[Federal Register Volume 77, Number 164 (Thursday, August 23, 2012)]
[Proposed Rules]
[Pages 51115-51457]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17663]
[[Page 51115]]
Vol. 77
Thursday,
No. 164
August 23, 2012
Part II
Bureau of Consumer Financial Protection
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12 CFR Parts 1024 and 1026
Integrated Mortgage Disclosures Under the Real Estate Settlement
Procedures Act (Regulation X) and the Truth In Lending Act (Regulation
Z); Proposed Rule
Federal Register / Vol. 77 , No. 164 / Thursday, August 23, 2012 /
Proposed Rules
[[Page 51116]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Parts 1024 and 1026
[Docket No. CFPB-2012-0028]
RIN 3170-AA19
Integrated Mortgage Disclosures Under the Real Estate Settlement
Procedures Act (Regulation X) and the Truth In Lending Act (Regulation
Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: Sections 1032(f), 1098, and 1100A of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the
Bureau to issue proposed rules and forms that combine certain
disclosures that consumers receive in connection with applying for and
closing on a mortgage loan under the Truth in Lending Act and the Real
Estate Settlement Procedures Act. Consistent with this requirement, the
Bureau is proposing to amend Regulation X (Real Estate Settlement
Procedures Act) and Regulation Z (Truth in Lending) to establish new
disclosure requirements and forms in Regulation Z for most closed-end
consumer credit transactions secured by real property. In addition to
combining the existing disclosure requirements and implementing new
requirements in the Dodd-Frank Act, the proposed rule provides
extensive guidance regarding compliance with those requirements.
DATES: Comments regarding the proposed amendments to 12 CFR 1026.1(c)
and 1026.4 must be received on or before September 7, 2012. For all
other sections including proposed amendments, comments must be received
on or before November 6, 2012.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0028 or RIN 3170-AA19, by any of the following methods:
Electronic: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail/Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1700 G
Street NW., Washington, DC 20552.
Instructions: All submissions should include the agency name and
docket number or Regulatory Information Number (RIN) for this
rulemaking. Because paper mail in the Washington, DC area and at the
Bureau is subject to delay, commenters are encouraged to submit
comments electronically. In general, all comments received will be
posted without change to http://www.regulations.gov. In addition,
comments will be available for public inspection and copying at 1700 G
Street NW., Washington, DC 20552, on official business days between the
hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment
to inspect the documents by telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or social
security numbers, should not be included. Comments will not be edited
to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: David Friend, Michael G. Silver and
Priscilla Walton-Fein, Counsels; Andrea Pruitt Edmonds, Richard B.
Horn, Joan Kayagil, and Thomas J. Kearney, Senior Counsels; Paul
Mondor, Senior Counsel & Special Advisor; and Benjamin K. Olson,
Managing Counsel, Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of Proposed Rule
A. Background
For more than 30 years, Federal law has required lenders to provide
two different disclosure forms to consumers applying for a mortgage.
The law also has generally required two different forms at or shortly
before closing on the loan. Two different Federal agencies developed
these forms separately, under two Federal statutes: the Truth in
Lending Act (TILA) and the Real Estate Settlement Procedures Act of
1974 (RESPA). The information on these forms is overlapping and the
language is inconsistent. Not surprisingly, consumers often find the
forms confusing. It is also not surprising that lenders and settlement
agents find the forms burdensome to provide and explain.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) directs the Bureau to combine the forms. To accomplish
this, the Bureau has engaged in extensive consumer and industry
research and public outreach for more than a year.\1\ Based on this
input, the Bureau is now proposing a rule with new, combined forms. The
proposed rule also provides a detailed explanation of how the forms
should be filled out and used.
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\1\ See part III below for a discussion of the Bureau's testing
of the forms with more than 100 consumers, lenders, mortgage
brokers, and settlement agents. This part also describes the
Bureau's outreach efforts, including the panel convened by the
Bureau to examine ways to minimize the burden of the proposed rule
on small businesses.
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The first new form (the Loan Estimate) is designed to provide
disclosures that will be helpful to consumers in understanding the key
features, costs, and risks of the mortgage for which they are applying.
This form will be provided to consumers within three business days
after they submit a loan application. The second form (the Closing
Disclosure) is designed to provide disclosures that will be helpful to
consumers in understanding all of the costs of the transaction. This
form will be provided to consumers three business days before they
close on the loan.
The forms use clear language and design to make it easier for
consumers to locate key information, such as interest rate, monthly
payments, and costs to close the loan. The forms also provide more
information to help consumers decide whether they can afford the loan
and to compare the cost of different loan offers, including the cost of
the loans over time.
In developing the new Loan Estimate form and Closing Disclosure
form, the Bureau has reconciled the differences between the existing
forms and combined several other mandated disclosures. The Bureau also
has responded to industry complaints of uncertainty about how to fill
out the existing forms by providing detailed instructions on how to
complete the new forms.\2\ This should reduce the burden on lenders and
others in preparing forms in the future.
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\2\ This guidance is provided in the proposed regulations and
the proposed Official Interpretations, which are in Supplement I.
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B. Scope of the Proposed Rule
The proposed rule applies to most closed-end consumer mortgages.
The proposed rule does not apply to home-equity lines of credit,
reverse mortgages, or mortgages secured by a mobile home or by a
dwelling that is not attached to real property (in other words, land).
The proposed rule also does not apply to loans made by a creditor who
makes five or fewer mortgages in a year.\3\
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\3\ For additional discussion of the scope of the proposed rule,
see part VI below regarding section 1026.19, Coverage of Integrated
Disclosure Requirements.
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C. The Loan Estimate
The Loan Estimate form would replace two current Federal forms. It
would replace the Good Faith Estimate designed by the Department of
Housing
[[Page 51117]]
and Urban Development (HUD) under RESPA and the ``early'' Truth in
Lending disclosure designed by the Board of Governors of the Federal
Reserve System (the Board) under TILA.\4\ The proposed rule and the
Official Interpretations (on which lenders can rely) contain detailed
instructions as to how each line on the Loan Estimate form would be
completed.\5\ There are sample forms for different types of loan
products.\6\ The Loan Estimate form also incorporates new disclosures
required by Congress under the Dodd-Frank Act.\7\
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\4\ These disclosures are available at http://www.hud.gov/offices/hsg/rmra/res/gfestimate.pdf and http://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf.
\5\ The requirements for the Loan Estimate are in proposed Sec.
1026.37. Additional discussion of this and other sections of the
proposed rule is provided in the relevant portion of part VI below.
\6\ Appendix H to the proposed rule provides examples of how to
fill out these forms for a variety of different loans, including
loans with fixed or adjustable rates or features such as balloon
payments and prepayment penalties.
\7\ For a discussion of these disclosures, see part V.B below.
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Provision by mortgage broker. The lender may rely on a mortgage
broker to provide the Loan Estimate form. However, the lender also
remains responsible for the accuracy of the form.\8\
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\8\ This provision is in proposed Sec. 1026.19(e)(1)(ii).
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Timing. The lender or broker must give the form to the consumer
within three business days after the consumer applies for a mortgage
loan.\9\ The proposed rule contains a specific definition of what
constitutes an ``application'' for these purposes.\10\
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\9\ This provision is in proposed Sec. 1026.19(e)(1)(iii).
\10\ The definition of ``application'' is in proposed Sec.
1026.2(a)(3).
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Limitation on 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.\11\
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\11\ This provision is in proposed Sec. 1026.19(e)(2)(i).
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Disclaimer on early estimates. Lenders and brokers may provide
consumers with written estimates prior to application. The proposed
rule requires that any such written estimates contain a disclaimer to
prevent confusion with the Loan Estimate form. This disclaimer would
not be required for advertisements.\12\
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\12\ This provision is in proposed Sec. 1026.19(e)(2)(ii).
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D. The Closing Disclosure
The Closing Disclosure form would replace the current form used to
close a loan, the HUD-1, which was designed by HUD under RESPA. It
would also replace the revised Truth in Lending disclosure designed by
the Board under TILA.\13\ The proposed rule and the Official
Interpretations (on which lenders can rely) contain detailed
instructions as to how each line on the Closing Disclosure form would
be completed.\14\ The Closing Disclosure form contains additional new
disclosures required by the Dodd-Frank Act and a detailed accounting of
the settlement transaction.
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\13\ These disclosures are available at http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf and http://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf.
\14\ The requirements for the Closing Disclosure are in proposed
Sec. 1026.38.
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Timing. The lender must give consumers this Closing Disclosure form
at least three business days before the consumer closes on the loan.
Generally, if changes occur between the time the Closing Disclosure
form is given and the closing, the consumer must be provided a new
form. When that happens, the consumer must be given three additional
business days to review that form before closing.\15\ However, the
proposed rule contains an exception from the three-day requirement for
some common changes. These include changes resulting from negotiations
between buyer and seller after the final walk-through. There also is an
exception for minor changes which result in less than $100 in increased
costs.\16\ The Bureau seeks comment on whether to permit additional
changes without requiring a new three-day period before closing.
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\15\ This provision is in proposed Sec. 1026.19(f)(1)(ii).
\16\ These exceptions are in proposed Sec. 1026.19(f)(2).
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Provision. 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 for who is
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.\17\ The Bureau seeks comment
as to which alternative is preferable.
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\17\ These alternatives are set forth in proposed Sec.
1026.19(f)(1).
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E. 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--the various services required to complete a loan,
such as appraisals, inspections, etc.--than the amount stated on their
Loan Estimate form. Unless an exception applies, charges for the
following services could 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 could not increase by more than 10
percent.\18\
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\18\ The limitations and the exceptions discussed below are in
proposed Sec. 1026.19(e)(3).
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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.
F. Changes to APR
The proposed rule redefines the way the Annual Percentage Rate or
``APR'' is calculated. Under the rule, the APR will encompass almost
all of the up-front costs of the loan.\19\ This will make it easier for
consumers to use the APR to compare loans and easier for industry to
calculate the APR.
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\19\ These revisions are in proposed Sec. 1026.4.
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G. Recordkeeping
The proposed rule requires lenders to keep records of the Loan
Estimate and Closing Disclosure forms provided to consumers in a
standard electronic format.\20\ This will make it easier for regulators
to monitor compliance. The Bureau seeks comment on whether smaller
lenders should be exempt from this requirement.
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\20\ This provision is in proposed Sec. 1026.25.
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H. Effective Date
The Bureau is seeking comment on when this final rule should be
effective. Because the final rule will provide important benefits to
consumers, the Bureau seeks to make it effective as soon as possible.
However, the Bureau understands that the final rule will
[[Page 51118]]
require lenders, mortgage brokers, and settlement agents to make
extensive revisions to their software and to retrain their staff. In
addition, some entities will be required to implement other Dodd-Frank
Act provisions, which are subject to separate rulemaking deadlines
under the statute and will have separate effective dates. Therefore,
the Bureau is seeking comment on how much time industry needs to make
these changes. 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.\21\
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\21\ For additional discussion, see part V below.
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II. Background
A. The Mortgage Market
Overview of the Market and the Mortgage Crisis
The mortgage market is the single largest market for consumer
financial products and services in the United States, with
approximately $10.3 trillion in loans outstanding.\22\ During the last
decade, the market went through an unprecedented cycle of expansion and
contraction that was fueled in part by the securitization of mortgages
and creation of increasingly sophisticated derivative products designed
to mitigate accompanying risks. So many other parts of the American
financial system were drawn into mortgage-related activities that when
the bubble collapsed in 2008, it sparked the most severe recession in
the United States since the Great Depression.
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\22\ Inside Mortgage Finance, Outstanding 1-4 Family Mortgage
Securities, Mortgage Market Statistical Annual (2012).
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The expansion in this market is commonly attributed to both
particular economic conditions and by changes within the industry.
Interest rates dropped significantly--by more than 20 percent--from
2000 through 2003.\23\ Housing prices increased dramatically--about 152
percent--between 1997 and 2006.\24\ Driven by the decrease in interest
rates and the increase in housing prices, the volume of refinances
increased from about 2.5 million loans in 2000 to more than 15 million
in 2003.\25\
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\23\ See U.S. Dep't. of Hous. and Urban Dev., An Analysis of
Mortgage Refinancing, 2001-2003 (Nov. 2004), available at
www.huduser.org/Publications/pdf/MortgageRefinance03.pdf; Souphala
Chomsisengphet and Anthony Pennington-Cross, The Evolution of the
Subprime Mortgage Market, Federal Reserve Bank of St. Louis Review,
88(1), 31, 48 (Jan./Feb. 2006), available at http://research.stlouisfed.org/publications/review/article/5019.
\24\ The Financial Crisis Inquiry Commission, The Financial
Crisis Inquiry Report (Feb. 25, 2011) (FCIC Report) at 156,
available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
\25\ An Analysis of Mortgage Refinancing, 2001-2003, at 1.
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At the same time, advances in the securitization of mortgages
attracted increasing involvement from financial institutions that were
not directly involved in the extension of credit to consumers and from
investors worldwide. Securitization of mortgages allows originating
lenders to sell off their loans (and reinvest the funds earned in
making new ones) to investors who want an income stream over time.
Securitization had been pioneered by what are now called government
sponsored enterprises (GSEs), such as the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). But by the early 2000s, large numbers of private
financial institutions were deeply involved in creating increasingly
sophisticated investment mortgage-related vehicles through securities
and derivative products.
Growth in the mortgage loan market was particularly pronounced in
what are known as ``subprime'' and ``Alt-A'' products. Subprime
products were sold both to borrowers with poor or no credit history, as
well as to borrowers with good credit. The Alt-A category of loans
permitted borrowers to provide little or no documentation of income or
other repayment ability. Because these loans involved additional risk,
they were typically more expensive to borrowers than so-called
``prime'' mortgages, though many offered low introductory rates. In
2003, subprime and Alt-A origination volume was about $400 billion. In
2006, it had reached $830 billion.\26\
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\26\ Inside Mortgage Finance: Mortgage Market Statistical Annual
2011.
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So long as housing prices were continuing to increase, it was
relatively easy for borrowers to refinance their loans to avoid
interest rate resets and other adjustments. However, housing prices
began to decline as early as 2005, slowing the growth in
refinances.\27\ At the same time, as the economy worsened the rates of
serious delinquency (90 or more days past due or in foreclosure) for
these subprime and Alt-A products began a steep increase from
approximately 10 percent in 2006, to 20 percent in 2007, to over 40
percent in 2010.\28\
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\27\ FCIC Report at 215.
\28\ Id. at 217.
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The impact of this level of delinquencies on the private investors
who purchased these loans from the mortgage originators was severe.
Private securitizations of subprime loans peaked at $465 billion in
2005, but were virtually eliminated in 2008. Private securitizations of
Alt-A loans followed a similar trajectory.\29\ This effect was even
felt by Fannie Mae and Freddie Mac, which were large purchasers of
these securitizations, and it resulted in the Federal government in
late 2008 placing the GSEs into conservatorship in order to support the
collapsing mortgage market.
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\29\ Id. at 124.
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Four years later, the United States continues to grapple with the
fallout. Home prices are down 35 percent from peak to trough on a
national basis, and it is not clear whether the national market has
reached bottom.\30\ The fall in housing prices is estimated to have
resulted in about $7 trillion in household wealth losses.\31\ Moreover,
mortgage markets continue to rely on extraordinary U.S government
support. In addition, distressed homeownership and foreclosure rates
remain at unprecedented levels. Approximately 5.8 million homeowners
were somewhere between 30 days late on their mortgage and in the
foreclosure process as of April 2012.\32\ Finally, the U.S. continues
to face a stubbornly high unemployment rate, which was at 8.2 percent
at the end of May 2012.\33\
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\30\ S&P/Case-Shiller 20-City Composite accessed from Bloomberg,
LP on June 6, 2012.
\31\ Board of Governors of the Federal Reserve System, The U.S.
Housing Market: Current Conditions and Policy Considerations (Jan.
4, 2012), available at http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf.
\32\ Lender Processing Services April 2012 Mortgage Monitor.
\33\ Bureau of Labor Statistics, accessed from Bloomberg, LP on
June 6, 2012.
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While there remains debate about which market issues definitively
sparked this crisis, there were several mortgage origination issues
that pervaded the mortgage lending system prior to the crisis and are
generally accepted as having contributed to its collapse. First, the
market experienced a steady deterioration of credit standards in
mortgage lending, particularly evidenced by the growth of subprime and
Alt-A loans, which consumers were often unable or unwilling to
repay.\34\
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\34\ FCIC Report at 88.
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Second, the mortgage market saw a proliferation of more complex
mortgage products with terms that were often difficult for consumers to
understand. These products included most notably 2/28 and 3/27 Hybrid
Adjustable Rate Mortgages and Option ARM products.\35\
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These products were often marketed to subprime and Alt-A customers. The
appetite on the part of mortgage investors for such products often
created inappropriate incentives for mortgage originators to originate
these more expensive and profitable mortgage products.\36\
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\35\ Id. at 106. ``Hybrid Adjustable Rate Mortgage'' is a term
frequently used to describe adjustable rate mortgage loans that have
a low fixed introductory rate for a certain period of time. ``Option
ARM'' is a term frequently used to describe adjustable rate mortgage
loans that have a scheduled loan payment that may result in negative
amortization for a certain period of time, but that expressly permit
specified larger payments in the contract or servicing documents,
such as an interest-only payment or a fully amortizing payment. For
these loans, the scheduled negatively amortizing payment was
typically described in marketing and servicing materials as the
``optional payment.''
\36\ Id. at 109.
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Third, responsibility for the regulation of consumer financial
protection laws was spread across seven regulators including the Board,
HUD, the Office of Thrift Supervision, the Federal Trade Commission,
the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the National Credit Union
Administration. Such a spread in responsibility may have hampered the
government's ability to coordinate regulatory monitoring and response
to such issues.\37\
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\37\ Id. at 111.
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In the wake of this financial crisis, Congress passed the Dodd-
Frank Act to address many of these concerns. In this Act, Congress
created the Bureau and consolidated the rulemaking authority for many
consumer financial protection statutes, including the two primary
Federal consumer protection statutes governing mortgage origination,
TILA and RESPA, in the Bureau.\38\ Congress also provided the Bureau
with supervision authority for certain consumer financial protection
statutes over certain entities, including insured depository
institutions with total assets over $10 billion and their affiliates,
and certain other non-depository entities.\39\
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\38\ Sections 1011 and 1021 of title X of the Dodd-Frank Act,
the ``Consumer Financial Protection Act,'' Public Law 111-203,
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer
Financial Protection Act is substantially codified at 12 U.S.C.
5481-5603.
\39\ Sections 1024 through 1026 of title X of the Dodd-Frank
Act, codified at 12 U.S.C. 5514-5516.
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At the same time, Congress significantly amended the statutory
requirements governing mortgage practices with the intent to restrict
the practices that contributed to the crisis. For example, in response
to concerns that some lenders made loans to consumers without
sufficiently determining their ability to repay, section 1411 of the
Dodd-Frank Act amended TILA to require that creditors make a reasonable
and good faith determination, based on verified and documented
information, that the consumer will have a reasonable ability to repay
the loan.\40\ Sections 1032(f), 1098, and 1100A of the Dodd-Frank Act
address concerns that Federal mortgage disclosures did not adequately
explain to consumers the terms of their loans (particularly complex
adjustable rate or optional payment loans) by requiring new disclosure
forms that will improve consumer understanding of mortgage transactions
(which is the subject of this proposal).\41\ In addition, the Dodd-
Frank Act established other new standards concerning a wide range of
mortgage lending practices, including compensation for mortgage
originators \42\ and mortgage servicing.\43\ For additional
information, see the discussion below in part II.F.
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\40\ Section 1411 of the Dodd-Frank Act, codified at 15 U.S.C.
1639c.
\41\ 1032(f) of the Dodd-Frank Act, codified at 12 U.S.C.
5532(f). Sections 1098 and 1100A of the Dodd-Frank Act amend RESPA
and TILA, respectively.
\42\ Sections 1402 through 1405 of the Dodd-Frank Act, codified
at 15 U.S.C. 1639b.
\43\ Sections 1418, 1420, 1463, and 1464 of the Dodd-Frank Act,
codified at 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g.
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Size of the Current Mortgage Origination Market
Even with the economic downturn, approximately $1.28 trillion in
mortgage loans were originated in 2011.\44\ In exchange for a mortgage
loan, borrowers promise to make regular mortgage payments and provide
their home or real property as collateral. The overwhelming majority of
homebuyers use mortgage loans to pay for at least some of their
property. In 2011, 93 percent of all new home purchases were financed
with a mortgage loan.\45\
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\44\ Moody's Analytics, Credit Forecast (2012). Reflects first-
lien mortgage loans.
\45\ Inside Mortgage Finance, New Homes Sold by Financing,
Mortgage Market Statistical Annual (2012).
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Borrowers may take out mortgage loans in order to purchase a new
home, to refinance an existing mortgage, or to access home equity.
Purchase loans and refinances produced 6.3 million new mortgage loan
originations in 2011 alone.\46\ The proportion of loans that are for
purchases as opposed to refinances varies with the interest rate
environment. In 2011, 65 percent of the market was refinance
transactions and 35 percent was purchase loans, by volume.\47\
Historically the distribution has been more even. In 2000, refinances
accounted for 44 percent of the market while purchase loans comprised
56 percent, and in 2005 the two products were split evenly.\48\
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\46\ Moody's Analytics, Credit Forecast (2012). Reflects first-
lien mortgage loans.
\47\ Inside Mortgage Finance, Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012). These percentages are
based on the dollar amount of the loans.
\48\ Inside Mortgage Finance, Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012). These percentages are
based on the dollar amount of the loans.
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Using a home equity loan, a homeowner can use their equity as
collateral in exchange for a loan. The loan proceeds can be used, for
example, to pay for home improvements or to pay off other debts. These
home equity loans resulted in an additional 1.3 million mortgage loan
originations in 2011.\49\
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\49\ Moody's Analytics, Credit Forecast (2012). Reflects open-
end and closed-end home equity loans.
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Shopping for Mortgage Loans
When shopping for a mortgage loan, research has shown that
consumers are most concerned about the interest rate and their monthly
payment.\50\ Consumers may underestimate the possibility that interest
rates and payments can increase later on, or they may not fully
understand that this possibility exists. They also may not appreciate
other costs that could arise later, such as prepayment penalties.\51\
This focus on short term costs while underestimating long term costs
may result in consumers taking out mortgage loans that are more costly
than they realize.\52\
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\50\ Bd. of Governors of the Fed. Reserve Sys., Summary of
Findings: Design and Testing of Truth in Lending Disclosures for
Closed-End Mortgages, prepared by Macro International, Inc. (July
16, 2009), p. 6, available at http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.;
see also Kleimann Communication Group, Inc., Know Before You Owe:
Evolution of the Integrated TILA-RESPA Disclosures (July 2012),
available at http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
\51\ James Lacko and Janis Pappalardo, Improving Consumer
Mortgage Disclosures: An Empirical Assessment of Current and
Prototype Disclosure Forms, Federal Trade Commission, p. 26 (June
2007) (finding borrowers had misunderstood key loan features,
including the overall cost of the loan, future payment amount,
ability to refinance, payment of up-front points and fees, whether
the monthly payment included escrow for taxes and insurance, any
balloon payment, whether the interest rate had been locked, whether
the rate was adjustable or fixed, and any prepayment penalty),
available at http://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf.
\52\ Oren Bar-Gill, The Law, Economics and Psychology of
Subprime Mortgage Contracts, 94 Cornell L. Rev. 1073, 1079 (2009)
(discussing how subprime borrowers may not fully understand the loan
costs due to product complexity and deferral of loan costs into the
future); id. at 1133 (explaining that borrower underestimation of
mortgage loan cost distorts their decision to take out a loan,
resulting in excessive borrowing), available at http://legalworkshop.org/wp-content/uploads/2009/07/cornell-A23090727-bar-gill.pdf.
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[[Page 51120]]
Research points to a relationship between consumer confusion about
loan terms and conditions and an increased likelihood of adopting
higher-cost, higher-risk mortgage loans in the years leading up to the
mortgage crisis. A study of data from the 2001 Survey of Consumer
Finances found that some adjustable-rate mortgage loan borrowers--
particularly those with below median income--underestimated or did not
realize how much their interest rates could change.\53\ These findings
are consistent with a 2006 Government Accountability Office study,
which raised concerns that mortgage loan disclosure laws did not
require specific disclosures for adjustable rate loans.\54\ This
evidence suggests that borrowers who are not presented with clear,
understandable information about their mortgage loan offer may lack an
accurate understanding of the loan costs and risks.
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\53\ Brian K. Bucks and Karen M. Pence, Do Borrowers Know their
Mortgage Terms?, J. of Urban Econ. (2008), available at http://works.bepress.com/karen_pence/5.
\54\ U.S. Government Accountability Office, Alternative Mortgage
Products: Impact on Default Remains Unclear, but Disclosure of Risks
to Borrowers Could Be Improved (Sept. 20, 2006), available at http://www.gao.gov/new.items/d061112t.pdf.
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The Mortgage Origination Process
Borrowers must go through a mortgage origination process to take
out a mortgage loan. During this process, borrowers have two
significant factors to consider: the costs that they pay to close the
loan, and the costs over the life of the loan. Both factors can vary
tremendously, making the home purchase especially complex. Furthermore,
there are many actors involved in a mortgage origination. In addition
to the lender and the borrower, a single transaction may involve a
seller, mortgage broker, real estate agent, settlement agent,
appraiser, multiple insurance providers, and local government clerks
and tax offices. These actors typically charge fees or commissions for
the services they provide. Borrowers learn about the loan costs and the
sources of those costs through a variety of sources, including
disclosures provided throughout the mortgage origination process.
Loan Terms. The loan terms affect how the loan is to be repaid,
including the type of loan product,\55\ the interest rate, the payment
amount, and the length of the loan term.
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\55\ Types of loan products include a fixed rate loan,
adjustable rate loan, and interest-only loan.
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Among other things, the type of loan product determines whether the
interest rate can change and, if so, when and by how much. A fixed rate
loan sets the interest rate at origination, and the rate stays the same
until the borrower pays off the loan. However, the interest rate on an
adjustable rate loan is periodically reset based on an interest rate
index. This shifting rate could change the borrower's monthly payment.
Typically, an adjustable rate loan will combine both types of rates, so
that the interest rate is fixed for a certain period of time before
adjusting. For example, a 5/1 adjustable rate loan would have a fixed
interest rate for five years, and then adjust every year until the loan
ends. Any changes in the interest rate after the first five years would
change the borrower's payments. Today, fixed rate mortgages are the
most common mortgage product, accounting for 87 percent of the mortgage
loan market in 2011.\56\ Adjustable rate mortgages accounted for only
13 percent of the mortgage loan market in 2011, although they have been
more popular in the past.\57\ Adjustable-rate mortgages accounted for
30 percent of mortgage loan volume in 2000, and reached a recent high
of 50 percent in 2004.\58\
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\56\ Inside Mortgage Finance, Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012). These percentages are
based on the dollar amount of the loans.
\57\ Inside Mortgage Finance, Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012). These percentages are
based on the dollar amount of the loans.
\58\ Inside Mortgage Finance, Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012). These percentages are
based on the dollar amount of the loans.
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Borrowers are usually required to make payments on a monthly basis.
These payments typically are calculated to pay off the entire loan
balance by the time the loan term ends.\59\ The way a borrower's
payments affect the amount of the loan balance over time is called
amortization. Most borrowers take out fully amortizing loans, meaning
that their payments are applied to both principal and interest so that
the loan's principal balance will gradually decrease until it is
completely paid off. The typical 30-year fixed rate loan has fully
amortizing monthly payments that are calculated to pay off the loan in
full over 30 years. However, loan amortization can take other forms. An
interest-only loan would require the borrower to make regular payments
that cover interest but not principal. In some cases, these interest-
only payments end after a period of time (such as five years) and the
borrower must begin making significantly higher payments that cover
both interest and principal to amortize the loan over the remaining
loan term. In other cases, the entire principal balance must be paid
when the loan becomes due.
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\59\ Some loans may require a large final payment (or
``balloon'' payment) in addition to monthly payments.
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The time period that the borrower has to repay the loan is known as
the loan term, and is specified in the mortgage contract. Many loans
are set for a term of 30 years. Depending on the amortization type of
the loan, it will either be paid in full or have a balance due at the
end of the term.
Closing Costs. Closing costs are the costs of completing a mortgage
transaction, including origination fees, appraisal fees, title
insurance, taxes, and homeowner's insurance. The borrower may pay an
application or origination fee. Lenders generally also require an
appraisal as part of the origination process in order to determine the
value of the home. The appraisal helps the lender determine whether the
home is valuable enough to act as collateral for the mortgage loan. The
borrower is generally responsible for the appraisal fee, which may be
paid at or before closing. Finally, lenders typically require borrowers
to take out various insurance policies. Insurance protects the lender's
collateral interest in the property. Homeowner's insurance protects
against the risk that the home is damaged or destroyed, while title
insurance protects the lender against the risk of claims against the
borrower's legal right to the property. In addition, the borrower may
be required to take out mortgage insurance which protects the lender in
the event of default.
Application. In order to obtain a mortgage loan, borrowers must
first apply through a loan originator. There are two different kinds of
loan originators. A retail originator works directly for a mortgage
lender. A mortgage lender that employs retail originators could be a
bank or credit union, or it could be a specialized mortgage finance
company. The other kind of loan originator is a mortgage broker.
Mortgage brokers work with many different lenders and facilitate the
transaction for the borrower.
A loan originator may help borrowers determine what kind of loan
best suits their needs, and will collect their completed loan
application. The application includes borrower credit and income
information, along with information about the home to be purchased.
Borrowers can apply to multiple loan originators in order to
compare the loans that they are being offered. Once they have decided
to move forward with the loan, the borrower must notify the loan
originator. The loan originator will
[[Page 51121]]
typically wait to receive this notification before taking more
information from the borrower and giving the borrower's application to
a loan underwriter.
Mortgage Processing. A loan underwriter uses the application and
additional information to confirm initial information provided by the
borrower. The underwriter will assess whether the lender should take on
the risk of making the mortgage loan. In order to make this decision,
the underwriter considers whether the borrower can repay the loan, and
whether the home is worth enough to act as collateral for the loan. If
the underwriter finds that the borrower and the home qualify, the
underwriter will approve the borrower's mortgage application.
Depending on the loan terms, as discussed above, lenders may
require borrowers to retain title insurance, homeowner's insurance,
private mortgage insurance, and other services. The lender may allow
the borrower to shop for certain closing services on their own.
Closing. After being accepted for a mortgage loan, completing any
closing requirements, and receiving necessary disclosures, the borrower
can close on the loan. Multiple parties participate at closing,
including the borrower and the settlement agent.
The settlement agent ensures that all the closing requirements are
met, and that all fees are collected. The settlement agent also
completes all of the closing documents. The settlement agent makes sure
that the borrower signs these closing documents, including a promissory
note and the security instrument. This promissory note is evidence of
the loan debt, and documents the borrower's promise to pay back the
loan. It states the terms of the loan, including the interest rate and
length. The security instrument, in the form of a mortgage, provides
the home as collateral for the loan. A deed of trust is similar to a
mortgage, except that a trustee is named to hold title to the property
as security for the loan. The borrower receives title to the property
after the loan is paid in full. Both a mortgage and deed of trust allow
the lender to foreclose and sell the home if the borrower does not
repay the loan.
In the case of a purchase loan, the funds to purchase the home and
pay closing costs are distributed at closing or shortly thereafter. In
the case of a refinance loan, the funds from the new loan are used to
pay off the old loan, with any additional amount going to the borrower
or to pay off other debts. Refinance loans also have closing costs,
which may be paid by the borrower at closing or, in some cases, rolled
into the loan amount. In home-equity loans, the borrower's funds and
the closing costs are provided upon closing. A settlement agent makes
sure that all amounts are given to the appropriate parties. After the
closing, the settlement agent records the deed at the local government
registry.
B. RESPA and Regulation X
Congress enacted the Real Estate Settlement Procedures Act of 1974
based on findings that significant reforms in the real estate
settlement process were needed to ensure that consumers are provided
with greater and more timely information on the nature and costs of the
residential real estate settlement process and are protected from
unnecessarily high settlement charges caused by certain abusive
practices that Congress found to have developed. 12 U.S.C. 2601(a).
With respect to RESPA's disclosure requirements, the Act's purpose is
to provide ``more effective advance disclosure to home buyers and
sellers of settlement costs.'' Id. 2601(b)(1). In addition to providing
consumers with appropriate disclosures, the purposes of RESPA include
effecting certain changes in the settlement process for residential
real estate that will result in (1) the elimination of kickbacks or
referral fees that Congress found to increase unnecessarily the costs
of certain settlement services; and (2) a reduction in the amounts home
buyers are required to place in escrow accounts established to insure
the payment of real estate taxes and insurance. Id. 2601. In 1990,
Congress amended RESPA by adding a new section 6 covering persons
responsible for servicing mortgage loans and amending statutory
provisions related to mortgage servicers' administration of borrowers'
escrow accounts.\60\
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\60\ Public Law 101-625, 104 Stat. 4079 (1990), sections 941-42.
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RESPA's disclosure requirements generally apply to ``settlement
services'' for ``federally related mortgage loans.'' Under the statute,
the term ``settlement services'' includes any service provided in
connection with a real estate settlement. Id. 2602(3). The term
``federally related mortgage loan'' is broadly defined to encompass
virtually any purchase money or refinance loan, with the exception of
temporary financing, that is ``secured by a first or subordinate lien
on residential real property (including individual units of
condominiums and cooperatives) designed principally for the occupancy
of from one to four families * * *.'' Id. 2602(1).
Section 4 of RESPA requires that, in connection with a ``mortgage
loan transaction,'' a disclosure form that includes a ``real estate
settlement cost statement'' be prepared and made available to the
borrower for inspection at or before settlement.\61\ Id. 2603. The law
further requires that form ``conspicuously and clearly itemize all
charges imposed upon the borrower and all charges imposed upon the
seller in connection with the settlement * * *.'' Id. 2603(a). Section
5 of RESPA provides for a booklet to help consumers applying for loans
to finance the purchase of residential real estate from lenders that
make federally related mortgage loans to understand the nature and
costs of real estate settlement services. Id. 2604(a). Further, each
lender must ``include with the booklet a good faith estimate of the
amount or range of charges for specific settlement services the
borrower is likely to incur in connection with the settlement * * *.''
Id. 2604(c). The booklet and the good faith estimate must be provided
not later than three business days after the lender receives an
application, unless the lender denies the application for credit before
the end of the three-day period. Id. 2604(d).
