Consumer Financial Protection Bureau (CFPB) Proposes Integrated Mortgage Loan Disclosures

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1 Carmen J. Bauccio, Compliance Manager Enterprise Government, Risk & Compliance (EGRC) Solutions

2 On July 9, 2012, the Consumer Financial Protection Bureau, (CFPB), issued a proposed rule with a request for comments, to combine certain mortgage loan disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The CFPB plans to issue final rules in January The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) was signed into law on July 21, The DFA directs the CFPB to issue proposed rules and forms that combine certain disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) that consumers receive in connection with applying for and closing on a mortgage loan transaction. Because different regulating bodies were responsible for developing and maintaining their own disclosures for over 30 years, the information on the existing disclosures is overlapping and the language is inconsistent. As a result, the CFPB was involved in extensive consumer and industry research, and public outreach for over a year. Both the TILA and the REPSA require that creditors provide consumers with a good faith estimate of charges within three business days after receiving the consumer s mortgage loan application, as well as providing the consumer with a list of closing costs prior to loan settlement. The proposed rule applies to most closed-end consumer mortgages. However, the proposed rule does not apply to home equity lines of credit, reverse mortgages, mortgages secured by a mobile home, a dwelling that is not attached to real property (i.e. land), or creditors that make five or fewer mortgage loans per year. The proposed rule will replace RESPA s Good Faith Estimate and the initial Truth in Lending disclosure with a new Loan Estimate disclosure, and RESPA s HUD-1 Settlement Statement and the final Truth in Lending disclosure with a new Closing Disclosure. These new disclosure forms also contain new disclosure requirements as mandated by the DFA. The forms use clear language and design to make it easier for consumers to locate key information such as interest rate, monthly payments, and costs to close the loan. The forms also provide more information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loan over time. In developing the new Loan Estimate form and Closing Disclosure form, the Bureau has reconciled the differences between the existing forms and combined several other mandated disclosures. The Bureau also has responded to industry complaints of uncertainty about how to fill out the existing forms by providing detailed instructions on how to complete the new forms. This should reduce the burden on lenders and others in preparing forms in the future. The Loan Estimate Form The Loan Estimate form 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 Loan Estimate form also incorporates the following new disclosures required by Congress under the DFA: a) Provision by mortgage broker, b) Timing, c) Limitation on Fees, and d) Disclaimer on early estimates. Each of these new disclosures is explained below. Provision by mortgage broker - The lender may rely on a mortgage broker to provide the Loan Estimate form. However, the lender remains responsible for the accuracy of the form FIS and/or its subsidiaries. All Rights Reserved. 2

3 Timing - The lender or broker must give the form to the consumer within three business days after the consumer applies for a mortgage loan. The proposed rule contains a specific definition of what constitutes an application for these purposes. Limitation on fees - Consistent with current law, the lender generally cannot charge consumers any fees until after the consumer has been given the Loan Estimate form and the consumer has communicated an intent to proceed with the transaction. There is an exception that allows lenders to charge fees to obtain consumers credit reports. Disclaimer on early estimates - Lenders and brokers may provide consumers with written estimates prior to application. However, the proposed rule requires that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer would not be required for advertisements. The Closing Disclosure Form The Closing Disclosure form 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 a loan. The Closing Disclosure form also incorporates the following new disclosures required by Congress under the DFA: a) Timing, and b) Provision. Each of these new disclosures is explained below. Timing - The lender must give consumers this Closing Disclosure form at least three business days before the consumer closes on the loan. Generally, if changes occur between the time the Closing Disclosure form is given and the closing, the consumer must be provided a new form. When that happens, the consumer must be given three additional business days to review that form before closing. However, the proposed rule contains an exception from the three-day requirement for some common changes. These include changes resulting from negotiations between buyer and seller after the final walkthrough. There also is an exception for minor changes which result in less than $100 in increased costs. The Bureau seeks comment on whether to permit additional changes without requiring a new three-day period before closing. Provision - Currently, settlement agents are required to provide the HUD-1, while lenders are required to provide the revised Truth in Lending disclosure. The Bureau is proposing two alternatives for who is required to provide consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the lender may rely on the settlement agent to provide the form. However, under the second option, the lender would also remain responsible for the accuracy of the form. The Bureau seeks comment as to which alternative is preferable Limits on Closing Cost Increases Similar to existing law, the proposed rule would restrict the circumstances in which consumers can be required to pay more for settlement services the various services required to complete a loan, such as appraisals, inspections, etc. than the amount stated on their Loan Estimate form. Unless an exception applies, charges for the following services could not increase: (1) the lender s or mortgage broker s charges for its own services; (2) charges for services provided by an affiliate of the lender or mortgage broker; and (3) charges for services for which the lender or mortgage broker does not permit the 2013 FIS and/or its subsidiaries. All Rights Reserved. 3

