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Integrated Mortgage Disclosures

July 24, 2012

As required by the Dodd-Frank Act, the CFPB has proposed integrated mortgage disclosure forms intended to facilitate compliance with RESPA and TILA disclosure requirements, aid the borrower in understanding the mortgage transaction, and “simplify the technical nature of the disclosures.” However, adopting the CFPB’s model forms will require extensive changes to mortgage lenders’ mortgage disclosure software and employee training programs.

The Issue: Pursuant to Sections 1032(f), 1098, and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), on July 9, 2012, the Bureau of Consumer Financial Protection (“CFPB” or “Bureau”) issued a proposed rule and published model forms relating to the disclosures that borrowers receive in connection with applying for and closing on a mortgage loan.[1] The proposed model forms combine and replace certain forms developed pursuant to the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”). Under the Dodd-Frank Act, the integrated TILA-RESPA model forms are intended to “facilitate compliance with the disclosure requirements” of TILA and RESPA, help the borrower understand the mortgage transaction, and “simplify the technical nature of the disclosures.”[2] The proposed rule explains when use of the forms will be mandatory, and when the forms will serve as “models for compliance.”[3]

In addition to the model forms and instructions for completing the forms, the proposed rule includes limits on closing cost increases, changes in the way annual percentage rates are calculated, and new recordkeeping requirements relating to the forms provided to consumers. The comment period on the proposed forms is open through November 6, 2012, though the comment period closes on September 7, 2012 for portions of the rule related to the calculation of finance charges, the calculation of annual percentage rates, and the delay of effective dates for certain new related disclosures that are required under separate sections of the Dodd-Frank Act.[4] The proposed rule and model forms do not apply to home-equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to land.

The Model Forms

The Bureau has proposed two new integrated model forms—the “Loan Estimate” and the “Closing Disclosure”—to replace existing RESPA and TILA-related disclosures. According to the Bureau, its proposed model forms “use clear language and design to make it easier for consumers to locate key information, such as interest rate, monthly payments and costs to close the loan” and “provide more information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of loans over time.”[5]

The Loan Estimate

The Loan Estimate[6] would replace the existing “Good Faith Estimate” and the “early” Truth in Lending disclosure required under TILA. Under the proposed rule, the Loan Estimate is required to be provided to borrowers within three business days after they submit a loan application. Lenders may rely on a mortgage broker to provide the Loan Estimate to the borrower, but the lender remains liable to the borrower for the accuracy of the form. The Bureau has published sample forms for different types of closed-end mortgage products, including fixed-rate loans, interest only adjustable-rate loans, loan refinances, and loans with balloon payments and negative amortization.

The Bureau believes that the new three-page Loan Estimate “integrates at least seven pages of disclosures,” currently required under various federal laws. Additionally, in its release of the proposed rule and model form, the Bureau explains that the Loan Estimate addresses the following new disclosure requirements:

  • the total interest percentage under TILA section 128(a)(19), which was added by section 1419 of the Dodd-Frank Act;
  • the aggregate amount of loan charges and closing costs the consumer must pay at consummation under TILA section 128(a)(17), which was added by section 1419 of the Dodd-Frank Act;
  • for refinance transactions, the anti-deficiency protection notice under TILA section 129C(g)(3), which was added by section 1414(c) of the Dodd-Frank Act; and
  • the homeowner’s insurance disclosure in TILA section 106(c) and 1026.4(d)(2)(i), which is required to exclude homeowner’s insurance premiums from the finance charge

The Closing Disclosure

The Closing Disclosure[7] would replace the existing HUD-1 form and the revised Truth in Lending disclosure required under TILA. Under the proposed rule, the lender would be required to provide the borrower the Closing Disclosure at least three business days before the loan transaction closes. The Bureau has proposed that either the lender or a settlement agent be responsible for providing the Closing Disclosure to the borrower, but in either case, the lender would be liable for the accuracy of the form. As is the case for the Loan Estimate, the Bureau has published sample forms for different mortgage transaction scenarios, including closing on a fixed-rate loan, closing with funds from a simultaneous second-lien loan, closing on a refinance transaction, and closing on transactions with various changes in closing costs.

