Implementing the Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosures

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1 Implementing the Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosures The Consumer Financial Protection Bureau (CFPB), as directed by Sections 1098 and 1100A of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), published the amended Real Estate Settlement Procedures Act (RESPA, or Regulation X) and the Truth in Lending Act (TILA, or Regulation Z), and their official interpretation of the amendments. The primary focus of the amendments is the integration of mortgage disclosures currently required under RESPA and TILA, with the goal being to promote fair and responsible lending by clearly informing borrowers of the key features, costs and risks of the mortgage for which they are applying. What s coming down the pike? Forms Essentially, the TILA-RESPA integrated disclosures combine four separate disclosures into two. Information contained in what is currently the Good Faith Estimate (GFE) and the initial Truth In Lending (TIL) disclosure will be combined into one form, the Loan Estimate. Similarly, the information in the current Housing and Urban Development Form 1 (HUD-1) and final TIL will become a single Closing Disclosure. These forms are designed to provide consumers with clear and understandable information that can adequately assist the consumer in making a decision about whether they are able to afford the loan offer. The forms will also allow consumers to compare competing loan offers by conspicuously identifying key components, such as interest rate, monthly payments and closing costs. Forms Current As of Aug. 1, 2015 GFE + initial TIL HUD-1 + final TIL Loan Estimate Closing Disclosure

2 Fee change tolerance The amended regulations will also impose greater restrictions on fee changes that occur between the Loan Estimate and settlement. Currently, fees listed on the initial TIL disclosure and GFE may be increased on the final disclosures, within a tolerance of 10%, unless they are lender-controlled fees. There is zero tolerance for any change in fees that are under the direct control of the lender between initial and final disclosures. Under the new RESPA requirements, lenders will be prohibited from charging more for settlement services than those already on the Loan Estimate for the following: fees that they directly control, fees charged by an affiliate of the creditor, fees charged by service providers selected by the creditor and fees for services for which the consumer is not permitted to shop. In other words, if the borrower either does not have the option to choose the third-party vendor for settlement services or must select from a list of vendors, then the creditor is said to have control over the corresponding service fee and may NOT increase the fee at closing, absent a change in circumstances. With the implementation of this stringent standard, creditors will have to take great care in preparing their initial disclosures in order to ensure accurate estimates. Fee increase tolerance level between initial disclosure and settlement Tolerance level Current As of Aug. 1, 2015 Zero tolerance 10% tolerance No tolerance limitation Fees that are in direct control of creditor (i.e., origination charge; while the borrower s interest rate is locked, the credit or charge for the interest rate chosen; while the borrower s interest rate is locked, the adjusted origination charge) Transfer taxes Fees charged for third-party settlement services (i.e., title services, title insurance, survey, pest inspection, recording fee, credit reports, appraisals, flood checks, tax services and any upfront mortgage insurance premium) Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account For services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor s written list of service providers Fees that are in direct control of creditor Fees charged by third party affiliated with creditor (service providers selected by the creditor; services for which the consumer is not permitted to shop) Transfer taxes Recording fees Charges for third-party services where the charge is not paid to the creditor or the creditor s affiliate Charges for third-party services where the consumer is permitted by the creditor to shop for the thirdparty service, and the consumer selects a third-party service provider on the creditor s written list of service providers Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account For services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor s written list of service providers 2

3 Consider the timing The mandate for strict adherence to disclosure timelines throughout the mortgage settlement process is also important to consider. Currently, under TILA, the creditor only has to provide the borrower with a copy of the final TIL disclosure at least three days prior to consummation only when the previously disclosed annual percentage rate (APR) becomes inaccurate. Additionally, unless the borrower requests it, RESPA only requires that the settlement agent complete the HUD-1 and make it available to the borrower at or before the time of settlement. However, the borrower does have the right to request a copy of the HUD-1 statement one business day before settlement and, if he does, it is the settlement agent s responsibility to provide this statement for inspection. Settlement is defined by Regulation X as the process of executing legally binding documents regarding a lien on a property that is subject to a federally related mortgage loan. See 12 CFR (b). 1 Timing requirements Current As of Aug. 1, 2015 Settlement agent must provide final disclosures at or before consummation Must provide corrected disclosures at least 3 days prior to consummation when APR changes Consumer has the right to request inspection of the HUD-1 one day before consummation Creditor must provide Closing Disclosure at least 3 days prior to consummation Must provide corrected disclosures at least 3 days prior to consummation when the APR becomes inaccurate, the product type changes or a prepayment penalty is added Consumer has the right to request inspection of the Closing Disclosure one day before consummation Beginning Aug. 1, 2015, creditors will have the responsibility of providing consumers with the Closing Disclosure at least three business days prior to consummation in all instances. Consummation, in contrast to settlement, occurs when a consumer becomes contractually obligated on a credit transaction. See 12 CFR (a)(13). 2 Additionally, any changes to the Closing Disclosure when the APR becomes inaccurate, the product type changes or a prepayment penalty is added will require a revised Closing Disclosure be sent to the borrower, along with a new three-day waiting period. 1 U.S. Government Publishing Office, Real Estate Settlement Procedures Act Regulation X, accessed March 3, U.S. Government Publishing Office, Truth in Lending Act Regulation Z, accessed March 3,

4 Key action items Not only is the lender required and expected to have a full compliance program ready to implement on Aug. 1, 2015, but the CFPB also requires lenders to remain in compliance with the current regulations for any application submitted prior to that date as well. In other words, the lender is not permitted to implement the new regulation and corresponding forms prior to Aug. 1, Practically, this means the lender must have dual systems in place in order to account for both the new and old regulations. And, given that the final rule under 12 CFR Part was published at the end of 2013, allowing lenders more than a year to prepare for the change, the CFPB is likely to have little sympathy for lenders who fail to comply with the mandates of the new regulation. Likewise, there will not be a grace period during which a lender may use the old forms while transitioning. Depending on business model, current processing times and backlog, lenders could be forced to run dual systems in excess of six months, because lenders will have to maintain policies and procedures to ensure compliance with the outgoing regulation for as long as there are loan applications in the pipeline that were submitted prior to Aug. 1, The importance of internal controls It is impossible to overstate the importance of having strong internal controls in place prior to the effective date, due to the necessity of maintaining and implementing policies and procedures for both the new and old regulations by Aug. 1, And a further significant adjustment to note is that the Closing Disclosure will be governed by TILA rather than RESPA, which currently governs the HUD-1. This is important because there is a private cause of action for violations of TILA, but there is not under RESPA. This means that the lender will be financially liable for any untimeliness or inaccuracies of the Closing Disclosure. The case for change Currently, it is standard practice for the HUD-1 disclosure to be completed by the settlement agent, and then to be sent to the lender for approval prior to settlement. But with the new pressure of financial liability, lenders will have to make business-risk decisions about whether they will retain their current processes, having their settlement agents complete and deliver the final settlement disclosures, or bring the process in-house to give them more control. In fact, due to this regulatory change and the levels of scrutiny and liability that come with it, two of the country s leading mortgage originators have already announced a departure from their current process, and will now handle both the production and delivery of the Closing Disclosure in-house rather than leaving that responsibility with the settlement agent. 3 U.S. Government Publishing Office, Truth in Lending Act Regulation Z, accessed March 3,

