Does Director Cordray Fully Appreciate the Implications of the TRID Rule?
Statements made by CFPB Director Richard Cordray to the National Association of Realtors on May 12, 2015, suggest that the Director may not fully appreciate the implications of the TILA/RESPA Integrated Disclosure (TRID) rule that is scheduled to become effective August 1, 2015.
The TRID rule requires that the combined consummation disclosure (Closing Disclosure) be received by the borrower at least three business days before consummation. Certain changes in the loan require not only a revised Closing Disclosure but also a new three-business-day waiting period. The changes that require a new waiting period are if the annual percentage rate (APR) becomes inaccurate, a prepayment penalty is added or the loan product (or certain loan features) change.
Apparently addressing industry concerns that the waiting period, and potential need for another waiting period if there are loan changes, may delay closings, the Director stated:
“The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits. On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances: (1) any increases to the APR by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans; (2) the addition of a prepayment penalty; or (3) a change in the basic loan product, such as moving from a fixed-rate loan to a variable-rate loan. That is it. We recognize that various other things can and do change in the days leading up to the closing, so the rule makes allowances for those ordinary changes without delaying the closing date in ways that neither the buyer nor the seller may be able to accommodate very easily.”
The Director correctly notes that the CFPB did react to comments that the proposed TRID rule would have resulted in closing delays, because a new waiting period would have been required if the costs to close increased by more than $100. The CFPB revised the proposal so that the final TRID rule requires a new waiting period based on only the APR becoming inaccurate, a prepayment penalty being added or the loan product (or certain loan features) being changed. This was a common-sense revision made by the CFPB. However, the Director’s comment that problems discovered during a walk-through of a home will not trigger the need for a new waiting period is not consistent with industry views and experience. Based on experience, industry members believe that issues discovered through a walk-through of a home before closing can result in changes to the sales transaction that result in changes to the loan terms, and that the loan term changes may cause the APR to become inaccurate.
Also, the Director did not address an important related issue. The TRID rule limits the amount that lender fees and various other fees may increase, but allows the lender to increase fees based on changed circumstances and similar events. The problem is that except in a very limited situation, only the upfront disclosure, called the “Loan Estimate,” may be used to increase fees subject to the TRID rule limits, and the rule does not permit a lender to issue a Loan Estimate after the lender has issued a Closing Disclosure. So if a lender issues a Closing Disclosure for receipt by the borrower at least three business days before consummation, and the lender then learns of changes to the transaction, such as because of a walk-through, that would increase loan fees, in many cases the lender will be in the unenviable position of having to bear the increased costs or deny the loan.
In both of the situations addressed above, matters involving the borrower and seller, and not the lender, will trigger the need for loan changes. Revisions to the TRID rule that would provide greater flexibility that would enable a lender to make appropriate changes, and to do so without triggering a new waiting period, would be welcomed by the industry, and also benefit consumers.
Also, the Director’s statement that with regard to the APR, only increases by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans require a new waiting period, does not reflect the regulatory environment and industry reaction. The TRID rule uses the same standard in effect today for the Truth in Lending Disclosure that a revised disclosure with a new three-business-day waiting period is required if the APR becomes inaccurate. Whether the APR becomes inaccurate is determined based on tolerances addressed in Regulation Z section 1026.22. That section incorporates the statutory APR tolerances of 1/8 of 1 percent for regular transactions and 1/4 of 1 percent for irregular transactions. Under the statutory tolerances the disclosed APR is deemed to be accurate if it is above or below the actual APR by no more than the applicable percentage.
Section 1026.22 also includes a regulatory APR overstatement tolerance. Under that tolerance, if the finance charge is overstated and the APR is also overstated, but by no more than the equivalent finance charge overstatement, the APR is deemed to be accurate. Because there often is confusion as to what is a regular versus an irregular transaction, and because the availability of the APR overstatement tolerance depends on the relationship of the disclosed APR to the disclosed finance charge, it is common in the industry to use only an APR tolerance of 1/8 of 1 percent above or below the actual APR to assess if a new Truth in Lending Disclosure with a new waiting period must be provided. It is believed that many industry members will adopt the same approach to determining whether a new Closing Disclosure with a new waiting period must be provided under the TRID rule.
The Director’s comments in fact reflect the confusion and complexity with regard to whether a transaction is a regular or irregular transaction, which is the basis for many industry members using only the regular transaction tolerance. The Director indicated that the 1/8 of 1 percent tolerance for regular transactions applies to fixed-rate loans, and that the 1/4 of 1 percent tolerance for irregular transactions applies to variable-rate loans. While often that will be the case, it many situations it will not. One of the factors that classifies a transaction as an irregular transaction is if there are irregular payment amounts, other than an irregular first or final payment. A fixed-rate loan that has an interest-only feature for a period of time or a graduated payment feature would have multiple payment levels and, thus, would be an irregular transaction. A variable-rate loan with an initial rate that equals the fully indexed rate would be disclosed as having a single payment level (ignoring the first and final payments) and, thus, would be a regular transaction.
