Hot Off of the Regulatory Printer — CFPB Releases Its Proposed "Know Before You Owe" Disclosures

For weeks the Consumer Financial Protection Bureau has been advertising the pending release of its proposed mortgage loan disclosures that “are easier for both consumers and lenders to understand and use.”  Alas, await no more.  The CFPB released its proposed mortgage loan disclosures today.   The purpose of the new, supposedly friendlier disclosures, is for the CFPB to meet the requirement under the Dodd-Frank Act that the Truth in Lending Act (commonly referred to as TILA) and the Real Estate Settlement Procedures Act (commonly referred to as RESPA) disclosures be combined into one easy-to-read disclosure.  If adopted, the new rule will modify the rules commonly known as Regulations X and Z. In order to ensure that its proposed disclosures are in fact easier to read, the CFPB enlisted the help of consumers, lenders, mortgage brokers, and settlement agents, and asked for their comments and proposals. According to the CFPB, its main goal was to ensure that the new disclosures met three criteria: (1) the form must help consumers understand the true costs and risks of a mortgage; (2) lenders and brokers can clearly and easily explain the form to their customers; and (3) the disclosures actually make the terms of the loan clearer.  

If you would like to decide for yourself whether the CFPB has met these goals, you may review a complete copy of the proposed rule and disclosure forms by visiting the CFPB’s website at http://www.consumerfinance.gov/knowbeforeyouowe/. If you would like to let the CFPB know whether you think that the proposed forms meet these goals, the comment period is open through November 6, 2012 (however, note that comments for the portions of the proposed rule related to the calculation of the finance charge and annual percentage rates, and the delay of the effective date for certain disclosures under Dodd-Frank are due by September 7, 2012). Comments may be submitted online at www.regulations.gov. 

For those of you who may be of the feeling that the CFPB will release its final rules as currently written, no matter the comments it may receive, here’s a brief description of the proposed forms: 

(1) The first new form is the Loan Estimate. The disclosure is reportedly designed to provide disclosures that will help consumers understand the key features of his or her loan, the costs of the loan, and the risks of the mortgage. The form must be provided to consumers within three business days after the consumer submits a loan application.  The proposed rule contains a specific definition of what constitutes an “application.”   

The Loan Estimate will replace the current Good Faith Estimate that is required under RESPA and the “early” Truth in Lending disclosure required under TILA. Lenders may rely on a broker to provide the Loan Estimate form to the consumer, but the lender remains responsible (also known as liable) to the consumer for the accuracy of the form. 

As is true currently of the RESPA and TILA forms, the lender generally cannot charge consumers any fees until after the consumer has been provided a copy of the Loan Estimate form and the consumer has provided his or her intent to proceed with the transaction. 

(2) The second form is the Closing Disclosure. It is designed to provide a break-down of all of the costs of the transaction, i.e. closing costs. The Closing Disclosure replaces the current HUD-1 forms required under RESPA to close a loan. It would also replace the revised Truth in Lending disclosure under TILA. The Closing Disclosure must be provided to consumers three business days before the consumer closes the loan. Except for some minor changes, if the form is changed, the consumer must be given three additional business days to review the form before closing.

Currently, the CFPB proposes two alternatives as to who is responsible to deliver the form to the consumer. Under the first alternative, the lender will be responsible for delivering the Closing Disclosure form to the consumer. Under the second alternative, the lender may rely on the settlement agent to provide the form, but the lender will remain responsible for the accuracy of the form.  The CFPB is seeking comment as to which alternative is preferable. 

Together, the forms are designed to inform the consumer of the total cost of the loan, including the interest rate for the loan, the amount of the monthly payments, and the total costs to close the loan. If there is any confusion about how to fill out the form, fear not, the CFPB has also proposed detailed instructions on how to complete the new forms. 

Additionally, the proposed rule would limit the closing cost increases allowed. Unless one of the stated exceptions apply, the cost for the following services could not be increased: (1) the lender’s charges for its own services; (2) charges for services provided by an affiliate; and (3) charges for services for which the lender does not permit the consumer to shop. Additionally, charges for any other services generally could not increase by more than 10 percent. 

Under the proposed rule, the APR must also encompass almost all of the up-front costs of the loan. The idea is that this new calculation will make it easier for consumers to use the APR to compare loans and calculate the APR. 

Finally, the proposed rule requires lenders to keep a copy of the Loan Estimate and Closing Disclosure forms provided to consumers in a standard electronic format so that the regulators can “monitor compliance.” The CFPB, however, is accepting comments on whether small lenders should be exempt from this requirement. 

Because the CFPB recognizes that the final rule will require lenders, mortgage brokers, and settlement agents to make extensive revisions to their software and to retrain their staff, the CFPB is also seeking industry comment regarding how much time is needed to make these changes. In a conciliatory manner, the CFPB is proposing to delay compliance with certain new disclosure requirements under Dodd-Frank until the CFPB’s final rule takes effect. However, despite the number of recommendations the CFPB may receive that the final rule should not become effective “until the cows come home,” or “when a new administration takes office,” the CFPB has made it clear that it seeks to make the rule effective as soon as possible because the final rule “will provide important benefits to consumers.”  Happy Commenting.