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Preliminary Observations Regarding CFPB's Final Mortgage Disclosure Rule And Forms
**Update – The CFPB has now released the final rule and related materials, available here.**
Later today, as anticipated, the CFPB will release its final rule combining the TILA and RESPA mortgage disclosure forms and rules. We will review the final forms and rule, monitor the related field hearing, and prepare a preliminary Special Alert followed by a more detailed summary.
The final rule and forms follow two years of drafting, testing, and revision by the Bureau. According to the Bureau, its testing demonstrates that the new forms significantly improve the ability of consumers with a variety of experience levels and loan types to answer questions about their loans, compare competing loans, and compare estimated and final loan terms and costs.
The text of the final rule will not be available until later today. However, we are able to make several preliminary observations based on our review of the materials made available thus far, perhaps most importantly that industry will have until August 1, 2015 to make the changes to systems and training necessary to implement the new forms, which is longer than anticipated. Additional observations follow.
Loan Estimate Disclosure
- The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
- It appears that the final rule will require lenders to provide the Loan Estimate three business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays). However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
- The design and layout of the Loan Estimate does not appear to differ substantially from the proposed form, except that estimated closing costs and estimated cash to close are now disclosed in separate rows on the bottom of page 1. The CFPB also states that it modified the forms to include checkboxes to tell consumers whether they are receiving or paying cash at closing and to provide a streamlined calculation of that amount.
- Owner’s title insurance is listed as “optional” on page 2. During a recent House Financial Services Committee hearing with CFPB Director Cordray, two committee members–Reps. Miller (R-CA) and Perlmutter (D-CO)–expressed concern that identifying this cost as optional would not serve consumers’ best interests.
- The Total Interest Percentage (TIP) disclosure, which was required by the Dodd-Frank Act and opposed by industry, has been retained on page 3.
- The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page. In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”
- It is unclear from the materials provided what changes, if any, will be made to the restrictions on changes in costs (or tolerances) imposed by the Department of Housing and Urban Development (HUD) in 2010. It is also unclear whether, under the final rule, TILA or RESPA liability will apply to violations of those restrictions.
Closing Disclosure
- The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement.
- It appears that the final rule will require the lender to ensure that the consumer receive the Closing Disclosure three business days before closing. This would mean that the lender must be able to demonstrate that the consumer received the Closing Disclosure three business days before closing.
- The CFPB materials indicate that, in comparison to the proposal that changes to the information provided in the Closing Disclosure generally require re-disclosure and an additional three business day waiting period before closing, the final rule limits the additional waiting period to situations in which there is a substantial change in the APR, a change in the loan product, or the addition of a prepayment penalty.
- It is unclear from the materials provided what role, if any, the settlement agent will play in the preparation of the Closing Disclosure and whether TILA or RESPA liability will apply.
- Like the final Loan Estimate, the design and layout of the final Closing Disclosure do not appear to differ substantially from the proposed form, except for the changes noted above.
- In addition, the final Closing Disclosure, like the proposed form, eliminates the HUD-1 line numbers. The final Closing Disclosure also eliminates the Average Cost of Funds (ACF) disclosure, which was added by the Dodd-Frank Act but opposed by industry.
Other Issues
- It appears that the CFPB has not adopted the proposed requirement that lenders retain records in an electronic, machine-readable format. Instead, the CFPB will work with the Fannie Mae and Freddie Mac to create a data standard based on the Closing Disclosure.
For additional background, please review our report on the rule as proposed.
HUD Revises Lender Self-Reporting Requirements
On November 13, HUD issued Mortgagee Letter 2013-41, which, effective immediately, clarifies self-reporting requirements for all single-family FHA-approved lenders. The letter details lenders’ obligations to report all findings of fraud and material misrepresentations, as well as any material findings concerning origination, servicing, or underwriting of a loan that the lender is unable to mitigate. The letter defines “material finding” and provides a non-exhaustive list of examples, and describes the parameters for mitigating reportable findings. The letter outlines internal and external reporting timeframes: (i) internal reporting to senior management must take place within 30 days of an initial findings report; (ii) findings of fraud or material misrepresentation must be reported immediately to the FHA; and (iii) all other material findings must be reported no later than 30 days after the lender has completed its internal evaluation, or within 60 days of initial disclosure, whichever occurs first. The letter also explains that the FHA may request supporting documentation for use in reviewing a report, and that the FHA requires the reporting contact to have immediate access to: (i) the endorsement case binder; (ii) the quality control report; and (iii) any other documentation necessary to evaluate the finding. The letter further states that failure to comply with these requirements may result in the FHA taking administrative action against the lender.
CFPB Director Testifies Before Senate Banking Committee
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month.
Mortgage Rule Implementation
Several committee members asked the Director about the CFPB’s compliance expectations for financial institutions when the various mortgage rules take effect in January. Director Cordray reiterated statements he has made recently in other forums: (i) the CFPB believes the vast majority of financial institutions, both large and small, will be in substantial compliance by January, (ii) the CFPB is sticking with the January implementation deadline, and (iii) “in the early months” the CFPB will not be looking for strict compliance, but rather will assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Senator Coburn (R-OK) sought clarification on the terms “early months” and “good faith effort.” On the former, the Director stated that it remains undefined. With regard to the latter, the Director explained that the CFPB will look to see whether institutions generally are taking the rules seriously and if they have compliance management system is in place that allow for monitoring and reporting to the institution’s board. He added that the CFPB does not intend to play “gotcha.”
Auto Finance
Several Republican members raised concerns about the CFPB’s approach to auto finance supervision and enforcement and specifically the indirect auto finance bulletin issued earlier this year. For example, Senator Moran (R-KS) urged Director Cordray to provide more specific answers to questions recently posed by a bipartisan group of Senators, including more detail on the CFPB’s statistical methodology for determining disparate impact and its use of proxies. Director Cordray’s November 4 response to the Senate letter largely re-stated the CFPB’s response to a similar inquiry submitted by a group of House members over the summer.
In the most recent letter, Director Cordray explained further the CFPB’s integrated methodology for proxying race and national origin, which combines probabilities about an individual’s race or ethnicity based on surname and geocoding. In a related blog post, the CFPB’s Assistant Director of Fair Lending and Equal Opportunity described proxy methodologies employed by “responsible lenders,” and attempted to further justify the CFPB’s methodology. During the hearing, Director Cordray asserted that the CFPB’s approach to both is time honored and well-tested. He explained that the CFPB’s proxy methodology is a refinement of that used by the Federal Reserve Board and is “state of the art.” He acknowledged that some may have a problem with the state of the art, but asserted that the methodology is proven in social science literature and used beyond the lending context, and added that the CFPB has to have confidence in the approach knowing that it could be tested in court.
Director Cordray expressed concern about discussing the CFPB’s specific methods in detail because they relate to ongoing investigative processes the CFPB is pursuing with the DOJ. He also repeatedly referenced today’s auto finance forum as a venue in which these issues will be discussed in more detail, and one that will provide industry an opportunity to weigh in on the CFPB’s approach. He dismissed concerns that the CFPB’s activities in the auto finance realm—in particular its push towards flat fee compensation arrangements for dealers—might constrain credit or raise consumer costs, citing the “red hot” car market.
Senator Warren (D-MA) commented on dealer markups, citing “studies” that show markups cost consumers $26 billion a year and that minorities pay a higher share of those costs. She called for Congress to remove the Dodd-Frank Act exemption for dealers and provide the CFPB authority over all auto lending. Director Cordray later stated that the law drew an “unnatural line” between finance companies on the one hand and dealers on the other, but that the CFPB understands its jurisdiction and does not want to be perceived to be extending its reach to cover dealers.
Student Lending
Student loans were the only product that received special, though not new, attention in the CFPB Director’s written testimony. There and in his oral statement he highlighted the comments and complaints the CFPB has received on student lending issues and again identified problems in the student loan market that the CFPB believes mirror those seen in the mortgage market prior to the financial crisis.
Senator Coburn posited that some of the student debt problem is attributable to borrowers maxing out loans for purposes other than paying for costs not directly associated with education and suggested that Congress look at limiting acceptable uses of federal loans.
Military Lending Act
In response to a question from Senator Reed (D-RI), Director Cordray stated that the CFPB, the DOD and other agencies are close to proposing new rules under the MLA. He indicated that the proposal is pending OMB review.
Prepaid Cards
Senator Menendez (D-NJ) complained about prepaid card fees and stated he plans to reintroduce his prepaid card bill. Director Cordray generally agreed that the CFPB has concerns about the prepaid market and noted the Bureau’s 2012 ANPR. The CFPB’s spring rulemaking agenda indicated the CFPB could propose a prepaid card rule before the end of this year. However, the Director did not provide an updated timetable for issuing a prepaid card rule during his testimony.
GLB Act Privacy Notices
Senator Brown (D-OH) continued to push his bill that would exempt from the Gramm-Leach-Bliley Act’s annual privacy policy notice requirement any financial institution that (i) provides nonpublic personal information only in accordance with specified requirements and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from its most recent disclosure. The House of Representatives passed its version earlier this year and the Senate could move the bill before the end of this year. Director Cordray indicated that the CFPB continues to work on a rulemaking on this issue, and that while the CFPB may not be able to go as far as Congress could through legislation, the CFPB rule is “moving in the same direction” as the legislation.
CFPB Data Collection
Much of the hearing again centered on the CFPB’s collection and use of personally identifiable information (PII). Sen. Crapo (R-ID) continued to press the issue for Republicans, and was joined by Senators Vitter (R-LA) and Toomey (R-PA). Those members asked Director Cordray to describe the types of data the CFPB collects and how that data is protected. Sen. Crapo focused primarily on the credit card account data that the CFPB obtains from Argus, which the Senator estimated to include 900 million accounts. Senator Crapo believes that even though the data may be “de-identified,” the possibility exists that it could be reverse engineered to allow CFPB staff to obtain PII or review individual accounts. Director Cordray repeatedly explained that the CFPB’s interest in that data set is to monitor market trends and the broad treatment of card holders, and the CFPB is not interested in monitoring individual accounts. He asserted the CFPB lacks the capability or interest to obtain or use consumer PII in that context. He pointed out that other regulators have had and continue to have access to the same data. Senator Crapo noted that he has requested a GAO review of this issue; Director Cordray welcomes the audit.
CFPB Rulemaking and Examination Processes
Senators Corker (R-TN) and Toomey (R-PA) brought up the recent Bipartisan Policy Center report on the CFPB to make the case that the CFPB should pursue open rulemakings instead of issuing guidance. Director Cordray stated that the CFPB will continue to use guidance when it is restating or clarifying the law, but otherwise will use open rulemakings. He admitted the auto finance guidance process could have been more open or inclusive, but again cited the upcoming forum as a way to address those concerns. He defended the CFPB’s debt collection bulletin and its 2012 fair lending bulletin.
Director Cordray stated that the CFPB still is only 80% staffed on supervision. While he agrees that the CFPB may have been slow on closing out examinations, the CFPB deliberately chose quality and consistency over speed while it staffed-up. He asserted that speed and responsiveness have greatly improved in recent months and will continue to improve next year.
CFPB Settles With Mortgage Company, Senior Executives Over Alleged Loan Officer Compensation Practices
On November 7, the CFPB announced it reached a settlement with a mortgage company and two of its executives accused of using compensation to incentivize loan officers to steer consumers into costlier mortgages. The proposed consent order, entered jointly and severally against the company and the individual executives, requires the defendants to pay more than $9 million in restitution to over 9,400 consumers and a $4 million civil money penalty. In addition, all defendants are subject to regular and mandatory compliance reporting and monitoring for a period of three years and are permanently enjoined from paying compensation to loan officers in a manner that violates the Loan Originator Compensation Rule. The order also mandates that the company maintain compensation records in compliance with federal law going forward. The defendants do not admit the CFPB’s allegations.
