided and the consumer has indicated a desire to proceed. The consumer can give this indication in any fashion (in-person, by phone or email, or by signing a pre-printed form) after receiving the Loan Estimate. Silence is not an indication, and the creditor must document this communication in some fashion in order to satisfy record retention requirements.

Accuracy and Tolerances. The Loan Estimate must provide a good faith estimate of the closing costs. An estimate is considered to be in good faith if the charges actually paid by or imposed on the consumer do not exceed the amounts disclosed in the Loan Estimate by more than any applicable tolerance. If the charges exceed the amounts originally disclosed by more than any applicable tolerance, the estimate is not in good faith regardless of the reason, whether due to technical error, miscalculation or underestimation of the charge. A Loan Estimate is also considered to be in good faith if the creditor charges less than the amount disclosed on the Loan Estimate without regard to any tolerance limitations.

The CFPB largely retained the tolerance regime under the existing rule with some changes. Charges may exceed the amounts disclosed in the Loan Estimate in the following situations:

  • Charges that may change without a tolerance limitation. Creditors may charge more than the amounts originally disclosed for the following items, provided that the original estimate was based on the best information reasonably available to the creditor at the time the Loan Estimate was prepared:
    • Prepaid interest, property insurance premiums, and amounts placed in escrow;
    • Charges for services required by the creditor that the consumer is permitted to shop for, provided, that the consumer picks a third-party provider that is not on the creditor's written list of providers; and
    • Charges for third-party services not required by the creditor (even if the service is provided by an affiliate of the creditor).
  • Charges that are subject to a 10% cumulative tolerance. These charges are grouped together and may not increase cumulatively by more than 10% over the sum of the amounts disclosed on the Loan Estimate:
    • Recording fees;
    • Charges for third-party services the consumer is allowed to shop for where the charge is not paid to the creditor or the creditor's affiliate and the consumer picks the provider from the creditor's written list of providers.
  • Changed circumstances. In certain specific circumstances, a revised Loan Estimate or Closing Disclosure may be provided that permits the charges to be increased (see below).

For all other charges, creditors are not permitted to charge more than the amounts shown on the Loan Estimate, unless a changed circumstance permits a revised Loan Estimate or Closing Disclosure to be given. These zero tolerance charges are: 1) all fees paid to the creditor, mortgage broker or any affiliate of either, 2) fees paid to third parties for required services that the consumer is not permitted to shop for, and 3) transfer taxes.

Changed Circumstances and Revisions. A creditor is bound by the Loan Estimate and may issue a revised Loan Estimate only in certain situations, including:

  • a changed circumstance that causes charges to exceed the applicable tolerance (note that for third party charges subject to the cumulative 10% tolerance, a creditor may only provide a revised Loan Estimate when the changed circumstance results in an increase to the sum of all charges in this category by more than 10%),
  • a changed circumstance that affects the consumer's eligibility for the loan product applied for or the value of the collateral,
  • changes to the loan terms are requested by the consumer,
  • a rate lock is entered into (but changes are limited to rate dependent terms)
  • the consumer fails to indicate an intent to proceed within 10 business days, or
  • the loan is a new construction loan and settlement is delayed more than 60 days (provided, the Loan Estimate discloses that the creditor may issue a revised Loan Estimate any time prior to 60 days before consummation).

A "changed circumstance" is defined as: 1) an extraordinary event beyond the control of any interested party, 2) information specific to the consumer or the transaction that was relied on in preparing the Loan Estimate changes or is found to be inaccurate, or 3) new information is provided that the creditor did not rely upon when preparing the Loan Estimate.

The revised Loan Estimate must be provided (delivered or placed in the mail) within 3 business days after learning of the change and at least 7 business days prior to consummation. The seven day waiting period begins once the revised Loan Estimate is delivered or placed in the mail, not when it is received by the consumer. If closing was originally scheduled to occur during the 7 day waiting period, the lender will not be able to rely on the revised Loan Estimate unless closing is delayed. As noted below, the Closing Disclosure is required to be received by the consumer at least 3 business days prior to consummation. A revised Loan Estimate may not be provided once the Closing Disclosure has been given, and, as a result, a consumer must actually receive a revised Loan Estimate no later than 4 business days prior to closing.

The Closing Disclosure. This new form takes the place of the old HUD-1 and TILA closing disclosure forms and includes additional disclosures mandated by the Dodd-Frank Act. The purpose is to provide a detailed accounting of the actual settlement costs and terms of the transaction. The Closing Disclosure may be provided by the creditor or by the settlement agent, but the creditor remains responsible and liable for the content and compliance with the rule.

