CUNA s COMPLIANCE HIGHLIGHTS TILA/RESPA INTEGRATED MORTGAGE DISCLOSURES 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 and Procedures Act (RESPA), resulting in inconsistent language and overlapping forms. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) directs the Consumer Financial Protection Bureau (CFPB) to integrate all of these mortgage loan disclosures. 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 and help them shop for their best mortgage option. 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 their mortgage loan. This form will be provided to consumers three business days before they close on the loan. The CFPB has determined that another disclosure mandated by the Dodd-Frank Act, which would have required creditors to disclose the approximate amount of the wholesale rate of funds in connection with the loan, would be more confusing than helpful to consumers. Consequently, the CFPB has exempted creditors from this new requirement. Scope of the New Rule Affected Mortgage Loans: The new rule applies to most closed-end consumer mortgages. Exemptions: The new rule does not apply to: home equity lines of credit, reverse mortgages*, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. 1
* Reverse mortgage disclosures will continue to be governed by Regulation X (the existing Good Faith Estimate and the HUD settlement statement), until the Bureau addresses them in a separate, future rulemaking. Under the new rule, the existing RESPA exemption on property of 25 acres or more is eliminated to make Regulation X (RESPA) more consistent with Regulation Z (TILA). The CFPB believes that most of these loans will be exempt under other exempted categories, such as loans for business, commercial or agricultural purposes. If a loan on property of 25 acres or more is not exempt by one of these other categories, the CFPB believes that the new integrated disclosures will be useful to the consumer. Partial Exemption: Loans subject to the new integrated disclosure requirements, as well as certain federally related mortgage loans that satisfy specified criteria associated with certain housing assistance programs for low- and moderate-income persons, are exempt from the requirements to provide: The RESPA Special Information Booklet (settlement costs), The RESPA Good Faith Estimate (GFE), The RESPA settlement statement (HUD-1, HUD-1A), and The mortgage servicing transfer disclosure. Effective Date The new rule is effective on October 3, 2015. The rule applies to transactions for which the creditor or mortgage broker receives an application on or after this effective date. The CFPB notes in its Official Interpretation to the rule that in regard to applications received before the effective date, for example, September 30, 2015, the Loan Estimate, Closing Disclosures and the Special Information Booklet required under the new TILA-RESPA integrated disclosure rule do not apply. Instead, the creditor and the settlement agent must provide the disclosure requirement under the existing TILA and RESPA rules, as applicable. Exceptions: The following provisions become effective on October 3, 2015, without respect to whether an application has been received on that date: Pre-disclosure activities - fee restrictions and written information regarding estimated terms and costs prior to disclosure ( 1026.19(e)(2)), and Provisions addressing the preemption of inconsistent state disclosure laws ( 1026.28(a)(1)), as well as the commentary regarding the substantial similarity standard used to grant state exemptions ( 1026.29). 2
Finance Charge The CFPB proposed to replace the current some fees in, some fees out approach to the mortgage finance charge with a more inclusive approach. Most of the current exclusions would have been eliminated for closed-end mortgage loans. CUNA, as well as many state credit union associations and credit unions, strongly opposed this change to the definition of finance charge arguing that it would impact credit union mortgage loans in a variety of ways, including subjecting more loans to additional limits and requirements under the Home Ownership Equity Protection Act and excluding some mortgage loans from being considered "qualified mortgages" under the CFPB's Abilityto-Repay rule. As a result, the CFPB did not change the definition of finance charge. The Bureau intends to revisit this issue in conjunction with an assessment of the new rule required within five years after its effective date. The Loan Estimate Form The Loan Estimate form replaces two current Federal forms. It replaces the Good Faith Estimate (RESPA) and the early Truth in Lending (TILA) disclosure. The Loan Estimate form also includes several new disclosures required by the Dodd- Frank Act, such as the total interest percentage, the aggregate amount of loan charges and closing costs the consumer must pay at closing, the homeowner s insurance disclosure, and for refinance transactions the anti-deficiency protection notice. Timing The creditor or mortgage broker must give the Loan Estimate form to the member no later than three business days after the member applies for a mortgage loan and not later than the seventh business day before closing. The definition of what constitutes an application includes: the member s name, the member s income, the member s social security number (to obtain a credit report), the property address, an estimate of the value of the property, and the mortgage loan amount requested. The new rule eliminates the seventh catch-all item in the current definition of application, which is any other information deemed necessary by the loan originator. The CFPB notes that this new definition does not prevent a creditor from collecting any 3
