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Thursday, October 16, 2014

RESPA/TILA Integration - Part I: Overview and Loan Estimate (Includes Loan Estimate Table)

RESPA/TILA Integration – Part I: Overview and Loan Estimate
   Jonathan Foxx [*]


 WHITE PAPER

This first of a four-part series will introduce the RESPA/TILA Integration and treat the numerous features of the Loan Estimate. In the second part of the series, I will detail the features of the Closing Disclosure. The third part will be a detailed analysis of the Loan Estimate. The fourth part will provide an in depth scrutiny of the Closing Disclosure.

Accompanying this article is a Loan Estimate Table that may be used for certain itemized categories and action requirements. The table outlines the types of areas of interest in many of the routine requirements of the Loan Estimate process. In reviewing the table, notice how many of these categories in some respects reflect the pre-August 2015 disclosure process. Rather than a before-and-after, comparative analysis, the Loan Estimate Table provides the requirements of the post-August 2015 Rule itself.

Two Download Locations



In the other articles of this four-part series, I will provide charts, tables, form specimens, and annotations for applicable categories and action requirements relating to the RESPA-TILA Integration. The full series, and accompanying charts, tables, and form specimens, will also appear in National Mortgage Professional Magazine, commencing October 2014. 

Discussion

Let’s admit at the outset that having to explain to loan applicants the fees and boxes and pages of the Good Faith Estimate (GFE) is not for the faint of heart. The Truth in Lending Disclosure (TIL) remains a conundrum without peer: difficult to explain to a consumer in just a few words; inscrutable even to loan officers; and, blisteringly enigmatic often even to lenders. Both disclosures are somewhat archaic, examples of good intentions gone to the shadowy realm of Unintended Consequences.

Notwithstanding the foregoing debacle, there is the infamous HUD-1 Settlement Statement (HUD-1), infamous for its myriad codes, infamous for codes that should correlate or sometimes seem not to correlate to the GFE itself, infamous for mapping challenges to the loan origination system, and infamous for irksome consternation about where, what, and how to show certain fees!

A consumer’s distrust of the lender seems to increase with the duration of the explanation provided by the mortgage loan originator. If it takes more than a sentence or two to explain a disclosure’s contents, many consumers are already hesitating, wondering if there’s something they’re not being told! So, is there a way to provide a new kind of consumer disclosure that replaces the overly-encrusted, superannuated, periodically reconditioned, creaky, decades’ old twosome and settlement documents that have dominated the origination of residential mortgage loans for an entire generation of mortgage loan originators?

Into this maelstrom of implacable confusion steps the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The debate as to whether we need to replace the GFE, TIL, and settlement disclosures, into an overall, encompassing disclosure, is over and done. Behind us now are the many analyses, heat maps, comment periods, public outreach, focus groups, committee reviews, Interagency evaluations, extensive consumer and industry research, association position papers, quantitative studies, speeches, public relations, announcements, and presentations. Before us unfolds on August 1, 2015 a brand new set of disclosures – a combined set, as in new disclosure at the commencement of the loan origination and new disclosure at its closing – the former to be called Loan Estimate and the latter to be called Closing Disclosure.[i]

The new set has been dubbed “RESPA-TILA Integration,” since the consolidation requirements reflect the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directed the Bureau to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5.[ii] For the balance of this article, I will refer to these provisions as the “RESPA-TILA Rule” or (“Rule”). Additionally, I will refer to the consolidated disclosures as “Integrated Disclosures.”

The Rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or chattel-dwelling loans, such as mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The provisions also do not apply to loans made by persons who are not considered “creditors,” where such persons make five or fewer mortgages in a year. However, certain types of loans that are currently subject to TILA but not RESPA are subject to the Rule’s Integrated Disclosure requirements, including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes. So, creditors originating these types of mortgages must continue to use, as applicable, the GFE, TIL, and HUD-1 disclosures required under current law.

There is also a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers. These creditors are exempt from the requirement to provide the RESPA settlement cost booklet, GFE, HUD-1, and application servicing disclosure statement requirements, and, thus, exempt from the requirements to provide a Loan Estimate, Closing Disclosure, and Special Information Booklet for these loans.

The RESPA/TILA Rule

I am sure that the question will be asked whether creditors may use the Integrated Disclosure on loans not covered by the Rule but subject to RESPA and TILA. The short answer is that using the Integrated Disclosures for such purposes is not prohibited on loans that are not covered by RESPA and TILA (i.e., mortgages associated with housing assistance loan programs for low- and moderate-income consumers). A creditor cannot use the new Integrated Disclosure forms instead of the GFE, TIL and HUD-1 forms for transactions that are covered by RESPA and TILA that require those disclosures (i.e., reverse mortgages).

With its usual flair for brevity, the Bureau’s proposal in July 2012 is a mere 1,099 pages.[iii] In November 2013, the final rule was issued, reaching the gargantuan proportions of 1,888 pages.[iv] Some of the seemingly boundless verbiage has thankfully been distilled to a 91 page guide, entitled TILA-RESPA Integrated Disclosure Rule, Small Entity Compliance Guide (“Guide”).[v] The most recent update to the Guide was issued in September 2014. The Guide touches on many features of the Rule and the implementation of the new disclosures; however, a thorough reading of the final rule is needed in order to comprehend the scope, application, and breadth of the Rule in effectuating its provisions. [vi] [vii] [viii]

Much of the Rule can be encapsulated in a single sentence, leaving aside all the details, as set forth by the Bureau:

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.[ix] (Emphases in original)

As in all consumer disclosure regulations, the compliance effective date and the operational recognition of that date are critical timing points. The new Integrated Disclosures must be provided by a creditor or mortgage broker that receives an application from a consumer for a closed-end credit transaction secured by real property on or after August 1, 2015. But creditors will still be required to use the GFE, TIL, and HUD-1 forms for applications received prior to August 1, 2015.

Operationally speaking, as the applications received prior to August 1, 2015 are consummated, withdrawn, or cancelled, the use of the GFE, TIL, and HUD-1 forms will no longer be used for most mortgage loans.[x]

But from a process perspective, this timing can get complicated quickly. Various restrictions take effect on the calendar date August 1, 2015, regardless of whether an application has been received on that date. For instance, take note of these restrictions: