On April 26, 2018, the Bureau of Consumer Financial Protection (“Bureau”) adopted an amendment to its Truth in Lending/RESPA Integrated Disclosures Rule (“TRID”), which, effective June 1, 2018, finally closes what has come to be known as the “black hole.”1 Below is an explanation of what exactly is the black hole, how and why the bureau closed it and what that means for mortgage lenders.
What is the black hole?
Requirement to provide loan estimate. To help consumers shop for a home mortgage loan, TRID requires creditors, within three business days after receiving a loan application from a consumer, to give the consumer a written loan estimate (“LE”) on a prescribed form.2 The LE sets forth the basic terms of the loan for which the consumer is applying and “good faith” estimates of the various fee and charges the consumer will have to pay in connection with the loan.3 The disclosed loan terms and fee estimates on the LE must remain fixed for at least 10 business days.4 During this 10-day period the consumer may use the LE to shop with other mortgage lenders for better terms and fees. If, by the end of this 10-day shopping period, the consumer has not informed the creditor that he/she wishes to proceed with the application, the LE expires and the creditor is free to issue a different one.5
Good faith/Tolerances. With two exceptions, TRID provides that fee estimates on the LE are subject to a “zero tolerance,” meaning that to be considered in “good faith,” they must not exceed the amounts the consumers actually have to pay for those particular services (“Zero Tolerance Fees”).6 The two exceptions are for estimates on the LE for (1) certain fees paid to third-party service providers, which are considered to be in “good faith” so long as the sum of the actual amounts the consumer pays for these services does not exceed the sum of the estimates by more than 10% (“10% Tolerance Fees”), and (2) certain other fees, which are considered to be in “good faith” so long as they are based on the best information reasonably available to the creditor at the time (“changeable fees”).7 Creditors must make refunds or provide credits to consumers whenever these tolerances are exceeded.8
Ability to reset tolerances using revised LEs. TRID permits creditors to issue revised LEs under limited circumstances, including “changed circumstances” (as defined in TRID) that affect settlement charges or eligibility, consumer-requested changes, interest rate dependent changes and expiration of the 10-day “shopping period” without an indication from the consumer of an intent to proceed (collectively, "Changed Circumstances").9 These revised LEs can then be used, in place of any previous LE, to determine whether the actual charges the consumer pays exceed the applicable tolerance (to “reset tolerances”).10
To take advantage of this ability to reset tolerances, creditors must issue revised LEs within three business days after receiving information sufficient to establish that a Changed Circumstance exists (“3-Day Requirement”).11 Also, creditors must ensure that the consumer receives any revised LE no later than four business days before consummation and may not issue a revised LE once they have provided a closing disclosure (“CD”) to the consumer.12
Ability to reset tolerances using CDs. Recognizing that some Changed Circumstances can occur very near to consummation, TRID permits creditors in certain circumstances to also reset tolerances using the CD. It states: “If … there are less than four business days between the time [a] revised [LE] … is required to be provided [i.e., within three business days after learning of the Changed Circumstance] … and consummation, creditors comply with the [good faith] requirements … if the revised disclosures are reflected in the [CD].” (“Four-Day Limit”).13 Since creditors are required to provide revised LEs within three business days after learning of a Changed Circumstance, the four-day limit translates into a requirement that creditors may use the CD to reset tolerances only in situations where they first learn of the Changed Circumstance no later than the sixth business day before consummation.
The black hole. If a creditor learns of a Changed Circumstance (1) more than six business days before the scheduled closing, or (2) six business days or less before the scheduled closing but the closing is then postponed such that consummation occurs more than six business days after the creditor learned of the Changed Circumstance, TRID does not provide the creditor with any explicit authority to reset tolerances using either a revised LE, the CD or a revised CD. The absence of such authority has been labeled by some as the “Black Hole.”
Closing the black hole
The Bureau received 43 unique comments to its proposal to close the black hole, from industry commenters (trade associations, creditors and other industry groups), a consumer advocacy group and others.14 After considering these comments, it determined to adopt the Amendment essentially as proposed in July 2017.
The Amendment makes several important changes to TRID and the associated commentary. First, it says that creditors can reset tolerances by giving the consumer a revised LE or, in instances where it is not permitted to do so, a CD or a revised CD, so long as the CD or revised CD is given consistent with the 3-Day Requirement.15 Second, it revises Comment 19(e)(4)(ii)-1 to eliminate the 4-Day Limit.16 Third, it adds three new examples of when tolerances may be reset after the CD has been delivered.17 These examples are paraphrased below:
- Consummation is scheduled for Thursday, June 4; the creditor hand delivers the CD on Monday, June 1; and on Tuesday, June 2, the consumer requests a loan change that allows the creditor to reset tolerances using a revised CD but does not require a new three-day waiting period. Section 1026.19(f)(2)(i) requires the creditor to provide corrected disclosures reflecting any changed terms so that the consumer receives them at or before consummation. The creditor complies with section 1026.19(e)(4) by hand delivering the revised CD reflecting the consumer-requested changes on Thursday, June 4.
- Consummation is scheduled for Wednesday, June 10; the creditor hand delivers the CD on Friday, June 5; and on Monday, June 8, the consumer postpones consummation until Wednesday, June 17, and requests a rate lock extension that triggers the need for revised disclosures but not a new three-day waiting period. The creditor complies with sections 1026.19(e)(4) and (f)(2)(i) by mailing or emailing the revised CD reflecting the consumer-requested changes on Thursday, June 11, since the consumer is considered to have received the revised CD on Monday, June 15 (unless the creditor relies on evidence that the consumer received the revised CD earlier).
- Consummation is scheduled for Wednesday, June 10; the creditor hand delivers the CD on Friday, June 5; APR becomes inaccurate on Monday, June 8, triggering a new 3-day waiting period and the need to provide a revised CD so that the consumer receives it at least three business days before consummation, and consummation is rescheduled for Friday, June 12. The creditor complies with section 1026.19(e)(4) by hand delivering a revised CD reflecting the new APR and any other changed terms to the consumer on Tuesday, June 9.
What does this mean for creditors?
What this means, in a nutshell, is that creditors will now be permitted to reset tolerances whenever they learn of a Changed Circumstance prior to the consummation of the transaction. They will be able to do so by issuing (1) a revised LE, if they learn of the Changed Circumstance six or more business days before consummation and they have not already issued the CD; (2) the CD, if they learn of the changed circumstance less than six business day before consummation and they have not already issued the CD; or (3) a revised CD, if they learn of the Changed Circumstance less than six business day before consummation and they have already issued the CD. In each case, the creditors are required to issue the revised disclosures within 3 business days after learning of the Changed Circumstance. The Amendment reflects the Bureau’s determination, supported by industry comments, that failure to close the black hole would not only be unfair to creditors (since it causes them arbitrarily to have to absorb cost increases resulting from Changed Circumstances simply because the Changed Circumstances occur near to consummation), but would also be potentially harmful to consumers (since creditors may elect in such situations to deny applications rather than absorb the cost increases or, even if they elect to proceed to closing and absorb the cost increases, to increase the cost of credit for all consumers).
Hats off to the Bureau for doing the right thing.