Consumer Finance Protection Bureau Proposes New Disclosures

The CFPB has proposed rules two sets of rules on July 9.

The first set of rules  proposes combining required disclosures under TILA and RESPA pursuant to sections 1032(f), 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Highlights of the major portions of the Rules are provided below.

Full text of proposed disclosure rules: http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf

View proposed disclosures as well as a summary of the proposals:
http://www.consumerfinance.gov/knowbeforeyouowe/compare/

Scope.  The CFPB has noted that the Rules will only affect closed-end mortgage loans.  It does not appear that home-equity lines of credit (HELOCs) and reverse mortgages would be affected by the Rules.

The Loan Estimate.  The Rules propose replacing the RESPA-mandated GFE and the TILA-mandated “TIL” form with a single new disclosure entitled the Loan Estimate.  The Loan Estimate must be provided no later than three (3) business days after a consumer submits a loan application, and may be provided by either the broker or the lender, although the lender retains responsibility for ensuring the Loan Estimate’s accuracy.  No person is permitted to impose a fee on a consumer in connection with an application until the consumer has received the Loan Estimate and has affirmatively indicated his or her intent to proceed with the transaction, although an exception exists for a fee to obtain a credit report.

The Closing Disclosure.  In addition to the Loan Estimate, the Rules would replace the HUD-1 with the Closing Disclosure.  It would have to be provided to the consumer no later than three (3) business days before the consumer closes on the loan.  If changes occur between provision of the Closing Disclosure and closing, the consumer generally must be given a new, updated Closing Disclosure and the closing must be delayed for another three (3) business days in order to give the consumer time to review the Closing Disclosure (with some exceptions, such as changes resulting from negotiations between the buyer and the seller after a final walk-through, or changes that result in less than one hundred dollars ($100) in increased costs). Additionally, the CFPB has proposed two alternatives for who may provide the Closing Disclosure.  Under the first alternative, the lender alone may deliver the document.  Under the second alternative, the lender may rely on the settlement agent to provide the document; in that event, however, the lender would still be responsible for the accuracy of the Closing Disclosure.

As with the current GFE and HUD-1 requirement, there would be limits on closing cost increases associated with the Closing Disclosure.  Generally, the Rules provide that the following charges could not increase from the amount disclosed on the Loan Estimate:  (A) the lender’s or broker’s charges for its own services; (B) charges for services provided by an affiliate of the lender or broker; and (C) charges for services for which the lender or broker does not permit the consumer to shop.  Generally, charges for all other services could not increase by more than ten percent (10%).  Exceptions to these restrictions could arise when:  (A) the consumer asks for a change; (B) the consumer chooses a service provider not identified by the lender; (C) information provided at application was inaccurate or becomes inaccurate; or (D) the Loan Estimate expired.

Finance Charge.  In addition to the new disclosures, with respect to closed-end loans the Rules would replace the current definition of “finance charge” under TILA with (in the CFPB’s words) a “simpler, more inclusive” test.  Under the Rules, a fee or charge would be included in the finance charge amount if:  (A) it is “payable directly or indirectly by the consumer” to whom the credit is extended; and (B) it is “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.”  Fees or charges paid in comparable cash transactions would continue to be excluded, as would late fees and other similar default or delinquency charges, seller’s points, amounts required to be paid into escrow accounts if they would not otherwise be included in the finance charge, and premiums for property and liability insurance if certain conditions were met.   However, the Rules would include in the definition of “finance charge” most of the charges that are currently exempted from that definition for closed-end transactions. 

The CFPB has indicated in the Rules that it is aware that this broader proposed definition of “finance charge” would potentially have negative consequences, such as exposing more loans to the HOEPA “high-cost” prohibitions due to APR or points-and-fees triggers or disqualifying more potential mortgages from the “qualified mortgage” definition under the proposed ability to repay rules, again due to points-and-fees triggers.  The CFPB in response has proposed two different methods of reconciling the expanded definition of the finance charge with existing APR or points-and-fees triggers, and has asked for comments on this topic (as noted above) by September 7, 2012.

Comment Due Dates. Public comments on certain portions of the Rules (most importantly, the revised definition of “finance charge”) are due by September 7, 2012.  All other public comments , including comments on when the Rules should become effective,  are due by November 6, 2012.

Rules Regarding High Cost Mortgages.  On the same date, additional rules were proposed that regulate and expand the definition of high-cost mortgages under HOEPA and the TIL Act.

The proposed rule (http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf) would implement an expansion of HOEPA rules approved by Congress when it passed the Dodd-Frank Act. The proposal would:

  • Ban “potentially risky” features. For mortgages that qualify as high-cost based on their interest rates, points and fees or prepayment penalties, the proposed rule would generally ban balloon payments and would ban prepayment penalties.
  • Ban and limit certain fees. The proposed rule would ban fees for modifying loans, cap late fees and restrict the charging of fees when consumers ask for a payoff statement.
  • Require housing counseling for high-cost mortgages. The proposed rule would require consumers to receive housing counseling before taking out a high-cost mortgage. In addition, the CFPB’s proposal would implement Truth in Lending counseling requirements for first-time borrowers taking out certain mortgage loans that permit negative amortization.  The proposal would also implement an amendment to RESPA to generally require that a list of housing counselors or counseling organizations be provided to all mortgage applicants

 

 

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