The Consumer Financial Protection Bureau’s (“CFPB”) new rules governing mortgage loan disclosures under the Dodd-Frank Act will now go into effect October 3, 2015 . These rules are designed to simplify forms used for mortgage loan transactions and impose tighter disclosure restrictions on lenders. Previously, Federal law required lenders to provide two different forms that were developed separately under two different federal agencies, pursuant to two Federal statutes: the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act of 1974 (“RESPA”). This resulted in redundant and lengthy forms for creditors and consumers alike.
The CFPB created these new rules as part of its initiative to allow consumers to “Know Before You Owe.” The new rules, which are called the Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) (78 FR 7973, Dec. 31, 2013) (the “TILA-RESPA” rule), consolidate four existing disclosures for closed-end credit transactions secured by real property into two forms: a Loan Estimate and a Closing Disclosure.
Loan Estimate: This form integrates and replaces the Good Faith Estimate under RESPA and the early Truth-in-Lending disclosure under TILA. The form provides the consumer with good-faith estimates of credit costs and transaction terms in a single form. This form must be delivered no later than the third business day after receiving the loan application. The term “application” refers to the receipt of six items of information: the consumer’s name, income, social security number, property address, estimated value of the property and the loan amount. This information requires lenders to issue estimates with less information and in a shorter time period than under the previous rules.
The result is that the Loan Estimate is not really an estimate since it requires lenders to be accountable for the preciseness of exact charges listed and to come within 10% on many others, while having less information than before. Furthermore, creditors are generally bound by the Loan Estimate and may not issue revisions unless there are certain changed circumstances that occur after the Loan Estimate is provided to the consumer such as locking an interest rate, misrepresenting income, or a natural disaster that damages the property.
Closing Disclosure: This form integrates the existing HUD-1 under RESPA and the final Truth-in-Lending disclosure under TILA. The form must be delivered to the consumer at least three business days prior to the loan’s consummation as that term is defined by state law. The Closing Disclosure must contain the actual terms and costs of the transaction in writing. If any terms change prior to the consummation of the loan, the creditor must provide a correct disclosure containing the actual terms of the transactions and must extend the consummation an additional three business days. These changes, while presenting new challenges for creditors, are designed to simplify real estate transactions and help make the process more transparent for consumers.
In addition to the integrated forms, the TILA-RESPA rule also includes new restrictions on a creditor’s activity prior to a consumer’s receipt of the Loan Estimate. These include:
A creditor is prohibited from imposing fees on a consumer before the consumer has received the Loan Estimate and indicated an intent to proceed with the transaction; • A creditor is prohibited from providing a written estimate of terms or costs (for example an advertisement of mortgage rates) prior to the Loan Estimate without providing a written disclaimer that the estimate is not an official Loan Estimate and the terms and costs may change; and • A creditor cannot require the consumer to provide documents verifying information related to the consumer’s application prior to providing the Loan Estimate.
Remedies for non-compliance with the new TILA-RESPA rule include a private right of action for actual damages, statutory damages, and recovery of attorneys’ fees and costs. Creditors now risk statutory penalties of up to $4,000 for failure to provide certain disclosures such as the interest rate. In addition, the CFPB can impose penalties ranging from $5,000 per day to $1 Million per day depending on factors such as recklessness and knowingness.
The new TILA-RESPA Rule allows consumers to know critical information regarding their loan within three business days of submitting an application and ensures that there will be virtually no surprises three days prior to loan consummation. While placing additional burdens on lenders and possibly delaying closings, the consumer’s receipt of the new integrated disclosures should add transparency to often-complicated credit transactions.
The foregoing article was prepared by Melissa Coyle, AFRCT, LLP is a full-service law firm, providing legal counsel to financial institutions and businesses throughout California.