the new mortgage disclosure forms: know the...

The New Mortgage Disclosure Forms: Know the Rule

10:15 – 11:15 a.m. Phillip L. Schulman, Esq., Partner, K&L Gates LLP

THE WAIT IS OVER. THE ANXIETY BEGINS.

Phillip L. Schulman, Esq. K&L Gates LLP 1601 K Street NW Washington, DC 20006 202.778.9000

[email protected]

New RESPA-TILA Mortgage Disclosure Forms

This PowerPoint is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

I. INTRODUCTION A. Background: Unprecedented Changes

1. Laissez-Faire Attitude of 2000s

2. Anything Goes – Up & Went

3. Congress Steps In

• over regulates • seeks to control every aspect of risk

4. Pendulum has Swung 180° • buzz word in Washington, D.C. • Responsibility, Accountability, Liability

I. INTRODUCTION (cont.)

B. What’s That Got To Do With Me? 1. Dodd-Frank Wall Street Reform and Consumer

Protection Act • clean up Wall Street • regulate mortgage industry • protect consumers

2. Consumer Financial Protection Bureau • statutory power • $ • influence to affect 18 consumer finance laws • eliminate deceptive practices • enforce consumer laws

I. INTRODUCTION (cont.)

B. What’s That Got To Do With RE Market? 3. CFPB churns out new regulations

• Ability to Repay/QM • LO compensation • servicing standards • new appraisal requirements • expanded escrow periods

4. Six Agencies release • new QRM rules

5. Now, CFPB issues new mortgage forms • combined RESPA-TILA mortgage disclosure forms

A. Two Competing Disclosure Forms

1. RESPA • Anti-kickback – Eliminate abusive practices that drive up

cost of product to consumers • Consumer disclosure – Give buyers and sellers full

disclosure of costs of transaction

2. TILA • Informed use of credit – Disclosure of credit terms • Cost of credit calculations – Annual percentage rate and

finance charge • Projected payment schedule – Allow consumers to compare

pricing among competitors

II. BACKGROUND

A. Two Competing Disclosure Forms (cont’d)

3. Similar timing of disclosure • Both require disclosure three days after application

• Both require final disclosure shortly before consummation

4. But that’s where similarities end • Forms contain overlapping information

• Inconsistent language

• Burdensome for lenders to provide

• Difficult for consumers to understand

II. BACKGROUND

B. Ancient History

1. Competing responsibilities • HUD in charge of RESPA • FRB in charge of TILA

2. 1996 Congress required integrated disclosures • 1998 HUD/FRB met, filed joint report to Congress • But could not agree on integration plan • Neither agency willing to cede authority

II. BACKGROUND

B. Ancient History (cont’d) 3. One upmanship

• 2009 FRB issues closed-end proposal with significant TILA disclosures

• 2010 HUD implements brand new GFE and HUD-1

4. Public pleads for coordinated forms

II. BACKGROUND

C. Modern History

1. Congress said, “We’ll take it from here.” • Section 1032(f) of Dodd-Frank Act requires CFPB to

propose a regulation that combines RESPA-TILA disclosures within one year of transfer

2. Know Before You Owe CFPB undertakes 18-month effort to get it right

II. BACKGROUND

C. Modern History (cont’d.)

3. Consumer testing and focus groups • Interactive comment process • Numerous sample forms analyzed • Public outreach

4. CFPB convenes Small Business Panel

5. July 9, 2012 Proposed Rule • Multiple prototypes

II. BACKGROUND

A. Goals of New Rule

1. Easier-to-use mortgage disclosure forms

2. Improve consumer understanding

3. Aid comparison shopping

4. Prevent surprises at closing table

III. FINAL REGULATION ISSUED 11-20-13

B. Two New Forms

1. The Loan Estimate Provided to consumers within three business days

after submission of loan application Replaces early TIL statement and GFE Provides summary of key loan terms and estimates of

loan and closing costs Idea to promote comparison shopping


B. Two New Forms (cont’d.)

2. The Closing Disclosure • Received by consumers three business days before

consummation • Replaces final TIL statement and HUD-1 Settlement

Statement • Provides detailed accounting of transactions

C. Effective Date – August 1, 2015


A. Overview 1. Substantial changes to TILA regulations to incorporate

combined disclosure forms

2. Substantial changes to Official Staff Commentary in TILA regulations to provide detailed guidance on how to use the forms

