The Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”) always seem to be the acts that make consumer lending compliance challenging. The Federal Reserve Board and the Department of Housing and Urban Development (“HUD”), the two responsible Federal agencies for authoring TILA and RESPA, unfortunately did not have a big pow-wow when these laws and implementing regulations were developed. The definitions, coverage, requirements and forms have made all of us, including bankers, consumers, and even the regulators, struggle for decades. When the most recent 2010 RESPA changes came around, we have learned the hard way how an implementation can go wrong and how many trainings, FAQs and revised FAQs it takes to get the current Good Faith Estimate and HUD Settlement disclosures “right”. Now it seems that the 2010 changes were just a warm up as we move closer to the deadline of August 1st for the new TILA-RESPA Integrated Disclosures (“TRID”) rules.
The new TILA-RESPA Integrated Disclosures rules should be no surprise. The Consumer Financial Protection Bureau (“CFPB”) issued the final rule in 2013 and trainings started to pop up shortly thereafter. In a nutshell, TRID is about making disclosure of mortgage loan information simpler for consumers, which means a new set of disclosures: the Loan Estimate, replacing the Early Truth in Lending and Good Faith Estimate and the Closing Disclosure, replacing the Final Truth in Lending and HUD Settlement. A lot of work and testing involving consumer input was completed to create disclosures that would provide information the consumer understands and needs to make an informed decision. The theory is straightforward; however, the practical implementation is much more complicated. The gloom and doom warnings about what it will take to comply and accomplish the primary goal of having a customer educated about the mortgage transaction settlement cost and finance charges are not exaggerations.
To ease the pressure with the fundamentally complex changes of these new rules, the Independent Community Bankers Association (“ICBA”) and two members of the House Financial Committee called on the CFPB in March 2015 to implement restrained enforcement and liability and a “hold harmless” period for those seeking to comply with the rule through the end of 2015. No recent updates have been announced on whether the grace period will be granted as of the writing this article. While there is no possibility of an extension or break, an examination for reasonable and good faith efforts to comply announced by National Credit Union Association (“NCUA”) on March 31, 2015 is a step in the right direction. The reasonability and good faith efforts often times create grey areas: What may be reasonable to one regulatory agency or examiner in charge may not be reasonable to another.
To our readers who are not compliance officers and who have not yet been fully inundated with the TRID rules, we would like to provide you a very high level overview of these significant changes.
Let’s start with coverage. TRID covers consumer transaction closed end credit secured by real property. The TILA consumer credit definition of primarily personal, family, or household purposes is still the mantra with the addition of trusts for tax or estate planning purposes. Construction only loans, vacant land loans and loans secured by 25 acres or more are now also covered under the new TRID rules. Let’s not get too excited about losing the “Fed box”, which has been the signature item of the Truth in lending disclosures. There will still be the “Fed box” requirement for loans, which require the final Truth in Lending disclosure: mobile home, car and other credits covered by TILA.
Research has shown that the APR, which is included in the Fed box, is not nearly as important and transparent to consumers as initially thought, and, going forward, the APR was moved from its prominent place to the third page, which is the last page of the new Loan Estimate.
The next key change is the definition of “application”. Financial institutions no longer have the advantage of using the seventh catchall piece of “any other information deemed necessary by the financial institution”. The playing field is leveled and the clock for TRID compliance starts as soon as the required six pieces of information are obtained: name, income, social security number, property address, property value, and loan amount.
The timing requirement for the Closing Disclosure delivery of three days prior to closing will have an effect on all parties involved including financial institutions and settlement agents preparing it. Having final numbers ready to go and providing the disclosure three days prior to the closing will require fundamental changes for communication with title companies and internal disclosure preparation processes.
Two different business day definitions are used for TRID purposes. The current Truth in Lending definition will continue to be applicable to providing the Loan Estimate and the updated version of the Home Buying Information Booklet. The Closing Disclosure will utilize the business day definition of “all calendar days except Sundays and legal public holidays”, which will require procedures for tracking the three day requirement for financial institutions using both definitions.
The CFPB announced revisions of the Home Buying Information Booklet also known as the Special Information Booklet on April 1, 2015. The new Your home loan toolkit A step-by-step guide references and explains the new integrated disclosures financial institutions will be required to provide to consumers in conjunction with the Loan Estimate.
One of the feared changes that we already have some experience with are the tolerances between the settlement charges disclosed on the Loan Estimate versus the Closing Disclosure. The zero and 10% tolerance concept was introduced with the 2010 RESPA changes. The current Good Faith Estimates charges for settlement services grouped in blocks and subject to zero, 10% or unlimited tolerance took awhile to figure out. The implications of over-disclosing settlement charges on the Good Faith Estimate hit the bottom line, as financial institutions are required to absorb them. The expectations are now even higher and the zero tolerance bucket also includes fees paid to an affiliate of the financial institution and fees paid to unaffiliated third party if the financial institution did not allow the consumer to shop for them.
In addition to the Loan Estimate and Closing disclosures, we now have a requirement to provide a new Escrow Closing Notice three days prior to escrow cancellation based on the consumer’s request and thirty days for cancellation for any other reason.
Another new requirement is the written estimate disclosure. The written estimate has to be specific to a customer and display the required verbiage conspicuously at the top of the first page.
The new Other Considerations section of the Loan Estimate including the Regulation B copy of appraisal and RESPA’s mortgage servicing transfer disclosure requirements may replace the existing separate disclosures and save paper and a box on an internal review checklist.
The above simply provides you a highlight of the changes to come without details on implications and ramifications. As you can see, the pressure is not only on financial institutions but also on the loan documentation software vendors. They are working hard to meet the deadline and overcome a number of challenges. As an example, the new Adjustable Payment table and Adjustable Interest Rate tables display only when applicable and when the payment and interest rate can change, which means the disclosures format should adjust depending on whether the tables are required. If you are the software administrator or on the software vendor email list for your company, you have been getting TRID related emails and more recently new software releases with options to test the TRID disclosures. Remember that the software updates will not and cannot do it all. The simplified view of relying on the software providers to update the disclosure without an in depth understanding of the new requirements will clearly not work and may lead to noncompliance with the new rules.
Employees with responsibilities in the loan documentation origination functions as well as any pre- and post-funding functions will have to be able to check and verify the disclosure forms nuances, such as:
Loan officers and closers need to understand the disclosures to be able to explain them to their customers. The new disclosures are more intuitive as a result of industry input and testing; however, the more complicated the loan, the more difficult it is to describe and disclose the terms. For instance, disclosure of the Projected Payments in whole years may be misleading and prompt the customer to inquire when a term of eighteen months is rounded to two years. Projected Payments information is also limited to only four columns triggered by changed events. If there are more changed events they will have to be combined and payments disclosed as ranges adding to the confusion. Following the disclosure of the APR is the new Total Interest Percentage, which is a brand new concept of disclosing the interest amount paid over the loan term as a percentage of the loan amount. This is another example of why loan officers and closers need to be adequately trained on the new rules.
Policies, procedures and training are all equally important for successful implementation of the new TRID rules. Key to an effective implementation includes hands on training using sample disclosures and examples, testing and learning how the software was designed, and determining what information is hard coded and what is the processor’s responsibility. Remember to document your efforts including vendors’ updates, revised and approved policies, procedures and employees training. Lastly, use this information to update management, various committees and the Board about the progress that has been made and your financial institution’s preparedness for the August 1st effective date.