The Consumer Financial Protection Bureau (“CFPB”) recently issued or perhaps had to issue a proposed amendment to the “Know Before You Owe mortgage disclosure rule,” also known as the “TILA-RESPA Integrated Disclosure” rule, or “TRID” for short, to move the effective date for implementation to October 3, 2015.1 The original effective date was August 1, 2015. Lenders had been pushing for a delay, saying they needed more time to prepare for compliance with the new requirements.2 Also, based on some reports I’ve seen, the CFPB’s request for delay may stem from it having apparently missed a filing deadline under the Congressional Review Act which requires that Congress be notified at least 60 days before a regulation becomes effective.3 In any event, mortgage lenders were able to heave a collective sigh of relief in response to the announced delay, at least for the moment.
We’re going to look more closely at what TRID is, including its purpose and requirements. We’ll do this in two parts. For starters, this particular posting will take a look at the origins of the Truth in Lending Act and the Real Estate Settlement Procedures Act, commonly referred to as “TILA” and “RESPA” respectively, and their places in the credit application and mortgage closing process.
In order to appreciate why the issue of new mortgage disclosure rules is such a big deal, here’s some quick background on mortgage origination numbers: For the past five years, mortgage originations have exceeded $1 Trillion each year. In the pre-great recession days, mortgage originations were routinely over $2 Trillion per year, on a few occasions pushing past the $1 Trillion mark per quarter.4 2014 was a relatively slow year as mortgage originations go (though still exceeding $1 Trillion mark for the year).5 However, things came roaring back in the first quarter of 2015. According to a June 29, 2015 HousingWire article, “[m]ortgage originations are booming, increasing nearly 75% from last year…Total mortgage origination balances hit $466 billion in the first quarter, a 74.4% increase from the same time a year ago.”6 Amy Crews Cutts, Chief Economist at Equifax, stated “[t]he drop in mortgage rates that began in the fourth quarter of last year kicked off a refinance boomlet that accelerated in the first quarter, as rates fell further, averaging just 3.7% for the first three months of this year.”7
OK, so we know the total dollar amounts for mortgage originations, year in and year out, have historically been in the stratosphere, even in down years. Now let’s talk about another number—the number of mortgage originations—or, put another way, the number of mortgage loans that have been made each year (as opposed to the dollar amounts of these loans). “The number of first mortgages originated in the first three months of the year was 1.78 million, a 54.9% increase over the same time a year ago and 13.6% higher than in the fourth quarter of 2014.”8 Keep in mind that’s just the number of “first mortgages” for the first quarter only. For an idea of the sheer number of “total” mortgage originations for each year over the past ten years, a good place to start is last November’s Federal Reserve Bulletin addressing The Home Mortgage Disclosure Act.9 That might not make for the most thrilling reading experience but, for the purpose of this particular blog entry, I’m especially interested in the number of mortgage originations (as opposed to the dollar amounts) because the number of mortgage originations correlates with the number of mortgage “closings” (though the generic term “closings” in the residential context covers home purchases, refinances, and equity lines).
Here’s what I’m getting at with my focus on mortgage origination numbers: There are millions of mortgage closings each year in which current disclosure rules under TILA and RESPA must be complied with. Those disclosure rules are about to change with the implementation of TRID in October. When you’re talking about changing the requirements for how to comply with these disclosure rules in millions of future closing transactions (including changing the documents needed to satisfy compliance with these requirements), that’s a big deal.
The CFPB announced the new, finalized forms for TRID on November 20, 2013, noting that the effective date would be August, 2015.10 This was already big news in the mortgage industry then, even knowing the effective date was almost two years away. David Stevens, President and CEO of the Mortgage Bankers Association, made the following statement on November 20, 2013 in response to the CFPB’s announcement: “We are pleased that they recognized the enormity of change being implemented in the mortgage systems on January 10. The August 2015 deadline is a clear recognition by the CFPB of how significant the change is and the time needed to implement this new rule. We have to yet to fully review all aspects of this rule and will provide a deeper analysis once we review the specific details.”11Does this mean that everyone in the mortgage industry has now had enough time to gear up for and get ready for the implementation of TRID now that we’re in the summer of 2015? This question might elicit a sigh (or some world weary chuckles) on the part of mortgage industry insiders. According to a HousingWire article from June, the requirements relating to the two new forms “have thrown the mortgage industry into a frenzy as they try to comply by the deadline.”12 Simply put, a lot of people aren’t ready.
OK, back to a point I made a minute ago: There are millions of mortgage closings each year in which current disclosure rules under TILA and RESPA must be complied with, and those disclosure rules--which must be complied with--are about to change with the implementation of TRID this coming October. To be clear, TILA and RESPA aren’t being replaced by TRID; rather, TRID is simply the new framework of requirements for compliance with TILA and RESPA in the mortgage closing context. So with that in mind, let’s take a closer look at TILA and RESPA since both are here to stay.
Let’s start with TILA since TILA was enacted before RESPA. Prior to TILA’s passage, many creditors did not disclose the annual percentage rate on consumer loans, raising concerns of widespread, uninformed use of credit by consumers.13 Concerned with what he perceived as the lack of public knowledge regarding the cost of credit—particularly during his career as a consumer advisor to a credit industry group--Illinois Senator Paul Douglas was determined to create and pass a bill that increased consumer awareness by mandating disclosure of the true cost of credit.14 Unbeknownst to Senator Douglas at the time, the difficulty of achieving this goal would be comparable to taking on Mt. Everest. A quick-and-dirty disclosure bill was drafted to propose the idea to Congress, and it was introduced to the Senate in January of 1960 under the name “Consumer Credit Labeling Bill”.15 The Bill immediately faced opposition from both the banking industry and Douglas’s own subcommittee16, but Douglas was not deterred.17 He faithfully introduced a revised version of the Bill to nearly every senatorial session from his election to the Senate until his defeat, but the Bill never made it past the full Banking and Currency Committee without being voted down.18 Finally, after Douglas’s successor, William Proxmire, reintroduced a conciliatory version of the Bill under a new name, it survived the vote of both the Committee and the full Senate.19 Very few of the provisions included in the Consumer Credit Labeling Bill survived its seven-and-a-half year long journey through the Senate, except for the determination of which agency would administer the statute.20 Douglas had originally chosen the Federal Reserve Board (instead of the Federal Trade Commission, which was perhaps a more suitable choice) in order to keep the Bill under the jurisdiction of his own subcommittee.21Interestingly enough, this decision was retained through the final revisions, where a joint committee combined the Senate and House versions of the now called Truth-in-Lending Bill.22 The ultimate version of the Bill was signed into law on May 29th, 196823 and is currently codified at 15 U.S.C. §§ 1601 et seq. The Act was implemented by the Federal Reserve Board through Regulation Z (Reg. Z), which is codified at 12 C.F.R. Pt. 226 and became effective on July 1, 1969.24 You have probably heard folks use the term “Reg. Z” as a shorthand reference for TILA – this is where it comes from.
Extending Douglas’s original intent behind TILA, the Federal Reserve Board expressed that “[a] principal purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also includes substantive protections. For example, the act and regulation give consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling. Regulation Z also prohibits specific acts and practices in connection with an extension of credit secured by a consumer's dwelling.”25 Also, Reg. Z. “prohibits certain practices relating to payments made to compensate mortgage brokers and other loan originators. The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators.”26 TILA and Reg. Z have each been amended frequently in the wake of lending industry changes, purportedly with an eye to providing more consumer protections.27
Now for RESPA: Increasing congressional worry that consumers were being duped and overcharged for settlement services for residential real estate mortgage loan closings prompted Congress to direct the Department of Housing and Urban Development (HUD) and the Department of Veteran’s Affairs (VA) to conduct a joint study to research settlement costs for consumers and recommend ways in which those costs could be lowered.28 The 1972 report from the joint study confirmed congressional concerns: providers of various services necessary for mortgage loan closings were engaging in a system of referrals and kickbacks, which drove up the cost of the closing for the consumer.29 Rather than shopping around for the best prices, “borrowers were referred to lenders, title insurance companies and other settlement service providers by real estate brokers, closing lawyers and other professionals who had no economic incentives to minimize costs. . .”30 The report recommended that Congress grant HUD and VA the power to determine a maximum amount that could be charged in the settlement process and to mandate uniform settlement statements.31 Instead, Congress decided to create and pass a statute with the intent to give consumers more advance and transparent disclosure of settlement costs and to eliminate kickback and referral fees for federally related mortgage loans.32 With considerably less struggle than what surrounded the passage of TILA, Congress responded by passing RESPA which became effective on June 20th, 1975 and is codified at 12 U.S.C. §§ 2601-2617.33 HUD, the most likely candidate to enforce the Act, then promulgated Regulation X, which is now codified at 12 U.S.C. Pt. 1024, implementing RESPA.34 You have probably heard folks use the term “Reg. X ” as a shorthand reference for RESPA – this is where it comes from. Much like TILA and Reg. Z, RESPA and Reg. X have been continuously amended to keep up with economic and lending industry trends.35
Both TILA and RESPA were originally enacted to promote clarity and simplicity in consumer lending, but this goal was seemingly unachievable with separate agencies responsible for enforcement of each Act. For example, under each Act, both the Federal Reserve Board and HUD were responsible for developing their own disclosure forms that must be given to consumers when they are applying for a mortgage and when they are closing on their loan.36 As one can imagine, the information contained in one form can both overlap and contradict the other, resulting in a consumer experience that is neither clear nor simple. 37
Now there’s the Dodd-Frank Act. As noted in my maiden blog entry relating to the CFPB (11/10/2014), Dodd-Frank created the CFPB, centralizing consumer financial protection enforcement into one agency.38 Since its creation, the CFPB has taken steps to attempt to streamline aspects of the consumer lending experience. Among other things, Dodd-Frank mandated that all mortgage disclosures must be integrated under TILA and RESPA.39 As noted above, the CFBP finalized the Integrated Disclosures Rule, or TRID, which combines the requirements of TILA and RESPA into one form that must be given to the consumer at least three days after a loan application is submitted (the Loan Estimate) and one form that must be given to the consumer three business days before closing on the loan (Closing Disclosure).40 We’ll take a look at the specifics of the forms in my next blog posting on TRID. For now, for those in the mortgage industry, there are two additional months of breathing room.