Consumer Financial Protection Bureau
ALTA Urges CFPB to Preserve Role of Independent Third-party Settlement Agents
|November 8, 2012
ALTA submitted a letter today (Nov. 6) to the Consumer Financial Protection Bureau (CFPB) sharing concerns about the bureau’s proposed regulations to combine the overlapping federal disclosure forms required by RESPA and TILA.
In an effort to help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table, the CFPB on July 9 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 (TIL), Good Faith Estimate (GFE) and HUD-1 Settlement Statement (HUD-1) disclosures. Deadline to comment was Nov. 6.
While ALTA supports the CFPB’s efforts to streamline disclosures and make them easier for consumers to locate key information, the proposed rule will dramatically alter the settlement process and harm consumers.
“The best thing that the bureau can do to protect consumers in a mortgage transaction is to maintain the robust role settlement agents currently play as an independent third party to the transaction,” said Michelle Korsmo, ALTA’s chief executive officer. “However, the current proposal will have unintended consequences of limiting consumer choice, concentrating risk among fewer settlement providers and potentially eliminating the role of the independent third-party settlement agent. The impact of these outcomes on consumers could be devastating.
“We should remember title insurance and settlement companies didn’t cause the housing crisis and didn’t take advantage of consumers and investors. Consumers deserve an independent, third-party at the settlement table and this rule should ensure this role remains in the real estate transaction,” Korsmo continued.
Currently, settlement agents are required to provide the HUD-1, while lenders provide the revised TIL disclosure. The Bureau proposes two alternatives for which party 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.
To preserve the valuable role of the independent settlement agent, ALTA proposes that the settlement agent provide the Closing Disclosure to the consumer. ALTA urged the CFPB to clarify which parts of the Closing Disclosure the settlement agents and lenders are each required to prepare and then leave it to the parties to determine who will deliver the completed disclosure to the consumer.
ALTA suggested that the creditor be responsible for preparing information contained in its systems and files (generally, pages 1, 4, and 5 of the proposed disclosure) and the settlement agent remain responsible for the information contained in its system (generally, pages 2 and 3 of the proposed disclosure). After preparing their respective parts, either the lender or settlement agent (following identical rules) would combine and provide the completed Closing Disclosure to the consumer. This option would allow both the creditor and the settlement agent to each prepare and be responsible for information currently in their control or systems, as they do now under TILA and RESPA.
“Our proposed modifications would improve consumers’ ability to understand their transactions by enabling settlement agents to continue to provide their expertise and the important checks and balances at the closing table,” Korsmo said. “Local settlement agents during closings across the country work directly with consumers, answering questions about the sources and accuracy of the variety of settlement costs. Since they are members of the local community, settlement agents are familiar with local customs and practices and can provide assistance to consumers during the closing process.”
Additionally, ALTA said the bureau’s alternatives for delivery of the Closing Disclosure could be anti-competitive. Holding lenders liable for the accuracy of the information and delivery of documents could force lenders to utilize national settlement firms in order to manage liability over the settlement process. This would lessen consumer choice and competitiveness in the marketplace for settlement services.
Concerns With Three-Day Rule
In its letter, ALTA also shared concerns about the proposed three-day rule. The proposed rule says the lender must give consumers the Closing Disclosure at least three business days before the consumer closes on the loan. 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. According to Dr. Nam Pham, who provided analysis commissioned by ALTA, the average transaction will take longer to close due to this portion of the proposal. According to Dr. Pham:
- Home sellers will be responsible for extra per-day interest costs to the tune of $64 million a day and $193 million per reset. Typically these homes will be empty since the sellers will have moved out in anticipation of closing.
- Home buyers would likely pay more to obtain longer mortgage rate locks or pay higher mortgage interest rates. It’s estimated that home buyers would have to pay more than $1 billion per year in additional interest throughout the life of their loans.
- In a refinance transaction, homeowners would forgo more than $21 million in savings per day and nearly $64 million for each three-day reset on mortgage interest payments for each 1 percentage point of mortgage rate reduction.
The Bureau has proposed a number of exceptions to the three-day requirement for some common changes, including changes as a result of last-minute negotiations between the buyer and seller, such as results from a property walkthrough; changes that amount to less than $100 total; changes (such as recording fees) that cannot be known until after closing; technical errors; and amounts paid by the lender to cure a tolerance violation.
