Disclosure Integration, High Cost, and Counseling

On July 9, 2012, the CFPB issued its proposed integration of RESPA and TILA disclosures into the "integrated" forms, entitled "Loan Estimate" and "Closing Disclosure". These new forms are derived from the Good Faith Estimate (GFE), the Truth-in-Lending (TIL) Disclosure, and the HUD-1/1A Settlement Statement. This assemblage has been duly dubbed with the euphemism "integration".

Excluded from the forthcoming integration are reverse mortgages, home equity lines of credit (HELOCs), chattel dwelling loans, and de minimis originations consisting of loans made by creditors who make five or fewer otherwise covered loans per year.

I have covered the process of constructing these forms in several newsletters and articles, including HERE, and HERE.*

The CFPB is not expecting to finalize the integration before the end of this year. Comments are due November 6, 2012.

However, there is a comment deadline of September 7, 2012 - which will lead to rulemaking before January 2013 - regarding the extent to which the rule applies to loans previously exempted from RESPA or TILA and the further redefining of the term “finance charge” to include most costs associated with residential mortgage loans.

By its own admission, the CFPB has stated that the proposal to "broaden" the definition of a "finance charge" by adopting certain adjustments or accommodations in its HOEPA implementing regulations under Regulation Z, would "cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA."

The CFPB has also set forth proposed rules to implement Dodd-Frank amendments regarding high-cost mortgages and also to provide homeownership counseling provisions that would affect mortgage lending generally (with no exclusion for HELOCs).

The implications of these rules, taken together, are far reaching. I would suggest that you visit our Library for further information.

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IN THIS ARTICLE

“Loan Estimate” and “Closing Disclosure”

Integration

High-Cost Mortgages

Homeownership Counseling

Library

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“Loan Estimate” and “Closing Disclosure”

• The Loan Estimate replaces the GFE and early TIL, while the Closing Disclosure replaces the HUD-1/1A and final TIL.

• HUD's Special Information Booklet will still be required.

• The CFPB's proposal would combine five pages (seven if typical appraisal and servicing disclosures were to be counted) of TILA/RESPA data into a three-page Loan Estimate, not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service.

• The Closing Disclosure is five pages.

Integration

The integration not only provides an entirely new format but also reconciles certain existing differences between Regulation X, the implementing regulation of RESPA and Regulation Z, the implementing regulation of TILA.

Highlights

• Redefines the term “application” by deleting the 7th component from the definition adopted by HUD, as outlined in its New RESPA Rule FAQs, as “any other information deemed necessary by the loan originator.”

• Alters the coverage of the disclosure requirements so they would apply to home loans, except for the aforementioned exemptions.

• Changes the timing and responsibility rules for providing closing disclosures.

HUD: Updates RESPA

On July 11, 2011, the Department of Housing and Urban Development (HUD) issued updates to the Real Estate Settlement Procedures Act (RESPA).

This is a final rule (Rule) which makes technical corrections and certain clarifying amendments to HUD's RESPA regulations promulgated by a final rule published on November 17, 2008.

The majority of the regulations promulgated by the November 17, 2008, and became applicable on January 1, 2010.

Effective Date: August 10, 2011.

SALIENT AMENDMENTS

Good Faith Estimate (GFE) and Intent to Proceed

The applicant borrower must express an intent to continue with the application process.

The Rule amends § 3500.7(a)(4) and (b)(4) to provide that the applicant borrower must indicate an intention to proceed with the loan covered by the GFE received by the applicant borrower from the lender or mortgage broker before the lender or mortgage broker may charge additional fees.

Good Faith Estimate (GFE)

Tolerances

Currently the applicable provision states that a loan originator is bound "within the tolerances provided in paragraph (e) of this section, to the settlement charges and terms listed on the GFE provided to the borrower, unless a [revised] GFE is provided prior to settlement consistent with this paragraph (f)."

However, the introductory paragraph inadvertently omits that the GFE does not remain binding indefinitely but expires 10 business days after the GFE is provided to the borrower if the borrower does not express an intent to continue with an application provided by the loan originator that provided the GFE, or expires after such longer period as may be specified by the loan originator pursuant to § 3500.7(c).

Although the expiration period of the GFE is clearly stated in paragraph (f)(4) of § 3500.7(f), HUD finds that clarity is enhanced by also adding this language to the introductory paragraph of § 3500.7(f).

Changed Circumstances

Currently the applicable provision addresses changed circumstances affecting settlement costs, provides that the revised GFE may increase charges for services listed on the GFE but only to the extent that the changed circumstances actually resulted in higher charges.

However, the currently the applicable provision, which addresses borrower-requested changes, inadvertently omits that the revised GFE may increase charges listed on the GFE only to the extent that changed circumstances affecting the loan, or the borrower's requested change, actually increased those charges.

This rule therefore adds language that clarifies this limitation.

Locked Interest Rate

HUD clarifies that whenever the borrower's interest rate is locked, a revised GFE must be provided to the borrower showing the revised interest rate-dependent changes and terms within 3 business days.

Construction Loans

In revising § 3500.7(f)(6) of RESPA, HUD is adding the word "construction" to the phrase "new home purchases" so that it reads "new construction home purchases."

HUD believes that the content of this paragraph is clear that new home purchases refers to purchases of newly constructed homes, not simply any home that is new to a borrower. This interpretation is supported by the preamble to the November 17, 2008, final rule in which this regulatory provision was discussed.

While HUD believes the meaning of paragraph (f)(6) is clear, to remove any possibility of ambiguity the word "construction" is inserted between the words "new" and "home purchases."

HUD-1 or HUD-1A Settlement Statements

Appendix: HUD-1 Instructions for Page 3

The instructions for the HUD-1, found at 73 FR 68243 of the November 2008 final rule, provide that the HUD-1 form is to be used as a statement of the actual charges and adjustments. If the borrower, or a person acting on behalf of the borrower, does not purchase a settlement service that was listed on the GFE (e.g., owner's title insurance), there should be no amount entered for that service in the corresponding line on Page 2 of the HUD-1, and the estimate of the charge from the GFE should not appear on the comparison chart on Page 3 of the HUD-1.

HUD has determined that the current instructions are not sufficiently clear on this point. Allowing loan originators to include on Page 3 of the HUD-1 charges from the GFE for settlement services that were not purchased could both induce loan originators to discourage consumers from purchasing settlement services (e.g., owner's title insurance) in order to gain padding in the 10 percent tolerance categories, and encourage loan originators to pad the 10 percent tolerance categories on the GFE with estimates of services that the consumer will not need in the transaction. HUD has previously addressed and clarified this issue in informal guidance.

Therefore, HUD is revising the first paragraph of the instructions for Page 3 of the HUD-1 to clarify that the amounts to be inserted in the comparison chart are those for the services that were purchased or provided as part of the transaction, and that no amount should be included on Page 2 of the HUD-1 for any service that was listed on the GFE, but which was not obtained in connection with the transaction.

LIBRARY

HUD: Real Estate Settlement Procedures Act (RESPA)
Technical Corrections and Clarifying Amendments
Federal Register - Vol. 76, No. 132
Monday, July 11, 2011

CFPB: Heat Maps and Mortgage Disclosure

The Consumer Financial Protection Bureau (CFPB) has taken an innovative approach toward designing the forthcoming, combined Good Faith Estimate and Truth in Lending Disclosure (Mortgage Disclosure): it is using heat maps to determine viewer orientation to information stated on the Mortgage Disclosure. This is part of the CFPB's Know Before You Owe project.

The CFPB announced this unique evaluative tool recently in its issuance, entitled Mortgage Disclosure Is Heating Up.

A heat map is a graphical representation of data, where a two-dimensional color table represents certain variable values. It has many uses in numerous fields.
Heat maps can be extrapolated from statistical values, providing feedback based on specific data points.

In our previous newsletter, we discussed the two sample Mortgage Disclosures that were under consideration by the CFPB. These were the subjects of heat map evaluations.
The forms were labeled "Ficus Bank" and "Pecan Bank."

Copies of those forms are available in our Library.

RESPONDENTS

According to the CFPB, more than 14,000 people submitted a choice between the two forms, and 13,000 individual comments were received.

The heat maps, essentially, were generated from the statistical values created by visitors clicking areas of the form.

The CFPB's evaluation process seems to include the heat maps - which provide the ways areas of the forms were experienced - along with the choice of disclosures selected by the visitors, and, importantly, the review of comments that the visitors provided.

HEAT MAP - MORTGAGE DISCLOSURE

The CFPB is using heat maps to display areas of the Mortgage Disclosure most frequently clicked by website visitors who were viewing the forms.

Click Heat Map

LEARNING CURVE

Thus far, the CFPB has determined the following from the use of the heat maps:

Respondents:

• Were interested in the bottom line.

CFPB: "The full loan amount at the top of the page, the projected payments section at the bottom of the page, and the estimated closing payment on the second page all received a lot of clicks."  

• Had a great deal to say about the "Key Loan Terms" and "Cautions" sections.

• Commented on the first page of the draft form much more than on the second.

CFPB: "This is a pretty common occurrence, and on its own, it serves as helpful advice for our designers about where to put certain important information. But the information on the second page (like closing costs, for example) is also an essential part of mortgage disclosure. That's why the next round of testing will focus on the second page."

INITIAL OBSERVATIONS

CFPB observed that the heat maps showed:

• How the two different formats drew attention to different parts of the form.
• Differences between what consumers and lenders commented on. ("For example, industry reviewers were very interested in applicant or lender information at the top of the form. Consumer reviewers paid less attention to that.")
• Differences between what positive and negative reviewers noticed on a form.

LIBRARY

Consumer Financial Protection Bureau
Library Section

Combining the GFE and TIL Disclosures

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

The Consumer Financial Protection Bureau (CFPB) announced on May 18, 2011 that it has created two alternative prototype forms that are designed to combine the consumer disclosures required by the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The creation of a combined form is required by the Dodd-Frank Act.

The CFPB will use the prototypes in a testing process that will last several months in preparation for the agency's formal proposal of a single form. The agency said that it plans five rounds of evaluation and revision before settling on a final form, and the process will use forms in both English and Spanish.

The prototypes both offer disclosures for a $216,000 adjustable rate mortgage loan. They combine the disclosures required by the current RESPA Good Faith Estimate of Closing Costs and the current TILA disclosures in two-page formats. By selecting the right options, it is possible not only to review the two prototypes but also to comment on which of the two is better and why. The CFPB's webpage also offers separate comment possibilities for consumers and industry participants.

The testing and public feedback process will enable the CFPB to revise the design and refine the content based on how it works for consumers to develop a single form that will officially replace the dual TILA and RESPA disclosure requirements.

The purpose of combining and simplifying the GFE and TIL is to reduce the regulatory burden on mortgage lenders.

Twofer

According to the CFPB, "the feedback process we're starting today is one of the first steps in combining the Truth in Lending form and the Good Faith Estimate into a single, simpler disclosure form."

The new form will consist of two pages. Page one provides an overview of the costs related to the origination of the loan and the monthly payment the consumer can expect, as well as whether or not the amount of that payment will change over time. Page two offers a more detailed explanation of the cost breakdown.

With respect to the prototype forms proffered, here are the questions about which the CFPB requests consideration:

• Would this form help consumers understand the true costs and risks of a mortgage?
• Could lenders and brokers clearly and easily explain the form to their customers?
• What would you like to see improved on the form? 
• Is there some way to make things a little bit clearer?

Learning from the Mortgage Industry

What is interesting about the CFPB's approach to this major overhaul is its forthright attitude. In offering the new form for industry evaluation, its announcement states that:

"at the heart of our work is the idea that the consumer financial product and services market should work for you. We think we should learn from you what you want to see. One of the best ways to do that is also the simplest: we're asking."

For industry participants accustomed to being told what to do, not asked, this is a welcome attitude. Even when regulators have asked industry members for comments, as a requirement of statutory authority and rulemaking, often most comments are not adopted, adapted, or, in some cases, even acknowledged.

But it should be noted that this is only a first step in a process that will last several months. The testing phase of the disclosure prototypes will take place over the next several months and involve one-on-one interviews with consumers, lenders, and brokers. 

CFPB expects to conduct five rounds of evaluation and revisions through September 2011. Initial rounds of testing will include both English and Spanish language versions. Interviews will be conducted in six cities: Albuquerque, New Mexico; Baltimore, Mary land; Birmingham, Alabama; Chicago, Illinois; Los Angeles, California; and Springfield, Massachusetts.

Yet, the CFPB lets us know, even though the process will take some time, "there will be more opportunities to weigh in as we move forward."

What this suggests is that the industry would do well to assist, rather than to resist, the type of cooperation that the CFPB wants to encourage. Ultimately, what is good for the consumer is good for the industry - that is a concept that the industry itself has always maintained as central to its mission.

Option A or Option B  

Of course, commentators will bring their own ideas about the way the form should be designed. Such participation is very important.

Many will look to extrapolate the existing ways of disclosing on the currently separate GFE and TIL disclosures into the new CFPB combined form. That also is needed and valuable.

However you view it, contributing to the process is much better than sitting on the sidelines without an opinion - or not expressing it when given the opportunity.

Library

Proposal to combine GFE and TIL Disclosures (Option A and Option B)
(5/18/11)
GFE and TIL: Option A
GFE and TIL: Option B

Loan Originator Compensation: Good Faith Estimate (GFE)

On March 18, 2011, the Department of Housing and Urban Development (HUD) issued its RESPA Roundup, this issue being devoted to completing the Good Faith Estimate (GFE)  in order to disclose loan originator compensation pursuant to the new TILA Loan Originator Compensation rule (Rule). [75 F.R. 58509 (September 24, 2010)]

HUD's guidance addresses the following issues:

(1) Mortgage broker transactions where the broker is compensated indirectly from the lender by means other than an amount that is computed based on the interest rate, such as by a flat fee or an amount that is based on any other computation;

(2) No cost transactions where the credit for the interest rate chosen covers third party settlement charges;

(3) Using a credit/charge calculation prior to completing Block 2 on the GFE; and

(4) Payments by lenders to borrowers to correct tolerance violations in wholesale transactions.

I will simplify the technical aspects of this HUD issuance, in order to clarify how to complete the GFE.

(1) Mortgage Broker Transactions
(Flat Fee Compensation)

Block 2 instructions state: "[f]or a mortgage broker, the credit or charge for the specific interest rate chosen is the net payment to the mortgage broker from the lender (i.e., the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate, or any other computation, and in a table funded transaction, the loan amount less the price paid for the loan by the lender)."

Illustration: Flat Fee Compensation

Example:

a) Flat Fee to Mortgage Broker is $4,000 (to be paid by the lender).
b) The lender charges $500 for processing and administrative fees. 

GFE: Block 1 reflects a charge of $4,500. (Block 2 has a credit of $4,000, adjusted origination charge of $500 in Block A.)

(2) No Cost Transactions
(Interest Rate Covers Originator
or Third Party Settlement Charges)

Overview:

Only Originator Fees: Line A would show a zero (0) charge as the adjusted origination charge. 

Originator Fees and Third Party Charges: All third party fees must still be itemized and listed in Block 3 through Block 11 on the GFE. 

NOTE (1): Block 1 includes lender and mortgage broker compensation as well as all other charges that the lender and mortgage broker will receive. Thus, Block 1 provides total compensation to lender and mortgage broker.

NOTE (2): Block 2 is used for the credit or charge for the interest rate chosen. 

(A) If "no cost" refers to only the lender and mortgage broker's fees, Block 2 offsets Block 1 resulting in $0 on Line A.

(B) If "no cost" refers to both Block 1 and the third party settlement charges (itemized in Blocks 3-11), the credit in Block 2 covers Block 1 and Blocks 3 through 11, resulting in $0 for the sum of Lines A and B.

Example

No cost loan covering only lender and mortgage broker charges (i.e., not third party settlement charges). 

In the following GFE, the total compensation for the lender and mortgage broker is $4,500, as reflected in Block 1. Borrower is locked in an interest rate of 6.375% such that the credit for the interest rate chosen results in a credit of $4,500. Thus, Block A results in $0.

Example

No cost loan covering lender, mortgage broker and third party settlement charges.

In the following GFE, the total compensation for both the lender and mortgage broker is $4,500, as reflected in Block 1. The borrower has locked in an interest rate of 7.375% such that the credit for the interest rate chosen results in a credit of $7,500. Block A results in a credit of $3,000 to offset the total of all third party charges in Block 3 through Block 11.

(3) Using a Charge or Credit Calculation
Prior to Completing Block 2 of the GFE 

Overview:

RESPA provides: "[w]hen the net payment to the mortgage broker from the lender is positive, there is a credit to the borrower and it is entered as a negative amount in Block 2 of the GFE. When the net payment to the mortgage broker from the lender is negative, there is a charge to the borrower and it is entered as a positive amount in Block 2 of the GFE." 

NOTE: the Rule prohibits a loan originator (as defined by the FRB) from receiving compensation directly from the consumer when it has received compensation from any person other than the consumer in connection with the transaction.

Example: Charge in Block 2

a) Principal balance is $250,000.

b) Lender charges $1,000 for processing and administrative fees.

c) Broker's compensation is $2,000, fully paid by the lender.

In the following GFE, the total origination charge in Block 1 is $3,000. The interest rate chosen a $2,000 credit. Pricing adjustments result in a $2,500 charge. The resulting $500 charge is placed in Block 2 and box three would be checked. The sum of Block 1 and Block 2 results in an adjusted origination charge in Line A of $3,500.

Example: Credit in Block 2
a) Principal balance of $250,000.
b) Lender charges $1,000 for an origination fee.
c) Broker receives $2,000 in indirect compensation from the lender.

In the following GFE, the total origination charge in Block 1 is $3,000. The interest rate chosen has a $2,000 credit. Pricing adjustments result in a $1,500 charge. The resulting $500 credit is placed in Block 2 and box two would be checked. The sum of Block 1 and Block 2 results in an adjusted origination charge in Line A of $2,500.

(4) Payments by Lenders to Borrowers for
Tolerance Violations in Wholesale Transactions

HUD restates the RESPA statute by emphasizing that regulations impose tolerance levels on charges disclosed on the GFE. Where actual charges to the borrower exceed these thresholds, mortgage brokers and lenders may cure to avoid a tolerance violation.

Advice given by HUD: timely and effective communication among the lender, its loan officers, and mortgage brokers to establish policies and procedures to ensure accurate calculation of compensation and credits in compliance with RESPA, as well as under the FRB compensation rule and any other applicable federal or state statute.

In other words, in HUD's view tolerance violations remain the burden to cure, though HUD provides no further guidance.

Some Observations

Changed Circumstances: The FRB's compensation rule will go into effect on April 1, 2011 and absent other factors cannot be considered a basis for a changed circumstance to revise the GFE pursuant to 24 C.F.R. §3500.7(f).

Volume Based Compensation: If a lender is basing its compensation to mortgage brokers on loan volume, as described in the new FRB compensation rule, it is nevertheless necessary to comply with RESPA Section 8 (12 U.S.C. 2607), which prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors.

Company Name Disclosed in Section F of the HUD-1: The name of the company originating the loan should be placed in Section F of the HUD-1. The name of any individual loan officer or mortgage broker is not disclosed.

Visit Library

Compliance Guidance for RESPA's Good Faith Estimate:
FRB's MLO Compensation Rules
HUD - RESPA Roundup,
March 18, 2011

Good Faith Estimate: Top 10 Broker Mistakes

Since the introduction of the effective implementation date of the new Good Faith Estimate (GFE) on January 1, 2010, we have been working closely with our clients to assure proper disclosure compliance. During this time, we have documented literally hundreds of issues that have required resolution and guidance pertaining not only to the GFE but also the new HUD-1 Settlement Statement (HUD-1).

Even now, these many months into the use of the new GFE, we receive numerous requests from clients seeking a better understanding of this form's nuances and requirements.

Regarding proper implementation of the GFE and HUD-1, we have compiled a database of resolutions and guidelines for regulatory compliance, and will soon make it available to our clients in the first release of our online client website.

However, there are still gaps and we look to the Department of Housing and Urban Development (HUD) for further written clarifications.
There have been eight (8) updates to the New RESPA Rule FAQs (RESPA FAQs) since HUD issued the Final Rule on November 17, 2008: six were issued in 2009, and two were issued in 2010 - with the second (and most recent) issued on April 2, 2010. Although HUD issued a RESPA Roundup in July, that document provided virtually no GFE guidance.

Given that the last RESPA FAQs update was in early April, another update is long overdue. HUD should update the RESPA FAQs soon.

We thought we'd share with you some mistakes made by mortgage brokers and the positions taken by our wholesale lending clients in response to those errors. Obviously, our retail mortgage banker clients have different issues and disclosure concerns. Nevertheless, wholesale lending has certain issues quite unique to the origination and loan flow processes.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx.

Highlights

Top 10 GFE Mistakes Made By Brokers

1. Broker submits a 2009 GFE. The 2010 HUD-approved GFE is the only version acceptable to the lender. Obviously, this mistake was happening during the early transition period, but the percentage of occurrences was inordinately high at the time.

2. Broker submits a 2010 GFE without a complete Service Provider List. All GFEs must include a Service Provider List and must clearly indicate all services that the broker has chosen for the borrower if the broker is selecting the provider. If the borrower chooses from the service provider(s) or if the broker chooses the service provider(s) the 10% tolerance must be adhered to.

3. Broker includes the YSP in Line #1, but leaves Line #2 completely blank. Line 2 should always be the Gross YSP. The adjustment for what the broker wants to make as income and what the broker would like to credit the borrower is adjusted in Line 1.

Here's an example taken from our files:

4. Broker includes the YSP in Line #2, but fails to include it in Line #1. The adjustment for what the broker wants to make as income and what the broker would like to credit the borrower is adjusted in Line 1.

Here's an example taken from our files:

5. Broker does not disclose the lender's underwriting fee in Line #1. The lender's underwriting fee should be included in Line #1.

6. Broker leaves Line #1 completely blank or is calculated incorrectly. Line #1 should include all income fees for the broker and lender.

Here's an outline taken from our files:

7. Broker does not include 3rd party fees in Line #3. Third party fees, including lender's fees [i.e., Tax Service Fee, Flood Certification Fee, Appraisal Fee (even if it is paid outside of closing), Credit Report Fee, FHA Upfront Mortgage Insurance Premium (MIP) Fee VA Funding Fee, and so forth], should be included in Line #3.

8. Broker does not disclose any and all seller paid items. All fees should be included on the GFE even if the seller is paying closing costs.

9. Broker does not include the transfer tax fees on the GFE in states where transfer tax is a requirement. The transfer tax fees must be disclosed in states where required. If state or local law is unclear or does not specifically attribute transfer tax to a seller or the borrower, the amount to be disclosed by the broker is governed by common practice or experience in the locality. Because not disclosing this fee is in the zero tolerance box, our wholesale lenders charge the broker if not disclosed upfront.

10. Broker does not include all income fees in Box 1 including the lender's underwriting fee. All broker income fees must be included in Box 1 along with the lender's underwriting fee. No additional fees can be added after the initial GFE.

Visit Library for Issuances

New Good Faith Estimate and HUD-1 Settlement Statement
RESPA - Final Rule and New RESPA Rule FAQs

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