additional information in relation to the mortgage loan, however, once a creditor has received these six pieces of information the Loan Estimate requirements are triggered. Ability to Repay: The CFPB clarifies that this timing provision does not prevent a creditor from fulfilling its obligation to evaluate a borrower s ability to repay. Creditors will be able to collect whatever information they need to evaluate a borrower s ability to repay as long as they sequence the collection of that information to ensure that they provide a Loan Estimate once the six application pieces of information have been collected. Creditors cannot condition the issuance of the disclosure on verifying the information. Mortgage broker: The rule requires either a mortgage broker or creditor 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 all requirements concerning the provisions of the form. Limitation on fees Consistent with current law, the credit union generally cannot charge members any fees until after the members have been given the Loan Estimate form and the members have communicated their intent to proceed with the mortgage loan. There is an exception that allows credit unions to charge fees to obtain members credit reports. Good Faith Estimates The general rule for the good faith estimates included on the Loan Estimate form is that the estimated closing cost in not in good faith if the charge actually paid by the member exceeds the amount originally disclosed. Examples of charges that must not increase include: Fees paid to the creditor; Fees paid to a mortgage broker; Fees paid to an affiliate of the creditor or a mortgage broker; Fees paid to an unaffiliated third party, if the creditor did not permit the borrower to shop for a third party service provider; and Transfer taxes. (Note: In the current regulations some of these charges are included in the 10% tolerance allowance described below.) Limited increases are allowed for certain charges. If the aggregated increases of the following charges do not exceed 10% of the sum of all of these charges as listed on the estimate, they will be considered in good faith: Fees paid to an unaffiliated third party, if the credit union permitted the member to shop around for servicers not on the list of servicers provided by the credit 4
union and the credit union informed the member that choosing a servicer not on the list is permitted. Recording fees. There are also charges that are allowed to be higher than their estimates as long as the estimated charge was based on the best information reasonably available to the creditor at the time the disclosure was made. These charges include: Prepaid interest; Property insurance premiums; Escrow amounts; Charges paid to third-party service providers selected by the that are not on the list provided by the creditor; and Charges paid to third-party service providers for services not required by the creditor. Refunds Related to GFEs If amounts paid by the member exceed the amounts specified in the GFE beyond the tolerance limits, the credit union must refund the excess to the member no later than 60 days after closing. The credit union must also deliver or place in the mail corrected disclosures that reflect the refund within the 60-day period. Revised Estimates: The Six Exceptions The new rule incorporates the six exceptions currently in Regulation X that allow a charge paid by a borrower to exceed the originally estimated charge, and permits a revised Loan Estimate disclosure to be issued: A. Changed Circumstances Affecting Settlement Charges - Such as: (1) an extraordinary event beyond the control of any interested party or other unexpected event specific to the member or transaction; (2) information specific to the member or transaction that the credit union relied upon when providing the disclosures and that was inaccurate or subsequently changes; or (3) new information specific to the member or transaction that was not relied on when providing the disclosures. The new rule eliminates the existing 4 th section of the definition which included other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. The Bureau believes this 4 th section is already covered by other elements of the definition and suggests that the overlap contributed to uncertainty surrounding what scenarios constitute a changed circumstance. 5
