As previously reported, the Consumer Financial Protection Bureau (CFPB) proposed substantive and technical revisions to the TILA/RESPA Integrated Disclosure (TRID) rule, which the CFPB refers to as the "Know Before You Owe" rule. The proposal would incorporate into the TRID rule informal guidance provided by the CFPB staff and make various substantive changes to address issues, many of which were raised by the industry. Comments on the proposal are due by October 18, 2016, and the CFPB is targeting the promulgation of a final rule on or before April 1, 2017. The CFPB expressly requests comments on the time needed to make the changes provided for in the proposal, and whether there is a better or worse time of year for any of the proposed changes to become effective.

CFPB Approach. In a preamble addressing the scope of the proposal, the CFPB states that "it is reluctant to entertain major changes that could involve substantial reprogramming of systems so soon after the October 2015 effective date [of the TRID rule] or to otherwise distract from [the] industry’s intense and very productive efforts to resolve outstanding implementation issues." The CFPB emphasizes that it is "not proposing any revisions that implicate fundamental policy choices" in the TRID rule. The CFPB cites both the rule’s approach to the disclosure of title insurance premiums when lender and owner policies will be issued simultaneously, and the rule’s cure provisions, as examples of policy choices the proposal will not alter. With regard to the cure provisions, the CFPB states it "is concerned that further definition of cure provisions would not be practicable without substantially undermining incentives for compliance with the [TRID] rule." This likely will be a disappointment to the industry, which sought clarification on cures that could be made under the provisions, and a longer time period to implement cures that is more in line with common post-consummation loan file review timeframes.

A number of the proposed revisions to the TRID rule are addressed below. 

The "Black Hole." One of the most—if not the most—frustrating aspects of the TRID rule for lenders is the so-called "black hole," which refers to an inadvertent limit on the ability of a creditor in certain situations to increase fees based on changes. The TRID rule imposes limits, often referenced as "tolerances," on the ability of a creditor to increase fees, and when a permitted basis to increase a fee exists, a creditor may do so by issuing a revised Loan Estimate. The TRID rule also provides that once a lender issues a Closing Disclosure, it may no longer issue a Loan Estimate. To enable a lender to address changes occurring just before consummation, the TRID rule includes a limited exception that allows a creditor to use a Closing Disclosure to increase fees. The exception applies when there are less than four business days between the time that a lender is required to provide a revised Loan Estimate and consummation. 

Industry experience reflects that the exception is too narrow. For example, in many cases, lenders provide a Closing Disclosure and then learn of a change in a timeframe that does not fall within the timing construct of the limited exception. Changes that require a delay in consummation also do not often allow a creditor to rely on the exception. 

The CFPB proposes a relatively straightforward solution, by revising the exception to allow a creditor to use a Closing Disclosure to increase fees based on changes when there are less than four business days between the time that a lender is required to provide a revised Loan Estimate and consummation, or the lender has provided a Closing Disclosure, as long as the lender still complies with the delivery timing requirements for the Closing Disclosure.

TRID Rule Scope—Cooperative Units. The mortgage loan provisions under Regulation Z typically apply to loans secured by a dwelling. The TRID rule takes a different approach as it applies to loans secured by real property. As a result, loans on units in a cooperative often are not subject to the TRID rule, because interests in a cooperative often are not considered real property under state law. The CFPB proposes to change the scope of the TRID rule to apply to loans (other than reverse mortgage loans) secured by real property or a cooperative unit. 

Exemption for Certain Assistance Loans. Subordinate lien loans that are made for the purpose of down payment assistance, closing cost assistance, or similar purposes are exempt from the TRID rule if various conditions are satisfied. If the exemption applies, the creditor must issue the standard initial and final Truth in Lending Act (TILA) disclosures. No disclosures are required under the Real Estate Settlement Procedures Act (RESPA) based on a corresponding exemption.

Two fee-related conditions for the exemption to apply are that the consumer may pay only recording fees, a bona fide and reasonable application fee and a bona fide and reasonable fee for housing counseling, and the total of the fees must be less than one percent of the loan amount. The CFPB notes in the preamble to the proposal that it "has learned that the exemption may not be operating as intended." Industry member experience reflects that, because of the typical low balance of the assistance loans, the fee limit often is exceeded based on recording fees. This can present a difficult compliance issue for a creditor if it initially provided TILA disclosures based on the belief that the exemption would apply, and near the time of consummation the creditor learns that the exemption will not apply because the permitted fees are higher than expected and will exceed the percentage limit. 

The CFPB proposes to modify the fee limits by allowing the consumer to pay transfer taxes, in addition to recording fees and bona fide and reasonable application and housing counseling fees, and imposing the fee limit of less than one percent of the loan amount on only the application and housing counseling fees.

Total of Payments Tolerance. The proposal would expressly provide for total of payments tolerances. For purposes of the general disclosure requirement, the amount disclosed for the total of payments would be considered accurate if it is understated by no more than $100 or greater than the amount required to be disclosed (i.e., greater than the actual total of payments amount). 

For purposes of the right to rescind, there would be three express tolerances:

• A general tolerance under which the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than one-half of one percent of the face amount of the note or $100, whichever is greater, or greater than the amount required to be disclosed.

• Except for a high-cost mortgage loan, with a refinancing by a new creditor with no new advance and no consolidation of existing loans, the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than one percent of the face amount of the note or $100, whichever is greater, or greater than the amount required to be disclosed.

• After the initiation of foreclosure on a loan secured by the consumer’s principal dwelling that secures the loan, the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than $35, or greater than the amount required to be disclosed.

Escrow Cancellation Notice and Mortgage Transfer Notice. In the same rulemaking that included the TRID rule, the CFPB adopted an escrow account cancellation notice requirement (Regulation Z section 1026.20(e)), and a requirement that a mortgage transfer notice include the new owner’s policy on the acceptance of partial payments (Regulation Z section 1026.39). The CFPB notes in the preamble to the proposal that there is uncertainty among industry members as to whether the disclosure requirements apply only to transactions for which the creditor received the application on or after October 3, 2015 (the effective date of the TRID rule), or to transactions regardless when the application was received. The CFPB states in the preamble that it "considers either approach compliant under existing [Regulation Z] comment 1(d)(5)-1." Nevertheless, the CFPB proposes to revise the comment to provide that the two disclosure requirements apply to transactions for which the lender received the application on or after October 3, 2015, and commencing October 1, 2017, to transactions for which the lender received the loan application before October 3, 2015.

Written List of Providers. The CFPB proposes to clarify that the model written list of providers form in Appendix H-27(A) to Regulation Z is not required, although creditors properly using the form will be deemed to be in compliance with disclosure requirements for the written list. The CFPB explains in the preamble to the proposal that the use of the form is not mandatory, and that a creditor may delete non-required information from the form without losing the safe harbor, as long as the changes do not affect the substance, clarity, or meaningful sequence of the disclosure. Note that while the model form includes a column for the amount of each service, the TRID rule does not require that the form include the amount for each service that is disclosed in the form.

The CFPB also proposes to revise the TRID rule to provide that if a creditor permits a consumer to shop for a service, but the creditor fails to provide a written list of providers or the list is not compliant with the TRID rule, then the charges for the applicable services will be subject to the effective zero percent tolerance on increases. This would change the current approach, under which the 10 percent aggregate tolerance would apply for service providers that are not affiliates of the creditor, and the effective zero percent tolerance would apply for service providers that are affiliates of the creditor.

Additionally, the CFPB proposes that when the creditor knows that a service is provided as part of a package or combination of settlement services offered by a single service provider, the specific identification of each service in the package is not required, provided that all the services are services for which the consumer is permitted to shop. 

Property Taxes. The TRID rule lists the following as charges that are not subject to a specific percentage tolerance limit on increases: prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve, or similar account; charges paid to third-party service providers when the consumer may shop for the service and selects a provider that is not on the creditor’s written list of providers; and charges paid for third-party services not required by the creditor. The list does not expressly refer to property taxes, which appears to have been an oversight. The CFPB staff has informally advised that property taxes could be treated as charges paid for a third-party service not required by the creditor. The CFPB now proposes to expressly include property taxes in the list of charges that are not subject to a specific percentage tolerance limit on increases. Estimates of property taxes would, however, be subject to the requirement that the creditor estimate the taxes based on the best information reasonably available to the creditor. 

