Regulations and Guidance Update

CFPB Proposes New Mortgage Disclosure Rules

On Monday, the Consumer Financial Protection Bureau (CFPB) released its long-awaited proposed rules for mortgage disclosure forms that are intended to add greater transparency to the mortgage market. The proposed rules, which are over 1000 pages long, amend the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) to establish new disclosure requirements and forms governing most home mortgages. The rules also provide extensive compliance guidance and, according the to the CFPB, “tell industry how to fill out the new forms” and “propos[e] commentary that interprets the rules to help industry understand how to comply.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB was charged with combining the overlapping federal disclosure forms required by RESPA and TILA. In developing the new forms, the CFPB has reconciled the differences in the existing disclosures and combined several other mandated disclosures. The proposed rules would require lenders to provide borrowers with two disclosure forms:

• Loan Estimate Disclosure Form: Borrowers would receive a three-page “Loan Estimate” form within three days of applying for a mortgage. This form would replace the “Good Faith Estimate” form and the “early” Truth in Lending disclosure form. It is intended to help consumers understand key features, costs and risks for the mortgage for which the borrower applied.
• Closing Disclosure Form: Borrowers would also receive a five-page “Closing Disclosure” form at least three days before the scheduled closing. The Closing Disclosure form would replace the forms currently required to close a loan:  the HUD-1 and the Truth in Lending disclosure. The Closing Disclosure contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.

The first page of both forms presents the interest rates, monthly payments, loan amounts and closing costs, as well as explanations regarding any changes in the interest rates during the life of the loan. The forms also require the inclusion of information on taxes, insurance, property tax costs and warnings about prepayment penalties, adjustable interest rates, and increases in loan balances (negative amortization). The Loan Estimate form must clearly present potential pitfalls or risky types of mortgages. The Closing Disclosure can be easily compared to the Loan Estimate Disclosure to avoid any surprises at closing; generally, lenders may not increase amounts disclosed on the loan estimate disclosure.  

The proposed rule and Commentary contain detailed instructions as to how each line on the Loan Estimate and the Closing form would be completed. The rule also includes sample forms for different types of loan products. Other specifics of the rule include the following:

Scope—The proposed rule applies to most closed-end consumer mortgages, with the exception of reverse mortgages, home equity lines of credit and mortgages secured by a mobile home or a dwelling not attached to real property. Lenders who make five or fewer mortgages a year are exempt from the rule.

Prior Fees—Consistent with current law, the lender generally cannot charge consumers any fees until after the consumers have been given the Loan Estimate form and the consumers have communicated their intent to proceed with the transaction. There is an exception that allows lenders to charge fees to obtain consumers’ credit reports.

Party Responsible—The lender may rely on a mortgage broker to provide the Loan Estimate form but remains responsible for the accuracy of its content.

Currently, settlement agents are required to provide the HUD-1, while lenders are required to provide the revised Truth in Lending disclosure. The Bureau is proposing two alternatives that address who should be required to provide consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the lender may rely on the settlement agent to provide the form. However, under the second option, the lender would also remain responsible for the accuracy of the form. The Bureau seeks comment as to which alternative is preferable.

Limits on Closing Cost Increases—Similar to existing law, the proposed rule would restrict the circumstances in which consumers can be required to pay more for settlement services than the amount stated on their Loan Estimate form. Unless an exception applies, charges for the following services may not increase: (1) the lender’s or mortgage broker’s charges for its own services; (2) charges for services provided by an affiliate of the lender or mortgage broker; and (3) charges for services for which the lender or mortgage broker does not permit the consumer to shop. Also, unless an exception applies, charges for other services generally may not increase by more than 10 percent.

The rule would provide exceptions, for example, when: (1) the consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the lender; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days.

Changes to APR—The proposed rule redefines the way the Annual Percentage Rate (APR) is calculated. Under the rule, the APR will encompass almost all of the upfront costs of the loan. This will make it easier for consumers to use the APR to compare loans and easier for industry to calculate the APR.