Because of the uncertainty created by the complexity of the APR tolerances, many industry members will likely rely on the regular transaction tolerance of 1/8 of 1 percent to assess if a new Closing Disclosure with a new waiting period is required. This likely will result in more delayed closings than would be the case if the TRID rule were revised to simplify when a new waiting period is required because of changes to the APR.
CFPB “Final” TRID Webinar
The CFPB staff held a “final” webinar on May 26, 2015, to address the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule that becomes effective on August 1, 2015. Presumably the characterization of the webinar as “final” refers to the webinar being the last webinar on the TRID rule before the effective date and not the last webinar on the rule during the remaining span of human civilization.
The CFPB staff noted at the outset that they were only addressing questions on which the CFPB staff had already provided some form of guidance. This may reflect that many industry members had voiced concerns about the CFPB staff providing new guidance that could require changes in policies and procedures or, of greater concern, changes in programming, based on the short amount of time until the August 1, 2015, effective date.
Among various items, the CFPB staff provided informal advice on the topics addressed below.
Preapprovals and Pre-qualifications
The TRID rule removes the so-called “catchall” element from the current definition of “application,” so that only six items of information will constitute an application: The borrower’s name, income and Social Security number, the property address and estimate of the property value, and the loan amount sought. With the removal of the catchall item that allowed lenders to specify any additional information they needed to have an application, industry members wondered whether preapproval or pre-qualification programs could still exist, particularly given that the TRID rule prohibits a creditor that has received an application from requiring verification documents before providing a Loan Estimate.
The CFPB staff advised that consumers may voluntarily provide verification documents before receiving a loan estimate, so creditors can continue to provide preapprovals and pre-qualifications.
Construction to Permanent Loans
The industry has asked for guidance on how to disclose one-time close construction-to-permanent loans and, in particular, has asked for samples of completed Loan Estimates and Closing Disclosures. Although the CFPB staff did not provide any such samples, the staff advised that creditors can follow the guidance in Regulation Z 1026.17(c)(6) and the related commentary. In particular, the CFPB staff advised that the creditor can choose to disclose the construction phase and permanent phase separately, and would disclose each phase in a separate Loan Estimate and Closing Disclosure.
Settlement Service Provider List With Added Service
The CFPB staff addressed the settlement service provider list requirement when, based on changes or a borrower request, a service is added. Like Regulation X, under the TRID rule when a creditor permits a borrower to shop for a service the creditor must provide a written settlement service provider list that identifies at least one provider for each applicable service.
The CFPB staff admitted that the TRID rule does not expressly address the settlement service provider list requirement in the context of a service being added after the initial list was issued. The staff advised that a creditor may elect to (1) update the prior settlement service provider list by including the additional provider; or (2) issue a new settlement service provider list that identifies only the additional provider. The staff also advised that if the creditor elects not to provide an updated or new settlement service provider list, then the charge for the applicable service would be subject to the 0 percent tolerance (apparently on the basis that the creditor was not following the procedure to allow a consumer to shop for the provider).
HUD-1 Comparison Chart for Tolerance Assessment
The CFPB staff confirmed that the closing Disclosure does not contain a disclosure like the Comparison of Good Faith Estimate (GFE) and HUD-1 Charges disclosure in the HUD-1 to assess compliance with the tolerances. The staff advised that under the TRID rule creditors must assess compliance with the tolerances “off sheet”.
Simultaneous Title Policy Issuance Disclosure Approach
The CFPB staff addressed the approach in the TRID rule, much criticized by the industry, for the disclosure of title insurance premiums when there is a simultaneous issue rate. Under the TRID rule, the lender’s policy amount must be disclosed as the full lender’s policy without any adjustment for a simultaneous owner’s policy, and the owner’s policy amount must be disclosed as the sum of the owner’s policy and simultaneous issuance amount, less the full amount of the lender’s policy. The CFPB staff advised that the CFPB still believes this is the best approach, given that in situations in which only lender’s title insurance is purchased the approach shows the full amount of the lender’s policy.
