CFPB Finalizes “Know Before You Owe” Mortgage Forms

The Consumer Financial Protection Bureau released November 3, 2014 the final rule (around 1900 pages) which sums up the RESPA-TILA Integrated Disclosures Rules. This rule will be effective for any applications as of August 1, 2015. These rule changes will significantly change the way we do business with respect to applying for loans and closing sales in escrow.

Loan Estimate | Closing Disclosure

The two new forms are considered to be integrated to meet the Consumer Financial Protection Bureau rules. Further it mandates the use of the two disclosures, the 3 page Loan Estimate will replace the GFE Good Faith Estimate and the Truth in Lending Disclosure and the five page Closing Disclosure will replace the HUD-1 and final Truth in Lending Disclosure.

Basic Changes are as follows. . .Loan Estimate

The Loan Estimate replaces both the GFE under RESPA and the initial Truth in Lending Disclosure under TILA. The Loan Estimate provides a summary of the contemplated loan terms, estimated loan costs, other estimated closing costs, and additional application disclosures. According to the CFPB, consumers will be able to utilize the Loan Estimate when comparing different loans.

If a consumer submits an application, the requirement to provide the Loan Estimate is then required. An application is defined as the submission of six pieces of information: (1) the consumer’s name, (2) the consumer’s income, (3) the consumer’s Social Security number to obtain a credit report (or other qualified identification if the consumer has no Social Security number), (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought. This is the same definition in the proposed rule. Consumers now may not be required to provide additional information, such as the desired loan product, as a condition to provide a Loan Estimate.

Prior to receiving the six specific items of information, lenders may provide consumers with written estimates, but any pre-application written estimate must contain a disclaimer that it is not an official Loan Estimate.

Once an application is received, the creditor has the obligation to ensure that the consumer is provided with a Loan Estimate within three business days of the consumer’s application.

The Loan Estimate must be provided to the consumer at least seven business days before consummation, and the special “business day” definition, which includes Saturdays. If the Loan Estimate is revised, the result would be the creditors must provide revised Loan Estimates at least four business days before consummation of the loan.

The CFPB recognized that consumers may work with either a mortgage broker or directly with a creditor; therefore, either a mortgage broker or a creditor may provide the Loan Estimate. If a mortgage broker provides the Loan Estimate, the creditor maintains responsibility for compliance with all Loan Estimate requirements.

The first page contains information identifying the borrower and loan, the loan terms, the projected monthly payments, the total estimated closing costs, and the total estimated cash needed to close. The second page breaks down the closing costs in more detail and includes information on prepaid and escrowed amounts, as well as detail on the cash needed to close. The third page includes a summary of loan costs over five years to provide for a comparison with other loan products, and required disclosures regarding the delivery of a copy of an appraisal to the borrower, whether the loan is assumable, whether homeowner’s insurance is required, late payment fee information, and whether the loan servicing may be transferred. The third page also contains a signature block for consumers to confirm receipt of the disclosure. See Loan Estimate.

The final rule includes under RESPA for delayed closings for construction loans. For transactions involving new construction, if the creditor expects that closing will occur more than 60 days after the Loan Estimate is provided, the creditor may issue revised disclosures any time prior to 60 days before consummation without regard to the limitations on revising the estimated costs, as long as the original Loan Estimate clearly states that revised disclosures may be issued at any time prior to 60 days before consummation.

What is a Qualified Mortgage and what are the eight ATR underwriting factors I must consider and verify under the rule?

A reasonable, good-faith ATR evaluation must include eight ATR underwriting factors. . .

Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan.
Current employment status (if you rely on employment income when assessing the consumer’s ability to repay)
Monthly mortgage payment for this loan. You calculate this using the introductory or fully indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially. You may already have underwriting policies, procedures, and internal controls that consider these factors. However, you should check your policies and procedures to ensure that they reflect that you will consider each of the eight factors. It may also be helpful to document how you consider the factors. However, the rule does not require validation of underwriting criteria using mathematical models.18 CONSUMER FINANCIAL PROTECTION BUREAU equal (See “What do I include on the debt side of the debt-to-income ratio when determining ATR?” on page 256 for special rules for calculating payments for interest only, negative-amortization, and balloon loans.)
Monthly payment on any simultaneous loans secured by the same property.
Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent.
Debts, alimony, and child-support obligations.
Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income.
Credit history.

The rule does not preclude you from considering additional factors, but you must consider at least these eight factors.

Basic Changes Closing Disclosure~

A buyer/borrower or seller refinance/borrower must receive the fully filled out Closing Disclosure and acknowledge receipt of it in writing prior to closing. From the time they sign and date it, there is a three (3) day waiting period that must occur for them to think about and digest what they have signed and give direction to move forward to close their loan and transaction.

It is quite important to not make any changes in your contract if you are a buyer or seller after the borrower had been approved in underwriting for your loan because this could trigger a review and re-approval by underwriting through your lender which could further extend your time period to be able to close escrow.

The Closing Disclosure replaces both the HUD-1 under RESPA, and the final Truth in Lending Disclosure under TILA. The Closing Disclosure provides a summary of the actual loan terms, the loan costs, other settlement costs, and additional closing disclosures.

Timing~ The creditor must provide the Closing Disclosure to the consumer at least three business days before the consumer closes on the loan. If there are changes to the Closing Disclosure between the time it is issued and closing, depending on the nature of the change, the creditor must provide an updated Closing Disclosure with another three-business-day waiting period, or simply provide an updated Closing Disclosure by closing. The final rule uses the special definition of “business day,” which is any day other than Sundays and certain legal public holidays.

The changes that require the creditor to provide an updated Closing Disclosure and an additional three-business-day waiting period are: (1) changes to the APR greater than 1/8 of a percent (or 1/4 of a percent for loans with irregular payments or periods), (2) changes to the loan product, or (3) the addition of a prepayment penalty. Less-significant changes can be disclosed on an updated Closing Disclosure without the need for an additional three-business-day waiting period. The proposed rule would have required a new three-business-day waiting period in many more cases when the Closing Disclosure was updated. The CFPB responded to industry comments that the proposed approach would require the rescheduling of many closings. The final rule approach is intended to limit circumstances in which a new waiting period is required to situations with more significant changes.

The creditor is responsible for delivering the Closing Disclosure form to the consumer. A creditor may use settlement agents to provide the disclosure, provided the settlement agent complies with the requirements of the rule, and the creditor must ensure that the Closing Disclosure is provided in accordance with the rule.

The Closing Disclosure is five pages long. The first page is similar to the first page of the Loan Estimate, and contains information identifying the borrower and loan, the loan terms, the projected monthly payments, and the total closing costs and total cash needed to close.

The second page contains an itemization of closing costs and other costs to close the loan, including whether each particular cost is paid by the borrower, seller, or another party. The third page includes a calculation of the cash needed to close and a summary of the borrower’s transaction and seller’s transaction.

The fourth and fifth pages contain additional loan disclosures below and contact information for the creditor, brokers, and settlement agent, & additional disclosures address.

Whether the loan is assumable
Whether it has a demand feature
Whether there is a negative amortization feature
Late payment fee information
The ability to refinance the loan
Whether servicing of the loan may be transferred
The responsibility of the creditor to deliver a copy of the appraisal to the borrower
Escrow requirements
Whether the lender accepts partial payments
Tax deductibility
Loan contract details
Borrower liability after foreclosure

The fifth page also includes a calculation of the total payments, finance charges; amount financed, and total interest percentage over the term of the loan. Finally, the fifth page also requires a signature for consumers to confirm receipt of the disclosure.

Restrictions on Increases in Closing Costs~

The final rule limits the circumstances in which borrowers may be required to pay more for settlement services than the amount stated on the Loan Estimate. Unless an exception applies, charges for the following services cannot increase: (1) the creditor’s or mortgage broker’s charges for its own services, (2) charges for services provided by an affiliate of the creditor or mortgage broker, and (3) charges for services for which the creditor or mortgage broker does not permit the consumer to shop for the provider. Charges for other services can increase, but generally not by more than 10 percent, in the absence of an exception. If a service is not required by the creditor, there is no restriction on cost increases.

The exceptions include situations when: (1) the consumer asks for a change, (2) the consumer chooses a service provider that was not identified by the creditor, (3) information provided at application was inaccurate or becomes inaccurate, or (4) the Loan Estimate expires.

The proposed rule revived a prior Federal Reserve Board proposal to expand the definition of the finance charge, which is then used to calculate the APR, to include a number of additional charges. The expanded APR would have included, among other things, closing agent charges, title agent charges, credit life insurance premiums, voluntary debt cancellation fees, and security-interest charges.

The final rule requires creditors to retain records evidencing compliance with the Loan Estimate and Closing Disclosure requirements for three years from the later of closing or when the disclosure is required. Consistent with existing RESPA requirements, a creditor must, however, retain the Closing Disclosure and all related documents for five years after closing.

The proposed rule would have required creditors to keep records of the Loan Estimate and Closing Disclosure in a standard electronic, machine-readable format. The CFPB removed this provision from the final rule, acknowledging in a blog post that “the data standard we were proposing wasn’t specific enough.” The CFPB still believes that requiring the retention of records in such format is a “good idea” and will study the matter further.

Specific Categories excluded from the rule~

The rule does not apply to the following:

Open-end credit plans (home equity lines of credit, or HELOCs)
Time-share plans
Reverse mortgages
Temporary or bridge loans with terms of 12 months or less (with possible renewal)
A construction phase of 12 months or less (with possible renewal) of a construction-to permanent loan
Consumer credit transactions secured by vacant land
Mortgages secured by mobile homes
Creditors that make five or fewer mortgages a year

The final rule does not otherwise include an exception for small creditors.

Writing the Purchase Contract with these two new rule form changes~

Some Basics to consider:

When asking for a prequalification from the buyer/borrowers lender be sure to as your buyer if they have received the Loan Estimate 3 pages and have signed it. To keep it to go over the costs when they are given their Closing Estimate for review with the figures. Ask for a LSU timely to see how the buyer/borrowers requirements are being updated.
Make sure the contract allows for the provision of buyers ability to review the Closing Estimate and it is consistent with the Loan Estimate per the rules.
Timing- Allow approximately 2 weeks for the close of escrow from the time the Closing Estimate is received by the buyer/borrower so that the required rules can be met before closing. You could write on or before that extra 2 week period.
Avoid changes in the contract after underwriting has approved the contract. This could trigger a new underwriting review and approval which could stretch out the close of escrow even longer.
Work closely with the Lender and Escrow Company and your escrow officer with respect to the process for a smooth successful closing. Keep your client informed along the way. J

A note from the editor~ The forms actually are easier to read and make the disclosures easier to understand for the consumer applying for the loan and the Realtors.

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