As we reported previously, the Consumer Financial Protection Bureau (CFPB) recently issued long-awaited amendments to the Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule, also known as the “Know Before Your Owe” rule. The CFPB also issued a proposal to address the so-called “black hole” issue, which refers to situations in which a lender may not be able to use a Closing Disclosure to reset fee tolerances. The amendments will become effective 60 days after publication in the Federal Register, although compliance will be optional until October 1, 2018. Comments on the black hole proposal will be due 60 days after publication in the Federal Register.
As the CFPB indicated when it proposed the amendments, its general intent was not to address larger policy issues and instead to adopt changes to the TRID rule to reflect informal guidance previously provided by CFPB staff in webinars or otherwise. The CFPB remained true to its intent. Larger issues on which the industry seeks clarification and changes, such as liability and the ability to cure errors, are not addressed by the amendments. On the most significant policy issue addressed by the CFPB, the so-called black hole, the CFPB deferred action by proposing a new amendment. We address in this article the black hole proposal and various final amendments to the TRID rule.
Black Hole Proposal. Under the TRID rule, a Loan Estimate is the disclosure primarily used to reset tolerances. Because the final revised Loan Estimate must be received by the consumer no later than four business days before consummation, the Commentary to the TRID rule includes a provision under which a creditor may use a Closing Disclosure to reset tolerances if “there are less than four business days between the time” a revised Loan Estimate would need to be provided and consummation. Because of the four-business-day timing element, in various cases when a creditor learns of a change, the creditor is not able to use a Closing Disclosure to reset tolerances. This situation is what the industry termed the “black hole.” The industry repeatedly asked the CFPB to address the black hole issue.
In the TRID rule proposed amendments issued in July 2016, the CFPB included a proposal regarding the black hole issue. As proposed, the existing Regulation Z Commentary provision that permits the use of a Closing Disclosure to reset tolerances (section 1026.19(e)(4)(ii)-1) would remain unchanged, and a new Commentary provision would be added (section 1026.19(e)(4)(ii)-2). The proposed Commentary provision appeared to retain the timing element of the existing provision that creates the black hole issue for an initial Closing Disclosure, but permit the use of a corrected Closing Disclosure to reset tolerances without regard to the timing element. Many industry members interpreted the proposal to effectively eliminate the black hole issue with regard to a corrected Closing Disclosure.
In the preamble to the current proposal, the CFPB advises that it actually intended only to clarify that, if the conditions for using a Closing Disclosure to reset tolerances are met, including the timing element, then either an initial Closing Disclosure or a corrected Closing Disclosure could be used to reset tolerances. The CFPB also advises that despite the proposal's limited intent, parties commenting on it were not uniform in their interpretations, with many interpreting the proposal to allow use of a corrected Closing Disclosure to reset tolerances without regard to when the disclosure was issued relative to the timing of consummation.
The CFPB decided not to finalize the originally proposed amendment, and to issue the current proposal. As stated by the CFPB in the preamble, “under the current proposal, creditors could use either initial or corrected Closing Disclosures to reflect changes in costs for purposes of determining if an estimated closing cost was disclosed in good faith, regardless of when the Closing Disclosure is provided relative to consummation.” The CFPB proposes that the amendment, if adopted, would become effective 30 days after publication in the Federal Register, although it seeks comment on the effective date. Creditors still would be limited to resetting tolerances to the circumstances currently set forth in the TRID rule, and still would need to issue a corrected Closing Disclosure within three business days of learning of the circumstance.
The CFPB seeks comment on various issues, including:
(1) the extent to which the current four business day timing element has prevented creditors from resetting tolerances;
(2) the average costs and nature of the costs involved when the timing element has prevented creditors from resetting tolerances; and
(3) the extent to which creditors are providing the initial Closing Disclosure so that it is received “substantially before the required three business days prior to consummation with terms and costs that are nearly certain to be revised.”
The CFPB indicates that it designed the Closing Disclosure to be the final disclosure of costs, and it is concerned about whether the proposal, if adopted, could lead to Closing Disclosures being issued early, particularly at a time when future cost revisions are nearly certain. The CFPB also seeks comment on whether it should limit the circumstances in which a creditor may use a corrected Closing Disclosure to reset tolerances, or limit the third-party fees and creditor fees that can be reset with a corrected Closing Disclosure.
Effective Date and Mandatory Compliance Date. As noted above, the TRID rule amendments will become effective 60 days after publication in the Federal Register, but compliance with the amendments will not become mandatory until October 1, 2018. Industry members have asked the CFPB in the past to take this approach to implementing rule changes, an approach that was used by the Federal Reserve Board when amending Regulation Z based on Truth in Lending Act section 105. Under that section, rule revisions that change disclosure requirements must have an effective date of the October 1 that follows by at least six months the promulgation of the rule, and creditors may comply with the newly promulgated disclosure requirement before the October 1 effective date.
The CFPB advises in the preamble to the TRID rule amendments that a creditor is permitted to comply with the amendments all at one time, or to phase in changes before the mandatory compliance date, whether based on application dates or during the course of a transaction. However, any implementation of the amendments may not result a violation of any existing provisions of Regulation Z that are unchanged by the amendments.
The CFPB indicates that it will take the same good faith approach in its oversight creditors' efforts to come into compliance by the mandatory date with the final TRID rule amendments as it did with the implementation of the original TRID rule.
For those hoping that the CFPB will now use the earlier effective date and later mandatory compliance date approach going forward, the CFPB advises that the approach “may not be appropriate in the context of other final rules with more significant substantive changes, more novel (as opposed to clarifying) amendments, or provisions whose staggered implementation posed a greater risk of consumer harm [or] in circumstances where the provisions of the final rule were sufficiently related that implementing them piecemeal would cause significant conflict with either the existing rule or final rule.” The CFPB should be mindful of the provisions in TILA section 105 that are noted above.
Cooperatives. The CFPB modified the scope of the TRID rule so that loans on units in a cooperative will be covered regardless of whether the cooperative is treated as real property under applicable state law.
Informational Loan Estimates. The CFPB added a Commentary provision to make clear that a creditor is permitted to provide a revised Loan Estimate for informational purposes to reflect updated information not relating to the resetting of tolerances. However, creditors who issue informational Loan Estimates may find that no good deed goes unpunished. Even an informational Loan Estimate will be subject to the standard of being based on the best information reasonably available to the creditor at the time the disclosure is provided. Thus, creditors would have to check on all information in an informational Loan Estimate to ensure that it was up to date based on the best information reasonably available to the creditor, or risk violating the standard. The standard effectively operates as a tolerance.
Partial Exemption for Down Payment Assistance and Similar Loans. Currently, Regulation Z contains a partial exemption for down payment assistance and similar loans if they meet various conditions, and there is a corresponding exemption in Regulation X under RESPA. If a loan qualifies for the exemptions, the loan is exempt from both the RESPA and TRID rule disclosure requirements, but the standard TILA disclosures must be provided.
One condition of the partial exemption is that the total costs payable by the consumer for the transaction at consummation must be less than 1 percent of the amount of credit extended, and may include only (1) fees for recordation of the security instruments, deeds and similar documents, (2) a bona fide and reasonable application fee, and (3) a bona fide and reasonable fee for housing counseling services. To address industry comments that the fee condition often prevents a loan from qualifying for the partial exemption, the CFPB proposed to exclude recording fees and transfer taxes from the fee limitation. The CFPB adopted the proposal and also adopted an optional approach under which the creditor can elect either to provide the standard TILA disclosures or provide the TRID rule disclosures. The optional approach provides a method for creditors to avoid being in no man’s land when, based on the belief that the partial exemption will apply, the creditor initially provides the standard TILA disclosures, but later in the loan process determines that the exemption will not apply. The creditor is stuck in this situation, because it cannot go back in time and provide the TRID rule disclosures. The optional approach allows the creditor to provide the TRID rule disclosures for a down payment assistance or similar loan, regardless of whether the loan ultimately qualifies for the partial exemption. The optional approach also addresses comments submitted by interested parties that some loan origination systems can no longer produce the standard TILA disclosures, or cannot accurately produce such disclosures for down payment assistance and similar loans because of the unique loan terms.
