On August 1, 2015, new rules will roll out that will dramatically change financial disclosure in closed-end credit transactions secured by 1-4 unit dwellings attached to real property (i.e., a single-family homes, condos or manufactured homes). The changes to the Truth in Lending Act and the Real Estate Settlement Procedures Act alter current law in 4 ways:
- They call for new disclosure documents, that combine the four now required into two,
- The documents must be delivered sooner than they are today and at several newly specified times during the transaction,
- Lenders may revise loan estimates only within strict tolerance limits and under limited circumstances, which do not include technical errors, miscalculations or underestimates,
- The new rules will affect creditors, mortgage brokers, agents, business partners and any employee who accepts applications, processes loans, or monitors transaction compliance.
What transactions do the changes apply to?
The new rules apply to most closed-end consumer mortgages and to credit extended to certain trusts for tax or estate planning purposes for which a creditor or mortgage broker receives an application on or after August 1, 2015. Certain types of loans that are now subject to TILA but not RESPA will now be subject to the TILA-RESPA rule’s integrated disclosure requirements. These include construction-only loans and loans secured by vacant land or by 25 or more acres.
The new rules do not apply 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. The final rules will also not apply to loans made by individuals who are not considered “creditors,” because they make five or fewer mortgages in a year. Those transactions will continue to require the use of existing good faith estimate documents, HUD-1s and Truth in Lending disclosure forms.
The new disclosure documents
The new rules consolidate four existing disclosure documents into two. The early TILA disclosure and traditional good faith estimate are combined into a new disclosure called the Loan Estimate, and the final TILA disclosure and HUD-1 settlement statement will be consolidated into a new form called the Closing Disclosure.
In order to make the disclosure easier for consumers to understand and to facilitate comparison shopping for loans, certain key loan information has been placed on the first page of the Loan Estimate and new sections and tables have been added. These include the loan terms (including amount, interest rate, and monthly principal and interest payments) and the projected payments (including principal and interest, mortgage insurance, and estimated total monthly payments).
A “Costs at Closing” section in the Loan Estimate provides information including total interest percentage and total amount of interest that will be paid over the loan term as a percentage of the total loan amount. In addition, the Loan Estimate Comparison shows how much the borrower will have paid in principal and interest over the first five years of the loan, and how much of the principal will have been paid off over that time period.
The Closing Disclosure generally must contain the actual terms and costs of the transaction. The Consumer Financial Protection Bureau’s form, which the lender must use, includes sections for general information, loan terms, projected payments, costs at closing, loan calculations and contact information.
The Loan Estimate must be delivered to the consumer twice: first, within three business days of receipt of the loan application and again, no later than the seventh business day before consummation of the transaction, which is defined as when the consumer becomes contractually obligated to the creditor on the loan. The Closing Disclosure must be given to the consumer at least three business days before consummation of the loan.
Changes, revisions and tolerances in the Loan Estimate
This is the subject of considerable concern for lenders because, in the interest of protecting consumers, the new rules impose very stringent limits on changes to the Loan Estimate and on differences between estimated and actual costs, as described in the Closing Disclosure. Some creditors are now imposing additional fees, sometimes termed “Recording Service fees” to cover anticipated shortages due to miscalculation.
The Loan Estimate must contain a good faith estimate of credit costs and transaction terms. If any information necessary for an accurate disclosure is unknown, the creditor must use the best information reasonably available at the time the disclosure is provided to the consumer, and exercise due diligence in obtaining the information. Lenders may not revise Loan Estimates to correct technical errors, miscalculations, or underestimations of charges.
Creditors may charge the consumer more than the estimated amount to account for:
- The consumer’s changed circumstances,
- Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account,
- Services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor’s written list of service providers, and
- Charges paid to third-party service providers for services not required by the creditor.
Lenders have also recently negotiated an extension of time to issue a revised Loan Estimate when an interest rate moves from floating to locked and a provision for disclosing that a creditor has reserved its right to issue a revised Loan Estimate for loans funding new construction.
Certain actual charges may vary from estimated charges by as much as 10 percent, while others are subject to zero tolerance. Within the category of 10 percent tolerance are recording fees and charges for third party services.
There is zero tolerance for variation in charges for:
- Fees paid to the creditor, mortgage broker, or an affiliate of either,
- Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service, and
- Transfer taxes.
When consumers pay more than permitted, the creditor must refund the money.
Creditors scramble to get ready
These are clearly big changes for lenders, both in terms of the new documentation that must be delivered on set dates and the more rigorous requirements for accuracy in the Loan Estimate. Many have been gearing up since the changes were first instituted in the second half of 2014. However, implementation is no small task, requiring complex, complicated changes to banks’ entire lending processes and procedures.
In addition, since the new requirements do not go into effect until August 1, lenders will have to maintain a dual system, continuing to use current document processes up to the implementation date, while simultaneously preparing for a transition.
The dual track will also be something of a permanent feature in banks’ and mortgage brokers’ future lending lives. The new rules do not apply to certain types of loans, like home equity lines of credit and reverse mortgages. Lenders originating these will need to continue generating today’s TILA disclosure forms, good faith estimates and HUD-1s in addition to those newly required for other real property lending by the TILA-RESPA changes.
Penalties for noncompliance
There are multiple new pitfalls for the lender, including the risk of noncompliance in five key areas:
- Failure to meet the tight deadline for the initial loan estimate,
- Inaccuracy of estimated fees,
- Failure to properly disclose changed fees,
- Changed circumstance disclosure timing, and
- Failure to provide the settlement services providers list,
Noncompliance now carries with it a private right of action for actual damages, statutory damages in certain cases, court costs, and attorney’s fees.
Most notable are the statutory penalties of up to $4,000 for failure to properly provide certain disclosures, including those for the borrower’s interest rate and APR. Also, under the Dodd-Frank financial reform law, the Consumer Financial Protection Bureau can impose civil money penalties of $5,000 per day per violation, $25,000 per day for reckless violations, and $1 million per day for knowing violations. The assignee of a mortgage can be subject to the same claims that can be brought against the original creditor. As you can imagine, violations leading to claims against investors could be very costly. Finally, failure to issue Loan Estimates in a timely way could lead to a violation of the Unfair, Deceptive, or Abusive Acts or Practices rules.
Although the new TILA-RESPA rules should make routine real estate transactions more transparent and more predictable for consumers, they present enormous challenges for creditors. Nonetheless, ready or not, here they come. Those institutions that are unsure about what their new responsibilities are or that have not already implemented new procedures and protocols to ensure compliance should address these issues as soon as possible.