After much anticipation, the Consumer Financial Protection Bureau (CFPB) issued the final rule for new integrated mortgage disclosures, combining the overlapping disclosures required by the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The industry has been anxiously awaiting the new rule that will certainly change the landscape of the settlement services and mortgage lending industries as we know them.
As stated in the CFPB’s final rule, a new Loan Estimate form will replace the Good Faith Estimate (GFE) and early TILA disclosure, and the new Closing Disclosure statement will replace the HUD-1 and final TILA disclosure.
The good news is that the CFPB has taken to heart the collective concerns raised in response to the issuance of the proposed rule last year and incorporated some important changes in the final rule.
The CFPB first issued a proposal back in July 2012 which sought to integrate the mortgage disclosure requirements of TILA and RESPA. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires a single, integrated disclosure for mortgage loan transactions that includes the disclosure requirements of both acts.
However, there are some discrepancies between TILA and RESPA that needed to be reconciled prior to the issuance of one integrated disclosure. The Mortgage Disclosure Improvement Act of 2008 amended TILA to require that consumers generally receive revised statements of costs no later than three days prior to closing. However, RESPA requires the person conducting the closing to provide the consumer with the HUD-1 at or before closing.
The CFPB surveyed consumer groups and concluded there is widespread frustration with the way closings are conducted today. Most settlement agents would probably agree with that statement. Buying a home is one of the most stressful and life-changing events that many people undertake and often, those frustrations culminate at the closing table over a stack of documents summarized by the HUD-1.
The CFPB is replacing the HUD-1 with the new Closing Disclosure statement, and the bureau has mandated that consumers receive the statement at least three days prior to closing. Under the initial proposal, the borrower was to be provided with an updated Closing Disclosure if a fee that is being paid by the borrower changes during the three days leading up to the closing (subject to limited exceptions). This would then delay closing for an additional three business days. Delayed closings usually mean increased costs and upset borrowers.
An analysis commissioned by the American Land Title Association (ALTA) showed that on average, 50 percent of transactions historically have some closing costs that change within the three days prior to closing. And even that figure seems conservative.
The analysis also showed that if there is a delay caused by the CFPB’s new rule:
- Home sellers will be responsible for extra per diem interest costs to the tune of $64 million a day, or $193 million per three-day reset. And during the window of delay, typically, these homes will be empty since the sellers will have moved out in anticipation of closing.
- Homebuyers will have to pay more to obtain longer mortgage rate locks or pay higher mortgage rates. Rate increases would mean borrowers would have to pay more than $1 billion per year in additional interest throughout the life of their loans.
- In a refinance transaction, for each 1 percentage point of mortgage rate reduction, homeowners would forego more than $21 million in savings per day on their mortgage interest payments, or nearly $64 million for each three-day reset with an updated Closing Disclosure.
The limited exceptions to the three-day rule as first proposed only included minor changes that resulted in less than $100 in increased costs, seller-buyer negotiation, post-closing change to a government fee, correction for non-numerical clerical error, and tolerance refunds.
The three-day rule as initially proposed would likely result in many borrowers missing contractual deadlines and losing out on opportunities to finance their home purchases if it were implemented with such narrow exceptions. This would mean lost earnest money deposits and forfeiture of all the costs they expended leading up to the closing.
The CFPB received extensive public comment about the impact that these types of delays would cause and instituted a much narrower list of changes under the final rule. With the revisions, a new three-day waiting period is required only if the creditor makes a significant change between the time the Closing Disclosure form is given to the borrower and the closing, such as:
- changing the annual percentage rate (APR) above 1/8 of a percent for most loans (and 1/4 of a percent for loans with irregular payments or periods),
- changing the loan product, or
- adding a prepayment penalty.
Narrowing the list of exceptions that prompt an additional three-day waiting period mitigates the potential detrimental effect of regulation-induced closing delays on both the consumer and the settlement industry as a whole.
There was also some confusion regarding whose responsibility it would be to provide the Closing Disclosure to the consumer. The CFPB initially listed two alternatives: (1) lenders solely prepare and provide the disclosure or (2) the lender and settlement agent share the responsibility for preparing and providing the disclosure. The settlement agent is the only neutral third party with real estate expertise in the transaction. Their role is to protect both the borrower and the lender and ensure both parties receive what they bargained for in the end.
In order for the settlement agent to continue to fulfill that role, the CFPB needed to adopt the shared responsibility model and provide some guidance on the division of responsibility. As the rule was initially proposed, it was unclear what disclosures were to be made by the lender, what disclosures were to be provided by the settlement agent, and whose responsibility it was to provide the disclosure to the consumer. This lack of clarity threatened to hinder industry compliance, disrupt current business relationships, and create unnecessary market inefficiencies.
Under the final rule, the CFPB has tasked the creditor with the responsibility for providing the Closing Disclosure form to the borrower. However, the creditor may utilize the settlement agent to provide the form so long as the settlement agent complies with the rules. The compromise strikes a balance between creating certainty regarding roles and maintaining the important function of the settlement agent in the closing process.
The new integrated disclosure rule takes effect August 1, 2015, and according to bureau officials, it will impact every lender, every title company, and every single borrower and property seller.
The clarification provided by the issuance of the final rule has allowed the industry to breathe a collective sigh of relief with the knowledge that the unintended consequences of limiting consumer choice, concentrating risk among fewer settlement providers, and possibly eliminating the role of independent escrow officers altogether will be avoided.
Most in our industry support the CFPB’s effort to streamline and improve the current disclosure forms using clear language and a better visual format. It makes it easier not only for the consumer, but for the settlement agents and creditors who provide the disclosures as well. Richard Cordray, the CFPB’s director, has acknowledged that the CFPB is sensitive to the impact of the proposed rule and has obviously sought to find an acceptable middle-ground with the issuance of the final rule.
The final rule applies to most closed-end consumer mortgages, but is not applicable to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property.