Now that the Consumer Financial Protection Bureau (CFPB) has issued its first group of mortgage regulations, let’s look at what the CFPB hasn’t done yet—and when we can expect it to be done. The CFPB delayed two of the most controversial and difficult of the mortgage reforms:
1. The revised definition of “finance charge”; and
2. The integrated mortgage disclosures rule.
Both of these proposals are meant to provide consumers more meaningful information to understand their loan terms and to make their loan decisions. The CFPB should issue the final rules for both changes sometime later this year.
Consumers recognize and generally understand the concept of the annual percentage rate (APR) disclosure today because it’s a uniform and familiar term. But the CFPB, of its own accord and not because of the Dodd–Frank Act, proposed to amend the definition of “finance charge” for mortgage loans to include most of the fees and costs related to the mortgage.
This change would increase APRs for most loans, which in turn could push many loans into higher-priced loan categories with increased compliance requirements. To deal with this problem, the CFPB introduced another new metric: the transaction coverage rate (TCR).
Finance charge and APR
In proposing changes to the definition of finance charge, the CFPB wants to more accurately reflect the overall cost of credit on mortgages. To this end, APR would include almost all of the up-front costs of the loan, including, most notably, third-party fees. A less obvious purpose of this rule is to “discourage the proliferation of certain ‘junk fees,’ such as fees for preparing loan-related documents.”
Transaction coverage rate
The CFPB proposed to determine coverage under the Home Ownership and Equity Protection Act rule, the ability-to-repay rule, and the appraisals rule through the use of the TCR calculation instead of an APR calculation. The TCR would be closer to the current APR, and would exclude most fees the creditor, the mortgage broker, or an affiliate of either don’t retain.
Integrated mortgage disclosures
The proposed integrated mortgage disclosures rule is designed to resolve the fact that consumers currently receive two different but overlapping disclosures at application and at closing. Housing and Urban Development (HUD) issues one under the Real Estate Settlement and Procedures Act (RESPA), and the CFPB issues another under the Truth in Lending (TIL) Act.
In theory, then, this rule could reduce the compliance burden for credit unions, because it will become the single point of reference when dealing with mortgage disclosures.
The CFPB’s proposed disclosure form would replace the RESPA Good Faith Estimate and the early Regulation Z disclosures with a single “loan estimate form.”
Also, a new “closing form” would replace the HUD-1 and the current TIL closing disclosures. The rule also will include the escrow disclosure requirements, along with additional new disclosures the Dodd-Frank Act requires.
The new rules already dominate compliance planning for the next year, but credit unions must save capacity for the disclosure changes that also will come out later in 2013.
Last summer’s proposal was 1,099 pages long. There’s no reason to expect less from the final rule.