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Happy Holidays from the CFPB: 1,088 Pages of New Disclosure Rules that will Present Some Interesting Practical Problems for Implementing Banks

Just in time for the holidays, the CFPB gifted the banking industry another 1,088 pages of final mortgage disclosure rules. 

Most of our banking clients have been relentlessly working to bring policies, procedures and information technology up to speed before the January 2014 effective date of the CFPB’s new mortgage origination and servicing rules. Just when compliance officers were starting to glimpse the light at the end of the new-rule-implementation tunnel . . . the CFPB released its latest proclamation in the form of a new mortgage disclosure rule: the “Final Rule on Simplified and Improved Mortgage Disclosures” (the “Disclosure Rule”).

Before I summarize the provisions of the new Disclosure Rule, I would like to point out the Rule’s rather unsurprising irony. In attempt to “make things easier” for consumers, the CFPB has “simplified” required mortgage disclosures and has reduced those disclosures by approximately two pages. To do this, however, the CFPB released 1,088 pages of complex final rules and related explanations with which creditors must now comply before August of 2015. In my opinion, it’s like the CFPB placed one extra candy cane in every consumer’s stocking this holiday, but at the same time, it dumped about six tons of coal on every mortgage lender . . . .

But enough about my opinion — what does the Disclosure Rule require?

Generally speaking, the Rule provides for integrated disclosures using two new forms under the Truth in Lending Act (“TILA”) and the Real Estate Settlement and Procedures Act (“RESPA”). The first new form – the “Loan Estimate” form — replaces two current federal forms. It replaces the Good Faith Estimate designed by the Department of Housing and Urban Development (“HUD”) under RESPA and the “early” Truth-in-Lending disclosure designed by the Board of Governors of the Federal Reserve System (“Board”) under TILA. This form must be provided to consumers within three business days after they submit a mortgage loan application. The second new form – the “Closing Disclosure” form — replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth-in-Lending disclosure designed by the Board under TILA. This form must be provided to consumers three business days before they close on the mortgage loan.

Upon initial inspection, it appears the new Disclosure Rule presents some immediate practical problems for many financial institutions. In particular, the Rule contains a new definition of “application” for determining the timing for delivery of the Loan Estimate. The practical problem with the new definition is that it could trigger a requirement to deliver the Loan Estimate before the lender is in possession of the information that it needs to accurately price the loan.

Under existing rules, pre-loan disclosures were not triggered until the lender received certain specific information and also “any other information deemed necessary by the creditor.” So under the prior rules, a lender could delay disclosure until it had sufficient information to appropriately disclose – or in other words, sufficient information to provide an accurate estimate of loan pricing. Under the new Rule’s definition of “application,” however, delivery of the Loan Estimate will be triggered when the lender comes into possession of the following six specific pieces of information: the consumer’s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property and the mortgage loan amount sought. As a consequence, if a bank is in possession of those six pieces of information, it has an “application” and must provide the Loan Estimate within three business days, even if it has no other information about the borrower, its credit history, the type of loan requested or other information that would typically be needed in advance of delivery of the initial pricing disclosures.

In light of the new Disclosure Rule’s definition of “application,” banks will need to review policies, procedures and mortgage loan application websites to ensure that the bank receives all of the information needed to price the loan before or at the same time as it receives the six specific pieces of information that will constitute an “application.” Banks will likely need to work with information technology providers, processors and independent mortgage brokers to ensure compliance.

And speaking of mortgage brokers – it is worthwhile to mention that the new Disclosure Rule will permit delivery of the Loan Estimate by either a mortgage broker or by the lender. However, even if the mortgage broker provides the Loan Estimate, the lender will remain responsible for complying with the all requirements concerning provision of the form.  Consequently, banks will need to update procedures to implement a process for verifying that any Loan Estimate provided by a mortgage broker on its behalf is in compliance with the new Rule’s requirements.

We will continue to review and monitor the new Disclosure Rule and its implications prior to the August 2015 effective date.

In the meantime, Happy Holidays from the CFPB!