4 consumer to shop. Moreover, unless an exception applies, charges for other services generally could not increase by more than 10 percent. The rule would provide exceptions, for example, when: (1) the consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the lender; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days. Changes to the APR (Annual Percentage Rate) The proposed rule redefines the way the Annual Percentage Rate or APR is calculated. Under the proposed rule, the APR will encompass almost all of the up-front costs of the loan. This will make it easier for consumers to use the APR to compare loans and easier for industry to calculate the APR. Recordkeeping The proposed rule requires lenders to keep records of the Loan Estimate and Closing Disclosure forms provided to consumers in a standard electronic format. This will make it easier for regulators to monitor compliance. The CFPB seeks comment on whether smaller lenders should be exempt from this requirement. Lenders must keep evidence of compliance for three years and a copy of the Closing Disclosure for five years. Comments on parts of this proposed rule must be received by September 7, 2012, but the comment period for other portions of the proposal will be open until November 6, The CFPB also proposed a rule to implement changes to the Home Ownership and Equity Protection Act (HOEPA) with respect to mortgages with high interest rates, fees or prepayment penalties. For mortgage loans that meet the high-cost definition, CFPB proposes to: Ban balloon payments and prepayment penalties Ban fees for modifying loans; cap late fees; and restrict the charging of fees for providing a mortgage payoff statement Require loan counseling for high-cost mortgage applicants The CFPB is seeking comment on when this final rule should be effective. Because the final rule will provide important benefits to consumers, the CFPB seeks to make it effective as soon as possible. However, the CFPB understands that the final rule will require lenders, mortgage brokers, and settlement agents to make extensive revisions to their software and to retrain their staff. In addition, some entities will be required to implement other Dodd-Frank Act provisions, which are subject to separate rulemaking deadlines under the statute and will have separate effective dates. Therefore, the CFPB is seeking comment on how much time industry needs to make these changes. The CFPB is proposing to delay compliance with certain new disclosure requirements contained in the Dodd-Frank Act until the CFPB s final rule takes effect. The CFPB is currently awaiting / reviewing all comments received up through the comment deadline of November 6, 2012; however, some comments were due by September 7, Upon review, the CFPB plans to issue final regulations in January FIS and/or its subsidiaries. All Rights Reserved. 4

5 About the Author Mr. Carmen J. Bauccio brings 21 years of banking experience to FIS. His experience and expertise includes internal audit, regulatory compliance, and information technology audits, legal items processing (e.g. IRS Levies, Subpoenas, etc.), as well as in all areas of banking operations including commercial / consumer / mortgage lending, deposit operations, Sarbanes- Oxley, credit administration, accounting and finance, and advertising reviews for compliance with all regulations / laws. Previous Experience Carmen was formerly an Assistant Vice President & Senior Manager at a savings bank where he was responsible for Managing Internal Audit/Compliance staff, internal audits (financial, operational, information technology), compliance reviews, performing internal audits/compliance reviews, monitoring progress, supervising / training staff, writing audit reports, communicating findings with clients, reporting audit/compliance activity to senior management / audit committees, providing high-level training to board of directors/audit committee, reviewing all bank advertisements for compliance with applicable laws/regulations, and conducting compliance committee meetings. In his role as Senior Manager, he also coordinated examination reviews with regulators from the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, State Department of Banking. While assigned to the Audit/Compliance/Risk department, Carmen performed regulatory compliance reviews, either separately or integrated within internal audits of all areas of bank operations such as lending, deposit operations, nondeposit investment products, information technology, involving both PA, OH, and WV State banking laws and regulations and Federal consumer banking regulations. Carmen has also held officer roles (i.e. Vice President, Executive Vice President, and President) with The Institute of Internal Auditors Pittsburgh Chapter, as well as serving as a Board of Governor for two years. His current involvement within The IIA Pittsburgh Chapter is 15 years. Specific Skill Sets Performed internal audits of commercial banks, involving regulatory compliance; underwriting; credit administration; internal controls, lending reviews, deposit operations, non-deposit investment products, and information technology reviews. Ensured compliance with relevant laws, regulations, rules and best practices pertaining to but, not limited to FRB Regulations B, C, D, E, O, P, V, Z, AA, BB, CC, DD; BSA/KYC; OFAC; HUD Regulation X (RESPA); Anti-tying, Foreign Corrupt Practices; Fair Lending; FDICIA; and, applicable State banking laws (i.e. Abandoned Property, mortgage banking). Performed internal audits of deposit operations and services including NACHA, and wire transfers. Development of Sarbanes-Oxley and FDICIA narratives; development of testing programs; and testing of internal controls Conducted audit risk assessments that lead to development of audit plans Performed compliance risk assessments and developed compliance monitoring programs Conducted compliance committee meetings for the bank 2013 FIS and/or its subsidiaries. All Rights Reserved. 5

6 Certifications Certified Financial Services Auditor (CFSA) Working towards certification as a Certified Regulatory Compliance Manager (CRCM) Education Bachelor of Science in business administration, Robert Morris College Contact us FIS Enterprise Governance, Risk and Compliance (EGRC) Solutions FIS and/or its subsidiaries. All Rights Reserved. 6