The CFPB has finalized revisions (“final rule”) to the TILA-RESPA Integrated Disclosure Rule (“TRID Rule”), also known as the Know Before You Owe Rule. The 560-page final rule contains substantive changes on various issues and makes additional clarifications and technical corrections. However, instead of finalizing the proposed resolution to the issue commonly referred to as the “black hole,” the CFPB released a new, separate proposal that adds further clarification to the proposed cure for the black hole and requests comments.
The final rule is effective 60 days after its publication in the Federal Register, but compliance with the rule is optional with respect to transactions for which an application is received before the mandatory compliance date of October 1, 2018. With respect to the escrow closing notice and partial payment disclosure requirements, compliance is mandatory on October 1, 2018, regardless of when the creditor or mortgage broker receives the application.
The industry was eagerly anticipating the proposed resolution to the black hole issue, which refers to circumstances where a creditor has a permissible reason to reset tolerances after it has provided the initial Closing Disclosure and there are four or more days between consummation and the time the revised version of the disclosure is required to be provided. However, due to concerns expressed by industry about the clarity of the proposed amendment, the CFPB declined to finalize the 2016 proposal and instead issued a new proposal to address this matter.
Under the new proposal, creditors would be allowed to use either initial or corrected Closing Disclosures to reset tolerances if the required conditions are met, regardless of when the Closing Disclosure is provided relative to consummation. Thus, under the proposal, there would be no four-business-day timing restriction for resetting tolerances with both initial Closing Disclosures and corrected Closing Disclosures in cases where a permissible reason to reset tolerances exists.
In connection with the new proposal, the CFPB is requesting comment about the following items: (1) the number of cases where creditors have to absorb extra cost increases due to being unable to reset tolerances if they have already provided the Closing Disclosure when they learn about an increase in costs, and the extent to which such possibility is currently priced into loan costs; (2) the incidence of cases where a loan application is rejected due to the inability of a creditor to pass on unexpected cost increases; and (3) the extent to which creditors might change their current practices regarding the timing of provision of the Closing Disclosures, if the current proposal is adopted.
Comments on the new “black hole” proposal will be due 60 days after publication in the Federal Register.
According to the CFPB, the intent of the final rule is to integrate some of the informal guidance the CFPB has periodically issued since the TRID Rule was finalized in November 2013, through webinars, compliance guides, and sample disclosures into the regulation to resolve outstanding implementation issues.
Although the final rule provides resolution to a wide range of issues that have confounded mortgage industry participants, the CFPB declined to provide further guidance regarding the simultaneous disclosure of lender and owner title insurance premiums or include additional cure provisions to correct technical defects. The preamble states that additional cure provisions were omitted from the final rule because “the Bureau is concerned that further definition of cure provisions would not be practicable without substantially undermining incentives for compliance with the rule,” adding that, “the Bureau believes that further defining cure provisions would be extraordinarily complex.”
We highlight a number of key amendments in the final rule below:
Total of Payments Tolerance. The Total of Payments is disclosed on page 5 of the Closing Disclosure and defined as “the total the consumer will have paid after making all payments of principal, interest, mortgage insurance, and loan costs, as scheduled.” In the preamble to the final rule, the CFPB acknowledged confusion regarding the tolerances for the Total of Payments. As a result, the final rule adopts tolerances for the Total of Payments that mirror the statutory tolerances for the finance charge and disclosures affected by the finance charge. Specifically, the final rule provides that the disclosed total of payments will be considered accurate if the amount disclosed as the Total of Payments: (1) is understated by no more than $100; or (2) is greater than the amount required to be disclosed (i.e., the total of payments is overstated).
The final rule also modifies Regulation Z’s right of rescission accuracy tolerance requirements (§ 1026.23(g) and § 1026.23(h)(2)) to include the tolerances that will apply to the Total of Payments disclosure for the purposes of a consumer’s right to rescind under TILA. The tolerances parallel the tolerances for the finance charge in those sections. The applicable tolerances for the Total of Payments that apply to the right to rescind are summarized below:
- The Total of Payments will be considered accurate if it is: (1) understated by no more than 0.5% of the face amount of the note or $100, whichever is greater; or (2) is greater than the amount required to be disclosed.
- In a refinancing by a new creditor that is not subject to the high-cost mortgage loan requirements, if the transaction is not for a new advance and not for a consolidation of existing loans, the amount disclosed for the Total of Payments will be considered accurate if it is: (1) understated by no more than 1% of the face amount of the note or $100, whichever is greater; or (2) is greater than the amount required to be disclosed.
- After the initiation of foreclosure on the consumer’s principal dwelling, the disclosure will be treated as accurate if the amount disclosed is: (1) not understated by more than $35; or (2) is greater than the amount required to be disclosed.
Cooperative Units. The final rule revises the TRID Rule to expressly cover loans secured by a cooperative unit, regardless of whether the unit is treated as real property under state law.
Written List of Service Providers. The final rule clarifies that use of the model written list of service providers form H-27 of Appendix H to the Regulation X is not mandatory, although creditors using the model form properly will be deemed to be in compliance with the written list requirements. In particular, changes that do not affect the substance, clarity, or meaningful sequence of form H-27, such as deleting the column for estimated fee amounts, are acceptable changes to the form.
The final rule also clarifies that if a creditor permits a consumer to shop but fails to provide the written list or does not comply with the disclosure requirements, then the charges for such services would be subject to the 10% tolerance, as long as the fee for the service is paid to an unaffiliated third party. This finalized amendment is a change from the proposed amendment, which would have adopted a stricter zero tolerance for shoppable services where a shopping list is not provided to the consumer, even for service providers that are not affiliates of the creditor.
With respect to the extent a creditor must itemize settlement services on the Loan Estimate and the written list, the final rule clarifies that the written list does not need to include all the settlement services that may be charged to the consumer, but that it must include at least the settlement services required by the creditor for which the consumer may shop. In addition, a creditor must identify settlement service providers that are available and capable of providing the services that are required by the creditor for which a consumer is permitted to shop. The preamble explains that, for example, if a creditor requires shoppable lender’s title insurance, the Loan Estimate must disclose the lender’s title insurance and at least one service provider capable of providing the insurance. However, the Loan Estimate does not need to provide a detailed breakdown of all the incidental fees that are not specifically required by the creditor, but that may be charged by the service provider, such as a notary fee, title search fee, or other associated administrative services.
Construction Loans. The final rule makes various changes and clarifications to matters regarding how construction-to-permanent loans should be disclosed, including:
- The final rule generally provides that in cases where a creditor discloses the construction loan as more than one transaction, the creditor must allocate to the construction phase all amounts that would not be imposed but for the construction financing. The final rule explains that this “but for” allocation method applies only to finance charges under § 1026.4 or points and fees under § 1026.32(b)(1). All other fees and charges that are not finance charges or points and fees may be allocated between the transactions in any manner the creditor chooses.
- The final rule clarifies that construction loan inspection and handling fees collected at or before consummation, including draw fees, are loan costs associated with the construction transaction, which are required to be disclosed on the Loan Costs table on page 2 of the Loan Estimate pursuant to § 1026.37(f). However, under the final rule, a creditor is required to disclose inspection and handling fees that are collected after consummation in a separate addendum to the Loan Estimate and Closing Disclosure under the heading “Inspection and Handling Fees Collected After Closing” rather than in the Loan Costs table, and that such fees are not counted for the purposes of the Calculating Cash to Close table. If the amount of the fees are not known at the time the disclosures are provided, the disclosures in the addendum must be based upon the best information reasonably available to the creditor at the time of disclosure.
- The final rule also adds a new comment that provides examples of how the Loan Estimate timing provisions apply to construction-to-permanent loans. In general, the final rule provides that when disclosing a construction-to-permanent loan as two separate transactions, a creditor must provide a Loan Estimate for each particular phase within three-business days of receiving an application for that phase.
The CFPB declined to adopt a proposal that would have considered a loan to finance the construction of a dwelling to satisfy the “may be permanently financed by the same creditor” condition, in all cases where the creditor generally makes both construction and permanent financing available to qualifying consumers, unless the consumer expressly informs the creditor that he or she will not obtain permanent financing from the creditor.
Privacy. Although not directly addressed in the final rule itself, in the preamble to the final rule, the CFPB discusses the exceptions to the notice and opt-out requirements under the Gramm-Leach-Bliley Act (“GLBA”) that allow creditors and settlement agents to share the Closing Disclosure with certain parties involved in a mortgage transaction. The CFPB specifically cites exceptions to GLBA privacy restrictions that allow a financial institution to share its customers’ non-public information (1) to comply with federal, state, or local laws, rules and other applicable legal requirements, and (2) if such sharing is 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. In addition, the preamble explains that creditors and settlement agents may disclose customer information to third parties with the consent or at the direction of the customer so long as the customer has not revoked the consent or direction.
