Real Estate Focus - Are You Ready for the New Mortgage Disclosure Requirements?
For over 30 years, federal law has required that lenders provide consumers with certain disclosure forms (i) at the time they apply for a mortgage loan and (ii) at or shortly before they close on a mortgage loan. These mortgage disclosures, required under the Truth in Lending Act ("TILA") and Real Estate Settlement Procedures Act of 1974 ("RESPA"), were intended to provide consumers with information to help them better understand the actual costs involved in purchasing a home. Because many people found the overlapping federal forms confusing, Congress directed the Bureau of Consumer Financial Protection (the "CFPB") to integrate the mortgage loan disclosures required under TILA and RESPA. In accordance with this mandate, the CFPB issued a final rule (the "TILA-RESPA Rule") providing for the replacement of the current forms with two new mortgage documents - the Loan Estimate and the Closing Disclosure.[i]
The TILA-RESPA Rule will apply to most closed-end mortgage applications made on or after October 3, 2015 though different requirements will apply to timeshares and construction loans. 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 must continue to use current disclosure forms required by TILA and RESPA. The TILA-RESPA Rule also does not apply to loans made by persons who make five or fewer mortgages a year.
The new forms use clear language and design so that consumers can more easily understand what, at times, can be a complicated transaction. Apart from a reduction in legalese, some of the more obvious benefits of the new forms include:
(i) The combination of several forms and new statutory disclosure requirements into two forms versus the existing four forms; which should mean less clutter for consumers and duplicative work for lending institutions.
(ii) Clear presentation of information typically considered to be most important to consumers, including the interest rate, monthly payment and total closing costs which will be set forth on the first page. This should hopefully make it easier for consumers to comparison shop for mortgages.
(iii) The provision of more information about the cost of taxes, insurance and how the interest rate and payments could change in the future which should help consumers better determine whether they can afford the loan now and in the future. The addition (as set forth in more detail below) of a greater degree of reliability with regard to the costs associated with closing on the home. Is there anyone in the residential real estate market who has not had a client surprised by actual costs at closing?
(iv) Clearer warnings to consumers about features they may want to avoid such as prepayment penalties, balloon payments and the possibility of negative amortization.
The Loan Estimate is designed to give consumers a good faith approximation of the full cost and terms of the mortgage loan and will replace two current federal forms - the Good Faith Estimate designed by the Department of Housing and Urban Development ("HUD") under RESPA and the initial Truth in Lending disclosure designed by the Board of Governors of the Federal Reserve System ("Federal Reserve") under TILA. The new form combines some of the disclosures required by the existing forms with other newly required disclosures along with disclosures that are currently provided separately, such as the appraisal notice required by the Equal Credit Opportunity Act and the servicing notice required by RESPA.
The Loan Estimate must be delivered or placed in the mail (i) not more than three (3) business days after receipt of an application and (ii) no later than seven (7) business days before closing.[ii] An application is deemed received under the TILA-RESPA Rule once the lender is provided the following information: the consumer's name, the consumer's income, the consumer's social security number (necessary to obtain a credit report), the property address, the mortgage loan amount and a property value estimate.[iii] For purposes of calculating the three (3) day requirement, a business day is defined as any "day on which the creditor's offices are open to the public for carrying on substantially all of its business functions."[iv] On the other hand, a business day is defined as all calendar days except Sundays and legal holidays for purposes of calculating the seven (7) day requirement.[v]
The consumer may modify or waive the seven (7) business day requirement after receiving the Loan Estimate if the consumer has a bona fide personal financial emergency that necessitates closing the transaction before the end of the waiting period. Whether a consumer has a bona fide personal financial emergency depends on the facts surrounding the consumer's individual situation.[vi] An example of a bona fide personal financial emergency would be the sale of a consumer's home at foreclosure, where the foreclosure sale would proceed unless the loan proceeds were made available to the consumer during the waiting period. In order to modify or waive the waiting period, the consumer must give the creditor a dated, written statement that describes the emergency, specifically modifies or waives the waiting period, and is executed by all consumers primarily liable on the loan.[vii]
In order for an estimate to be considered given in "good faith", the charges imposed on the consumer may not exceed the amounts originally disclosed in the Loan Estimate. There are, however, certain exceptions including:
(i) Limited increases for certain charges. An estimate of a charge for a third-party service or a recording fee is in good faith if:
(a) the aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed on the Loan Estimate by more than 10%;
(b) the charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and
(c) the creditor permits the consumer to shop for the third-party service.[viii]
(ii) Variations permitted for certain charges. An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed in the Loan Estimate:
(a) prepaid interest;
(b) property insurance premiums;
(c) amounts placed into an escrow, impound, reserve or similar account;
(d) charges paid to third-party service providers selected by the consumer that are not on a list of service providers provided by the creditor to the consumer; and
(e) charges paid for third-party services not required by the creditor regardless of whether the third-party provider is an affiliate of the creditor.
(iii) Revised estimates. A creditor may use a revised estimate of a charge instead of the originally disclosed estimate of the charge if the revision is due to any of the following reasons:
(a) Changed circumstances affecting settlement charges or eligibility. Changed circumstances which cause the estimated charges to increase or affect the consumer's creditworthiness or the value of the security for the loan include: (1) an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or the transaction; (2) information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or (3) new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate.[ix]
(b) Revisions requested by the consumer. The consumer requests revisions to the credit terms or the settlement that cause an estimated charge to increase.[x]
(c) Interest rate dependent charges. The points or lender credits change because the interest rate was not locked when the Loan Estimate was originally provided. No later than three (3) business days after the date the interest rate is locked, the creditor must provide a revised Loan Estimate to the consumer with the revised interest rate, points, lender credits and any other interest rate dependent charges or terms.[xi]
(d) Expiration. The consumer indicates an intent to proceed with the transaction more than ten (10) business days after the Loan Estimate was provided.[xii]
(e) Delayed settlement on a construction loan. In transactions involving new construction, where the creditor reasonably expects that settlement will occur more than sixty (60) days after the Loan Estimate is provided, the creditor may provide a revised Loan Estimate if the original Loan Estimate clearly and conspicuously states that at any time prior to sixty (60) days before consummation, the creditor may issue revised disclosures.[xiii]
If the creditor revises a Loan Estimate in reliance on one or more of the aforementioned exceptions, the creditor must provide the revised Loan Estimate to the consumer within three (3) business days of receiving information sufficient to establish that the exception applies.[xiv] Moreover, the creditor may not provide a revised Loan Estimate on or after the date on which the creditor provides the Closing Disclosure. Thus, the consumer must receive a revised version of the Loan Estimate no later than four (4) business days prior to closing.
Apart from a reasonable credit report fee, a lender cannot impose any fees on the consumer until such time as the Loan Estimate has been provided to the consumer and the consumer has advised that it will proceed with the application.[xv] Additionally, the creditor shall not require a consumer to submit documents verifying information related to the consumer's application before a Loan Estimate has been provided to the consumer.[xvi]
The new Closing Disclosure is designed to help consumers prepare for the actual costs that will be due at the closing and, like the Loan Estimate, will replace two current federal forms - the HUD-1 designed by HUD under RESPA and the revised Truth in Lending disclosure designed by the Federal Reserve under TILA. The Closing Disclosure contains additional new disclosures required by the Dodd-Frank Act[xvii] and a detailed accounting of the settlement transaction. Creditors may, however, provide estimated disclosures on the Closing Disclosure using the best information reasonably available when the actual term is unknown to the creditor at the time disclosures are made.[xviii] The Closing Disclosure may be provided by either the creditor or the settlement agent though the creditor retains ultimate responsibility for ensuring that the form is provided in accordance with the rule.[xix]
Creditors must ensure that a consumer receives the Closing Disclosure at least three (3) business days before the consumer closes on the loan.[xx] If the Closing Disclosure is not delivered to the consumer in person, the consumer is considered to have received the disclosures three (3) business days after they are delivered or placed in the mail.[xxi] It should be kept in mind that a "business day" for purposes of calculating these requirements means all calendar days except Sundays and legal public holidays.[xxii] As with the seven (7) business day waiting period for the Loan Estimate, the consumer may modify or waive the three (3) business day waiting period if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency.[xxiii]
There appears to be a common misperception that any change to the Closing Disclosure will require that a revised Closing Disclosure be prepared by the creditor, thus extending the waiting period and delaying the closing. In reality, the requirements governing changes to the Closing Disclosure vary depending on which item(s) are changed and when the change occurs.
(i) Changes before consummation. Generally speaking, the creditor is allowed to provide the consumer with a revised Closing Disclosure at or before closing if a change occurs to one or more of the disclosures set forth in the original Closing Disclosure without requiring a new three (3) day waiting period. Only three changes require a new Closing Disclosure and the commencement of a new three (3) day waiting period, including:
(a) if the creditor makes changes to the APR above 1/8 of a percent for most loans (and 1/4 of a percent for loans with irregular payments or periods);[xxiv]
(b) if the loan product is changed, causing the previously disclosed information to become inaccurate (e.g., fixed versus adjustable rate);[xxv] or
(c) if a prepayment penalty is added, causing the statement regarding a prepayment penalty to become inaccurate.[xxvi]
(ii) Changes due to events after consummation. If during the 30-day period following closing, an event in connection with the settlement of the transaction occurs that causes the disclosures in the Closing Disclosure to become inaccurate, and such inaccuracy results in a change to an amount actually paid by the consumer from the amount disclosed in the Closing Disclosure, the creditor shall deliver or place in the mail corrected disclosures not later than thirty (30) days after receiving information sufficient to establish that such event has occurred.[xxvii]
(iii) Changes due to clerical errors. If the Closing Disclosure contains non-numeric clerical errors, the creditor must provide a corrected Closing Disclosure not later than sixty (60) days after closing.[xxviii]
(iv) Refunds related to the good faith analysis. If amounts paid by the consumer exceed applicable tolerances for the amounts specified in the Loan Estimate (e.g., 10% for third-party services), the creditor must refund the excess payment and provide a corrected Closing Disclosure reflecting the refund no later than sixty (60) days after closing.[xxix]
So, the long awaited changes to the federal mortgage disclosure requirements are now at hand. While the final rule is not as intimidating as the original proposal, it will nevertheless require close coordination among various participants in the home closing process to make sure closings are not unduly delayed. In particular, the creditor and the settlement agent will need to work together so that the "best information reasonably available" is obtained several days and preferably at least a week before closing is scheduled. Failure to do so could otherwise result in potentially unnecessary delays to closing.
This article may be considered advertising under applicable state laws.
This article is provided by AldrichEgg LLC for educational and information purposes only. It is not intended and should not be construed as legal advice.
©2015 AldrichEgg LLC, 46 Main Street, Suite 106, Sparta, New Jersey 07871. All rights reserved.
[i] Bureau of Consumer Financial Protection, Final Rule, Integrated Mortgage Disclosures Under The Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) (Nov. 20, 2013).
[ii] 12 C.F.R. § 1026.19(e)(1)(iii)(A)-(B).
[iii] 12 C.F.R. § 1026.2(a)(3)(ii).
[iv] 12 C.F.R. § 1026.2(a)(6).
[vi] 12 C.F.R. § 1026.19(e)(1)(v).
[viii] 12 C.F.R. § 1026.19(e)(3)(ii)(A)-(C).
[ix] 12 C.F.R. § 1026.19(e)(3)(iv)(A)-(B).
[x] 12 C.F.R. § 1026.19(e)(3)(iv)(C).
[xi] 12 C.F.R. § 1026.19(e)(3)(iv)(D).
[xii] 12 C.F.R. § 1026.19(e)(3)(iv)(E).
[xiii] 12 C.F.R. § 1026.19(e)(3)(iv)(F).
[xiv] 12 C.F.R. § 1026.19(e)(4)(i).
[xv] 12 C.F.R. § 1026.19(e)(2)(i)(A)-(B).
[xvi] 12 C.F.R. § 1026.19(e)(2)(iii).
[xviii] Comment 19(f)(1)(i)-2.
[xix] 12 C.F.R. § 1026.19(f)(1)(v).
[xx] 12 C.F.R. § 1026.19(f)(1)(ii)(A).
[xxi] 12 C.F.R. § 1026.19(f)(1)(iii).
[xxii] 12 C.F.R. § 1026.2(a)(6).
[xxiii] 12 C.F.R. § 1026.19(f)(1)(iv).
[xxiv] 12 C.F.R. §§ 1026.19(f)(2)(ii)(A), 22(a).
[xxv] 12 C.F.R. §§ 1026.19(f)(2)(ii)(B), 37(a)(10).
[xxvi] 12 C.F.R. §§ 1026.19(f)(2)(ii)(C).
[xxvii] 12 C.F.R. §§ 1026.19(f)(2)(iii).
[xxviii] 12 C.F.R. §§ 1026.19(f)(2)(iv).
[xxix] 12 C.F.R. §§ 1026.19(f)(2)(v).