Updated with industry reaction
11/20/13 @ 3:45 p.m. ET
Updated to include information on new CFPB initiative to overhaul closing process
11/20/13 @ 5:15 p.m. ET
Updated with a brief analysis from Phil Schulman of K&L Gates
11/21/13 @ 11:30 a.m. ET
The wait is finally over. The Consumer Financial Protection Bureau (CFPB) released the new mortgage disclosure forms and their implementing rule. The final rule provides answers to many of the industry's long-standing questions about the RESPA/Truth in Lending Act (TILA) proposal released last year.
The final rule, which takes effect in August 2015, includes several changes in response to industry comments. For instance, the bureau made important changes to the proposed definition of business day. The CFPB also decided to put off finalizing a proposal to change the annual percentage rate (APR) calculation. However, other debated provisions remained unchanged in the final rule. For instance, title insurance is still described as "optional" on the bureau's Closing Disclosure.
Under the Dodd-Frank Act, the CFPB was charged with integrating the RESPA and TILA mortgage disclosures. In May 2011, the CFPB released its first group of integrated mortgage disclosure form prototypes — two months before the agency opened its doors. The agency then spent 14 months releasing prototypes and requesting feedback from the public. The bureau published its 1,099-page proposed rule on July 9, 2012. The proposal suggested new integrated disclosure forms, as well as new timing requirements, modified tolerance levels, new definitions and record keeping requirements. Many in the industry were concerned that some of the proposed changes were impractical and would hinder consumer's access to mortgage loans.
"Taking out a mortgage is one of the biggest financial decisions a consumer will ever make," said CFPB Director Richard Cordray. "Our new 'Know Before You Owe' mortgage forms improve consumer understanding, aid comparison shopping and help prevent closing table surprises for consumers. Today's rule is an important step toward the consumer having greater control over the mortgage loan process."
Here are some of the highlights from the final rule.
The Loan Estimate
The Loan Estimate form is an integration of the Good Faith Estimate and TILA's early disclosure.
Timing. The rule requires that the form is provided to consumers within three business days after they submit a loan application.
The Closing Disclosure
The Closing Disclosure form takes the place of the HUD-1 Settlement Statement and the final TILA disclosure.
Timing. It must be provided to the consumer three business days before closing.
Re-disclosure. If a change occurs between the time the Closing Disclosure form is provided and the closing, the proposal required the lender to give the borrower a new form. After re-disclosing the form, the borrower was to be provided three additional days to review the form with some limited exceptions. The CFPB said it received comments that this process could result in closing delays. In the final rule, the bureau decided to reduce the number of situations that could trigger an additional three-day waiting period.
The situations are limited to:
- Substantial changes to the APR;
- Changes in the loan product; and
- The addition of a prepayment penalty.
Provision of the form: Under current law, settlement agents are required to provide the HUD-1 to the borrower, while creditors must provide the final TILA disclosure. In its proposal, the CFPB offered two alternatives: 1) The creditor provides the Closing Disclosure; or 2) The settlement agent provides the Closing Disclosure but the creditor has the liability.
The final rule requires creditors to provide the Closing Disclosure, but allows creditors to use settlement agents to give the form to consumers as long as they comply with regulatory requirements.
"The final rule acknowledges settlement agents' longstanding involvement in the closing of real estate and mortgage loan transactions, as well as their preparation and delivery of the HUD-1," the bureau wrote. "The final rule avoids creating uncertainty regarding the role of settlement agents and also leaves sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers."
Definition of business day
One issue the industry had been concerned about was the CFPB's proposed definition of business day, which included Saturdays. Regulation X's current definition of business day does not include Saturdays, and many small lenders worried that the bureau's proposal would be impractical because they normally do not conduct business on Saturdays.
Taking this into consideration, the bureau determined that the cost of compliance for smaller lenders outweighs the benefit to consumers and could result in a reduction in access to mortgage credit for borrowers. In the final rule, the CFPB included only days on which the lender is open in the three days the lender has to provide the Loan Estimate after receiving a homebuyer's application.