3. GFE and HUD-1 not dead — will continue to be used in connection with reverse mortgages

IV. FINAL REGULATIONS OVERVIEW

B. Coverage 1. Applies to most closed-end consumer mortgage

loans

2. Does not apply to:

• Home equity lines of credit • Reverse mortgages • Mortgages secured by mobile homes or by dwellings

not attached to property • Creditor that makes five or fewer mortgage loans in

one year


C. Proposals Not Adopted in Final Rule 1. All-inclusive APR out for now

• Proposed rule would have included almost all up-front costs of the loan (including title charges)

• CFPB caved to pressure from title industry and lenders

2. Electronic, machine readable forms out for now • CFPB scraps proposal • But will further study the matter

3. Approximate Cost of Funds box eliminated • Consumers could not understand it • CFPB overrides Dodd-Frank Act


Narrowed Definition of “Application” • Neither TILA nor RESPA statutes define

“Application”

• Current Reg X defines an application as consisting of 7 elements

• Including a catch-all provision • “Any other information deemed necessary for the

originator”

• CFPB believes 7th element delays loan estimates to consumers

V. TOP TAKEAWAYS IN FINAL RULE

Narrowed Definition of “Application” (cont’d)

Final Rule eliminates catch-all provision

• “Application” defined by 6 elements: - Borrower name - Property address - Income - Estimated value of property - Social Security Number - Mortgage loan amount

• Perceived Benefits: - Earlier receipt of loan information - Uniform standard for all creditors - Additional information still collectable


Definition of “Business Day” • Not one, but two definitions

• When providing Loan Estimate to consumer within three business days of application

• Defined as day on which the creditor’s offices are open to the public to carry on substantially all functions

• Waiting period for Loan Estimate and consumer receipt of Closing Disclosure

• Defined as all calendar days except Sunday and certain federal holidays


Variations … the New Tolerances

• Concept of “tolerances” nowhere to be found in RESPA (though TILA adopts tolerances to facilitate compliance)

• Current Reg X creates three Tolerance Buckets • 1024.7(e)(1) Zero Tolerance • 1024.7(e)(2) 10% Tolerance • 1024.7(e)(3) No Tolerance

• Final Rule Avoids the “T” Word • “Good Faith Estimate” is essentially defined as the

disclosure of the actual amount charged to a consumer at closing


Variations … the New Tolerances (cont’d) Tolerances now called “Variations”

• No Variations (Zero Bucket) expanded to include: - Affiliate charges - Fees paid to unaffiliated SSP that consumer cannot shop for

• Limited Increases (10% Bucket) - Charge paid to unaffiliated SSP selected from creditor’s SSPL

• Variations permitted (No Tolerance Bucket) - SSP shopped for by consumer - Prepaid interest - Property insurance premiums - Escrow amounts, impound reserves


Variations … the New Tolerances (cont’d)

• No Tolerance Does Not Mean No Tolerance • Creditor still on the hook under No Tolerance Bucket • “Best information reasonably available to the Creditor” • Don’t get off scot-free if you intentionally lowball prepaid

interest, escrow amounts, etc.

• Changed circumstances still exist to permit revisions to Loan Estimate fees


“Changed Circumstances” • “Good faith” for purposes of fee variation rules can be

determined based on a revised Loan Estimate if:

• Changed circumstances cause the charge or aggregate charges to increase or a borrower’s eligibility to change

• Borrower requests a change • Borrower indicates intent to proceed more than 10 business

days after Loan Estimate is provided • New construction with closing more than 60 days after initial

Loan Estimate • Interest rate is locked

• New LE is required on date of rate lock with revisions to interest-rate dependent charges


Written List of Providers • Carry over from HUD Regs

• Lender must provide consumer with Settlement Service Providers List

• At least one provider for each service for which the consumer may shop

• Multiple providers permitted

• SSPL must be provided on separate sheet of paper

• May expressly state that list is not an endorsement of providers


Written List of Providers (cont’d)