The Bureau believes that the new five-page Closing Disclosure “integrates at least nine pages” of new and existing disclosures under RESPA, TILA, and Dodd-Frank amendments to TILA. Additionally, in its release of the proposed rule and model form, the Bureau explains that the Closing Disclosure also addresses the following new disclosure requirements:

  • the total interest percentage under TILA section 128(a)(19), which was added by section 1419 of the Dodd-Frank Act;
  • the approximate amount of the wholesale rate of funds in connection with the loan under TILA section 128(a)(17), which was added by section 1419 of the Dodd-Frank Act; and
  • the aggregate amount of settlement charges for all settlement services provided in connection with the loan and the aggregate amount of other fees or required payments in connection with the loan under TILA section 128(a)(17), which was added by section 1419 of the Dodd-Frank Act.

Guidance and Instructions for Completing the Forms

As part of the proposed rule, the Bureau has also released proposed “Official Interpretations,” including guidance regarding the rule and instructions for completing the model forms; the guidance was requested by members of the mortgage origination industry in order to reduce uncertainty about completing the forms.

Implications: The mortgage industry has repeatedly expressed concerns regarding the time, effort, and costs required to make changes to forms, systems, and policies in order to comply with new requirements, such as those related to the integrated TILA-RESPA model forms.[8] Additionally, lenders have expressed concern that implementation of the integrated TILA-RESPA forms before the rulemaking process is complete with respect to other mortgage origination and disclosure requirements under the Dodd-Frank Act will result in a “cumbersome, expensive, inefficient, and confusing” process that will “necessitate erratic and intermittent amendments” to the TILA-RESPA integration rule as additional rules are finalized.[9]

Acknowledging that “creditors, mortgage brokers, settlement agents, and other entities affected by the proposed rule will incur one-time compliance costs, such as software upgrades to generate the integrated disclosure forms, training staff and related parties to use the new disclosure forms, updating compliance systems and processes, and obtaining legal guidance,” the Bureau has not proposed an effective date for the final rule but is instead “seeking comment on how much time industry needs to make” the changes that would be required under the proposed rule. As part of the proposed rule, the Bureau also proposed that implementation of certain new disclosure requirements under the Dodd-Frank Act be delayed until a final rule implementing the integrated TILA-RESPA disclosure takes effect.

Elizabeth L. McKeen - (949) 823-7150  emckeen@omm.com
Danielle Oakley - (949) 823-7921  doakley@omm.com
Edgar Martinez - (949) 823-7143  emartinez@omm.com

[1] The proposed rule is available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.  
[2] 12 U.S.C. § 2603(a); 15 U.S.C. § 1604(b).
[3] Where not required, use of the model forms may nonetheless entitle the creditor to certain statutory presumptions. See 15 U.S.C. § 1604(b).
[4] These additional disclosures are enumerated in Section V(B) of the Bureau’s July 9, 2012 release of the proposed rule and model disclosures.
[5] Consumer Financial Protection Bureau, Proposed Rule to Simplify and Improve Mortgage Disclosure Forms, available at http://files.consumerfinance.gov/f/201207_cfpb_detailed-summary_proposed-rule-to-improve-mortgage-disclosure.pdf.  
[6] A sample Loan Estimate is available at http://files.consumerfinance.gov/f/201207_cfpb_loan-estimate.pdf.      
[7] A sample Closing Disclosure is available at http://files.consumerfinance.gov/f/201207_cfpb_closing-disclosure.pdf.  
[8] See April 23, 2012 Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Integration of TILA and RESPA Mortgage Disclosure Requirements, p. 27; Testimony of Brenda K. Hughes on behalf of the American Bankers Association before the Subcommittee on Insurance, Housing and Community Opportunity of the Committee on Financial Services, United States House of Representatives, June 20, 2012, at p. 2, available at http://financialservices.house.gov/UploadedFiles/HHRG-112-BA04-WState-BHughes-20120620.pdf.
[9] See id. at p. 4. Note that before the Bureau released the proposed rule regarding TILA-RESPA disclosure form integration, the American Bankers Association requested a delay in the issuance of the proposed rule and requested that Congress permit the Bureau to satisfy its statutory deadline for release of the rule by issuance of an advance notice of proposed rulemaking. Id. at p. 5. Instead, the Bureau issued the proposed release twelve days in advance of its statutory deadline.