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Combined RESPA and TIL Disclosures: There is More to the Proposed Changes than Meets the Eye

On February 21, the Consumer Financial Protection Bureau (CFPB) unveiled the most recent revision of its proposed combined RESPA and TIL early and final disclosures. In the proposal, there are two alternatives which do not differ greatly. This may not be the last tweak to the combined disclosure, but it is probably pretty close to what the final will be. Overall, I give the CFPB pretty high marks in developing a disclosure that the consumer can understand and that provides the information that the consumer actually needs. The document that a lender will provide within three business days of an application is three pages long and is called the “Loan Estimate”. The document to be provided at closing is titled “Settlement Disclosure” and is five pages long.

The Loan Estimate form focuses, I believe, on the terms of the loan and not the artificial calculations such as the annual percentage rate, the finance charge, and the amount financed. In fact, you do not disclose the APR until the third page, and the finance charge is not disclosed at all. There are some inane disclosures such as the “Total Interest Percentage,” but it is mandated by Dodd Frank and the CFPB did not have the ability to exclude it. If the transaction being financed is a purchase, the burden on the lender in providing the disclosure increases greatly because you are required to disclose the estimated cash to close. Also, if you will require an escrow, you must calculate the initial escrow payment and the monthly payment requirements.

The Settlement Disclosure provides the loan terms on the first page; pages two and three resemble a current HUD settlement statement; the fourth page describes the loan terms; and the fifth page has the finance charge, APR and other Regulation Z calculations and some other disclosures. I am confident that every lender that does any significant volume of residential mortgage lending has a document preparation system for the preparation of disclosures and documents. Therefore, the bulk of the cost will fall initially on the vendors of the document preparation systems. However, they don’t work for free; so one way or another, those costs will be passed on to the lenders – and ultimately to the borrowers. I think that the learning curve that lenders will have will be less than it was with the last round of RESPA changes, although a significant amount of training will be required.

Some of the biggest changes that the CFPB is considering have nothing to do with the disclosures themselves, but with the basic definition and calculation of the information that is being disclosed. The most significant issues are the following:

  • Redefine “Finance Charge” to include all costs that the lender requires the borrower to pay as finance charges. The only exceptions would be property insurance and late fees. Accordingly, for a real estate secured loan, the appraisal fee, credit report fee, title insurance costs, etc. would all be finance charges. This will create a corresponding increase in the annual percentage rate and cause more loans to be higher-priced mortgage loans and/or high cost mortgage loans (Section 32 HOEPA) under Regulation Z and its rules and restrictions.
  • Increase the zero tolerance for increases in the amount initially disclosed as settlement costs from just lender fees to include: the fees of third party service providers owned or controlled by the lender and service providers who the customer does not have the right to select either because it will be selected by the lender, such as the appraiser or the credit bureau; or the borrower is required to select from a list provided by the lender but cannot select someone not on the list. This can become a real problem with providers like appraisers whose costs are not necessarily fixed and where the charge can vary from provider to provider. It will probably force lenders to disclose the highest possible cost just to avoid a potential loss.
  • The Settlement Disclosure will have to be provided to the borrower at least three business days prior to the closing. If it contains errors, there may be a requirement to re-disclose and delay the closing. I have been to a myriad of closings; normally, the ink is still wet on the documents when they are given to the borrower. Seldom have I seen a settlement agent have the Closing Statement prepared the day before closing as is presently required, much less three business days. Also, there is the issue of who is responsible for the accuracy of the Settlement Disclosure? The lender will always be responsible for the loan term issues, but the CFPB is questioning whether the lender or the settlement agent should be responsible for the transaction aspects of a purchase.

If you are a lender or have lending compliance responsibilities, you should have pretty strong feelings about these issues. Don’t suffer in silence. Whatever your feelings are, let the CFPB know. For more information, go to: http://files.consumerfinance.gov/f/2012/02/20120221_cfpb_tila-respa-integration-rulemaking-outline-of-proposals-and-alternatives.pdf

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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

TriComply compliance service offer banks a full compliance package that provides them with quality assistance at an affordable price. TriComply provides the TriComply knowledgebase, compliance manual, policy manual (written and reviewed), compliance newsletter (weekly), advertisement review, compliance calendar, helpful resources and an online training library of compliance webinars.

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