Fees to Affiliates. Affiliate fees generally are subject to the effective zero percent tolerance, but there is an exception for certain affiliate fees. In the preamble to the proposal, the CFPB addresses the list of services that are not subject to any specific percentage tolerance, and notes that there is uncertainty in the industry regarding whether only the fifth listed charge—charges paid for third-party services not required by the creditor—or all of the listed charges are not subject to a specific percentage tolerance even if paid to an affiliate of the creditor. The CFPB states that it "believes there are reasonable arguments to support either of those interpretations under the current rule." The CFPB proposes to revise the rule to expressly provide that all of the listed fees are not subject to a specific percentage tolerance, even if paid to an affiliate of the creditor.

Construction to Permanent Loans. The CFPB proposes to make various technical changes regarding construction loans, including the incorporation into the TRID rule of guidance that CFPB staff provided informally in webinars or in other contexts. The proposal addresses the following matters, among others:

• The proposal would require that when a creditor elects to disclose a construction-to-permanent loan as one transaction, the creditor must allocate to the construction phase all costs that would not be imposed but for the construction financing.

• Currently, when a loan to finance the construction of a dwelling "may be" permanently financed by the same creditor, the creditor may elect to disclose the construction phase and permanent phase as one transaction or multiple transactions. Under the proposal, the "may be" permanently financed condition would be satisfied if the creditor generally makes construction and permanent financing available, and the consumer does not expressly state that he or she would not obtain permanent financing from the creditor. Thus, as proposed, the "may be" permanently financed condition would not be based on the creditor’s determination regarding the particular consumer. The CFPB expressly requests comment on this approach, including comment regarding a situation in which a consumer first states that he or she will not obtain permanent financing from the creditor, and then subsequently inquires about permanent financing from the creditor. 

• If a creditor will collect, after consummation, inspection and handling fees for the staged disbursement of the construction loan proceeds, the CFPB proposes that the fees would be disclosed in an addendum to the Loan Estimate and Closing Disclosure, and would not be included in the calculation of the cash to close. 

• For construction costs that the consumer will be obligated to pay, any payoff of existing liens secured by the property, and any payoff of unsecured debt, the CFPB proposes that the amounts be disclosed in the Other portion of the Other Costs section of the Loan Estimate and Closing Disclosure, unless the amounts are disclosed in the alternative calculating cash to close table.

• If a portion of the construction loan proceeds will be placed in a reserve or other account at consummation, the CFPB proposes that, at the creditor’s option, the account may be disclosed separately from the other construction costs or may be included in the amount disclosed for constructions costs. When the creditor selects the option to disclose the account separately, the CFPB proposes that the creditor would need to disclose the amount as a separate itemized cost and label the amount with any accurate term that meets the clear and conspicuous standard. 

Per Diem Interest. Under Regulation Z, if a creditor estimates the per diem interest based on the information known to the creditor at the time the disclosure for consummation is prepared, the estimate is deemed accurate. The proposal would clarify that when a creditor estimates the per diem interest set forth in the Closing Disclosure based on the information known to the creditor at the time the disclosure is prepared, the creditor is not required to issue a corrected Closing Disclosure if the actual per diem interest differs from the estimated amount.

Separation of Consumer and Seller Information; Parties Receiving Closing Disclosure. In the preamble, the CFPB addresses inquiries from industry members regarding who may receive copies of the Closing Disclosure. The CFPB notes exceptions under the Gramm-Leach-Bliley Act (GLBA) that permit a financial institution to share a customer’s non-public personal information when the sharing is to comply with federal, state, or local laws, rules, and other applicable legal requirements or required, or is a usual, appropriate, or acceptable method, to provide the customer or the customer’s agent or broker with a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product. The CFPB then states:

"The Closing Disclosure, whether provided as a combined form containing consumer and seller information or separate forms reflecting each side of the real estate transaction conveying the real property from the seller to the consumer, is a record of the transaction (among other things), both for the consumer and creditor, of the transactions between the consumer, seller, and creditor, as required by both TILA and RESPA. Such records may be informative to real estate agents and others representing both consumers and creditors as part of both the consumer credit and real estate portions of residential real estate sales transactions, as they provide the consumer or the consumer’s agent with a record of the transaction. Based on its understanding of the real estate settlement process, the Bureau understands that it is usual, appropriate, and accepted for creditors and settlement agents to provide the combined or separate Closing Disclosure as a confirmation, statement, or other record of the transaction, to consumers, sellers, and their agents, or information on the status or value of the financial service or financial product to their customers or their customers’ agents or brokers."

Thus, in its own way, the CFPB appears to be stating that the second GLBA exception noted above applies to the sharing of the Closing Disclosure with the real estate agents and other parties representing the consumer and seller. The CFPB then addresses the removal of the consumer’s information from the Closing Disclosure provided to the seller and vice versa.  This suggests that when the CFPB is referring to the sharing of the Closing Disclosure with the agents and other representatives of the consumer and seller, it is referring to the sharing of the version of the Closing Disclosure provided to the consumer with the consumer’s agents and representatives, and the sharing of the version of the Closing Disclosure provided to the seller with the seller’s agents and representatives. Further clarification in this important area would be helpful.

While the CFPB proposes commentary revisions to address how information may be removed from the consumer’s or seller’s Closing Disclosure, the CFPB did not propose to change provisions of the rule itself that detail what information may be removed. Thus, it appears that the CFPB did not propose to broaden the seller information that may be removed from the consumer’s Closing Disclosure, such as the real estate agent commissions paid by the seller.

When a consumer will obtain both a first lien and second lien loan at the same time in connection with a purchase transaction, the CFPB proposes that if the Closing Disclosure for the first lien loan records the entirety of the seller’s transaction, then the seller may be provided with a Closing Disclosure for only the first lien loan.

Calculating Cash to Close. The CFPB proposes various changes to the cumbersome calculating cash to close sections of both the Loan Estimate and Closing Disclosure. A number of the changes appear to be designed to address assumptions made by the CFPB in connection with the design of the original TRID rule, such as there would never be a principal reduction with a purchase money loan, that do not reflect actual variations that exist in transactions. The CFPB did not propose to address the difference in closing costs that results from the aggregate accounting escrow adjustment being reflected in the Closing Disclosure but not the Loan Estimate.

Among the various proposed changes:

• The CFPB proposes to address the issue of gift funds by revising the rule to provide that amounts paid to consumers before consummation by parties not involved in the transaction, such as family members, are not required to be disclosed in the calculating cash to close section of the Loan Estimate or Closing Disclosure. This will help to avoid understating the actual cash to close by treating such funds as amounts that the borrower must bring to closing, and not as amounts that will be received from a third party at closing (which is the construct of the current rule). 

• With regard to the calculating cash to close table in the Closing Disclosure, the CFPB proposes to clarify that the amounts disclosed in the table are not subject to a tolerance, but are subject to the general standard that the amounts must be based on the best information reasonably available to the creditor.

• The CFPB proposes to conform the calculation of closing costs financed for the Closing Disclosure with the approach used for the Loan Estimate. 

Model Versus Sample Forms. The CFPB advises in the preamble to the proposal that while the proper use of an appropriate a model TRID rule form in Appendix H to Regulation Z provides for a safe harbor, there is no safe harbor associated with sample forms in Appendix H, and that the sample forms are not a substitute for the text of Regulation Z sections 1026.37 and 1026.38 (which set forth the requirements for the Loan Estimate and Closing Disclosure, respectively), and the related commentary. The CFPB proposes a comment to Appendix H that would identify which forms are the model forms. The CFPB notes that it "has not conducted a systematic review of [the] accuracy [of the sample TRID rule forms, and that] should the Bureau undertake such a review in the future and identify errors, it will adopt appropriate revisions."

Miscellaneous. Among other proposed changes, the CFPB also proposes to clarify the rounding requirements, clarify that prepaid interest is included in the calculation of the total interest percentage, and clarify the calculation of the escrow payments that will be made in the first year following consummation.