Director Cordray explained that “Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home.” He has also stressed that the proposed disclosure form and the implementation rules will ensure that the costs and the risks of the loan are not hidden in the fine print. The CFPB claims that the new forms are the result of 18 months and 10 rounds of testing throughout the country with consumers and industry representatives, as well as thousands of public comments on prior drafts of the forms. Industry groups, however, have expressed reservations about the scope and implementation of the proposed rules. David Stevens, chief executive of the Mortgage Bankers Association, explained that his group is generally supportive of greater transparency but is concerned that the proposed changes are “going to be incredibly, extremely difficult to implement.” Stevens explained, “[t]his isn’t about saying don’t do it. It’s a question of the massive amount of change being made in a very tenuous housing finance system . . . and making sure we do this deliberately and we don’t rush it.”

Perhaps reflecting industry concerns about rushing into these proposed changes, the proposed rules do not set forth a proposed “effective date.” Instead, “the Bureau is seeking comment on when this final rule should be effective.” The Bureau acknowledges that, while it would like to make the rule “effective as soon as possible,” the final rule will, among other things, “require lenders, mortgage brokers, and settlement agents to make extensive revisions to their software and to retrain their staff.” Therefore, the “Bureau is proposing to delay compliance with certain new disclosure requirements contained in the Dodd-Frank Act until the Bureau’s final rule takes effect.”

The public has been provided with a 120-day comment period, with comments due on or before November 6, 2012.

Consumer Financial Protection Bureau Adopts Rule for Protection of Privileged Information

On June 28, the CFPB adopted a rule to protect privileged information it receives from the financial institutions it regulates. In January, the CFPB advised its supervised institutions that the submission of privileged information to the Bureau does not waive any applicable privilege as to third parties. The new rule codifies this position. The new rule also provides further assurances that providing privileged information to the CFPB will not compromise its confidentiality.

The CFPB requested comments when the rule was first proposed in March but ultimately made no modifications before adopting the final rule. The new rule, codified at 12 C.F.R. § 1070.47 and 1070.48, appeared in the Federal Register on July 5 and has an effective date of August 6, 2012. CFPB Director Richard Cordray praised the rule as supportive of the “free flow of information that is essential to an effective supervision program,” while still “safeguarding the confidential information of the institutions that [the CFPB] supervises.”

The rule codifies a CFPB policy that the submission of privileged information to the Bureau does not result in a waiver of, or otherwise affect, any applicable privilege. Furthermore, the new rule clarifies that the CFPB’s transfer of privileged information to other federal or state agencies does not result in a waiver of privilege, no matter whether the privilege is held by the CFPB or any other person.

While the financial institutions support the initiative, they are unlikely to be satisfied by a regulation from the CFPB. Banks are concerned about the limits of the CFPB’s power to protect privileged information. Typically, a party waives any potential privilege upon providing information to a third party. Prior legislation exempted bank regulators from that rule, but the Dodd-Frank Act did not expressly include the CFPB in that exemption. As stated in the final rule, though, the CFPB believes that its own authority under the Dodd-Frank Act is sufficient to preserve privilege such that “the bureau does not believe such legislation is necessary.”

Nevertheless, banks and the CFPB continue to support a bill that would statutorily provide the protection granted under the new rule—protect privileged information provided by financial institutions to the CFPB. A statement in support of the rule from a group representing non-depository institutions articulated the sentiment that “the same policy must apply to all consumer creditors to ensure an effective and equitable examination and investigatory process.” The bill received strong bipartisan support, but was held up and eventually tabled by a group of senators hoping to pass a larger bill that would make some changes to the Dodd-Frank Act.

It is unclear if the bill will be reopened. Until that time, the CFPB believes that this new rule is sufficient to protect privileged information it receives. Any information received during the course of its supervisory or investigatory processes, even information that it eventually turns over to other federal and state agencies, will retain its privileged status.

Rule Implementing HOEPA Changes Proposed by CFPB; Counseling Requirements Also Proposed

On July 9, 2012, pursuant to provisions of the Dodd-Frank Act, the CFPB proposed a new rule aimed at protecting more borrowers from mortgages carrying high rates and fees or risky loan terms by expanding the definition of “high-cost mortgage” and providing additional protections for borrowers obtaining Home Ownership and Equity Protection Act (HOEPA) loans.

As a first step, the CFPB is expanding the definition of what qualifies as a “high-cost” mortgage so that more consumers can qualify for the additional protections offered by HOEPA. Under the existing rule, a mortgage is considered “high-cost” if certain rate or fee thresholds are triggered. Currently a loan is deemed to be a high-cost loan if the APR at consummation will exceed the yield on Treasury securities having comparable maturities as the loan by more than eight percentage points for first lien loans and by more than 10 percentage points for subordinate lien loans. The rate triggers under the proposed rule have been lowered to 6.5 and 8.5 percentage points, respectively. The point and fee threshold currently qualifies a loan as high-cost if the points and fees charged to the consumer exceed eight percent of the loan amount. Under the proposal rule, that threshold would fall to five percent for most loans. The proposal also provides guidance on the proper application of the triggers.

The proposed rule also prohibits certain risky loan terms, such as balloon payments—where a borrower pays off the loan’s principal amount in a large lump-sum payment at the end of the term instead of making smaller payments throughout the term. In addition, prepayment penalties are completely banned under the proposed rules and creditors would be prohibited from financing points and fees. Certain other fees are also prohibited or restricted under the proposed rules. Fees for modifying loans would be banned, late fees would be capped at four percent of the past due payment and fees for payoff statements would be limited.

Before making a high-cost mortgage, creditors would also be required to obtain confirmation from a federally certified or approved home ownership counselor that the consumer has received counseling on the advisability of the loan. 

The proposal would also implement two Dodd-Frank Act homeownership counseling-related provisions that are not amendments to HOEPA.

• The proposed rule would amend Regulation X to implement a requirement under the RESPA that lenders provide a list of federally certified or approved homeownership counselors or organizations to consumers within three business days of applying for any mortgage loan. The Bureau expects to create a website portal to make it easy for lenders and consumers to obtain lists of homeownership counselors in their areas.
• The proposed rule would amend Regulation Z to implement a requirement under TILA that creditors obtain confirmation that a first-time borrower had received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a negative amortization loan to the borrower.

Written comments on CFPB’s proposal on high-cost loans are due on or before until September 7, 2012. 

News from the Bureau

CFPB Announces Plan to Level the Playing Field for Loan Originators

The CFPB has announced its intent to publish proposed guidelines that would level the playing field for all mortgage loan officers (LO), whether those loan officers work for a bank or a non-depository entity. The CFPB plans to publish its proposal this summer so that it can finalize the rule by January 2013. The rule is expected to address LO qualification and compensation requirements.

Currently the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) establishes different qualification standards for LOs that work for a non-depository entity (regulated by the states) and LOs that work for a bank (regulated by the federal government). The SAFE Act requires LOs that work for a non-depository institution to be licensed with the National Mortgage Licensing System (the NMLS) but only requires bank LOs to be registered with the NMLS. In order to be licensed, LOs must complete 20 hours of training, pass a national exam, and meet extensive credit and criminal background checks. The proposed rule, to be issued pursuant to the Dodd Frank Act, will deviate from the SAFE Act requirements. Under the expected proposal, the CFPB intends to extend the credit and criminal background checks to bank LOs, as well as require a certain level of training.

Banking groups have stated that bank LOs should not be required to undergo additional government training and testing because banks already provide extensive training to their employees due to the strict supervision of these entities by the federal government.

The CFPB is also expected to address LO anti-steering compensation requirements similar to those issued by the Federal Reserve Board in April, 2011. Under the Dodd-Frank Act, LOs may not be compensated by both sides of a loan agreement and may not be compensated based on certain loan terms that would promote steering borrowers to unfavorable loans. The Dodd-Frank Act provides the CFPB the authority to establish exemptions to LO compensation requirements. The CFPB is considering using this exemption authority to allow compensation to the LO to be paid by the creditor even when the borrower pays bona fide discount points that result in a reduction of the interest rate of the loan. 

In addressing compensation rules, the Mortgage Bankers Association has stressed that the CFPB should limit its new rule to the requirements specified in the Dodd-Frank Act. Industry advocates have also expressed hope that the CFPB will use the rule to clarify industry confusion that has grown over the April 2011 Federal Reserve Board rule. The National Association of Mortgage Professionals has proposed that the CFPB also use its exemption power to exempt prime, traditional, and government loans to more narrowly tailor the anti-steering compensation rules to riskier loan types, which are believed more likely to be abusive to consumers.

Regulatory Scorecard

Please click here access a printable version of the Dykema Regulatory Scorecard, our up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.

Contacts and Caveats

For more information about Dykema’s Financial Services Regulatory and Compliance practice, please contact group leader, Don Lampe at 704-335-2736, Arthur B. Axelson at 202-906-8607, or any of the listed attorneys. 

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