• Timing of SSPL • Same timing as provision of Loan Estimate

• Within three business days of application

• Affiliates • Lender affiliates may be listed on SSPL

• No prohibition to limiting providers to affiliates only

• Rule provides model form


Timing of Disclosures 1. Loan Estimate:

• 3 business days after Application • 7 business days prior to consummation • consumer can waive in bona fide financial emergency

2. Closing Disclosure: • borrower must receive 3 business days before

consummation • unless consumer waiver • seller receives CD on day of closing • if CD becomes inaccurate = another 3 days


Timing of Disclosures (cont’d)

3. Three Limited Exceptions to issuing new CD: • changes above APR tolerance • change to loan product • addition of repayment penalty

4. Post-closing: • If final figures change re-disclose within 30 days • non-numeric clerical errors = 60 days • Tolerance violation = at settlement/60 days


Who Provides Closing Disclosure? • Either Creditor or Settlement Agent may provide

Closing Disclosure to borrower • Creditor still on the hook • Settlement Agent must meet all Section 1026.19(f)

requirements

• Settlement Agent still must prepare and provide Closing Disclosure to seller

• Must provide copy of seller Closing Disclosure to creditor


Pre-Application Worksheet and Disclosure • If consumer provided with a written estimate of terms or

costs specific to that consumer before the creditor receives a loan application, document must include disclaimer:

“Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”


Pre-Application Worksheet and Disclosure (cont’d.) • Disclaimer must appear at the top on first page of estimate in

12-point or larger font

• Would not be required for: • Advertisements • Information not specific to the consumer


Limits on Up-Front Fees • Current Regulation X/Regulation Z permit only credit

report fee to be charged before early disclosures

• CFPB maintains this requirement in final rule

• Creditors prohibited from imposing fees before consumer has received Loan Estimate and expressed an intent to proceed with the transaction

• Except, creditor may charge bona fide and reasonable fee for obtaining a credit report


Limits on Up-Front Fees (cont’d.) • If credit report fee charged to consumer’s credit card,

separate authorization needed to charge subsequent fees


Itemization of Fees and Charges • Change in philosophy

• HUD’s 2010 GFE and HUD-1 big on bundled services and charges on theory that consumers care about final figures

• CFPB unbundles the services and separately itemizes each charge — so consumer knows exactly what they are paying


Itemization of Fees and Charges (cont’d.) • Fees and charges listed alphabetically

• All title insurance charges (including closing fee) must be designated by “Title – [description of fee]”


Average Charges • Lender or SSP may charge a consumer the average

charge for a settlement service

• Requirements • Average charge no more than average amount paid

for that service by consumer • Class of transactions based on an appropriate (i)

period of time; (ii) geographic area; and (iii) type of loan

• Lender or SSP must use same average charge for every transaction


Average Charges (cont’d.) • Prohibited for certain services

• Any type of insurance • Any service based on loan amount or property value • Seller transactions • Prohibited by law


Record Retention

1. Loan Estimate • 3 years after later of:

• Date of consummation • Disclosures required to be made • Date action required to be taken

2. Closing Disclosure

• Must be retained for 5 years from date of consummation


State Law Preemption

• State laws that are inconsistent with TILA are preempted to the extent of the inconsistency • Inconsistent = state law requires creditor to make disclosures

or take actions that contradict TILA

• Contradict = state law requires the use of the same term to represent a different amount or a different meaning than TILA, or it requires the use of a term different from that required in TILA to describe the same item

• May request that CFPB determine whether a state law is inconsistent


Penalties and Liability • Penalties for GFE/HUD-1 Violations under RESPA =

None • Penalties for Disclosure Violations under TILA =

• $4,000 per violation • Actual damages and attorneys’ fees

• Do TILA penalties apply to any violation related to combined mortgage disclosures?

• UDAP concerns = creditor must use information reasonably available to make fee disclosures


Increased Time for Closings • Increased CD from 3 pages to 5 pages • Additional time needed to explain form to consumer • Three day advance submission of CD

• May eliminate questions at closing table • Or, may increase inquiries

• In any event = expect longer closings • Longer closing means fewer closings per day • Fewer closings mean more expensive closings


Implementation Concerns

• New combined disclosures will require substantial technology changes • As an example, proposed Closing Disclosure does not

use Series numbers from HUD-1 (1100 series for title) • No distinct line for a distinct service • Mortgage companies and settlement agents just

overhauled their disclosure technology in 2009 for GFE and HUD-1


Implementation Concerns (cont’d.)