Written List of Providers. The CFPB modifies the Commentary to make clear that removing the column for estimated fee amounts from the model written list of providers form is an acceptable change.
The CFPB had proposed that if a creditor permitted a consumer to shop for a service, but the creditor did not provide the written list of providers at all, or the written list did not comply with the TRID rule, then the charges for the service would be subject to the zero percent tolerance, and not the 10 percent aggregate tolerance. The latter tolerance is applicable under the original TRID rule in situations where the written list is not provided, if the provider of the service is not an affiliate of the creditor. The CFPB did not adopt the proposal, but added the concept to the Commentary that whether the creditor permits the consumer to shop for a service consistent with TRID rule section 1026.19(e)(1)(vi)(A) is determined based on all the relevant facts and circumstances.
Fees Not Subject to a Specific Percentage Tolerance. The following fees are not subject to a specific percentage tolerance, although they must be estimated based on the best information reasonably available to the creditor: (1) prepaid interest, (2) property insurance premiums, (3) amounts placed into an escrow, impound, reserve or similar account, (4) charges paid to third-party service providers selected by the consumer that are not on the creditor’s written list of providers, and (5) charges paid for third-party services not required by the creditor. The CFPB made a few changes in this area.
There was confusion in the industry as to whether only the last charge on the list, or all of the charges, is not subject to a specific percentage tolerance even if paid to an affiliate of the creditor. The CFPB redrafted the provision to clarify that all of the charges are not subject to a specific percentage tolerance even if paid to an affiliate of the creditor.
Property taxes were inadvertently left off of the list in the original TRID rule, and the amendments add property taxes to the list.
The CFPB also added an interesting concept for the charges not to be subject to a specific percentage tolerance. Not only must the charges be estimated based on the best information reasonably available to the creditor, the charges also must be bona fide. One has to wonder if the CFPB may be attempting to use the TRID rule to impose a position similar to the Department of Housing and Urban Development’s interpretation that the fee-splitting prohibition of RESPA prohibits one service provider from charging the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed. This position was rejected by the Supreme Court in Freeman vs. Quicken Loans, 566 US ___, 132 S.Ct. 2034 (2012). The Court held that “[i]n order to establish a violation of §2607(b), a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons.”
Total of Payments Tolerance. The CFPB adopted tolerances for the Total of Payments disclosure that follow the existing tolerances for the finance charge. Thus, for example, the Total of Payments disclosure will be deemed accurate if it is understated by no more than $100 or is greater than the amount required to be disclosed. The Total of Payments disclosure also will be subject to same tolerances for purposes of the right to rescind that exist for the finance charge.
Total of Payments Calculation. The CFPB modified the calculation of the Total of Payments by revising the Commentary to provide that charges that would otherwise be included as components of the Total of Payments are to be excluded if they are designated in the Closing Disclosure as being paid by the seller or others. Charges that the seller or another party, including the creditor, pay with a specific credit also are excluded from the Total of Payments. This approach differs from the “In 5 Years” calculation for the Loan Estimate, which does not provide for the exclusion of covered loan costs that are paid by others directly or with a specific credit.
Total Interest Percentage Calculation. The CFPB clarified that the calculation of the Total Interest Percentage includes prepaid interest, and that if such interest is disclosed as a negative number then it is included as a negative value in the calculation of the Total Interest Percentage.
Per Diem Interest. The Commentary is revised to provide that in the event the actual per diem interest differs from the amount disclosed in the Closing Disclosure, a corrected Closing Disclosure is not required to be provided after consummation merely to correct the per diem interest and any disclosures affected by the change in per diem interest. However, if a creditor issues a corrected Closing Disclosure after consummation for reasons other than the per diem interest, the creditor must update the per diem interest and disclosures affected by the per diem interest to reflect the actual amounts.
Construction Loans—Allocation of Costs and May Be Permanently Financed Concept. For a construction-permanent loan that is disclosed as multiple transactions, the CFPB revised the Commentary to provide that finance charges under Regulation Z section 1026.4 and points and fees under Regulation Z section 1026.32(b)(1) must be allocated to the construction transaction if they would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase. Fees and charges that are not used to compute the finance charges under Regulation Z section 1026.4 or points and fees under Regulation Z section 1026.32(b)(1) may be allocated between the construction and permanent transaction in any manner that the creditor chooses.
The CFPB had proposed to require that if a creditor generally provides both construction and permanent financing, when a consumer applied for a construction loan, the creditor would have to provide disclosures for both a construction loan and permanent loan, unless the consumer expressly stated that he or she would not obtain permanent financing from the creditor. The proposal appeared to be a solution in search of a problem. Parties commenting on the proposal generally opposed the concept, and noted the potential for misunderstanding by consumers if they received a disclosure for loan they were not seeking. The CFPB decided not to adopt the proposal.
Model Versus Sample Forms. The CFPB had proposed to indicate only the following Loan Estimate and Closing Disclosure forms are model forms, and that all of the other forms in Appendix H are sample forms: Loan Estimate forms H-24(A) and (G), Closing Disclosure forms H-25(A) and (H) through (J), Spanish-language Loan Estimate forms H-28(A) and (I), and Spanish-language Closing Disclosure forms H-28(F) and (J). While the proper use of a model form provides for a safe harbor, there is no safe harbor for sample forms. The proposed change, if adopted, would have been significant, as examples of various text that must be inserted in the Loan Estimate or Closing Disclosure are set forth only in sample forms. The industry, as well as Fannie Mae and Freddie Mac, opposed the proposal. The CFPB decided not to adopt the proposal, and advises in the preamble to the TRID rule amendments that “use of an appropriate sample form, if properly completed with accurate content, constitutes compliance with the requirements of §§ 1026.37 or 1026.38 and associated commentary, as applicable.”
The CFPB also advised that while parties commenting on the rule requested revisions to the sample forms to address apparent discrepancies between the forms and the TRID rule, the CFPB declined to revise the forms, noting that “[d]oing so would be inconsistent with the Bureau’s focus in this rulemaking on providing additional clarity in an expeditious manner.” When proposing the TRID rule amendments, the CFPB indicated that it would not review and revise the sample forms as part of the regulatory effort.
Escrow Cancellation Notice and Partial Payment Policy Disclosure. Although not integrated disclosure provisions, the CFPB included with the original TRID rule provisions a requirement under Regulation Z section 1026.20(e) to provide a notice in connection with the cancellation of an escrow account maintained in connection with a loan, and a requirement under Regulation Z section 1026.39(d)(5) to address in a mortgage loan transfer notice the partial payment acceptance policy of the new owner. The CFPB notes in the preamble to the TRID rule amendments that there is uncertainty within the industry as to whether these post-consummation disclosures apply to applicable transactions for which an application was received on or after October 3, 2015 (applications received on or after this date are subject to the TRID rule), or all applicable transactions as of October 3, 2015, regardless of when the application was received. The CFPB advises that on and after October 1, 2018, the requirement to provide the post-consummation disclosures will be mandatory for all applicable transactions, regardless of the date the corresponding loan application was received.
Calculating Cash to Close. The CFPB made numerous changes in an attempt to improve the Calculating Cash to Close disclosures, including allowing a creditor to treat gift funds as not being paid at consummation when the consumer will receive the funds earlier. However, the Calculating Cash to Close section remains unduly complicated and flawed. The CFPB should either simplify the section and ensure that the disclosed amounts, as computed under the TRID rule, reflect actual values, or eliminate the section from the TRID rule disclosures.