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Consumer Financial Protection Bureau

ALTA President Outlines Principles for Successful Mortgage Disclosures during Congressional Hearing

June 21, 2012

ALTA President Outlines Principles for Successful Mortgage Disclosures during Congressional Hearing

ALTA President Chris Abbinante testified June 20 before the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity during a hearing titled “Mortgage Disclosures: How Do We Cut Red Tape for Consumers and Small Businesses?”

The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Consumer Financial Protection Bureau (CFPB) to simplify and combine mortgage disclosures required under the Truth in Lending Act (TILA) and Real Estate Settlement and Procedures Act (RESPA). The CFPB is expected to issue a proposed final rule in July 2012.

Raj Date, deputy director of the CFPB, was the lone participant on the first panel. Abbinante kicked off the second panel, which also included Anne C. Canfield, executive director of the Consumer Mortgage Coalition; Bill Cosgrove, president and chief executive officer of Union National Mortgage Co., on behalf of the Mortgage Bankers Association; Chanelle Hardy, senior vice president for policy and executive director of the National Urban League Policy Institute; Brenda Hughes, senior vice president, retail lending administrator for First Federal Savings Bank, on behalf of the American Bankers Association; Maurice Veissi, president of the National Association of Realtors; and Tim Wilson, president, affiliated businesses, Long and Foster Companies, on behalf of the Real Estate Services Providers Council.

“ALTA supports simplified mortgage disclosures,” Abbinante said. "However, industry groups and the Bureau agree that there are a number of statutory conflicts between RESPA and TILA. It is not clear if these conflicts can be resolved by the Bureau or will require an act of Congress."

Examples of these statutory conflicts include whether the disclosures are standard or model forms, whether the final disclosure is provided at closing or three days before closing and whether the final disclosure is provided to consumers by the person conducting the settlement or the creditor.

Date told House lawmakers the bureau will likely hold off on a final a set of disclosure forms and accompanying regulations until work is completed on other mortgage reforms, such as regulations that address the borrower's “ability to pay” and compensation of loan originators—both of which must be finalized by Jan. 21, 2013. The bureau is implementing at least seven different mortgage rules required under Dodd-Frank, he noted.

“I certainly understand the argument that a number of these rules should be finalized before the disclosure forms are made final,” Date said. “It is an issue that we raised explicitly with the small business review panel. So it's entirely possible that timetable will play out.”

This was a message echoed by Abbinante and several other panelists.

“We appreciate the difficulties the CFPB faces in achieving Congress’ mandate to integrate the disclosure without clear direction on how statutory conflicts should be resolved,” Abbinante said. “If done carefully, this project can meet the CFPB’s dual goals of helping improve consumers understanding of their mortgage transaction and facilitating industry compliance with TILA and RESPA. However, getting the rule right is more important than getting it done fast.”

Abbinante’s testimony outlined six principles to help the CFPB develop disclosures that are fair for consumers and the industry and avoid unintended consequences. The principles are:
  1. Prevent disruptive and costly delays to closing for consumers
  2. Provide industry with clear guidance
  3. Promote fair competition
  4. Avoid unnecessarily high costs for small business
  5. Test the disclosures on actual closings instead of isolated interviews with consumers
  6. Encourage consumers to make informed decisions
“These principles will help ensure the CFPB avoids unintended consequences for consumers, industry and the entire real estate market,” Abbinante testified. “Lenders should continue to have responsibility and liability for preparing the part of the disclosure related to the loan costs, while settlement agents should continue to have responsibility and liability for preparing the part of the disclosure related to the settlement costs.”

Prevent Disruptive and Costly Delays to Closing for Consumer

The CFPB’s proposed requirement that the consumer receive their final settlement disclosure form three days in advance of closing will result in delays and added costs for industry and consumers. Abbinante said providing disclosures earlier in the process makes sense in theory, but is simply not practical and will result in delays, costs and frustration for businesses and consumers.

“In many cases, the buyer and seller renegotiate their contract up until the last minute before closing,” Abbinante said. “These changes can impact a variety of costs that are disclosed on the settlement statement, including bills for repairs, payoffs for the borrower’s other debts and prorations for charges like taxes and home heating oil. If these changes also trigger a three-day waiting period, this will most certainly add costs to the consumer and cause delays to the settlement/closing. Consequences will likely include lost rate locks and disruption to the transaction.”

He added that a three-day rule will also increase costs for settlement agents because it will require settlement agents to duplicate efforts of reviewing the disclosure with consumers, resulting in loss of productivity and profitability.

Provide Industry with Clear Guidance

When the GFE/HUD-1 was revised two years ago, HUD issued 400 frequently asked questions after the rule was published. This was very costly for businesses because each change required new software coding, testing and training. Abbinante said clear guidance helps ensure that consumers get consistent answers to their questions.

“Without clear and definitive guidance, it is very difficult and costly for industry to comply with the regulation,” he said. “For this project, the most important thing is that we know exactly what cost items will be required to go in which location on the forms. This is the only way that the settlement industry can ensure we are developing compliant software that ensures settlement agents can be compliant. Something as simple as where a title insurance premium needs to show on the form can cause a huge issue if it falls into a “gray” area in the final rule.”

Promote Fair Competition

HUD’s 2010 RESPA rule established a system of ‘‘tolerances’’ or limits on the amount actual settlement charges can vary at closing from the amounts stated on the GFE. The rule established three categories of settlement charges, each with different tolerance. The CFPB is considering increasing this liability on lenders. This increased liability will likely lead to unintended consequences for lenders, settlement agents and consumers.

“This increased liability will most likely force lenders to limit the number of settlement agents that they conduct business with for fear that it will be necessary to limit their liability for tolerance violations,” Abbinante said. “We urge the CFPB to work with us to ensure that settlement agents still provide the settlement statement and conduct the closing.”

Avoid Unnecessarily High Costs for Small Business

When the industry went through the most recent round of RESPA changes in 2010, ALTA’s vendor partners reported that the comparatively smaller changes by HUD’s rule cost each software company approximately $800,000 to $1 million to implement. Based on a conservative estimate, this round of changes is expected to cost closer to $2 to $2.5 million per software company. ALTA estimates estimate settlement companies will pay $800 per employee for upfront implementation and training and see a 20 percent annual increase in software fees.

“More troublesome, because of the complexity of this new form, it is estimated that closing staff at small settlement providers will be able to close two fewer transactions per day,” Abbinante said. This represents a 25 percent reduction in productivity for most settlement agents.

In addition, ALTA encourages the CFPB is issue a standard disclosure form, as required by RESPA, rather than a model disclosure form, as required by TILA.

“If the CFPB adopts the model form approach, software companies will need to produce custom disclosure forms that meet the approval of the hundreds or thousands of mortgage lenders rather than one standard form for all transactions,” Abbinante said. “This lack of standardization could lead to a duplication of effort that dramatically increases the costs estimated above and produces confusion for consumers.

Encourage Consumers to Make Informed Decisions

Some versions of the Loan Estimate use the term “not required” to disclose to consumers the closing costs that are not mandated by the lender, but are available to the consumer, including Owners Title Insurance. By calling a service “not-required,” these proposals imply that the service is of less value to consumers. ALTA encourages policymakers to use terms like “recommended” or “advisable.”

“This message prejudices consumers against considering these services, even when these services are often in consumers' best interests and protection,” Abbinante said. “A consumer without an owners’ title insurance policy is out of luck when their ownership interest is challenged, while their lender is off the hook and indemnified of any cost. This is tragic, and it can be prevented.”

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