April 15, 2015
Complying with the new TILA-RESPA Integrated Disclosure Rule
In less than five months, the mortgage, real estate, and legal industries face the largest change in federal mortgage disclosure requirements in more than 30 years. On August 1, the forms that have become second nature for generations of loan originators, attorneys and borrowers—including the Good Faith Estimate (GFE), HUD-1 and Truth-in-Lending—will disappear for new transactions. In their place will be two completely new forms and a new set of requirements for how and when they are provided to borrowers.
Given the magnitude of the change, we want to help our clients prepare for the shift.
Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has integrated the mortgage loan disclosures under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). The new TILA-RESPA Integrated Disclosure Rule (also called TRID) replaces the four existing disclosures for closed-end credit transactions secured by real property with two new forms:
- A Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and
- A Closing Disclosure that must be provided to the consumer at least three business days prior to consummation of the transaction.
CFPB also released guidance for complying with the new requirements when they come into effect for all applications received on or after August 1, 2015. (Lenders will still be required to use the GFE, HUD-1, and Truth-in-Lending forms for applications received prior to August 1, 2015.) While various parties have requested a delay, the CFPB has been adamant that they will not delay the implementation date, with CFPB Director Richard Cordray repeating this position during Congressional testimony two weeks ago.(i) Even if the CFPB suspends enforcement for six months,(ii) the industry will still be under significant pressure to conform from a secondary market that may reject loans not in compliance with the new TILA-RESPA rule.(iii) Moreover, lenders could face repurchase claims by investors based on potential violations of their repurchase agreements.(iv)
TRID applies to most closed-end consumer mortgages, including certain loans that are not currently subject to RESPA such as: construction-only loans; loans secured by vacant land or by 25 or more acres; and credit extended to certain trusts for tax or estate planning purposes. TRID does not apply to home equity lines of credit (HELOCs), reverse mortgages or mortgages secured by a mobile home or by a dwelling that is not attached to real property. The final rule also does not apply to loans made by persons who are not considered creditors.(v)
The three-day delivery requirement for the Closing Disclosure will impact transaction timelines. Scheduling could become challenging in situations when several transactions rely on other deals to close by a certain date and involve different attorneys, lenders and real estate agents. Failing to meet the three-day delivery requirement on one transaction could derail the subsequent transactions. Furthermore, some lenders, in order to comply with the three-day delivery of the Closing Disclosure prior to closing, plan to institute additional deadlines—such as requiring title premium numbers, endorsements and fees a week or more prior to scheduled closing date—to allow time for document finalization, mailing and customer receipt.(vi) Finally, closing delays ultimately affect when a real estate agent receives his or her commission. And, of course, expect some deals to fall through due to missing the three-day requirement.(vii)
TRID puts more responsibility on lenders for both the timeline and accuracy of the information to the consumer. To comply with the TILA-RESPA rule lenders must obtain necessary information, including title premium and related closing costs, earlier in the process. Specifically, the CFPB holds lenders accountable for the exact charges listed in the new Loan Estimate (LE) form and, furthermore, lenders will have to come within ten percent on many of the other numbers listed. OneTitle will continue to meet—and exceed—all of our partners’ requirements to ensure that our premiums, as well as municipal taxes and recording charges, are reflected accurately.
