Wednesday, June 17, 2015

Loan Estimate: Deep Dive

Jonathan Foxx
President & Managing Director

This third article of a four-part series beckons us to a deep dive into the Loan Estimate.

In the first article, I discussed the mission of TILA-RESPA Integration and the Loan Estimate (LE).[i] The second article introduced and treated the numerous features of the Closing Disclosure (CD).[ii] Each of the foregoing articles were accompanied by detailed tables to be used for certain itemized categories and action requirements.

The final and fourth article will provide an extensive analysis of the Closing Disclosure.

I would suggest that you read all the articles in this series in order to better understand the TILA-RESPA Integration Disclosure (TRID) rule promulgated by the Consumer Financial Protection Bureau (CFPB).

One of the reasons I have written this series is to cut through the information noise. My concern stems from the nearly profiteering stance of the flourishing punditry to opine on TRID. This approach to learning seems to have become the norm recently at conferences, conventions, webinars, seminars, lectures, and pricey city-to-city forums. Indeed, also, people with no real experience in directing regulatory compliance, though having some training background, seem to hang out their TRID webinar shingle. I view the latter as but shills for generating leads for their affiliated pundits.

Attendees sometimes leave these convocations and ad hoc caboodles more confused than beforehand. Occasionally, they call my firm and want to know who has the correct view, Mr. Pundit A or Ms. Pundit B. I have noticed recently that certain pundits that previously, freely offered advice on TRID are now charging fees for their webinars or offering their guidance, for a fee, via well-known webinar purveyors and online audio/visual enablers. I offer these reflections not as exculpation, rather as expiation, since I have been on panels, and given lectures and webinars, alongside many members of the conscientious punditocracy.

But I happen to think that TRID is too important, being a generational change in disclosure, to hog the helpful information about TRID by charging a fee just so somebody could attend and possibly learn something about it. With that in mind, my firm recently did two proactive things: (1) we established the TEAM TRID™ task force,[iii] a relatively inexpensive, cost-effective way to get TRID integration implementation done efficiently; and importantly (2) we established,[iv] an entirely free online service, manned by our task force, to assist people with their questions about TRID. We want to listen to their compliance needs!

In my view, these two foregoing measures help to address the challenge we face as we head toward the compliance effective date of August 1, 2015. I want to do what I can to ensure that we all are ready! “Ready” means ready for everybody, since the stability of the residential mortgage loan originations industry and the financial protection of the consumer depend on understanding and implementing the many features of the TRID rule.

Hopefully, you will have read the previous two articles (i.e., Part I and Part II). Now we will embark on a detailed review of the new disclosures, beginning in this third article with the Loan Estimate.

Let’s get real close to the Loan Estimate. In this article I will not discuss pre-application estimates and worksheets in detail, except to mention that a creditor or other person may choose to provide a consumer with a written preliminary estimate of terms or costs specific to that consumer before providing the Loan Estimate. If it does so, the creditor or other person must clearly and conspicuously state at the top of the front of the first page of the estimate in a font size no smaller than 12-point: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”[v] Furthermore, the estimate may not be made with headings, content, and format substantially similar to the Loan Estimate or Closing Disclosure.[vi]

So let’s focus on the Loan Estimate, since I plan to take you solely through the Loan Estimate in considerable detail. I will discuss salient highlights of the Loan Estimate, though I caution you to realize that this review is not exhaustive or comprehensive, given that the TRID rule contains very complex disclosure requirements, far more involved, byzantine, elaborate, incisive, and potentially enigmatic than the compendiary features of it discussed herein.

Please follow my analysis carefully. Allow at least two hours to consider this elucidation. Make notes, raise questions, seek answers from competent compliance professionals!


Loan Estimate Form
For any federally related mortgage loan,[vii] the Loan Estimate must be made using the model form set forth in Exhibit H - Form H-24 in the CFPB’s Federal Register issuance.[viii] TRID does not require the use of the model form for non-RESPA transactions; that is, those subject to the integrated disclosures because they are subject to TILA and secured by real property but are not subject to RESPA.[ix] There are numerous text, structure, and field descriptions associated with the LE disclosure. Thus, it would be wise not to deviate from the model provided.

For those non-RESPA loans, the disclosures must be made with headings, content and format substantially similar to form H-24. Use of model form H-24, properly completed with accurate content, would constitute compliance for those loans.[x]

According to the CFPB, the Loan Estimate integrates at least seven pages of disclosures, including:
·       Three pages of the RESPA Good Faith Estimate;
·       Two pages typically used for early TILA disclosures;
·       One page typically used for the appraisal notice under the Equal Credit Opportunity Act;
·       One page typically used for the servicing disclosure.

The Loan Estimate also incorporates disclosures of:
·       The total interest percentage (TIP);[xi]
·       The aggregate amount of loan charges and closing costs the consumer must pay at consummation;[xii]
·       For refinances, the anti-deficiency protection notice;[xiii]
·       The homeowner’s insurance disclosure.[xiv]

TRID imposes strict specifications for the Loan Estimate. For instance, unless otherwise specifically provided, a disclosure that does not apply to a transaction should be left blank, not marked “not applicable” or “N/A,” and, as a general rule, may not be deleted.[xv]

There are special rules for certain disclosures. For example, the Adjustable Payment and Adjustable Interest Rate tables may be included only when applicable to the transaction and otherwise must be excluded.[xvi]

The importance of complying with the specialized requirements cannot be overstated: failure to comply with the precise and detailed rules may lead to significant liability and litigation risk, under both TILA and RESPA, as well as other statutes, such as the Equal Credit Opportunity Act, State and federal unfair, deceptive or abusive acts or practices (UDAAP) statutes, and State mini-TILA and mini-RESPA statutes.

Given the rigid features of the LE, I suggest that a creditor should use Form H-24 for all loans covered by the TRID rule, even if the loan is not a RESPA loan. TRID permits providing a cover letter so long as the Loan Estimate is provided separately from the cover letter.[xvii] Creditors may not add pages in between the pages of the Loan Estimate, or at the end of the Loan Estimate, except as permitted by Regulation Z.[xviii] Creditors may not add information not required by TILA Regulation Z. If the creditor devises its own form for loans not subject to RESPA, it must be very careful to compare that form to Form H-24 and ensure that each difference is carefully examined and justified. TRID does not permit any deviations from form H-24 for forms optimized to be shown on a computer screen or tablet.

Timing and Receipt
The creditor or mortgage broker must provide (either give or mail) the Loan Estimate to the consumer no later than 3 business days after receiving the consumer’s application for a mortgage loan. The standard definition of “business day” applies (i.e., a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions).[xix] A mortgage broker that gives a Loan Estimate must comply with all the Loan Estimate requirements as if it were the creditor.[xx]

If the LE is not delivered in person, “receipt” occurs three business days after the Loan Estimate has been delivered or placed in the mail. Alternatively, the creditor may rely on evidence (i.e., a signed receipt for overnight delivery) that the consumer received the disclosures earlier than the end of the three business days.[xxi]

One question that comes up often is how to manage the timing with respect to electronic delivery. The 3-business-day period applies to methods of electronic delivery, such as email. Thus, if a creditor sends a Loan Estimate by email on a Monday, the consumer is considered to have received the disclosures on a Thursday, unless the creditor relies on evidence that the consumer received the emailed disclosures earlier (such as an acknowledgment of email receipt). Creditors relying on electronic delivery methods must comply with the consumer consent and other applicable provisions of the E-Sign Act.[xxii]

Irrespective of E-Sign consent provisions, we advise our clients to consider:

·       Whether procedures are needed to deal with electronic disclosures returned undelivered;
·       Whether electronic disclosures are provided in a form that can be retained;
·       The duration of electronic notices or disclosures available to consumers through the financial institution’s systems;
·       Establishing a process to appropriately respond to consumer requests for paper copies of electronic notices and disclosures;
·       Dealing with changes in hardware or software that may create a risk that consumers will no longer be able to access or retain electronic disclosures; and
·       Ensuring their electronic disclosures comply with the timing, format, content, and recordkeeping requirements of the underlying substantive rule (i.e., Regulation Z).