ALTA encouraged the CFPB to include these additional exceptions to prevent delays in closings:
- Closing costs paid by or on behalf of the seller that do not impact the buyer, including sellers’ debts, liens or judgments
- Closing costs paid by or on behalf of the buyer, but unrelated to the loan costs (such as changes to or decisions to purchase property insurance coverages, flood insurance, owner’s title insurance or the like)
- Payment to discharge any defects, liens, encumbrances or other matters requiring curative action which are discovered in a title search or examination
- All prorations as long as the underlying per-day rate does not change or they are paid to a state or local government instrumentality or authority
- Recording costs and other fees incurred due to additional documentation used for the consumer’s convenience (such as a power of attorney)
- Any increase in the borrowers’ costs due to a change to the sales contract, mutually agreeable to the buyer and seller and not objected to by the lender, or as a result of local custom or practice regardless of when the change is made or the amount of the change
ALTA also suggested the exception for changes that amount to less than $100 total be converted to 1 percent of the loan amount.
In order to comply with the three-day rule, ALTA asked the CFPB to provide guidance on several questions, including:
Disclosure of Title Fees
- What constitutes delivery of the closing disclosure?
- What constitutes “consummation?”
While the CFPB’s proposed forms do make some improvements in the way they provide information to the consumer, one place they fall short is in their disclosure of title-related fees. Attempting to disclose the cost and availability of Owner’s Title Insurance has been a lingering debate since the last round of RESPA Reform in 2009. With differences across the country in who pays for owner's title insurance, it is difficult to devise a single scheme to accurately disclose the cost to consumers on a standardized form.
The CFPB is proposed requiring owners’ title insurance to be listed as “(Optional).”
“By incorrectly disclosing the costs of title insurance, the bureau is doing consumers a disservice that will make it more difficult for them to understand the costs of their transaction,” ALTA said in the letter. ALTA said using a modifier such as optional will prejudice consumers against making financial decisions that are in their best interest.
Another area addressed by ALTA is the new line-numbering scheme proposed on the Closing Disclosure. The current three and four-digit line numbering system on the HUD-1 has been dropped. The proposed Closing Disclosure form only sets specific line numbers for a small number of fees. Without specific line numbers, software vendors are faced with the challenge of trying to determine the appropriate placement of data. Also, unlike with the current HUD-1, very few of the closing cost items are hard coded to appear in the same spot on all Closing Disclosures. Instead, closings costs must be listed in alphabetical order under the appropriate cost subsection.
“While these are costly programming challenges, the lack of standard formatting for where costs are listed on the disclosures will make it difficult for consumers to compare disclosures from different lenders and for different transactions,” ALTA wrote in its letter. “Each lender, type of transaction and specific loan product will require their own sets of loan and closing costs. Since most loan and closing costs will not appear in the same place on every disclosure, consumers attempting to compare competing Loan Estimates or Closing Disclosures from different transactions will have barriers to comparing those costs.”
To reduce software costs and improve consumers’ ability to understand their transactions, ALTA suggests retaining the current line numbering system and requiring more costs to be hard coded in a set location on the disclosure.
“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, we see potential problems and encourage the bureau to continue working with the industry to refine the rule and test the proposed forms and rules on consumers. Getting this right is important to ensure that consumers have a safe and efficient closing process.”
It was only a few years ago that HUD finalized the previous RESPA reform, which according to Dr. Pham, cost the industry $157.4 million ($13.7 million to upgrade software, $97.6 million for settlement agent training and $53.2 million of productivity losses). While the Bureau estimates that the total one-time cost related to the Proposed Rule will be $100.1 million, ALTA believes that a more accurate estimate—given the size and scope of this regulation—is that it will cost the industry $314.7 million, or twice the impact of the 2010 changes.
It’s expected that the CFPB will review comments through the first quarter of 2013 and issue final RESPA/TILA regulations and forms during the second or third quarter of next year. It’s projected the industry could be using the new mortgage disclosures in 2014. To keep informed about what’s going on, go to www.alta.org/cfpb
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