The Loan Estimate form must be given within three days, which is triggered after six items of information are collected: consumer’s name, income, Social Security number, address of the property, estimated value of the property and the loan amount. This form’s requirements may incent lenders to collect less consumer information up front to avoid the requirement to issue accurate loan estimates early in the process.(viii)
The new Closing Disclosure both reiterates the Loan Estimate form information and memorializes the settlement information. The Closing Disclosure must be delivered to the consumer a full three days prior to closing and, if there are changes during the three-day period, the closing could be delayed. The CFPB made it clear that lenders are liable for the contents of the documents. At least at the beginning of the TRID implementation, we expect that lenders will take a conservative approach and may not tolerate last-minute changes.(ix)
Real estate professionals should no longer expect to be able to make last-minute changes at the closing and professionals should prepare their clients not to demand last-minute changes. In this new closing climate, the American Land Title Association (ALTA) is instructing real estate practitioners to work collaboratively to have all closing documents ready a full week before the closing date. The “bona fide financial emergency” exception included in the regulations is not a reliable way to circumvent the three-day rule and its application will have to be approved by the lender. Importantly, the Rule states that lenders can provide updated information to borrowers at closing; the unknown is just how much risk tolerance this allowance requires of lenders, so we expect a conservative Rule interpretation at first.(x)
Due to liability and other concerns, some larger lenders are taking over most of the document preparation process. Some institutional lenders have already announced that they will complete the closing disclosure form in-house to ensure compliance. Importantly, borrowers will still be able to select a title company to handle the closing, provided the title company is appropriately licensed and follows the new processes the lenders are implementing to conform to the TRID guidelines.(xi) OneTitle is already appropriately licensed and ready and able to work within the new RESPA/TILA guidelines framework.
Furthermore, to conform to the Rule’s consumer protections, some larger lenders will only exchange documents, data and information with attorneys and real estate brokers via secure computer systems. OneTitle has already fully implemented secure email and document delivery systems. The use of this encrypted technology will discontinue the use of unencrypted email, fax and other document delivery methods to better safeguard nonpublic information. Attorneys should make sure that their computer hardware and software are current, since some of the latest technology is not compatible with older systems.
Finally, in states across the U.S. including New York, title companies are required by state law to charge title insurance premiums and discounts in a manner different than the way the CFPB would have them disclose those fees to the consumer.(xii) New York title companies, such as OneTitle, offer discounts on the loan policy when an owner’s policy is simultaneously purchased. Despite the common practice, TRID prohibits lenders from disclosing the discounted simultaneous issue price for the lender’s title insurance policy on the Loan Estimate and Closing Disclosure forms.(xiii) If left unchanged, this disclosure requirement will cause New York consumers to think they need more cash to close, which will result in consumers seeking more out-of-pocket funds, only to be refunded later. Also, title companies will have to provide additional disclosure forms to consumers at closing to show the actual title insurance costs and to prove compliance with New York State law governing industry-filed rates.(xiv) OneTitle, of course, will continue to offer our lower filed rates to consumers, ensuring they realize significant savings on their title insurance.
This is merely a brief summary and discussion of the new TILA-RESPA rule, not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding its requirements.
(i) http://www.alta.org/advocacy/news.cfm?newsID=27377 (“[P]eople should take the Aug. 1 date seriously.”) (ii) Similar to the U.S. Department of Housing and Urban Development’s delayed enforcement of the 2010 RESPA Reform Rule. (iii) http://www.alta.org/advocacy/news.cfm?newsID=27142 (“a loan that has a potential RESPA/TILA error will at a minimum be difficult to sell on the secondary market.”) (iv) January 12, 2015 Blog Post by Marx Sterbcow, Esq. entitled TILA-RESPA implementation deadline triggering warning signs for industryhttp://www.respalawyer.com/2015/01/tilarespa_implementation_deadl.html . See also, http://www.alta.org/advocacy/news.cfm?newsID=27142 (v) Defined as persons who make five or fewer mortgages in a year. (vi) http://www.alta.org/advocacy/news.cfm?newsID=27397 (vii) http://www.alta.org/advocacy/news.cfm?newsID=27143 (viii) http://www.alta.org/advocacy/news.cfm?newsID=27142 (ix) Id. (x) Id. (xi) http://www.nationalmortgagenews.com/news/origination/why-new-cfpb-closing-form-is-driving-lenders-crazy-1044052-1.html?zkPrintable=1&nopagination=1 (xii) January 13, 2015 ALTA Press Release entitled ALTA Says New CFPB Mortgage Forms Disclose Inaccurate Fees http://www.reuters.com/article/2015/01/13/dc-alta-idUSnBw136689a+100+BSW20150113 (xiii) Id. (xiv) http://www.mpamag.com/mortgage-originator/is-the-cfpb-breaking-its-own-rules-21014.aspx