The CFPB staff then addressed situations in which the seller has agreed to pay for the actual cost of the owner’s title insurance policy. In such cases, if the seller is shown as paying the amount of the owner’s policy as disclosed in the closing disclosure, the amount would be less than the actual cost of the policy. The staff advised that there are three methods to show the full amount that the seller actually will pay. In addition to showing the seller paying the disclosed amount of the owner’s policy:
- The remainder could be disclosed as an additional amount paid toward title costs by the seller.
- The remainder could be disclosed as a general seller credit in the summary of transactions section.
- The remainder could be disclosed as a seller credit for the remaining amount of the owner’s title policy in the summaries of transactions section.
The staff noted that the third method is a method suggested by the industry.
Your Home Loan Toolkit
The CFPB staff addressed the CFPB publication Your Home Loan Toolkit, which replaces the Settlement Cost Booklet. The CFPB staff advised that a creditor would not satisfy the requirement to deliver the Toolkit to loan applicants by posting the Toolkit on its website. The staff also advised that industry members may place their company logo on the Toolkit.
Shelby Draft Regulatory Relief Bill Addresses Various Residential Mortgage Issues
Senator Richard Shelby (R-AL) released a draft of a regulatory reform bill titled “The Financial Regulatory Improvement Act of 2015” on May 12, 2015. The draft bill addresses various residential mortgage lending issues, a number of which are summarized below.
TRID Safe Harbor. Section 117(b) of the draft bill would effectively allow lenders to continue to provide the existing Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures for residential mortgage loans even after the scheduled August 1, 2015, effective date of the TILA/RESPA Integrated Disclosure (TRID) rule. Under the section an entity that provides the existing TILA and RESPA disclosures would not be subject to any civil, criminal, or administrative action or penalty for failure to fully comply with the Dodd-Frank provision under which the CFPB adopted the TRID rule.
The safe harbor would apply until 30 days after the date that the CFPB Director publishes a certification in the Federal Register that the TRID rule model disclosures (the Loan Estimate and Closing Disclosure) are accurate and in compliance with all state laws. The concept of federal disclosures being “in compliance” with state laws is interesting given federal preemption. Potentially the concept is intended to address a concern raised by the industry that many state laws in some fashion incorporate the existing disclosures under TILA and RESPA, and have not been updated to reflect the Loan Estimate and Closing Disclosure under the TRID rule.
The industry also has raised concerns about the requirement under the TRID rule to disclose the cost of the lender’s title insurance policy and the owner’s title insurance policy in a manner that differs from the actual pricing of the policies. Potentially the requirement that the Director certify that the Loan Estimate and Closing Disclosure are “accurate” is intended to address the concern.
TRID Waiting Period. A summary of the draft bill provides that Section 117 would remove the three-business-day waiting period under the TRID rule in cases in which the only change from the prior disclosure is that the annual percentage rate (APR) is lowered. Under the TRID rule, the Closing Disclosure must be received by the borrower at least three business days before consummation, and a revised Closing Disclosure with a new waiting period is required if the APR becomes inaccurate, a prepayment penalty is added or the loan program (or certain loan features) change.
The TRID rule uses the same standard in effect today for determining if the APR becomes inaccurate, which triggers the need to provide a revised Truth in Lending Disclosure with a new three-business-day waiting period. One element of the standard is the regulatory APR overstatement tolerance. Under that tolerance, if the finance charge is overstated and the APR is also overstated, but by no more than the equivalent finance charge overstatement, the APR is deemed to be accurate. Because the availability of the APR overstatement tolerance depends on the relationship of the disclosed APR to the disclosed finance charge, many industry participants do not rely on the overstatement tolerance. It is believed that many industry members will adopt the same approach to determining whether a new Closing Disclosure with a new waiting period must be provided under the TRID rule. Apparently, the intent of the draft bill is to eliminate this uncertainty by making clear that if the only change is a decrease in the APR, no new waiting period is required under the TRID rule.
Unfortunately, the current version of Section 117(a) in the draft bill would not achieve the apparent intent. The draft bill would modify the separate disclosure requirement under TILA that applies to high-cost mortgage loans. The waiting period under the TRID rule is not contained in TILA - it is set forth in Regulation Z. Section 117(a) would need to be modified to achieve what appears to be the intent of the draft bill. The change could be accomplished during the May 21, 2015, mark-up.
Ability to Repay Safe Harbor. Section 106 of the draft bill would modify the ability to repay provisions under TILA by creating a safe harbor with respect to a loan if the creditor retained the loan in portfolio since origination or a person acquiring the loan has continued to hold the loan in portfolio since the acquisition, and certain conditions were satisfied. The conditions are that (1) the loan was not acquired through a securitization, (2) any prepayment penalties comply with the phase-out requirements for prepayment penalties that apply to qualified mortgages, (3) the loan does not have a negative amortization feature, interest-only features, or a term of more than 30 years, and (4) the creditor documented the consumer’s income, employment, assets and credit history.
Loan Originator Licensing. Section 118 of the draft bill would create a temporary license for a loan originator who (1) is a registered loan originator (i.e., a loan originator who works for a depository institution) and then becomes employed as a loan originator with a state-licensed mortgage lender, banker or servicer or (2) is a registered loan originator or loan originator licensed in one state and then becomes employed as a loan originator with a state-licensed mortgage lender, banker or servicer in another state. The temporary license would be effective for 120 days. The mortgage industry has long sought a transitional license to allow loan originators to continue to perform loan origination functions when they move from a depository institution to a state-licensed mortgage entity, or from one state (working as a loan originator for a state-licensed mortgage entity) to a state-licensed mortgage entity in another state. Currently, loan originators who change employment from a depository institution to a state-licensed mortgage entity cannot perform loan originator functions until they become licensed. Similarly, with the exception of six states that have implemented a transitional license structure, loan originators who move from one state to a state-licensed mortgage entity in another state cannot perform loan originator functions until they become licensed in that state. This impedes freedom of movement by individual loan originators, and requires state-licensed entities to bear the costs of employing a loan originator during the period that the originator can perform no loan origination functions. A number of state regulators in states that have not adopted a transitional license structure have taken steps to facilitate the movement of loan originators from one state-licensed entity to another, such as by the adoption of the Uniform State Test and use of the Approved-Inactive status for loan originators. However, a more global solution is necessary to ensure uniformity among the states.
Points and Fees. Section 107 of the draft bill would amend the definition of “points and fees” for purposes of qualified mortgage loans and high-cost mortgage loans to exclude amounts that are escrowed for the future payment of insurance and exclude premiums for accident insurance. The exclusion of amounts escrowed for the future payment of insurance is viewed as a conforming change, as amounts escrowed for the future payment of taxes are already excluded from points and fees.
Unlike the Mortgage Choice Act of 2015 (H.R. 685), which the House passed in April 2015 (and prior versions were also passed by the House), the draft bill would not exclude from points and fees any fees or premiums for title examination, title insurance or similar purposes when received by an affiliate of the creditor. Current law excludes such fees and premiums from points and fees if received by a party that is not an affiliate of the creditor, even if the fees and premiums are the same as or exceed the fees and premiums that would be charged by an affiliate of the creditor. However, Section 107 would require the Comptroller General of the United States, who is the head of the Government Accountability Office (GAO), to conduct a study on various access to credit issues and also “on the ability of affiliated lenders to provide mortgage credit.” The study may be a compromise approach to address the different treatment of title charges, and certain other real estate related charges, for points and fees purposes based on whether the charges are received by an affiliate or non-affiliate of the creditor.
Studies. Among other provisions, the draft bill also would (1) require the GAO to conduct a study and provide a report to Congress regarding whether the data published under the Home Mortgage Disclosure Act (HMDA) creates various privacy and identity theft risks (Section 111), and (2) require the federal banking agencies to conduct a joint study and provide a report to Congress regarding the appropriate capital requirements for mortgage servicing assets of banking institutions, including the effect of the Basel III capital requirements. The HMDA data study likely is intended to address the expanded data reporting requirements under Dodd-Frank that are expected to be finalized later this year when the CFPB adopts the final version of a rule proposed by the CFPB in July 2014 and published in the Federal Register in August 2014. The industry has raised privacy concerns regarding the expanded data elements, and a backdrop to the concerns is a GAO findingthat the CFPB needs to improve its privacy and data security procedures.
CFPB Spring 2015 Agenda: Significant Rulemaking Actions on the Horizon
Just in time for the holiday weekend, the CFPB released its Spring 2015 rulemaking agenda last Friday. The agenda sets the following timetables:
Debt collection. In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection. The agenda indicates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in December 2015. The CFPB had indicated in its prior agenda that further prerule activities would occur in April 2015.
Home Mortgage Disclosure Act. In July 2014, the CFPB issued a proposed rule to implement Dodd-Frank Act amendments to HMDA. The agenda indicates that the CFPB expects to issue a final rule in August 2015.
Mortgage rules. In February 2015, the CFPB issued a proposal to modify certain mortgage loan requirements for small creditors, including those that operate predominantly in “rural or underserved” areas. The agenda sets a September 2015 date for a final rule.
In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules. The agenda has a March 2016 date for issuance of a final rule.