The settlement resolves an action commenced by the CFPB in July 2013 in which the CFPB employed its civil litigating authority to charge that the company’s quarterly bonus program violated the Federal Reserve Board’s Loan Originator Compensation Rule and other consumer financial protection laws by, among other things, incentivizing loan officers to steer consumers into loans with higher interest rates. According to the complaint, after the rule took effect in 2011, the defendants eliminated from their compensation program any written reference to compensation based upon loan terms or conditions, but in practice continued to adjust loan officers’ quarterly bonuses based on the interest rates of loans closed during the quarter. The case was referred to the Bureau by the Utah Department of Commerce, Division of Real Estate.
BuckleySandler recently hosted a webinar about this CFPB action and impending changes to mortgage loan originator compensation rules. Please contact any of the attorneys below for materials from the webinar or with any questions about this action or the new mortgage loan originator regulations.
- Clinton Rockwell, (310) 424-3901
HUD Releases Draft Section Of Overhauled SF Handbook
On October 29, HUD released a draft section of its new FHA Single Family Housing Policy Handbook (SF Handbook). The draft section consolidates all FHA Single Family requirements—including content from hundreds of mortgagee letters, housing notices, and other requirements—for application through endorsement into a single, authoritative source for FHA Single Family Housing Policy. HUD stated that the new SF Handbook is “universally and fundamentally different in the format, style, content and delivery.” While many of the changes made in developing this first draft section of the SF Handbook are designed to conform FHA policy to a standard format using clear, consistent language, other proposed revisions reflect actual proposed changes to policy. The draft section and other information about the broader project are available on a new HUD website. HUD provided tips for reviewing the draft and requested that stakeholders provide comments on the draft section by November 29. HUD noted that the draft posting is the first phase of a multi-phased effort to overhaul the SF Handbook.
CFPB Files Brief In Long-Running RESPA Case
On October 30, the CFPB filed an amicus brief in Edwards v. First American, a long-running case concerning the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) that is currently pending in the U.S. Court of Appeals for the Ninth Circuit. The case revolves around allegations that the defendant-title insurer purchased interests in title insurance agencies in order to secure referrals of insurance business from those agencies. The consumer-plaintiffs alleged that these arrangements constituted illegal kickback agreements under Section 8 of RESPA, even though they did not suffer any actual damages.
At issue before the Ninth Circuit is whether a private plaintiff must specifically allege an overcharge in order to have standing under RESPA. The district court held that (i) to constitute a “thing of value” exchanged for a referral in violation of RESPA, the putative class must show that the defendant overpaid for the interests in the title insurance agencies in exchange for referrals of settlement service business, and (ii) all members of the class must prove not only that they were referred to the title company but also that the referral influenced their selections of a settlement service provider.
The Bureau disagrees that proof of an overpayment for the interests in the title companies is required to establish that the referrals violated RESPA. Instead, the CFPB’s brief argues that the “thing of value” exchanged includes the value of the transaction itself and that the plaintiffs need only show that the defendant-company purchased the ownership interests in order to ensure the referral of future settlement business, even if the price paid was fair. The CFPB also disputes the district court’s conclusion that violations require proof of referral and influence on a plaintiff-by-plaintiff basis, arguing that under the plain language of the statute, the level of influence on a consumer is irrelevant in cases of explicit referrals.
The CFPB filed an amicus brief in the same case in October 2011, when a separate standing issue was appealed to the U.S. Supreme Court. The Supreme Court heard the case but declined in June 2012 to issue an opinion, stating that certiorari was “improvidently granted.”