5 Know your risks It is important that lenders understand the risks that should be weighed when deciding whether to leave the responsibility of production and delivery with the settlement agent or not. While doing so is unquestionably the easier option, given that a majority of lenders currently use this model, lenders must recognize that they will be liable for any untimeliness or inaccuracies of the Closing Disclosure, regardless of who caused the error. So if a lender does decide to retain their current business model, there must be an extremely high level of trust between the lender and agent. One action worth considering is to have a standing service level agreement between the lender and settlement agent, laying out any consequences for negligent preparation and delivery of Closing Disclosures. This could help mitigate any liability incurred by the lender. While this will not alleviate lender liability to the CFPB for the Closing Disclosure, it will potentially allow the lender to recover damages for violations that are the fault of the settlement agent. Alternatively, taking on the responsibilities of production and delivery of the Closing Disclosure will undoubtedly generate the need for additional internal controls, such as comprehensive test scripts, quality assurance/quality control audits, and internal compliance. Audits must be built and implemented to ensure accuracy and timeliness of the production and delivery of the disclosure to the borrower. Furthermore, any inaccuracy at the production stage could cause a delay at closing because the new regulation states that a new disclosure must be sent to the borrower for any discrepancy outside of the allowable thresholds. This immediately triggers a new three-day waiting period, which could affect various elements of a loan settlement, such as rate lock agreements, sales contracts, contiguous closings and myriad other time-dependent factors. Updates for materials What you need to know Lenders must be able to develop an action plan, create training materials, complete training test sessions and implement new compliance programs for all affected groups companywide prior to Aug. 1, Training programs of this magnitude can take months to implement, so it is vital that they do so meticulously in order to make a smooth transition. The potential shifting of production and delivery of the Closing Disclosure from settlement agents to inhouse employees means that numerous changes will need to be made. New training materials and courses need to be created. Internally, various groups of employees, such as new Closing Disclosure processors, quality assurance/quality control analysts, and compliance specialists, will require additional training on the requirements of the new form and the allowable thresholds of variance from the Loan Estimate. Communication between lender and closing agent will be essential to the success of the process and integral to limiting delays. Training will be vital for employees and third-party vendors, such as loan processors, underwriters, loan originators and settlement agents, in order to limit the number of communication breakdowns that will inevitably occur without a well-designed process. While choosing to retain current process with regard to having the Closing Disclosure completed by the settlement agent may reduce the amount of additional training necessary, there will still be implications such as the need for added resources dedicated to ensuring Loan Estimate accuracy, lender-settlement agent liaising and monitoring for any final loan terms that fall outside of the tolerable limitations. 5

6 Personnel adjustment and reallocation Depending on what changes are made to policies and procedures, an adjustment or reallocation in staffing as well as third-party contractors will be critical for proper implementation. Given that the initial TIL and GFE are currently produced and delivered by lenders with proper management, training and reallocation of resources the same groups of employees will be capable of producing the new Loan Estimate. The liability impact of these regulatory changes and necessity of reallocated resources will mean that lenders will need to create new personnel groups composed of positions such as loan processors; lender-agent liaisons; quality assurance specialists; and compliance/risk consultants to ensure compliance, coordination and communication. Risks and consequences of noncompliance Risk Financial Reputational Criminal Consequence Civil monetary penalties Private causes of action Legal fees Share prices Public trust and perception Criminal charges for willful violations of TILA [15 U.S. Code 1611(3), 2006] including a fine of up to $5,000, one year in prison, or both Next steps for banks The new disclosure timeline requirements have caused frustration and unease amongst mortgage lenders and settlement agents due to the uncertainty of impact. But the new requirements do afford lenders and agents an excellent housekeeping opportunity to review; improve; redefine; and achieve important operational risk, efficiency and compliance objectives moving forward. While most lenders have internal policies and procedures for implementing change controls following a regulatory or statutory modification, a change of this scale and complexity can be overwhelming for even the best-equipped institution. The magnitude of change can weigh heavily on internal change management groups, which tend to focus on day-to-day operational goals rather than the long-term vision of compliance with the Dodd- Frank Act. In this case, it can be helpful to call in a third-party specialist, who can help navigate the tricky waters and keep an eye on details both vertically and horizontally throughout the organization. Whichever road a business chooses to follow, it will be crucial to have the right team in place to evaluate current policies and procedures, internal controls, training programs, and materials. The team should also be both educated and empowered to determine what changes are necessary, and ultimately implement them into a lender s existing business model. And with the clock ticking, the time to start is most definitely now. Contacts Molly Curl Partner, Bank Advisory and Regulatory Services Leader Mortgage Center of Excellence T E molly.curl@us.gt.com Ryan Dobrusin Senior Associate Financial Services T E ryan.dobrusin@us.gt.com Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information about the issues discussed, consult a Grant Thornton LLP client service partner or another qualified professional. Connect with us linkd.in/grantthorntonus Grant Thornton refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and its member firms are not a worldwide partnership. All member firms are individual legal entities separate from GTIL. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. Please visit grantthornton.com for details Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd