THE REFORM OF THE MORTGAGE LENDING SYSTEM has officially kicked into full gear with the release of the combined Real Estate Settlement and Procedures Act (RESPA) and Truth in Lending Act (TILA) disclosures. On July 9, 2012, the Consumer Financial
Protection Bureau (CFPB) released the much-awaited proposed rule that implements
congressional mandates to consolidate the home mortgage forms.
For more than a year, mortgage industry participants
and advocates have navigated the forest of integrated
disclosure prototypes—Butternut, Hemlock, Pecan, Ficus,
Dogwood, Redbud—that have been issued by the CFPB
for public comment. While the release of the proposed
rule is certainly a step forward, the industry still has a
long way to go until final implementation, and many
questions remain unanswered. As released, the proposed
rule stands at a grandiose 1,099 pages and poses more
than 75 additional questions about a slew of technical
compliance issues, rule options, and impact assessments
for public comment.
This rulemaking is a brave attempt to do what has
been tried many times before—to reform and simplify
the mortgage settlement process to create clarity and
transparency for consumers. The bureau’s efforts to
improve the mortgage process comes with a potent
congressional prod—the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The legislation explicitly directs the bureau to craft,
“integrated disclosures for mortgage loan transactions,” and does so in three different sections of the
legislation—Sections 1098( 2), 1100A( 5), and 1032(f).
The Dodd-Frank Act establishes two goals for consolidation: to improve consumer understanding of mortgage
loan transactions and to facilitate industry compliance
with RESPA and TILA. These are lofty goals and stating
them alone cannot resolve the well-recognized problem
that the mortgage loan process is notoriously complex
and convoluted. The typical mortgage transaction includes numerous entities and specialized servicers; it is a
transaction where sellers and buyers engage in extensive
negotiations that often involve multifarious fee allocations. It involves both private and governmental entities
that seek to collect fees, levies, taxes, and an assortment
of other assurances. Moreover, both state and federal
laws govern the entire process.
Nonetheless, the congressional order to transform
mortgage disclosures is well intended, and has historically
garnered support from the financial services industry.
Banks have always served as financial advisors to their
customers, and mortgage services have been a mainstay
of this financial relationship. The two statutes are so
complex, however, that they serve as liability traps for
even the most cautious of lenders. Inadvertent mistakes
are unavoidable, and penalties and legal actions lurk
behind every section and provision.
Given the stakes, the anticipation surrounding this
reform has been tremendous. Now that the disclosures
have been released, the industry and the public can begin
to discern the shape and impact of these new provisions.
The Shape of the Law
The release of the proposed RESPA/TILA rules marks
the end of months-long research and public outreach
from CFPB as part of its Know Before You Owe Initiative.
The bureau said that public testing steered its decisions
about how to craft the new forms.
The proposed forms are not, however, significantly shorter. “Elizabeth Warren’s dream of a one-page
mortgage disclosure form is officially dead,” said Rich
Andreano, partner at Philadelphia-based law firm Ballard Spahr.
The new forms are somewhat more consolidated
than existing disclosures, but still contain three dense
pages of estimates and five crowded pages of settlement
disclosures. “The new forms may be somewhat better
in allowing consumers to assess the terms of the loan,
but they hardly advance the ball in terms of disclosures
relating to fees,” Andreano said.
The proposal offers integrated model forms that the
bureau believes will help consumers better understand
mortgage transactions and select the loans best fitting their
needs. A “Loan Estimate” form will be provided within
RESPA/TILA UPDATE
What
ROD ALBA AND HOLLIS BECKNER
