CFPB: Upcoming Changes

What you need to know for August 1, 2015

Presented By

Alan K. Brickley, Counsel

What is the TILA-RESPA rule about?

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms:

Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application

Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

What transactions are covered by the TILA-RESPA rule? (§§ 1024.5, 1026.3, and 1026.19)

The TILA-RESPA rule applies to most closed-end consumer credit transactions secured by real property, but does not apply to: – HELOCs; – Reverse mortgages; or – Chattel-dwelling loans, such as loans secured by a

mobile home or by a dwelling that is not attached to real property (i.e., land).

– Consistent with the current rules under TILA, the rule also does not apply to loans made by a person or entity that makes five or fewer mortgages in a calendar year and thus is not a creditor. (§ 1026.2(a)(17))

Basics of the Integrated Mortgage Disclosures Rule

What – Changes to the Loan and Settlement Disclosure forms and processes are coming.

When – The changes will be effective for transactions where a loan application is taken by a lender on or after August 1, 2015.

Why – Because the Dodd-Frank Act of 2010 mandates the combination of the Truth in Lending Act (TILA) loan disclosures with the Real Estate Settlement Procedures Act (RESPA) Good Faith Estimate and HUD-1 Settlement Statement disclosures.

How – The Consumer Financial Protection Bureau (CFPB), an entity created by the Dodd Frank Act, issued a new TILA final regulation that, among other things, created two new forms (each with many variations) and new 3 business day delivery requirements. • Loan Estimate – 3 business days after application • Closing Disclosure– 3 business days before consummation

Basics of the Integrated Mortgage Disclosures Rule

Who will issue the forms? Loan Estimate – Lender or Mortgage Broker Closing Disclosure – Lender or Settlement Agent (Escrow) – if the

Lender delegates responsibility to the Settlement Agent (Escrow)

Enforcement – The CFPB can levy substantial penalties so Lenders will be very cautious: Up to $5,000 per day for any violation of a law, rule, or final order

or condition imposed in writing by the Bureau; Up to $25,000 per day for any person that recklessly engages in a

violation of a Federal consumer financial law; and Up to $1,000,000 per day for any person who knowingly violates a

Federal consumer financial law

Loan Estimate Delivery

3 Business Day Delivery Requirement – The creditor must deliver or place the Loan Estimate in the mail no later than the 3rd “business day” after the creditor has received the loan application

Business Day – For purposes of the Loan Estimate “business day” is defined as a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.

Application – “Application” is defined as submission of a consumer’s financial information for the purposes of obtaining an extension of credit. For purposes of the Loan Estimate an “application” consists of the submission of: 1) name; 2) income; 3) social security number; 4) property address; 5) estimate of the value of the property; and 6) mortgage loan amount sought.

Loan Estimate Delivery

Mailing – When the Loan Estimate is mailed, receipt is presumed 3 business days after it is mailed.

Delivery Methods – Some of the ways the Loan Estimate may be delivered are by: regular mail, e- mail, overnight delivery service and personal delivery. If the Loan Estimate is actually received earlier than the 3 day presumed receipt (i.e. if an e-mail was received and opened by the consumer the same day it was sent), the 3 business day presumed receipt date would be shortened. However, there are specific requirements that must be met in these situations.

Changed Circumstances – A revised Loan Estimate may be sent when certain “changed circumstances” occur.

Loan Estimate Delivery

The Loan Estimate must also be delivered or placed in the mail no later than the seventh business day before consummation of the transaction. ( See § 1026.19(e)(1)(iii)(B))

The consumer may modify or waive the seven-business-day waiting period after receiving the Loan Estimate if the consumer has a bona-fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period.

Loan Estimate Impact on Real Estate Transactions

Impact on Real Estate Professionals Loan Estimate must be received 7 days before

consummation. Loan Estimate replaces the early Good Faith Estimate (GFE)

and Truth In Lending (TIL) disclosures. You will be seeing different forms for most transactions. Your clients may receive multiple Loan Estimates due to:

“Changed circumstances” – certain defined circumstances that cause the estimated charges to increase by more than the variance allowed under the Final Rule;

Multiple applications with different lenders; or Multiple applications for different loan products with the same lender

Loan Estimate Delivery Calendar Example

Loan Estimate – Page 1

Basic borrower

information &

Basic loan terms

Loan Estimate – Page 1

Projected payment

calculations &

closing cost calculations

Loan Estimate – Page 2 – Closing Cost Details

• Origination Charges- charges paid to the lender

• Services you cannot shop for-

required by he lender when the lender selects the vendor or choice of vendors

• Services you can shop for-

required by the lender when the consumer selects vendor

• Total loan costs-

the sum of all loan costs

Loan Estimate – Page 2 – Closing Cost Details

Other Costs- Transactional costs that must be paid to complete the transaction

Calculating Cash to Close Estimate of cash needed for closing

Loan Estimate – Page 3 -Additional Information

Loan Estimate – Page 3 -Additional Information

About the Closing Disclosure

Five page detailed disclosure of the closing costs and loan terms

Replaces the final Truth in Lending disclosure and the HUD-1 Settlement Statement

Repeats much of the same information from the Loan Estimate

Received by consumers three business days before consummation

Lender is responsible for accuracy of form Separate 2 page Closing Disclosure for sellers (settlement agents are responsible for sellers Closing Disclosure)

Closing Disclosure Delivery

3 Business Day Review Period – The consumer must receive the Closing Disclosure 3 “business days” before “consummation.”

Business Day – For purposes of the Closing Disclosure “business day” is defined as every day except Sundays and Federal legal holidays.