• Employee training

• Costs of implementation will be substantial


A. Some Victories 1. All-inclusive APR not implemented

2. Manageable implementation time frame

3. Controls preparation of Closing Disclosure for sellers

4. Limited reasons for re-issuing new CD

VI. IMPACT OF RULE ON TITLE INDUSTRY

B. Some Work to Do 1. Partial victory on owner’s title insurance

• “Optional” label still applies for buyer-paid insurance

• Abandoned more radical phrase “not required”

• If seller pays, optional phrase eliminated

2. High costs for implementation • New rule could cost settlement agents $800

per employee • 20% increase in yearly software fees


B. Some Work to Do (cont’d.)

3. CFPB still holds lenders responsible for Closing Disclosure

• CFPB acknowledges role for settlement agents, but lenders to decide what that role will be


A. Important Items for Affiliated Businesses 1. Fees charged by creditor’s affiliates in “zero

tolerance” Good faith = actual charge imposed by affiliate

2. Affiliates permitted on SSPL Inclusion of affiliate = referral

3. Better integration to satisfy three-business-day requirement for Closing Disclosure

VII. IMPACT OF RULE ON AfBAs

LOAN ESTIMATE FORM

A. First page • Loan terms – loan amount, interest rate, monthly P&I,

prepayment penalty, balloon payment • Projected payments • Escrow information • Total estimated costs

• Closing Costs • Cash to Close

VIII. LOAN ESTIMATE FORM

Fixed-Rate Purchase

5/3 ARM Interest-

only Purchase

B. Second page

• Estimated settlement fees

• Cash to close, including credits, escrow and down payment

• Adjustable payment and interest rate tables


Fixed-Rate Purchase

5/3 ARM Interest-only

Purchase

C. Third page • Comparisons, including APR and total amount of

interest

• Other disclosures – appraisal, assumption, servicing transfer

• Borrower acknowledgement and signature (not required)


Fixed-Rate Purchase

5/3 ARM Interest-

only Purchase

CLOSING DISCLOSURE FORM

A. First page • Same as first page of Loan Estimate

• Loan terms – loan amount, interest rate, monthly P&I, prepayment penalty, balloon payment

• Project payments

• Escrow information

• Total estimated costs

• Closing Costs

• Cash to Close

IX. CLOSING DISCLOSURE FORM

Fixed-Rate Purchase

Fixed-Rate Refinance

B. Second page • Closing cost details

• All Loan Costs and Other Costs paid by borrower, seller, and other parties

• Similar to current page 2 of HUD-1


Fixed-Rate Purchase

C. Third page • Calculating Cash to Close table

• Similar to table on page 2 of Loan Estimate • Requires comparison to information on Loan

Estimate

• Summaries of Borrower and Seller transactions

• Similar to current page 1 of HUD-1


Fixed-Rate Purchase

D. Fourth page • Loan disclosures

• Assumption • Demand feature • Late payment • Negative amortization • Partial payments • Security interest • Escrow account

• Adjustable Payment and Interest Rate Tables

• But, only if applicable to the transaction


Fixed-Rate Purchase

E. Fifth page • Loan calculations

• Total of payments • Finance charge • Amount financed • APR • Total interest percentage

• Other disclosures • Appraisal (if applicable) • Contract details • Liability after foreclosure • Refinance • Tax deductions


E. Fifth page (cont’d.) • Contact Information • Signature lines (but not required)


Fixed-Rate Purchase

A. CFPB sought to accomplish four goals: 1. Easier-to-use disclosure forms

2. Improved consumer understanding

3. Better comparison shopping

4. Avoiding costly surprises at the closing table

B. Implementation challenges now begin

C. Buckle your seatbelts

X. CONCLUSION

QUESTIONS

Phillip L. Schulman, Esq., Partner, K&L Gates LLP

the new mortgage disclosure forms: know the...

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