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Consumer Financial Protection Bureau

ALTA RESPA Task Force Addresses Concerns Over Initial Mortgage Disclosure

November 8, 2011

While the Consumer Financial Protection Bureau has now shifted its focus to the final disclosure form, ALTA’s RESPA Task Force provided substantial feedback following the Bureau’s fifth round of testing the combined initial mortgage disclosure.

“While ALTA members do not issue the application stage disclosure, we are interested in the form and application process because of the impact that they will have on the closing stage disclosure, which ALTA members prepare and deliver to consumers, as well as how they will affect the entire transaction, generally,” Justin Ailes, ALTA’s vice president of government and regulatory affairs, wrote to the CFPB.

Following the CFPB's testing of the combined mortgage disclosure in New Mexico, it is not clear whether the early disclosure form is intended to disclose costs related to the loan or also to include costs related to the entire real estate transaction. This uncertainty among real estate settlement agents is significant, according to the Task Force. Consumers will struggle to shop for settlement services if the form is intended to disclose only those costs related to the loan. Consumers will not have a clear understanding of the cash needed to close if costs related to the real estate transaction are not included in the early disclosure form. ALTA has asked for guidance from the CFPB to clarify whether the initial disclosure form will disclose information about loan costs and transaction costs. ALTA believes it should.

The Task Force previously indicated its concern that the forms should not discourage consumers against purchasing an Owner’s Title Insurance Policy by describing this protection as “optional” or “not required.” The Task Force suggests it simply be disclosed as Owner’s Title Insurance.

In addition to this continued concern, the Task Force provided feedback about the concept of tolerance, the disclosure of title fees and the lenders cost of funds.

Tolerance

When HUD issued the current RESPA regulation in 2009, it introduced the concept of tolerance, which requires that some costs, listed on page three of the Good Faith Estimate, could either not increase in any amount (called Zero Tolerance) or could not increase by more than a set amount of 10 percent in the aggregate without a “change in circumstances,” as defined in the regulation. Under the tolerance concept, lenders are required to document a changed circumstance and either reissue the GFE or cure the tolerance violation.

The Bureau’s latest draft disclosure appears to remove the need to cure a tolerance violation. On page two, the form now includes the following language on the concept of tolerance, “Limits on Increases: Generally, charges in A and Transfer Taxes in D cannot increase, and the total of the charges in B, C, and Recording Fees in D cannot increase by more than 10%. We will notify you if a change causes an increase above these limits.”

This shift in language raises the following questions:

• Does this language signify a shift in the Bureau’s thinking on tolerances?
• Is a valid changed circumstance still necessary for the lender to issue to increase the charges in excess of the tolerance threshold and issue a new disclosure?

Disclosure of Title Fees

Title charges are listed on page two under the “Services You Can Shop For” section. In this section, the form lists five line items for title and closing related charges: Title – Insurance Binder; Title – Search; Title – Lender’s Policy; Title – Owner’s Policy (optional); and Settlement Agent Fee. How does the Bureau envision completing this section when the fees are included in a single aggregated rate, commonly called an “All Inclusive Rate” as occurs in states like Pennsylvania? The most recent CFPB prototypes use New Mexico as an example, yet do not appear to follow the All Inclusive Rate structure promulgated by the New Mexico Department of Insurance. We also note that the cost of services in Section C appears to be significantly higher than actual costs in New Mexico.

The current RESPA regulations and instructions for completing the 1100 series on the HUD-1 Uniform Settlement Statement require, “In such cases, enter the overall fee on Line 1107 (for attorneys), or Line 1108 (for title companies), and enter on that line the item numbers of the services listed which are covered in the overall fee. If this is done, no individual amounts need be entered into the borrower's and seller's columns for the individual items which are covered by the overall fee.” Is the Bureau considering similar guidance? Some instruction will be necessary as a number of state insurance laws and title insurance rate filings incorporate all potential title charges, including the lender’s policy premium, commitment, and both search and examination fees to be aggregated into a single rate. This might make it difficult for lenders to appropriately fill out the application disclosure.

Lenders Cost of Funds

Many in the title insurance industry were confused by the appearance of the new line item for Lender’s Cost of Funds on page three of the disclosure. While we understand that Section 1419 of Dodd-Frank requires the Bureau include this line item, we struggle to understand how this disclosure is meant to be used by consumers.

From a consumer’s perspective, the Lender’s Cost of Funds and the lender’s corresponding margin on a particular loan does not help them understand whether that loan product is the best fit for their needs. Seeing the margin could discourage consumers from choosing the best loan for them, because they see the lender is making a profit that may be perceived as excessive.

Further, will regulations outline how should a lender calculate this line item? Typically the lender’s cost for funding a particular loan is not known until right before funding. Will lenders be able to provide an accurate estimate at the time of the initial disclosure?