Legal Update August 18, 2016 “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications With only a few days to spare to meet its July 2016 target release date, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a Notice of Proposed Rulemaking (“NPRM”) on July 29, 2016, proposing a number of amendments to its TILA-RESPA Integrated Disclosure rule (“TRID” or the “Rule”). Since the CFPB indicated in April 2016 that it would engage in formal rulemaking to provide “greater certainty and clarity” to the mortgage industry under TRID, the industry has been anxiously awaiting the proposal to see which of the many issues the CFPB would address. While it may not touch upon every issue the mortgage lending industry has raised, the NPRM is a step in the right direction and demonstrates that the CFPB understands some of the challenges market participants have faced. That said, the NPRM leaves significant issues unaddressed, including a lender’s ability to cure errors and the resulting impact on liability as well as the use of a particular formula to disclose title insurance premiums where a simultaneous discount applies. The CFPB calls these issues “policy” decisions on which the industry will no doubt continue to push the CFPB to provide a regulatory fix. Until then, the industry is working through the 293-page proposal and preparing public comments that must be submitted by October 18, 2016. This Legal Update highlights and summarizes the significant proposals in the NPRM, which the CFPB notes “memorialize certain past informal guidance, whether issued through webinar, compliance guide, or otherwise, and make additional clarifications and technical amendments.”1 These include proposals to address the infamous “black hole,” additional Official Interpretation guidance to provide instruction on disclosing construction-topermanent mortgage loans, tolerances for the Total of Payments disclosure, regulatory amendments to make loans secured by cooperatives expressly subject to the Rule, a revised exemption for certain subordinate-lien housing finance loans, and several other revisions that provide the regulatory certainty on issues that had otherwise been ambiguous under the Rule. Before getting into these details, we emphasize a few proposals that would have an immediate impact on lenders. • When closings are delayed and changes happen in the transaction, lenders may be required to absorb increases in settlement charges, like a rate lock extension fee, if a revised Closing Disclosure cannot be used to reset tolerances. The NPRM would include revised Commentary to make clear that a lender can revise a Closing Disclosure based on changed circumstances at any time after the disclosure has been provided and use that disclosure to reset tolerances. This would eliminate the “black hole” that currently 2 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications restricts a lender’s ability to increase charges after a Closing Disclosure has been provided. • While the NPRM does not address a lender’s ability to cure errors on the disclosures, the NPRM proposes to make existing tolerances for disclosures affected by the finance charge applicable to the Total of Payments disclosure. If that change is made, minor errors in calculating the Total of Payments disclosure should not raise liability concerns if within tolerance. • The threat of borrower refunds due to increased fees in the zero tolerance category would be expanded under the NPRM. In addition to origination fees, transfer taxes and fees for services for which the borrower cannot shop, the NPRM would include fees in the zero tolerance category if the borrower can shop for services and the lender does not provide the borrower with the required written list of settlement service providers. • Certain of the calculations written into TRID and the Calculating Cash to Close table would be modified, allowing this table to more accurately reflect a figure for cash needed by the consumer to close the mortgage transaction. • Loan Estimate and Closing Disclosure forms would be required for all closed-end consumer credit transactions secured by cooperatives, regardless of whether state law treats cooperatives as real estate or personal property. Closing the “Black Hole” Lenders should be happy about the proposed change to the “black hole,” which would remove a current limitation on a lender’s ability to reset tolerances after it has provided a Closing Disclosure to the consumer. By way of background, an estimated closing cost disclosed on the Loan Estimate is considered to have been made in “good faith” if the charge paid by or imposed on the consumer does not deviate from the charge disclosed on the Closing Disclosure beyond the specified permitted tolerances.2 For purposes of determining “good faith” and measuring tolerances, a creditor is permitted to use a revised estimate, in part, if the revision is due to a valid changed circumstance, or if the borrower requests the revision.3 When the creditor intends to use a revised Loan Estimate to establish new good-faith tolerance baselines, the creditor must provide the revised Loan Estimate to the consumer within three business days after receiving information sufficient to establish that the changed circumstance exists,4 with the caveat that the creditor may not provide a revised Loan Estimate on or after the day on which it provides the Closing Disclosure to the consumer.5 The creditor must also ensure that the consumer receives the revised Loan Estimate no later than four business days prior to consummation.6 When the revised Loan Estimate is not provided to the consumer in person, the Rule considers the consumer to have received the disclosure three business days after the creditor delivers or places the document in the mail.7 Issues arise under the current Rule when a creditor receives information that a changed circumstance has occurred after it has issued the Closing Disclosure, such that it is no longer able to issue a revised Loan Estimate. The Rule’s Official Interpretations (the “Commentary”) state that “[i]f…there are less than four business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation, creditors comply with the requirements of § 1026.19(e)(4) if the revised disclosures are reflected in the [Closing Disclosure].”8 In other words, if a changed circumstance or borrowerrequested change occurs and there are less than four business days between the time the revised Loan Estimate is required to be provided (three business days after the changed circumstance or 3 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications borrower’s request) and consummation, a creditor may issue a Closing Disclosure and use those figures to determine good faith. Similarly, based on guidance provided by the CFPB interpreting this Commentary language, if the event triggering the revised disclosure occurs after the initial Closing Disclosure was provided, the creditor may issue a revised Closing Disclosure to reset the baseline for tolerances if there are less than four business days between the time the revised disclosure is required to be provided and consummation. Unfortunately, this exception that permits the use of a revised estimate on a Closing Disclosure has proven to be too limited and results in the so-called “black hole” where the creditor cannot re-baseline its estimates for purposes of the tolerance calculations. Based on the Commentary language above, when there are four or more business days between the time the revised version of the disclosure is required to be provided (i.e., three business days following knowledge of a changed circumstance) and consummation, the creditor has no ability to reset tolerances if the initial Closing Disclosure has already been provided to the consumer. Stated differently, the creditor has no ability to reset tolerances when it already has provided an initial Closing Disclosure and a changed circumstance occurs more than six business days prior to the anticipated consummation date. To the extent a changed circumstance occurs in the “black hole” and increases charges subject to tolerances, creditors could confront a claim for a refund of the excess charges. In its proposal, the CFPB seeks to close the “black hole” by permitting a creditor to rebaseline its estimates using a Closing Disclosure at any time after the initial Closing Disclosure is provided, as long as the revision is provided within the applicable timeframe (three business days after the creditor receives information sufficient to establish that the changed circumstance exists).9 To this end, the CFPB’s proposal would include the following in the Commentary to Section 1026.19(e)(4)(ii): If there are fewer than four business days between the time the revised version of the disclosures is required to be provided under § 1026.19(e)(4)(i) and consummation or the Closing Disclosure required by § 1026.19(f)(1) has already been provided to the consumer, creditors comply with the requirements of § 1026.19(e)(4) (to provide a revised estimate under § 1026.19(e)(3)(iv) for the purpose of determining good faith under § 1026.19(e)(3)(i) and (ii)) if the revised disclosures are reflected in the corrected disclosures provided under § 1026.19(f)(2)(i) or (2)(ii), subject to the other requirements of § 1026.19(e)(4)(i).10 Pursuant to this proposed Comment, if a creditor provided the Closing Disclosure to the consumer, and a changed circumstance occurs, the creditor could provide a revised Closing Disclosure to the consumer reflecting updated estimates and resetting tolerances, as long as that revised disclosure is provided within three business days of the triggering event. This is a significant and welcome proposed amendment for lenders because it would remove the risk of being required to provide tolerance credits as the result of events largely out of their control. Construction and Construction-toPermanent Loans The CFPB’s proposal includes several clarifications and amendments concerning construction loans and construction-topermanent loans, which have proven difficult and confusing to disclose under the current regulations. Under the Rule, when a multipleadvance construction loan may be permanently financed by the same creditor, the creditor may treat the construction phase and the permanent phase as either one transaction or more than one transaction.11 Since a construction loan that may be permanently financed has two distinct 4 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications phases, a creditor may provide the consumer either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for the two phases.12 The unique aspects of construction-topermanent loans, including the two phases of financing and multiple advances, have caused confusion in the industry under TRID’s disclosure requirements. Although the CFPB issued a construction loan factsheet in January 2016, and held a webinar on construction lending on March 1, 2016, many questions remained concerning construction-topermanent lending. The NPRM attempts to address several of the issues, including the allocation of costs between the two financing phases, the meaning of the “may be permanently financed by the same creditor” condition in the Rule, and the optional disclosure instructions in Appendix D of Regulation Z. These, too, are welcome clarifications for lenders. ALLOCATION OF COSTS When a creditor relies on Section 1026.17(c)(6)(ii) to disclose the construction-topermanent loan as multiple transactions, buyers points and similar amounts imposed on the consumer must be allocated between the two transactions for purposes of calculating disclosures.13 Currently, the creditor has flexibility in how such amounts are allocated between the transactions, subject to the restriction that the amounts are not taken into account more than once.14 In certain circumstances, however, it can be difficult to know for certain how to allocate these costs without running afoul of the prohibition on dividing a loan into multiple transactions to avoid high-cost mortgage restrictions. To provide more certainty, the CFPB proposal would clarify the proper allocation of points and similar amounts by adding a “but for” test to the Commentary.15 The revised