B. Changed Circumstances Affecting Eligibility: Such as a changed circumstance affecting the borrower s credit worthiness or the value of the collateral. C. Revisions Requested by the Consumer D. Interest Rate Dependent Charges : Such as if an interest rate that has not been locked, or a locked rate that has expired. E. Expiration : Such as when a borrower expresses an intent to proceed with the mortgage loan more than ten business days after the disclosures are provided. F. Delayed Settlement Date on a Construction Loan: Such as when closing is scheduled to occur more than 60 days after delivery of the estimated disclosures, provided that the borrower was alerted to this fact when the estimated disclosures were provided. A revised Loan Estimate must be delivered within three business days of establishing that a valid reason for the revision exists. Disclaimer on Early Estimates Credit unions and other persons may provide members with written estimates prior to the member submitting a mortgage application. The rule requires that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer is not required for advertisements. The Closing Disclosure The Closing Disclosure form replaces the current RESPA form used to close a loan, the HUD 1, and the (final)truth in Lending (TILA) disclosure form. The Closing Disclosure form also includes new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction. Timing of Disclosure The credit union must give the Closing Disclosure form to members so that they receive it at least three business days before the member closes on the loan. If the Closing Disclosure is mailed to the member or delivered by means other than presenting the form to the person, the member is considered to have received the disclosure three business days after it is mailed or delivered. Timing of Revised Disclosures 6
If the credit union makes certain significant changes between the time the Closing Disclosure form is given and the closing specifically, if the credit union makes: changes to the APR above 1 8 of a percent 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 member 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 member at or before closing - without delaying the closing. This requirement is intended to provide the protection to consumers of an additional three-day waiting period for significant changes, but not cause closing delays for less significant changes that may frequently occur. Revisions Due to Events After Closing: If during the 30-day period after closing, an event in connection with the settlement of the mortgage occurs that causes the Closing Disclosure to become inaccurate, the credit union must deliver or place in the mail corrected disclosures to the member not later than 30 days after receiving information sufficient to establish that the event has occurred. Revisions Due to Clerical Errors: Credit unions must correct non-numeric clerical errors no later than 60 days after closing. Revisions Due to GFE Refunds: If the credit union is required to refund settlement costs to the consumer due to a GFE discrepancy, the credit union must deliver or place in the mail corrected disclosures that reflect the refund within the 60-day period. Waiver of Timing Requirements A member may waive or modify the timing requirements for disclosures to expedite closing, if the member determines that the extension of credit is needed to meet a bona fide personal financial emergency not for convenience purposes. The CFPB notes that waivers should be provided with the delivery of the Closing Disclosure and should be based on a justification contained in a written statement provided by the member and signed by all borrowers primarily liable on the legal obligation. Printed forms are prohibited. Settlement Agents A settlement agent is allowed to provide the Closing Disclosure to the borrower, as long as the settlement agent complies with all necessary requirements as if it were the creditor. The credit union and settlement agent must agree on a division of responsibilities regarding the delivery or the disclosures. For example, it may be agreed 7
that the credit union will provide the Closing Disclosure three business days before closing and the settlement agent will provide any corrected Closing Disclosures at closing. Currently, settlement agents are required to provide the HUD 1 under RESPA, while creditors are required to provide the revised Truth in Lending disclosure under TILA. Over the years there has been some uncertainty regarding the role of the settlement agent. Under the new rule, the creditor is responsible for delivering the Closing Disclosure form to the borrower, but may use settlement agents to provide the disclosure, as long as they comply with the final rule s requirements for the Closing Disclosure. The new rule is intended to allow for sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers. No Fees for Closing Disclosure Preparation No fee may be imposed on any person, as a part of the settlement costs or otherwise, by a creditor or by a servicer for the preparation or delivery of the Closing Disclosure. Special Information Booklet The credit union must deliver or place in the mail the Special Information booklet not later than three business days after the mortgage application is received. If the credit union denies the application before the end of the three-business-day period, the credit union is not required to send the booklet. Escrow Disclosure: Post-Consummation Escrow Cancellation The Dodd-Frank Act establishes that a creditor or servicer must provide disclosures when a consumer chooses, and provides written notice of the choice, to close his or her mortgage loan related escrow account. When Disclosure Not Required Creditors and servicers are not required to provide the borrower with the Post- Consummation Escrow Cancellation Disclosure when the mortgage loan for which an escrow account was established is terminated by, for example, repayment of the loan, refinancing, rescission or foreclosure. Timing of Disclosure 8