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\61\ Prior to the Dodd-Frank Act, section 4 of RESPA applied to
``all transactions in the United States which involve federally
related mortgage loans.'' 12 U.S.C. 2603 (2009). However, section
1098 of the Dodd-Frank Act deleted the reference to ``federally
related mortgage loan'' in this section and replaced it with
``mortgage loan transactions.'' The regulation implementing this
statutory requirement has historically applied and continues to
apply to ``federally related mortgage loans.'' See 12 CFR 1024.8; 24
CFR 3500.8 (2010).
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Historically, Regulation X of the Department of Housing and Urban
Development (HUD), 24 CFR part 3500, has implemented RESPA. On March
14, 2008, after a 10-year investigatory process, HUD proposed extensive
revisions to the good faith estimate and settlement forms required
under Regulation X, as well as new accuracy standards with respect to
the estimates provided to consumers. 73 FR 14030 (Mar. 14, 2008) (HUD's
2008 RESPA Proposal).\62\ In November 2008, HUD finalized the proposed
revisions in substantially the same form, including new standard good
faith estimate and settlement forms, which lenders, mortgage brokers,
and settlement agents were required to use beginning on January 1,
2010. 73 FR 68204 (Nov. 17, 2008) (HUD's 2008 RESPA Final Rule). HUD's
2008 RESPA Final Rule implemented significant changes to the
[[Page 51122]]
rules regarding the accuracy of the estimates provided to consumers.
The final rule required re-disclosure of the good faith estimate form
when the actual costs increased beyond a certain percentage of the
estimated amounts, and permitted such increases only under certain
specified circumstances. Id. at 68240 (amending 24 CFR 3500.7). HUD's
2008 RESPA Final Rule also included significant changes to the RESPA
disclosure requirements, including prohibiting itemization of certain
amounts and instead requiring the disclosure of aggregate settlement
costs; adding loan terms, such as whether there is a prepayment penalty
and the borrower's interest rate and monthly payment; and requiring use
of a standard form for the good faith estimate. Id. The standard form
was developed through consumer testing conducted by HUD, which included
qualitative testing consisting of one-on-one cognitive interviews.\63\
HUD issued informal guidance regarding the final rule on its Web site,
in the form of frequently asked questions \64\ (HUD RESPA FAQs) and
bulletins \65\ (HUD RESPA Roundups).
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\62\ During this 10-year period, in 2002, HUD published a
proposed rule revising the good faith estimate forms and accuracy
standards for cost estimates, which it never finalized. 67 FR 49134
(July 29, 2002).
\63\ U.S. Dep't. of Hous. and Urban Dev., Summary Report:
Consumer Testing of the Good Faith Estimate Form (GFE), prepared by
Kleimann Communication Group, Inc. (2008), available at http://www.huduser.org/publications/pdf/Summary_Report_GFE.pdf.
\64\ New RESPA Rule FAQs, available at http://portal.hud.gov/hudportal/documents/huddoc?id=resparulefaqs422010.pdf.
\65\ RESPA Roundup Archive, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/resroundup.
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The Dodd-Frank Act (discussed further in part I.D, below)
transferred rulemaking authority for RESPA to the Bureau, effective
July 21, 2011. See sections 1061 and 1098 of the Dodd-Frank Act.
Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau
published for public comment an interim final rule establishing a new
Regulation X, 12 CFR part 1024, implementing RESPA. 76 FR 78978 (Dec.
20, 2011). This rule did not impose any new substantive obligations but
did make certain technical, conforming, and stylistic changes to
reflect the transfer of authority and certain other changes made by the
Dodd-Frank Act. The Bureau's Regulation X took effect on December 30,
2011. RESPA section 5's requirements of an information booklet and good
faith estimate of settlement costs (RESPA GFE) are implemented in
Regulation X by Sec. Sec. 1024.6 and 1024.7, respectively. RESPA
section 4's requirement of a real estate settlement statement (RESPA
settlement statement) is implemented by Sec. 1024.8.
C. TILA and Regulation Z
Congress enacted the Truth in Lending Act based on findings that
the informed use of credit resulting from consumers' awareness of the
cost of credit would enhance economic stability and would strengthen
competition among consumer credit providers. 15 U.S.C. 1601(a). One of
the purposes of TILA is to provide meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit. Id.
TILA's disclosures differ depending on whether credit is an open-end
(revolving) plan or a closed-end (installment) loan. TILA also contains
procedural and substantive protections for consumers.
TILA's disclosure requirements apply to a ``consumer credit
transaction'' extended by a ``creditor.'' Under the statute, consumer
credit means ``the right granted by a creditor to a debtor to defer
payment of debt or to incur debt and defer its payment,'' where ``the
party to whom credit is offered or extended is a natural person, and
the money, property, or services which are the subject of the
transaction are primarily for personal, family, or household
purposes.'' Id. 1602(f), (i). A creditor generally is ``a person who
both (1) regularly extends * * * consumer credit which is payable by
agreement in more than four installments or for which the payment of a
finance charge is or may be required, and (2) is the person to whom the
debt arising from the consumer credit transaction is initially payable
on the face of the evidence of indebtedness or, if there is no such
evidence of indebtedness, by agreement.'' Id. 1602(g).
TILA section 128 requires that, for closed-end credit, the
disclosures generally be made ``before the credit is extended.'' Id.
1638(b)(1). For closed-end transactions secured by a consumer's
dwelling and subject to RESPA, good faith estimates of the disclosures
are required ``not later than three business days after the creditor
receives the consumer's written application, which shall be at least 7
business days before consummation of the transaction.'' Id.
1638(b)(2)(A). Finally, if the annual percentage rate (APR) disclosed
in this early TILA disclosure statement becomes inaccurate, ``the
creditor shall furnish an additional, corrected statement to the
borrower, not later than 3 business days before the date of
consummation of the transaction.'' Id. 1638(b)(2)(D).
Historically, Regulation Z of the Board of Governors of the Federal
Reserve System, 12 CFR part 226, has implemented TILA. TILA section
128's requirement that the disclosure statement be provided before the
credit is extended (final TILA disclosure) is implemented in Regulation
Z by Sec. 1026.17(b). The requirements that a good faith estimate of
the disclosure be provided within three business days after application
and at least seven business days prior to consummation (early TILA
disclosure) and that a corrected disclosure be provided at least three
business days before consummation (corrected TILA disclosure), as
applicable, are implemented by Sec. 1026.19(a). The contents of the
TILA disclosures, as required by TILA section 128, are implemented by
Sec. 1026.18.
On July 30, 2008, Congress enacted the Mortgage Disclosure
Improvement Act of 2008 (MDIA).\66\ MDIA, in part, amended the timing
requirements for the early TILA disclosures, requiring that these TILA
disclosures be provided within three business days after an application
for a dwelling-secured closed-end mortgage loan also subject to RESPA
is received and before the consumer has paid any fee (other than a fee
for obtaining the consumer's credit history).\67\ Creditors also must
mail or deliver these early TILA disclosures at least seven business
days before consummation and provide corrected disclosures if the
disclosed APR changes in excess of a specified tolerance. The consumer
must receive the corrected disclosures no later than three business
days before consummation. The Board implemented these MDIA requirements
in final rules published May 19, 2009, which became effective July 30,
2009, as required by the statute. 74 FR 23289 (May 19, 2009) (MDIA
Final Rule).
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\66\ MDIA is contained in sections 2501 through 2503 of the
Housing and Economic Recovery Act of 2008, Public Law 110-289,
enacted on July 30, 2008. MDIA was later amended by the Emergency
Economic Stabilization Act of 2008, Public Law 110-343, enacted on
October 3, 2008.
\67\ MDIA codified some requirements previously adopted by the
Board in a July 2008 final rule. 73 FR 44522 (July 30, 2008) (HOEPA
Final Rule). To ease discussion, the description of MDIA's
disclosure requirements includes the requirements of the 2008 HOEPA
Final Rule.
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MDIA also requires disclosure of payment examples if the loan's
interest rate or payments can change, along with a statement that there
is no guarantee the consumer will be able to refinance the transaction
in the future. Under the statute, these provisions of MDIA became
effective on January 30, 2011. The Board worked to implement these
provisions of MDIA at the same time that it was completing work on a
several
[[Page 51123]]
year review of Regulation Z's provisions concerning home-secured
credit. As a result, the Board issued two sets of proposals
approximately one year apart. On August 26, 2009, the Board published
proposed amendments to Regulation Z containing comprehensive changes to
the disclosures for closed-end credit secured by real property or a
consumer's dwelling, including revisions to the format and content of
the disclosures implementing MDIA's payment examples and refinance
statement requirements, and several new requirements. 74 FR 43232 (Aug.
26, 2009) (2009 Closed-End Proposal).
For the 2009 Closed-End Proposal, the Board developed several new
model disclosure forms through consumer testing consisting of focus
groups and one-on-one cognitive interviews.\68\ In addition, the 2009
Closed-End Proposal proposed an extensive revision to the definition of
``finance charge'' that would replace the ``some fees in, some fees
out'' approach for determining the finance charge with a simpler, more
inclusive ``all-in'' approach. The proposed definition of ``finance
charge'' would include a fee or charge if it is (1) ``payable directly
or indirectly by the consumer'' to whom credit is extended, and (2)
``imposed directly or indirectly by the creditor as an incident to or a
condition of the extension of credit.'' The finance charge would
continue to exclude fees or charges paid in comparable cash
transactions.\69\
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\68\ Bd. of Governors of the Fed. Reserve Sys., Summary of
Findings: Design and Testing of Truth in Lending Disclosures for
Closed-End Mortgages, prepared by Macro International, Inc. (July
16, 2009) (Macro 2009 Closed-End Report), available at http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.
\69\ As discussed in the analysis of the proposed amendments to
Sec. 1026.4 in part VI, in response to concerns about the effect of
an ``all-in'' finance charge on the higher-priced and HOEPA coverage
thresholds in Sec. Sec. 1026.35 and 1026.32, respectively, the
Board proposed to implement a different ``transaction coverage
rate'' for higher-priced coverage and to retain the existing ``some
fees in, some fees out'' treatment of certain charges in the
definition of points and fees for purposes of determining HOEPA
coverage. See 76 FR 27390, 27411-12 (May 11, 2011); 76 FR 11598,
11608-09 (Mar. 2, 2011); 75 FR 58539, 58636-38, 58660-61 (Sept. 24,
2010).
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On September 24, 2010, the Board published an interim final rule to
implement MDIA's payment example and refinance statement requirements.
75 FR 58470 (Sept. 24, 2010) (MDIA Interim Rule). The Board's MDIA
Interim Rule effectively adopted those aspects of the 2009 Closed-End
Proposal that implemented these MDIA requirements, without adopting
that proposal's other provisions, which were not subject to the same
January 30, 2011 statutory effective date. The Board later issued
another interim final rule to make certain clarifying changes to the
provisions of the MDIA Interim Rule. 75 FR 81836 (Dec. 29, 2010).
On September 24, 2010, the Board also proposed further amendments
to Regulation Z regarding rescission rights, disclosure requirements in
connection with modifications of existing mortgage loans, and
disclosures and requirements for reverse mortgage loans. This proposal
was the second stage of the comprehensive review conducted by the Board
of TILA's rules for home-secured credit. 75 FR 58539 (Sept. 24, 2010)
(2010 Mortgage Proposal).
The Board also began, on September 24, 2010, issuing proposals
implementing the Dodd-Frank Act, which had been signed on July 21,
2010. The Board issued a proposed rule implementing section 1461 of the
Dodd-Frank Act, which, in part, adjusts the rate threshold for
determining whether escrow accounts are required for ``jumbo loans,''
whose principal amounts exceed the maximum eligible for purchase by
Freddie Mac.\70\ 75 FR 58505 (Sept. 24, 2010). On March 2, 2011, the
Board proposed amendments to Regulation Z implementing other
requirements of sections 1461 and 1462 of the Dodd-Frank Act, which
added new substantive and disclosure requirements regarding escrow
accounts to TILA. 76 FR 11598 (March 2, 2011) (2011 Escrows Proposal).
Sections 1461 and 1462 of the Dodd-Frank Act create new TILA section
129D, which substantially codifies requirements that the Board had
previously adopted in Regulation Z regarding escrow requirements for
higher-priced mortgage loans (including the revised rate threshold for
``jumbo loans'' described above), but also adds disclosure
requirements, and lengthens the period for which escrow accounts are
required.
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\70\ The Board finalized this proposal effective April 1, 2011.
76 FR 11319 (Mar. 2, 2011).
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On May 11, 2011, the Board proposed amendments to Regulation Z to
implement section 1411 of the Dodd-Frank Act, which amends TILA to
prohibit creditors from making mortgage loans without regard to the
consumer's repayment ability. 76 FR 27390 (May 11, 2011) (2011 ATR
Proposal). Section 1411 of the Dodd-Frank Act adds section 129C to
TILA, codified at 15 U.S.C. 1639c, which prohibits a creditor from
making a mortgage loan unless the creditor makes a reasonable and good
faith determination, based on verified and documented information, that
the consumer will have a reasonable ability to repay the loan,
including any mortgage-related obligations (such as property taxes).
Effective July 21, 2011, the Dodd-Frank Act transferred rulemaking
authority for TILA to the Bureau.\71\ See sections 1061 and 1100A of
the Dodd-Frank Act. Along with this authority, the Bureau assumed
responsibility for the proposed rules discussed above. Pursuant to the
Dodd-Frank Act and TILA, as amended, the Bureau published for public
comment an interim final rule establishing a new Regulation Z, 12 CFR
part 1026, implementing TILA (except with respect to persons excluded
from the Bureau's rulemaking authority by section 1029 of the Dodd-
Frank Act). 76 FR 79768 (Dec. 22, 2011). This rule did not impose any
new substantive obligations but did make certain technical, conforming,
and stylistic changes to reflect the transfer of authority and certain
other changes made by the Dodd-Frank Act. The Bureau's Regulation Z
took effect on December 30, 2011.
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\71\ Section 1029 of the Dodd-Frank Act excludes from this
transfer of authority, subject to certain exceptions, any rulemaking
authority over a motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the leasing and
servicing of motor vehicles, or both. 12 U.S.C. 5519.
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D. The History of Integration Efforts
For more than 30 years, TILA and RESPA have required creditors and
settlement agents to give consumers who apply for and obtain a mortgage
loan different but overlapping disclosure forms regarding the loan's
terms and costs. This duplication has long been recognized as
inefficient and confusing for both consumers and industry.
Previous efforts to develop a combined TILA and RESPA disclosure
form were fueled by the amount, complexity, and overlap of information
in the disclosures. On September 30, 1996, Congress enacted the
Economic Growth and Regulatory Paperwork Reduction Act of 1996,\72\
which required the Board and HUD to ``simplify and improve the
disclosures applicable to the transactions under [TILA and RESPA],
including the timing of the disclosures; and to provide a single format
for such disclosures which will satisfy the requirements of each such
Act with respect to such transactions.'' \73\ If the agencies found
that legislative action might be necessary or appropriate to simplify
and unify the disclosures, they were to submit a report to Congress
containing recommendations for such action. In the same legislation,
Congress added
[[Page 51124]]
exemption authority in TILA section 105(f) for classes of transactions
for which, in the determination of the Board (now the Bureau), coverage
under all or part of TILA does not provide a meaningful benefit to
consumers in the form of useful information or protection.\74\
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\72\ Public Law 104-208, 110 Stat. 3009 (1996).
\73\ Id., section 2101.
\74\ Id., section 2102(b).
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The Board and HUD did not propose an integrated disclosure pursuant
to this legislation. Instead, in July 1998, the Board and HUD issued a
``Joint Report to the Congress Concerning Reform to the Truth in
Lending Act and the Real Estate Settlement Procedures Act'' (Board-HUD
Joint Report).\75\ The Board-HUD Joint Report concluded that
``meaningful change could come only through legislation'' and provided
Congress with the Board's and HUD's recommendations for revising TILA
and RESPA.
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\75\ Bd. of Governors of the Fed. Reserve Sys. And U.S. Dep't of
Hous. and Urban Dev., Joint Report to the Congress Concerning Reform
to the Truth in Lending Act and the Real Estate Settlement
Procedures Act (1998), available at http://www.federalreserve.gov/boarddocs/rptcongress/tila.pdf.
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The agencies recommended a number of amendments to TILA and RESPA
in the report, such as amendment of TILA's definition of ``finance
charge'' to eliminate the ``some fees in, some fees out'' approach and
instead include ``all costs the consumer is required to pay in order to
close the loan, with limited exceptions''; the amendment of RESPA to
require either the guaranteeing of closing costs on the GFE or
estimates that are subject to an accuracy standard; and provision of
the final TILA disclosure and settlement statement three days before
closing, so that consumers would be able to study the disclosures in an
unpressured environment.
The Board-HUD Joint Report also recommended several additional
changes to the TILA disclosures. In particular, the report recommended
significant revisions to the ``Fed Box,'' which is the tabular
disclosure provided to consumers in the early and final TILA
disclosures under Regulation Z containing the APR, the finance charge
(which is intended to be the cost of credit expressed as a dollar
amount), the amount financed (which is intended to reflect the loan
proceeds available to the consumer), and the total of payments (which
is the dollar amount of the transaction over the loan term, including
principal and finance charges).\76\ The report recommended, among other
things, eliminating the amount financed from the disclosure for
mortgage loans because it probably was not useful to consumers in
understanding mortgage loans. The report also recommended adding
disclosure of the total closing costs in the Fed Box, citing focus
groups conducted by the Board in which participants stated that
disclosure of the amount needed to close the loan would be useful.
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\76\ See, e.g., Regulation Z, 12 CFR part 1026 app. H-2 Loan
Model Form.
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The Board-HUD Joint Report did not result in legislative action.
Eleven years later, and four months before the revised RESPA
disclosures under HUD's 2008 RESPA Final Rule were to become mandatory,
the Board published the 2009 Closed-End Proposal, which proposed
significant revisions to the TILA disclosures and stated that the Board
would work with HUD towards integrating the two disclosure regimes. The
proposal stated that ``the Board anticipates working with [HUD] to
ensure that TILA and [RESPA] disclosures are compatible and
complementary, including potentially developing a single disclosure
form that creditors could use to combine the initial disclosures
required under TILA and RESPA.'' \77\ The proposal stated that consumer
testing would be used to ensure consumers could understand and use the
combined disclosures. However, only ten months later in July 2010, the
Dodd-Frank Act was enacted by Congress, which transferred rulemaking
authority under both TILA and RESPA to the Bureau and mandated that the
Bureau establish a single disclosure scheme under TILA and RESPA. Now,
nearly 16 years after Congress first directed the Board and HUD to
integrate the disclosures under TILA and RESPA, the Bureau publishes
this proposed rule.
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\77\ 74 FR 43232, 43233.
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E. The Dodd-Frank Act
As noted above, RESPA and TILA historically have been implemented
by regulations of HUD and the Board, respectively, and the Dodd-Frank
Act consolidated this rulemaking authority in the Bureau. In addition,
the Dodd-Frank Act amended both statutes to mandate that the Bureau
establish a single disclosure scheme for use by lenders or creditors in
complying comprehensively with the disclosure requirements discussed
above. Section 1098(2) of the Dodd-Frank Act amended RESPA section 4(a)
to require that the Bureau ``publish a single, integrated disclosure
for mortgage loan transactions (including real estate settlement cost
statements) which includes the disclosure requirements of this section
and section 5, in conjunction with the disclosure requirements of
[TILA] that, taken together, may apply to a transaction that is subject
to both or either provisions of law.'' 12 U.S.C. 2603(a). Similarly,
section 1100A(5) of the Dodd-Frank Act amended TILA section 105(b) to
require that the Bureau ``publish a single, integrated disclosure for
mortgage loan transactions (including real estate settlement cost
statements) which includes the disclosure requirements of this title in
conjunction with the disclosure requirements of [RESPA] that, taken
together, may apply to a transaction that is subject to both or either
provisions of law.'' 15 U.S.C. 1604(b).
The amendments to RESPA and TILA mandating a ``single, integrated
disclosure'' are among numerous conforming amendments to existing
Federal laws found in subtitle H of the Consumer Financial Protection
Act of 2010.\78\ Subtitle C of the Consumer Financial Protection Act,
``Specific Bureau Authorities,'' codified at 12 U.S.C. chapter 53,
subchapter V, part C, contains a similar provision. Specifically,
section 1032(f) of the Dodd-Frank Act provides that, by July 21, 2012,
the Bureau ``shall propose for public comment rules and model
disclosures that combine the disclosures required under [TILA] and
[sections 4 and 5 of RESPA] into a single, integrated disclosure for
mortgage loan transactions covered by those laws, unless the Bureau
determines that any proposal issued by the [Board] and [HUD] carries
out the same purpose.'' 12 U.S.C. 5532(f). The Bureau is publishing
this proposed rule pursuant to that mandate and the parallel mandates
established by the conforming amendments to RESPA and TILA, discussed
above.
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\78\ The Consumer Financial Protection Act is title X, ``Bureau
of Consumer Financial Protection,'' of the Dodd-Frank Act, Public
Law 111-203, 124 Stat. 1376 (2010), sections 1001-1100H. In the
Consumer Financial Protection Act, Congress established the Bureau
and its powers and authorities, transferred to the Bureau various
existing functions of other agencies, mandated certain regulatory
improvements, and prescribed other requirements and conforming
amendments. Subtitle H, ``Conforming Amendments,'' is the last
subtitle and consists of sections 1081-1100H. Certain titles of the
Dodd-Frank Act are codified at 12 U.S.C. chapter 53. Subtitles A
through G (but not H) of title X are codified at 12 U.S.C. chapter
53, subchapter V, parts A through G. Thus, the Consumer Financial
Protection Act is substantially codified at 12 U.S.C. 5481-5603.
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F. Other Rulemakings
In addition to this proposal, the Bureau currently is engaged in
six other rulemakings relating to mortgage credit
[[Page 51125]]
to implement requirements of the Dodd-Frank Act:
HOEPA: On the same day that this proposal is released by
the Bureau, the Bureau is releasing a proposal to implement Dodd-Frank
Act requirements expanding protections for ``high-cost'' mortgage loans
under HOEPA, pursuant to TILA sections 103(bb) and 129, as amended by
Dodd-Frank Act sections 1431 through 1433 (2012 HOEPA Proposal). 15
U.S.C. 1602(bb) and 1639.\79\
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\79\ Available at http://www.consumerfinance.gov/notice-and-comment/.
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Servicing: The Bureau is in the process of developing a
proposal to implement Dodd-Frank Act requirements regarding force-
placed insurance, error resolution, and payment crediting, as well as
forms for mortgage loan periodic statements and ``hybrid'' adjustable-
rate mortgage reset disclosures, pursuant to sections 6 of RESPA and
128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-
Frank Act sections 1418, 1420, 1463, and 1464. The Bureau has publicly
stated that in connection with the servicing rulemaking the Bureau is
considering proposing rules on reasonable information management, early
intervention for troubled and delinquent borrowers, and continuity of
contact, pursuant to the Bureau's authority to carry out the consumer
protection purposes of RESPA in section 6 of RESPA, as amended by Dodd-
Frank Act section 1463. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f,
and 1639g.
Loan Originator Compensation: The Bureau is in the process
of developing a proposal to implement provisions of the Dodd-Frank Act
requiring certain creditors and mortgage loan originators to meet duty
of care qualifications and prohibiting mortgage loan originators,
creditors, and the affiliates of both from receiving compensation in
various forms (including based on the terms of the transaction) and
from sources other than the consumer, with specified exceptions,
pursuant to TILA section 129B as established by Dodd-Frank Act sections
1402 and 1403. 15 U.S.C. 1639b.
Appraisals: The Bureau, jointly with Federal prudential
regulators and other Federal agencies, is in the process of developing
a proposal to implement Dodd-Frank Act requirements concerning
appraisals for higher-risk mortgages, appraisal management companies,
and automated valuation models, pursuant to TILA section 129H as
established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and
sections 1124 and 1125 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act
sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354,
respectively. In addition, the Bureau is developing rules to implement
section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended
by Dodd-Frank Act section 1474, to require that creditors provide
applicants with a free copy of written appraisals and valuations
developed in connection with applications for loans secured by a first
lien on a dwelling (collectively, Appraisals Rulemaking). 15 U.S.C.
1691(e).
Ability to Repay: The Bureau is in the process of
finalizing a proposal issued by the Board to implement provisions of
the Dodd-Frank Act requiring creditors to determine that a consumer can
repay a mortgage loan and establishing standards for compliance, such
as by making a ``qualified mortgage,'' pursuant to TILA section 129C as
established by Dodd-Frank Act sections 1411 and 1412 (Ability to Repay
Rulemaking). 15 U.S.C. 1639c.
Escrows: The Bureau is in the process of finalizing a
proposal issued by the Board to implement provisions of the Dodd-Frank
Act requiring certain escrow account disclosures and exempting from the
higher-priced mortgage loan escrow requirement loans made by certain
small creditors, among other provisions, pursuant to TILA section 129D
as established by Dodd-Frank Act sections 1461 and 1462 (Escrows
Rulemaking). 15 U.S.C. 1639d.
With the exception of the requirements being implemented in this
rulemaking, the Dodd-Frank Act requirements referenced above generally
will take effect on January 21, 2013 unless final rules implementing
those requirements are issued on or before that date and provide for a
different effective date. To provide an orderly, coordinated, and
efficient comment process, the Bureau is generally setting the
deadlines for comments on this and other proposed mortgage rules based
on the date the proposal is issued, instead of the date this notice is
published in the Federal Register. Specifically, as discussed below, it
may be appropriate to finalize proposed Sec. Sec. 1026.1(c) and 1026.4
in conjunction with the final rules adopted on or before January 21,
2013. Therefore, the Bureau is providing 60 days for comment on those
proposals (until September 7, 2012), which will ensure that the Bureau
receives comments with sufficient time remaining to issue final rules
by that date. For the other portions of this proposed rule (including
the Paperwork Reduction Analysis in part IX below), the Bureau is
providing 120 days (until November 6, 2012). Because the precise date
this notice will be published cannot be predicted in advance, setting
the deadlines based on the date of issuance will allow interested
parties that intend to comment on multiple proposals to plan
accordingly.
The Bureau regards the foregoing rulemakings as components of a
larger undertaking; many of them intersect with one or more of the
others. Accordingly, the Bureau is coordinating carefully the
development of the proposals and final rules identified above. Each
rulemaking will adopt new regulatory provisions to implement the
various Dodd-Frank Act mandates described above. In addition, each of
them may include other provisions the Bureau considers necessary or
appropriate to ensure that the overall undertaking is accomplished
efficiently and that it ultimately yields a regulatory scheme for
mortgage credit that achieves the statutory purposes set forth by
Congress, while avoiding unnecessary burdens on industry.
Thus, many of the rulemakings listed above involve issues that
extend across two or more rulemakings. In this context, each rulemaking
may raise concerns that might appear unaddressed if that rulemaking
were viewed in isolation. For efficiency's sake, however, the Bureau is
publishing and soliciting comment on proposed answers to certain issues
raised by two or more of its mortgage rulemakings in whichever
rulemaking is most appropriate, in the Bureau's judgment, for
addressing each specific issue. Accordingly, the Bureau urges the
public to review this and the other mortgage proposals identified
above, including those previously published by the Board, together.
Such a review will ensure a more complete understanding of the Bureau's
overall approach and will foster more comprehensive and informed public
comment on the Bureau's several proposals, including provisions that
may have some relation to more than one rulemaking but are being
proposed for comment in only one of them.
For example, as discussed in detail in the section-by-section
analysis under proposed Sec. 1026.4 below, this proposal includes a
simpler, more inclusive definition of the finance charge, similar to
what the Board proposed in its 2009 Closed-End Proposal. See 74 FR
43232, 43241-45 (Aug. 26, 2009). The Board recognized at that time that
the more inclusive finance charge would cause more loans to be
considered higher-priced mortgage loans under Sec. 1026.35 and would
expand the coverage of
[[Page 51126]]
HOEPA and similar State laws. Id. at 43244-45. For these reasons, in
its 2010 Mortgage Proposal, the Board proposed to retain the existing
treatment of third-party charges in the points and fees definition,
notwithstanding the proposed expansion of the finance charge for
disclosure purposes. 75 FR 58539, 58637-38 (Sept. 24, 2010). Similarly,
the Board's 2010 Mortgage Proposal introduced a new metric for
determining coverage of the higher-priced mortgage loan protections to
be used in place of a transaction's APR, known as the ``transaction
coverage rate'' (TCR), which does not reflect the additional charges
that are reflected in the disclosed APR under the more inclusive
finance charge definition. Id. at 58660-62.
The Bureau recognizes, as did the Board, that the proposed more
inclusive finance charge could affect the coverage of the higher-priced
mortgage loan and HOEPA protections. The Bureau also is aware that,
consequently, a more inclusive finance charge has implications for the
HOEPA, Appraisals, Ability to Repay, and Escrows rulemakings identified
above. Those impacts are analyzed below, but the Bureau believes that
it is also helpful to analyze potential mitigation measures on a rule-
by-rule basis. Accordingly, the Bureau expects to seek comment in the
HOEPA and Appraisals rulemakings on whether and how to account for the
implications of the more inclusive finance charge on those specific
regulatory regimes, for instance by adopting the TCR as previously
proposed by the Board.\80\
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\80\ The Board already sought comment on this issue in its
proposals to implement the ability to repay and escrow requirements.
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III. Outreach and Consumer Testing
As noted above, the Dodd-Frank Act established two goals for this
rulemaking: ``to facilitate compliance with the disclosure requirements
of [TILA and RESPA]'' and ``to aid the borrower or lessee in
understanding the transaction by utilizing readily understandable
language to simplify the technical nature of the disclosures.'' Dodd-
Frank Act sections 1098, 1100A. Further, the Bureau has a specific
mandate and authority from Congress to promote consumer comprehension
of financial transactions through clear disclosures. Section 1021(a) of
the Dodd-Frank Act directs the Bureau to ``implement * * * Federal
consumer financial law consistently for the purpose of ensuring,''
inter alia, that ``markets for consumer financial products and services
are fair, transparent, and competitive.'' 12 U.S.C. 5511(a). Section
1021(b) of the Dodd-Frank Act, in turn, authorizes the Bureau as part
of its core mission to exercise its authorities to ensure that, with
respect to consumer financial products and services, ``consumers are
provided with timely and understandable information to make responsible
decisions about financial transactions.'' 12 U.S.C. 5511(b). Consistent
with these goals and in preparation for proposing integrated rules and
forms, the Bureau conducted a multifaceted information gathering
campaign, including researching how consumers interact with and
understand information, testing of prototype forms, developing
interactive online tools to gather public feedback, and hosting
roundtable discussions, teleconferences, and meetings with consumer
advocacy groups, industry stakeholders, and other government agencies.
A. Early Stakeholder Outreach & Prototype Form Design
In September 2010, the Bureau began meeting with consumer
advocates, other banking agencies, community banks, credit unions,
settlement agents, and other industry representatives. This outreach
helped the Bureau better understand the issues that consumers and
industry face when they use the current TILA and RESPA disclosures.
At the same time, the Bureau began to research how consumers
interact with and understand information. Given the complexities and
variability of mortgage loan transactions and their underlying real
estate transactions, the Bureau understood that the integrated
disclosures would have to convey a large amount of complex and
technical information to consumers in a manner that they could use and
understand. Considering that, in January 2011, the Bureau contracted
with a communication, design, consumer testing, and research firm,
Kleimann Communication Group, Inc. (Kleimann), which specializes in
consumer financial disclosures. Kleimann has been hired by other
Federal agencies to perform such design and qualitative testing work in
connection with other financial disclosure forms. For example, the
Federal Trade Commission and the Federal banking agencies contracted
with Kleimann to design and conduct consumer testing for revised model
privacy disclosures.\81\ Also, HUD contracted with Kleimann to assist
in the design and consumer testing for its revised good faith estimate
and settlement statement forms.\82\
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\81\ 72 FR 14940, 14944 (Mar. 29, 2007); 74 FR 62890, 62893
(Dec. 1, 2009).
\82\ 73 FR 14030, 14043; 73 FR 68204, 68265.
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The Bureau and Kleimann reviewed relevant research and the work of
other Federal financial services regulatory agencies to inform the
Bureau's design of the prototype integrated disclosures. One of the
findings of this research was that there is a significant risk to
consumers of experiencing ``information overload'' when the volume or
complexity of information detracts from the consumer decision-making
processes. ``Information overload'' has often been cited as a problem
with financial disclosures.\83\ Researchers suggest that there should
be a balance between the types and amount of information in the
disclosures, because too much information has the potential to detract
from consumers' decision-making processes.\84\ In its 2009 Closed-End
Proposal, the Board cited a reduction in ``information overload'' as
one of the potential benefits of its plan to harmonize the TILA and
RESPA disclosures in collaboration with HUD.\85\ The Board's consumer
testing in connection with its 2009 Closed-End Proposal found that when
participants were asked what was most difficult about their mortgage
experience, the most frequent answer was the amount of paperwork.\86\
HUD also stated that one of its guiding principles for HUD's 2008 RESPA
Proposal was that ``the [mortgage loan settlement process] can be
improved with simplification of disclosures and better borrower
information,'' the complexity of which
[[Page 51127]]
caused many problems with the process.\87\
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\83\ See e.g., Debra Pogrund Stark and Jessica M. Choplin, A
Cognitive and Social Psychological Analysis of Disclosure Laws and
Call for Mortgage Counseling to Prevent Predatory Lending, 16 Psych.
Pub. Pol. and L. 85, 96 (2010); Paula J. Dalley, The Use and Misuse
of Disclosure as a Regulatory System, 34 Fla. St. U.L. Rev. 1089,
1115 (2007); Patricia A. McCoy, The Middle-Class Crunch: Rethinking
Disclosure in a World of Risk-Based Pricing, 44 Harv. J. on Legis.
123, 133 (2007); Lauren E. Willis, Decisionmaking and The Limits of
Disclosure: The Problem of Predatory Lending: Price, 65 Md. L. Rev.
707, 766 (2006); Troy A. Paredes, After the Sarbanes-Oxley Act: The
Future Disclosure System: Blinded by the Light: Information Overload
and its Consequences for Securities Regulation, 81 Wash. U. L. Q.
417 (2003); William N. Eskridge, Jr., One Hundred Years of
Ineptitude: The Need for Mortgage Rules Consonant with the Economic
and Psychological Dynamics of the Home Sale and Loan Transaction, 70
Va. L. Rev. 1083, 1133 (1984).
\84\ John Kozup & Jeanne M. Hogarth, Financial Literacy, Public
Policy, and Consumers' Self-Protection--More Questions, Fewer
Answers, 42 Journal of Consumer Affairs 2, 127 (2008).
\85\ 74 FR 43232, 43234.
\86\ See Macro 2009 Closed-End Report at 19. For additional
discussion regarding information overload, see the section-by-
section analysis to proposed Sec. 1026.37(l).
\87\ 73 FR 14030, 14031.
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The potential for ``information overload'' was also cited by
Congress as one of the reasons it amended the TILA disclosures in the
Truth-in-Lending Simplification and Reform Act of 1980.\88\ According
to the Senate Committee on Banking, Housing and Urban Affairs, this
legislation arose in part because:
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\88\ Public Law 96-221, 94 Stat 132 (1980).
During its hearings the Consumer Affairs Subcommittee heard
testimony from a leading psychologist who has studied the problem of
`informational overload.' The Subcommittee learned that judging from
consumer tests in other areas, the typical disclosure statement
utilized today by creditors is not an effective communication
device. Most disclosure statements are lengthy, written in
legalistic fine print, and have essential Truth in Lending
disclosures scattered among various contractual terms. The result is
a piece of paper which appears to be `just another legal document'
instead of the simple, concise disclosure form Congress
intended.\89\
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\89\ Public Law 96-221, Depository Institutions Deregulation and
Monetary Control Act of 1980, Senate Report No. 96073 (Apr. 24,
1979).
Based on this research, the Bureau is particularly mindful of the risk
of information overload, especially considering the large volume of
other information and paperwork consumers are required to process
throughout the mortgage loan and real estate transaction.
The Bureau began development of the integrated disclosures with
certain design objectives. Considering that the quantity of information
both on the disclosures and in other paperwork throughout the mortgage
loan and real estate transaction may increase the risk of information
overload, the Bureau began development of the integrated disclosures
with the objective of creating a graphic design that used as few words
as possible when presenting the key loan and cost information. The
Bureau's purpose for such a design was to make the information readily
visible so that consumers could quickly and easily find the information
they were looking for, without being confronted with large amounts of
text. Accordingly, the Bureau decided to limit the content of the
disclosures to loan terms, cost information, and certain textual
disclosures and to exclude educational material. The Bureau understood
that consumers would receive educational materials under applicable
law, such as the Special Information Booklet required by section 5 of
RESPA, or through other means. In addition, the Bureau understood that
it would provide additional educational information and tools on its
Web site and place a Web site link on the integrated disclosures
directing consumers to that site, which would obviate the need to place
educational material directly on the disclosures.
The Bureau also believed the design should highlight on the first
page the most important loan information that consumers readily
understand and use to evaluate and compare loans, placing more detailed
and technical information later in the disclosure. In addition, the
Bureau believed the design should use plain language and limit the use
of technical, statutory, or complex financial terms wherever possible.
The Bureau believes these design objectives best satisfy the
purposes of the integrated disclosures set forth by Dodd-Frank Act
sections 1098 and 1100A, as well as the Bureau's mandate under Dodd-
Frank Act section 1021(b) to ensure that consumers are provided with
``understandable information'' to enable them to make responsible
decisions about financial transactions.
From January through May 2011, the Bureau and Kleimann developed a
plan to design integrated disclosure prototypes and conduct qualitative
usability testing, consisting of one-on-one cognitive interviews. The
Bureau and Kleimann worked collaboratively on developing the
qualitative testing plan and several prototype forms for the Loan
Estimate (i.e., the disclosure to be provided in connection with a
consumer's application integrating the RESPA GFE and the early TILA
disclosure). Although qualitative testing is commonly used by Federal
agencies to evaluate the effectiveness of disclosures prior to issuing
a proposal, the qualitative testing plan developed by the Bureau and
Kleimann was unique in that the Bureau conducted qualitative testing
with industry participants as well as consumers. Each round of
qualitative testing included at least two industry participants,
including lenders from several different types of depository
institutions (including credit unions and community banks) and non-
depository institutions, mortgage brokers, and settlement agents.
B. Prototype Testing and the Know Before You Owe (KBYO) Project
In May 2011, the Bureau selected two initial prototype designs of
the Loan Estimate, which were used in qualitative testing interviews in
Baltimore, Maryland. In these interviews, consumers were asked to work
through the prototype forms while conveying their impressions, and also
asked a series of questions designed to assess whether the forms
presented information in a format that enabled them to understand and
compare the mortgage loans presented to them. These questions ranged
from the highly specific (e.g., asking whether the consumer could
identify the loan payment in year 10 of a 30-year, adjustable-rate
loan) to the highly general (e.g., asking consumers to choose the loan
that best met their needs).\90\ Industry participants were asked to use
the prototype forms to explain mortgage loans as they would to a
consumer and to identify implementation issues and areas for
improvement.
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\90\ The consumers who participated in these interviews had
varying levels of education (from consumers with less than a high
school education to consumers with graduate degrees) and varying
levels of experience with the home buying and mortgage loan process
(from consumers who never owned a home to consumers who had been
through the home buying and mortgage loan process before).
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At the same time, to supplement its qualitative testing, the Bureau
launched an initiative, which it titled ``Know Before You Owe,'' to
obtain public feedback on the prototype disclosure forms.\91\ The
Bureau believed this would provide an opportunity to obtain a large
amount of feedback from a broad base of consumers and industry
respondents around the country. This initiative consisted of either
publishing and obtaining feedback on the prototype designs through an
interactive tool on the Bureau's Web site or posting the prototypes to
the Bureau's blog on its Web site and providing an opportunity for the
public to email feedback directly to the Bureau. Individual consumers,
loan officers, mortgage brokers, settlement agents, and others provided
feedback based on their own experiences with the mortgage loan process
by commenting on specific sections of the form, prioritizing
information presented on the form, and identifying additional
information that should be included.\92\
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\91\ See http://www.consumerfinance.gov/knowbeforeyouowe/.
\92\ Examples of consumer and industry responses to the
prototypes of the disclosures can be seen in the CFPB blog,
including at: www.consumerfinance.gov/know-before-you-owe-go;
www.consumerfinance.gov/13000-lessons-learned; and
www.consumerfinance.gov/know-before-you-owe-its-closing-time.
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From May to October 2011, Kleimann and the Bureau conducted a
series of five rounds of qualitative testing of different iterations of
the Loan Estimate with consumer and industry participants. In addition
to Baltimore, Maryland, this testing was conducted in Los Angeles,
California; Chicago,
[[Page 51128]]
Illinois; Springfield, Massachusetts; and Albuquerque, New Mexico. Each
round focused on a different aspect of the integrated disclosure, such
as the overall design, the disclosure of closing costs, and the
disclosure of loan payments over the term of the loan. The overall goal
of this qualitative testing was to ensure that the forms enabled
consumers to understand and compare the terms and costs of the loan.
After each round of testing, Kleimann analyzed and reported to the
Bureau on the results of the testing. Based on these results and
supplemental feedback received through the KBYO process, the Bureau
revised the prototype disclosure forms for the next round of testing.
This iterative process helped the Bureau develop forms that enable
consumers to understand and compare mortgage loans and that assist
industry in complying with the law. For a detailed discussion of this
testing, see the report prepared by Kleimann, Know Before You Owe:
Evolution of the Integrated TILA-RESPA Disclosures (Kleimann Testing
Report), which the Bureau is publishing on its Web site in conjunction
with this proposed rule.\93\
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\93\ Kleimann Communication Group, Inc., Know Before You Owe:
Evolution of the Integrated TILA-RESPA Disclosures (July 2012),
available at http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
---------------------------------------------------------------------------
After completion of the qualitative testing that focused solely on
the Loan Estimate, the Bureau and Kleimann began work on the prototype
designs for the Closing Disclosure (i.e., the disclosure provided in
connection with the closing of the mortgage loan that integrates the
RESPA settlement statement and the final TILA disclosure). From
November 2011 through March 2012, the Bureau and Kleimann conducted
five rounds of qualitative testing of different iterations of the
Closing Disclosure with consumer and industry participants. This
testing was conducted in five different cities across the country: Des
Moines, Iowa; Birmingham, Alabama; Philadelphia, Pennsylvania; Austin,
Texas; and Baltimore, Maryland.
Similar to the qualitative testing of the Loan Estimate, the Bureau
revised the prototype Closing Disclosure forms after each round based
on the results Kleimann provided to the Bureau and the feedback
received from the KBYO process. The Bureau focused on several aspects
of the prototypes during each round, such as the settlement disclosures
adapted from the HUD-1, new disclosure items required under title XIV
of the Dodd-Frank Act, and tables to help identify changes in the
information disclosed in the initial Loan Estimate. The overall goal of
the qualitative testing of the Closing Disclosure was to ensure that
the forms enabled consumers to understand their actual terms and costs,
and to compare the Closing Disclosure with the Loan Estimate to
identify changes. Accordingly, several rounds included testing of
different iterations of the Loan Estimate with the Closing Disclosure.
Overall, the Bureau performed qualitative testing with 92 consumer
participants and 22 industry participants, for a total of 114
participants. In addition, through the Bureau's KBYO initiative, the
Bureau received over 150,000 visits to the KBYO Web site and over
27,000 public comments and emails about the prototype disclosures.
C. Ongoing Stakeholder Outreach
Throughout the qualitative testing of the prototype disclosure
forms, the Bureau continued to conduct extensive outreach to consumer
advocacy groups, other regulatory agencies, and industry
representatives and trade associations. The Bureau held meetings with
individual stakeholders upon request, and also invited stakeholders to
meetings in which individual views of each stakeholder could be heard.
The Bureau conducted these meetings with a wide range of stakeholders
that may be affected by the integrated disclosures, even if not
directly regulated by the proposed rule. The meetings included
community banks, credit unions, thrifts, mortgage companies, mortgage
brokers, settlement agents, settlement service providers, software
providers, appraisers, not-for-profit consumer and housing groups, and
government and quasi-governmental agencies. Many of the persons
attending these meetings represented small business entities from
different parts of the country. In addition to these meetings, after
each round of qualitative testing, the Bureau received numerous letters
from individuals, consumer advocates, financial services providers, and
trade associations, which provided the Bureau with additional feedback
on the prototype disclosure forms.
In preparing this proposal, the Bureau also considered comments
provided in response to its December 2011 proposal regarding
streamlining of regulations for which rulemaking authority was
inherited by the CFPB from other Federal agencies, including TILA and
RESPA. 76 FR 75825 (Dec. 5, 2011) (2011 Streamlining Proposal). That
proposal specifically sought public comment on provisions of the
inherited regulations that the Bureau should make the highest priority
for updating, modifying, or eliminating because they are outdated,
unduly burdensome, or unnecessary, and sought suggestions for practical
measures to make compliance with the regulations easier. Several
commenters requested that the Bureau reconcile inconsistencies in the
terminology and requirements of Regulations X and Z. Wherever possible,
the Bureau has proposed to do so in this rulemaking. In addition, other
relevant comments received in response to the 2011 Streamlining
Proposal are addressed below.
D. Small Business Review Panel
In February 2012, the Bureau convened a Small Business Review Panel
with the Chief Counsel for Advocacy of the Small Business
Administration (SBA) and the Administrator of the Office of Information
and Regulatory Affairs within the Office of Management and Budget
(OMB).\94\ As part of this process, the Bureau prepared an outline of
the proposals then under consideration and the alternatives considered
(Small Business Review Panel Outline), which it posted on its Web site
for review by the general public as well as the small entities
participating in the panel process.\95\ The Small Business Review Panel
gathered information from representatives of small lenders, mortgage
brokers, settlement agents, and not-for-profit organizations and made
findings and recommendations regarding the potential compliance costs
and other impacts of the proposed rule on those entities. These
findings and recommendations are set forth in the Small Business Review
Panel Report, which will be made part of the administrative record in
this rulemaking.\96\ The Bureau has carefully considered these findings
and recommendations in preparing this proposal and has addressed
certain specific examples below.
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\94\ The Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA) requires the Bureau to convene a Small Business Review
Panel before proposing a rule that may have a substantial economic
impact on a significant number of small entities. See Public Law
104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L.
110-28, sec. 8302 (2007)).
\95\ Available at http://www.consumerfinance.gov/blog/sbrefa-small-providers-and-mortgage-disclosure/.
\96\ Final Report of the Small Business Review Panel on CFPB's
Proposals Under Consideration for Integration of TILA and RESPA
Mortgage Disclosure Requirements (Apr. 23, 2012), available at
http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-sbrefa-feedback.pdf.
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In addition, the Bureau held roundtable meetings with other Federal
banking and housing regulators, consumer advocacy groups, and
[[Page 51129]]
industry representatives regarding the Small Business Review Panel
Outline. At the Bureau's request, many of the participants provided
feedback, which the Bureau has used in preparing this proposal.
E. Next Steps
The public may submit comments on the proposed rule for 120 days
after issuance (with the exception of the proposed amendments to
Sec. Sec. 1026.1(c) and 1026.4 that have a shorter 60-day comment
period as discussed below). These comments will be available to the
public, as will summaries of written or oral presentations in
accordance with the Bureau's ex parte policy.\97\ During the comment
period and after it closes, the Bureau will carefully review and
analyze the comments.
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\97\ CFPB Bulletin 11-3 (August 16, 2011), available at http://files.consumerfinance.gov/f/2011/08/Bulletin_20110819_ExPartePresentationsRulemakingProceedings.pdf.
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Once the Bureau has completed its review and analysis of the
comments, it will consult with other Federal agencies and determine
whether changes should be made to the proposed forms or rules. If
changes are contemplated to the forms, the Bureau may conduct
additional qualitative testing to evaluate the effectiveness of those
changes. Whether or not changes are made, the Bureau may conduct large-
scale quantitative testing of the forms to confirm that the forms aid
consumers' understanding of mortgage transactions, if appropriate. On
March 28, 2012, the Bureau published a notice for comment under the
Paperwork Reduction Act in connection with this quantitative testing,
specifically inviting comment on whether the information collected will
have practical utility, the accuracy of the Bureau's burden hour
estimates, and ways to enhance the quality of the information collected
and minimize the burden on respondents.\98\ The Bureau received no
comments to this notice.
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\98\ 77 FR 18793 (Mar. 28, 2012).
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During the Small Business Review Panel, several small business
representatives requested that the Bureau explore the feasibility of
conducting testing of the disclosure forms on actual loans before
issuing a final rule. See Small Business Review Panel Report at 28.
Based on this feedback and consistent with the Small Business Review
Panel's recommendation, the Bureau is considering testing the forms on
actual loans after reviewing comments received in connection with this
proposal, and making any appropriate revisions to the proposed forms.
After the Bureau has completed the appropriate steps, it will
prepare and issue a final rule. However, as discussed below in part
V.A, the Bureau understands from the Small Business Review Panel
process and from other outreach that lenders, settlement agents, and
others will need a period of time to update their systems and processes
to comply with the final rule and to train their employees.
Accordingly, the Bureau is asking for comment on a time period that
strikes the appropriate balance between providing consumers with
improved disclosures as soon as possible and providing industry with
the necessary time to come into compliance.
In addition, during the Small Business Review Panel, several small
business representatives requested that the Bureau provide detailed
guidance on how to complete the integrated forms, including, as
appropriate, samples of completed forms for a variety of loan
transactions. See Small Business Review Panel Report at 28. Similar
feedback was also submitted by several industry trade associations in
response to the Small Business Review Panel Outline. The Bureau also
understands from its other outreach efforts that industry has
experienced difficulties in complying with HUD's 2008 RESPA Final Rule,
in part because of a lack of detailed guidance in HUD's 2008 RESPA
Final Rule, and the many informal interpretations of the rule issued by
HUD in the HUD RESPA FAQs and HUD RESPA Roundups. Based on this
feedback and consistent with the Small Business Review Panel's
recommendation, the proposed rule contains detailed provisions
regarding the completion of the integrated disclosures, multiple
examples of completed disclosures forms in appendix H to Regulation Z,
and additional guidance and clarification in the Bureau's official
commentary to Regulation Z. Such detailed guidance has, of course,
added significant length to the proposed rule. The Bureau solicits
comment on whether the level of detail in the proposed regulations and
guidance (including the number of examples illustrating what is and is
not permitted) will make compliance more, rather than less, burdensome
and whether the Bureau should adopt a less prescriptive approach in the
final rule.
IV. Legal Authority
The Bureau is issuing this proposed rule pursuant to its authority
under TILA, RESPA, and the Dodd-Frank Act. On July 21, 2011, section
1061 of the Dodd-Frank Act transferred to the Bureau all of the HUD
Secretary's consumer protection functions relating to RESPA.\99\
Accordingly, effective July 21, 2011, the authority of HUD to issue
regulations pursuant to RESPA transferred to the Bureau. Section 1061
of the Dodd-Frank Act also transferred to the Bureau the ``consumer
financial protection functions'' previously vested in certain other
Federal agencies, including the Board. The term ``consumer financial
protection function'' is defined to include ``all authority to
prescribe rules or issue orders or guidelines pursuant to any Federal
consumer financial law, including performing appropriate functions to
promulgate and review such rules, orders, and guidelines.'' \100\ TILA,
RESPA, and title X of the Dodd-Frank Act are Federal consumer financial
laws.\101\ Accordingly, the Bureau has authority to issue regulations
pursuant to TILA and RESPA, including the disclosure requirements added
to those statutes by title XIV of the Dodd-Frank Act, as well as title
X of the Dodd-Frank Act.
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\99\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12
U.S.C. 5581(b)(7).
\100\ 12 U.S.C. 5581(a)(1).
\101\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA and RESPA).
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A. The Integrated Disclosure Mandate
Section 1032(f) of the Dodd-Frank Act requires that, ``[n]ot later
than one year after the designated transfer date [of July 21, 2011],
the Bureau shall propose for public comment rules and model disclosures
that combine the disclosures required under [TILA] and sections 4 and 5
of [RESPA], into a single, integrated disclosure for mortgage loan
transactions covered by those laws, unless the Bureau determines that
any proposal issued by the [Board] and [HUD] carries out the same
purpose.'' 12 U.S.C. 5532(f). In addition, the Dodd-Frank Act amended
section 105(b) of TILA and section 4(a) of RESPA to require the
integration of the TILA disclosures and the disclosures required by
sections 4 and 5 of RESPA.\102\ The
[[Page 51130]]
purpose of the integrated disclosure is to facilitate compliance with
the disclosure requirements of TILA and RESPA, and to help the borrower
understand the transaction by utilizing readily understandable language
to simplify the technical nature of the disclosures. Dodd-Frank Act
sections 1098, 1100A.
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\102\ Section 1100A of the Dodd-Frank Act amended TILA section
105(b) to provide that the ``Bureau shall publish a single,
integrated disclosure for mortgage loan transactions (including real
estate settlement cost statements) which includes the disclosure
requirements of this title in conjunction with the disclosure
requirements of the Real Estate Settlement Procedures Act of 1974
that, taken together, may apply to a transaction that is subject to
both or either provisions of law.'' 15 U.S.C. 1604(b). Section 1098
of the Dodd-Frank amended RESPA section 4(a) to require the Bureau
to publish a ``single, integrated disclosure for mortgage loan
transactions (including real estate settlement cost statements)
which includes the disclosure requirements of this section and
section 5, in conjunction with the disclosure requirements of the
Truth in Lending Act that, taken together, may apply to a
transaction that is subject to both or either provisions of law.''
12 U.S.C. 2603(a).
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Although Congress imposed this integrated disclosure requirement,
it did not fully harmonize the underlying statutes. In particular, TILA
and RESPA establish different timing requirements for disclosing
mortgage credit terms and costs to consumers and require that those
disclosures be provided by different parties. TILA generally requires
that, within three business days of receiving the consumer's
application and at least seven business days before consummation of
certain mortgage transactions, creditors must provide consumers a good
faith estimate of the costs of credit.\103\ TILA section 128(b)(2)(A);
15 U.S.C. 1638(b)(2)(A). If the annual percentage rate that was
initially disclosed becomes inaccurate, TILA requires creditors to
redisclose the information at least three business days before
consummation. TILA section 128(b)(2)(D); 15 U.S.C. 1638(b)(2)(D). These
disclosures must be provided in final form at consummation. TILA
section 128(b)(2)(B)(ii); 15 U.S.C. 1638(b)(2)(B)(ii). RESPA also
requires that the creditor or broker provide consumers with a good
faith estimate of settlement charges no later than three business days
after receiving the consumer's application. However, unlike TILA, RESPA
requires that, at or before settlement, ``the person conducting the
settlement'' (which may or may not be the creditor) provide the
consumer with a statement that records all charges imposed upon the
consumer in connection with the settlement. RESPA sections 4(b), 5(c);
12 U.S.C. 2603(b), 2604(c).
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\103\ This requirement applies to extensions of credit that are
both secured by a dwelling and subject to RESPA. TILA section
128(b)(2)(A); 15 U.S.C. 1638(b)(2)(A).
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The Dodd-Frank Act did not reconcile these and other statutory
differences. Therefore, to meet the Dodd-Frank Act's express
requirement to integrate the disclosures required by TILA and RESPA,
the Bureau must do so. Dodd-Frank Act section 1032(f), TILA section
105(b), and RESPA section 4(a) provide the Bureau with implicit
authority to issue regulations that reconcile certain provisions of
TILA and RESPA to carry out Congress's mandate to integrate the
statutory disclosure requirements. For the reasons discussed in this
notice, the Bureau is proposing regulations to carry out the
requirements of Dodd-Frank Act section 1032(f), TILA section 105(b),
and RESPA section 4(a).
B. Other Rulemaking and Exception Authorities
The proposed rule also relies on the rulemaking and exception
authorities specifically granted to the Bureau by TILA, RESPA, and the
Dodd-Frank Act, including the authorities discussed below.\104\
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\104\ As discussed in part II above, prior to the Dodd-Frank
Act, rulemaking authority over TILA was vested in the Board and
rulemaking authority over RESPA was vested in HUD. The Dodd-Frank
Act transferred rulemaking authority for TILA and RESPA to the
Bureau, effective July 21, 2011. See Dodd-Frank Act sections 1061,
1098, and 1100A. The Bureau implements the proposed rule pursuant to
its authorities in section 1061 of the Dodd-Frank Act.
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Truth in Lending Act
TILA section 105(a). As amended by the Dodd-Frank Act, TILA section
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations
to carry out the purposes of TILA, and provides that such regulations
may contain additional requirements, classifications, differentiations,
or other provisions, and may provide for such adjustments and
exceptions for all or any class of transactions, that the Bureau judges
are necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance. A
purpose of TILA is ``to assure a meaningful disclosure of credit terms
so that the consumer will be able to compare more readily the various
credit terms available to him and avoid the uninformed use of credit.''
TILA section 102(a); 15 U.S.C. 1601(a). This stated purpose is tied to
Congress' finding that ``economic stabilization would be enhanced and
the competition among the various financial institutions and other
firms engaged in the extension of consumer credit would be strengthened
by the informed use of credit[.]'' TILA section 102(a). Thus,
strengthened competition among financial institutions is a goal of
TILA, achieved through the effectuation of TILA's purposes.
Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
However, Dodd-Frank Act section 1100A clarified the Bureau's section
105(a) authority by amending that section to provide express authority
to prescribe regulations that contain ``additional requirements'' that
the Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance. This amendment clarified the authority to exercise TILA
section 105(a) to prescribe requirements beyond those specifically
listed in the statute that meet the standards outlined in section
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking
authority over certain high-cost mortgages pursuant to section 105(a).
As amended by the Dodd-Frank Act, TILA section 105(a) authority to make
adjustments and exceptions to the requirements of TILA applies to all
transactions subject to TILA, except with respect to the provisions of
TILA section 129 \105\ that apply to the high-cost mortgages referred
to in TILA section 103(bb), 15 U.S.C. 1602(bb). For the reasons
discussed in this notice, the Bureau is proposing regulations to carry
out TILA's purposes and is proposing such additional requirements,
adjustments, and exceptions as, in the Bureau's judgment, are necessary
and proper to carry out the purposes of TILA, prevent circumvention or
evasion thereof, or to facilitate compliance. In developing these
aspects of the proposal pursuant to its authority under TILA section
105(a), the Bureau has considered the purposes of TILA, including
ensuring meaningful disclosures, facilitating consumers' ability to
compare credit terms, and helping consumers avoid the uninformed use of
credit, and the findings of TILA, including strengthening competition
among financial institutions and promoting economic stabilization.
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\105\ 15 U.S.C. 1639. TILA section 129 contains requirements for
certain high-cost mortgages, established by the Home Ownership and
Equity Protection Act (HOEPA), which are commonly called HOEPA
loans.
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TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f),
authorizes the Bureau to exempt from all or part of TILA any class of
transactions if the Bureau determines that TILA coverage does not
provide a meaningful benefit to consumers in the form of useful
information or protection. In exercising this authority, the Bureau
must consider the factors identified in section 105(f) of TILA and
publish its rationale at the time it proposes an exemption for public
comment. Specifically, the Bureau must consider:
[[Page 51131]]
(a) The amount of the loan and whether the disclosures, right of
rescission, and other provisions provide a benefit to the consumers who
are parties to such transactions, as determined by the Bureau;
(b) The extent to which the requirements of this subchapter
complicate, hinder, or make more expensive the credit process for the
class of transactions;
(c) The status of the borrower, including--
(1) Any related financial arrangements of the borrower, as
determined by the Bureau;
(2) The financial sophistication of the borrower relative to the
type of transaction; and
(3) The importance to the borrower of the credit, related
supporting property, and coverage under this subchapter, as determined
by the Bureau;
(d) Whether the loan is secured by the principal residence of the
consumer; and
(e) Whether the goal of consumer protection would be undermined by
such an exemption.
For the reasons discussed in this notice, the Bureau is proposing to
exempt certain transactions from the requirements of TILA pursuant to
its authority under TILA section 105(f). In developing this proposal
under TILA section 105(f), the Bureau has considered the relevant
factors and determined that the proposed exemptions may be appropriate.
TILA section 129B(e). Dodd-Frank Act section 1405(a) amended TILA
to add new section 129B(e), 15 U.S.C. 1639B(e). That section authorizes
the Bureau to prohibit or condition terms, acts, or practices relating
to residential mortgage loans on a variety of bases, including when the
Bureau finds the terms, acts, or practices are not in the interest of
the borrower. In developing proposed rules under TILA section 129B(e),
the Bureau has considered whether the proposed rules are in the
interest of the borrower, as required by the statute. For the reasons
discussed in this notice, the Bureau is proposing portions of this rule
pursuant to its authority under TILA section 129B(e).
Real Estate Settlement Procedures Act
Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to
prescribe such rules and regulations and to make such interpretations
and grant such reasonable exemptions for classes of transactions as may
be necessary to achieve the purposes of RESPA. One purpose of RESPA is
to effect certain changes in the settlement process for residential
real estate that will result in more effective advance disclosure to
home buyers and sellers of settlement costs. RESPA section 2(b); 12
U.S.C. 2601(b). In addition, in enacting RESPA, Congress found that
consumers are entitled to be ``provided with greater and more timely
information on the nature and costs of the settlement process and [to
be] protected from unnecessarily high settlement charges caused by
certain abusive practices * * *'' RESPA section 2(a); 12 U.S.C.
2601(a). In the past, section 19(a) has served as a broad source of
authority to prescribe disclosures and substantive requirements to
carry out the purposes of RESPA.
In developing proposed rules under RESPA section 19(a) for this
proposal, the Bureau has considered the purposes of RESPA, including to
cause changes in the settlement process that will result in more
effective advance disclosure of settlement costs. For the reasons
discussed in this notice, the Bureau is proposing portions of this rule
pursuant to its authority under RESPA section 19(a).
Dodd-Frank Act
Dodd-Frank Act section 1021. Section 1021(a) of the Dodd-Frank Act
provides that the Bureau shall seek to implement and, where applicable,
enforce Federal consumer financial law consistently for the purpose of
ensuring that all consumers have access to markets for consumer
financial services and that markets for consumer financial products and
services are fair, transparent, and competitive. 12 U.S.C. 5511(a). In
addition, section 1021(b) of the Dodd-Frank Act provides that the
Bureau is authorized to exercise its authorities under Federal consumer
financial law for the purposes of ensuring that, with respect to
consumer financial products and services: (1) Consumers are provided
with timely and understandable information to make responsible
decisions about financial transactions; (2) consumers are protected
from unfair, deceptive, or abusive acts and practices and from
discrimination; (3) outdated, unnecessary, or unduly burdensome
regulations are regularly identified and addressed in order to reduce
unwarranted regulatory burdens; (4) Federal consumer financial law is
enforced consistently, without regard to the status of a person as a
depository institution, in order to promote fair competition; and (5)
markets for consumer financial products and services operate
transparently and efficiently to facilitate access and innovation. 12
U.S.C. 5511(b).
Accordingly, this proposal is consistent with the purposes of Dodd-
Frank Act section 1021(a) and with the objectives of Dodd-Frank Act
section 1021(b), specifically including Dodd-Frank Act section
1021(b)(1) and (3).
Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules ``as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of the Federal consumer financial laws,
and to prevent evasions thereof[.]'' 12 U.S.C. 5512(b)(1). Section
1022(b)(2) of the Dodd-Frank Act prescribes certain standards for
rulemaking that the Bureau must follow in exercising its authority
under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above,
TILA and RESPA are Federal consumer financial laws. Accordingly, the
Bureau proposes to exercise its authority under Dodd-Frank Act section
1022(b) to prescribe rules under TILA and RESPA that carry out the
purposes and prevent evasion of those laws. See part VII for a
discussion of the Bureau's standards for rulemaking under Dodd-Frank
Act section 1022(b)(2).
Dodd-Frank Act section 1032(a). Section 1032(a) of the Dodd-Frank
Act provides that the Bureau ``may prescribe rules to ensure that the
features of any consumer financial product or service, both initially
and over the term of the product or service, are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances.'' 12
U.S.C. 5532(a). The authority granted to the Bureau in section 1032(a)
is broad, and empowers the Bureau to prescribe rules regarding the
disclosure of the ``features'' of consumer financial products and
services generally. Accordingly, the Bureau may prescribe rules
containing disclosure requirements even if other Federal consumer
financial laws do not specifically require disclosure of such features.
Dodd-Frank Act section 1032(c) provides that, in prescribing rules
pursuant to section 1032, the Bureau ``shall consider available
evidence about consumer awareness, understanding of, and responses to
disclosures or communications about the risks, costs, and benefits of
consumer financial products or services.'' 12 U.S.C. 5532(c).
Accordingly, in developing proposed rules under Dodd-Frank Act section
1032(a) for this proposal, the Bureau has considered available studies,
reports, and other evidence about consumer
[[Page 51132]]
awareness, understanding of, and responses to disclosures or
communications about the risks, costs, and benefits of consumer
financial products or services. See parts II and III, above. Moreover,
the Bureau has considered the evidence developed through its consumer
testing of the integrated disclosures as well as prior testing done by
the Board and HUD regarding TILA and RESPA disclosures. See part III
for a discussion of the Bureau's testing. For the reasons discussed in
this notice, the Bureau is proposing portions of this rule pursuant to
its authority under Dodd-Frank Act section 1032(a).
In addition, Dodd-Frank Act section 1032(b)(1) provides that ``any
final rule prescribed by the Bureau under this [section 1032] requiring
disclosures may include a model form that may be used at the option of
the covered person for provision of the required disclosures.'' 12
U.S.C. 5532(b)(1). Any model form issued pursuant to that authority
shall contain a clear and conspicuous disclosure that, at a minimum,
uses plain language that is comprehensible to consumers, using a clear
format and design, such as readable type font, and succinctly explains
the information that must be communicated to the consumer. Dodd-Frank
Act 1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed in the section-by-
section analysis for proposed Sec. Sec. 1026.37(o) and 1026.38(t), the
Bureau is proposing certain model disclosures for transactions subject
to TILA, and standard forms for transactions subject to both TILA and
RESPA. For the reasons discussed in this notice, the Bureau is
proposing these model disclosures pursuant to its authority under Dodd-
Frank Act section 1032(b).
Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank
Act provides that, ``[n]otwithstanding any other provision of [title 14
of the Dodd-Frank Act], in order to improve consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures, the Bureau may, by rule, exempt from or
modify disclosure requirements, in whole or in part, for any class of
residential mortgage loans if the Bureau determines that such exemption
or modification is in the interest of consumers and in the public
interest.'' 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act,
which amends TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5), generally
defines residential mortgage loan as any consumer credit transaction
that is secured by a mortgage on a dwelling or on residential real
property that includes a dwelling other than an open-end credit plan or
an extension of credit secured by a consumer's interest in a timeshare
plan. Notably, the authority granted by section 1405(b) applies to
``disclosure requirements'' generally, and is not limited to a specific
statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a
broad source of authority to modify the disclosure requirements of TILA
and RESPA.
In developing proposed rules for residential mortgage loans under
Dodd-Frank Act section 1405(b) for this proposal, the Bureau has
considered the purposes of improving consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures, and the interests of consumers and the
public. For the reasons discussed in this notice, the Bureau is
proposing portions of this rule pursuant to its authority under Dodd-
Frank Act section 1405(b).
V. Mandatory Compliance
A. Implementation Period
As discussed in part II.E above, the Bureau is proposing rules and
disclosures that combine the pre-consummation disclosure requirements
of TILA and sections 4 and 5 of RESPA, not later than July 21, 2012,
consistent with the requirements of sections 1032(f), 1098, and 1100A
of the Dodd-Frank Act. 12 U.S.C. 2603(a); 5532(f); 15 U.S.C. 1604(b).
The Dodd-Frank Act does not impose a deadline for issuing final rules
and disclosures in connection with this mandate to integrate disclosure
requirements or provide a specific amount of time for entities subject
to those rules to come into compliance.
As discussed in part II, above, the Dodd-Frank Act establishes two
goals for the TILA-RESPA mortgage disclosure integration: To improve
consumer understanding of mortgage loan transactions; and to facilitate
industry compliance with TILA and RESPA. Dodd-Frank Act sections 1098
and 1100A. The Bureau must balance these statutory objectives in
considering the length of the implementation period. The Bureau
believes requiring industry to implement the requirements of the final
rule as soon as practicable after its issuance will benefit consumers
by expediting the use of the integrated disclosure forms, which will
improve consumer understanding of mortgage loan transactions. At the
same time, the Bureau recognizes that the creditors, mortgage brokers,
settlement agents, and other entities affected by the proposed rule
will incur one-time compliance costs, such as software upgrades to
generate the integrated disclosure forms, training staff and related
parties to use the new disclosure forms, updating compliance systems
and processes, and obtaining legal guidance.\106\ Consequently, the
Bureau believes that a reasonable implementation period would help
facilitate compliance and potentially reduce the one-time costs that
may be incurred by the entities affected by the rule.
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\106\ These one-time costs are discussed in the section 1022
analysis in part VII, below, with respect to covered persons as
defined for purposes of the Dodd-Frank Act, and the initial
regulatory flexibility analysis in part VIII, below, with respect to
small entities as defined for purposes of the Regulatory Flexibility
Act (RFA).
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The Bureau is mindful that small entities \107\ may face unique
challenges in complying with the rule. During the SBREFA Small Business
Review Panel process,\108\ the Small Business Review Panel received
feedback from small entity representatives requesting that the Bureau
provide a substantial compliance period after issuance of the final
rule. The small entity representatives reported that they anticipated
significant one-time software upgrade and training costs, though their
estimates varied greatly, and they generally stated that these costs
would be less burdensome if the Bureau provided a substantial
compliance period to upgrade systems and to train staff. The small
entity representatives requested a variety of implementation periods,
however.\109\ As detailed in the Panel Report, the Panel recommended
that the Bureau provide a compliance period that permits sufficient
time for small entities to make necessary system upgrades and provide
training, and that the Bureau solicit public comment on the amount of
time needed for such upgrades and training.\110\ Moreover, industry
feedback generally in response to the Bureau's Small Business Review
Panel process stated that an implementation period for the final rule
should provide sufficient time for training, systems development, and
the operational changes that the rule will necessitate.
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\107\ The term ``small entities'' means those entities defined
as small entities for purposes of the RFA, as discussed further in
part VIII, below. The terms ``large entities'' or ``larger
entities'' refer to all entities that are not small entities as
defined for purposes of the RFA.
\108\ See part VIII.A, below, for a discussion of the Bureau's
Small Business Review Panel process.
\109\ Small Business Review Panel Report, at 19. As noted in
chapter 8.1 of the Panel Report, the small entity representatives
generally asked for an implementation period ranging from 12 to 18
months.
\110\ See id. at p. 27.
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In feedback provided during the SBREFA process and through other
[[Page 51133]]
industry outreach, lenders, mortgage brokers, settlement agents, and
forms vendors, as well as several trade associations representing
lenders, brokers, and settlement agents, requested an implementation
period of at least 12 months. Because the TILA-RESPA final rule will
provide important benefits to consumers, the Bureau wishes to make the
rule effective as soon as possible. However, the Bureau understands
that the final rule will require lenders, mortgage brokers, and
settlement agents to make extensive revisions to their software and to
retrain their staff. In addition, some entities will be required to
implement other Dodd-Frank Act provisions, which are subject to
separate rulemaking deadlines under the statute and will have separate
effective dates. Therefore, the Bureau is seeking comment on how much
time industry needs to make these changes, and specifically requests
details on the required updates and changes to systems and other
measures that would be required to implement the rule and the amount of
time needed to make those changes.
Furthermore, in light of the feedback provided by small entity
representatives during the SBREFA process, as reflected in the Panel
Report of the Small Business Review Panel, the Bureau solicits comment
on whether small entities affected by the rule should have more time to
comply with the final rule than larger entities. In soliciting comment
on this issue, however, the Bureau notes its concern that a bifurcated
implementation period could be detrimental to consumers. During any
period where only larger entities must comply with the final rule,
consumers potentially would receive different disclosures and be
subject to different sets of consumer protections depending on their
choice of creditor, mortgage broker, or settlement agent. In addition,
larger entities that are subject to the final rule and that purchase
loans from small entities may nevertheless insist that small entities
comply with the final rules. See, e.g., Small Business Review Panel
Report at 30 (discussing recordkeeping requirements). Accordingly,
based on the Small Business Review Panel recommendation, the Bureau
solicits comment on whether any separate compliance period for larger
entities should take into account the relationship between larger and
smaller entities.
B. Delayed Effective Dates of Certain Disclosure Requirements
Established by Title XIV of the Dodd-Frank Act
As discussed above, the Bureau is proposing rules and disclosures
that combine the pre-consummation disclosure requirements of TILA and
sections 4 and 5 of RESPA, not later than July 21, 2012, consistent
with the requirements of section 1032(f) of the Dodd-Frank Act. 12
U.S.C. 5532(f). The Dodd-Frank Act does not impose a deadline for
issuing final rules and disclosures.
In addition to this integrated disclosure requirement in title X,
various provisions of title XIV of the Dodd-Frank Act amend TILA,
RESPA, and other consumer financial laws to impose new pre-consummation
disclosure requirements for mortgage transactions. These provisions
generally require disclosure of certain information when a consumer
applies for a mortgage loan or shortly before consummation of the loan,
around the same time that consumers will receive the integrated TILA-
RESPA disclosures required by section 1032(f) of the Dodd-Frank Act. If
regulations that are required to implement the disclosure requirements
in title XIV are not prescribed in final form within eighteen months
after the designated transfer date (i.e., by January 21, 2013),
institutions must comply with the statutory requirements on that date.
Dodd-Frank Act section 1400(c)(3); 15 U.S.C. 1601 note.
The Bureau believes that implementing a single, consolidated
disclosure that satisfies section 1032(f) and certain of the disclosure
requirements in title XIV of the Dodd-Frank Act will benefit consumers
and facilitate compliance with TILA and RESPA. That is, the Bureau
believes that both consumers and industry will benefit by incorporating
many of the disclosure requirements in title XIV into this proposal
(collectively, the ``Affected Title XIV Disclosures''). Consumers will
benefit from a consolidated disclosure that conveys loan terms and
costs to consumers in a coordinated way. Lenders and settlement agents
will benefit by integrating two sets of overlapping disclosures into a
single form and by avoiding regulatory burden associated with revising
systems and practices multiple times. However, given the broad scope
and complexity of this rulemaking and the 120-day comment period
provided by this proposal, a final rule will not be issued by January
21, 2013. Absent a final implementing rule, institutions would have to
comply with the Affected Title XIV Disclosures on that date due to the
statutory requirement that any section of title XIV for which
regulations have not been issued by January 21, 2013 shall take effect
on that date. This likely would result in widely varying approaches to
compliance in the absence of regulatory guidance, creating confusion
for consumers, and would impose a significant burden on industry. For
example, this could result in a consumer who shops for a mortgage loan
receiving different disclosures from different creditors. Such
disclosures would not only be unhelpful to consumers, but likely would
be confusing since the same disclosures would be provided in widely
different ways. Moreover, implementing the title XIV disclosures
separately from the integrated TILA-RESPA disclosure would increase
compliance costs and burdens on industry. Nothing in the Dodd-Frank Act
itself or its legislative history suggests that Congress contemplated
how the separate requirements in titles X and XIV would work
together.\111\
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\111\ Certain of the Affected Title XIV Disclosures highlight
that Congress did not intend for the title XIV disclosure
requirements and the integrated TILA-RESPA disclosure to operate
independently. For example, Dodd-Frank Act section 1419 amended
paragraphs (a)(16) through (19) of TILA section 128 to require
additional content on the disclosure provided to consumers within
three days of application and in final form at or before
consummation. 15 U.S.C. 1638(a)(16) through (19). Pursuant to TILA
section 128(b)(1), for residential mortgage transactions, all
disclosures required by TILA section 128(a) must be ``conspicuously
segregated'' from all other information provided in connection with
the transaction. 15 U.S.C. 1638(b)(1). Therefore, these sections are
directly implicated by the integrated TILA-RESPA requirement.
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Accordingly, and for the further reasons set forth below, the
Bureau proposes to implement the Affected Title XIV Disclosures by
delaying those requirements by temporarily exempting entities from the
requirement to comply on January 21, 2013, until a final rule
implementing the integrated TILA-RESPA disclosures take effect,
pursuant to the Bureau's authority under TILA section 105(a), RESPA
section 19(a), Dodd-Frank Act section 1032(a) and, for residential
mortgage loans, Dodd-Frank Act section 1405(b). 15 U.S.C. 1604(a); 12
U.S.C. 2617(a); 12 U.S.C. 5532(a); 15 U.S.C. 1601 note. Implementing
the Affected Title XIV Disclosures as part of the broader integrated
TILA-RESPA rulemaking, rather than issuing rules implementing each
requirement individually or allowing those statutory provisions to take
effect by operation of law, will improve the overall effectiveness of
the integrated disclosure for consumers and reduce burden on industry.
The Bureau will issue a final
[[Page 51134]]
rule finalizing the proposed delay prior to January 21, 2013.
Specifically, as set forth in the section-by-section analysis to
proposed Sec. 1026.1(c), the Bureau proposes to delay those
requirements by temporarily exempting entities from the requirement to
comply on January 21, 2013. This is, in effect, a delay of the
effective date of the following statutory provisions:
Warning regarding negative amortization features. Dodd-
Frank Act section 1414(a); TILA section 129C(f)(1).\112\
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\112\ Dodd-Frank Act section 1414(a) also added to TILA new
section 129C(f)(2), which requires first-time borrowers for certain
residential mortgage loans that could result in negative
amortization to provide the creditor with documentation to
demonstrate that the consumer received homeownership counseling from
organizations or counselors certified by HUD. That provision is
implemented in the Bureau's 2012 HOEPA Proposal, which also
implements the requirement of RESPA section 5(c), added by section
1450 of the Dodd-Frank Act, that lenders provide borrowers with a
list of certified homeownership counselors.
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Disclosure of State law anti-deficiency protections. Dodd-
Frank Act section 1414(c); TILA section 129C(g)(2) and (3).
Disclosure regarding creditor's partial payment policy.
Dodd-Frank Act section 1414(d); TILA section 129C(h).
Disclosure regarding mandatory escrow accounts. Dodd-Frank
Act section 1461(a); TILA section 129D(h).
Disclosure regarding waiver of escrow at consummation.
Dodd-Frank Act section 1462; TILA section 129D(j)(1)(A).
Disclosure of monthly payment, including escrow, at
initial and fully-indexed rate for variable-rate transactions. Dodd-
Frank Act section 1419; TILA section 128(a)(16).
Repayment analysis disclosure to include amount of escrow
payments for taxes and insurance. Dodd-Frank Act section 1465; TILA
128(b)(4).
Disclosure of settlement charges and fees and the
approximate amount of the wholesale rate of funds. Dodd-Frank Act
section 1419; TILA section 128(a)(17).
Disclosure of mortgage originator fees. Dodd-Frank Act
section 1419; TILA section 128(a)(18).
Disclosure of total interest as a percentage of principal.
Dodd-Frank Act section 1419; TILA section 128(a)(19).
Optional disclosure of appraisal management company fee.
Dodd-Frank Act section 1475; RESPA section 4(c).
The Bureau is not proposing to delay the effective date for the
following disclosure requirements found in title XIV of the Dodd-Frank
Act, and therefore these provisions are not Affected Title XIV
Disclosures for purposes of this discussion. These provisions will be
implemented in separate rulemakings, which are expected to be proposed
in summer 2012 and finalized by January 21, 2013, with the specific
effective dates set out in the final rules for those specific
rulemakings.
Disclosure regarding notice of reset of hybrid adjustable
rate mortgage. Dodd-Frank Act section 1418(a); TILA section 128A(a).
The Bureau does not propose to delay this requirement because it
applies, for the most part, to the period after consummation.
Loan originator identifier requirement. Dodd-Frank section
1402(a)(2); TILA section 129B(b)(1)(B). The Bureau does not propose to
delay this requirement because it applies broadly to ``loan
documents.'' In the integrated TILA-RESPA final rule, the Bureau will
harmonize the loan originator identifier provisions of this proposal
with the separate rulemaking implementing TILA section 129B(b)(1)(B).
Disclosure regarding waiver of escrow after consummation.
Dodd-Frank Act section 1462; TILA section 129D(j)(1)(B). The Bureau
does not propose to delay this requirement because it applies to the
period after consummation and because it will be implemented by final
rule pursuant to an outstanding proposal published by the Board. 76 FR
11598 (Mar. 2, 2011).
Consumer notification regarding appraisals for higher-risk
mortgages. Dodd-Frank Act section 1471; TILA section 129H(d). The
Bureau does not propose to delay this requirement because it overlaps
substantially with an existing disclosure requirement under ECOA (see
below) and must be implemented through an interagency rulemaking. In
the integrated TILA-RESPA final rule, the Bureau plans to harmonize the
appraisal notification provisions of this proposal with the separate
rulemaking implementing TILA section 129H(d), so that once the
integrated form is finalized creditors will be able to use the
integrated forms to satisfy the 129H(d) requirement.
Consumer notification regarding the right to receive an
appraisal copy. Dodd-Frank Act section 1474; ECOA section 701(e)(5).
The Bureau does not propose to delay this requirement because it
replaces an existing disclosure requirement under ECOA that is
typically provided separately from other disclosures. In the integrated
TILA-RESPA final rule, the Bureau will harmonize the provisions with
the separate rulemaking implementing ECOA section 701(e)(5), so that
once the integrated form is finalized creditors will be able to use it
to satisfy the ECOA requirement.
As discussed in the section-by-section analysis to proposed Sec.
1026.19, the integrated disclosure provisions of this proposal apply to
closed-end transactions secured by real property, other than reverse
mortgages as defined in Sec. 1026.33(a). However, under the statute,
the Affected Title XIV Disclosures vary in scope and are in some cases
broader than the scope of the proposed integrated disclosure
provisions.\113\ For example, certain of the Affected Title XIV
Disclosures apply to open-end credit plans,\114\ transactions secured
by dwellings that are not real property,\115\ and/or reverse
mortgages,\116\ which are not the subject of this rulemaking. However,
because the final scope of the integrated disclosure provisions is not
yet known, the Bureau is proposing to delay the Affected Title XIV
Disclosures to the fullest extent those requirements could apply under
the statutory provisions. However, the Bureau also solicits comment on
whether the final rule implementing the integrated disclosures should
implement the Affected Title
[[Page 51135]]
XIV Disclosures for open-end credit plans, transactions secured by
dwellings that are not real property, and reverse mortgages, as
applicable, by requiring creditors to comply with the proposed
provisions that implement those disclosure requirements.
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\113\ Except as described below, the Affected Title XIV
Disclosures apply to ``residential mortgage loans,'' which are
defined in TILA section 103(cc)(5). 15 U.S.C. 1602(cc)(5). TILA
section 129C(f)(1) (requiring a negative amortization warning)
applies to open- or closed-end consumer credit plans secured by a
dwelling. 15 U.S.C. 1639c(f)(1). TILA section 129D(h) (disclosure
regarding mandatory escrow accounts) applies to consumer credit
transactions secured by a first lien on the principal dwelling of
the consumer, other than open-end credit plans and reverse
mortgages. 15 U.S.C. 1639d(h). TILA section 129D(j)(1)(A) applies to
consumer credit transactions secured by real property. 15 U.S.C.
1639d(j)(1)(A). TILA section 128(b)(4) (requiring escrow amounts to
be included in the repayment analysis disclosure) applies to
consumer credit transactions secured by a first lien on the
consumer's principal dwelling, other than open-end plans or reverse
mortgages. 15 U.S.C. 1638(b)(4). RESPA section 4(c) (permitting an
appraisal management fee disclosure) applies to ``federally related
mortgage loans.'' 12 U.S.C. 2603(c). To the extent these statutory
provisions do not cover transactions that are within the scope of
the integrated disclosure provisions of this proposal (e.g., vacant
land), the Bureau is proposing to modify the statutory requirements
to cover those transactions. See the section-by-section analysis to
proposed Sec. 1026.19.
\114\ The following Affected Title XIV Disclosures apply to
open-end credit plans: TILA section 129C(f) (negative amortization
warning); TILA section 129D(j)(1)(A) (disclosure regarding waiver of
escrow at consummation); RESPA section 4(c) (appraisal management
company fee disclosure).
\115\ All of the Affected Title XIV Disclosures, other than TILA
section 129D(j)(1)(A) (disclosure regarding waiver of escrow at
consummation) and RESPA section 4(c) (appraisal management company
fee disclosure), apply to transactions secured by dwellings that are
not real property.
\116\ All of the Affected Title XIV Disclosures, other than TILA
section 128(b)(4) (requiring repayment analysis to include escrow)
and TILA section 12D(h) (mandatory escrow or impound account
disclosure), apply to reverse mortgages.
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Improving Overall Effectiveness of Disclosures
Issuing final rules implementing the Affected Title XIV Disclosures
at the same time as the integrated TILA-RESPA final rule will improve
the overall effectiveness of the integrated disclosure. One of TILA's
primary purposes is to ``assure a meaningful disclosure of credit terms
* * * and avoid the uninformed use of credit.'' TILA section 102(a); 15
U.S.C. 1601(a). Similarly, one purpose of RESPA is to improve advance
disclosure of settlement costs. RESPA section 2(b)(1); 12 U.S.C.
2601(b)(1). As discussed above, however, TILA, RESPA, and current
Regulations Z and X generally require that consumers receive two
separate disclosures after applying for a mortgage loan, and then
receive two additional separate disclosures prior to closing on that
loan. Concerns have been raised that duplicative disclosures may reduce
consumer understanding of mortgage loan transactions and increase
burden on industry. Thus, when viewed together, the duplicative
disclosures required by TILA and RESPA may inhibit consumers'
understanding of their loans. Section 1032(f) of the Dodd-Frank Act
addresses these concerns by directing the Bureau to integrate these
disclosure requirements to improve consumer understanding of mortgage
disclosures.
This same rationale supports delaying the requirements of the
Affected Title XIV Disclosures until such time as the Bureau issues a
final rule implementing the broader TILA-RESPA integration.
Incorporating the Affected Title XIV Disclosures will enable the Bureau
to use the results of its consumer testing and public feedback to
develop forms that include these pre-consummation disclosures in a way
that could improve overall consumer understanding of mortgage loan
transactions. Implementing the Affected Title XIV Disclosures in
isolation could have the opposite effect, by multiplying the number of
individual disclosures that consumers receive, thereby reducing the
likelihood that consumers will focus on any of them.
Through consumer testing, the Bureau has specifically examined how
the required disclosures should work together on the integrated
disclosure to maximize consumer understanding. For example, in its
consumer testing of the integrated disclosures, the Bureau tested and
solicited public feedback on clauses related to the Affected Title XIV
Disclosures to determine how the language will be understood by
consumers, both separately and in the context of the overall form.
The Bureau estimates that, by incorporating Affected Title XIV
Disclosures that would otherwise be provided separately, the total page
count for pre-consummation TILA and RESPA disclosures would be reduced
by as much as 50 percent. The Bureau believes that this reduction will
not only improve consumer understanding of mortgage transactions, but
also facilitate compliance as discussed below. Consumer testing also
indicates that some disclosures are either not helpful or are
detrimental to consumer understanding; as discussed in the section-by-
section analysis below, the Bureau proposes to use its authority to
modify these disclosures to enhance consumer understanding.
Facilitating Compliance by Reducing Regulatory Burden
As noted above, another purpose of the integrated TILA-RESPA
disclosure is to facilitate compliance with the requirements and
purposes of those statutes. TILA section 105(b); 15 U.S.C. 1604(b);
RESPA section 4(a); 12 U.S.C. 2603(a). Delaying the effective date of
the Affected Title XIV Disclosures until a rule implementing the
integrated TILA-RESPA disclosure is final will further this purpose by
reducing regulatory burden. A substantial burden would be imposed if
entities were required to revise their systems and practices twice--
once to comply with the Affected Title XIV Disclosures and again to
comply with the final rule integrating the TILA and RESPA disclosures.
Implementing the changes twice would be particularly burdensome because
compliance with the Affected Title XIV Disclosures will involve
modifying forms and systems, updating compliance manuals, and training
staff regarding the new disclosures.
Implementing the Affected Title XIV Disclosures as part of the
integrated TILA-RESPA rulemaking will reduce regulatory burden by
allowing entities to adopt all the necessary changes at one time.
Implementing a single, consolidated disclosure will also reduce ongoing
regulatory burden because an integrated disclosure is less costly to
provide than a series of disclosures.
Legal Authority
For the reasons discussed above, the Bureau proposes to exercise
its authority under TILA section 105(a) and (f), RESPA section 19(a),
Dodd-Frank section 1032(a), and, for residential mortgage loans, Dodd-
Frank Act section 1405(b) to, in effect, delay the effective date of
the Affected Title XIV Disclosures by exempting regulated entities from
these provisions until a final rule implementing Dodd-Frank Act section
1032(f) takes effect. 15 U.S.C. 1604(a); 12 U.S.C. 2617(a); 12 U.S.C.
5532(a); 15 U.S.C. 1601 note. TILA section 105(a) gives the Bureau
authority to adjust or except from the disclosure requirements of TILA
all or any class of transactions to effectuate the purposes of TILA or
facilitate compliance. As set forth above, delaying the Affected Title
XIV Disclosures until such time as a final rule implementing the
integrated TILA-RESPA disclosures takes effect achieves the purpose of
TILA to promote the informed use of credit through a more effective,
consolidated disclosure, and facilitates compliance by reducing
regulatory burden associated with revising systems and practices
multiple times and providing multiple disclosures to consumers.
The Bureau also proposes the exemption pursuant to TILA section
105(f). The Bureau has considered the factors in TILA section 105(f)
and believes that an exemption is appropriate under that provision.
Specifically, the Bureau believes that the proposed exemption is
appropriate for all affected borrowers, regardless of their other
financial arrangements and financial sophistication and the importance
of the loan to them. Similarly, the Bureau believes that the proposed
exemption is appropriate for all affected loans, regardless of the
amount of the loan and whether the loan is secured by the principal
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers.
As discussed above, the Bureau believes that the exemption provides
a benefit to consumers through a more effective, consolidated
disclosure. Absent an exemption, the Affected Title XIV Disclosures
would complicate and hinder the mortgage lending process because
consumers would receive inconsistent disclosures and, likely, numerous
additional pages of Federal disclosures that do not work together in a
meaningful way. The Bureau also believes that the cost of credit would
be increased if the Affected Title XIV Disclosures take effect
independent of the larger TILA-RESPA integration
[[Page 51136]]
because industry would be required to revise systems and practices
multiple times. The Bureau has also considered the status of mortgage
borrowers in issuing the proposed exemptions, and believes the
exemption is appropriate to improve the informed use of credit. The
Bureau does not believe that the goal of consumer protection would be
undermined by the exemption, because of the risk that layering the
Affected Title XIV Disclosures on top of existing mandated disclosures
would lead to consumer confusion. The exemption allows the Bureau to
coordinate the changes in a way that improves overall consumer
understanding of the disclosures.
RESPA section 19(a) provides the Bureau with authority to grant
exemptions from the requirements of RESPA as necessary to achieve the
purposes of RESPA. As discussed above, one purpose of RESPA is to
achieve more effective advance disclosure to home buyers and sellers of
settlement costs. RESPA section 2(b)(1); 12 U.S.C. 2601(b). Delaying
the Affected Title XIV Disclosures until such time as a final rule
implementing the integrated TILA-RESPA disclosures takes effect will
result in a more effective disclosure and improve consumer
understanding and will facilitate compliance by reducing regulatory
burden, as discussed above.
In addition, section 1405(b) of the Dodd-Frank Act gives the Bureau
authority to exempt from or modify disclosure requirements for any
class of residential mortgage loans if the Bureau determines that the
exemption or modification is in the interest of consumers and the
public. As discussed above, implementing the Affected Title XIV
Disclosures with the integrated TILA-RESPA disclosure is in the
interest of consumers because it allows the Bureau to coordinate the
changes in a way that improves overall consumer understanding of the
disclosures. Further, implementing the Affected Title XIV Disclosures
as part of the integrated disclosure rulemaking is in the public
interest because it produces a more efficient regulatory scheme by
incorporating multiple, potentially confusing disclosures into clear
and understandable forms through consumer testing.
Finally, consistent with section 1032(a) of the Dodd-Frank Act,
implementing the Affected Title XIV Disclosures together with the
integrated disclosure would ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances. The Bureau
believes that implementing a single, consolidated disclosure will
benefit consumers and facilitate compliance with TILA and RESPA. For
these reasons, the Bureau is proposing to delay the Affected Title XIV
Disclosures until the Bureau issues a final rule implementing the
integrated TILA-RESPA disclosure required by section 1032(f) of the
Dodd-Frank Act.
The Bureau is proposing to implement the Affected Title XIV
Disclosures in Sec. 1026.1(c), which is discussed further in the
section-by-section analysis below. This proposal, therefore,
incorporates the Affected Title XIV Disclosures as part of the
integrated disclosure. The Bureau views proposed Sec. 1026.1(c) as
prescribing the required rules in final form pursuant to Dodd-Frank Act
section 1400(c)(1)(A) and the effective date of the final rule
implementing the delay of the Affected Title XIV Disclosures as
satisfying Dodd-Frank Act section 1400(c)(1)(B).
The Bureau plans to issue a final rule implementing this exemption
before the statutory provisions take effect in January 2013. For this
reason, the Bureau is providing a comment period of 60 days for the
proposed amendments to Sec. 1026.1(c), rather than the 120-day comment
period provided for all other aspects of this proposed rule other than
Sec. 1026.4, to permit the Bureau to evaluate comments received in
response to this aspect of the proposal before issuing a final rule.
The Bureau plans to issue a final notice that would remove this
regulatory exemption at the time a final rule implementing the
integrated TILA-RESPA disclosure takes effect, but solicits comment on
whether the regulatory exemption should sunset on a specific date.
C. Potential Exemptions from Disclosure Requirements
As discussed in part III, above, one of the Bureau's primary
considerations in developing the integrated disclosures was to minimize
the risk of information overload and enhance consumers' overall
understanding of mortgage loan and real estate transactions. To that
end, the integrated disclosures highlight information that is important
to consumers in comparing and evaluating mortgage loans and deemphasize
information that is secondary to consumer understanding. In addition,
as discussed in the section-by-section analysis, below, the Bureau is
proposing to use its exemption and modification authority to exempt
transactions subject to proposed Sec. 1026.19(e) and (f) from certain
disclosure requirements that consumer testing and research indicate are
confusing and unhelpful to consumers. Specifically, the Bureau is
proposing to use its authority under TILA section 105(a) and (f), Dodd-
Frank Act section 1032(a) and, for residential mortgage loans, Dodd-
Frank Act section 1405(b) to omit from the Loan Estimate provided three
business days after receipt of the consumer's application: the amount
financed (TILA section 128(a)(2)), the finance charge (TILA section
128(a)(3)), a statement that the creditor is taking a security interest
in the consumer's property (TILA section 128(a)(9)), a statement that
the consumer should refer to the appropriate contract document for
information about their loan (TILA section 128(a)(12)), a statement
regarding certain tax implications (TILA section 128(a)(15)), and the
creditor's cost of funds (TILA section 128(a)(17)). See the section-by-
section analysis to proposed Sec. 1026.37(l). Although the Bureau is
generally proposing to require these disclosures on the Closing
Disclosure provided three business days prior to consummation, the
Bureau is alternatively proposing to use its exemption and modification
authority to omit the creditor's cost of funds disclosure (TILA section
128(a)(17)) and the total interest percentage disclosure (TILA section
128(a)(19)) from both the Loan Estimate and the Closing Disclosure. See
the section-by-section analysis to proposed Sec. Sec. 1026.37(l) and
1026.38(o).
For these same reasons, the Bureau solicits comment on additional
disclosures that appear on the integrated disclosures that are
unhelpful or potentially confusing to consumers and whether the Bureau
should use its authority under TILA section 105(a) and (f), Dodd-Frank
Act section 1032(a) and, for residential mortgage loans, Dodd-Frank Act
section 1405(b) to exempt transactions subject to proposed Sec.
1026.19(e) and (f) from any such disclosure requirements. The Bureau
believes exempting transactions from those disclosure requirements
would promote the informed use of credit and facilitate compliance,
consistent with TILA section 105(a). For the same reasons, the Bureau
believes such exemptions would be appropriate under TILA section 105(f)
for all affected borrowers, regardless of their other financial
arrangements and financial sophistication and the importance of the
loan to them, and for all affected loans, regardless of the amount of
the loan and whether the loan is secured by the principal residence of
the consumer and
[[Page 51137]]
would simplify the credit process without undermining the goal of
consumer protection or denying important benefits to consumers. Any
such exemption would also ensure that the features of the transaction
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to better understand the costs, benefits,
and risks associated with the mortgage transaction, in light of the
facts and circumstances, consistent with Dodd-Frank Act section
1032(a), and would improve consumer awareness and understanding of
residential mortgage loans, which is in the interest of consumers and
the public, consistent with Dodd-Frank Act section 1405(b).
VI. Section-by-Section Analysis
As discussed above, TILA's mortgage disclosure requirements are
currently implemented in Regulation Z, whereas RESPA's mortgage
disclosure requirements are currently implemented in Regulation X.
Regulation Z contains detailed regulations and guidance regarding
disclosures for mortgage transactions, whereas Regulation X largely
relies on the GFE and HUD-1 forms. The Bureau understands that the
additional detail in Regulation Z facilitates compliance by industry,
which is one of the goals of this rulemaking.\117\ Accordingly, the
Bureau is proposing to establish the integrated disclosure requirements
in Regulation Z, while making conforming and other amendments to
Regulation X.\118\ However, as discussed above, the Bureau solicits
comment on whether the level of detail in the proposed regulations and
guidance (including the number of examples illustrating what is and is
not permitted) will make compliance more, rather than less, burdensome
and whether the Bureau should adopt a less prescriptive approach in the
final rule.
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\117\ For example, the small financial service providers who
advised the Small Business Review Panel stated that ambiguity in the
application or interpretation of the current RESPA disclosure
requirements produces substantial costs in the form of legal fees,
staff training, and, for settlement agents, preparing forms
differently for different lenders. To address this concern, these
providers generally requested that the Bureau provide clear guidance
on how to fill out the forms, similar to that currently provided in
Regulation Z. See Small Business Review Panel Report at 19-20.
\118\ The Bureau is proposing to retain established regulatory
terminology in Regulations X and Z for consistency.
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As discussed in detail below with respect to proposed Sec.
1026.19, certain mortgage transactions that are subject to TILA are not
subject to RESPA and vice versa. As proposed, the integrated mortgage
disclosures would apply to most closed-end consumer credit transactions
secured by real property. Certain types of loans that are currently
subject to TILA but not RESPA (construction-only loans and loans
secured by vacant land or 25 or more acres) would be subject to the
proposed integrated disclosure requirements, whereas others (such as
mobile home loans and other loans that are secured by a dwelling but
not real property) would remain solely subject to the existing
Regulation Z disclosure requirements. Reverse mortgages are excluded
from coverage of the proposed integrated disclosures and would
therefore remain subject to the current Regulation X and Z disclosure
requirements until the Bureau addresses those unique transactions in a
separate, future rulemaking. Finally, consistent with the current rules
under TILA, the integrated mortgage disclosures would not apply to
mortgage loans made by persons who are not ``creditors'' as defined by
Regulation Z (such as persons who make five or fewer mortgage loans in
a year), although such loans would continue to be subject to RESPA.
A. Regulation X
Section 1024.5 Coverage of RESPA
5(a) Applicability
For the reasons discussed below under proposed Sec. 1024.5(c), the
Bureau is proposing to use its authority under RESPA section 19(a) and,
for residential mortgage loans, Dodd-Frank Act section 1405(b) to
exempt certain transactions from the existing RESPA GFE and RESPA
settlement statement requirements of Regulation X. The Bureau therefore
is proposing a conforming amendment to Sec. 1024.5(a) to reflect these
partial exemptions pursuant to the same authority.
5(b) Exemptions
5(b)(1)
Section 1024.5(b)(1) currently exempts from the coverage of RESPA
and Regulation X loans on property of 25 acres or more. The Bureau
believes that most loans that fall into this category are separately
exempt under a provision excluding extensions of credit primarily for
business, commercial, or agricultural purposes, set forth in Sec.
1024.5(b)(2). Accordingly, the Bureau proposes to exercise its
authority under RESPA section 19(a) and, for residential mortgage
loans, Dodd-Frank Act section 1405(b) to eliminate the Regulation X
exemption. This amendment will render the TILA and RESPA regimes more
consistent, which promotes more effective advance disclosure of
settlement costs (which is a purpose of RESPA). In addition, this
consistency will improve consumer awareness and understanding of
transactions involving residential mortgage loans and is therefore in
the interest of consumers and the public, consistent with Dodd-Frank
Act section 1405(b). Because it is unclear whether any mortgages are
exempt based solely on Sec. 1024.5(b)(1), the Bureau solicits comment
on the number of loans that may be affected by this aspect of the
proposal and any reasons for any continued exemption of loans on
property of 25 acres or more.
5(c) Partial Exemptions for Certain Mortgage Loans
As discussed further below, the Bureau proposes to exercise its
authority under RESPA section 19(a), Dodd-Frank Act section 1032(a)
and, for residential mortgage loans, Dodd-Frank Act section 1405(b) to
add new Sec. 1024.5(c), which would exempt two types of federally
related mortgage loans from coverage of the RESPA settlement cost
booklet, GFE, and settlement statement requirements of Sec. Sec.
1024.6, 1024.7, 1024.8, and 1024.10. This partial exemption would apply
to: (1) federally related mortgage loans that are subject to the
integrated disclosures the Bureau is proposing in Regulation Z Sec.
1026.19(e) and (f) and (2) federally related mortgage loans that
satisfy specified criteria associated with certain housing assistance
loan programs for low- and moderate-income persons. As described
further below, these exemptions are designed to create consistency with
the integrated disclosures under Regulation Z and to codify a
disclosure exemption previously granted by HUD. However, the exemptions
would retain coverage of affected loans for all other requirements of
Regulation X, such as the servicing requirements in RESPA section 6,
prohibitions on referral fees and kickbacks in RESPA section 8, and
limits on amounts to be deposited in escrow accounts in RESPA section
10.
5(c)(1)
Pursuant to the authority discussed above, proposed Sec.
1024.5(c)(1) exempts from the RESPA settlement cost booklet, GFE, and
settlement statement requirements of Sec. Sec. 1024.6, 1024.7, 1024.8,
and 1024.10 federally related mortgage loans that are subject to the
special disclosure requirements for certain consumer credit
transactions secured by real property set forth in Regulation Z, under
proposed Sec. 1026.19(e) and (f). As discussed in detail below,
proposed Sec. 1026.19(e) and (f) establishes the integrated
disclosures
[[Page 51138]]
for compliance both with sections 4 and 5 of RESPA and with TILA
disclosures required for mortgage transactions, as mandated by section
1032(f) of the Dodd-Frank Act. Accordingly, compliance with Sec. Sec.
1024.6, 1024.7, 1024.8, and 1024.10 is unnecessary for transactions
that are subject to Sec. 1026.19(e), (f) and (g) of Regulation Z.
Because proposed Sec. 1026.19(e) and (f) governs all closed-end
transactions secured by real property other than reverse mortgages, the
only federally related mortgage loans that will continue to comply with
the Regulation X GFE and settlement statement requirements are reverse
mortgages. The Bureau plans to address the disclosure requirements for
reverse mortgages in a separate later rulemaking, at which time the
Bureau may revise or eliminate the remaining disclosure provisions in
Regulation X.
5(c)(2)
Proposed Sec. 1024.5(c)(2) exempts from the RESPA settlement cost
booklet, GFE, and settlement statement requirements of Sec. Sec.
1024.6, 1024.7, 1024.8, and 1024.10 federally related mortgage loans
that satisfy several criteria associated with certain housing
assistance loan programs for low- and moderate-income persons. This
provision cross-references proposed 12 CFR 1026.3(h), which codifies an
exemption issued by HUD on October 6, 2010.\119\ Under the HUD
exemption, lenders need not provide the GFE and settlement statement
when six prerequisites are satisfied: (1) the loan is secured by a
subordinate lien; (2) the loan's purpose is to finance downpayment,
closing costs, or similar homebuyer assistance, such as principal or
interest subsidies, property rehabilitation assistance, energy
efficiency assistance, or foreclosure avoidance or prevention; (3)
interest is not charged on the loan; (4) repayment of the loan is
forgiven or deferred subject to specified conditions; (5) total
settlement costs do not exceed one percent of the loan amount and are
limited to fees for recordation, application, and housing counseling;
and (6) the loan recipient is provided at or before settlement with a
written disclosure of the loan terms, repayment conditions, and costs
of the loan.
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\119\ See http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_14574.pdf.
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In granting this partial exemption, HUD invoked its authority under
RESPA section 19(a) to grant ``reasonable exemptions for classes of
transactions, as may be necessary to achieve the purposes of [RESPA].''
HUD determined that, for transactions meeting the criteria listed
above, the RESPA GFE and settlement statement forms would be difficult
to complete in a meaningful way and would be likely to confuse
consumers who received them. Moreover, because of the limited, fixed
fees involved with such transactions, the comparison shopping purpose
of the GFE would not be achieved. Finally, the alternative written
disclosure required as a prerequisite of the exemption would ensure
that consumers understand the loan terms and settlement costs charged.
To facilitate compliance, the Bureau is proposing to codify this
exemption in Regulations X and Z for the same reasons and under the
same authority as cited by HUD. In addition, the Bureau relies on its
authority under Dodd-Frank Act section 1405(b) because the proposed
exemption will improve consumer awareness and understanding of
transactions due to these same concerns discussed involving residential
mortgage loans in the identified class of transactions and is therefore
in the interest of consumers and the public.
The Bureau is proposing to adopt this exemption with the same
prerequisites established by HUD. The Bureau seeks comment, however, on
whether the same rationale for the exemption still would exist
regardless of lien position and, therefore, the subordinate lien
position should be eliminated as a requirement for the exemption. The
Bureau also seeks comment concerning the prerequisite that the loan
contract not ``require the payment of interest.'' As noted above, the
exemption as issued by HUD requires that the loan ``carr[y] an interest
rate of -0- percent.'' This wording may be interpreted narrowly to
refer only to the rate of interest stated in the note or loan contract
but not to other requirements or features that may serve as interest
substitutes. For example, such a narrow reading would mean that loans
requiring private mortgage insurance or loans having shared-equity or
shared-appreciation features could qualify for this exemption, provided
the note recites an interest rate of zero percent. The Bureau's
wording, on the other hand, could be interpreted as disallowing such
requirements and features because they are essentially interest
substitutes. The Bureau therefore seeks comment on whether such
requirements and features should be considered ``interest'' and,
therefore, should be impermissible for loans seeking to qualify for
this partial exemption. In addition, the Bureau seeks comment on other
types of loan requirements and features that should be similarly deemed
``interest'' for purposes of this partial exemption. Alternatively, the
Bureau seeks comment on whether this provision should be eliminated.
Appendix A--Instructions for Completing HUD-1 and HUD-1A Settlement
Statements; Sample HUD-1 and HUD-1A Statements
As previously discussed, the Bureau proposes to require creditors
to use the integrated Closing Disclosure required by Sec. Sec.
1026.19(f) and 1026.38 to satisfy the disclosure requirements under
RESPA section 4 for most closed-end transactions covered by RESPA,
except for reverse mortgage transactions. Currently, the manner in
which reverse mortgage transactions are disclosed on the HUD-1 or HUD-
1A under appendix A of Regulation X is a source of confusion for
creditors. HUD attempted to clarify the use of the RESPA settlement
disclosure in reverse mortgage transactions by issuing frequently-asked
questions, the HUD RESPA FAQs, the most recent of which was released on
April 2, 2010. The Bureau proposes to exercise its authority under
RESPA section 19(a) to modify appendix A of Regulation X to incorporate
the guidance provided by the HUD RESPA FAQs because, under the proposed
rule, the closing of reverse mortgage transactions will continue to be
disclosed using the RESPA settlement statement. The proposed revisions
can be found in the instructions for lines 202, 204 and page 3, loan
terms.
The Bureau believes that adopting this guidance will improve the
effectiveness of the disclosures when used for reverse mortgages,
thereby reducing industry confusion and advancing the purpose of RESPA
to provide more effective advanced disclosure of settlement costs to
both the consumer and the seller in the real estate transaction,
consistent with RESPA section 19(a).
Appendix B--Illustrations of Requirements of RESPA
Appendix B to part 1024 contains illustrations of requirements
under RESPA. Illustration 12 provides a factual situation where a
mortgage broker provides origination services to submit a loan to a
lender for approval. The mortgage broker charges the borrower a uniform
fee for the total origination services, as well as a direct up-front
charge for reimbursement of credit reporting, appraisal services, or
similar charges. To address this factual situation, illustration 12
provides a comment that: the mortgage broker's fee
[[Page 51139]]
must be itemized in the Good Faith Estimate and on the HUD-1 Settlement
Statement; other charges that are paid for by the borrower and paid in
advance of consummation are listed as paid outside closing on the HUD-1
Settlement Statement, and reflect the actual provider charge for such
services; and any other fee or payment received by the mortgage broker
from either the lender or the borrower arising from the initial funding
transaction, including a servicing release premium or yield spread
premium, is to be noted on the Good Faith Estimate and listed in the
800 series of the HUD-1 Settlement Statement.
Subsequent to the guidance provided in illustration 12, Regulation
Z Sec. 1026.36(d)(2) was adopted. Section 1026.36(d)(2) states:
If any loan originator receives compensation directly from a
consumer in a consumer credit transaction secured by a dwelling: (i)
No loan originator shall receive compensation, directly or
indirectly, from any person other than the consumer in connection
with the transaction; and (ii) No person who knows or has reason to
know of the consumer-paid compensation to the loan originator (other
than the consumer) shall pay any compensation to a loan originator,
directly or indirectly, in connection with the transaction.
The last sentence in illustration 12 clearly contemplates the loan
originator, a mortgage broker, receiving compensation from the lender
as well as the borrower, which therefore describes a factual situation
prohibited by Sec. 1026.36(d)(2). Accordingly, for consistency with
Sec. 1026.36(d)(2), the Bureau proposes to exercise its authority
under RESPA section 19(a) to delete the last sentence of the comment
provided in illustration 12 in Appendix B to part 1024.
Appendix C--Instructions for Completing Good Faith Estimate (GFE) Form
As previously discussed, the Bureau proposes to require creditors
to use the integrated loan estimate required by Sec. Sec. 1026.19(e)
and 1026.37 to satisfy the disclosure requirements under RESPA section
5 for most closed-end transactions covered by RESPA, except for reverse
mortgage transactions. Currently, the manner in which reverse mortgage
transactions are disclosed on the RESPA GFE under appendix C of
Regulation X is a source of confusion for creditors. HUD clarified the
use of the RESPA GFE in reverse mortgage transactions in the HUD RESPA
FAQs. The Bureau proposes to exercise its authority under RESPA section
19(a) to modify appendix C of Regulation X to incorporate the guidance
provided by the HUD RESPA FAQs because, under the proposed rule,
reverse mortgage transactions will continue to be disclosed using the
RESPA GFE. The proposed revisions can be found in the instructions for
the ``Summary of your loan'' and ``Escrow account information''
sections. The Bureau believes that these revisions satisfy the purpose
of RESPA to provide more effective advanced disclosure of settlement
costs to both the consumer and the seller in the real estate
transaction.
Section 1026.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
The Bureau is proposing conforming amendments to Sec. 1026.1 to
reflect the fact that, under this proposal, Regulation Z implements not
only TILA, but also certain provisions of RESPA. The details of the
regulatory implementation of these statutory requirements are discussed
below, under the applicable sections of Regulation Z. To reflect the
expanded statutory scope of Regulation Z, the proposed conforming
amendments revise Sec. 1026.1(a) (authority), (b) (purpose), (d)(5)
(organization of subpart E), and (e) (enforcement and liability) to
include references to the relevant provisions of RESPA.
1(c) Coverage
As discussed in part V.B, the Bureau is proposing to exempt persons
temporarily from the disclosure requirements of sections 128(a)(16)
through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129C(h),
129D(h), and 129D(j)(1)(A) of TILA and section 4(c) of RESPA, until
regulations implementing the integrated disclosures required by section
1032(f) of the Dodd-Frank Act take effect. 15 U.S.C. 1638(a)(16)-(19),
1638(b)(4), 1639c(f)(1), 1639c(g), 1639c(h), 1639d(h), and
1639d(j)(1)(A); 12 U.S.C. 2604(c); 12 U.S.C. 5532(f). Proposed Sec.
1026.1(c)(5) implements this exemption by stating that no person is
required to provide the disclosures required by the statutory
provisions listed above. Proposed comment 1(c)(5)-1 explains that Sec.
1026.1(c)(5) implements the above-listed provisions of TILA and RESPA
added by the Dodd-Frank Act by exempting persons from the disclosure
requirements of those sections. The comment clarifies that the
exemptions provided in proposed Sec. 1026.1(c)(5) are intended to be
temporary and will apply only until compliance with the regulations
implementing the integrated disclosures required by section 1032(f) of
the Dodd-Frank Act become mandatory. Proposed comment 1(c)(5)-1 also
clarifies that the exemption in proposed Sec. 1026.1(c)(5) does not
exempt any person from any other requirement of Regulation Z,
Regulation X, or of TILA or RESPA. For the reasons discussed in part
V.B, the Bureau is providing a comment period of 60 days for the
proposed amendments to Sec. 1026.1(c). In addition, as discussed above
in part V.B, the Bureau requests comment on whether the exemptions
provided in proposed Sec. 1026.1(c)(5) should expire after a specified
period of time.
Section 1026.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(3) Application
Background
Neither TILA nor RESPA defines the term ``application.'' Although
Regulation Z does not define this term, for the good faith estimate
disclosures currently required by Sec. 1026.19(a), Regulation Z
incorporates the Regulation X definition. See comment 19(a)(1)(i)-3.
Section 1024.2(b) of Regulation X defines application as ``the
submission of a borrower's financial information in anticipation of a
credit decision relating to a federally related mortgage loan, which
shall include the borrower's name, the borrower's monthly income, the
borrower's social security number to obtain a credit report, the
property address, an estimate of the value of the property, the
mortgage loan amount sought, and any other information deemed necessary
by the loan originator.'' 12 CFR 1024.2(b). This definition, adopted as
part of HUD's 2008 RESPA Final Rule, was intended to ensure that
consumers received a RESPA GFE containing reliable estimates of
settlement costs early in the process of shopping for a mortgage loan.
However, in response to concerns that a narrow definition of
application might inhibit preliminary underwriting, the definition
adopted by HUD includes seven elements, one of which is ``any other
information deemed necessary by the loan originator.'' HUD added this
``catch-all'' element to enable creditors to collect any additional
information deemed necessary to underwrite a loan.
Concerns With the Current Definition Under Regulation X
While the Bureau believes that creditors should be able to collect
information in addition to the six elements, the Bureau is concerned
that the seventh catch-all element may
[[Page 51140]]
permit creditors to delay providing consumers with the integrated Loan
Estimate. One primary purpose of the integrated Loan Estimate is to
inform consumers of the cost of credit when they have bargaining power
to negotiate for better terms and time to compare other financing
options. It is vital, however, that creditors be able to collect the
information necessary to originate loans in a safe and sound manner.
The Bureau does not believe that these principles conflict. The
definition of application does not define or limit underwriting; it
instead establishes a point in time at which disclosure obligations
begin.
Based on this premise, the definition of ``application'' should
facilitate consumers' ability to receive reliable estimates early in
the loan process, but should not restrict a creditor's ability to
determine which information is necessary for sound underwriting.
Removing the catch-all element from the definition under Regulation X
may ensure that the disclosures are received both early in the loan
process and based on the information most critical to providing
reliable estimates. Consumers would be able to receive the disclosures
as soon as consumers provide creditors with the information needed for
reliable estimation. Creditors would be able to collect whatever
information is, in the creditor's view, necessary for a reasonably
reliable estimate, provided that it collects the additional information
prior to collecting the six pieces of information specified in proposed
Sec. 1026.2(a)(3)(ii), which are the consumer's name, income, and
social security number to obtain a credit report, as well as the
property address, an estimate of the value of the property, and the
mortgage loan amount sought. For example, if a creditor believes that a
reliable estimate cannot be provided without information related to the
consumer's combined current liabilities, the creditor may collect this
information, provided that it does so prior to, or at the same time as,
collecting the six pieces of information specified in Sec.
1026.2(a)(3)(ii). The Bureau acknowledges that creditors could
strategically order information collection in a manner that best suits
the needs of the creditor. Even if the creditor did so, the Bureau
believes that the definition would enable the consumers to receive the
disclosures early in the loan process. This approach may also ensure
that consumers are not required to disclose sensitive information, such
as the consumer's social security number or income, until after the
creditor collects less sensitive information. Thus, removing the
seventh catch-all element, while preserving creditors' ability to
collect any additional necessary information, may strike the
appropriate balance between the needs of consumers and the needs of
industry.
This approach also dovetails with the requirements of proposed
Sec. 1026.19(e) establishing limitations on fee increases for the
purposes of determining good faith, but which are subject to several
exceptions, including exceptions based on the information the creditor
relied on in disclosing the estimated loan costs. Thus, the proposed
definition of application, by requiring creditors to collect any
additional information prior to collecting the six pieces of
information specified in Sec. 1026.2(a)(3)(ii), maintains creditors'
current flexibility in deciding which additional information is
necessary for providing estimates. For example, if a creditor chooses
to collect a consumer's combined liability information prior to
collecting the six pieces of information specified in Sec.
1026.2(a)(3)(ii), the disclosures provided pursuant to Sec. 1026.19(e)
may reflect such information. If the consumer's combined liabilities
subsequently increase, the creditor may issue a revised disclosure
reflecting the change in information relied upon in providing the
original disclosure. If a different creditor chooses to rely on only
the six pieces of information specified in Sec. 1026.2(a)(3)(ii) in
providing the disclosures, but during underwriting information related
to the consumer's combined liabilities is discovered, and such
information requires a revision in loan terms, the creditor may issue a
revised disclosure reflecting such new information not previously
relied on in providing the disclosures. But neither creditor may delay
providing consumers with the disclosures in the first instance by
claiming that additional information related to the consumer's combined
liabilities is required after the consumer has provided the six pieces
of information specified in Sec. 1026.2(a)(3)(ii). Thus, removal of
the seventh catch-all element may achieve the same outcome from the
creditor's perspective as under the current Regulation X definition,
while inhibiting the ability of creditors to delay providing consumers
with the disclosures. This approach has the added benefit of being a
uniform standard for disclosure obligations across all creditors, which
facilitates compliance and supervision.
Accordingly, pursuant to its authority under section 105(a) of TILA
and 19(a) of RESPA, the Bureau is proposing to add Sec.
1026.2(a)(3)(i) to define ``application'' as the submission of a
consumer's financial information for the purposes of obtaining an
extension of credit. Proposed Sec. 1026.2(a)(3)(ii) provides that,
except for purposes of subpart B, subpart F, and subpart G, the term
consists of the consumer's name, income, and social security number to
obtain a credit report, and the property address, an estimate of the
value of the property, and the mortgage loan amount sought. For the
reasons discussed above, removal of the seventh catch-all element from
the definition of application may help carry out the purposes of TILA
by promoting the informed use of credit and achieve the purposes of
RESPA by promoting more effective advance disclosure of settlement
costs by encouraging creditors to provide consumers with good faith
estimates of loan terms and costs earlier in the process.
The Bureau has received feedback, including a comment received in
response to the 2011 Streamlining Proposal, requesting a single
definition of ``application'' under Regulation Z, Regulation B (which
implements the Equal Credit Opportunity Act), and Regulation C (which
implements the Home Mortgage Disclosure Act). The Bureau recognizes the
potential consistency benefits of a single definition. However, for the
reasons discussed above, the Bureau believes that the proposed
definition provides important benefits to consumers in this context.
During the Small Business Panel Review process, several small
entity representatives expressed concern about eliminating the seventh
prong of the definition of application currently under Regulation X.
See Small Business Review Panel Report at 33-34, 49, and 67. Based on
this feedback and consistent with the recommendation of the Small
Business Review Panel, the Bureau solicits comment on what, if any,
additional specific information beyond the six items included under the
proposed definition of application is needed to provide a reasonably
accurate Loan Estimate. See id. at 29.
The proposed definition of application consists of two parts. The
first part establishes a broad definition for all of Regulation Z. The
second part provides that an application consists of six elements of
data. These elements, which are currently set forth in the definition
of application in Regulation X, have an established significance in the
context of closed-end loans secured by real property, but may be less
significant or even inapplicable to other types of credit. Thus, these
six elements
[[Page 51141]]
do not apply to Subpart B (open-end loans), Subpart F (student loans),
and Subpart G (special rules for credit card accounts and open-end
credit offered to college students).
Proposed comment 2(a)(3)-1 explains that a consumer's submission of
financial information is for purposes of obtaining an extension of
credit. A creditor is free to collect information in addition to that
listed in Sec. 1026.2(a)(3)(ii) that it deems necessary in connection
with the request for the extension of credit. However, once a creditor
has received the six listed pieces of information, it has an
application for purposes of Sec. 1026.2(a)(3). The proposed comment
also contains illustrative examples of this provision.
Proposed comment 2(a)(3)-2 clarifies that, if a consumer does not
have a social security number, the creditor may instead request
whatever unique identifier the creditor uses to obtain a credit report.
For example, a creditor has obtained a social security number to obtain
a credit report for purposes of Sec. 1026.2(a)(3)(ii) if the creditor
collects a Tax Identification Number from a consumer who does not have
a social security number, such as a foreign national. This comment is
consistent with guidance provided by HUD in the HUD RESPA FAQs p. 7,
14 (``GFE--General'').
Proposed comment 2(a)(3)-3 clarifies that the creditor's receipt of
a credit report fee does not affect whether an application has been
received. Section 1026.19(a)(1)(iii) permits the imposition of a fee to
obtain the consumer's credit history prior to the delivery of the
disclosures required under Sec. 1026.19(a)(1)(i). Section
1026.19(e)(2)(i)(B) permits the imposition of a fee to obtain the
consumer's credit report prior to the delivery of the disclosures
required under Sec. 1026.19(e)(1)(i). Whether, or when, such fees are
received is irrelevant for the purposes of the definition in Sec.
1026.2(a)(3) and the timing requirements in Sec. 1026.19(a)(1)(i) and
(e)(1)(iii). For example, if, in a transaction subject to Sec.
1026.19(e)(1)(i), a creditor receives the six pieces of information
identified under Sec. 1026.2(a)(3)(ii) on Monday, June 1, but does not
receive a credit report fee from the consumer until Tuesday, June 2,
the creditor does not comply with Sec. 1026.19(e)(1)(iii) if it
provides the disclosures required under Sec. 1026.19(e)(1)(i) after
Thursday, June 4. The three-business-day period beings on Monday, June
1, the date the creditor received the six pieces of information. The
waiting period does not begin on Tuesday, June 2, the date the creditor
received the credit report fee.
2(a)(6) Business Day
Although neither RESPA nor TILA defines ``business day,'' that term
is defined in Regulations X and Z. Both Regulation X Sec. 1024.2(b)
and Regulation Z Sec. 1026.2(a)(6) generally define ``business day''
to mean a day on which the offices of the creditor or other business
entity are open to the public for carrying on substantially all of the
entity's business functions. For certain provisions of Regulation Z,
however, an alternative definition applies. Under this definition,
``business day'' means all calendar days except Sundays and the legal
public holidays specified in 5 U.S.C. 6103(a), i.e., New Year's Day,
the Birthday of Martin Luther King, Jr., Washington's Birthday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day.
The alternative definition of business day applies to, among other
things, the three-business-day limitation on the imposition of fees in
Sec. 1026.19(a)(1)(ii) and the three- and seven-business-day waiting
periods in Sec. 1026.19(a)(2). As discussed below, the Bureau is
proposing to amend Sec. 1026.19 to implement the integrated disclosure
requirement in section 1032(f) of the Dodd-Frank Act by adding new
paragraphs (e) and (f). Accordingly, for consistency and to facilitate
compliance with TILA, the Bureau is proposing to use its authority
under TILA section 105(a) to amend Sec. 1026.2(a)(6) to apply the
alternative definition of business day to the provisions of paragraphs
(e) and (f) that are analogous to Sec. 1026.19(a)(1)(i), (a)(1)(ii),
and (a)(2). The Bureau also proposes conforming amendments to comment
2(a)(6)-2.
The Bureau recognizes that this issue was previously raised during
the Board's 2008-2009 MDIA rulemaking. See 73 FR 74989 at 74991 (Dec.
10, 2008) and 74 FR 23289 at 23293-23294 (May 19, 2009). However, the
Bureau believes that applying the alternative definition of business
day to the integrated disclosures would facilitate compliance. The
Bureau solicits feedback regarding whether the general definition of
business day instead should apply to the integrated disclosure delivery
requirements. The Bureau also solicits comment on whether the rules
should be analogous to the current rules, where the general business
day requirement applies to some requirements and the alternative
business day requirement applies to other requirements. Finally, the
Bureau seeks feedback regarding whether the business day usage under
current Sec. 1026.19(a) should remain, or if Sec. 1026.19(a) should
be modified to use a single definition of business day consistent with
proposed Sec. 1026.19(e) and (f).
2(a)(17) Creditor
Under current Regulation Z, a person who extended consumer credit
25 or fewer times in the past calendar year, or five or fewer times for
transactions secured by a dwelling, is exempt from the definition of
``creditor.'' See Sec. 1026.2(a)(17)(v). The Bureau's 2011
Streamlining Proposal specifically requested comment on whether these
thresholds should be raised and, if so, to what number of transactions.
In addition, the proposal solicited comment on whether a similar
exemption should be applied to the pre-consummation disclosure
requirements under RESPA that will be integrated with the TILA
requirements pursuant to Dodd-Frank Act section 1032(f). In response,
trade association commenters suggested raising the threshold number of
transactions in order to reduce regulatory burden on more small
lenders. For example, one trade association commenter suggested raising
the threshold number of transactions to 50, regardless of transaction
type. In light of this feedback, the Bureau requests comment on whether
the five-loan exemption threshold is appropriate for transactions
subject to this proposed rule and, if not, what number of transactions
would be appropriate. The Bureau also solicits comment on whether any
transaction-based exemption adopted in this rulemaking should be
applied to the pre-consummation disclosure requirements of sections 4
and 5 of RESPA.
2(a)(25) Security Interest
Pursuant to its authority under TILA section 105(a), the Bureau
proposes a conforming amendment to the definition of ``security
interest'' in current Sec. 1026.2(a)(25). Under the current definition
of security interest, for purposes of the disclosure requirements in
Sec. Sec. 1026.6 and 1026.18, the term does not include an interest
that arises solely by operation of law. For consistency and to
facilitate compliance with TILA, the Bureau's proposed amendment
extends that exemption to disclosures required under proposed
Sec. Sec. 1026.19(e) and (f) and 1026.38(l)(6). The same conforming
amendment would be made to comment 2(a)(25)-2.
[[Page 51142]]
Section 1026.3 Exempt Transactions
The Bureau is proposing a partial exemption from the disclosure
requirements of proposed Sec. 1026.19(e), (f), and (g) for certain
mortgage loans. The Bureau therefore is proposing conforming amendments
to Sec. 1026.3(h) to reflect this exemption. The Bureau is also
proposing amendments to the commentary to Sec. 1026.3(a) to clarify
the current exemption for certain trusts.
3(a) Business, Commercial, Agricultural, or Organizational Credit
TILA section 104(1), 15 U.S.C. 1603(1), excludes from TILA's
coverage extensions of credit to, among others, organizations.
Accordingly, Sec. 1026.3(a)(2) provides that Regulation Z does not
apply to extensions of credit to other than a natural person. The
Bureau is proposing to revise comments 3(a)-9 and -10 to clarify that
credit extended to certain trusts for tax or estate planning purposes
is considered to be extended to a natural person rather than to an
organization and, therefore, is not exempt from the coverage of
Regulation Z under Sec. 1026.3(a)(2).
Existing comment 3(a)-10 discusses land trusts, a relatively
uncommon way of structuring consumer credit in which the creditor holds
title to the property in trust and executes the loan contract as
trustee on behalf of the trust. The comment states that, although a
trust is technically not a natural person, such arrangements are
subject to Regulation Z because ``in substance (if not form) consumer
credit is being extended.'' This proposal amends comment 3(a)-10 to
extend this rationale to more common forms of trusts. Specifically,
proposed comment 3(a)-10 notes that consumers sometimes place their
assets in trust with themselves as trustee(s), and with themselves or
themselves and their families or other prospective heirs as
beneficiaries, to obtain certain tax benefits and to facilitate the
future administration of their estates. Under this proposal, revised
comment 3(a)-10 states that Regulation Z applies to credit that is
extended to such a trust, even if the consumer who is both trustee and
beneficiary executes the loan documents only in the capacity of the
trustee, for the same reason the existing comment notes with respect to
land trusts: Such transactions are extensions of consumer credit in
substance, if not in form. Comment 3(a)-9 would be revised to cross-
reference comment 3(a)-10.
3(h) Partial Exemption for Certain Mortgage Loans
The Bureau is proposing a new Sec. 1026.3(h) to provide an
exemption from proposed Sec. 1026.19(e), (f), and (g) for transactions
that satisfy several criteria associated with certain housing
assistance loan programs for low- and moderate-income persons. As
discussed below, proposed Sec. 1026.19(e) and (f) establishes the
requirement to provide the new integrated disclosures for transactions
secured by real property, other than reverse mortgages, and proposed
Sec. 1026.19(g) establishes the requirement to provide a special
information booklet for those transactions. The partial exemption in
proposed Sec. 1026.3(h) parallels Sec. 1024.5(c)(3), discussed above.
The exemptions are designed to create consistency with Regulation X and
to codify a disclosure exemption previously granted by HUD. Thus, under
the two proposed exemptions, lenders would be exempt from providing the
RESPA-mandated closing cost disclosures for federally related mortgage
loans that satisfy the exemption's conditions, even if the transaction
otherwise would be subject to RESPA.
The Bureau proposes this exemption pursuant to its authority under
TILA section 105(a) and (f), RESPA section 19(a), Dodd-Frank Act
section 1032(a), and, for residential mortgage loans, Dodd-Frank Act
section 1405(b). The Bureau believes that the proposed exemption will
create consistency with Regulation X and therefore facilitate
compliance with TILA and RESPA. In addition, the Bureau believes the
special disclosure requirements that covered persons must meet to
qualify for the proposed exemption will help ensure that the features
of these mortgage transactions are fully, accurately. and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with these mortgage
transactions, consistent with Dodd-Frank Act section 1032(a). The
proposed exemption will also improve consumer awareness and
understanding of transactions involving residential mortgage loans,
which is in the interest of consumers and the public, consistent with
Dodd-Frank Act section 1405(b). The Bureau has considered the factors
in TILA section 105(f) and believes that, for the reasons discussed
above, an exception is appropriate under that provision. Specifically,
the Bureau believes that the proposed exemption is appropriate for all
affected borrowers, regardless of their other financial arrangements
and financial sophistication and the importance of the loan to them.
Similarly, the Bureau believes that the proposed exemption is
appropriate for all affected loans, regardless of the amount of the
loan and whether the loan is secured by the principal residence of the
consumer. Furthermore, the Bureau believes that, on balance, the
proposed exemption will simplify the credit process without undermining
the goal of consumer protection or denying important benefits to
consumers.
The proposed exemption applies only to transactions secured by a
subordinate lien. For the same reasons discussed in the section-by-
section analysis to proposed Sec. 1024.5(c)(3), the Bureau requests
comment on whether the exemption in proposed Sec. 1026.3(h) should
extend to first liens. In addition, for the reasons discussed above,
the Bureau seeks comment on whether requirements and features that may
serve as interest substitutes should be considered ``interest'' and,
therefore, should be impermissible for loans seeking to qualify for
this partial exemption. The Bureau also seeks comment on the types of
loan requirements and features that should be similarly deemed
``interest'' for purposes of this partial exemption. Alternatively, the
Bureau seeks comment on whether such requirements and features should
be permissible within the exemption on the grounds that the disclosure
required by proposed Sec. 1026.3(h)(6) is sufficient to inform
consumers of such loan terms.
Proposed comments provide additional guidance. Proposed comment
3(h)-1 notes that transactions that meet the requirements of Sec.
1026.3(h) are exempt from only the integrated disclosure requirements
and not from any other applicable requirement of Regulation Z. The
comment further clarifies that Sec. 1026.3(h)(6) requires the creditor
to comply with the disclosure requirements of Sec. 1026.18, even if
the creditor would not otherwise be subject to that section because of
proposed Sec. 1026.19(e), (f), and (g). In addition, the comment notes
that the consumer also has the right to rescind the transaction under
Sec. 1026.23, to the extent that provision is applicable.
Proposed comment 3(h)-2 explains that the conditions that the
transaction not require the payment of interest under Sec.
1026.3(h)(3) and that repayment of the amount of credit extended be
forgiven or deferred in accordance with Sec. 1026.3(h)(4) must be
evidenced by terms in the credit contract. The comment further
clarifies that, although the other conditions need not be reflected in
the credit contract, the creditor must retain evidence of compliance
with those requirements, as required by Sec. 1026.25(a). The Bureau
[[Page 51143]]
solicits comment on whether this exemption should be adopted in
Regulation Z.
Section 1026.4 Finance Charge
TILA's Approach to the Finance Charge
Section 106(a) of TILA defines the finance charge as ``the sum of
all charges, payable directly or indirectly by the person to whom the
credit is extended, and imposed directly or indirectly by the creditor
as an incident to the extension of credit,'' excluding charges of a
type payable in a comparable cash transaction. 15 U.S.C. 1605(a).
Despite this broad general definition of the finance charge, TILA
contains numerous exceptions. For example, TILA generally includes in
the finance charge credit insurance and property and liability
insurance charges or premiums, but it also excludes such amounts if
certain conditions are met. 15 U.S.C. 1605(b), (c); TILA section
106(b), (c). TILA also specifically excludes from the finance charge
certain charges related to the perfecting of the security interest, and
various fees in connection with loans secured by real property, such as
title examination fees, title insurance premiums, fees for preparation
of loan-related documents, escrows for future payment of taxes and
insurance, notary fees, appraisal fees, pest and flood-hazard
inspection fees, and credit report fees. 15 U.S.C. 1605(d), (e); TILA
section 106(d), (e). Such amounts would otherwise be included in the
finance charge under the general definition.
Current Regulatory Approach to the Finance Charge
Current Sec. 1026.4 implements TILA section 106 by largely
mirroring the statutory definition of finance charge and the specific
exclusions from that definition. In addition, Sec. 1026.4 contains
certain exclusions from the finance charge that are not specifically
listed in the statute. For example, current Sec. 1026.4(c)
specifically excludes application fees and forfeited interest from the
definition of finance charge, whereas TILA does not.
There are longstanding concerns about the ``some fees in, some fees
out'' approach to the finance charge in TILA and Regulation Z. Early
concerns about the problems with this approach to the finance charge
are outlined in the Board-HUD Joint Report. Board-HUD Joint Report at
10. The Board-HUD Joint Report states that a fundamental problem with
the finance charge is that the ``cost of credit'' has different
meanings from the perspective of the consumer and the creditor. Id.
From the creditor's perspective, the cost of credit may mean the
interest and fee income that the creditor receives in exchange for
providing credit to the consumer. Id. However, the consumer views the
cost of credit as what the consumer pays for the credit, regardless of
the persons to whom such amounts are paid. Id. The current ``some fees
in, some fees out'' approach to the finance charge largely reflects the
creditor's perspective, not the consumer's.
In its 2009 Closed-End Proposal, the Board proposed to broaden the
definition of the finance charge in closed-end transactions secured by
real property or a dwelling, citing the Board-HUD Joint Report and
consumer testing conducted by the Board as support for an expanded
approach to the finance charge. 74 FR 43232, 43243 (Aug. 26, 2009).
First, the Board reasoned that excluding certain fees from the finance
charge undermines the effectiveness of the APR as a measure of the true
cost of credit. Id. Second, the Board's 2009 Closed-End Proposal stated
that the numerous exclusions from the finance charge encourage lenders
to shift the cost of credit to excluded fees. Id. This practice
undermines the usefulness of the APR and has resulted in the creation
of new so-called ``junk fees,'' such as fees for preparing loan-related
documents, which are not part of the finance charge. Third, the Board
cited the complexity of the implementing rules, which create
significant regulatory burden and litigation risk, as support for a
simplified definition of the finance charge. Id.
In light of these concerns about the finance charge, for closed-end
credit transactions secured by real property or a dwelling, the Board's
2009 Closed-End Proposal would have replaced the ``some fees in, some
fees out'' approach to the finance charge with a more inclusive
approach to ensure that the finance charge and corresponding APR
disclosed to consumers provides a more complete and useful measure of
the cost of credit. The Board did not finalize its proposal prior to
the transfer of its TILA rulemaking authority to the Bureau.
The Bureau's Proposal
For the reasons set forth in the Board's 2009 Closed-End Proposal,
discussed above, proposed Sec. 1026.4 revises the test for determining
the finance charge. Except where otherwise noted, the Bureau's proposal
generally mirrors the Board's 2009 Closed-End Proposal. Pursuant to its
authority under TILA section 105(a) and (f), Dodd-Frank Act section
1032(a), and, for residential mortgage loans, Dodd-Frank Act section
1405(b), the Bureau is proposing to amend Sec. 1026.4 to replace the
current ``some fees in, some fees out'' approach to the finance charge
with a simpler, more inclusive test based on the general definition of
finance charge in TILA section 106(a). 15 U.S.C. 1601 note; 1604(a),
(f); 12 U.S.C. 5532(a). The proposed changes to Sec. 1026.4 apply to
closed-end transactions secured by real property or a dwelling, and are
not limited to transactions subject to proposed Sec. 1026.19(e) and
(f).
Under proposed Sec. 1026.4, the current exclusions from the
finance charge would be largely eliminated, for closed-end transactions
secured by real property or a dwelling. Specifically, under the
proposed test, a fee or charge is included in the finance charge if it
is (1) ``payable directly or indirectly by the consumer'' to whom
credit is extended, and (2) ``imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.''
However, the finance charge would continue to exclude fees or charges
paid in comparable cash transactions. The proposed rule also retains a
few narrow exclusions from the finance charge. As discussed below,
proposed Sec. 1026.4 continues to exclude from the finance charge late
fees and similar default or delinquency charges, seller's points,
amounts required to be paid into escrow accounts if the amounts would
not otherwise be included in the finance charge, and premiums for
property and liability insurance if certain conditions are met.
The Bureau proposes Sec. 1026.4 pursuant to its authority under
TILA section 105(a) and (f), Dodd-Frank-Act section 1032(a), and, for
residential mortgage loans, Dodd-Frank Act section 1405(b). The Bureau
has considered the purposes for which it may exercise its authority
under TILA section 105(a) and, based on that review, believes that the
proposed adjustments and exceptions are appropriate. The proposal would
effectuate TILA's purpose by better informing consumers of the total
cost of credit and prevent circumvention or evasion of the statute
through the unbundling or shifting of the cost of credit from items
that are included in the finance charge to fees or charges that are
currently excluded from the finance charge. The Bureau has considered
the factors in TILA section 105(f) and believes that, for the reasons
discussed above, an exception is appropriate under that provision.
Specifically, the Bureau believes that the proposed exemption is
appropriate for all affected borrowers, regardless of their other
financial arrangements and financial sophistication and the
[[Page 51144]]
importance of the loan to them. Similarly, the Bureau believes that the
proposed exemption is appropriate for all affected loans, regardless of
the amount of the loan and whether the loan is secured by the principal
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers. A more inclusive approach to the
finance charge may improve the process of mortgage lending by enhancing
consumer understanding of the finance charge and APR, and will also
reduce compliance costs. The Bureau does not believe that the proposed
exemptions undermine the goal of consumer protection; rather they
promote and are more consistent with the overall purposes of TILA.
Based on that review, the Bureau believes that treating the fees that
are currently exempt as part of the finance charge, for closed-end
transactions secured by real property or a dwelling, is appropriate.
In addition, for the reasons set forth above, the proposed changes
to the finance charge will ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances, consistent
with section 1032(a) of the Dodd-Frank Act. Finally, for closed-end
transactions secured by real property or a dwelling that are also
residential mortgage loans as defined in TILA section 103(cc)(5), the
Bureau proposes Sec. 1026.4 pursuant to its authority under Dodd-Frank
Act section 1405(b). For the reasons set forth above, including
avoiding consumer confusion and preventing the unbundling of the cost
of credit, the Bureau believes this proposed modification may improve
consumer understanding, and therefore is in the interest of consumers
and the public.
Industry feedback in response to the Bureau's Small Business Review
Panel Outline raised concerns about the usefulness of the proposed
expansion of the finance charge in light of the Bureau's proposal to
deemphasize the finance charge and APR in the disclosures provided to
consumers within three days of the consumers' application and prior to
consummation, as discussed below in the section-by-section analysis for
proposed Sec. Sec. 1026.37(l) and 1026.38(o). The Bureau has
considered this feedback in developing the proposed rule, but
nevertheless believes that, in addition to benefiting industry by
simplifying the finance charge and APR calculation, the proposed
approach could provide important benefits to consumers in the form of
an APR that better reflects the true cost of credit. The Bureau intends
to develop supplemental educational materials to further explain how to
use the finance charge and APR in comparing loan costs over the long
term. Accordingly, the Bureau's proposal to remove exclusions from the
finance charge is one of several ways the Bureau intends to improve the
disclosure as a useful measure for consumers.
The Bureau recognizes that the proposed more inclusive finance
charge could affect coverage under other laws, such as higher-priced
mortgage loan and HOEPA protections, and that a more inclusive finance
charge has implications for the HOEPA, Escrow, Appraisals, and Ability
to Repay rulemakings identified in part II.F above. Absent further
action by the Bureau, the more inclusive finance charge would:
Cause more closed-end loans to trigger HOEPA protections
for high-cost loans.\120\ The protections include special disclosures,
restrictions on certain loan features and lender practices, and
strengthened consumer remedies. The more inclusive finance charge would
affect both the points and fees test (which currently uses the finance
charge as its starting point) and the APR test (which under Dodd-Frank
will depend on comparisons to APOR) for defining what constitutes a
high-cost loan.
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\120\ Under the Dodd-Frank Act, a loan is defined as a high-cost
mortgage, subject to HOEPA protections, if the total points and fees
payable in connection with the transaction exceed specified
thresholds (points and fees coverage test); the transaction's APR
exceeds the applicable APOR by a specified threshold (APR coverage
test); or the transaction has certain prepayment penalties. First,
under the points and fees coverage test, the definition of points
and fees includes, as its starting point, all items included in the
finance charge. Therefore, a potential consequence of the more
inclusive finance charge is that more loans might exceed HOEPA's
points and fees threshold because new categories of charges would be
included in the calculation of total points and fees for purposes of
that coverage test. In addition, under the APR coverage test, the
more inclusive finance charge could result in some additional loans
being covered as high-cost mortgages because closed-end loans would
have higher APRs. There are currently some differences between APR
and the average prime offer rate, which is generally calculated
using data that includes only contract interest rate and points but
not other origination fees. See 75 FR 58660-58662. The current APR
includes not only discount points and origination fees but also
other charges the creditor retains and certain third-party charges.
The more inclusive finance charge, which would also include most
third-party charges, would widen the disparity between the APR and
APOR and cause more closed-end loans to qualify as a high-cost
mortgage. The Bureau notes that substantially similar implications
would apply to each respective rulemaking in which coverage depends
on comparing a transaction's APR to the applicable APOR. In
addition, the Bureau notes that the Dodd-Frank Act expands HOEPA to
apply to more types of mortgage transactions, including purchase
money mortgage loans and open-end credit plans secured by a
consumer's principal dwelling. However, the proposed more inclusive
finance charge applies only to closed-end loans. Therefore, the
Bureau notes that the more inclusive finance charge would not affect
the potential coverage of open-end credit plans under HOEPA.
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Cause more loans to trigger Dodd-Frank Act requirements to
maintain escrow accounts for first-lien higher-priced mortgage loans.
Coverage depends on comparing a transaction's APR to the applicable
APOR.
Cause more loans to trigger Dodd-Frank Act requirements to
obtain one or more interior appraisals for ``higher-risk'' mortgage
loans. Coverage depends on comparing a transaction's APR to the
applicable APOR.
Reduce the number of loans that would otherwise be
``qualified mortgages'' under the Dodd-Frank Act Ability to Repay
requirements, given that qualified mortgages cannot have points and
fees in excess of three percent of the loan amount. Also, more loans
could be required to comply with separate underwriting requirements
applicable to higher-priced balloon loans, and could be ineligible for
certain exceptions authorizing creditors to offer prepayment penalties
on fixed-rate, non-higher-priced qualified mortgage loans.\121\ Again,
status as a higher-priced mortgage loan depends on comparing APR to
APOR.
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\121\ Specifically, the Dodd-Frank Act generally prohibits
prepayment penalties on closed-end, dwelling-secured mortgage loans,
except on fixed-rate qualified mortgages that are not higher-priced
mortgage loans. For balloon loans, the Dodd-Frank Act generally
requires creditors to assess consumers' ability to repay a higher-
priced loan with a balloon payment using the scheduled payments
required under the terms of the loan including any balloon payment,
and based on income and assets other than the dwelling itself. Only
consumers with substantial income or assets would likely qualify for
such a loan. A separate Dodd-Frank Act provision authorizing balloon
loans made by creditors that operate predominantly in rural or
underserved areas is not affected by the finance charge issue.
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During the Small Business Review Panel and in industry feedback
provided in response to the Small Business Review Panel Outline,
concerns were expressed that one unintended consequence of a more
inclusive definition of finance charge could be that more loans would
qualify as high-cost loans subject to additional requirements under
TILA section 129 and under similar State laws. See Small Business
Review Panel Report at 25. Industry feedback generally suggests that
the proposed revisions to the
[[Page 51145]]
finance charge be viewed in the context of other rulemakings
implementing the Dodd-Frank Act revisions to the thresholds for high-
cost mortgages and qualified mortgage determinations, because of the
relationship between the APR and those thresholds and because any
changes to the APR calculation could be costly to implement and should
be done in conjunction with other related changes.
Based on this feedback and consistent with the Small Business
Review Panel's recommendation, the Bureau has considered the
requirements of TILA section 129 (high-cost mortgages) and TILA section
129C (qualified mortgages), including the Dodd-Frank Act amendments to
those provisions, as well as State predatory lending laws, in proposing
the amendments to Sec. 1026.4. For example, the Board previously
proposed two means of reconciling an expanded definition of the finance
charge with existing thresholds for loan APR and points and fees, and
the Bureau expects to seek comment on potential trigger modifications
in each proposal it issues as discussed below. The Bureau will consider
any final or proposed rules implementing those provisions prior to
issuing a final rule on this issue. See Small Business Review Panel
Report at 30.
As described in the Sec. 1022 analysis below, the Bureau is
seeking data that will allow it to perform a quantitative analysis to
determine the impacts of a broader finance charge definition on APR
thresholds for HOEPA and various other regimes.\122\ The Bureau seeks
comment on its plans for data analysis, as well as additional data and
comment on the potential impacts of a broader finance charge definition
and potential modifications to the triggers.
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\122\ In its 2009 Closed-End Proposal, the Board relied on a
2008 survey of closing costs conducted by Bankrate.com that contains
data for hypothetical $200,000 loans in urban areas. Based on that
data, the Board estimated that the share of first-lien refinance and
home improvement loans that are subject to HOEPA would increase by
.6 percent if the definition of finance charge was expanded. The
Bureau is considering the 2010 version of that survey, but as
described below the Bureau is also seeking additional data that
would provide more representative information regarding closing and
settlement costs that would allow for a more refined analysis of the
proposals.
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The Bureau is carefully weighing whether modifications may be
warranted to the thresholds for particular regulatory regimes to
approximate coverage levels under the current definition of finance
charge. It is not clear from the legislative history of the Dodd-Frank
Act whether Congress was aware of the Board's 2009 Closed-End Proposal
to expand the current definition of finance charge or whether Congress
considered the interplay between an expanded definition and coverage
under various thresholds addressed in the Dodd-Frank Act. In light of
this fact and the concerns raised by commenters on the Board's 2009
Closed-End Proposal regarding effects on access to credit, the Bureau
believes that it is appropriate to explore alternatives to
implementation of the expanded finance charge definition for purposes
of coverage under HOEPA and other regulatory regimes.
For example, the Board previously proposed two means of reconciling
an expanded definition of the finance charge with existing APR-based
thresholds. On several occasions, the Board proposed to replace the APR
with a ``transaction coverage rate'' as a transaction-specific metric a
creditor compares to the average prime offer rate to determine whether
the transaction meets the higher-priced loan threshold in Sec.
1026.35(a). See 76 FR 27390, 27411-12 (May 11, 2011); 76 FR 11598,
11608-09 (Mar. 2, 2011); 75 FR 58539, 58660-61 (Sept. 24, 2010).\123\
Although adopting the TCR would mean that lenders would have to
calculate one metric for purposes of disclosure and another for
purposes of regulatory coverage, both metrics would be simpler to
compute than APR today using the current definition of finance
charge.\124\ In addition, the Board proposed to amend Sec. 1026.32 to
retain the existing treatment of certain charges in the definition of
points and fees for purposes of determining HOEPA coverage. 75 FR at
58539, 58636-38 (Sept. 24, 2010). The Bureau has proposed language to
adopt the transaction coverage rate and to exclude the additional
charges from the HOEPA points and fees test in its 2012 HOEPA Proposal.
The Bureau has proposed language to adopt the transaction coverage rate
and to exclude the additional charges from the HOEPA points and fees
test in its 2012 HOEPA Proposal. The Bureau seeks comment on these
prior proposals and other potential methods of addressing the impact of
a more inclusive approach to the finance charge on other regimes.
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\123\ The transaction coverage rate would be determined in
accordance with the applicable rules of Regulation Z for the
calculation of the annual percentage rate for a closed-end
transaction, except that the prepaid finance charge for purposes of
calculating the transaction coverage rate includes only charges that
will be retained by the creditor, mortgage broker, or affiliates of
either. The wording of the Board's proposed definition of
``transaction coverage rate'' varied slightly between the 2010
Mortgage Proposal and the 2011 Escrows Proposal as to treatment of
charges retained by mortgage broker affiliates. In its 2012 HOEPA
Proposal, the Bureau proposes to use the 2011 Escrows Proposal
version, which would include charges retained by broker affiliates.
The Bureau believes that this approach is consistent with the
rationale articulated by the Board in its earlier proposals and with
certain other parts of the Dodd-Frank Act that distinguish between
charges retained by the creditor, mortgage broker, or affiliates of
either company. See, e.g., Dodd-Frank Act sections 1403, 1411(a).
\124\ To the extent that lenders believe that it is burdensome
to calculate two metrics, they could continue to use APR for both
purposes.
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The Bureau also seeks comment on the potential advantages and
disadvantages to both consumers and creditors of using different
metrics for purposes of disclosures and for purposes of determining
coverage of various regulatory regimes. With regard to the transaction
coverage rate, the Bureau believes that the potential compliance burden
is mitigated by the fact that both TCR and APR would be easier to
compute than the APR today using the current definition of finance
charge. However, the Bureau seeks comment on the issue generally and in
particular on whether use of the TCR or other trigger modifications
should be optional, so that creditors could use the broader definition
of finance charge to calculate APR and points and fees triggers if they
would prefer. The Board's 2010 Mortgage Proposal structured TCR as a
mandatory requirement out of concern that identical transactions
extended by two different creditors could have inconsistent coverage
under regulations governing higher-priced mortgage loans, but similarly
sought comment on the issue.
Finally, the Bureau also seeks comment on the timing of
implementation. There is no statutory deadline for issuing final rules
to integrate the mortgage disclosures under TILA and RESPA, and the
Bureau expects that it may take some time to conduct quantitative
testing of the forms prior to issuing final rules. However, the Bureau
expects to issue several final rules to implement provisions of title
XIV of the Dodd-Frank Act by January 21, 2013, that address thresholds
for compliance with various substantive requirements under HOEPA and
other Dodd-Frank Act provisions. In some cases the Dodd-Frank Act
requires that regulations implementing title XIV take effect within one
year of issuance.
The Bureau believes that it would be preferable to make any change
to the definition of finance charge and any related adjustments in
regulatory triggers take effect at the same time, in order to provide
for consistency and efficient systems modification. The Bureau also
believes that it may be advantageous to consumers and creditors to make
any such changes at
[[Page 51146]]
the same time that creditors are implementing new title XIV
requirements involving APR and points and fees thresholds, rather than
waiting until the Bureau finalizes other aspects of this rulemaking
relating to disclosures. If the Bureau expands the definition of
finance charge, this approach would likely provide the benefits to
consumers of the final rule at an earlier date as well as avoid
requiring creditors to make two sets of systems and procedures changes
focused on determining which loans trigger particular regulatory
requirements. However, given that implementation of the disclosure-
related elements of this proposal will also require systems and
procedures changes, there may be advantages to delaying any change in
the definition of finance charge and any related adjustments to
regulatory triggers until those changes occur. The Bureau therefore
seeks comment on whether to sequence any change in the proposal
considering the benefits and costs to both consumers and industry of
both approaches.
In light of these implementation issues, the Bureau wishes to
evaluate comments on the cumulative effect of an expanded definition of
the finance charge simultaneously with comments on the rules to
implement title XIV. The Bureau therefore is providing a comment period
of 60 days for the proposed amendments to Sec. 1026.4, rather than the
120-day comment period provided for all other aspects of this proposed
rule other than Sec. 1026.1(c). The Bureau believes a shorter comment
period is particularly appropriate given that this aspect of the
proposal largely mirrors the proposed changes to Sec. 1026.4 in the
Board's 2009 Closed-End Proposal.
4(a) Definition
Section 1026.4 states the basic test for the finance charge, as set
forth in TILA section 106(a), and specifies that it does not include
types of charges payable in a comparable cash transaction. Consistent
with the Board's 2009 Closed-End Proposal, the Bureau is proposing new
comment 4(a)-6 to clarify that, in a transaction where there is no
seller, such as a refinancing of an existing extension of credit
described in Sec. 1026.20(a), there is no comparable cash transaction
and, therefore, the exclusion from the finance charge in proposed Sec.
1026.4(a) for types of charges payable in a comparable cash transaction
does not apply to such transactions. The Bureau solicits comment on
this proposed clarification.
4(a)(2) Special Rule; Closing Agent Charges
Section 1026.4(a)(2) provides a special rule for the treatment of
closing agent charges in determining the finance charge. That section
excludes from the finance charge fees charged by a third party that
conducts a loan closing unless the creditor (1) requires the particular
service for which the consumer is charged; (2) requires the imposition
of the charge; or (3) retains a portion of the third-party charge.
Under proposed Sec. 1026.4(a)(2), this exclusion is inapplicable to
closed-end transactions secured by real property or a dwelling. Under
the basic test for the finance charge in TILA section 106(a), many
closing agent charges described in Sec. 1026.4(a)(2) would typically
be part of the finance charge because creditors generally require
closing agents to conduct closings who, in turn, impose various fees on
the consumer. As the Board described in its 2009 Closed-End Proposal,
in some cases, the creditor clearly requires the particular fee charged
by the closing agent but that, in other cases, it is not clear whether
a charge is specifically required by the creditor. A case-by-case
determination as to whether the creditor requires the particular
service charged by a closing agent would result in significant burden
and risk for consumers and, likely, inconsistent treatment of such
fees, which would undermine the purpose of disclosing the finance
charge to consumers. 74 FR at 43246. For these reasons, proposed Sec.
1026.4(a)(2) adopts a bright-line rule that includes in the finance
charge fees charged by closing agents, including fees of other third
parties hired by closing agents to perform particular services,
assuming those fees meet the general definition of finance charge and
that no other exclusion applies. Proposed comment 4(a)(2)-3 clarifies
that comments 4(a)(2)-1 and 4(a)(2)-2 do not apply to closed-end
transactions secured by real property or a dwelling.
As the Board noted in its 2009 Closed-End Proposal, the inclusion
of third-party charges in the finance charge may create some risk that
creditors will understate the finance charge if the creditor does not
know that a charge is imposed by a third party or the particular amount
of such charge. 74 FR at 43246. Some industry commenters in response to
the 2009 Closed-End Proposal supported the inclusion of all closing
agent charges in the finance charge as a means of simplifying
compliance. Other industry commenters opposed the inclusion of all
closing agent charges in the finance charge due to the creditor's lack
of control over these charges, and also because including these amounts
in the finance charge makes creditors responsible for settlement fees
under TILA. The Bureau has considered these comments in developing the
proposed rule, but believes that a determination of whether a creditor
requires the particular service for which the consumer is charged
results in significant confusion for consumers and inconsistent
treatment of such fees. In addition, as discussed below, the Dodd-Frank
Act added to TILA a requirement that creditors disclose aggregate
settlement charges, so that creditors now have a statutory disclosure
responsibility for such charges under TILA. Furthermore, creditors are
responsible for disclosing settlement charges subject to certain
estimation requirements and limitations on increases in settlement
costs pursuant to HUD's 2008 RESPA Final Rule and proposed Sec.
1026.19(e), discussed below. The Bureau also notes that the risk of
understating the finance charge is lessened by TILA section 106(f), 15
U.S.C. 1605(f), current Sec. 1026.18(d)(1), and proposed Sec.
1026.38(o)(2), which provide that a disclosed finance charge is treated
as accurate if it does not vary from the actual finance charge by more
than $100 or is greater than the amount required to be disclosed. The
Bureau requests comment on the extent to which settlement costs
increase from the good faith estimate to closing and whether the Bureau
should increase the finance charge tolerance for closed-end
transactions secured by real property or a dwelling in light of the
proposal to include third-party charges in the finance charge, and the
amount of any such increase.
In addition, the Board's 2009 Closed-End Proposal stated that
excluding certain fees from the finance charge because they are
voluntary or optional is inconsistent with the statutory objective of
disclosing the ``cost of credit,'' including charges imposed ``as an
incident to the extension of credit.'' 74 FR at 43246. As the Board
noted, an assumption underlying the exclusion from the finance charge
for certain voluntary or optional charges is that they are not
``imposed directly or indirectly by the creditor.'' Id. However, some
charges may be imposed by the creditor even if the services for which
the fee is imposed are not specifically required by the creditor. Id.
For example, a creditor may require the use of a closing agent, but may
not impose or require certain fees or services imposed by that closing
agent for which
[[Page 51147]]
the consumer is charged, such as administration fees for voluntary
escrow accounts. Excluding such charges from the finance charge
conflicts with the statutory purpose of including charges that are
imposed ``as an incident to the extension of credit.''
The Board historically interpreted the definition of ``finance
charge'' as not dependent on whether a charge is voluntary or required.
See, e.g., 61 FR 49237, 49239 (Sept. 19, 1996) (``The Board has
generally taken a case by case approach in determining whether
particular fees are `finance charges' and does not interpret Regulation
Z to automatically exclude all `voluntary' charges from the finance
charge.''). This approach is reflected in current Regulation Z's
treatment of voluntary credit insurance premiums and debt cancellation
fees, which are by definition voluntary, as excluded from the finance
charge only under certain circumstances. This special rule presupposes
that voluntary credit insurance and debt cancellation charges would be
included in the finance charge under the general definition.
Furthermore, excluding certain fees from the finance charge because
they are voluntary or optional requires a factual determination, which
is not practical in all cases since it may be difficult to determine
whether a fee or charge is truly voluntary. The Board's 2009 Closed-End
Proposal cited the current provisions addressing whether a charge for
credit insurance is optional as an example of an approach to defining a
voluntariness test that has proven unsatisfactory. Id. For this reason,
the Bureau proposes a bright-line rule to include in the finance charge
both voluntary and required charges that are imposed by the creditor to
avoid fact-based analysis and improve consistency in disclosure of the
finance charge and APR.
The Board cited as another basis for the current exclusions from
the finance charge the assumption that creditors cannot know the
amounts of voluntary or optional charges at the time the finance charge
and APR disclosures must be provided to consumers. Id. However, like
the Board, the Bureau believes that creditors know the amounts of their
own voluntary charges, if any, and that creditors know or can readily
determine voluntary charges when disclosing the finance charge and APR
to consumers at least three business days prior to consummation. As a
practical matter, most voluntary fees would be excluded from the
finance charge because they are also payable in a comparable cash
transaction (e.g., home warranty fees). The Board cited voluntary
credit insurance premiums as the primary voluntary third-party charge
in connection with a mortgage transaction that is not otherwise
excluded from the finance charge, noting that creditors generally
solicit consumers for this insurance and that, historically, creditors
had to disclose the premium for voluntary credit insurance to exclude
such amounts from the finance charge. However, the Bureau solicits
comment on whether there are voluntary third-party charges that would
be included in the finance charge under the proposed more-inclusive
approach the amounts of which cannot be determined three business days
before consummation.
The Bureau also recognizes that, within three business days of
receiving the consumer's application, creditors may not know what
voluntary or optional charges the consumer will incur. Regulation Z
generally permits creditors to rely on reasonable assumptions regarding
voluntary or optional charges and label those disclosures as estimates
pursuant to Sec. 1026.17(c) and its commentary. The Bureau requests
comment on whether further guidance is required regarding reasonable
assumptions for the voluntary or optional charges.
4(b) Examples of Finance Charges
The Bureau proposes to amend comment 4(b)-1 to be consistent with
proposed Sec. 1026.4(g), which provides that the exclusions from the
finance charge under Sec. 1026.4(a)(2) and (c) through (e), other than
Sec. 1026.4(c)(2), (c)(5), (c)(7)(v), and (d)(2), do not apply to
closed-end transactions secured by real property or a dwelling, as
discussed below.
4(c) Charges Excluded From the Finance Charge
The Bureau proposes to amend Sec. 1026.4(c), which lists specific
exclusions from the finance charge, to be consistent with proposed
Sec. 1026.4(g). Pursuant to proposed Sec. 1026.4(g), the exclusions
in Sec. 1026.4(c), other than the exclusion for late fees, exceeding a
credit limit, and default, delinquency, or similar charges, seller's
points, and escrowed items that are otherwise not included in the
finance charge, would not apply to closed-end transactions secured by
real property or a dwelling. The Bureau also proposes to amend the
commentary to Sec. 1026.4(c) to be consistent with Sec. 1026.4(g).
4(c)(2)
The Bureau proposes to retain the exclusion from the finance charge
under Sec. 1026.4(c)(2) of fees for actual unanticipated late payment,
exceeding a credit limit, or for delinquency, default, or a similar
occurrence. Although the Bureau is generally proposing a more inclusive
approach to the finance charge through proposed Sec. 1026.4, the
charges described in Sec. 1026.4(c)(2) should be excluded from the
finance charge because they are incurred, if at all, only after
consummation of the transaction. At the time a creditor must disclose
the finance charge and other items affected by the finance charge, the
creditor cannot know whether or how many times such charges may be
imposed.
4(c)(5)
The Bureau proposes to retain the exclusion from the finance charge
under Sec. 1026.4(c)(5) of seller's points. Seller's points include
any charges imposed by the creditor upon the non-creditor seller of
property for providing credit to the buyer or for providing credit on
certain terms. Although the Bureau is generally proposing a more
inclusive approach to the finance charge, the Bureau believes that it
is appropriate to continue to exclude seller's points from the finance
charge because seller's points are not payable by the consumer and
because the extent to which seller's points are passed on to the
consumer in the form of a higher sales price is unknown. However, the
Bureau requests comment on whether seller's points should be included
in the finance charge for closed-end transactions secured by real
property or a dwelling. In particular, the Bureau requests comment on
the frequency with which seller's points are passed on to the borrower
through a higher sales price. In addition, although the scope of the
changes to Sec. 1026.4 under this proposal is limited to closed-end
transactions secured by real property or a dwelling, the Bureau
solicits comment on the potential ramifications of including seller's
points in the finance charge for other types of credit.
4(c)(7) Real-Estate Related Fees
Section 106(e) of TILA, 15 U.S.C. 1605(e), excludes certain charges
from the finance charge for credit secured by an interest in real
property. This provision is implemented in current Sec. 1026.4(c)(7),
which contains exclusions from the finance charge that generally mirror
the statute, for transactions secured by real property or in
residential mortgage transactions, provided that the fees for such
charges are bona fide and reasonable in amount. Specifically, Sec.
1026.4(c)(7) excludes from the finance charge those fees for: title
examination, abstract of title, title insurance, property survey, and
similar
[[Page 51148]]
purposes; preparing loan-related documents, such as deeds, mortgages,
and reconveyance or settlement documents; notary and credit report
fees; property appraisal or inspections to assess the value or
condition of the property prior to closing, including pest-infestation
or flood-hazard determination; and amounts required to be paid into
escrow or trustee accounts if the amounts would not otherwise be
included in the finance charge. These fees fall squarely within the
general statutory definition of the finance charge, and their exclusion
from the finance charge significantly undermines the purpose of the
finance charge as a reflection of the cost of credit since the charges
comprise a significant portion of the up-front costs paid by consumers.
As noted by some industry commenters to the 2009 Closed-End Proposal,
the inclusion of real-estate related fees such as application,
appraisal, and credit report fees in the finance would reduce the
possibility that a creditor can manipulate the APR by shifting some
costs of credit to fees that are currently excluded from the finance
charge. Some commenters also noted that these charges are generally
known to the creditor early in the loan process. Accordingly, proposed
Sec. 1026.4 includes these charges in the finance charge.
However, proposed Sec. 1026.4 retains the exclusion from the
finance charge in current Sec. 1026.4(c)(7)(v) for amounts required to
be paid into escrow or trustee accounts if the amounts would not
otherwise be included in the finance charge. For example, homeowner's
insurance premiums that are excluded from the finance charge pursuant
to Sec. 1026.4(d)(2) would not be included in the finance charge
simply because such premiums will be paid into an escrow account.
Under the Board's 2009 Closed-End Proposal, Sec. 1026.4(c)(7)
would have applied only to open-end credit plans secured by real
property or open-end residential mortgage transactions. Some commenters
interpreted that proposal to mean that amounts required to be paid into
escrow or trustee accounts should be included in the finance charge
calculation, even if such amounts would not otherwise be included in
the finance charge if not paid into an escrow or trustee account.
Concerns about including escrowed taxes and insurance in the finance
charge were raised during the Small Business Review Panel (see Small
Business Review Panel Report at 30), in industry feedback provided in
response to the Small Business Review Panel Outline, and in comment
letters provided to the Board in response to the 2009 Closed-End
Proposal. The Small Business Review Panel specifically recommended that
escrowed taxes and insurance remain excluded from the finance charge,
unless those amounts would otherwise be considered finance charges
under the expanded definition. Small Business Review Panel Report at
30. Commenters to the 2009 Closed-End Proposal noted that including
escrowed taxes and insurance in the finance charge while excluding
those paid outside of escrow may mislead consumers who try to compare
escrowed and non-escrowed loans. Commenters also noted that the APR for
identical loans could be vastly different because the escrow deposit is
calculated based on the date the loan closes and when the next tax
payment is due. Based on this feedback and consistent with the Small
Business Review Panel's recommendation, the Bureau is proposing to
exclude escrowed taxes and insurance from the finance charge, unless
those amounts would otherwise be considered finance charges under the
expanded definition. In short, a fee or charge that is not part of the
finance charge does not become part of the finance charge merely
because it is paid to an escrow account.
Accordingly, proposed comment 4(c)(7)-1 clarifies that the
exclusion of escrowed amounts under Sec. 1026.4(c)(7)(v) applies to
all residential mortgage transactions and to other transactions secured
by real estate. The Bureau also proposes other amendments to the
commentary to Sec. 1026.4(c)(7) to be consistent with proposed Sec.
1026.4(g).
4(d) Insurance and Debt Cancellation and Debt Suspension Coverage
The Bureau proposes to amend Sec. 1026.4(d), which currently
excludes from the finance charge, under certain circumstances,
voluntary credit insurance premiums, property insurance premiums, and
voluntary debt cancellation or debt suspension fees. Consistent with
proposed Sec. 1026.4(g), proposed Sec. 1026.4(d) would not exclude
from the finance charge credit insurance premiums and debt cancellation
or debt suspension fees, for closed-end mortgage transactions. The
Bureau also proposes to amend the commentary to Sec. 1026.4(d) to be
consistent with Sec. 1026.4(g).
4(d)(1) Voluntary Credit Insurance Premiums
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
TILA section 106(b)(7), 15 U.S.C. 1605(b)(7), provides that
premiums for credit life, accident, or health insurance written in
connection with any consumer credit transaction are part of the finance
charge unless (1) the coverage is not a factor in the approval by the
creditor of the extension of credit, and this fact is clearly disclosed
in writing to the consumer; and (2) to obtain the insurance, the
consumer specifically requests the insurance after getting the
disclosures. Current Sec. 1026.4(d)(1) and (d)(3) implement this
provision by providing that the creditor may exclude from the finance
charge any premium for credit life, accident, health or loss-of-income
insurance; any charge or premium paid for debt cancellation coverage
for amounts exceeding the value of the collateral securing the
obligation; or any charge or premium for debt cancellation or debt
suspension coverage in the event of loss of life, health, or income or
in case of accident, whether or not the coverage is insurance, if (1)
the insurance or coverage is not required by the creditor and the
creditor discloses this fact in writing, (2) the creditor discloses the
premium or charge for the initial term of the insurance or coverage,
(3) the creditor discloses the term of insurance or coverage, if the
term is less than the term of the credit transaction, and (4) the
consumer signs or initials an affirmative written request for the
insurance or coverage after receiving the required disclosures. In
addition, under Sec. 1026.4(d)(3)(iii), the creditor must disclose,
for debt suspension coverage, the fact that the obligation to pay loan
principal and interest is only suspended, and that interest will
continue to accrue during the period of suspension.
Proposed Sec. 1026.4(d)(1) and (3) includes credit insurance and
debt cancellation charges in the finance charge for closed-end
transactions secured by real property or a dwelling to be consistent
with Sec. 1026.4(g). Proposed Sec. 1026.4(d) is consistent with the
overall proposed changes to Sec. 1026.4, which remove exclusions from
the finance charge, to make the finance charge and APR more accurately
reflect the cost of credit. As discussed above, the Bureau does not
believe that a rule that excludes fees from the finance charge simply
because they are ``voluntary'' is consistent with the statute, which
says that the finance charge include charges ``imposed as an incident
to the extension of credit,'' and that a determination of whether a fee
is, in fact, voluntary simply has not been effective. As discussed
above and as the Board noted in its 2009 Closed-End Proposal, the
current test for defining
[[Page 51149]]
whether a charge for credit insurance and debt cancellation or
suspension coverage is ``voluntary'' has proven unsatisfactory. See 74
FR at 43246-50. Instead, the Bureau proposes a bright-line rule to
include in the finance charge premiums for credit insurance and debt
suspension fees. The Bureau also proposes to amend the commentary to
Sec. 1026.4(d) to be consistent with Sec. 1026.4(g).
Concerns were raised in industry feedback in response to the Small
Business Review Panel Outline and in comment letters in response to the
2009 Closed-End Proposal that voluntary charges such as credit
insurance and debt cancellation fees should not be part of the finance
charge because they are not ``imposed'' by the creditor. Commenters to
the 2009 Closed-End Proposal also noted that the products are often
sold after consummation of the transaction and that including fees for
these products in the finance charge may confuse consumers into
believing they are mandatory. The Bureau has considered this feedback
in developing the proposed rule, but, as discussed above, believes that
whether or not a fee is ``voluntary'' is not determinative of whether
it is imposed as an ``incident to the extension of credit.'' Concerns
that consumers might mistake voluntary charges for mandatory ones due
to their inclusion in the finance charge are mitigated by the fact that
(1) the TILA disclosures do not itemize the components of the finance
charge or APR, and (2) for transactions secured by real property other
than reverse mortgages, creditors must indicate that voluntary credit
insurance or debt suspension, or cancellation fees are ``optional'' on
the Loan Estimate provided to consumers within three business days of
application and the Closing Disclosure provided three business days
before consummation pursuant to proposed Sec. 1026.37(g)(4)(ii).
Furthermore, existing commentary makes clear that credit insurance and
debt cancellation and suspension products requested by the consumer
after consummation are not considered written in connection with the
credit transaction and therefore do not meet the basic test for
inclusion in the finance charge. See comments 4(b)(7) and (b)(8)-2 and
4(b)(1)-2.
