With tweaks to an earlier proposal, the Consumer Financial Protection Bureau released a final rule on mortgage disclosures and issued two new forms to replace the existing disclosures required by the Real Estate Settlement Procedures Act and the Truth in Lending Act.
Creditors have until August 1, 2015, to begin using the new “Know Before You Owe” forms after more than 30 years of using the old disclosure forms. The rule applies to most closed-end consumer mortgages; home equity lines of credit and reverse mortgages are not covered. The new rule – which runs to 1,888 pages – was mandated by the Dodd-Frank Wall Street Reform Act, which required the CFPB to integrate and combine the existing RESPA and TILA disclosures.
The CFPB released preliminary disclosures for public comment in May 2011; the agency released additional prototypes over the following months and issued a proposed rule in July 2012.
Pursuant to the final rule, when it becomes effective in 2015, the three-page Loan Estimate will have to be provided to the consumer within three business days after a loan application is submitted. In the proposed rule, the CFPB wanted to change the definition of “business day” to include Saturdays. Based on feedback from industry members, the final rule instead allows a company-specific definition of “business day.” Under that definition, the three-day period will be based on the days that the given company’s offices are open to the public for conducting substantially all of its business.
Lenders may not charge any fees until after the Loan Estimate form has been provided and the consumer goes forward with the loan. The form combines requirements of several statutes, featuring disclosures from the current Truth in Lending (TIL) statement with some from the RESPA Good Faith Estimate, as well as additional disclosures required by the Dodd-Frank Act and the appraisal notice mandated by the Equal Credit Opportunity Act.
The borrower must receive the five-page Closing Disclosure at least three business days before the loan closes. If a “significant change” to the loan terms occurs after the Closing Disclosure is delivered, then a new Closing Disclosure must be given, and another three business days must elapse before the closing can occur. “Significant changes” are defined by the rule to mean only (i) a rate (APR) change of 1/8th of 1% or more (or 1/4th of 1% for loans with irregular payments or periods), (ii) a change in the product type, or (iii) addition of a prepayment penalty. The final rule has fewer such situations where an additional three-day waiting period will be required, compared to the proposed rule.
The CFPB provided detailed guidance to creditors for both forms, including a variety of samples for different mortgages, such as an interest-only adjustable rate, fixed-rate, balloon-payment, and negative amortization purchase loans, as well as a refinancing sample.
The agency made other tweaks to the rule as proposed last year. After pushback from the industry, the CFPB chose not to require “additional costs” to be added to the finance charge. Items like title-agent charges, credit life insurance premiums, voluntary debt cancellation fees, closing agent charges, and security interest charges all would have been included. Industry representatives successfully argued that including those items would have significantly raised APRs, increasing the number of loans considered to be “high-cost” and therefore limiting the availability of relying upon the safe harbor for Qualified Mortgages that are not “high-cost.”
The industry dodged another blow from the proposed rule, with the agency tossing a requirement that creditors maintain evidence of their compliance in an “electronic, machine readable format.” Under the final rule, records may be retained in paper or scanned forms.
Finally, industry efforts to provide a sufficient time period for lenders to come into compliance proved successful. With the release of the final rule in November 2013, a roughly 20-month implementation period will exist before the new forms must be used in August 2015.
To read the final rule, click here.
To see the Loan Estimate form, click here.
To see the Closing Disclosure form, click here.
Why it matters: Although there is substantial lead time until the effective date of August 1, 2015, there is immediate work to be done to prepare for this dramatic change. Forms and systems will have to be conformed to the new physical format. Some disclosure items are not on the old forms at all, and others are newly redefined. Systems will need to be modified to perform the new calculations. Banks, mortgage companies and other loan originators should start working with their vendors now to be prepared for the changes.