All in Good Faith. mortgagedashboard. How Know Before You Owe Changes Everything. Jorge Sauri

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1 All in Good Faith How Know Before You Owe Changes Everything. Jorge Sauri mortgagedashboard

2 August 1, 2015, marks the end of a long road for federal regulations that promise to greatly impact the mortgage process and the start of an even longer one for credit unions, community banks and mortgage bankers responsible for following the new rules. August 1 is the effective date of muchdiscussed amendments to Regulations X and Z that establish new disclosure requirements and forms for most closed-end consumer credit transactions secured by real property. The mortgage industry has been heavily involved in the changes dubbed Know Before You Owe by the Consumer Financial Protection Bureau, which was created under the Dodd-Frank Act and required by that legislation to combine the Truth in Lending Act and Real Estate Settlement Procedures Act disclosures. The final rule from the CFPB summarizes the situation succinctly: For more than 30 years, Federal law has required lenders to provide two different disclosure forms to consumers applying for a mortgage. The law also has generally required two different forms at or shortly before closing on the loan. Two different Federal agencies developed these forms separately, under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). The information on these forms is overlapping and the language is inconsistent. Not surprisingly, consumers often find the forms confusing. It is also not surprising that lenders and settlement agents find the forms burdensome to provide and explain. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) directs the Bureau to integrate the mortgage loan disclosures under TILA and RESPA sections 4 and 5. The result, the CFPB says, are the new Loan Estimate Form and Closing Disclosure Form. The first new form (the Loan Estimate) is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form will be provided to consumers within three business days after they submit a loan application. The second form (the Closing Disclosure) is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form will be provided to consumers three business days before they close on the loan. AUG 1 2 mortgagedashboard.com

3 The Loan Estimate Form The Loan Estimate form replaces the early Truth in Lending disclosure and the Good Faith Estimate. According to the CFPB: Either a mortgage broker or creditor is required to provide the Loan Estimate form upon receipt of an Application by a mortgage broker. However, even if the mortgage broker provides the Loan Estimate, the creditor remains responsible for complying with the all requirements concerning provision of the form. The creditor or mortgage broker must provide the form to the consumer no later than three business days after the consumer applies for a mortgage loan. The final rule contains a definition of what constitutes an application for these purposes, which consists of the consumer s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought. Consistent with current law, the creditor generally cannot charge consumers any fees until after the consumers have been given the Loan Estimate form and the consumers have communicated their intent to proceed with the transaction. There is an exception that allows creditors to charge fees to obtain consumers credit reports. Creditors and other persons may provide consumers with written estimates prior to application. The rule requires that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer is required for advertisements. 3 mortgagedashboard.com

4 The Closing Disclosure Form The Closing Disclosure Form replaces the HUD-1 Settlement Statement and the final Truth in Lending disclosure. Again, according to the CFPB: The creditor must give the Closing Disclosure form to consumers so that they receive it at least three business days before the consumer closes on the loan. If the creditor makes certain significant changes between the time the Closing Disclosure form is given and the closing specifically, if the creditor makes changes to the APR of 1/8 of a percent or greater for most loans (and 1/4 of a percent for loans with irregular payments or periods), changes the loan product, or adds a prepayment penalty to the loan the consumer must be provided a new form and an additional three-business-day waiting period after receipt of the new form. Less significant changes can be disclosed on a revised Closing Disclosure form provided to the consumer at or before closing, without delaying the closing. The creditor is responsible for delivering the Closing Disclosure form to the consumer, but creditors may use settlement agents to provide the Closing Disclosure, provided that the settlement agents comply with the final rule s requirements for the Closing Disclosure. 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 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. 4 mortgagedashboard.com

5 The Predicted Impact On Consumers According to the CFPB, these new forms reduce both paperwork and confusion. They suggest that the language and design are more clear and highlight the information most important to consumers. There will be more information on the costs of taxes and insurance as well as warnings about features they may want to avoid. Finally, the agency says that by receiving the Closing Disclosure at least three business days before closing, consumers will come to the table better informed and able to ask questions. On the Industry The National Association of Federal Credit Unions has publicly expressed concerns about the changes on a number of occasions. In 2012, its president said, NAFCU questions whether it is wise or fair for the CFPB to hold lenders to even tighter standards (regarding third party providers, no less) while simultaneously reducing the amount of information and the amount of time the lender has to perform due diligence and review the application. It went on to say that Requiring more and more out of lenders while giving them less time and smaller margins upon which to work will ultimately disadvantage credit unions and other small entities, and further undermine the mortgage market. 5 mortgagedashboard.com

6 When the rules were finalized, the organization expressed further concerns about the costs and burdens. It released a statement saying, we believe that the underlying regulations will complicate the process of the mortgage loan transaction. In particular, we are concerned with the rule s inflexibility in regard to changes that can be made to estimates given in the Loan Estimate and to provide borrowers the Closing Disclosure three business days prior to consummation. NAFCU will push back where necessary to ensure that the benefits of combining the current TILA and RESPA disclosures are not diluted by the costs and burdens associated with the underlying regulations. More recently, the group sought clarity in the form of written guidance on compliance, saying, We believe reliable written guidance is essential for credit unions to operate on a level playing field in implementing the regulation, and will help avoid unnecessary confusion and discrepancies in implementation down the road. The Independent Community Bankers of America has also been vocal about the new regulation s impact on industry. In the fall of 2013, it submitted an open letter to the CFPB that said, The CFPB s new regulations will significantly change the mortgage business of community banks and all of the participants they work with such as software vendors, servicers, escrow agents, title agents, guarantors, and appraisers. Even the most negligible regulatory change can require many months of time to change systems, update policies and procedures, revise underwriting requirements, and train staff. This can be particularly problematic for community banks given their limited staff and legal and compliance resources. In seeking a delay in implementation the group went as far as to say, we are concerned that community banks will exit the consumer mortgage business due to their frustration and inability to comply with the ever-changing requirements in time and the crippling liability they will face that noncompliance brings. For its part, the Mortgage Bankers Association is offering help, for a price. In announcing its $6,000 TILA RESPA Integrated Disclosure (TRID) Resource Guide, the trade group noted that, TRID is 1,888 pages in length and affects every business functioning in the single-family mortgage market. Compliance with this new rule requires major systems and operational changes. 6 mortgagedashboard.com

7 A Time to Review Your Loan Origination Software How dramatically the TILA RESPA Integrated Disclosure impacts the mortgage industry remains to be seen. What is clear is that credit unions, community banks and mortgage brokers will need to move quickly to: Assess the various impacts on their organizations Consider the changes that likely will occur in their activities with brokers, agents and vendors Develop plans for implementation Train their staffs on all of the many differences in the new forms. At the same time, Know Before You Owe is also an impetus for organizations to review their loan origination software to make certain that it is up to date, fosters communication, enhances security and ensures compliance. MortgageDashboard is the software of choice for on-demand loan origination management. Based on a Software as a Service (SaaS) model, it is a completely paperless system that has everything mortgage brokers and bankers need from start to finish. MortgageDashboard helps credit unions, community banks and mortgage bankers build their businesses while keeping them organized, compliant and in control even in times of great change. 7 mortgagedashboard.com

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