Commentary would explain that the creditor must allocate amounts to the construction phase if such amount would not be imposed on the consumer “but for” the construction financing.16 All other amounts would be allocated to the permanent financing, which includes all amounts that would not be imposed “but for” the permanent financing, and all amounts that are not imposed solely because of the construction financing.17 For example, if a creditor charges an origination fee for a construction-only loan but charges a greater origination fee for a construction-to-permanent loan, the difference between the two fees would be allocated to the permanent phase.18 “MAY BE PERMANENTLY FINANCED BY THE SAME CREDITOR” As stated above, a creditor may treat a construction-to-permanent loan as one transaction or more than one transaction when the multiple-advance loan to finance the construction “may be permanently financed by the same creditor.”19 The Rule and Commentary do not currently define this phrase, and so the CFPB would add a new Comment to Section 1026.17(c)(6) that provides guidance regarding the meaning of “may be permanently financed by the same creditor.”20 Under the NPRM, a loan to finance the construction “may be permanently financed by the same creditor” if the creditor generally makes both construction and permanent financing available to qualified consumers, unless a consumer expressly indicates to the creditor that he or she will not obtain the permanent financing from the creditor.21 Thus, the “may be permanently financed by the same creditor” condition would be met in all situations other than where the permanent financing is not available at all from the creditor (i.e., the creditor does not offer permanent financing) or the consumer expressly informs the creditor that he or she will not be obtaining the permanent financing from the creditor. 5 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications APPENDIX D Appendix D provides creditors with optional instructions concerning the disclosure of construction-to-permanent loans when the actual schedule of advances is not known at consummation.22 Appendix D is divided into two parts — (i) if the construction phase is separately disclosed; and (ii) if the construction and permanent phases are disclosed as one transaction.23 For each part, Appendix D currently provides methods for calculating and determining the estimated interest, estimated APR, repayment schedule and amount financed.24 According to the CFPB, creditors have experienced difficulty making the disclosures under the Rule for construction financing because of unique characteristics that differ from a typical mortgage loan.25 To alleviate some of the uncertainty, the CFPB seeks to revise the Commentary to Appendix D and provide additional explanations for the disclosure of construction-to-permanent loans, including guidance regarding the disclosure of the loan term, product, interest rate, initial periodic payment, increase in periodic payment, projected payments table, construction costs, and construction loan inspection and handling fees.26 For example, the proposed Comment would clarify that if the creditor discloses the construction and permanent financing as a single transaction, the disclosed loan term should be the total combined term of the construction phase and the permanent phase.27 However, if the construction phase and permanent phase are disclosed as separate transactions, the loan term of the permanent financing would be counted from the date that interest for the first scheduled periodic payment of the permanent financing begins to accrue (regardless of when the permanent phase is disclosed).28 CONSTRUCTION LOAN INSPECTION AND HANDLING FEES Sections 1026.37(f) and 1026.38(f) require the disclosure of all loan costs associated with the transaction. Construction loan inspection and handling fees are loan costs associated with the construction transaction for purposes of these sections.29 The NPRM would clarify that if the fees are collected at or before consummation, the fees should be disclosed in the loan costs table on the Loan Estimate and Closing Disclosure.30 If the construction loan inspection and handling fees are collected after consummation, however, the fees would instead be disclosed in a separate addendum to the Loan Estimate and Closing Disclosure under the heading “Inspection and Handling Fees Collected After Closing.”31 Cooperatives Loan Estimate and Closing Disclosure forms are required for all closed-end consumer credit transactions secured by real property.32 With no definition of “real property” in Regulation Z, a lender must defer to state law to determine what constitutes real property.33 Generally, that determination is straightforward, unless the property to be purchased or refinanced is a cooperative unit. Some states treat ownership of a share in a cooperative as real property, while other states deem it personal property. Still other states deem a cooperative unit to be real property for certain purposes and personal property for others. As a result, lenders have been left to determine whether they would use the Loan Estimate and Closing Disclosure forms in connection with mortgage loans secured by cooperative units, which could result in inconsistent use of the disclosure forms for these loans.34 To remove all uncertainty related to cooperatives, the NPRM proposes to require the provision of the TRID disclosures in all closed- 6 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications end consumer credit transactions secured by cooperative units, regardless of whether state law classifies the interests as real or personal property.35 Lenders will be thankful for this much-needed amendment. Written List of Service Providers While the CFPB has indicated the NPRM generally is intended to contain only minor modifications and clarifications to the exiting Rule, the written list of settlement service providers (“WLSP”) is one area where the CFPB has proposed a change that appears to represent a policy shift related to consumer shopping and tolerance categories. On the Loan