The Consumer Financial Protection Bureau (CFPB) recently released the final rule combining the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) mortgage disclosure rules and forms.
The final rule, which applies to most closed-end consumer mortgage loans, created two new disclosure forms that are intended to eliminate confusion amongst consumers and reduce the burden on lenders in preparing the forms. It does not apply to home-equity lines of credit, reverse mortgages, mortgages secured by mobile homes, or creditors that make five or fewer mortgages a year. Unlike many of the CFPB mortgage rules, the final rule does not otherwise include an exception for small creditors. These disclosures will be required to be given to consumers for mortgage applications received on or after August 1, 2015.
The final rule mandates the use of two disclosure forms, the three-page Loan Estimate and the five-page Closing Disclosure. In addition, the rule requires that the Closing Disclosure in most cases be received by the borrower at least three business days before closing. The rule also includes a number of substantive changes and additions to RESPA and TILA.
Overview of Required Disclosure Forms
The new forms integrate existing disclosures and implement new disclosure requirements under the Dodd-Frank Act. Detailed instructions for completing each line of the forms can be found in the final rule and the CFPB has also released sample forms for different types of loan products.
The Loan Estimate replaces both the Good Faith Estimate under RESPA and the initial TILA disclosure. The Loan Estimate provides a summary of the contemplated loan terms, estimated loan costs, other estimated closing costs, and additional application disclosures.
The form must be provided by either the mortgage broker or creditor upon receipt of an application, but in no event, later than three business days after the consumer applies for a mortgage loan. Regardless of who provides the form (i.e. the mortgage broker or the creditor), the creditor maintains responsibility for compliance with all Loan Estimate requirements, including the form’s timely receipt by the consumer. The final rule states that an application will be deemed to have been received if the consumer provides the following six pieces of information:
- the consumer's name;
- the consumer's income;
- the consumer's Social Security number to obtain a credit report (or other unique identifier if the consumer has no Social Security number);
- the property address;
- an estimate of the value of the property; and
- the mortgage loan amount sought.
Prior to receiving the six specific items of information, lenders may provide consumers with written estimates, but any pre-application written estimate must contain a disclaimer that it is not a substitute for the Loan Estimate form.
The Closing Disclosure replaces both the HUD-1 form and the final TILA disclosure. The Closing Disclosure provides a summary of the actual loan terms, the loan costs, other settlement costs, and additional closing disclosures. Additionally, the creditor must ensure that the consumer receives the Closing Disclosure form at least three business days before the consumer closes the loan.
If there are changes to the terms of the loan between the time it is issued and closing, depending on the nature of the change, the creditor must provide an updated Closing Disclosure with another three business day waiting period, or simply provide an updated Closing Disclosure by closing. The changes that require the creditor to provide an updated Closing Disclosure and an additional three business day waiting period are:
- changes to the APR greater than 1/8 of a percent (or 1/4 of a percent for loans with irregular payments or periods);
- changes to the loan product; and
- the addition of a prepayment penalty.
The three-day waiting period does not apply to less significant changes, and the creditor may provide the consumer with an updated Closing Disclosure at or before the closing in these instances.
The final rule also limits the circumstances in which creditors can charge consumers closing costs higher than those included on their Loan Estimate form.
Unless an exception applies, charges for the following services cannot increase:
- the creditor's or mortgage broker's charges for its own services;
- charges for services provided by an affiliate of the creditor or mortgage broker; and
- charges for services for which the creditor or mortgage broker does not permit the consumer to shop for the provider.
Charges for other services can increase, but generally not by more than 10 percent, in the absence of an exception. If a service is not required by the creditor, there is no restriction on cost increases.
The full text of the rule can be found here.