The CFBP and Innovation: The Government May "Fix" Us Yet!

Since 1974, the Real Estate Settlement Procedures Act ("RESPA"), has been the legislative tool by which the Department of Housing and Urban Development ("HUD"), targeted illegal kickbacks, unearned fees and illegal fee splitting. Real estate professionals -- attorneys, title agents, real estate agents -- have had varying degrees of confidence in HUD's ability to successfully prosecute RESPA violations. Throughout the years, RESPA has undergone a variety of amendments until January 2009 when it experienced a virtual facelift. The 2009 revisions and amendment had been, to that point, the most prolific and far reaching. The implementation date was January 2010 to allow the industry to adjust to the changes, which included completely reworking the software packages relied upon by lenders and settlement companies across the country.

The 2009-2010 Amendments saw an expansion of traditional HUD-1 Settlement sheet from two pages to three pages, which included disclosing tolerances that (theoretically) described charges that could not increase at all, described charges that could vary upward by as much as ten percent, and identified charges for which there were no prescribed limits for change. The RESPA Amendments coincided with changes to the Truth in Lending Act ("TILA"), which changed the timing and quality of information that a lender had to give to a consumer. The Truth in Lending ("TIL") Statements are disclosure statements that inform borrower of the cost of the loan. Prior to the 2009-2010 Amendments, lenders' habits had become such that consumers were not getting this information until they were actually at settlement, far too late for the information to be of any use! With the contemporaneous changes, lenders were obligated to issue a Good Faith Estimate ("GFE"), within three days of receiving an application for a mortgage from a consumer. The GFE was the initial disclosure form that was intended to inform the consumer of the cost of the loan, the charges that could change, the charges that could not change and the charges that could increase up to ten percent.

After about a year, the industry adapted, lenders found the loopholes and prosecutions for RESPA violations continued to go nowhere.

Then came the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). The Dodd-Frank Act, among a myriad of other changes, created the Consumer Financial Protection Bureau ("CFPB"), and transferred the power to enforce RESPA and TILA violations. And the CFPB has been enthusiastically prosecuting violations! Dodd-Frank also directed the CFPB to integrate the RESPA and TIL disclosure forms, and that is where things stand today. Section 1032(f) of Dodd-Frank mandated the CFPB to propose rules and model forms combining the RESPA and TIL forms within one year from assuming authority over those laws. The designated transfer date of authority was July 21, 2011; on July 9, 2012, the CFPB issued a proposed rule in a concise 1099 pages! The comment period closed on November 6, 2012; and the CFPB received over 2,000 comments from industry and consumer advocate groups.

The CFPB has proposed two forms, the Loan Estimate Form and the Closing Disclosure Form. The Loan Estimate Form is a three-page document that combines the GFE and the TIL disclosures. Page one presents the loan terms, amount, interest rate and projected payment information. Page two itemizes and details the costs, fees and charges for which the consumer will be responsible. Page three contains additional information about the lender and about the loan. Interestingly, one of the stated goals behind the changes and consolidations is to provide the consumer with better, more easily understood information about the loan. However, some of the information required by Dodd-Frank on page three is rather incomprehensible and offers no useful information to the consumer.

The second document developed by the CFPB is the Closing Disclosure Form, which combines the HUD-1 and the Final TIL into a five-page document that, some fear, will extend residential settlements by as much as an hour! As part of the departmental consolidation that occurred through Dodd-Frank, the CFPB has a close affiliation with the Department of Redundancy Department ("DRDRDR"), as evidenced by the fact that page one of the Closing Disclosure Form is quite similar to the Loan Estimate Form. This description is not exactly fair in that page one does offer projected payments set out over years 1-7, and years 8-30, information that would be relevant if a consumer opted for a variable rate product. Page two is also quite similar to page two of the Loan Estimate Form, providing the final costs, fees and charges attributable to the buyer. One major change from the existing forms is the suggestion that the fees be itemized in alphabetical order. Under this organizational scheme, there will be no more 100, 200, 700, 1100, or any other numbered lines -- however, in order to keep all of the charges related to title insurance together, those charges will begin with the prefix 'title-'.

Page three of the Closing Disclosure Form provides the borrow with a breakdown of the cash needed to close. It is designed to compare the initial estimates with the final numbers, and to provide a brief explanation of any increases that occur. Page three also contains the reimbursements and proration charges between buyer and seller. Page four is the loan disclosure page that explains to the buyer what will happen if payments are not made on time, whether partial payments will be accepted, and escrow account information. Page five shows the 'traditional' TIL information, as well as the additional disclosure data required by Dodd-Frank. Attached as exhibits are the "Old" TIL, the Proposed Loan Estimate Form, the "Old" HUD-1 and the Proposed Closing Disclosure Form.

One area of MAJOR concern is what industry group is responsible for preparing and providing the Closing Disclosure Form. The CFPB intends to hold lenders responsible for the accuracy of the information on the form, but the CFPB has not, thus far, weighed in on who is responsible for providing the form. There are two option: (1) the lender provides the Closing Disclosure Form; or (2) the settlement agent provides the Closing Disclosure Form, but the lender remains responsible for its accuracy. While it makes sense that the settlement agent remain responsible for aggregating the information and preparing the Closing Disclosure Form (as is the norm today), expect some resistance from lenders.

In a press release dated January 8, 2013, the CFPB indicated September 2013 is the target date for releasing the integrated disclosure forms.