three business days after application and replace the early Truth in
Lending (TIL) disclosure and the Good Faith Estimate (GFE). This
form will present the key loan fees and terms through an initial
summary page and will be followed by two additional pages that
itemize different terms and cost items required in the transaction.
The second form, the “Closing Disclosure,” is designed to present all of the final costs of the transaction, and will be provided to
consumers three business days before settlement. In addition to
itemizing the final figures, this disclosure will provide consumers
with a detailed accounting
of the transaction.
Six ThingS
To WaTch
as mortgage lending reform moves
into high gear, there are some things
compliance professionals must be
aware of:
ALL MORTGAGE FORMS WILL BE
DIFFERENT:
this means that the actual physical
disclosures will differ and will vary
from today’s disclosures in how they
describe the products you offer.
CALCULATIONS WILL CHANGE:
the placement of fees and how you
add them up for the final disclosure
will vary. When finalized, you will
have to learn a new way to calculate
the terms, fees, and costs that must
be placed in the disclosure.
TRAINING WILL BE REQUIRED:
since all the forms will differ, all
staff involved in mortgage lending—
loan originators, compliance staff,
and underwriters—will have to
understand the new rules.
LEGAL ADVICE WILL BE NEEDED:
remember that altering the entire
respa/tIla disclosure system will
lead to uncertainties and alterations
in established procedures. You should
have access to legal expertise for the
“unknowables” that are sure to arise.
INVESTOR DEMANDS WILL
CHANGE:
a change in the underlying rules
will give rise to changed investor
guidelines. communication with
them should begin soon.
THIRD-PARTY RELATIONSHIPS
WILL CHANGE:
Your relationship with closing agents
will have to adapt to new rules. Be
prepared to communicate with third-
party settlement service providers to
make sure they understand the new
demands to ensure compliance with
changed laws.
indirectly by the creditor as an incident to or a condition of the
extension of credit.” In short, the APR figure will be very inflated.
Banks are concerned about the ramifications of APR changes.
The more inclusive finance charge will drastically expand the
instances in which lenders trip the triggers applicable with Higher
Priced Mortgage Loans (HPML) and the Home Ownership and
Equity Protection Act (HOEPA) provisions. The bureau has recognized this point, but continues to move forward with the changes.
The bureau also proposed that the integrated Closing Disclosure be delivered no later than three days before consummation. This timing requires all cost disclosures
to be presented in final form well ahead of settlement.
Lenders will have to assure, three days prior to schedule
closings, that the financing is secured as described in the
closing documents. This provision raises concerns because
transaction elements can, and very often do, change in
the last days of the pre-closing period. The lender takes
on contractual risks with any changes that may occur.
Negotiations between buyers and sellers can extend until
closing. Having such “wet” transactions in the pipeline for three
additional days also means that lenders will have to increase
warehouse capacity by a considerable amount to maintain
volumes consistent with today’s originations.
Finally, all the important mortgage-related forms will be entirely
razed. Replacing the full set of current forms will require more
than “tweaks” to current systems. It will require that disclosure
software be entirely replaced and it will necessitate full-scale
retraining of staff and alter legal relationships with investors.
These elements will have a serious impact.
In this sense, the redisclosure system follows the general structure of the existing RESPA/TILA regulations. They are provided
to consumers early in the mortgage shopping process, and they
must contain accurate figures that are constrained by tolerances.
The rule ensures disclosure accuracy by limiting circumstances in
which the final costs can be higher than the estimated costs. The
structure is identical to the existing concept of a “changed circumstances” redisclosure under RESPA. Additionally, the final Closing
Disclosure must represent the actual, final costs of the settlement.
Aside from these similarities, the new disclosures diverge from
the old rules in ways that concern ABA and other industry advocates.
For instance, the current proposal to create an “all-in” Annual Percentage Rate (APR) eliminates the current exclusions
from the finance charge for closed-end real estate. To define the
finance charge, the bureau would look to whether a fee is “payable
directly or indirectly by the consumer,” and “imposed directly or
The Cost of Law
Without a doubt, financial institutions of all sizes will feel the
impact. Lenders will be responsible for updating their systems,
implementing changes, training employees, and distributing and
explaining the forms. Ultimately, lenders will be liable if the rules
are implemented incorrectly.
While some of the smallest lenders may have had an in-house
compliance team consisting of only a few employees to tackle these
sorts of regulatory reforms, the industry will have to increasingly
rely on the resources, expertise, and products of industry vendors.
“The CFPB is aware of available technology and probably expects
that lenders have software to help comply with these changes, so
the message to smaller companies or anyone trying to do these
changes on their own is to seek out your vendors,” said Jason Roth,
senior vice president of ComplianceEase, an Burlingame, Calif.,-based company that provides compliance software.
Randy McElwee, vice president of Southport, N.C.-based
Security Savings Bank agrees. “We’re very uncertain of what the
final rule and final requirements are going to be and what the
costs associated will be,” he said. “We’re totally reliant on outside
vendors to be able to make the required system changes in time
to meet the compliance deadlines.”
Vendors are preparing to offer a variety of services and products
including document preparation, loan origination system updates,
compliance technology, policies and procedures consulting, legal
advice, and training.