Estimate, a creditor must identify the settlement services for which the consumer is permitted to shop, which requires the creditor to disclose an itemization of each amount the consumer will pay for such settlement services.36 A creditor permits a consumer to shop for a settlement service if the creditor allows the consumer to select the provider for the settlement service, subject to reasonable requirements.37 When the creditor permits the consumer to shop for a settlement service, the creditor must provide the consumer with a WLSP identifying at least one available provider of the settlement service and stating that the consumer is not required to choose the provider on the list and may select a different provider for the service.38 The settlement service providers identified on the WLSP must correspond to the settlement services for which the consumer may shop that are disclosed on the Loan Estimate pursuant to section 1026.37(f)(3).39 TOLERANCES Currently, fees paid for settlement services that the creditor permits the consumer to shop for will fall into one of two tolerance categories: (i) fees that may increase by 10 percent in the aggregate (10 percent tolerance category);40 or (ii) fees that may increase by any amount (no tolerance category).41 Fees paid for settlement services fall under the 10 percent tolerance category if the creditor permitted the consumer to shop for the service provider and disclosed that the consumer may do so, but the consumer either selected the provider that the creditor disclosed on the WLSP or does not select a provider at all.42 If, however, the consumer chooses a provider that is not on the WLSP, then the fee will not be subject to any tolerance limitations.43 Finally, if the creditor permits the consumer to shop for settlement services, but fails to provide the WLSP or provides a noncompliant WLSP, then fees for such services will be subject to the 10 percent tolerance category, regardless of the provider ultimately selected by the consumer.44 In the NPRM, the CFPB proposes to revise the Commentary regarding the WLSP and tolerances to align with its belief that a creditor did not permit a consumer to shop for a settlement service if the creditor failed to provide a WLSP in compliance with the regulations.45 To this end, the CFPB would revise Comment 2 to Section 1026.19(e)(3)(iii) to reflect that good faith is determined under the zero tolerance category if the creditor fails to provide the WLSP or provides a noncompliant WLSP, regardless of the service provider selected by the consumer.46 Based on this revision, the CFPB is now taking the view that a consumer was not permitted to shop for settlement services if he or she never received the WLSP or received a noncompliant WLSP. This appears to be the case despite the fact that the Loan Estimate reflects that the consumer was able to shop for certain services and the consumer may, in fact, have shopped for a settlement service provider. Nevertheless, this new zero tolerance proposal reinforces the CFPB’s view of the WLSP as an important part of the Loan Estimate. We anticipate this issue to be the subject of intense comments. 7 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications IDENTIFICATION OF SETTLEMENT SERVICE PROVIDERS The extent of the listing of settlement services on the WLSP has been a source of confusion for many creditors because the existing Rule and Commentary do not clearly explain whether creditors must itemize each individual settlement service the consumer may shop for, or whether creditors may combine related settlement services on the WLSP if the same provider offers those services. For example, if a creditor itemizes four title-related services as services the consumer can shop for on the Loan Estimate, it is unclear whether the creditor must itemize all four title-related services on the WLSP along with a provider for those services, or whether the creditor may combine all four title-related services into a single disclosed title service with a corresponding provider (assuming that the disclosed provider can cover all four services). The CFPB addresses this issue in the NPRM and proposes to clarify that creditors must specifically identify each settlement service the consumer is permitted to shop for on the WLSP unless, based on the best information reasonably available to the creditor at the time of disclosure, the creditor knows that the settlement service is provided as part of a package or combination of services offered by a single service provider, and all such services in the package are services for which the consumer is permitted to shop.47 Using the example above, the proposal would require the creditor to itemize the four title-related services on the WLSP unless it knows at the time it provides the WLSP that the provider of title-related services offers each of the four individual services as a package or combination of services. In that case, the proposal would allow the creditor to disclose the bundled services on the WLSP. This proposal should allow creditors to simplify the title insurance disclosure on the WLSP. USE OF THE CFPB’S MODEL WRITTEN LIST OF SERVICE PROVIDERS FORM The Commentary to Section 1026.19(e)(1)(vi) directs creditors to Form H-27 for a model WLSP.48 According to the CFPB, there has been some uncertainty as to whether compliance with the WLSP provisions requires use of the CFPB’s model Form H-27(A),49 as the use of other CFPB model forms is mandatory in some circumstances (e.g., with respect to Form H-24 for the Loan Estimate and Form H-25 for the Closing Disclosure50). The CFPB would clarify that the use of Form H-27(A) is not required, but creditors that use a compliant model Form H-27(A) will be deemed to comply with the WLSP requirements.51 Tolerances for the Total of Payments Disclosure Now that creditors have been closing loans with the Loan Estimate and Closing Disclosure for more than 10 months and working through errors with secondary market investors, the industry has repeatedly requested formal guidance on disclosure cures. Unfortunately, the CFPB is declining to address