Timing. The Closing Disclosure must be received by the consumer no later than three (3) business days before closing. If mailed, the disclosure is considered to be received 3 business days after mailing.

Content. The Closing Disclosure must contain the actual terms and costs in connection with the transaction. Since the disclosure must be given at least 3 business days before closing, the rule allows a creditor to estimate disclosures using the best information available at the time the disclosure is prepared if the actual term or cost is not known. However, the creditor must act in good faith and use due diligence in obtaining the information. That will require close coordination between the lender and the closing attorney well in advance of closing in order to be able to provide a completed disclosure form 3 business days prior to closing. If an estimated disclosure changes, corrected final disclosures must be provided at or before consummation.

Revisions. Since the Closing Disclosure must be received by the consumer 3 business days before consummation, it is always possible that something about the loan or closing costs may change after the disclosure is given. The rule describes three categories of changes that require redisclosure:

  • changes that occur before consummation that require a new 3 day waiting period to close after a corrected Closing Disclosure has been given,
  • minor changes that occur before consummation that do not require a new 3 day waiting period and require only that a revised Closing Disclosure be given at or before consummation, and
  • changes that occur after consummation.

If any one or more of the following three types of significant changes occur before consummation, a corrected Closing Disclosure and a new 3 business day waiting period is required before closing: the disclosed APR changes (by more than ⅛ of 1%, or ¼ of 1% in an irregular transaction), the loan product changes (for example, fixed to adjustable rate), or a prepayment penalty is added. Other less significant changes can be made by simply providing a revised Closing Disclosure at or before consummation of the loan. In that case, however, the consumer has the right to request inspection of the corrected Closing Disclosure during the business day before consummation. Remember, too, that changes may not result in an increase in settlement charges by more than any applicable tolerance, except where a changed circumstance occurs that permits re-disclosure and the increase.

Changes after consummation also require re-disclosure. If during 30 calendar days after closing, an event in connection with the settlement occurs that causes the Closing Disclosure to be inaccurate and changes the amount actually paid by the consumer (for example, actual recording fees differ from the amount disclosed and paid at closing), the creditor must provide a corrected Closing Disclosure within 30 calendar days of receiving information sufficient to establish that the event occurred. In a purchase transaction, re-disclosure would similarly be required if the event caused a change in the amount actually paid by the seller. For non-numeric clerical errors that do not affect the timing, delivery or other requirements of the rule, the creditor must provide a corrected Closing Disclosure within 60 days after consummation. An example would be where the Closing Disclosure incorrectly identifies the name of a settlement service provider.

Tolerance Refunds. Charges paid by the consumer at closing that exceed the amounts disclosed on the Loan Estimate beyond any applicable tolerance must be refunded and a corrected Closing Disclosure reflecting the refund must be delivered or placed in the mail within 60 calendar days after closing. For charges subject to a zero tolerance, the excess of any individual charge over the amount disclosed must be refunded. For charges subject to the cumulative 10% tolerance, the amount by which the total sum of those charges exceeds the sum of those charges shown on the Loan Estimate by more than 10% must be refunded.

Record Retention. Copies of the Closing Disclosure and all documents related to it must be retained for at least 5 years after consummation. All other records relating to compliance with the Integrated Disclosure rule must be kept for at least 3 years after consummation. If a creditor sells or transfers the loan and does not continue to service it (for example, a sale of a mortgage in the secondary market with servicing released), the creditor must provide a copy of the Closing Disclosure to the new owner or servicer as part of the transfer of the loan file and both the creditor and new owner or servicer must retain a copy for the full 5 year period. Fortunately for lenders, the Bureau did not adopt its proposal to require creditors to maintain records of compliance in electronic, machine readable format. Records may be kept by any method that reproduces disclosures and other records accurately, including computer programs and electronic storage.

Implementation. How you comply with the new rule will depend a great deal on how you operate. To start with, though, it may be helpful to identify all affected products, departments and staff. Changes to loan documentation systems will certainly be necessary and discussions with your vendors about the status of upgrades and when the forms and system changes will be available for installation and testing should already be taking place. Identifying and planning for training needs for loan originators, processors, compliance and quality control staff should be considered as well as consultation with and training of closing attorneys who frequently close loans your bank originates will be most important. Quality control during preparation of documents, closing and post-closing will be important. As with all changes, there will be a period of learning and adjustment for all concerned. We will devote a major segment of the February Quarterly Meeting to the new rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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