Consummation – “Consummation” is defined as the time that a consumer becomes contractually obligated on a credit transaction. State law governs when this is.

Mailing – When the Closing Disclosure is mailed, receipt is presumed 3 business days after the Closing Disclosure is mailed.

Delivery Methods – some of the ways the Closing Disclosure may be delivered are by: regular mail, e-mail, overnight delivery service and personal delivery. If the Closing Disclosure is actually received earlier than the 3 day presumed receipt (i.e. if an e-mail was received and opened by the consumer the same day it was sent), the 3 business day review period may begin to run at the time of the earlier receipt. However, there are specific requirements that must be met in these situations.

Closing Disclosure Infographic

Closing Disclosure Delivery Calendar Examples

More on Consummation

Consummation may commonly occur at the same time as closing or settlement, but it is a legally distinct event.

Consummation is not the same thing as closing or settlement. Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. (§ 1026.2(a)(13))

The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable State law. (§ 1026.2(a)(13); Comment 2(a)(13)-1) Creditors and settlement agents should verify the applicable State laws to determine when consummation will occur, and make sure delivery of the Loan Estimate occurs within three business days of the receipt of an application.

Revised Closing Disclosure

The three-business-day waiting period requirement applies to a corrected Closing Disclosure that is provided when there are:

– Changes to the loan’s APR;

– Changes to the loan product; or

– The addition of a prepayment penalty.

If other types of changes occur, creditors must ensure that the consumer receives a corrected Closing Disclosure at or before consummation. (§ 1026.19(f)(2)(i) and (ii))

Revised Closing Disclosure (continued)

The disclosed APR becomes inaccurate. If the annual percentage rate (APR) previously disclosed becomes inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected APR disclosure and all other terms that have changed. The APR’s accuracy is determined according to § 1026.22. (§ 1026.19(f)(2)(ii)(A))

The annual percentage rate (APR) continues to be considered accurate if it is not more than 1⁄8 of 1 percentage point (.125%) above or below the annual percentage rate determined in accordance with paragraph §1026.22(a)(1). §1026.22(a)(2).

The loan product changes. If the loan product previously disclosed becomes inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected loan product and all other terms that have changed. (§ 1026.19(f)(2)(ii)(B))

A prepayment penalty is added. If a prepayment penalty is added to the transaction, the creditor must provide a corrected Closing Disclosure with the prepayment penalty provision disclosed and all other terms that have changed. (§ 1026.19(f)(2)(ii)(C))

Closing Disclosure Impact on Real Estate Transactions

Impact on Real Estate Professionals Closing Disclosure must be received by consumer three

business days prior to consummation of the loan. Remember, if mailed or delivered electronically there is

ALSO the 3 business day assumed delivery period unless the creditor has evidence that the consumer received the Closing Disclosure earlier than the three business days after it was mailed or delivered electronically.

Communication with your lender and settlement agent is more critical than ever before as legal consummation timelines need to fall within real estate contract timelines

Last-minute changes that require an additional three business day waiting requirement could require longer contract extensions

Closing Disclosure Impact on Real Estate Transactions

Impact on Real Estate Professionals Realize that consummation is a legally distinct event from

settlement or closing. Remember….. Consummation occurs when the consumer

becomes contractually obligated to the creditor on the loan. The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law. (§ 1026.2(a)(13) and Comment 2(a)(13)-1).

Oregon has yet to define consummation. Get used to using the term “consummation” and communicating

with the lender on your transaction to be sure contract dates and extensions are set in accordance with consummation timelines

Your contact information and license number must appear on the Closing Disclosure form (see page 5 of the Closing Disclosure form) This applies to both Buyers Broker and Sellers Broker

Closing Disclosure – Page 1

Very similar to page 1 of the Loan Estimate

Closing Disclosure – Page 1

Very similar to page 1 of the Loan Estimate

Closing Disclosure – Page 2 Closing Cost Details - Loan Costs

• Origination Charges- charges paid to the lender

• Services borrower did not

shop for- charges for services that the lender requires and selected the vendor

• Services borrower did shop

for- charges for services that the lender requires but did not select the vendor

• Total loan costs-

the sum of all loan costs

Closing Disclosure – Page 2 Closing Cost Details – Other Costs

Closing Disclosure – Page 3 Calculating Cash to Close

Calculating Cash to Close – the amounts used in the calculation of the cash required from the borrower to complete the transaction; comparison of the final amounts to original amounts on the Loan Estimate.