cures with this NPRM, but it does provide some relief regarding errors related to the Total of Payments disclosure. For certain credit transactions that are secured by real property, the Truth in Lending Act (“TILA”) sets forth the tolerances for accuracy for disclosure of “the finance charge and other disclosures affected by any finance charge.”52 TILA states that “the finance charge and other disclosures affected by any finance charge” will be considered accurate other than for rescission purposes (for which separate tolerances apply),53 if the amount disclosed as the finance charge: (A) does not vary from the actual finance charge by more than $100; or (B) is greater than the amount required to be disclosed.54 TRID implements these tolerance requirements explicitly.55 8 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications TILA also requires a creditor to disclose “[t]he sum of the amount financed and the finance charge,” and to title that disclosure “total of payments.”56 Prior to TRID, under Regulation Z, the Total of Payments disclosure required a creditor to disclose the sum of the amount financed and the finance charge.57 Because this disclosure was “affected by” the finance charge, it was subject to the tolerances discussed above. The Rule altered how the Total of Payments disclosure was calculated. TRID currently states that the disclosure requires a creditor to disclose the sum of the “principal, interest, mortgage insurance, and loan costs.”58 This has caused confusion in the industry as to whether the revised Total of Payments disclosure is still subject to the finance charge tolerances. Loan costs, which are now required to be part of the Total of Payments disclosure, may or may not be part of the finance charge, and components of the finance charge are now not included in the Total of Payments disclosure if those components are not interest, loan costs or included in the principal amount of the loan. Accordingly, the Total of Payments disclosure is arguably not a disclosure “affected by any finance charge,” and so is not subject to the finance charge tolerances. And, because the Total of Payments disclosure is a material disclosure for purposes of liability under TILA,59 any misdisclosure is a significant concern for creditors and secondary market investors. The NPRM seeks to clarify that the finance charge tolerances also apply to the Total of Payments disclosure.60 The CFPB would add to section 1026.38(o)(1) (“total of payments”) the tolerances that are currently laid out in section 1026.38(o)(2) (“finance charge”).61 Moreover, the CFPB proposes to amend section 1026.23 (“right of rescission”) to explicitly include the tolerances that would apply to the Total of Payments disclosure for purposes of the right to rescission.62 The CFPB explains that when it enacted TRID, it never intended to remove the tolerances for the Total of Payments disclosure.63 The CFPB is making right on that intention, which would be a positive step in addressing the impact of minor misdisclosures of the Total of Payments in the secondary market. Housing Assistance Lending As part of the revisions to the Good Faith Estimate (“GFE”) and HUD-1 Settlement Statement (“HUD-1”) in 2010, the US Department of Housing and Urban Development (“HUD”) created an exception to those disclosure requirements for certain second-lien, homebuyer assistance loans. The CFPB adopted the same exception in the Rule as it relates to the Loan Estimate and Closing Disclosure.64 However, in the months since the Rule took effect, Housing Finance Agencies (“HFA”), which are often the originators of these loans, have reported that many homebuyer assistance loans were falling outside the exception because typical fees incurred as part of the loans exceed the limit established in the exception. Specifically, one criterion of the exception to the Loan Estimate and Closing Disclosure in section 1026.3(h) is that the total costs payable by the consumer at consummation must be less than 1 percent of the amount of credit extended and include no costs other than fees for recordation, application and housing counseling.65 The CFPB recognizes that these loans are often unable to meet the 1 percent requirement because of the relatively small size of these loans compared to the fees for recordation charged by State and local governments.66 For example, recording fees of $36 (which one HFA reports as typical in one state) is more than the 1-percent limitation for a $2,500 loan. The Bureau cited similar problems regarding taxes associated with recording.67 As noted above, if these transactions do not meet the criteria in section 1026.3(h), the creditor typically has to provide the GFE and HUD-1 disclosures as part of the transaction. In the NPRM, the CFPB states that HFAs are 9 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications having difficulty finding lenders to partner with to make these loans because, following TRID, some vendor and loan origination systems no longer support the Real Estate Settlement Procedures Act (“RESPA”) disclosures.68 As a result, some HFAs have reported that they are completing RESPA disclosures manually, which the CFPB notes “is cumbersome and may increase errors.”69 The problems qualifying for the section 1026.3(h) exemption and the limited support for RESPA disclosures raises concerns that these homebuyer assistance loans will not be as readily available. To address this concern, the CFPB would clarify that, for purposes of the section 1026.3(h) exemption, fees for recordation (which are expressly permitted) include transfer taxes.70 Moreover, the CFPB proposes that recording fees and transfer taxes would not count towards the 1-percent threshold.71 The goal with this proposed change is to ensure the governmentimposed fees that must be paid as part of the second-lien homebuyer assistance loans do not cause the loans to lose the Loan Estimate and Closing Disclosure exception. Although the CFPB has asked the industry to comment on whether the proposal goes far enough with regard to fees excluded from the 1-percent limit, the proposal is a good step in ensuring consistency in how HFA homebuyer assistance second-lien loans are disclosed across states and local jurisdictions. The proposal also will likely spur lenders to partner with HFAs on this critical financing to first-time homebuyers. Privacy and Information Sharing The Rule requires that the creditor provide the Closing Disclosure to the consumer and that the settlement agent provide a copy of the Closing Disclosure to the seller.72 However, the creditor or settlement agent may provide to the seller a separate Closing Disclosure containing just the details of the seller’s transaction.73 The Rule does not provide further guidance on to whom the Closing Disclosure may be provided and the extent to which information about one party may be provided to another party. As a result, common practices of providing copies of closing statements to buyer and seller real estate agents were halted until creditors and settlement agents could obtain express consent from consumers to share the Closing Disclosure with other parties. Financial institutions must comply with federal laws, such as the Gramm-Leach-Bliley Act (“GLBA”), relating to the sharing of consumer information. Accordingly, the NPRM states that the CFPB “has been asked repeatedly” about whether and how entities are permitted to share the Closing Disclosure with third parties involved in a mortgage transaction, such as real estate agents, loan officers and settlement agents.74 To address these concerns and provide explicit guidance, the CFPB discusses two exceptions to the GLBA privacy restrictions that allow financial institutions to share customer information without following notice and optout requirements – one that applies if a financial institution shares customer non-public personal information to comply with federal, state or local laws, rules and other applicable legal requirements, and another that applies if a financial institution’s “sharing of its customers’ non-public personal information is required, or is a usual, appropriate, or acceptable method, to provide the customer or the customer’s agent or broker with a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product.”75 Although the CFPB stops short of analyzing and applying these provisions directly to the Rule, it notes that the Closing Disclosure, whether as a combined form or separate forms with borrower and seller information, is a record of the transaction,76 which suggests the CFPB believes creditors and settlement agents may share the disclosure with other parties involved in the transaction pursuant to these GLBA exceptions. 10 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications The CFPB also proposes to add a comment clarifying that, at its discretion, the creditor may make modifications to the Closing Disclosure form to accommodate the provision of separate Closing Disclosure forms to the consumer and seller.77 The proposed comment would allow the creditor to modify the Closing Disclosure in any one of the following ways: (i) Leave the applicable disclosure blank concerning the seller or consumer on the form provided to the other party; (ii) Omit the table or label, as applicable, for the disclosure concerning the seller or consumer on the form provided to the other party; or (iii) Provide to the seller, or assist the settlement agent in providing to the seller, a modified version of the form under § 1026.38(t)(5)(vi), as illustrated by form H-25(I) of appendix H to this part.78 Other proposed comments would provide examples of where the creditor may choose to provide separate Closing Disclosure forms to the consumer and seller.79 Cash to Close A positive component of the Loan Estimate and Closing Disclosure forms is a Calculating Cash to Close table that allows a consumer to see the math in the transaction as it relates to the various items to be paid by the consumer at the closing, as well as the items that reduce the total amount of funds the consumer must bring to the closing table. The regulations that govern this table are very prescriptive to ensure uniformity in how creditors disclose information to the consumer.80 However, that also means there is little flexibility in how creditors may use the table to reflect the costs of a transaction. As a result, the industry has raised a number of questions regarding how certain amounts in the table are to be calculated or where certain costs are to be disclosed if they cannot be included in the table. These issues often are fact specific, and the CFPB expresses its concern in its proposal that differing practices among creditors could undermine consumer understanding of the transaction.81 Accordingly, the CFPB proposes several changes and clarifications regarding the calculation of various amounts disclosed on the cash to close table. Below we summarize a few of them: • For a simultaneous loan for subordinate financing, the CFPB proposes to exclude the sale price required to be disclosed under section 1026.37(a) (“General information”) from any of the calculations for the Calculating Cash to Close table on the Loan Estimate. By omitting the sale price, the CFPB explains the cash to close calculation for simultaneous loans for subordinate financing will accurately reflect the proceeds of the subordinate financing, which corresponds to the amount disclosed under “Adjustments and Other Credits” on the Calculating Cash to Close table on the firstlien Loan Estimate.82 • Section 1026.37(h)(1)(ii) requires disclosure of the closing costs to be financed, which is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed as a loan cost (section 1026.37(f)) or other cost (section 1026.37(g)) from the disclosed loan amount.83 Among other things, the CFPB proposes Commentary explaining that the loan amount disclosed under this section is the total amount the consumer will borrower, as reflected by the face amount of the note.84 This would create a consistent definition in all cases, regardless of how creditors use the term “loan amount” or how other agencies may use similar terms under their own loan programs. Similar modifications would be made related to the Cash to Close table on the Closing Disclosure.85 • A creditor is required to disclose on the Calculating Cash to Close table the amounts the seller will pay for total loan costs and total other costs, labeled “Seller Credits.”86 Creditors also must itemize loan costs and other costs under respective sections on page 11 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications two of the Loan Estimate.87 The CFPB’s proposal would clarify that specific seller credits for the payment of certain loan costs and other costs may be disclosed, at the creditor’s option, either in the “Seller Credits” line of the Calculating Cash to Close table or be reflected within the amounts disclosed for specific items itemized for loan costs or other costs.88 In other words, if a seller has agreed to pay one-half of the settlement fee, a creditor would be able to reduce the amount of the settlement fee itemized on the Loan Estimate by one-half or disclose the fee equivalent as a seller credit in the Calculating Cash to Close table. The CFPB specifically requests public comment on whether one of the two approaches should be mandatory, rather than left to the creditor’s discretion.89 • To the extent there are loan costs and other costs that are to be paid by persons other than the originator, creditor, consumer or seller, the Rule requires such amounts to be combined with any other amounts that are required to be paid by the consumer at consummation pursuant to a sales contract and disclosed in the “Adjustments and Other Credits” section of the Calculating Cash to Close table on the Loan Estimate.90 The Rule also dictates that such amount be disclosed as a negative number,91 which assumes the amount required to be paid by a consumer at consummation will be greater than other credits. This, of course, is not always the case. The CFPB seeks to eliminate the requirement that the combined amount be disclosed as a negative number.92 The CFPB also proposes to clarify that amounts expected to be paid by third parties not involved in the transaction are to be included in the amount disclosed only if expected to be paid at consummation, not in advance of consummation.93 Rounding TRID imposes different rounding requirements for different information disclosed on the Loan Estimate and Closing Disclosure. For example, the Rule lists numerous categories of disclosures that must be rounded to the nearest whole dollar on the Loan Estimate, including dollar amounts required to be disclosed under the “Other Costs” column of the Loan Estimate.94 The Rule, however, excludes the per diem amount of interest and the monthly amounts in the initial escrow section from this rounding requirement and states that these amounts should not be rounded.95 The Rule also requires that percentage amounts for the interest rate, amount of origination points, Adjustable Interest Rate table and Total Interest Percentage be disclosed “up to two or three decimal places,” whereas the Annual Percentage Rate must “be disclosed up to three decimal places.”96 The CFPB notes there has been “continued uncertainty about rounding requirements on the Loan Estimate.”97 To address these questions, the CFPB proposes clarifications to explain that the per diem amount and the monthly amounts required for initial escrow payments should be rounded to the nearest cent and disclosed to two decimal places.98 It also clarifies that the required percentage disclosures should be disclosed by rounding the exact amounts to three decimal places and then dropping any trailing zeros to the right of the decimal point.99 For example, the revised Commentary would state: [A] 2.4999 percent annual percentage rate, when rounded as an exact amount to three decimal places, becomes 2.500 percent but is disclosed as “2.5 percent” under § 1026.37(o)(4)(ii). Similarly, a 7.005 percent annual percentage rate is disclosed as “7.005%,” and a 7.000 annual percentage rate is disclosed as “7%.”100 The CFPB also proposes the same rounding clarification for percentages disclosed on the Closing Disclosure.101 One can only hope these 12 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications fixes will not be unduly burdensome for technology companies to reprogram. Unanswered Questions Many other technical clarifications are proposed by the CFPB, which we do not summarize here, but overall, the proposed changes provide important, helpful guidance to the industry. It is apparent the CFPB has been carefully following the challenges raised by the industry and wants to make changes to improve the TRID forms and resolve ambiguities. But certain major compliance issues are left unanswered, as the CFPB itself acknowledged. The CFPB states that it is proposing “a few…substantive changes in a limited number of situations” to address “potential discrete solutions to specific implementation challenges.”102 The proposal is not, the CFPB stresses, intended “to revisit major policy decisions.”103 The CFPB did not want to propose “major changes that could involve substantial reprogramming of systems so soon after the October 2015 effective date or to otherwise distract from industry’s intense and very productive efforts to resolve outstanding implementation issues.”104 Cure provisions are chief among the unresolved issues. The industry had strenuously and repeatedly requested that the CFPB further define procedures for curing errors in Loan Estimates and Closing Disclosures. One concern underlying these requests is that lenders and assignees can face liability for minor, typographical errors that do not fall into one of the regulatory cures provided for under the Rule. There also is ongoing concern over whether lenders and assignees have liability for errors disclosed on the Loan Estimate despite corrected disclosures made on the Closing Disclosure. According to the proposal, the CFPB did not address cure provisions because to do so “would be extraordinarily complex” and “would not be practicable without substantially undermining incentives for compliance with the rule.”105 No one is disagreeing that TRID is complex, and no one is asking for