Posted on 31st Jul 2012 @ 11:58 AM

Almost 2 weeks ahead of its July 21 Dodd-Frank deadline, the CFPB released its proposal to integrate TILA and RESPA disclosures for closed-end mortgage loans. In a nod to industry concerns, the agency repeats throughout its preamble that it does not have to, and will not, finalize the integration proposal by January 2013 (except perhaps the two provisions with a September 7 comment date, see below).

Its intent is to coordinate this proposal with 6 other Dodd-Frank projects on its platter: (1) high-cost mortgage loans (currently, HOEPA or Section 32 loans), described below; (2) servicing requirements; (3) loan originator compensation; (4) appraisals for higher-risk mortgages; (5) ability to repay (including qualified mortgage) requirements, previously proposed; and (6) escrow account disclosures, also previously proposed – all 6 of which must be finalized by January 21, 2013 or the Dodd-Frank requirements will take effect on that day. The CFPB urged the public to review the various projects together with an eye to synchronizing requirements.

The integration proposal is finely honed, the result of more than a year’s effort to bounce proposed forms off consumers and industry participants, but should not be viewed as the final word. Comments on two aspects are due September 7 – application of the rule to loans previously exempted from RESPA or TILA, and the remarkable broadening of the term “finance charge” to include most loan costs. The general comment period for other matters ends November 6.

The following home loans will not be subject to the disclosure integration: (1) reverse mortgages; (2) home-equity lines of credit; (3) chattel-dwelling loans; and (4) loans made by creditors who make 5 or fewer otherwise covered loans per year. Until the CFPB re-works the rules for the first two categories and for other closed-end disclosures generally, these loans will remain subject to the existing provisions of Regulations X and Z. As for the set of rules contained in Title XIV of Dodd-Frank that call for implementation January 21, 2013 if regulations have not been adopted, the CFPB plans to issue a rule before that date granting temporary exemptions.

Goodbye to lender flexibility in determining when an application is received. The proposal would delete the seventh element from the definition adopted by HUD: “any other information deemed necessary by the loan originator.” In the CFPB’s view, this catch-all element permits creditors to delay providing consumers with a Good Faith Estimate (GFE, to be renamed the “Loan Estimate”). Creditors will be allowed to gather their additional information “prior to collecting the six pieces of information specified [in Regulation X],” not after, says the CFPB.

A Loan Estimate form will replace the GFE and early TIL, while a Closing Disclosure will supplant the HUD-1/1A and final TIL. The Special Information Booklet will still be required. As in the past, the Loan Estimate must be given by the lender or mortgage broker within 3 business days after application and not later than the seventh business day before loan consummation. The Closing Disclosure will be due at least 3 business days before closing. In general, the limited changes permitted after a Closing Disclosure has been given would require a new form and a new 3-day waiting period. For both forms, lenders are on the hook for accuracy.

What’s being added to the Loan Estimate? Things like sale price (or estimated property value), loan purpose and type, product, CFPB web site reference, details about mortgage insurance premiums and property taxes, financed closing costs, downpayment, deposit, seller credits, a 5-year comparison, “Total Interest Percentage,” and aggregate closing costs. What’s being deleted? Finance charge, amount financed, total of payments, demand feature, ARM booklet, security interest, contract reference, instructions and tradeoff table, and a few more items.

In its quest to avoid information overload, the CFPB basically crammed 5 (7 if typical appraisal and servicing disclosures are counted) pages of TILA/RESPA data into the 3-page Loan Estimate (not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service). The CFPB threw in the towel by leaving the Closing Disclosure at 5 pages. So much for any 5-year old suggestion that one page is more than enough. Curiously, a year and a half of testing involved only 92 consumer and 22 industry participants. One must wonder if anyone read the 27,000 public comments posted on the CFPB website.

Not Just Disclosure Integration

The CFPB integration proposal goes beyond integration of disclosures to the reconciliation of other differences between Regulations X and Z. According to the CFPB, “the integrated disclosure mandate requires the Bureau to reconcile what Congress did not.” The proposal would redefine the term “application,” alter the coverage of the regulations, and change the timing and responsibility rules for providing closing disclosures. In addition, the CFPB proposes to:

• Until the Loan Estimate has been received, prohibit the collection of any fees other than a credit report fee as provided by Reg. X instead of the broader “credit history” fee of Reg. Z.

• Prohibit the collection of any fees other than a credit report fee until the consumer has indicated “an intent to proceed with the loan,” as specified by Reg. X amendments that took effect in 2010.

• Require the credit report fee to be accurately described as a credit report fee, not as an “application fee.”

• Allow preliminary estimates only if they are clearly labeled as not the Loan Estimate.

• Continue requiring the Reg. X Special Information Booklet, perhaps incorporating material from the Reg. Z ARM (CHARM) booklet.

• Prohibit a creditor from requiring a consumer to verify any information the consumer provided with the application, as proscribed by Reg. X effective in 2010.

• Incorporate the disclosure tolerances of Reg. X implemented in 2010, modified to extend the zero tolerance to fees paid affiliate providers and providers for whom a consumer cannot shop.

• Adjust the Reg. X limitations on revised Loan Estimates, including the definition of “changed circumstances.”

• Allow waiver of waiting periods in the event of bona fide personal emergencies.

• Permit average pricing.

• Require relevant Closing Disclosures to the seller if one is involved in a transaction.

• Require close communication and cooperation to ensure accurate disclosure, both with mortgage brokers and settlement service providers.

• Prohibit providing disclosures of estimated and actual costs at the same time (such as a revised Loan Estimate and a Closing Disclosure).

• Require the retention of evidence of compliance (electronic is fine) for 3 years for Loan Estimates and 5 years for Closing Disclosures.

• Require states with existing exemptions from TILA (Maine, Connecticut, Massachusetts, Oklahoma and Wyoming) to conform their laws if they wish to retain their exemptions.

The CFPB offered a small carrot to community banks, by suggesting in several instances that different rules might be appropriate for smaller institutions, including a longer implementation period. Of course, small banks that sell their loans to big banks – despite the continuing missteps of their larger brethren – would probably be required by their big partners to comply with the big boy rules … or perhaps it’s time to cut the cord.