Unofficial Transcripts Of CFPB Webinars On Mortgage Rules
In an effort to address outstanding questions regarding the new mortgage rules that are scheduled to take effect in January 2014, CFPB staff provided non-binding, informal guidance in two webinars hosted by the Mortgage Bankers Association. Specifically, CFPB staff answered questions regarding the mortgage servicing rules on October 16, 2013 and questions regarding the mortgage origination rules (including the Ability-to-Repay/Qualified Mortgage and Loan Originator Compensation rules) on October 17, 2013.
The CFPB staff’s slides presenting the questions addressed during the webinars and the audio recordings of their responses are available through the MBA’s Compliance Resource Center. BuckleySandler has prepared transcripts of the servicing and mortgage origination webinars that incorporate the CFPB’s slides. These transcripts are provided for informational purposes only and do not constitute legal opinions, interpretations, or advice by BuckleySandler. The transcripts were prepared from the audio recordings provided by the MBA and may have minor inaccuracies due to sound quality. In addition, the transcripts have not been reviewed by the CFPB for accuracy or completeness.
Questions regarding the matters discussed in the webinars or the rules themselves may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past. Additional information about the CFPB mortgage rules is available in our CFPB Resource Center.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Sherry-Maria Safchuk, (310) 424-3917
CFPB Mortgage Disclosure Rule Now Expected on November 20, 2013
On November 1, the CFPB announced a field hearing on “Know Before You Owe: Mortgages,” to be held on Wednesday, November 20 at 11 a.m. EST in Boston. In conjunction with the hearing, the Bureau is expected to release its long-awaited final rule combining the Good Faith Estimate and HUD-1 with the mortgage disclosures under the Truth in Lending Act.
The CFPB has stated that the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. The final rule, which was originally expected in October, will not only replace the forms that consumers receive during the mortgage origination process but will also fundamentally alter the regulations governing the preparation and provision of – and liability for – those disclosures. As a result, lenders, settlement agents, and service providers will be required to make extensive changes to their systems, compliance programs, and contractual relationships.
In September, BuckleySandler hosted a webinar covering the key issues in this rulemaking and discussing what industry can do to start preparing now. The webinar featured a discussion with Jeff Naimon, who has spent years assisting the industry with the existing forms. Please contact Jeff for a copy of the webinar materials or with any questions about the expected rule.
Fannie Mae, Freddie Mac Preview Next ULDD Phase, Update Current Phase
On October 29, Fannie Mae and Freddie Mac jointly published a Uniform Loan Delivery Dataset (ULDD) Phase 3 preview, which is intended to provide lenders and vendors with an early look at the next phase’s specification to help them prepare for implementation in the fourth quarter of 2015. The joint preview identifies 15 new data points—13 related to the CFPB’s new ability-to-repay rule and two other data points that were deferred from Phase 2. In addition, the joint publication provides additional implementation notes and guidance on the 17 new data points that will be implemented in ULDD Phase 2 in 2015 (the exact implementation date will be announced by the end of the first quarter of 2014).
Fannie Mae Updates Selling Guide
On October 22, Fannie Mae issued Selling Guide Announcement SEL-2013-08, which updates policies regarding (i) the use of a power of attorney, (ii) DU Refi Plus and Refi Plus eligibility, and (iii) master or blanket insurance for unaffiliated projects, among other miscellaneous updates. The Announcement updates provisions for use of a power of attorney in connection with the final loan application, restrictions on certain transaction types for which a power of attorney may be used, and requirements specifying who may not act as the attorney-in-fact or agent due to a potential financial connection to the transaction, except under limited circumstances. It also addresses the growing practice of lenders using powers of attorney as a matter of convenience or cost savings through a closing transaction facilitated by an online, interactive session between the borrower and a lender-chosen attorney-in-fact. In addition, the Announcement states that the eligibility date for DU Refi Plus or Refi Plus, which previously required the original loan to have been acquired by Fannie Mae on or before May 31, 2009, will now be based on the note date of the original loan. Finally, effective February 1, 2014, Fannie Mae will no longer permit master hazard insurance policies that provide coverage for multiple unaffiliated projects in a single insurance policy.