the CFPB to allow any and all errors to be corrected in a way that makes compliance with the Rule an afterthought. Rather, the industry was hoping the CFPB would propose to formalize the guidance it has provided informally on cure mechanisms under the Rule and TILA. The CFPB should expect the industry to continue to fight for greater clarity. In its proposal, the CFPB also declines to revisit prior policy decisions, such as the methodology for disclosing title insurance premiums. The Rule includes a specific formula for the disclosure of lender’s title insurance premium and owner’s title insurance premium on the Loan Estimate and Closing Disclosure when discounts are available for the simultaneous issuance of the policies. This formula is not reflective of the actual amounts charged for the policies; rather, the Rule requires the full amount of lender’s title premium to be disclosed in all instances notwithstanding the application of a discount. The CFPB has stated that it made this policy decision to ensure the consumer knows the worst-case scenario for the cost of lender’s title insurance in case the consumer elects not to purchase an owner’s policy. The result is the figures for title premium disclosed on the Loan Estimate and Closing Disclosure never match the actual charges for those policies, and the title industry has reported confusion in applying the CFPB’s calculation and explaining the distinctions to consumers. No doubt the title industry will continue to push these concerns with the CFPB. Ultimately, industry participants should be ready to get in the weeds with the NPRM and provide the CFPB with both positive and negative comments on the proposals. The CFPB has stated that it is sensitive to the technology changes that may be required to implement the proposals and any impact that may have on the industry’s ability and timeline to implement the proposed changes. Commenters should raise those implementation concerns, if any, with the 13 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications Bureau. Mayer Brown would be happy to assist your company in preparing any public comments you wish to submit to the CFPB in response to this critical NPRM. For more information about the topics raised in this Legal Update, please contact any of the following lawyers. Phillip L. Schulman +1 202 263 3021 firstname.lastname@example.org Holly Spencer Bunting +1 202 263 3380 email@example.com Jeremy M. McLaughlin +1 650 331 2087 firstname.lastname@example.org Charles J. Weinstein +1 202 263 3456 email@example.com Endnotes 1 Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z), 81 Fed. Reg. 54,317, 54,318 (proposed Aug. 15, 2016) (to be codified at 12 C.F.R. pt. 1026). 2 12 C.F.R. § 1026.19(e)(3)(i). 3 Id. § 1026.19(e)(3)(iv). Valid changed circumstances include: an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. Id. § 1026.19(e)(3)(iv)(A). 4 Id. § 1026.19(e)(4)(i). 5 Id. § 1026.19(e)(4)(ii). 6 Id. 7 Id. 8 Id. § 1026.19(e)(4)(ii), Comment 1. 9 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,334. 10 Id. at 54,376 (emphasis added). 11 12 C.F.R. § 1026.17(c)(6)(ii). 12 Id. § 1026.17(c)(6), Comment 2. 13 Id. § 1026.17(c)(6), Comment 5. 14 Id. 15 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,327. 16 Id. 17 Id. 18 Id. at 54,372 19 12 C.F.R. § 1026.17(c)(6)(ii). 20Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,327. 21 Id. 22 12 C.F.R. pt. 1026 , App. D. 23 Id. 24 Id. 25 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,357. 26 Id. 27 Id. 28 Id. at 54,358. 29 Id. at 54,339. 30 Id. 31 Id. 32 12 C.F.R. §§ 1026.19(e), (f). 33 Id. § 1026.2(b)(3). 34 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,328. 35 Id. 36 12 C.F.R. §§ 1026.19(e)(1)(vi)(B), 1026.37(f)(3). 37 Id. § 1026.19(e)(1)(vi)(A). 38 Id. § 1026.19(e)(1)(vi)(C). 39 Id. § 1026.19(e)(1)(vi), Comment 3. 40 Id. § 1026.19(e)(3)(ii). 41 Id. § 1026.19(e)(3)(iii). 42 Id. § 1026.19(e)(3)(ii), Comment 3. 43 Id.; see also id. § 1026.19(e)(3)(iii)(D). 44 Id. § 1026.19(e)(3)(iii), Comment 2. 45 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,332. 46 Id. 47 Id. at 54,330. 48 12 C.F.R. § 1026.19(e)(1)(vi), Comment 3. 49 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,330. 50 See 12 C.F.R. §§ 1026.37(o)(3), 1026.38(t)(3) (requiring the model forms for a transaction that is a federally related mortgage loan). 51 Amendments to the Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,330. 52 15 U.S.C. § 1605(f). 14 Mayer Brown | “Know Before You Owe” Is Still a Work in Progress: CFPB Proposes TRID Changes and Clarifications 53 See 15 U.S.C. § 1605(f)(2). 54 15 U.S.C. § 1605(f)(1). 55 See 12 C.F.R. §§ 1026.23(g) (for purposes of a consumer’s right of rescission), 1026.38(o)(2). 56 15 U.S.C. § 1638(a)(5). 57 See Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,353. 58 12 C.F.R. § 1026.38(o)(1). 59 See 15 U.S.C. § 1640. 60Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,354. 61 Id. 62 Id. at 54,336. 63 Id. at 54,354. 64 12 C.F.R. § 1026.3(h). 65 Id. § 1026.3(h)(5). 66 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,325. 67 Id. 68 Id. 69 Id. 70 Id. 71 Id. 72 12 C.F.R. § 1026.38(f)(1)(i), (f)(4)(i). 73 Id. §§ 1026.19(f)(4)(i), Comment 1, 1026.38(t)(5)(vi). 74 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,356. 75 Id. 76 Id. 77 Id. 78 Id. at 54,385. 79 Id. at 54,356. 80 See 12 C.F.R. § 1026.37(h). 81 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,341. 82 Id. 83 12 C.F.R. §1026.37(h)(1)(ii), Comment 1. 84 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,341. 85 See id. at 54,349–50. 86 12 C.F.R. § 1026.37(h)(1)(vi). 87 See id. § 1026.37(f), (g). 88 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,343. 89 Id. 90 12 C.F.R. § 1026.37(h)(1)(vii). 91 Id. 92 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,343. 93 Id. 94 12 C.F.R. § 1026.37(o)(4)(i)(A). 95 Id. 96 Id. § 1026.37(o)(4)(ii). 97 Amendments to Mortgage Disclosure Requirements, 81 Fed. Reg. at 54,344. 98 Id. at 54,345. 99 Id. 100Id. at 54,381. 101 Id. at 54,355. 102 Id. at 54,318. 103 Id. at 54,320. 104 Id. 105Id. 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