Closing Disclosure – Page 3 Summaries of Transaction

Closing Disclosure – Page 4

• Assumption • Demand Feature • Late Payment • Negative Amortization • Partial Payments • Security Interest • Escrow Account When Applicable: • Adjustable Payment Table • Adjustable Interest Rate Table

Closing Disclosure – Page 5

Closing Disclosure – Page 5

Agent contact information AND license number is required

Sellers Disclosure

The settlement agent is required to provide the seller with the Closing Disclosure reflecting the actual terms of the seller’s transaction. (§ 1026.19(f)(4)(i))

The settlement agent may comply with this requirement by providing the seller with a copy of the Closing Disclosure provided to the consumer (buyer) if it also contains information relating to the seller’s transaction. (Comment 19(f)(4)(i)-1)

The settlement agent may also provide the seller with a separate disclosure, including only the information applicable to the seller’s transaction from the Closing Disclosure (§ 1026.38(t)(5)(v) or (vi), as applicable).

(See form H-25(I) of appendix H to Regulation Z for a model form). However, if the seller’s disclosure is provided in a separate document, the settlement agent has to provide the creditor with a copy of the disclosure provided to the seller. (§ 1026.19(f)(4)(iv))

Sample Sellers Disclosure

Sample Sellers Disclosure

FAQ’s

May a consumer waive the three-business-day waiting period? (§ 1026.19(f)(1)(iv))

Yes. consumers may waive or modify the three-business-day waiting period when: • The extension of credit is needed to meet a bona fide personal financial

emergency. (§ 1026.19(f)(1)(iv));

• The consumer has received the Closing Disclosure; and

• The consumer gives the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all consumers who are primarily liable on the legal obligation. (§ 1026.19(f)(1)(iv))

For example, the imminent sale of the consumer’s home at foreclosure, where the foreclosure sale will proceed unless loan proceeds are made available to the consumer during the waiting period, may be considered a bona fide personal financial emergency. (Comment 19(f)(1)(iv)-1)

The creditor is prohibited from providing the consumer with a pre-printed waiver form. (§ 1026.19(f)(1)(iv))

Bona fide personal financial emergency

FAQ’s

What charges may change without regard to a tolerance limitation? (§ 1026.19(e)(3)(iii))

• Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account. (§ 1026.19(e)(3)(iii)(A)-(C))

• For 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. (§ 1026.19(e)(3)(iii)(D))

• Charges paid to third-party service providers for services not required by the creditor (may be paid to affiliates of the creditor). (§ 1026.19(e)(3)(iii)(E))

• However, creditors may only charge consumers more than the amount disclosed when the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. (§ 1026.19(e)(3)(iii))

FAQ’s

What charges are subject to a 10% cumulative tolerance?

• Recording fees (Comment 19(e)(3)(ii)-4);

• Charges for third-party services where: • The charge is not paid to the creditor or the creditor’s

affiliate (§ 1026.19(e)(3)(ii)(B)); and

• The consumer is permitted by the creditor to shop for the third-party service, and the consumer selects a third-party service provider on the creditor’s written list of service providers. (§ 1026.19(e)(3)(ii)(C); § 1026.19(e)(1)(vi); Comment 19(e)(1)(vi)-1 through 7)).

FAQ’s

What charges are subject to zero tolerance? (§ 1026.19(e)(3)(ii))

• Fees paid to the creditor, mortgage broker, or an affiliate of either (§ 1026.19(e)(3)(ii)(B));

• 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 (§

1026.19(e)(3)(ii)(C)); or

• Transfer taxes. (Comments 19(e)(3)(i)-1 and -4)

FAQ’s

Question: What is TIP?

Answer: The TIP is the total amount of interest that the consumer will pay over the life of the loan, expressed as a percentage of the amount of credit extended, using the term “Total Interest Percentage,” the abbreviation “TIP,” and the statement “The total amount of interest that you will pay over the loan term as a percentage of your loan amount”. § 1026.37(l)(3) For example, if the Loan Amount is $100,000 and the total amount of interest that the consumer will pay over the Loan Term is $50,000, then the TIP is 50%.

FAQ’s

Question: Is the annual percentage rate tolerance still .125%?

Answer: Yes. The annual percentage rate (APR) continues to be considered accurate if it is not more than 1⁄8 of 1 percentage point (.125%) above or below the annual percentage rate determined in accordance with paragraph §1026.22(a)(1). §1026.22(a)(2).

FAQ’s

Question: Can we provide the integrated disclosures electronically?

Answer: Yes, However, creditors using electronic delivery methods, such as email, must also comply with the Electronic Signatures in Global and National Commerce Act (E-Sign Act) which was signed into law on June 30, 2000. This Act provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent

Thank You!