State AG – Credit Bureaus Settlement: What Furnishers Need to Know
Last week, Ohio Attorney General Mike DeWine issued a press release announcing the results of a multi-state investigation into the three national credit reporting agencies (CRAs) - Equifax Information Services LLC, Experian Information Solutions Inc., and TransUnion LLC. DeWine and 30 other state attorneys general reached a settlement with the CRAs that will require the CRAs to change certain business practices to purportedly benefit consumers. Although the settlement applies only directly to the CRAs, regulatory pressure may be brought to bear on other consumer reporting agencies to get them to conform to the terms of the settlement. In addition, many of the required changes will also impact the approximately 10,000 furnishers that provide information to the CRAs. Any company acting as a furnisher under the Fair Credit Reporting Act (FCRA) should be prepared to update its procedures for furnishing information to reflect the following settlement requirements:
- CRA Monitoring / Discipline
- CRAs are required to analyze data on disputes to determine whether action should be taken to enhance the e-Oscar system and furnisher conduct in processing automated consumer disputes.
- CRAs are required to establish a working group to share best practices for monitoring furnishers.
- CRAs must implement policies to monitor the performance of individual furnishers.
- CRAs must take corrective action, when reasonably necessary, with respect to furnishers that fail to comply with furnisher obligations and reinvestigation requirements.
- CRAs are required to provide semi-annual reports to the states containing aggregated furnisher metrics. However, CRAs must also provide records and reports about individual furnisher evaluations and material corrective actions upon a state’s request. (This reporting appears to differ from the reporting about furnishers required by the CFPB.).
- Debt Collection / Debt Buying
- CRAs are required to reject data furnished by collection agencies and debt buyers that do not include the name of the original creditor and specified creditor classification codes.
- CRAs are required to take corrective action against furnishers who misreport or misuse creditor classification codes on a recurring basis, including the use of a default value.
- CRAs will no longer report debt that does not arise from a consumer contract or agreement to pay (i.e., parking tickets, fines, etc.).
- CRAs will periodically remove or suppress collection accounts that have not been updated by the collection furnisher within the last six months.
- CRAs must instruct collection furnishers to accurately report when collection accounts are sold, transferred, or are no longer being managed by the furnisher.
- CRAs are required to remove or suppress known medical collections if such debt has been reported paid by a consumer’s insurance coverage.
- After a “reasonable notice period,” CRAs will no longer accept furnisher information in the Metro 1 data reporting format, but only Metro 2 formatted data.
- CRAs are required to form a working group to establish minimum standards for the type of information that furnishers must report for newly opened trade lines or collection data in order for the CRAs to accept the data. For example, CRAs are prohibited from reporting information furnished about authorized users unless a date of birth also has been furnished on new accounts.
- CRAs must send a consumer’s supporting documents to the furnisher as part of the complaint or dispute process.
The changes required under the settlement will be implemented in three phases to allow the CRAs to update their IT systems and to implement the new procedures with the furnishers. All changes are required to be implemented by August 12, 2018.
- Kim Phan
Foreclosure Notices Subject to FDCPA, Federal Court Finds
Sending foreclosure notices to delinquent borrowers constitutes debt collection activity subject to the federal Fair Debt Collection Practices Act (FDCPA), a federal court in Nevada recently ruled.
In Mallory v. McCarthy & Holthus, LLP, delinquent borrowers sued a foreclosure law firm under the FDCPA for sending allegedly misleading foreclosure notices.
The law firm moved to dismiss the FDCPA claim based on the argument that the notices were not “debt collection activity.” The law firm asserted that the letters were “simply notices provided as part of the foreclosure process, compliant with Nevada statutes, and do not constitute attempts to collection on Plaintiffs’ debt.”
The U. S. District Court for the District of Nevada rejected the argument, based in large part on the fact that the complaint alleged that foreclosure notices stated that “this may be considered an attempt to collect a debt and any information obtained will be used for that purpose.”
The court also rebuffed the argument that the law firm did not meet the definition of a “debt collector” under the FDCPA.
The ruling raises the specter that courts may be increasingly willing to expand the scope of conduct covered by the FDCPA to include foreclosure activities.
Oklahoma Amends SAFE Act
Governor Mary Fallin signed SB-377 on May 12, amending provisions relating to the Oklahoma SAFE Act (the Act). The amendment clarifies the Act by adding references to “mortgage lenders” and “servicing” throughout the Act and removes the ability for licensed mortgage brokers, mortgage lenders, and mortgage loan originators (MLOs) to request inactive licensure status. The measure also modifies the education requirements for an MLO by adding one hour of Oklahoma law and regulations to the 20 total hours of pre-licensing education requirements. Finally, the amendment removes the requirement that an MLO must complete his or her continuing education credits in a classroom setting at least every two years. The amendment is effective November 1, 2015.