‘Know Before You Owe’ Continues to Evolve

CFPB develops new ‘loan estimate’ and ‘closing disclosure’ forms.

October 1, 2012

The project aims to combine the early disclosures required by TIL and RESPA into one document.

The ConsumerFinancial Protection Bureau (CFPB) issued a proposed rule in early July in an effort to integrate the mortgage disclosure requirements of the Truth in Lending Act (TIL) and the Real Estate Settlement Procedures Act (RESPA) as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

For more than 30 years, TIL and RESPA have required lenders to give mortgage borrowers different but overlapping disclosure forms regarding terms and costs. This duplication has been inefficient and confusing for both lenders and borrowers.

CFPB’s “Know Before You Owe” project began more than 20 months ago in an effort to combine the early disclosures required by TIL and RESPA into one document.

The agency’s proposal took into consideration 10 rounds of testing and feedback from the public on multiple prototype forms.

The result of these efforts is the “loan estimate” document, which must be provided to borrowers within three days of applying for a loan.

The agency also developed a separate document, the “closing disclosure,” which combines the TIL/Regulation Z disclosures required at loan closing with information in the RESPA HUD-1 Settlement Statement.

Borrowers would have to receive the proposed closing disclosure three business days before loan closing. Generally, if changes occur within this time, the lender must provide a new form and grant an additional three days before loan closing.

The proposed rule provides extensive guidance on how to complete both of these new forms. CFPB also proposes requiring creditors to retain evidence of compliance for the provision of these forms for three years.

The bureau has proposed a number of related changes, such as a more inclusive definition of “finance charge,” similar to what the Federal Reserve proposed in its 2009 closed-end proposal.

The new definition would apply to closed-end loans secured by real property or a dwelling.

Instead of Reg Z’s current “some fees in, some fees out” approach, the proposal would continue to exclude:

  • Fees or charges paid in comparable cash transactions;
  • Late fees, or delinquency or default charges;
  • Fees for exceeding a credit limit;
  • Seller’s points;
  • Funds required to be paid into escrow accounts if the amounts aren’t otherwise included in the finance charge; and
  • Premiums for property and liability insurance if certain conditions are met.

The proposal would include in the finance charge any fees charged by closing agents.

This includes fees for the third parties closing agents hire to perform particular services; title examination, abstract of title, title insurance, or property survey; the preparation of loan-related documents (i.e., deeds, mortgages, and settlement documents); notary services and credit reports; and property appraisals, including those related to pest infestation or flood hazard determinations.

The proposal would treat a disclosed finance charge as accurate if it doesn’t exceed the actual finance charge by more than $100, or is greater than the amount required to be disclosed.

Another related change affects the RESPA tolerance rules.

The proposal would reduce the current 10% tolerance to 0% for charges for the lender’s or mortgage broker’s own services, services provided by an affiliate or mortgage broker, and charges for which the lender or mortgage broker doesn’t permit the consumer to shop.

Unless an exception applies, none of these charges can increase from the amounts stated on the loan estimate form.

Furthermore, unless an exception applies, charges for other services generally may not increase by more than 10%.

Comments on the proposal generally are due Nov. 6, 2012. But changes regarding the finance charge and the annual percentage rate, as well as the delayed effective date of several new disclosures, are open for comment only through Sept. 7, 2012.

 MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel. Contact him at 608-231-4185.