Preparing to Comply with TILA-RESPA Changes on August 1

ACTION: Compliance Required as of August 1, 2015; Update: Compliance Required as of October 3, 2015

EFFECTIVE DATE UPDATE: The Consumer Financial Protection Bureau (CFPB) has delayed the effective date of the TILA-RESPA Integrated Disclosure Rule from August 1, 2015, until October 3, 2015 through a notice available here. All references to the August 1, 2015, effective date should be read to mean October 3, 2015. Please note the new disclosures may not be used for applications received before the new effective date.

BOOKLET UPDATE: In connection with the TILA-RESPA Integrated Disclosure Rule, CFPB issued a new special information booklet (a.k.a. “toolkit”) to guide consumers through the process of shopping for a mortgage. For transactions subject to the new rule, issue the new booklet rather than the booklet linked below in this Regulatory Alert. The current booklet and the new booklet are available on CFPB’s website here (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) .

Dear Board of Directors and Chief Executive Officer:

If your credit union originates mortgage loans as a creditor/lender or a mortgage broker, you likely will have to comply starting August 1, 2015 with a Final Rule issued by the Consumer Financial Protection Bureau (CFPB) to establish new disclosure requirements and forms for most closed-end consumer mortgages.¹

The Final Rule amends Regulation Z, which implements the Truth in Lending Act (TILA), and Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA).  The Final Rule combines existing mortgage disclosure requirements, implements new mortgage disclosure requirements, and refines existing disclosure requirements for both mortgage and non-mortgage loans.

The purpose of this Regulatory Alert is to notify you of the integrated disclosure requirements and other new disclosure requirements under Regulation Z and Regulation X so you can take action to ensure compliance with CFPB’s Final Rule.  You must provide the new integrated disclosures for covered mortgage applications received on or after August 1, 2015.²

Background

Currently, under TILA and RESPA, creditors provide different sets of disclosure forms to mortgage applicants:

• Good Faith Estimate (GFE) and HUD-1 or HUD-1A settlement statement (HUD-1) under RESPA and Regulation X; and 
• Initial TILA disclosures and final TILA disclosures under TILA and Regulation Z. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) directed CFPB to integrate these disclosures.³    

CFPB combined the GFE and initial TILA disclosure into a new form: the Loan Estimate disclosure (Loan Estimate).  The new Loan Estimate is designed to help consumers understand the key features, costs, and risks of the mortgage loan for which they are applying.  You must provide the Loan Estimate to members within three business days after they submit a mortgage loan application and at least seven business days before consummation.  (See The Loan Estimate section of this Regulatory Alert for details.)   

CFPB also combined the HUD-1 and final TILA disclosure into a new Closing Disclosure.  The Closing Disclosure is designed to help consumers understand all the costs of the transaction.  You must provide the Closing Disclosure to members at least three business days before loan consummation.  (See The Closing Disclosure section of this Regulatory Alert for details.) 

Under the Final Rule, you will continue to provide to members a special information booklet required under RESPA.  CFPB plans to revise the special information booklet to reflect the new integrated disclosures and new RESPA requirements added by the Dodd-Frank Act.  You must provide the special information booklet within three business days after receiving the member’s loan application.  (See the Special Information Booklet section of this Regulatory Alert for details.)

Also, under the Final Rule, if you allow a member to shop for a settlement service, you must provide the member a written list identifying available providers of these services, which must state the consumer can choose a different provider.  You must provide a list of settlement service providers within three business days after receiving the member’s loan application.  (See the Written List of Service Providers section of this Regulatory Alert for details.)

The Final Rule adds a new requirement to provide an Escrow Closing Notice before cancelling an escrow account for a closed-end consumer credit transaction secured by a first lien on real property or a dwelling.  If the member requests cancellation, you must provide an Escrow Closing notice at least three business days before cancellation.  In other cases, you or the servicer must ensure the member receives the Escrow Closing Notice no later than 30 business days before cancellation.  (See the Escrow Closing Notice section of this Regulatory Alert for details.) 

In addition, the Final Rule amends the requirement to provide mortgage transfer notices when transferring ownership of a mortgage loan to require you to include information related to the policy on making partial payments.  (See the Partial Payment Disclosures section of this Regulatory Alert for details.)

I.  Loan Coverage

Which Loans Does the Final Rule Cover?
The Final Rule applies to most closed-end consumer mortgage transactions secured by real property.  The Final Rule also applies to construction loans and loans secured by interests in timeshare plans, although special rules apply.⁴ 

Most provisions of the Final Rule apply to all covered loans for which an application is received on or after August 1, 2015.⁵   If an application is received before August 1, 2015, you must provide all disclosures based on the requirements as they stood before August 1, 2015, even for disclosures for that transaction you provide after August 1, 2015.

II.  The Loan Estimate

The Loan Estimate—Content

What disclosure provides initial estimates of loan terms?
The Loan Estimate provides initial, good faith estimates of loan terms.  It replaces the GFE provided under RESPA and the initial disclosure provided under TILA.⁶

What form is used to provide the Loan Estimate?
CFPB has provided a standard Loan Estimate form, which you must use for “federally related mortgage loans” subject to RESPA.⁷   (See Form H-24 in Appendix H to Regulation Z.) 
For non-federally related mortgage loans subject to the Final Rule, you are not strictly required to use Form H-24.  However, the disclosures must contain the exact same information and be made with substantially similar headings, content, and format.

What information does the Loan Estimate provide?
Information the Loan Estimate provides includes:

• On page 1: general information, such as the date issued, the name of the member(s), loan type, and whether there is a rate lock; tables for loan terms; projected payments; costs at closing; and a link to more information on CFPB’s website.
• On page 2: details about closing costs, including loan costs and other costs such as taxes and government fees; a table calculating cash needed to close; and, as applicable, information about adjustments to payments and to the interest rate.
• On page 3: contact information for the lender, loan officer, and mortgage broker, if any, and information for comparison purposes about loan costs based on the following factors: (1) if the member were to pay off the principal in five years; (2) the annual percentage rate (APR); and (3) the total interest to be paid, as a percentage of the loan amount.

• Member’s name;
• Member’s income,
• Member’s Social Security number to obtain a credit report;
• Property address;
• Estimate of the value of the property; and
• Mortgage loan amount sought.

What are the timing and delivery requirements for the Loan Estimate?  
Generally, the Loan Estimate must be delivered or placed in the mail not later than the third business day after the creditor receives the member’s application.⁸  To determine business days for purposes of this requirement, count days a creditor’s offices are open to the public for carrying out substantially all of its business functions.

• If a mortgage broker receives a member’s application, either the creditor or the mortgage broker may provide the member with the Loan Estimate.
   
• If the Loan Estimate is not provided to the member in person, it is deemed received three business days (counting days other than Sundays and holidays)⁹  after it is delivered or mailed.  Of course, you may rely on proof of actual receipt instead.
   
• The Loan Estimate also must be delivered or placed in the mail at least seven business days (counting days other than Sundays and holidays) before consummation, unless the member waives this timing requirement based on a bona fide personal financial emergency.¹⁰

When may a transaction proceed?
A transaction may proceed once a member indicates intent to proceed by communicating such intent after the Loan Estimate has been delivered.  The member may communicate such intent in any manner the member chooses, unless you require a particular manner of communication.  You must document the communication to comply with the Final Rule’s record retention requirements. 

When may fees be charged?
Consistent with current requirements, the Final Rule prohibits imposing fees on a member in connection with an application before the member has received the Loan Estimate and has indicated an intent to proceed with the transaction.  This restriction includes limits on imposing application fees, appraisal fees, and underwriting fees.  However, you may charge a bona fide and reasonable fee for obtaining the member’s credit report before the member receives the Loan Estimate.

You “impose” a fee if you require a member to provide a method of payment, even if payment is not made at that time.¹¹   You must obtain the member’s consent to collect money after the member indicates an intent to proceed.

• The written estimate is not used as a substitute for the Loan Estimate;
• The estimate does not use any headings, content, or format substantially similar to the Loan Estimate or the Closing Disclosure; and
• The top of the first page of the written estimate contains a statement that: “Your actual rate, payment, and costs may be higher.  Get an official Loan Estimate before choosing a loan.”

What are the “good faith” and accuracy requirements with respect to the Loan Estimate?
The Loan Estimate figures must be made in good faith and must be consistent with the best information reasonably available to you at the time of disclosure.  You must exercise due diligence in obtaining information necessary to complete the Loan Estimate.  If you use estimated figures (when certain information is not reasonably available to you at the time the Loan Estimate is made), you must designate such figures as estimates on the Loan Estimate. 

Whether or not a Loan Estimate was made in good faith is determined by looking at the difference between the estimated charges originally provided in the Loan Estimate and the actual charges paid by or imposed on the member.  In some cases, regardless of whether you later discover a technical error, miscalculation, or underestimation of a charge, if the charge paid by or imposed on the member exceeds the amount originally disclosed on the Loan Estimate, the disclosure is not considered made in good faith.  That is, there is “zero tolerance” for changes in these cases (unless the creditor charges less than the amount disclosed). 

However, the amount disclosed and the amount charged may vary in certain circumstances, such as the three permissible variations discussed below.

When may a creditor charge more than the amount disclosed in the Loan Estimate?
You may charge the member more than the amount disclosed in the Loan Estimate in the following circumstances: 1) if the Final Rule expressly allows a variation for the particular charge; 2) if the variation falls within a 10 percent “tolerance” threshold permitted for certain charges; or 3) if specified “changed circumstances” have occurred.

What is a “tolerance”?
A tolerance is a permissible variation between the amount disclosed and the amount charged.

• Fees paid to the creditor, mortgage broker, or an affiliate of either;
• Fees paid to unaffiliated third party service providers if you did not permit the member to “shop” (see Written List of Service Providers section below); and
• Transfer taxes.

If the amounts the member pays at closing exceed the amounts disclosed on the Loan Estimate beyond any applicable threshold, must the member receive a refund?
Yes.  If the amounts paid by the member at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, you must refund the excess to the member no later than 60 calendar days after consummation, and deliver or place in the mail a corrected Closing Disclosure that reflects the refund no later than 60 days after consummation.

When may Loan Estimates be corrected or revised?
In general, you are bound by the Loan Estimate and may not issue revisions because you later discover technical errors, miscalculations, or underestimations of charges.  You may provide to the member revised Loan Estimates (and use them to compare estimated amounts to amounts actually charged for purposes of determining good faith) only in certain circumstances:

• “Changed circumstances” occur after the Loan Estimate is provided to the member that increase
  Regulatory Tip: If any of these exceptions lead to an increase in a settlement charge only to an extent that does not exceed an applicable tolerance, the original Loan Estimate is still deemed to be in good faith and re-disclosure is not permitted.  Also, in the case of a charge subject to the 10 percent cumulative tolerance, you may provide and use a revised Loan Estimate re-disclosing that settlement charge if a changed circumstance caused the sum of those charges subject to the tolerance to increase by more than 10 percent.

   
  settlement charges by more than permitted by the Final Rule (the meaning of “changed circumstances” is described below);
• “Changed circumstances” occur after the Loan Estimate is provided to the member that affect the member’s eligibility for the terms for which the member applied or the value of the security for the loan;
• The member requests revisions to the loan terms or settlement that cause the estimated charge to increase;
• The interest rate was not locked when the Loan Estimate was provided, and locking the rate causes the points or lender credits disclosed on the Loan Estimate to change;
• The Loan Estimate “expires” because the member indicates an intent to proceed with the transaction more than ten business days (counting days you are open for business) after the Loan Estimate was originally delivered or placed in the mail; or
• A loan involves new construction and you reasonably expect settlement to occur more than 60 days after the Loan Estimate is provided to the member, if the original Loan Estimate clearly and conspicuously states that you may issue revised disclosures at any time prior to 60 days before consummation.

What is a “changed circumstance” that warrants the delivery of a revised or corrected Loan Estimate?
For the purposes of a revised Loan Estimate, a “changed circumstance” occurs when there is:

• An extraordinary event beyond the control of any interested party or other unexpected event specific to the member or the transaction (e.g., war or natural disaster);
• Information specific to the member or the transaction that you relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided (e.g., loss of employment or title insurer goes out of business); or
• New information specific to the member or transaction that you did not rely on when providing the Loan Estimate.

You should make sure to keep accurate documentation of changed circumstances.

Must a creditor provide a revised Loan Estimate if the rate is locked after the initial Loan Estimate is provided?
Yes.  If, at the time the Loan Estimate was provided, the interest rate was not locked, the Final Rule requires you to provide a revised Loan Estimate no later than three business days (counting days you are open for business) after the interest rate was locked.¹²  You may execute a written agreement with the borrower stating that the lock will not be effective until some later date if a borrower calls to lock a rate.

If you mail the revised Loan Estimate and rely on the “mailbox rule” (meaning that the member is considered to receive the revised Loan Estimate three business days after mailing), you would need to place the revised Loan Estimate in the mail no later than seven business days before consummation to allow three business days for receipt. 

• The member is applying for a HELOC subject to 12 CFR § 1026.40.  However, you must provide a copy of the brochure entitled “When Your Home is On the Line: What You Should Know About Home Equity Lines of Credit”;
• The member is applying for a real property-secured consumer credit transaction that does not have the purpose of purchasing a one-to-four family residential property (that is, a refinancing, closed-end loan secured by a subordinate lien or a reverse mortgage); or
• You deny the member’s application or the member withdraws the application before the end of three business days.

IV.  Written List of Service Providers

• On page 1: general information, such as the date issued, the member’s name, the loan type; loan terms; projected payments; and costs at closing.
• On page 2: details about loan costs and other costs, such as taxes and government fees; prepaid costs; and initial escrow payments at closing.
• On page 3: calculations of cash to close; and summaries of borrower’s and seller’s transactions.
• On page 4: additional loan disclosures, including an escrow account description and adjustable payment and interest tables.
• On page 5: loan payment calculations, including total loan amount, finance charge, amount financed, APR, and total interest as a percentage of the loan amount; a notice about how to get more information; and contact information for the lender, mortgage broker, real estate broker, and settlement agent.

What happens if certain information is not reasonably available when the Closing Disclosure is prepared?
Generally, the Closing Disclosure must contain the actual terms and costs of the transaction, unless that information is not reasonably available.  In that case, you may estimate disclosures using the best information reasonably available by acting in good faith and using due diligence to obtain the information, and you must provide corrected disclosures containing the actual terms of the transaction at or before consummation.

The Closing Disclosure—Timing

What are the timing requirements for providing the Closing Disclosure? 
In general, the timing requirements for Closing Disclosures impose a three-business-day waiting period – meaning a loan may not be consummated fewer than three business days after the member receives the Closing Disclosure (counting days other than Sundays and holidays).  If the Closing Disclosure is not provided in person, the member is considered to have received it three business days after it is delivered or placed in the mail (counting days other than Sundays and holidays). 

If there are delays that prevent providing the Closing Disclosure statement three business days before settlement, what can be done?
If a settlement is scheduled during the three-business-day waiting period, you generally must postpone settlement – unless the member waives or modifies the waiting period.

When can a member waive the three-business-day waiting period?
A member can waive or modify the three-business-day waiting period after the member has received the Closing Disclosure by giving you a dated written statement that describes a bona fide personal financial emergency for which the loan is required and that modifies or waives the waiting period.

Who needs to make disclosures to the seller and when must they be made?
The settlement agent is required to provide the seller with the Closing Disclosure, reflecting the actual terms of the seller’s transaction, at or before consummation.  The settlement agent may comply with this requirement by either:

• Providing the seller with a copy of the Closing Disclosure provided to the member (the buyer), if it also contains information relating to the seller’s transaction; or
• Providing the seller with a separate disclosure, including only the information applicable to the seller’s transaction.  (See Form H-25(I) in Appendix H to Regulation Z for a model form.)  However, if the seller’s disclosure is provided in a separate document, the settlement agent must also provide the creditor with a copy of the disclosure provided to the seller.

The Closing Disclosure—Accuracy & Modifications

When must the Closing Disclosure be revised or corrected after it has been provided?
The general rule is that you must re-disclose terms or costs on the Closing Disclosure if certain types of changes occur that cause the provided Closing Disclosure to become inaccurate.  Three categories of changes require a corrected Closing Disclosure containing all changed terms:

• Changes before consummation (pre-consummation changes) that require a new three-business-day waiting period;
  Regulatory Tip: Although all pre-consummation changes require you to re-disclose terms on the Closing Disclosure, only the three changes listed trigger a new three-business-day waiting period, which could push back the date of consummation.  For any other types of changes, you must provide a corrected Closing Disclosure reflecting any changed terms to the member at or before consummation.
• Pre-consummation changes that do not require a new three-business-day waiting period; and
• Changes that occur after consummation (post-consummation changes).

• The APR disclosed on the Closing Disclosure becomes inaccurate;
• The loan product changes; or
• A prepayment penalty is added.¹⁴

• Member and Seller Charges: If an event in connection with the settlement occurs within 30 calendar days after consummation that causes the Closing Disclosure to become inaccurate and results in a change to an amount paid by the member or the seller from what was previously disclosed.
  • You must deliver the corrected Closing Disclosure or place it in the mail within 30 calendar days of receiving information sufficient to establish that such an event has occurred.
• Clerical Errors: To correct a non-numerical clerical error. 
  • You must deliver the corrected Closing Disclosure or place it in the mail within 60 calendar days after consummation.
• Refunds: If you cure a tolerance violation by providing a refund to the member:
  • You must deliver or place in the mail a corrected Closing Disclosure that reflects the refund no later than 60 calendar days after consummation.

VI.  Escrow Closing Notice

What is the Escrow Closing Notice?
The Escrow Closing Notice is a notice provided to a member before cancelling an escrow account in connection with a closed-end consumer credit transaction secured by a first lien on real property or a dwelling.  

What are the timing requirements for providing the Escrow Closing Notice?
If the member requests cancellation of an escrow account, the creditor or servicer must ensure that the member receives the Escrow Closing Notice no later than three business days before the member’s escrow account is closed. 

If an account is cancelled for any other reason, the creditor or servicer must ensure that the member receives the Escrow Closing Notice no later than 30 business days before the member’s escrow account is closed. 

If the notice is not provided in person, the member is considered to have received the Escrow Closing Notice three business days after it is delivered or placed in the mail.  (For purposes of the Escrow Closing Notice timing requirements, count days other than Sundays and holidays.)

VII.  Partial Payment Disclosures

What information regarding the partial payment policy must be provided?
If you are required by existing Regulation Z to provide mortgage transfer notices when the ownership of a mortgage loan is being transferred, the notice must include information related to the policy that will apply if partial payments are made for the mortgage loan.¹⁶  This post-consummation partial payment disclosure is required for a closed-end consumer credit transaction secured by a dwelling or real property.

What Should You Do Next?

If your credit union offers mortgage loans to members, you should take several actions to implement the regulatory requirements of the Final Rule prior to its effective date:

• Become familiar with the new requirements of the Final Rule;
• Determine the business and process changes needed to comply with the Final Rule;
• Develop a plan to implement the new requirements by August 1, 2015, including a schedule and a budget;
• Review the plan with executive management;
• Identify third parties affected by the Final Rule, including vendors and real estate agents. 
• Contact vendors to make sure they can implement the necessary changes and deliver relevant software on time, and address any questions about the new processes and who will perform which tasks;
• Plan how you will work with settlement service providers to ensure the accuracy of disclosures;
• Develop and provide training for staff and management;
• Test and implement technology changes; and
• Roll out changes in time to issue the new disclosures for applications received on or after August 1, 2015.