If the creditor or servicer cancels the escrow account at the borrower s request, the creditor or servicer must ensure that the borrower receives the disclosure no later than three business days before closure of the escrow account. If a creditor or servicer cancels the escrow account and the cancellation is not at the borrower s request, the creditor or servicer must ensure that the borrower receives the escrow cancellation disclosure no later than 30 business days before the closure of the escrow account. If the disclosures are not provided to the borrower in person, the borrower is considered to have received the disclosures three business days after they are delivered or placed in the mail. Content of Disclosure The disclosures must be in a reasonably understandable form and readily noticeable by the borrower. The Post-Consummation Escrow Cancellation form must include: Under the heading Escrow Closing Notice : a statement informing the borrower of the date on which the escrow account will be closed; a statement that an escrow account may also be called an impound or trust account; the reason why the escrow account will be closed; a statement that without an escrow account, the borrower must pay all property costs, such as taxes and homeowner s insurance, directly, possibly in one or two large payments a year. A table, titled Cost to you, that includes: an itemization of the amount of any fee the creditor or servicer imposes on the borrower for closing the escrow account labeled Escrow Closing Fee ; a statement that the fee is for closing the account. Under the reference In the future : A statement of the consequences if the borrower fails to pay property costs, including the actions that a State or local government may take if property taxes are not paid, and A statement of the actions the creditor or servicer may take if the borrower does not pay some or all property costs, such as adding amounts to the loan balance, adding an escrow account to the loan, or purchasing a property insurance policy on the borrower s behalf that may be more expensive and provide fewer benefits than a policy that the borrower could obtain directly. 9
A statement including a telephone number the borrower may use to request information about the escrow cancellation. A statement of whether the creditor or servicer offers the option of keeping the escrow account open, and, as applicable, a telephone number the borrower can use to request that the account be kept open. A statement of whether there is a cut-off date by which the borrower can request that the account be kept open. Record Retention 3 years: A creditor must retain evidence of compliance with the requirements for the new early disclosures ( 1026.19(e)) and new final disclosures ( 1026.19(f) - except for the Closing Disclosure) for three years after the later date of: closing, the date disclosures are required to be made, or the date the action is required to be taken. The CFPB clarifies that the creditor must retain evidence that it performed the required actions as well as made the required disclosures. For example, evidence that the creditor properly differentiated between affiliated and independent third party settlement service providers for determining a good faith estimate, or evidence that the creditor properly documented the reason for revisions, or evidence that the creditor properly calculated average costs. 5 years: The Closing Disclosures are an exception to the three-year record retention requirement. The Closing Disclosures, which include the settlement information, must be retained for five years after settlement, even after the credit union sells, transfers, or otherwise disposes of its interest in the loan. This is a change from the current Regulation X record retention requirements, which do not require creditors to maintain these documents if they dispose of their interest in the mortgage loan and do not service the loans. Electronic Records: The CFPB considered requiring creditors to keep records of the Loan Estimate and Closing Disclosure forms provided to consumers in an electronic, machine readable format to make it easier for regulators to monitor compliance. CUNA, along with many other state credit union associations and credit unions, strongly argued against the requirement for the machine readable format due to excessive compliance costs. As a result, the Bureau did not include these changes in the final rule, but continues to believe these ideas may have benefits for consumers and industry and intends to 10
continue studying the issue. After additional study, the Bureau may propose a new rule regarding electronic records. State Law Preemption State laws are preempted by the rule to the extent of their inconsistencies with the new integrated disclosure forms. States, creditors, and other interested parties are permitted to request a determination by the CFPB regarding such inconsistencies. If the Bureau determines that a State-required disclosure is inconsistent, creditors located in that State may not make disclosures using the inconsistent term or form, and will incur no liability under the State law for failure to use them unless the Bureau s determination is subsequently amended, rescinded, or determined invalid. # # # 11