Some Positive Signs in CFPB’s Proposed Rule, but Industry’s Role in Transaction Could Be Threatened
July 10, 2012
On July 9, the Consumer Financial Protection Bureau (CFPB) released a 1,099-page proposed rule to go with a new Loan Estimate and Closing Disclosure that will replace the current Truth In Lending, Good Faith Estimate and HUD-1 Settlement Statement disclosures.
ALTA’s RESPA Taskforce has worked closely with the CFPB and shared industry concerns over the past year and a half as the Bureau went through several iterations of the proposed forms. After an initial review of the proposal, ALTA has been successful on several fronts as the Bureau indicated the disclosures will be standardized and outlined exceptions to the three-day delivery of the Closing Disclosure to the consumer. However, the Bureau is considering two proposals on who provides the Closing Disclosure to the consumer.
“The proposed rule has some positive sides, but there are some places where CFPB really missed the boat. It’s clear that CFPB recognized they needed to provide industry with clear and definitive guidance and standardized disclosure forms for this rule to be successful. That is a solid step forward,” said Michelle Korsmo, ALTA’s chief executive officer. “But regrettably, the Bureau chose to pass the buck on the most important thing they could do to protect consumers, especially by ensuring that an independent, third-party conducts the closing.”
There are several items in the proposal that will impact ALTA members. Some of these proposed changes include who will provide the Closing Disclosure to the consumer; timing of when the disclosure must be provided to the consumer; and line numbering on the Closing Disclosure is different from the current HUD-1.
Bye, Bye HUD-1
The Closing Disclosure would replace the current HUD-1. It would also replace the revised Truth in Lending disclosure. The Official Interpretations contain detailed instructions as to how each line on the Closing Disclosure form would be completed. The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.
Timing of Disclosure
According to the proposal, the consumer must be provided the Closing Disclosure form at least three business days before the loan closes. Generally, if changes occur between the time the Closing Disclosure form is given and the closing, the consumer must be provided a new form. When that happens, the consumer must be given three additional business days to review that form before closing. However, the proposed rule contains an exception from the three-day requirement for some common changes (See analysis below on exceptions).
Who Provides the Disclosure
Currently, settlement agents are required to provide the HUD-1, while lenders provide the revised TIL disclosure. The Bureau proposes two alternatives for who is required to provide consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the lender may rely on the settlement agent to provide the form. However, under the second option, the lender would also remain responsible for the accuracy of the form. The Bureau seeks comment as to which alternative is preferable.
“ALTA and its members support the Bureau’s efforts to create mortgage disclosures that will help inform consumers when shopping for a mortgage and to better understand what they are paying for when they get to the closing table,” Korsmo said. “While the proposed rule is a step in the right direction to improve the disclosures, more needs to be done to refine the proposal and to bring better transparency to the process. Consumers need to feel more confident when purchasing a home and businesses need to be able to compete on a level playing field. We will continue to work with the Bureau to find ways to improve this rule.”
The proposed rule applies to most consumer mortgages, but does not apply to home-equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to land. The proposed rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.
ALTA has requested that the line numbers from the current HUD-1 be retained because the revised line numbers in the Closing Disclosure would significantly increase programming costs. Based on this feedback, the Bureau seeks comment on whether the use of line numbers will lower software-related costs on industry, and the exact amount of the savings given the rest of the changes in the integrated closing disclosure contemplated by the proposal.
ALTA’s RESPA Task Force is reviewing the Proposed Rule and will provide deeper analysis to ALTA membership over the coming weeks. ALTA also plans to provide webinars on different sections of the proposed rule.
Last month, ALTA President Chris Abbinante provided Congress with the industry’s six principles to ensure this rule works for both consumers and industry. Below is a preliminary scorecard on how the Bureau responded to ALTA’s principles:
- Prevent disruptive and costly delays to closing for consumer: This is a partial victory for the industry. ALTA was able to successfully persuade the Bureau to include a number of exemptions to its rule requiring consumers to wait three days between receiving their final Closing Disclosure and actually closing on the transaction. These exemptions include, (1) changes that result from last-minute negotiations between the buyer and seller, such as results from the walkthrough; (2) changes that amount to less than $100 total; (3) changes that cannot be known until after closing, like recording fees; (4) technical errors; and (5) amounts paid by the lender to cure a tolerance violation.