4(d)(2) Property Insurance Premiums
Section 106(c) of TILA, 15 U.S.C. 1605(c), provides that premiums
for insurance, written in connection with any consumer credit
transaction, against loss of or damage to property or against liability
arising out of the ownership or use of property, should be included in
the finance charge unless the creditor provides the consumer with a
clear written statement that discloses the cost of such insurance if
obtained from or through the creditor, and informs the consumer that he
may choose his own insurance provider. Current Sec. 1026.4(d)(2)
implements TILA section 106(c), and generally provides that such
premiums may be excluded from the finance charge if (1) the insurance
may be obtained from a person of the consumer's choice, and that fact
is disclosed to the consumer, and (2) if the coverage is obtained from
or through the creditor, the premium for the initial term of insurance
coverage is disclosed.
The Bureau proposes to retain the current exclusion from the
finance charge under Sec. 1026.4(d)(2) for premiums for insurance
against loss of or damage to property, or against liability arising out
of the ownership or use of property. As the Board noted in its 2009
Closed-End Proposal, property insurance is generally a hybrid product
that protects both the value of the creditor's collateral and the
consumer's equity in the property, such that it is impossible to
segregate the premium into the portion that protects the creditor and
the portion that protects the consumer. 74 FR at 43250. Although
creditors generally require property insurance as a condition to
extending credit secured by real property or a dwelling, consumers who
do not have mortgages also regularly purchase property insurance to
protect themselves from the risk of loss of or damage to property. Id.
For these reasons, the Bureau proposes to retain the current exclusion
from the finance charge under Sec. 1026.4(d)(2).
The Bureau proposes to revise comment 4(d)-8 to conform it to the
statutory language providing that, to be excluded from the finance
charge, premiums for property insurance obtained ``from or through the
creditor'' must be disclosed to the consumer. 15 U.S.C. 1605(c).
Current Sec. 1026.4(d)(2) also provides that if coverage is obtained
``from or through the creditor,'' the premium for the initial term must
be disclosed. However, current comment 4(d)-8 states, in relevant part,
that ``[t]he premium or charge must be disclosed only if the consumer
elects to purchase the insurance from the creditor; in such a case, the
creditor must also disclose the term of the property insurance coverage
if it is less than the term of the obligation.'' (Emphasis added.)
Accordingly, the Bureau proposes to amend comment 4(d)-8 to conform to
the statutory language. In addition, proposed Sec. 1026.4(d)(2) and
comment 4(d)-8 clarify that insurance is available ``from or through a
creditor'' only if it is available from the creditor or the creditor's
``affiliate,'' as that term is defined under the Bank Holding Company
Act, 12 U.S.C. 1841(k). The Bank Holding Company Act defines an
``affiliate'' as ``any company that controls, is controlled by, or is
under common control with another company.'' Thus, if the consumer
elects to purchase property insurance from a company that controls, is
controlled by, or is under common control with the creditor, then the
creditor is required to disclose the cost of the insurance and its
term, if it is less than the term of the obligation, for the charge to
be excluded from the finance charge.
4(e) Certain Security Interest Charges
TILA section 106(d), 15 U.S.C. 1605(d), provides exclusions from
the finance charge for certain government recording taxes and related
fees and the premiums for any insurance in lieu of perfecting a
security interest, provided those amounts are disclosed to the
consumer. This provision is implemented in current Sec. 1026.4(e).
Consistent with the overall approach to largely eliminate the specific
exclusions from the finance charge for closed-end transactions secured
by real property or a dwelling, the Bureau proposes to amend Sec.
1026.4(e) to eliminate those exclusions, consistent with proposed Sec.
1026.4(g). The Bureau believes this approach will better inform
consumers of the total cost of credit and prevent circumvention or
evasion of the statute through the unbundling of the cost of credit to
fees or charges that are currently excluded from the finance charge.
The Bureau also proposes to amend the commentary to Sec. 1026.4(e) to
be consistent with Sec. 1026.4(g).
4(g) Special Rule for Closed-End Mortgage Transactions
The Bureau proposes new Sec. 1026.4(g), which treats certain fees
as part of the finance charge, for closed-end transactions secured by
real property or a dwelling. Specifically, proposed Sec. 1026.4(g)
provides that the exclusions from the finance charge in Sec.
1026.4(a)(2) (closing agent charges) and (c) (fees for actual
unanticipated late payment, exceeding a credit limit, or for
delinquency, default, or similar occurrence), (d) (premiums for credit
insurance and debt cancellation coverage), and (e) (certain security-
interest charges), other than Sec. 1026.4(c)(2) (late, over-limit,
delinquency, default, and similar fees), (5) (seller's points), (7)(v)
(escrowed items that are not included in the finance charge), and
(d)(2) (property and
[[Page 51150]]
liability insurance premiums), do not apply to closed-end transactions
secured by real property or a dwelling.
As discussed above, the Bureau proposes to retain the exclusion
from the finance charge for late, over-limit, delinquency, default and
similar fees in Sec. 1026.4(c)(2), seller's points described in Sec.
1026.4(c)(5), amounts required to be paid into escrow or trustee
accounts if the amounts would not otherwise be included in the finance
charge described in Sec. 1026.4(c)(7)(v), and property and liability
insurance described in Sec. 1026.4(d)(2).
Proposed comments 1026.4(g)-1 through -3 provide guidance to
creditors on compliance with the special rule for closed-end mortgage
transactions provided in proposed Sec. 1026.4(g). Proposed comment
4(g)-1 clarifies that the commentary under the exclusions identified
above no longer applies to closed-end credit transactions secured by
real property or a dwelling. Proposed comment 4(g)-2 clarifies that
third-party charges that meet the definition under Sec. 1026.4(a) and
are not otherwise excluded from the finance charge generally are
included in the finance charge, whether or not the creditor requires
the services for which they are imposed. Proposed comment 4(g)-3
clarifies that charges payable in a comparable cash transaction, such
as property taxes and fees or taxes imposed to record the deed
evidencing transfer of title to the property from the seller to the
buyer, are not part of the finance charge because they would have to be
paid even if no credit were extended to finance the purchase.
Section 1026.17 General Disclosure Requirements
The Bureau is proposing conforming amendments to current Sec.
1026.17 to reflect the proposed rules regarding the format, content,
and timing of disclosures for closed-end transactions secured by real
property, other than reverse mortgages subject to Sec. 1026.33.
17(a) Form of Disclosures
TILA section 128(b)(1) provides that the disclosures required by
TILA sections 128(a) and 106(b), (c), and (d) must be conspicuously
segregated from all other terms, data, or information provided in
connection with the transaction, including any computations or
itemizations. 15 U.S.C. 1638(a), (b)(1); 15 U.S.C. 1605(b), (c), (d).
In addition, TILA section 122(a) requires that the ``annual percentage
rate'' and ``finance charge'' disclosures be more conspicuous than
other terms, data, or information provided in connection with the
transaction, except information relating to the identity of the
creditor. 15 U.S.C. 1632(a). Current Sec. 1026.17(a) implements these
statutory provisions. Current Sec. 1026.17(a)(1) implements TILA
section 128(b)(1) by providing that closed-end credit disclosures must
be grouped together and segregated from all other disclosures and must
not contain any information not directly related to the disclosures.
Current Sec. 1026.17(a)(2) implements TILA section 122(a) for closed-
end credit transactions by requiring that the terms ``annual percentage
rate'' and ``finance charge,'' together with a corresponding amount or
percentage rate, be disclosed more conspicuously than any disclosure
other than the creditor's identity.
The Bureau proposes to revise Sec. 1026.17(a) to reflect the fact
that special rules apply to the disclosures required by Sec.
1026.19(e), (f), and (g), by providing that Sec. 1026.17(a) is
inapplicable to those disclosures. As discussed below, the Bureau is
implementing the grouping and segregation requirements of TILA section
128(b)(1) in proposed Sec. Sec. 1026.37(o) and 1026.38(t). Further,
for the reasons set forth in the section-by-section analysis to
proposed Sec. Sec. 1026.37(l)(3) and 1026.38(o)(2) and (4), the Bureau
proposes to use its authority under TILA section 105(a), Dodd-Frank Act
section 1032(a), and, for residential mortgage loans, Dodd-Frank Act
section 1405(b), to modify the requirements of TILA section 122(a) for
transactions subject to Sec. 1026.19(e) and(f). Proposed comment 17-1
states that, for the disclosures required by proposed Sec. 1026.19(e),
(f), and (g), rules regarding the disclosures' form are found in
proposed Sec. Sec. 1026.19(g), 1026.37(o), and 1026.38(t). In
addition, proposed comment 17(a)(1)-7 reflects the special disclosure
rules for transactions subject to Sec. 1026.18(g) or (s).
17(b) Time of Disclosures
TILA section 128(b)(1) provides that the disclosures required by
TILA section 128(a) shall be made before credit is extended. 15 U.S.C.
1638(b)(1). Special timing rules for transactions subject to RESPA are
found in TILA section 128(b)(2). 15 U.S.C. 1638(b)(2). Current Sec.
1026.17(b) implements TILA section 128(b)(1) by requiring creditors to
make closed-end credit disclosures before consummation. The special
timing rules for transactions subject to RESPA are implemented in
current Sec. 1026.19(a). As discussed below, the Bureau is proposing
special timing rules for the disclosures required by proposed Sec.
1026.19(e), (f), and (g) in those provisions. Proposed Sec. 1026.17(b)
reflects these special rules by providing that Sec. 1026.17(b) is
inapplicable to the disclosures required by Sec. 1026.19(e), (f), and
(g). Proposed comment 17-1 states that, for to the disclosures required
by Sec. 1026.19(e), (f), and (g), rules regarding timing are found in
those sections.
17(c) Basis of Disclosures and Use of Estimates
17(c)(1)
Current Sec. 1026.17(c)(1) requires that the disclosures that
creditors provide pursuant to subpart C of Regulation Z reflect the
terms of the legal obligation between the parties. The commentary to
current Sec. 1026.17(c)(1) provides guidance to creditors regarding
the disclosure of specific transaction types and loan features.
As discussed more fully in the section-by-section analysis to
proposed Sec. Sec. 1026.37 and 1026.38, the Bureau is proposing to
integrate the disclosure requirements of TILA and sections 4 and 5 of
RESPA in the Loan Estimate that creditors must provide to consumers
within three business days after receiving the consumer's application
and the Closing Disclosure that creditors must provide to consumers at
least three business days prior to consummation. Some disclosures
required by RESPA pertain to services performed by third parties, other
than the lender. Accordingly, the Bureau is proposing conforming
amendments to the commentary to Sec. 1026.17(c) to clarify that the
``parties'' referred to in the commentary to Sec. 1026.17(c) are the
consumer and the creditor and that the ``agreement'' referred to in the
commentary to Sec. 1026.17(c) is the legal obligation between the
consumer and the creditor. The proposed conforming amendments to the
commentary also clarify that the ``disclosures'' referred to in the
commentary to current Sec. 1026.17(c) are the finance charge and the
disclosures affected by the finance charge. Finally, the proposed
conforming amendments to the commentary extend existing guidance on
special disclosure rules for transactions subject to Sec. 1026.18(s)
to reflect the addition of new special rules under Sec. 1026.19(e) and
(f).
The Bureau also proposes amendments to the commentary to Sec.
1026.17(c)(1) to address areas of industry uncertainty regarding TILA
disclosures. First, the Bureau proposes to revise comment 17(c)(1)-1 to
provide the general principle that disclosures based on the assumption
that the consumer will abide by the terms of the legal obligation
throughout its term comply with Sec. 1026.17(c)(1). In
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addition, the Bureau proposes to revise comments 17(c)(1)-3 and -4,
regarding third-party and consumer buydowns, respectively. Under
existing Regulation Z, whether the effect of third-party or consumer
buydowns are disclosed depends on State law. To address uncertainty,
the Bureau is proposing to revise the examples in comments 17(c)(1)-3
and -4 to clarify that, in the disclosure of the finance charge and
other disclosures affected by the finance charge, third-party buydowns
must be reflected as an amendment to the contract's interest rate
provision if the buydown is reflected in the credit contract between
the consumer and the creditor and that consumer buydowns must always be
reflected as an amendment to the contract's interest rate provision.
The Bureau also proposes new comment 17(c)(1)-19, regarding
disclosure of rebates and loan premiums offered by a creditor. In its
2009 Closed-End Proposal, the Board proposed to revise comment 18(b)-2,
which provides guidance regarding the treatment of rebates and loan
premiums for the amount financed calculation required by Sec.
1026.18(b). 74 FR at 43385. Comment 18(b)-2 primarily addresses credit
sales, such as automobile financing, and provides that creditors may
choose whether to reflect creditor-paid premiums and seller- or
manufacturer-paid rebates in the disclosures required by Sec. 1026.18.
The Board stated its belief that such premiums and rebates are
analogous to buy-downs because they may or may not be funded by the
creditor and reduce costs that otherwise would be borne by the
consumer. 2009 Closed-End Proposal, 74 FR at 43256. Accordingly, their
impact on the Sec. 1026.18 disclosures properly depends on whether
they are part of the legal obligation, in accordance with Sec.
1026.17(c)(1) and its commentary. The Board therefore proposed to
revise comment 18(b)-2 to clarify that the disclosures, including the
amount financed, must reflect loan premiums and rebates regardless of
their source, but only if they are part of the legal obligation between
the creditor and the consumer. The Board also proposed a parallel
comment under the section requiring disclosure of the amount financed
for transactions subject to the proposed, separate disclosure scheme
for transactions secured by real property or a dwelling. 2009 Closed-
End Proposal, 74 FR at 43417 (proposed comment 38(e)(5)(iii)-2).
The Bureau agrees with the Board's reasoning in proposing the
foregoing revisions to comment 18(b)-2 that the disclosures must
reflect loan premiums and rebates, even if paid by a third party such
as a seller or manufacturer, but only if they are part of the legal
obligation between the creditor and the consumer. The Bureau notes,
however, that the comment's guidance extends beyond the calculation of
the amount financed. For example, the guidance on whether and how to
reflect premiums and rebates applies equally to such disclosures as the
amount financed, the APR, the projected payments table, interest rate
and payment summary table, or payment schedule, as applicable, and
other disclosures affected by those disclosures. The Bureau therefore
is proposing to place the guidance in the commentary to Sec.
1026.17(c)(1), as that section is the basis for the underlying
principal that the impact of premiums and rebates depends on the terms
of the legal obligation.
17(c)(2)
Current Sec. 1026.17(c)(2) and its commentary contain general
rules regarding the use of estimates. The Bureau proposes conforming
amendments to the commentary to Sec. 1026.17(c)(2) to be consistent
with the special disclosure rules for closed-end mortgage transactions
subject to proposed Sec. 1026.19(e) and (f).
Comment 17(c)(2)(i)-1 provides guidance to creditors on the basis
for estimates. The proposed rule amends this comment to specify that it
applies except as otherwise provided in Sec. Sec. 1026.19, 1026.37,
and 1026.38, and that creditors must disclose the actual amounts of the
information required to be disclosed pursuant to Sec. 1026.19(e) and
(f), subject only to the estimation and redisclosure rules in those
sections. The proposed rule also revises comment 17(c)(2)(i)-2, which
gives guidance to creditors on labeling estimated disclosures, to
provide that, for the disclosures required by Sec. 1026.19(e), use of
the Loan Estimate form H-24 in appendix H, pursuant to Sec.
1026.37(o), satisfies the requirement that the disclosure state clearly
that it is an estimate. In addition, consistent with the proposed
revisions to comment 17(c)(1)-1, the proposed rule revises comment
17(c)(2)(i)-3, which provides guidance to creditors regarding
disclosures in simple interest transactions, to reflect that the
comment applies only to the extent that it does not conflict with
proposed Sec. 1026.19. Proposed comment 17(c)(2)(i)-3 also clarifies
that, in all cases, creditors must base disclosures on the assumption
that payments will be made on time and in the amounts required by the
terms of the legal obligation, disregarding any possible differences
resulting from consumers' payment patterns. Finally, proposed comment
17(c)(2)(ii)-1, regarding disclosure of per diem interest, provides
that the creditor shall disclose the actual amount of per diem interest
that will be collected at consummation, subject only to the disclosure
rules in Sec. 1026.19(e) and (f).
17(c)(4)
The proposed rule revises comment 17(c)(4)-1 to clarify that
creditors may disregard payment period irregularities when disclosing
the payment summary tables pursuant to Sec. Sec. 1026.18(s),
1026.37(c), and 1026.38(c), in addition to the payment schedule under
Sec. 1026.18(g) discussed in the existing comment.
17(c)(5)
Current Sec. 1026.17(c)(5) and its commentary contain general
rules regarding the disclosure of demand obligations. The proposed rule
revises comment 17(c)(5)-2, which addresses obligations whose maturity
date is determined by a future event, to reflect the fact that special
rules apply to the disclosures required by Sec. 1026.19(e) and (f). In
addition, the proposal revises comment 17(c)(5)-3, regarding
transactions that convert to demand status only after a fixed period,
to delete obsolete references to specific loan programs and to update
cross-references. Finally, the proposal revises comment 17(c)(5)-4,
regarding balloon payment mortgages, to reflect the fact that special
rules apply to the disclosure of balloon payments in the projected
payments tables required by Sec. Sec. 1026.37(c) and 1026.38(c).
17(d) Multiple Creditors; Multiple Consumers
Current Sec. 1026.17(d) addresses transactions that involve
multiple creditors or consumers. The proposed rule revises comment
17(d)-2, regarding multiple consumers, to clarify that the early
disclosures required by Sec. 1026.19(a), (e), or (g), as applicable,
need be provided to only one consumer who will have primary liability
on the obligation. Material disclosures, as defined in Sec.
1026.23(a)(3)(ii), under Sec. 1026.23(a) and the notice of the right
to rescind required by Sec. 1026.23(b), however, must be given before
consummation to each consumer who has the right to rescind, including
any such consumer who is not an obligor. As the Board stated in its
2010 Mortgage Proposal, the purpose of the TILA section 128 requirement
that creditors provide early and final disclosures is to
[[Page 51152]]
ensure that consumers have information specific to their loan to use
while shopping and evaluating their loan. See 75 FR at 58585. On the
other hand, the purpose of the TILA section 121(a) requirement that
each consumer with a right to rescind receive disclosures regarding
that right is to ensure that each such consumer has the necessary
information to decide whether to exercise that right. Id. For this
reason, the proposed rule requires creditors to provide all consumers
who have the right to rescind with the material disclosures under
Sec. Sec. 1026.18 and 1026.38 and the notice of the right to rescind
required by Sec. 1026.23(b), even if such consumer is not an obligor.
17(e) Effect of Subsequent Events
Current Sec. 1026.17(e) provides rules regarding when a subsequent
event makes a disclosure inaccurate and requires a new disclosure. The
proposed rule revises comment 17(e)-1 to clarify that special rules
apply to transactions subject to proposed Sec. 1026.19(e) and (f).
17(f) Early Disclosures
Current Sec. 1026.17(f) contains rules regarding when a creditor
must redisclose after providing disclosures prior to consummation. As
discussed in the section-by-section analysis to proposed Sec.
1026.19(a), (e), and (f), special timing requirements apply for
transactions subject to those sections. Accordingly, Sec. 1026.17(f)
is revised to reflect the fact that the general early disclosure rules
in Sec. 1026.17(f) are subject to the special rules in Sec.
1026.19(a), (e), and (f). In addition, comments 17(f)-1 through -4
would be revised to conform to the special timing requirements under
proposed Sec. 1026.19(a) or (e) and (f).
17(g) Mail or Telephone Orders--Delay in Disclosures
Current Sec. 1026.17(g) and its commentary permit creditors to
delay disclosures for transactions involving mail or telephone orders
until the first payment is due if specific information, including the
principal loan amount, total sale price, finance charge, annual
percentage rate, and terms of repayment is provided to the consumer
prior to the creditor's receipt of a purchase order or request for
extension of credit. As discussed in the section-by-section analysis to
proposed Sec. 1026.19(a), (e), and (f), the Bureau proposes special
timing requirements for transactions subject to those provisions.
Accordingly, the Bureau proposes to revise Sec. 1026.17(g) and comment
17(g)-1 to clarify that Sec. 1026.17(g) does not apply to transactions
subject to Sec. 1026.19(a), (e), and (f).
17(h) Series of Sales--Delay in Disclosures
Current Sec. 1026.17(h) and its commentary permit creditors to
delay disclosures until the due date of the first payment in
transactions in which a credit sale is one of a series made under an
agreement providing that subsequent sales may be added to the
outstanding balance. As discussed in the section-by-section analysis to
proposed Sec. 1026.19(a), (e), and (f), the Bureau proposes special
timing requirements for transactions subject to those provisions.
Accordingly, the Bureau proposes to revise Sec. 1026.17(h) and comment
17(h)-1 to clarify that Sec. 1026.17(h) does not apply to transactions
subject to Sec. 1026.19(a) or (e) and (f).
1026.18 Content of Disclosures
Section 1026.18 sets forth the disclosure content for closed-end
consumer credit transactions. As discussed in more detail below, the
Bureau is proposing to establish separate disclosure requirements for
closed-end transactions secured by real property, other than reverse
mortgage transactions, through proposed Sec. 1026.19(e) and (f).
Accordingly, the Bureau is proposing to amend Sec. 1026.18's
introductory language to provide that its disclosure content
requirements apply only to closed-end transactions other than mortgage
transactions subject to Sec. 1026.19(e) and (f).
The Bureau is also proposing revisions to Sec. 1026.18(k), which
provides for disclosure of whether, if the obligation is prepaid in
full, a penalty will be imposed or a consumer will be entitled to a
rebate of any finance charge. The proposed revisions conform to the
definition of ``prepayment penalty'' in proposed Sec. 1026.37(b)(4)
and associated commentary. As explained in more detail in the section-
by-section analysis for proposed Sec. 1026.37(b)(4), the Bureau is
coordinating the definition of ``prepayment penalty'' across its
pending mortgage-related rulemakings, and proposed revisions to Sec.
1026.18(k) are part of that comprehensive approach.
The Bureau also is proposing to add a new comment 18-3 clarifying
that, because of the exclusion of transactions subject to Sec.
1026.19(e) and (f), the disclosures required by Sec. 1026.18 apply
only to closed-end transactions that are unsecured or secured by
personal property (including dwellings that are not also secured by
real property) and to reverse mortgages. The comment would also clarify
that, for unsecured transactions and transactions secured by personal
property that is not a dwelling, creditors must disclose a payment
schedule under Sec. 1026.18(g), and for other transactions that are
subject to Sec. 1026.18, creditors must disclose an interest rate and
payment summary table under Sec. 1016.18(s), as adopted by the Board's
MDIA Interim Rule. 75 FR at 58482-84. Finally, the comment would
clarify that, because Sec. 1026.18 does not apply to most transactions
secured by real property, references in the section and its commentary
to ``mortgages'' refer only to transactions secured by personal
property that is not a dwelling and reverse mortgages, as applicable.
18(b) Amount Financed
Section 1026.18(b) addresses the calculation and disclosure of the
amount financed for closed-end transactions. Comment 18(b)-2 currently
provides that creditors may choose whether to reflect creditor-paid
premiums and seller- or manufacturer-paid rebates in the disclosures
required by Sec. 1026.18. For the reasons discussed under Sec.
1026.17(c)(1), above, the Bureau is proposing to remove comment 18(b)-2
and place revised guidance regarding rebates and loan premiums in
proposed comment 17(c)(1)-19.
18(b)(2)
The Bureau is proposing certain conforming changes to comment
18(b)(2)-1, which addresses amounts included in the amount financed
calculation that are not otherwise included in the finance charge. As
discussed more fully under proposed Sec. 1026.4, above, the Bureau
proposes to adopt a simpler and more inclusive definition of the
finance charge. Therefore, references to real estate settlement charges
in comment 18(b)(2)-1 are inappropriate. Proposed comment 18(b)(2)-1
removes those references and substitutes appropriate examples.
18(c) Itemization of Amount Financed
Section 1026.18(c) requires an itemization of the amount financed
and provides guidance on the amounts that must be included in the
itemization. The Bureau proposes certain conforming amendments to two
comments under Sec. 1026.18(c). Under this proposal, Sec. 1026.18
disclosures, including the itemization of amount financed under Sec.
1026.18(c), are required only for closed-end transactions that are not
secured by real property and reverse mortgages;
[[Page 51153]]
transactions secured by real property other than reverse mortgages are
subject instead to the disclosure content required by Sec. Sec.
1026.37 and 1026.38. The Bureau therefore proposes technical revisions
to comments 18(c)-4 and 18(c)(1)(iv)-2 to limit those comments'
discussions of the RESPA disclosures and their interaction with Sec.
1026.18(c) to reverse mortgages.
18(f) Variable Rate
18(f)(1)
18(f)(1)(iv)
Section 1026.18(f)(1)(iv) requires that, for variable-rate
transactions not secured by a consumer's principal dwelling and
variable-rate transactions secured by a consumer's principal dwelling
where the loan term is one year or less, creditors disclose an example
of the payment terms that would result from an interest rate increase.
The Bureau proposes to revise comment 18(f)(1)(iv)-2 by removing
paragraph 2.iii, which provides that such an example is not required in
a multiple-advance construction loan disclosed pursuant to appendix D,
part I. Appendix D, part I provides guidance for disclosing the
construction phase of a construction-to-permanent loan as a separate
transaction pursuant to Sec. 1026.17(c)(6)(ii) (or for disclosing a
construction-only loan). The Bureau's proposal to remove comment
18(f)(1)(iv)-2.iii is intended solely as a conforming amendment, to
reflect the fact that multiple-advance construction loans would no
longer be subject to the Sec. 1026.18 disclosure requirements under
this proposal. The Bureau believes that multiple-advance construction
loans are limited to transactions with real property as collateral, and
are not used for dwellings that are personal property or in reverse
mortgages. Therefore, all construction loans would be subject instead
to the new disclosure content requirements of Sec. Sec. 1026.37 and
1026.38. The Bureau seeks comment, however, on whether any reason
remains to preserve comment 18(f)(1)(iv)-2.iii.
18(g) Payment Schedule
Section 1026.18(g) requires the disclosure of the number, amounts,
and timing of payments scheduled to repay the obligation, for closed-
end transactions other than transactions subject to Sec. 1026.18(s).
Section 1026.18(s) requires an interest rate and payment summary table,
in place of the Sec. 1026.18(g) payment schedule, for closed-end
transactions secured by real property or a dwelling, other than
transactions that are secured by a consumer's interest in a timeshare
plan. As noted above, however, the Bureau is proposing to remove from
the coverage of Sec. 1026.18 transactions secured by real property,
other than reverse mortgages, and subject them to the integrated
disclosures under Sec. Sec. 1026.37 and 1026.38. Thus, under this
proposal, Sec. 1026.18(g) applies only to closed-end transactions that
are unsecured or secured by personal property that is not a dwelling.
All closed-end transactions that are secured by either real property or
a dwelling, including reverse mortgages, are subject instead to either
the interest rate and payment summary table disclosure requirement
under Sec. 1026.18(s) or the projected payments table disclosure
requirement under Sec. Sec. 1026.37(c) and 1026.38(c), as applicable.
In light of these changes to the coverage of Sec. 1026.18
generally, and specifically Sec. 1026.18(g), the Bureau is proposing
several conforming changes to the commentary under Sec. 1026.18(g).
Specifically, comment 18(g)-4 would be revised to remove a reference to
home repairs, and comment 18(g)-5, relating to mortgage insurance,
would be removed and reserved. In addition, comment 18(g)-6, which
currently discusses the coverage of mortgage transactions as between
Sec. Sec. 1026.18(g) and 1026.18(s), would be revised to reflect the
additional effect of proposed Sec. 1026.19(e) and (f), which requires
the new integrated disclosures set forth in proposed Sec. Sec. 1026.37
and 1026.38 for most transactions secured by real property. Finally,
the Bureau also proposes to amend comments 18(g)(2)-1 and -2 to remove
unnecessary, and potentially confusing, references to mortgages and
mortgage insurance.
18(k) Prepayment
Section 1026.18(k) implements the provisions of TILA section
128(a)(11), which requires that the transaction-specific disclosures
for closed-end consumer credit transactions disclose whether (1) a
consumer is entitled to a rebate of any finance charge upon prepayment
in full pursuant to acceleration or otherwise, if the obligation
involves a precomputed finance charge, and (2) a ``penalty'' is imposed
upon prepayment in full of such transactions if the obligation involves
a finance charge computed from time to time by application of a rate to
the unpaid principal balance. 15 U.S.C. 1638(a)(11). Commentary to
Sec. 1026.18(k) provides further guidance regarding the disclosures
and provides examples of prepayment penalties and the types of finance
charges where a consumer may be entitled to a rebate. For further
background on Sec. 1026.18(k), see the section-by-section analysis for
proposed Sec. 1026.37(b)(4), below.
The Bureau defines ``prepayment penalty'' in proposed Sec.
1026.37(b)(4) for transactions subject to Sec. Sec. 1026.19(e) and (f)
as a charge imposed for paying all or part of a loan's principal before
the date on which the principal balance is due, and provides examples
of prepayment penalties and other relevant guidance in proposed
commentary. The Bureau's proposed definition of ``prepayment penalty''
and commentary is based on its consideration of the existing statutory
and regulatory definitions of ``penalty'' and ``prepayment penalty''
under TILA and Regulation Z, the Board's proposed definitions of
prepayment penalty in its 2009 Closed-End Proposal, 2010 Mortgage
Proposal, and 2011 ATR Proposal, and the Bureau's authority under TILA
section 105(a) and Dodd-Frank Act sections 1032(a) and, for residential
mortgage loans, 1405(b). Further background on the Bureau's definition
of prepayment penalty and the basis of its legal authority for
proposing that definition are in the section-by-section analysis for
proposed Sec. 1026.37(b)(4), below.
As discussed in the section-by-section analysis for proposed Sec.
1026.37(b)(4), the Bureau is coordinating the definition of
``prepayment penalty'' in proposed Sec. 1026.37(b)(4) with the
definitions in the Bureau's other pending rulemakings under the Dodd-
Frank Act concerning ability-to-repay requirements, high-cost mortgages
under HOEPA, and mortgage servicing. The Bureau believes that, to the
extent consistent with consumer protection objectives, adopting a
consistent definition of ``prepayment penalty'' across its various
pending rulemakings affecting closed-end mortgages will facilitate
compliance. As an additional part of adopting a consistent regulatory
definition of ``prepayment penalty,'' the Bureau is proposing certain
conforming revisions to Sec. 1026.18(k) and associated commentary.
The Bureau recognizes that, with such conforming revisions to Sec.
1026.18(k) and associated commentary, the revised definition of
``prepayment penalty'' will apply to both closed-end mortgage and non-
mortgage transactions. In particular, the proposed conforming revisions
to Sec. 1026.18(k) define ``prepayment penalty'' with reference to a
prepayment of ``all or part of'' the principal balance of a loan
covered by the provision, while TILA section 128(a)(11) and current
Sec. 1026.18(k) and its associated commentary refer to prepayment ``in
full.'' This revision may lead to an expansion of the set of instances
that trigger disclosure under Sec. 1026.18 of a
[[Page 51154]]
prepayment penalty for closed-end transactions. The Bureau believes
that consumers entering into closed-end mortgage and non-mortgage
transactions alike will benefit from the transparency associated with
more frequent and consistent disclosure of prepayment penalties.
Therefore, the Bureau is using its authority under TILA section 105(a)
to make the proposed conforming revisions to Sec. 1026.18(k) because
they will effectuate the purposes of TILA by promoting the informed use
of credit. Similarly, these revisions will help ensure that the
features of these mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand better the costs, benefits, and risks associated with
mortgage transactions, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). The revisions will also
improve consumer awareness and understanding of residential mortgage
loans, and are in the interest of consumers and the public, consistent
with Dodd-Frank Act section 1405(b). The Bureau solicits comment on
this approach to the definition of prepayment penalty.
To conform with the proposed definition of prepayment penalty in
Sec. 1026.37(b)(4), proposed Sec. 1026.18(k)(1) deletes the phrase
``a statement indicating whether or not a penalty may be imposed if the
obligation is prepaid in full'' and replaces it with the phrase ``a
statement indicating whether or not a charge may be imposed for paying
all or part of a transaction's principal before the date on which the
principal is due.'' Proposed Sec. 1026.18(k)(2) adds the phrase ``or
in part'' at the end of the phrase ``a statement indicating whether or
not the consumer is entitled to a rebate of any finance charge if the
obligation is prepaid in full.''
Proposed revised comments 18(k)-1 through -3 insert the word
``prepayment'' before the words ``penalty'' and ``rebate'' when used,
to standardize the terminology across Regulation Z (i.e., Sec.
1026.32(d)(6) currently refers to ``prepayment penalty,'' and proposed
Sec. 1026.37(b)(4) uses the same phrase). Proposed revised comment
18(k)(1)-1 replaces the existing commentary text with the language from
proposed comments 37(b)(4)-2 and -3. For further background on proposed
comments 37(b)(4)-2 and -3, see the section-by-section analysis for
proposed Sec. 1026.37(b)(4), below.
18(r) Required Deposit
If a creditor requires the consumer to maintain a deposit as a
condition of the specific transactions, Sec. 1026.18(r) requires that
the creditor disclose a statement that the APR does not reflect the
effect of the required deposit. Comment 18(r)-6 provides examples of
arrangements that are not considered required deposits and therefore do
not trigger this disclosure. The Bureau is proposing to remove and
reserve paragraph 6.vi, which states that an escrow of condominium fees
need not be treated as a required deposit. In light of the changes to
the coverage of Sec. 1026.18 under this proposal, the only
transactions to which this guidance could apply are reverse mortgages,
which do not entail escrow accounts for condominium fees or any other
recurring expenses. Accordingly, the Bureau believes that comment
18(r)-6.vi is rendered unnecessary by this proposal. The Bureau seeks
comment, however, on whether any kind of transaction exists for which
this guidance would continue to be relevant under Sec. 1026.18, as
amended by this proposal.
18(s) Interest Rate and Payment Summary for Mortgage Transactions
Section 1026.18(s) currently requires the disclosure of an interest
rate and payment summary table for transactions secured by real
property or a dwelling, other than a transaction secured by a
consumer's interest in a timeshare plan. Under this proposal, however,
Sec. 1026.19(e) and (f) requires new, separate disclosures for
transactions secured by real property, other than reverse mortgages.
Generally, the disclosure requirements of Sec. 1026.19(e) and (f)
apply to transactions currently subject to current Sec. 1026.18(s),
except that reverse mortgages and transactions secured by dwellings
that are personal property would be excluded. In addition, as discussed
in the section-by-section analysis to proposed Sec. 1026.19,
transactions secured by a consumer's interest in a timeshare plan are
covered by the integrated disclosure requirements of Sec. 1026.19(e)
and (f), although such transactions are not currently subject to the
requirements of Sec. 1026.18(s).
