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Tackling the TILA-RESPA problem

The mortgage industry faces a whole new set of rules

The sweeping CFPB TILA-RESPA integrated disclosures roll-out will affect almost every residential mortgage loan application that is submitted to a creditor on or after this date. The new rule, which has a mandatory compliance date of Aug. 1, 2015, covers most closed-end loans secured by real property that are extended to consumers. It does not apply, however, to extensions of credit primarily for business purposes (e.g., investment), Home Equity Lines of Credit (HELOCs), reverse mortgages or loans secured by a dwelling that is personal property (e.g., a manufactured home) not attached to real property.

At its core, the CFPB rule consolidates the separate RESPA and TILA application and origination disclosures required under current law into a single set of combined disclosures — an initial Loan Estimate and a final Closing Disclosure. The consolidated disclosures also incorporate certain other disclosures required under Equal Credit Opportunity Act (ECOA) and RESPA, such as the ECOA appraisal disclosure requirement and the RESPA servicing transfer disclosure.

As part of integrating the TILA-RESPA disclosures, the CFPB also has harmonized various delivery requirements, waiting periods, and the definitions of certain key terms.

To dive deeper into the wide-ranging impacts of the Integrated Disclosures roll-out, the following breakdown may be useful.

MODEL FORMS VS. PROMULGATED FORMS

Today, TILA authorizes the CFPB to issue model forms in Federal Reg Z. These model forms can be modified if required. However, RESPA requires that the CFPB promulgate standard forms under Federal Reg X, which generally cannot be modified in any material way. The Dodd Frank Act directed the CFPB to integrate the TIL disclosure model forms with the GFE and HUD-1 standard forms, but did not amend RESPA to no longer require standard forms. As a result, the new TILA-RESPA Integrated Disclosures will be standard forms for any transaction that is subject to RESPA, which, in short, means that virtually no modifications to the regulatory forms will be allowed for federally regulated mortgage loans.

TILA-RESPA INTEGRATED DISCLOSURES – NEW DOCUMENTS AND DOCUMENT RETENTION

Under the new rule, both the new Loan Estimate (which must be provided within three business days of application) and the new Closing Disclosure (which must be provided at least three business days before closing) will retain certain elements of today’s GFE, HUD-1, and TILA forms. However, obtaining and mapping specific information into the format of the newly combined disclosures raises a number of new challenges. These include how best to capture information about loan terms; show mortgage payment projections; include adjustable payment and adjustable interest rate tables (when applicable); detail closing costs and accurately calculate the final amount of cash needed to close.

The new rule also changes the number of years a creditor must retain documented evidence of the disclosures and proof that the creditor complied with all actions required by the final rule. In place of the recordkeeping requirements under current law (generally two years for TILA and three years for RESPA), evidence of the compliance with the integrated disclosure requirements must be kept for at least three years from the later of the date of consummation, the date disclosures are required to be made or the date the action is required to be taken. In addition, the creditor must keep copies of the completed Closing Disclosure and all related documents for at least five years after consummation. If the creditor transfers the servicing rights or sells the loan to an investor, the new owner or servicer (as applicable) is also bound by the five-year record retention requirement.

TILA-RESPA INTEGRATED DISCLOSURES IMPLEMENTATION CHALLENGES

DUAL RULES 
Even after the new TILA-RESPA Integrated Disclosures rule becomes effective next August, today’s separate TILA and RESPA rules will continue to apply to any loans that were initiated prior to the Aug. 1, 2015, effective date. The current separate disclosures also must continue to be supported for transactions that are exempt from the integrated disclosure requirements, such as open-end HELOCs, reverse mortgages, and personal property loans that are not dwellings. This means lenders must be prepared to support a dual-rule environment, and redesign and manage a pipeline that includes both loans that are subject to the new rules and loans that continue to be subject to the old rules.

MANAGING FORM VARIATION POSSIBILITIES
The new Loan Estimate combines the current Initial TIL and Good Faith Estimate (GFE) into a single three-page disclosure. The first page of the new form allows for two possible variations, and the second and third pages may have as many as four possible variations, depending on loan features.

The new Closing Disclosure combines the current final TIL and HUD-1 settlement statement into a five-page document that includes information similar to the Loan Estimate, plus certain additional information. The first page of the new form allows for up to three possible variations, the second and third pages each have one possible variation and the fourth and fifth pages each accommodate up to four possible variations.

To manage the range of possibilities for these two forms, the industry must create and implement numerous business rules to select and complete the proper version of each form for a particular transaction. For example:

  • The Projected Payments section of both forms may require anywhere from one to four columns
  • The presence or absence of Adjustable Payment and Adjustable Interest Rate tables must be accommodated
  • The Closing Cost Details section will differ depending on whether or not the loan has a seller, as will the Calculating Cash to Close section.
  • The presence or absence of Appraisals and Liability after Foreclosure notices must be accommodated
  • The presence or absence of Signature Lines also must be taken into consideration

These differences and variations from today’s disclosures will require originators to develop a clear action plan to redesign and map the right information to the appropriate location in order to accommodate these requirements.