- Provide Industry with Clear Guidance: This may be the clearest victory in the rule for ALTA members. In the proposal, the Bureau followed ALTA’s recommendation and proposed mandatory uniform disclosure forms (as required under RESPA). Having multiple forms in the marketplace would confuse consumers and result in title and settlement companies having to create forms for different lenders. The Bureau also announced that it would provide industry with clear and definitive guidance through official staff commentary. This will prevent the uncertainty that surrounded the 2010 RESPA implementation that required HUD to issue over 400 frequently asked questions.
- Promote Fair Competition: This is the issue on which ALTA and its members will have the most work to do. The Bureau punted on the issue of determining who should provide the Closing Disclosure. In addition, the Bureau keeps in place the tolerance regime, which reduces the number of settlement agents that are allowed to compete for business. ALTA will continue to push the Bureau to ensure that consumers are protected by having settlement agents continue to serve as the independent, third-party at closing.
- Avoid Unnecessarily High Costs for Small Business: It is unclear whether the proposal will meet this principle. ALTA is working with industry software vendors to determine how costly this rule will be to implement. ALTA has previously estimated that the new forms would cost settlement agents $800 per employee in upfront implementation and training costs, and a 20% increase in yearly software maintenance fees. To be successful on this principle, ALTA needs to provide the Bureau with clear and defensible cost estimates. ALTA is asking all members to work with their software vendors to give us a detailed estimate of how much it will cost them to implement this new rule.
- Test the Disclosures on Actual Closings Instead of Isolated Interviews with Consumers: It is unclear whether the proposal will meet this principle. While the Bureau acknowledged the benefit that extra consumer testing of the loans on actual closed transactions, they avoid endorsing more testing and instead agreed to study the feasibility of this type of testing. ALTA will continue to push the Bureau to conduct more testing to ensure these disclosures work for consumers.
- Encourage Consumers to Make Informed Decisions: This is a partial victory for the industry. The Bureau will still require lenders to list owner’s title insurance as “optional” when it will be paid by the buyer, however it has abandoned the more prejudicial phrase of “not required.” For transactions in which the seller will pay for owner’s title insurance, the line will not have to include the phrase “optional.” While ALTA is not thrilled, this is better than initial drafts. ALTA will continue to push the Bureau to list the product as owner’s title, without any additional modifiers. ALTA is not optimistic the Bureau will call owner’s title “advisable” or “recommended,” as the Bureau has said they see it as the industry’s job to promote its products. Other fees that will also be listed as “optional” include appliance warranties and credit life insurance.
To keep up-to-date about the rule and for information on how to take action, join the Title Action Network. As you review the rule and the new forms, consider how it will impact your business and consumers. You can send feedback to ALTA at firstname.lastname@example.org so that we can incorporate them into ALTA’s official comments to the CFPB. Click here to submit comments directly to the CFPB. When providing feedback, give specific examples of how this will impact consumers and the industry, along with suggested changes to improve the rule and forms. The CFPB will review and analyze the comments before issuing a final rule.
Comment Deadline and Effective Date
Deadline to provide feedback to the CFPB is Nov. 6, 2012, for most of the proposal. Comments regarding changes to the calculation of the finance charge and Annual Percentage Rate, and the delay of the effective date for certain disclosures required by the Dodd-Frank Act are due by Sept. 7, 2012. The Bureau also is seeking comment on when this final rule should be effective.
“Because the final rule will provide important benefits to consumers, the Bureau seeks to make it effective as soon as possible. However, the Bureau understands that the final rule will require lenders, mortgage brokers, and settlement agents to make extensive revisions to their software and to retrain their staff. Therefore, the Bureau is seeking comment on how much time industry needs to make these changes. The Bureau is proposing to delay compliance with certain new disclosure requirements contained in the Dodd-Frank Act until the Bureau’s final rule takes effect,” the CFPB said in a summary of its proposal.
Click here for more information about CFPB’s proposal and view all of ALTA’s advocacy efforts regarding the mortgage disclosures. If you have questions or for more information, contact any of ALTA’s government affairs team: Justin Ailes, ALTA’s vice president of government and regulatory affairs; Jessica McEwen, ALTA’s director of government affairs; or Steve Gottheim, ALTA’s legislative and regulatory counsel, at email@example.com.