On Thursday, August 23, the Consumer Financial Protection Bureau (the “Bureau”) issued proposed amendments to its Regulation Z (Truth In Lending Act) and Regulation X (Real Estate Settlement Procedures Act) in order to implement certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).
Several sections of the Act require the Bureau to issue proposed rules and model forms that combine certain disclosures currently required by Regulations X and Z in connection with applying for and closing on a residential mortgage loan. The notice contains rules, model forms and instructions for the following new forms:
- The Loan Estimate Form.
This form would replace two current Federal forms, Regulation X’s Good Faith Estimate form and Regulation Z’s “early” Truth In Lending Initial Disclosure Statement. The proposed rule contains regulations (with Official Interpretations) and model forms, as well as instructions for completing the form and samples of completed forms for different types of loan products. The new form also includes several new disclosures required by the Act.
A lender or broker must give the completed form to the consumer within three business days after it receives an application from the consumer. The proposed rule is seeking specific comment on what is an “application” for these purposes. The lender cannot charge any fees (other than a credit report fee) in connection with the loan or the application process until it has given the consumer the Loan Estimate and the consumer has communicated the intent to proceed with the loan. Lenders or brokers may give written loan estimates prior to the receipt of an application, but these must contain a statement that the actual fees may be higher, and that the consumer should obtain a Loan Estimate.
- The Closing Disclosure Form.
This form would also replace two current Federal forms, Regulation X’s settlement statement (the HUD-1) and Regulation Z’s Truth In Lending Initial Disclosure Statement. The proposed rule contains regulations (with Official Interpretations) and model forms, as well as instructions for completing the form and samples of completed forms for different types of loan products. The new form also includes several new disclosures required by the Act as well as a detailed accounting of the settlement transaction.
A lender must give the completed form to the consumer within three business days before the closing of the loan. If changes occur after the Closing Disclosure is given and before the actual closing, a new Closing Disclosure must be given and the consumer must be given at least an additional three business days before closing to review the new terms. There are exceptions to the additional three-business day review period, such as where there are negotiations between the buyer and seller after the initial walk-through, and changes that would result in less than $100 in increased costs. The proposed rule is seeking specific comment on additional exceptions to the three-business day review requirement.
The new rule would restrict the circumstances under which certain of the actual settlement costs could be greater than what is disclosed in the Loan Estimate. Unless an exception applies, costs for the lender’s and broker’s fees, services provided by an affiliate of the lender or broker, and services for which the lender does not provide the consumer the opportunity to shop around, cannot be raised above those fees as set forth in the Loan Estimate. There is also a 10% cap on the increase in the amount of all other fees above what is disclosed in the Loan Estimate, unless an exception applies. Permitted exceptions include, for example, an increase resulting from a change requested by the consumer, where the charge is from a service provider not identified by the lender, where the charge as set forth in the Loan Estimate is incorrect or rendered incorrect, or the expiration of the Loan Estimate. If an exception applies, the lender generally must provide a revised Loan Estimate within three business days.
In addition to other changes, the proposed rule redefines the way the “Annual Percentage Rate” or “APR” is calculated. Rather than the current method of determining which fees are to be included in the calculation of the APR, and which are not, the revised rule would require that almost all up-front fees be included in the calculation.
The Board is also seeking specific comment on when these final rules should be effective.
The proposed rule applies to most closed-end consumer mortgages. It does not apply to home-equity lines of credit, reverse mortgages, loans secured by mobile homes and certain other non-standard residential loans. The proposed rule also does not apply to creditors that make five or fewer mortgage loans per year.
The proposed rule is 342 pages long in the Federal Register, and contains many specific requests for comments on various aspects of the final rule (some of which are mentioned above), timing of implementation and other requirements.
Lenders may comment, and should do so if they think that these changes, or the specifics of the implementation of these changes as published in the notice, will have an adverse effect on their businesses. According to the notice of proposed rulemaking, comment letters should refer to Docket No. CFPB-2012-0028 or RIN No. 3170-AA19 and may be mailed electronically or in hard copy to the addresses set forth in the notice. The comment period ends September 7, 2012, with respect to the proposed changes to the definition of “APR”, and November 6, 2012, with respect to all other proposed changes. The APR comment period is so short because the Board believes that most comments on this proposed change have already been received from the public when it released its overall “Closed-End Proposal” in 2009.