CHANGE OF CIRCUMSTANCE/REVISED DISCLOSURES
The new rules provide for certain tolerances with respect to how much a fee can change from the Loan Estimate to the amount actually charged on the Closing Disclosure. If a lender exceeds those tolerances, it must reimburse the borrower for the difference. While this requirement is also required under RESPA today, the new rule changes the tolerance categories that apply to certain fees.

Unlike the current TILA rules, which require an initial TIL to be redisclosed only when the APR changes beyond applicable tolerances, the new rules provide that the Loan Estimate is binding and cannot be redisclosed, except if redisclosure is required because of a lock event or within three business days after a “changed circumstance” causes certain estimated charges to increase by at least 10%; the consumer becomes ineligible for an estimated charge because the “changed circumstance” affected the consumer’s creditworthiness or the value of the security for the loan; the consumer requests revisions to the credit terms or the settlement that cause an estimated charge to increase; the consumer indicates an intent to proceed with the transaction more than 10 business days after the Loan Estimate was provided; or the special rule for new construction applies.

Note that when an original Loan Estimate was issued before rate lock (or if a locked rate has expired), then the creditor is required to issue a revised Loan Estimate on the lock/relock date, but only rate-related terms and charges may change. In any event, the initial Loan Estimate must be delivered or placed in the mail at least seven business days before consummation. If the Loan Estimate is redisclosed, the consumer must receive the corrected disclosure no later than four business days before consummation and before the date that the creditor provides the Closing Disclosure.

The new rules require the creditor to provide the Closing Disclosure to the consumer no later than three business days before consummation. Further, and notwithstanding the redisclosure timing requirements below, a preliminary Closing Disclosure must be available for inspection by the consumer during the business day immediately preceding consummation. If the Closing Disclosure becomes inaccurate before consummation, the consumer generally must receive corrected disclosures at or before consummation. However, the consumer must receive the corrected Closing Disclosure no later than three business days before consummation in the event that the disclosed APR becomes inaccurate beyond permitted tolerances; the disclosed “loan product” type has changed; or a prepayment penalty is added to the transaction.

In addition, the settlement agent must provide the seller with a copy of the Closing Disclosure no later than the day of consummation. When the consumer’s and seller’s disclosures are on separate documents, the settlement agent must provide the creditor with a copy of the seller’s disclosures.

In those circumstances where a revised disclosure is required post-closing, the new rule requires the corrected disclosure to be provided within 60 calendar days from closing for non-numerical clerical errors or when documenting tolerance violation refunds; other events such as a numerical mistake require the corrected disclosure to be provided within 30 calendar days of the event.

CANCELLATION OF ESCROW
After a borrower closes, there is a new disclosure that is required regarding the cancellation of an escrow account. If the borrower requests the closure of the escrow account, the disclosure must be provided no later than three business days before account closure. If the account is being closed for other reasons, the disclosure must be provided no later than 30 business days before account closure.

OTHER IMPACTS
While this is not intended to be a comprehensive overview of every change for which creditors must prepare, it offers a high-level view of some of the primary challenges they will face. What is not discussed is the significant range of other impacts on third parties, including compliance vendors, fee providers and title/closing agents. Third-party integration certainly must be addressed and, from an industry-wide perspective, lenders and closing agents must come together to ensure that they have coordinated their implementation plans.

Ultimately, these new requirements from the CFPB will have many other consequences, such as the shift in responsibility with respect to the disclosure of settlement costs under RESPA from the settlement agent to the lender. The settlement agent can still provide services to support lenders, but under the new rule, the lender is responsible for ensuring compliance with all elements of the Integrated Disclosures rule.

Clearly, the mortgage industry has a great deal of work to do in order to gear up for the implementation of the Integrated Disclosures requirements next summer. The new requirements will simplify the forms and make them easier for borrowers to understand. While these changes will ultimately serve consumers and the industry well, the distance from today’s rules to the implementation of the new regulations is significant, especially considering the limited amount of time left before the Aug. 1 effective date. Compliance will require untold hours and the superb coordination of mortgage professionals from across the industry to get there. Still, with strong planning, continuous communication, appropriate collaboration and flawless execution, the industry will be ready to move forward with the new Integrated Disclosures on time.

Author’s Note: The regulations discussed here are complex, and this article should not be construed as an exhaustive analysis of all possible considerations. Seeking advice from a professional with expertise on these matters is highly recommended.

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