Definition of APR
In its proposed rule, the CFPB suggested a change to the way the APR is calculated. The proposed APR calculation encompassed almost all of the up-front costs of the loan. After reviewing comments from the public, however, the CFPB decided to continue to study the issue, rather make it part of the final regulation. The bureau said the change could have affected the types of loans available to consumers.
Tolerance levels
According to the bureau, the rule prohibits lenders from charging consumers with higher or new fees on the final loan unless there is a legitimate reason.
Machine-readable data
The CFPB originally proposed requiring lenders to retain records in an electronic machine-readable format. However, after receiving comments that the industry would benefit more from a specific data standard rule, the bureau decided not to include it in the final rule.
Language
The bureau provided versions of the forms in both English and Spanish.
Effective date
The rule goes into effect on Aug. 1, 2015. This gives the industry approximately 20 months to prepare for implementation. Phil Schulman, a partner in the Washington, D.C., office of K&L Gates, said the longer implementation time "doesn't lessen the anxiety over compliance," but he hopes it will provide enough time for the industry to get ready.
Brief analysis of the disclosures
Schulman noted that the new forms are similar to the disclosures the CFPB proposed last year.
“Fifteen months after interviewing focus groups, reviewing public comments and re-examining every line of the new Loan Estimate and Closing Disclosure forms — it looks like the CFPB still likes its proposed forms.”
The CFPB did, however, make some limited changes to the final disclosures.
“Some new language was added to make the forms clearer to understand and there were a few changes, but nothing earth shattering,” Schulman said. “For example, the bottom of page one of both new forms now includes two separate disclosures regarding the money the borrower will need to get the deal closed. One requires a disclosure of the estimated closing costs and the other a disclosure of the estimated cash to close. The prior version only included a box for cash to close. This change should provide greater transparency. They got rid of the Approximate Cost of Funds box on the Closing Disclosure. Consumers were baffled by it, as was everyone else. It’s gone. They added an extra category for partial payment options and that will clarify things as well. Finally, the Closing Disclosure form tells borrowers to contact the providers on the list, rather than just the lender.”
Schulman also noted that the rule, at 1,888 pages, is substantial. Even though the final forms look similar to the ones the CFPB proposed, there is much more to this rule that needs to be analyzed.
“Issues about who will close these transactions, how the APR will be calculated, how the tolerances will work and whether TILA or RESPA liabilities will be imposed for noncompliance are all in there somewhere,” Schulman said.
Reaction
The new mortgage disclosures were officially unveiled during a CFPB field hearing in Boston. Cordray told hearing attendees the bureau's mortgage forms and rules would give greater control to consumers so they can take charge of their mortgage decisions.
"The end result will be a more competitive and user-friendly shopping experience," Cordray said.
Cordray noted that the forms and rules were informed by broad input from consumers and industry participants, as well as extensive qualitative and quantitative testing.
Michelle Korsmo, chief executive officer of the American Land Title Association, testified during the hearing. She noted that while the bureau took some industry comments to heart, it did not change its stance on other debated provisions.
"When a significant change like this is released it can be difficult to see where the positives lie within the massive amount of change. On first look, I am very impressed that the bureau listened and worked to incorporate feedback. It's clear the bureau listened to our members' real life examples, and the consumer will benefit with the final product," Korsmo said. "We remain very concerned about the description of owner's title insurance as optional. Homeowners should not be dissuaded from the same protections lenders insist upon."
Leslie Wyatt, director of industry relations with SoftPro, attended the hearing. She was particularly pleased that the bureau heeded calls for a lengthy implementation period.
"As a software provider, we're very happy the CFPB took into consideration the amount of time and effort it will take to upgrade our software and incorporate all the changes in the final rule," Wyatt said. "We couldn't be more pleased with the 21-month implementation timeline."
Consumer advocates applauded the bureau's efforts, but also had some concerns with the new forms. Willard Ogburn, executive director of the National Consumer Law Center, told CFPB leaders that they should have made the APR disclosure more prominent to facilitate borrowers' ability to shop. He also encouraged the agency to move forward with its initial plan to change the APR calculation.