Notably, the CFPB states in the preamble that the GLBA exception for sharing a record of the transaction would generally apply only to the provision of the consumer’s Closing Disclosure to the consumer’s agent or broker and to the provision of the seller’s Closing Disclosure to the seller’s agent or broker.
The final rule also provides new guidance regarding the methods that a creditor may use to omit a consumer’s information from the Closing Disclosure provided to the seller and vice versa. The amendments also clarify that although a settlement agent may provide a Closing Disclosure to the seller, the ultimate decision to provide separate Closing Disclosures to the consumer and the seller (and to apply any permissible separations of consumer and seller information), is to be made by the creditor.
In addition, the final rule provides that a creditor may provide separate disclosure forms to a consumer and seller if state law prohibits a creditor from disclosing a consumer’s information to parties other than the consumer or bar a creditor from disclosing a seller’s information to parties other than the seller.
Housing Assistance Lending. Currently, TRID contains an exemption from the requirement to provide the Loan Estimate, Closing Disclosure, and special information booklet for certain non-interest bearing subordinate-lien transactions that provide down payment and other home owner assistance, commonly referred to as homebuyer assistance loans. In general, a loan qualifies for this partial exemption if it satisfies six criteria, including the requirement that the total of costs payable by the consumer at consummation is less than 1% of the amount of credit extended and includes no charges other than fees for recordation, application, and housing counseling.
In practice, the CFPB found that the exemption was not operating as intended, because, due to the small size of these loans (typically between $2,500 and $10,000), the fees for recordation often exceed the 1% threshold on costs payable by the consumer at consummation. To resolve this issue, the final rule revises the fee limits by excluding recording fees and transfer taxes from the 1% threshold. The final rule also permits consumers to pay transfer taxes, in addition to recording fees and application and housing counseling fees, without losing eligibility for the partial exemption.
The TRID Rule currently provides that a creditor must provide the disclosures required by § 1026.18 (i.e., the TILA disclosures of the cost of credit, commonly referred to as the TIL Disclosure Statement) for loans that meet the partial exemption criteria. Acknowledging that the unique characteristics of homebuyer assistance loans and current loan origination systems may make it difficult to comply with the § 1026.18 disclosure requirements, the final rule permits creditors to provide the TRID disclosures for loans that satisfy the partial exemption in place of the § 1026.18 disclosures. This means that for eligible homebuyer assistance loans, creditors may, at their option, provide either the disclosures required by § 1026.18, or the Loan Estimate and Closing Disclosure. The special information booklet is not required to be provided in connection with an eligible homebuyer assistance loan, regardless of the disclosure option the creditor chooses.
Rate Lock Redisclosure. The final rule clarifies that creditors must provide a revised Loan Estimate when the initial Loan Estimate did not disclose an interest rate subject to a rate lock agreement, even if the terms and charges disclosed remain the same. With respect to the situation where the interest rate becomes subject to a rate lock agreement on or after the date the initial Closing Disclosure is provided, the final rule states that a corrected Closing Disclosure is required only when the disclosures on the Closing Disclosure become inaccurate as a result of the lock. Given that the information disclosed on the Loan Estimate regarding the terms of the rate lock agreement are not disclosed on the Closing Disclosure, the final rule indicates that a rate lock agreement that occurs after the initial Closing Disclosure is provided does not by itself require a corrected Closing Disclosure unless the charges and terms become inaccurate as well.
Partial Payment Disclosures and Escrow Closing Notices. The CFPB acknowledged that it is unclear based on the current Rule whether the post-consummation escrow cancellation notice and partial payment disclosures apply to all covered transactions as of October 3, 2015 (i.e., the original TRID effective date), or only to covered transactions for which the application was received on or after the original TRID effective date. The final rule clarifies that the requirement to provide these post-consummation disclosures will be mandatory for all covered transactions as of October 1, 2018, regardless of when the application was received. The final rule also establishes an optional compliance period, giving creditors the option to provide the required disclosures for all applicable pre-and post-TRID loans without regard to the application date until the mandatory compliance date.
Per-Diem Interest. Currently, Regulation Z provides that any disclosure with respect to per-diem interest collected upon consummation is accurate if the disclosure is based on information actually known to the creditor at the time that the disclosure is prepared. The final rule clarifies that, even if the amount of per-diem interest actually paid by a consumer differs from the amount disclosed, a creditor is not required to provide a post-consummation Closing Disclosure if the only changes that would be required to be disclosed in the corrected disclosure would be changes to per-diem interest and any disclosures affected by the change in per-diem interest. However, the amendment also provides that in situations where a creditor is providing a corrected Closing Disclosure for reasons other than changes in per-diem interest and the per-diem interest has also changed, the creditor must correct the per-diem interest (and affected disclosures) in the post-consummation corrected Closing Disclosure as well.
Expiration Date. The final rule states that once a consumer has indicated an intent to proceed with a transaction, the expiration date disclosed on the initial Loan Estimate is to be left blank on any subsequent revised Loan Estimates.
Simultaneous Subordinate Financing. The final rule provides that Closing Disclosures for simultaneous subordinate financing purchase transactions may leave the disclosure of the seller’s name and address blank if the first-lien Closing Disclosure will record the entirety of the seller’s transaction. The final rule also explicitly permits creditors to use the alternative table on the Closing Disclosure for simultaneous subordinate financing if the first-lien Closing Disclosure records the entirety of the seller’s transaction and satisfies certain disclosure requirements.
The Escrow Account Table on Page 4 of the Closing Disclosure. The TRID Rule requires creditors to make various disclosures about escrow accounts on page 4 of the Closing Disclosure. While the current rule specifically excludes amounts for mortgage insurance premiums from the page 4 escrow account disclosure, the amendments provide that amounts for ongoing mortgage insurance premiums that are included in the escrow account analysis prescribed by Regulation X, § 1024.17 are included in the disclosure.
The final rule also provides creditors with an option to calculate the “Escrowed Property Costs over Year 1” disclosure (if an escrow account will be established) and the “Estimated Property Costs over Year 1” (if no escrow account will be established) disclosure on a 12-month period beginning with the borrower’s initial payment date or beginning with consummation. Currently, the regulation requires creditors to make those disclosures based only on a 12-month period beginning with consummation.
In addition, the final rule provides that additional pages may be attached to the Closing Disclosure to accommodate the complete listing of all items required to be shown under the escrow account disclosure table. In the situation where such an addenda is used, a reference such as “See attached page for additional information” placed in the applicable section of the Closing Disclosure.
Rounding and Decimal Places. The final rule clarifies various issues surrounding rounding and decimal places. For instance, the current Rule simply provides that the disclosure of the per diem amount and the monthly amounts required for initial escrow payments are not required to be rounded to the nearest whole dollar. The final rule clarifies that these amounts should be rounded or truncated to the nearest cent and disclosed to two decimal places. Thus, under the final rule, a creditor is required to disclose per-diem interest of $68.1254 as $68.13 or $68.12.
Lender Credits on the Loan Estimate. The final rule amends the Rule to clarify that both specific and general lender credits, as determined by the legal obligation between the creditor and consumer, are included in the disclosure labeled “Lender Credits” under Total Closing Costs table on the Loan Estimate.
Seller Credits on the Loan Estimate. The final rule provides that on the Loan Estimate, creditors may, at their option, disclose specific seller credits by either: (1) disclosing the specific credits as a lump sum in the Calculating Cash to Close table, or (2) by reducing the amounts disclosed for specific items in the Loan Costs or Other Costs table under § 1026.37(f) and (g). For example, the final rule provides that if the creditor knows at the time of the delivery of the Loan Estimate that the seller has agreed to pay half of a $100 required pest inspection fee, the creditor may either disclose the required pest inspection fee as $100 under Loan Costs with a $50 seller credit disclosed in the Calculating Cash to Close table or disclose the required pest inspection fee as $50.
Principal Reduction and Tolerance Cure Disclosures. The final rule provides details for proper disclosure of principal reductions (i.e., principal curtailments), including for situations where principal reductions are used to provide tolerance refunds.
Miscellaneous. The final rule includes other modifications to the TRID Rule, as well as dozens of clarifications and technical corrections, including: the Calculating Cash to
Close table; the “In 5 Years” calculation; payment ranges on the Projected Payments table; the Payoffs and Payments table; payoffs with a purchase loan; recording fees; the Summaries of Transactions table; and the total interest percentage calculation.
The 2017 TILA-RESPA Final Rule is available here: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201707_cfpb_Final-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf.
The 2017 TILA-RESPA Proposal is available here: http://files.consumerfinance.gov/f/documents/201707_cfpb_Proposed-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf.