Stewart CFPB Stewart CFPB

The Proposed Rule

As part of Dodd-Frank, the CFPB was mandated to propose regulations integrating the consumer disclosures required under RESPA and the Truth-in-Lending Act (TILA). This mandate led to the CFPB’s proposed rule on July 9, 2012 and the final rule issued on November 20, 2013.

The CFPB performed consumer testing and sought comments from lenders, title insurers, software companies, settlement agents and others affected by the rule to provide input on all aspects of its proposal issued in July 2012, including the cost of implementation and impact on operations. The Bureau released the final rule on November 20, 2013, with an effective date of August 1, 2015; giving the industry 21 months to implement changes. The CFPB’s rule to integrate, simplify and improve consumer disclosures given in mortgage transactions has five primary changes from the existing regulations. Each is discussed below.

Loan Estimate Form

Loan Estimate Form

The Loan Estimate form will replace the separate disclosures currently required under the Truth In Lending Act (TILA), called the “initial TIL,” and Real Estate Settlement Procedures Act (RESPA), known as the Good Faith Estimate or “GFE”. As described in the rule, the new form can be delivered to the consumer by either the lender or a mortgage broker – but the lender is ultimately responsible for the information it contains.

The form is three pages and was developed by the CFPB through nine rounds of iterative testing with consumers and refined according to comments received during the review period of the proposed rule. It de-emphasizes APR, which consumers found confusing, and includes new disclosures mandated by Dodd-Frank such as Total Interest Percentage and the “In 5 Years” calculation.

Closing Disclosure Form

Closing Disclosure Form

The Closing Disclosure form integrates the HUD-1 required by RESPA and the “final TIL” required under TILA. There are multiple versions of the form to account for different transaction types – such as a refinance and a purchase.  There also is a Seller only form. This new form will be used only for closed-end loans in residential transactions. Other loans such as reverse mortgages and home equity lines of credit will still use the HUD-1 form.

The form mixes the lender and settlement costs with loan terms and replaces the HUD line numbers with an alpha-numeric system. The Closing Disclosure form  itemizes the costs and includes section totals rather than lumping costs together and rolling them up as  is the case with the 2010 HUD-1. Because the form is a mixture of loan information and settlement costs, communication and cooperation between the lender and closing agent will be necessary to complete the Closing Disclosure. If the settlement agent completes the Closing Disclosure form, the lender will need to provide a copy of the Loan Estimate form, as the information it provides will be necessary to complete the Closing Disclosure form.

Three-day Rule

Three-day Rule

The initial Loan Estimate must be delivered or placed in the mail to the borrower no later than three business days after the lender receives the mortgage application and no less  than seven business days before consummation of the loan.  A revised Loan Estimate due to changed circumstances is to be delivered or placed in the mail within three business days of the lender’s knowledge of a changed circumstance; however it must be received by the borrower no later than four business days before consummation of the loan.

The borrower must receive the Closing Disclosure no later than three business days prior to the consummation of the loan.  A revised Closing Disclosure can, in most cases, be delivered and received at the closing. Key points of the Three-day Rule include:

  • If disclosures are not delivered in person but by other means (such as U.S. Postal Service, electronic mail or courier), the borrower is considered to have received the disclosure three business days after placed in the mail, sent by email or placed with a courier. Accordingly if delivering other than in person, an additional three business days is required in order to ensure receipt by the borrower no later than three business days prior to consummation.
  • The creditor can rely on evidence that the consumers actually received the disclosure earlier. For example, if the disclosure is sent by email (assuming the consumer has consented to email), and receipt is acknowledged the same day as sent, then the creditor can rely on the actual day of receipt and consummation may take place on the third business day after the actual receipt.  
  • The Closing Disclosure can change from the time received by the borrower and consummation EXCEPT if (a) the APR changes by 1/8 of 1%, or (b) the loan product changes, or (c) a prepayment penalty is added. In those three instances, a re-disclosure must be received by the borrower three business days before consummation such that consummation would be delayed.
Delivery of Forms

Delivery of Forms

Under the rule, either the creditor or a mortgage broker acting on their behalf may provide the Loan Estimate Form to the consumer. However, in either situation it is the creditor who is ultimately responsible for the complying with all requirements concerning the information provided in the form and its provision to the consumer.

Similarly the Closing Disclosure form can be provided by either of two parties – the creditor or a settlement agent – with ultimate responsibility for the form and providing it to the consumer falling to the creditor. This allows for sufficient flexibility for creditors and settlement agents to ensure they are providing the Closing Disclosure to consumers in the most efficient manner possible.

Tolerance Levels

Tolerance Levels

The concept of “tolerance levels” was introduced with the 2010 GFE and HUD-1.  Under the CFPB rule, this concept is carried forward but some of the items falling within the “buckets” will be changed for loans falling under this rule.

Zero tolerance bucket – There can be no increase for any item in this bucket in the amount paid at closing over the estimated amount on the Loan Estimate form for borrower paid:

  • Charges paid to the creditor and/or mortgage broker for their own fees, such as origination charges
  • Transfer taxes
  • Fees paid to an affiliate of the creditor or mortgage broker for a service required by the creditor (which is not a zero tolerance item under current HUD regulations)
  • Fees paid to an unaffiliated service provider for a service required by the creditor if the borrower was not allowed to shop for the provider (which is not a zero tolerance item under current HUD regulations)

10% bucket – Charges for services that can increase – but by no more than 10% in the aggregate – are as follows:

  • Fees paid to an third-party provider not affiliated with the creditor for a service required by the creditor if the creditor permitted the borrower to shop and the borrower still selected off the creditor’s provider list
  • Recording fees paid by the borrower

Charges that can increase – The costs of items below can increase by an unlimited amount above the estimated amounts on the Loan Estimate:

  • Prepaid interest
  • Property insurance
  • Amounts for escrow deposits (taxes, insurance)
  • Fees paid to third-party providers selected by the borrower and not on the creditor’s list of providers
  • Charges paid for third-party services not required by the creditor

The creditor can issue revised Loan Estimates after the initial Loan Estimate if a “changed circumstance” occurs.  If a “changed circumstance” occurs causing an increase in charges above the applicable “tolerance level” the creditor must usually provide an updated Loan Estimate form within three business days after having knowledge of the change. Examples of “changed circumstances” permitting revisions in the Loan Estimate include:

  • The consumer asks for a change
  • Information provided in the application was inaccurate or has changed since the application
  • New information as to the consumer or transaction is provided that the creditor had not relied on
  • The Loan Estimate form expires
  • Interest rate dependent charges (when the rate is locked by the consumer, creditor must provide revised Loan Estimate showing all such changed charges)
  • Extraordinary event occurs beyond the control of any party
Changes From the Proposed Rule

Changes From the Proposed Rule

In the proposed rule released July 9, 2012, the CFPB recommended including in the APR many charges and fees previously excluded including: title services, closing agent fees, appraisal costs and credit report. The proposal was sometimes referred to as the “All-in APR”. They had also proposed requiring lenders to maintain electronic records of Loan Estimate forms and requiring that records of Closing Disclosure forms be kept in a “standard, electronic, machine-readable format”.

Based on public comments the CFPB received regarding these two proposals, they were not included in the final rule due to implementation and cost concerns. The CFPB has stated that it continues to believe these ideas can benefit consumers and will follow up on both issues at a later time.