"I know you're committed to looking at that in the future, but it is an egregious omission currently," Ogburn said. "Unfortunately the forms as they're now constructed allow closing costs and even inflated and padded title insurance to be excluded from that [APR] calculation, so it makes shopping much more difficult."
Implementation
Earlier this year, the CFPB announced a major outreach effort to help industry participants comply with several mortgage rules that go into effect in January 2014. The effort included the release of plain language compliance guides and videos explaining the new rules. Cordray said the bureau would launch a similar effort to ensure the RESPA/TILA mortgage rule and forms are implemented properly. The bureau also will continue to educate consumers about the mortgage process.
"We are working to help inform and empower consumers earlier in the mortgage process, "Cordray said. "We will soon be rolling out new tools and resources on our website to help consumers better understand the mortgage market and the choices they should be considering carefully as they think about buying a home."
The bureau made several clarifications and changes to the mortgage rules it released earlier this year. Cordray said the agency stands ready to tweak its RESPA/TILA rule if needed.
"There will still be plenty of time for people to talk to us, and if we need to make some changes in the rules to facilitate compliance, or if we think we said something clearly but it turns out you think we didn't or you show us an ambiguity that creates potential legal issues … we will consider addressing those matters."
Bernie Winne, president and chief executive officer of Boston Firefighters Credit Unions, told bureau leaders that requiring the new Closing Disclosure to be sent to the borrower three days before the closing could create difficulties in states like Massachusetts.
"Massachusetts being a state where the conveyance process is handled by attorneys does put a complication into this process, especially with regard to the three-day window," Winne said. "We have situations right now where we really run to the last minute in terms of trying to meet a potential homebuyer's commitment to close on a certain day."
Winne was also concerned about the costs association with implementing the bureau's requirements. He said community institutions didn't cause the issues that eventually led to the CFPB's regulations, and he warned that smaller banks and credit unions could ultimately decide to stop offering good consumer financial products for compliance reasons.
Korsmo said some ALTA members worry whether they will be able to compete in the future.
"The reality is that changes like this come with a cost," Korsmo said. "While there's never a convenient time to go through this type of change, we want to know that as we make our significant investments in updating our systems, training our staff and educating consumers, all of this will result in a positive experience for the homebuyer and seller."
Transforming the closing process
In addition to releasing the forms and final rule, the CFPB announced a new "Know Before You Owe" information gathering initiative aimed at overhauling the real estate closing process.
Cordray said the bureau will study technologies that could lead to paperless "eClosings." He also said the bureau would work to reduce the stack of paperwork borrowers are confronted with at the closing table.
"By reducing the visual tyranny of the stack of closing documents, we can focus more attention on the new user-friendly Closing Statement, which may enable further advances in consumer education and understanding," Cordray said.
The bureau plans to work with consumer advocates, industry participants and government leaders to identify certain closing documents that can be reduced or eliminated if they are no longer adding value to the mortgage transaction.
During the hearing, the CFPB played a video that envisioned a system where consumers would be able to review documents online in the comfort of their homes. Such a system could use technology to help answer questions and define unfamiliar terms and make it easier for borrowers to quickly see changes and compare them to the original offer, the bureau said.
Winne agreed that shrinking the stack of documents consumers face at the closing table would be a step in the right direction.
"This is certainly a case where less is better," Winne said. "If we could find a way to make this package have more valuable information but maybe a third or a quarter of the paper content, then maybe we could make everybody's life a lot easier."
A factsheet about the "Know Before You Owe" mortgage disclosures is available at: http://files.consumerfinance.gov/f/201311_cfpb_factsheet_kbyo_mortgage-disclosures.pdf
A factsheet about the testing process the CFPB used to arrive at today's rule is available at: http://files.consumerfinance.gov/f/201311_cfpb_factsheet_kbyo_testing.pdf
The "Know Before You Owe" mortgage disclosure rule is available at: http://files.consumerfinance.gov/f/201311_cfpb_final-rule_integrated-mortgage-disclosures.pdf