The new, integrated disclosures include a different form of
projected payments table, under Sec. Sec. 1026.37(c) and 1026.38(c),
instead of the summary table under Sec. 1026.18(s). Accordingly, the
Bureau proposes to amend Sec. 1026.18(s) to provide that it applies to
transactions that are secured by real property or a dwelling, other
than transactions that are subject to Sec. 1026.19(e) and (f) (i.e.
reverse mortgages and dwellings that are not secured by real property).
The Bureau is proposing parallel revisions to comment 18(s)-1 to
reflect this change in the scope of Sec. 1026.18(s)'s coverage. The
Bureau also proposes to add a new comment 18(s)-4 to explain that Sec.
1026.18(s) governs only closed-end reverse mortgages and closed-end
transactions secured by a dwelling that is personal property.
18(s)(3) Payments for Amortizing Loans
18(s)(3)(i)(C)
Current Sec. 1026.18(s)(3)(i)(C) requires creditors to disclose
whether mortgage insurance is included in monthly escrow payments in
the interest rate and payment summary. The Bureau understands that some
government loan programs impose annual guarantee fees and that
creditors typically collect a monthly escrow for the payment of such
amounts. The Bureau has learned through industry inquiries that
uncertainty exists regarding whether such guarantee fees should be
disclosed as mortgage insurance under Sec. 1026.18(s)(3)(i)(C) if the
guarantee technically is not insurance under applicable law. One way to
comply with Sec. 1026.18(s) is to include such guarantee fees in the
monthly payment amount, without using the check box for ``mortgage
insurance.'' See comment 18(s)(3)(i)(C)-1 (escrowed amounts other than
taxes and insurance may be included but need not be). Although the
Bureau recognizes that government loan program guarantees may be
legally distinguishable from mortgage insurance, they are functionally
very similar. Moreover, such a technical, legal distinction is unlikely
to be meaningful to most consumers. Therefore, the Bureau believes that
the disclosure of such fees would be improved by including them in the
monthly escrow payment amount and using the check box for ``mortgage
insurance.''
For these reasons, pursuant to its authority under TILA section
105(a), Dodd-Frank Act section 1032(a), and, for residential mortgage
loans, Dodd-Frank Act section 1405(b), the Bureau proposes to revise
Sec. 1026.18(s)(3)(i)(C) to provide that mortgage insurance or any
functional equivalent must be included in the estimate of the amount of
taxes and insurance, payable with each periodic payment. Proposed
comment 18(s)(3)(i)(C)-2 is revised to conform to Sec.
1026.18(s)(3)(i)(C). Specifically, the proposed comment clarifies that,
for purposes of the interest rate and payment summary disclosure
required by Sec. 1026.18(s), ``mortgage insurance or any functional
equivalent'' includes ``mortgage guarantees'' (such as a United States
Department of Veterans
[[Page 51155]]
Affairs or United States Department of Agriculture guarantee) that
provide coverage similar to mortgage insurance, even if not technically
considered insurance under State or other applicable law. Since
mortgage insurance and mortgage guarantee fees are functionally very
similar, the Bureau believes that including both amounts in the
estimate of taxes and insurance on the table required by Sec.
1026.18(s) will promote the informed use of credit, thereby carrying
out the purposes of TILA, consistent with TILA section 105(a). In
addition, the proposed disclosure will ensure that more of the features
of the mortgage transaction are fully, accurately, and effectively
disclosed to consumers in a manner that will permit consumers to
understand the costs, benefits, and risks associated with the mortgage
transaction, consistent with Dodd-Frank Act section 1032(a), and will
improve consumer awareness and understanding of residential mortgage
loans and will be in the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b). Proposed comment
18(s)(3)(i)(C)-2 is consistent with the treatment of mortgage guarantee
fees on the projected payments table required by proposed Sec. Sec.
1026.37(c) and 1026.38(c). See proposed comment 37(c)(1)(i)(C)-1.
Section 1026.19 Certain Mortgage and Variable-Rate Transactions
As discussed below, the Bureau proposes to amend Sec. 1026.19 to
define the scope of the proposed integrated disclosures and to
establish the requirements for provision of those disclosures.
Coverage of Integrated Disclosure Requirements
For the reasons discussed in detail below, the Bureau proposes to
require delivery of the integrated disclosures for closed-end consumer
credit transactions secured by real property, other than reverse
mortgages. As discussed above in part IV, section 1032(f) of the Dodd-
Frank Act requires that ``the Bureau shall propose for public comment
rules and model disclosures that combine the disclosures required under
[TILA] and sections 4 and 5 of [RESPA], into a single, integrated
disclosure for mortgage loan transactions covered by those laws.'' 12
U.S.C. 5532(f). In addition, sections 1098 and 1100A of the Dodd-Frank
Act amended RESPA section 4(a) and TILA section 105(b), respectively,
to require the Bureau to publish a ``single, integrated disclosure for
mortgage loan transactions (including real estate settlement cost
statements) which includes the disclosure requirements of [TILA and
sections 4 and 5 of RESPA] that, taken together, may apply to a
transaction that is subject to both or either provisions of law.'' 12
U.S.C. 2604(a); 15 U.S.C. 1604(b). Accordingly, the Bureau is directed
to establish the integrated disclosure requirements for ``mortgage loan
transactions'' that are ``subject to both or either provisions of''
RESPA sections 4 and 5 (the statutory GFE and settlement statement
requirements) and TILA.\125\
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\125\ In addition to, and at the same times as, provision of the
GFE under RESPA section 5(c), section 5(d) also requires lenders to
provide to mortgage applicants the home buying information booklet
prepared by the Bureau pursuant to section 5(a). Although the Bureau
is not proposing to integrate the booklet with the RESPA GFE and
TILA disclosures, in the sense of building all of their contents
into a single form, the Bureau is proposing to implement the booklet
requirement in proposed Sec. 1026.19(g), discussed below. The same
considerations of coverage discussed here with respect to the
integrated disclosures also apply for purposes of the booklet
requirement.
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The Legal Authority discussion in part IV also notes that,
notwithstanding this integrated disclosure mandate, the Dodd-Frank Act
did not reconcile important differences between RESPA and TILA relating
to the timing of delivery of the RESPA settlement statement and the
TILA disclosure, as well as the persons and transactions on whom those
disclosure requirements are imposed. Accordingly, to meet the
integrated disclosure mandate, the Bureau believes that it must
reconcile such statutory differences. In addition to those differences
already noted, RESPA and TILA have certain differences in the types of
transactions to which their respective disclosure requirements apply.
The Bureau also recognizes that application of the integrated
disclosure requirements to certain transaction types may be
inappropriate, even though those transaction types are within the
scopes of one or both statutes. These issues and the Bureau's proposal
for addressing them are discussed below.
Differences in coverage of RESPA and TILA. RESPA applies generally
to ``federally related mortgage loans,'' which means loans (other than
temporary financing such as construction loans) secured by a lien on
residential real property designed principally for occupancy by one to
four families and that are (1) made by a lender with Federal deposit
insurance; (2) made, insured, guaranteed, supplemented, or assisted in
any way by any officer or agency of the Federal government; (3)
intended to be sold to Fannie Mae, Ginnie Mae, or (directly or through
an intervening purchaser) Freddie Mac; or (4) made by a ``creditor,''
as defined under TILA, that makes or invests in real estate loans
aggregating more than $1,000,000 per year, other than a State agency.
12 U.S.C. 2602(1), 2604.\126\ RESPA section 7(a) provides that RESPA
does not apply to credit for business, commercial, or agricultural
purposes or to credit extended to government agencies. Id. 2606(a).
Thus, RESPA disclosures essentially are required for consumer-purpose
loans that have some Federal nexus (or are made by a TILA creditor with
sufficient volume) and that are secured by real property improved by
single-family housing.
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\126\ Although section 4 of RESPA, 12 U.S.C. 2603, originally
recited that it applied to federally related mortgage loans as well,
as amended by the Dodd-Frank Act it no longer does so explicitly.
The Bureau nevertheless regards the RESPA settlement statement
requirement as continuing to apply to federally related mortgage
loans, consistent with the rest of RESPA's scope generally.
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Regulation X Sec. 1024.5 implements these statutory provisions.
Section 1024.5(a) provides that RESPA and Regulation X apply to
federally related mortgage loans, which are defined by Sec. 1024.2(b)
to parallel the statutory definition described above. Section 1024.5(b)
establishes certain exemptions from coverage, including loans on
property of 25 acres or more; loans for a business, commercial, or
agricultural purpose; temporary financing, such as construction loans,
unless the loan is used to finance transfer of title or may be
converted to permanent financing by the same lender; and loans on
unimproved property, unless within two years from settlement the loan
proceeds will be used to construct or place a residence on the land. 12
CFR 1024.5(b)(1) through (4). Unlike the others, the exemption for
loans secured by properties of 25 acres or more is not statutory and is
established by Regulation X only.
TILA, on the other hand, applies generally to consumer credit
transactions of all kinds, including unsecured credit and credit
secured by nonresidential property. 15 U.S.C. 1602(f) (``credit''
defined as ``the right granted by a creditor to a debtor to defer
payment of debt or to incur debt and defer its payment''). Similar to
RESPA, TILA excludes, among others, extensions of credit primarily for
business, commercial, or agricultural purposes, or to government or
governmental agencies or instrumentalities, or to organizations. Id.
1603(1). In contrast with RESPA and Regulation X, however, TILA (and
therefore Regulation Z) has no exclusion
[[Page 51156]]
for property of 25 acres or more, temporary financing, or vacant land.
Moreover, TILA applies only to transactions made by a person who
``regularly extends'' consumer credit. Id. 1602(g) (definition of
creditor).
Regulation Z Sec. Sec. 1026.2(a)(14) and (17) and 1026.3(a)
implement these statutory provisions. In particular, Sec.
1026.2(a)(17) defines creditor in pertinent part as a person who
regularly extends consumer credit, and Sec. 1026.2(a)(17)(v) further
provides that, for transactions secured by a dwelling (other than
``high-cost'' loans subject to HOEPA), a person ``regularly extends''
consumer credit if it extended credit more than five times in the
preceding calendar year. Section 1026.3(a) implements the exclusion of
credit extended primarily for a business, commercial, or agricultural
purpose, as well as credit extended to other than a natural person,
including government agencies or instrumentalities.
Although TILA generally applies to consumer credit that is
unsecured or secured by nonresidential property, Dodd-Frank Act section
1032(f), RESPA section 4(a), and TILA section 105(b) specifically limit
the integrated disclosure requirement to ``mortgage loan
transactions.'' The Dodd-Frank Act did not specifically define
``mortgage loan transaction,'' but did direct that the disclosures be
designed to incorporate disclosure requirements that may apply to ``a
transaction that is subject to both or either provisions of the law.''
As described above, five types of loans are currently covered by
TILA or RESPA, but not both. Under the foregoing provisions, loans to
finance home construction that do not finance transfer of title and for
which the creditor will not extend permanent financing (construction-
only loans), loans secured by unimproved land already owned by the
consumer and on which a residence will not be constructed within two
years (vacant-land loans), and loans secured by land of 25 acres or
more (25-acre loans) all are subject to TILA but are currently exempt
from RESPA coverage. In addition, loans secured by dwellings that are
not real property, such as mobile homes, houseboats, recreational
vehicles, and similar dwellings that are not deemed real property under
State law, (chattel-dwelling loans) could be considered ``mortgage loan
transactions,'' and they also are subject to TILA but not RESPA.
Meanwhile, federally related mortgage loans made by persons who are not
creditors under TILA, because they make five or fewer such loans per
year, are subject to RESPA but not TILA. In addition, some types of
mortgage loan transactions are covered by both statutes, but may
warrant uniquely tailored disclosures because they involve terms or
features that are so different from standard closed-end transactions
that use of the same form may cause significant consumer confusion and
compliance burden for industry.
For the reasons discussed in detail below, the Bureau proposes to
use its authority under TILA section 105(a), (b), and (f), RESPA
sections 4(a) and 19(a), and Dodd-Frank Act sections 1032(a) and (f)
and, for residential mortgage loans, 1405(b) to tailor the scope of
this proposed rule so that the integrated disclosure requirements apply
to all closed-end consumer credit transactions secured by real
property, other than reverse mortgages. Doing so will ensure that, in
most mortgage transactions, consumers receive integrated disclosure
forms developed by the Bureau through extensive testing that will
improve consumers' understanding of the transaction. Furthermore,
applying a consistent set of disclosure requirements to most mortgage
transactions will facilitate compliance by industry. However, for a
subset of mortgage transactions, the Bureau believes that application
of the integrated disclosure requirements would not improve consumer
understanding or facilitate compliance and that these transactions
should therefore be exempted from those requirements.
In some cases, the Bureau is proposing to exempt transactions that
could arguably fall within Dodd-Frank Act sections 1032(f), 1098, and
1100A but are sufficiently different from other mortgage transactions
that application of the integrated disclosure forms would neither
improve consumer understanding nor facilitate compliance by industry
(e.g., reverse mortgages, open-end transactions secured by real
property or a dwelling, and closed-end transactions secured by a
dwelling but not real property). These transactions will remains
subject to the existing disclosure requirements under Regulations X and
Z, as applicable, until the Bureau adopts integrated disclosures
specifically tailored to their distinct features.\127\
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\127\ As discussed below, certain new mortgage disclosure
requirements in the Dodd-Frank Act apply to these transactions,
among others. Accordingly, transactions that are not subject to the
proposed rule would be temporarily exempt from those requirements
until the Bureau adopts a new disclosure scheme specific to those
transactions.
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In other cases, the Bureau is proposing to expand the scope of
certain mortgage disclosure requirements in order to ensure that, in
most mortgage transactions, consumers receive a consistent set of
disclosures, which the Bureau believes will improve consumer
understanding and facilitate compliance. In particular, the proposed
rule applies to certain transactions that are currently subject to
Regulation Z but not Regulation X (construction-only loans, vacant-land
loans, and 25-acre loans). In addition, many of the new Dodd-Frank Act
mortgage disclosure requirements apply to ``residential mortgage
loans,'' which--as noted above--are defined in section 1401 of the
Dodd-Frank Act as any consumer credit transaction that is secured by a
mortgage on a dwelling or on residential real property that includes a
dwelling other than an open-end credit plan or an extension of credit
secured by a consumer's interest in a timeshare plan.\128\ Thus, in
addition to narrowing the application of these disclosures to exempt
temporarily reverse mortgages and transactions that are not secured by
real property, the proposed rule expands the application of these
disclosure requirements to apply to transactions secured by real
property that does not contain a dwelling. Similarly, the proposed rule
both narrows and expands the application of other Dodd-Frank Act
mortgage disclosure requirements to improve consumer understanding and
facilitate compliance.\129\
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\128\ See, e.g., Dodd-Frank Act Sec. 1402(a)(2) (requires
disclosure of loan originator identifier) (codified at TILA Sec.
129B(b)(1)(B)); Dodd-Frank Act Sec. 1414(c) (requires disclosure of
anti-deficiency protections) (codified at TILA Sec. 129C(g)); Dodd-
Frank Act Sec. 1414(d) (requires disclosure of partial payment
policy) (codified at TILA Sec. 129C(h)); Dodd-Frank Act Sec. 1419
(requires disclosure of certain aggregate amounts and wholesale rate
of funds) (codified at TILA Sec. 128(a)(17)); Dodd-Frank Act Sec.
1419 (requires disclosure of loan originator compensation) (codified
at TILA Sec. 128(a)(18)); Dodd-Frank Act Sec. 1419 (requires
disclosure of total interest) (codified at TILA Sec. 128(a)(19)).
\129\ See, e.g., Dodd-Frank Act Sec. 1414(a) (requires negative
amortization disclosure for open or closed end consumer credit plans
secured by a dwelling or residential real property that includes a
dwelling that provides or permits a payment plan that may result in
negative amortization) (codified at TILA Sec. 129C(f)); Dodd-Frank
Act Sec. 1419 (requires certain payment disclosures for variable
rate residential mortgage loans for which an escrow account will be
established) (codified at TILA Sec. 128(a)(16)); Dodd-Frank Act
Sec. Sec. 1461(a), 1462, and 1465 (requires certain payment and
escrow disclosures for consumer credit transactions secured by a
first lien on the principal dwelling of the consumer, other than an
open end credit plan or reverse mortgage) (codified at TILA Sec.
129D(h) and (j) and 128(b)(4)); Dodd-Frank Act Sec. 1475 (permits
disclosure of appraisal management fees for federally related
mortgage loans) (codified at RESPA Sec. 4(c)).
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Accordingly, the Bureau believes adjusting the application of the
provisions of TILA and RESPA is within its general mandate under Dodd-
Frank
[[Page 51157]]
Act section 1032(f) to prescribe integrated disclosures, which requires
that the Bureau reconcile differences in coverage between the two
statutes. The Bureau also believes that this approach is expressly
authorized by sections 4(a) of RESPA and 105(b) of TILA because both
provisions direct the Bureau to prescribe disclosures that ``may apply
to a transaction that is subject to both or either provisions of law.''
(Emphasis added.) Those provisions authorize requiring the integrated
disclosures for any transaction that is subject to either RESPA or
TILA, and not only a transaction that is subject to both, precisely so
that the Bureau has the flexibility necessary to reconcile those
statutes' coverage differences for purposes of the integrated
disclosure mandate.
Furthermore, the Bureau believes that applying the integrated
disclosures to closed-end consumer credit transactions secured by real
property other than reverse mortgages will carry out the purposes of
TILA and RESPA, consistent with TILA section 105(a) and RESPA section
19(a), by promoting the informed use of credit and more effective
advance disclosure of settlement costs, respectively. In addition, the
proposed scope will ensure that the integrated disclosure requirements
are applied only in circumstances where they will permit consumers to
understand the costs, benefits, and risks associated with the mortgage
transaction, consistent with Dodd-Frank Act section 1032(a), and will
improve consumer awareness and understanding of residential mortgage
loans, consistent with Dodd-Frank Act section 1405(b).
Finally, the Bureau also proposes the exemption pursuant to TILA
section 105(f). The Bureau has considered the factors in TILA section
105(f) and believes that an exemption is appropriate under that
provision. Specifically, the Bureau believes that the proposed
exemption is appropriate for all affected borrowers, regardless of
their other financial arrangements and financial sophistication and the
importance of the loan to them. Similarly, the Bureau believes that the
proposed exemption is appropriate for all affected loans, regardless of
the amount of the loan and whether the loan is secured by the principal
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers. Based on these considerations, the
results of the Bureau's consumer testing, and the analysis discussed
elsewhere in this proposal, the Bureau believes that the proposed
exemptions are appropriate.
Coverage issues with HELOCs. Open-end transactions secured by real
property or a dwelling (home-equity lines of credit, or HELOCs) and
reverse mortgages are within the statutory scope of both TILA and RESPA
and also reasonably could be considered ``mortgage loan transactions.''
Nevertheless, both types of transaction are by their natures
fundamentally different from other forms of mortgage credit. For the
reasons discussed below, the Bureau is proposing to exclude these types
of transaction from the coverage of the integrated disclosure
requirement.
HELOCs are open-end credit plans and therefore are appropriately
subject to the open-end disclosure requirements in subpart B of
Regulation Z. The Bureau looked to the closed-end content requirements
under TILA section 128 in developing the integrated disclosures. It did
so because the Dodd-Frank Act mandate to propose integrated disclosures
includes section 5 of RESPA, which requires the GFE, and only closed-
end transactions are subject to the parallel, early disclosure
requirement under TILA section 128(b)(2)(A). Subjecting open-end
transactions to the integrated disclosure requirements thus would
result in consumers who are obtaining open-end credit receiving closed-
end disclosures, many of which would be inapposite and therefore
potentially confusing or even misleading. Further, in recognition of
the distinct nature of open-end credit, Regulation X effectively
exempts such plans from the RESPA disclosure requirements. Sections
1024.6(a)(2) and 1024.7(h) of Regulation X state that, for HELOCs, the
requirements to provide the ``special information booklet'' regarding
settlement costs and the GFE, respectively, are satisfied by delivery
of the open-end disclosures required by Regulation Z. And Regulation X
Sec. 1024.8(a) exempts HELOCs from the settlement statement
requirement altogether. The Bureau expects to address HELOCs through a
separate, future rulemaking that will establish a distinct disclosure
scheme tailored to their unique features, which will achieve more
effectively the purposes of both RESPA and TILA.\130\
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\130\ In 2009, the Board proposed significant revisions to the
disclosure requirements for HELOCs. See 74 FR 43428 (Aug. 26, 2009).
The Bureau is now responsible for this proposal.
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Coverage issues with reverse mortgages. The Bureau is aware that
lenders and creditors face significant difficulties applying the
disclosure requirements of RESPA and TILA to reverse mortgages, in
light of those transactions' unusual terms and features. The
difficulties appear to stem from the fact that a number of the
disclosed items under existing Regulations X and Z are not relevant to
such transactions and therefore have no meaning. Moreover, the Bureau
developed the proposed integrated disclosure forms for use in
``forward'' mortgage transactions and did not subject those forms,
which implement essentially the same statutory disclosure requirements
as do the current regulations, to any consumer testing using reverse
mortgage transactions. The Bureau therefore is concerned that the use
of the integrated disclosures for reverse mortgages may result in
numerous disclosures of items that are not applicable, difficult to
apply, or potentially even misleading or confusing for consumers.\131\
As with HELOCs, the Bureau expects to address reverse mortgages through
a separate, future rulemaking process that will establish a distinct
disclosure scheme.\132\
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\131\ In addition, many reverse mortgages are structured as
open-end plans and therefore may be subject to the same concerns
noted with respect to HELOCs.
\132\ The Board's 2010 Mortgage Proposal included several
provisions relating to reverse mortgages. See 75 FR 58539, 58638-59.
Specifically, the Board proposed requiring creditors to use new
forms of disclosures designed specifically for reverse mortgages,
rather than the standard TILA disclosures. The 2010 Mortgage
Proposal also proposed significant protections for reverse mortgage
consumers, including with respect to advertising of reverse
mortgages and cross-selling of reverse mortgages with other
financial and insurance products. In addition, section 1076 of the
Dodd-Frank Act required the Bureau to engage in a study of reverse
mortgage transactions and instructed the Bureau to consider
protections with respect to obtaining reverse mortgages for the
purpose of funding investments, annuities, and other investment
products and the suitability of a borrower in obtaining a reverse
mortgage. The Bureau intends that its future rulemaking for reverse
mortgages will address the issues identified in the Board's 2010
Mortgage Proposal and the findings of the Bureau's reverse mortgage
study.
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Coverage issues with chattel-dwelling loans. Chattel-dwelling loans
(such as loans secured by mobile homes) do not involve real property,
by definition. The Bureau estimates that approximately one-half of the
closing-cost content of the integrated disclosures is not applicable to
such transactions because they more closely resemble motor vehicle
transactions than true mortgage transactions. Such transactions
currently are not subject to RESPA and, unlike the transactions above
that involve real property, generally are not consummated with ``real
estate settlements,'' which are the basis of RESPA's coverage. Thus,
were these
[[Page 51158]]
transactions subject to the integrated disclosures under this proposal,
a significant portion of the disclosures' content would be
inapplicable. The Bureau believes that permitting those items to be
omitted altogether could compromise the overall integrity of the
disclosures, which were developed through consumer testing that never
contemplated such extensive omissions, and the Bureau therefore has no
basis for expecting that they would necessarily be as informative to
consumers if so dramatically altered. The Bureau has similar concerns
about keeping the overall forms intact but directing creditors to
complete the inapplicable portions with ``N/A'' or simply to leave them
blank. Moreover, the Bureau believes that such an approach would risk
undermining consumers' understanding of their transactions, which would
be inconsistent with the purpose of this rulemaking, because they could
be distracted by extensive blank or ``N/A'' disclosures from the
relevant disclosures present on the form.
Although chattel-dwelling loans are subject to TILA, excluding them
from coverage of the integrated disclosures would not excuse them from
TILA's disclosure requirements. Rather, they would remain subject to
the existing closed-end TILA disclosure requirements as implemented in
Sec. 1026.18. Thus, this approach preserves the current treatment of
chattel-dwelling loans under both RESPA and TILA. The Bureau expects
that it will undertake improvements to the Sec. 1026.18 disclosures in
the future, through a process similar to the one used in this proposal.
The Bureau believes that the TILA disclosures resulting from that
process would be more appropriate and more beneficial to consumers than
the integrated disclosures under this proposal. Excluding chattel-
dwellings from the integrated disclosure requirements means they would
not be subjected by this rulemaking to certain new disclosure
requirements added to TILA section 128(a) by the Dodd-Frank Act. As
discussed under Sec. 1026.1(c) above, certain new mortgage disclosure
requirements established by the Dodd-Frank Act are being deferred until
such requirements are implemented by regulations. Such regulations
include, but are not limited to, the final rule that will be adopted
under this proposal. As noted above, the Bureau plans to address
chattel-dwellings, as well as reverse mortgages and HELOCs, in future
rulemakings. Accordingly, pursuant to the authority discussed above,
those transactions also are subject to the temporary exemption in
proposed Sec. 1026.1(c) until those rulemakings are completed.
The Bureau's proposal. For the reasons discussed above, proposed
Sec. 1026.19(e) and (f), discussed further below, requires that the
integrated disclosures be provided for closed-end consumer credit
transactions secured by real property, other than a reverse mortgage
subject to Sec. 1026.33. Similarly, proposed Sec. 1026.19(g) requires
provision of the home buying information booklet for closed-end
consumer credit transactions secured by real property and states in
Sec. 1026.19(g)(1)(iii)(C) that the requirement does not apply to
reverse mortgages. Accordingly, construction-only loans and vacant-land
loans are subject to the proposed integrated disclosure and booklet
requirements. On the other hand, chattel-dwelling loans are not subject
to the proposed integrated disclosure or booklet requirements and,
instead, remain subject to the existing disclosure requirements in
Sec. 1026.18. Finally, federally related mortgage loans extended by a
person that is not a creditor, as defined in Regulation Z Sec.
1026.2(a)(17), are not subject to the proposed integrated disclosure or
booklet requirements because such transactions are not subject to
Regulation Z at all.
The Bureau believes that, although construction-only loans, vacant-
land loans, and 25-acre loans all currently are exempt from RESPA
coverage either by statute or regulation, consumers may benefit from
the integrated disclosures in such transactions. If such transactions
were not subjected to the integrated disclosure requirements, they
would remain subject to the existing TILA disclosures under Sec.
1026.18. The Bureau believes this treatment would deprive consumers in
such transactions of the benefits of the enhanced disclosures developed
for this proposal. Moreover, these types of transactions involve real
property and, therefore, are amenable to disclosure of the information
currently disclosed through the RESPA GFE and settlement statement
requirements. Thus, the Bureau expects that creditors should be able to
use existing systems to provide the integrated disclosures for such
transactions. The Bureau solicits comment, however, on whether
application of the integrated disclosures to these transactions will
impose significant burdens on creditors.
The Bureau also believes that, if a lender extends five or fewer
consumer credit transactions secured by a consumer's dwelling in a
year, it should not be subject to TILA or Regulation Z. This treatment
preserves the status of such transactions under existing Regulation Z.
That is, currently, consumers do not receive Regulation Z disclosures
from such lenders because they are not considered ``creditors''
pursuant to Sec. 1026.2(a)(17)(v). The Bureau believes that
eliminating this exemption could represent a significant expansion of
TILA coverage and is unaware of any significant problems encountered by
consumers obtaining credit from such small lenders that might justify
such an expansion. Further, because such small creditors may lack the
systems to comply with TILA, they may cease to extend credit if forced
to establish compliance systems. Although preserving this exemption
means that the integrated disclosures would not be received by
consumers in such transactions, the Bureau expects the impact of such
an exemption to be limited. Based on data reported for 2010 under the
Home Mortgage Disclosure Act (HMDA), 12 U.S.C. 2801 et seq., the Bureau
notes that 569 creditors (seven percent of all HMDA reporters) reported
five or fewer originations and, more significantly, that their combined
originations of 1399 loans equaled only 0.02 percent of all
originations reported under HMDA for that year. These transactions
would remain subject to the RESPA disclosure requirements under
Regulation X.
Provision of Current Disclosures Under TILA and RESPA
TILA. Section 128(b)(2)(A) of TILA provides that for an extension
of credit secured by a consumer's dwelling, which is also subject to
RESPA, good faith estimates of the disclosures in section 128(a) shall
be made in accordance with regulations of the Bureau and shall be
delivered or placed in the mail not later than three business days
after the creditor receives the consumer's written application. 15
U.S.C. 1638(b)(2)(A). Section 128(b)(2)(A) also requires these
disclosures to be delivered at least seven business days before
consummation. Regulation Z implements this provision in Sec.
1026.19(a), which generally tracks the statute except that it does not
apply to home equity lines of credit subject to Sec. 1026.40 and
mortgage transactions secured by a consumer's interest in a timeshare
plan subject to Sec. 1026.19(a)(5).
Section 128(b)(2)(A) and (D) of TILA states that, if the
disclosures provided pursuant to section 128(b)(2)(A) contain an annual
percentage rate that is no longer accurate, the creditor shall furnish
an additional, corrected
[[Page 51159]]
statement to the borrower not later than three business days before the
date of consummation of the transaction. 15 U.S.C. 1638(b)(2)(A), (D).
Regulation Z implements TILA's requirement that the creditor deliver
corrected disclosures in Sec. 1026.19(a)(2)(ii).
RESPA. Section 5(c) of RESPA states that lenders shall provide,
within three days of receiving the consumer's application, a good faith
estimate of the amount or range of charges for specific settlement
services the borrower is likely to incur in connection with the
settlement as prescribed by the Bureau.\133\ 12 U.S.C. 2604(c). Section
3(3) of RESPA defines ``settlement services'' as:
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\133\ RESPA section 5(d) provides that ``Each lender referred to
in subsection (a) of this section shall provide the booklet
described in such subsection to each person from whom it receives or
for whom it prepares a written application to borrow money to
finance the purchase of residential real estate. Such booklet shall
be provided by delivering it or placing it in the mail not later
than 3 business days after the lender receives the application, but
no booklet need be provided if the lender denies the application for
credit before the end of the 3-day period.'' RESPA section 5(c)
provides that ``Each lender shall include with the booklet a good
faith estimate of the amount or range of charges for specific
settlement services the borrower is likely to incur in connection
with the settlement as prescribed by the Bureau.'' Thus, the lender
must deliver the good faith estimate not later than three business
days after receiving the consumer's application.
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[A]ny service provided in connection with a real estate settlement
including, but not limited to, the following: title searches, title
examinations, the provision of title certificates, title insurance,
services rendered by an attorney, the preparation of documents,
property surveys, the rendering of credit reports or appraisals, pest
and fungus inspections, services rendered by a real estate agent or
broker, the origination of a federally related mortgage loan
(including, but not limited to, the taking of loan applications, loan
processing, and the underwriting and funding of loans), and the
handling of the processing, and closing or settlement. 12 U.S.C.
2602(3).
Section 1024.7(a)(1) of Regulation X currently provides that, not
later than three business days after a lender receives an application,
or information sufficient to complete an application, the lender must
provide the applicant with the GFE.
In contrast to the TILA and RESPA good faith estimate requirements,
which apply to creditors, the RESPA settlement statement requirement
generally applies to settlement agents. Specifically, section 4 of
RESPA provides that the settlement statement must be completed and made
available for inspection by the borrower at or before settlement by the
person conducting the settlement. 12 U.S.C. 2603(b). Section 4 also
provides that, upon the request of the borrower, the person who will
conduct the settlement shall permit the borrower to inspect those items
which are known to such person on the settlement statement during the
business day immediately preceding the day of settlement. Id. These
requirements are implemented in Regulation X Sec. 1024.10(a).
The Dodd-Frank Act. Sections 1098 and 1100A of the Dodd-Frank Act
amended RESPA and TILA to require an integrated disclosure that ``may
apply to a transaction that is subject to both or either provisions of
law.'' Accordingly, as discussed below, the Bureau is proposing to
integrate the TILA and RESPA good faith estimate requirements in a new
Sec. 1026.19(e). The Bureau is also proposing to integrate the TILA
and RESPA settlement statement requirements in a new Sec. 1026.19(f).
Finally, as appropriate, the Bureau is proposing to incorporate related
statutory and regulatory requirements into Sec. 1026.19 and to make
conforming amendments.
19(a) Reverse Mortgage Transactions Subject to RESPA
As discussed above, the proposal narrows the scope of Sec.
1026.19(a) so that all loans currently subject to Sec. 1026.19(a),
other than reverse mortgages, are instead subject to proposed Sec.
1026.19(e) and (f). Pursuant to its authority under section 105(a) of
TILA, the Bureau proposes to amend Sec. 1026.19(a)(1)(i) to apply only
to reverse mortgage transactions subject to both Sec. 1026.33 and
RESPA. This proposed amendment is consistent with TILA's purpose in
that it seeks to ensure meaningful disclosure of credit terms by
requiring the integrated disclosures only with respect to the loans for
which they were designed--mortgage loans secured by real property other
than reverse mortgages. This modification will also be in the interest
of consumers and the public because consumer understanding will be
improved if consumers of reverse mortgages are not provided with
inapplicable disclosures, consistent with Dodd-Frank Act section
1405(b). The Bureau also proposes to make conforming changes to Sec.
1026.19(a)(1)(ii), to delete Sec. 1026.19(a)(5), to delete comments
19(a)(5)(ii)-1 through -5, and to delete comments 19(a)(5)(iii)-1 and -
2.
19(e) Mortgage Loans Secured by Real Property--Early Disclosures
19(e)(1) Provision
19(e)(1)(i) Creditor
As discussed above, the Bureau is proposing to integrate the good
faith estimate requirements in TILA section 128 and RESPA section 5 in
Sec. 1026.19(e)(1)(i), which provides that in a closed-end consumer
credit transaction secured by real property, other than a reverse
mortgage subject to Sec. 1026.33, the creditor shall make good faith
estimates of the disclosures listed in Sec. 1026.37. Proposed comment
19(e)(1)(i)-1 explains that Sec. 1026.19(e)(1)(i) requires early
disclosure of credit terms in closed-end credit transactions that are
secured by real property, other than reverse mortgages. These
disclosures must be provided in good faith. Except as otherwise
provided in Sec. 1026.19(e), a disclosure is in good faith if it is
consistent with the best information reasonably available to the
creditor at the time the disclosure is provided.
19(e)(1)(ii) Mortgage Broker
Currently, neither TILA's nor RESPA's disclosure requirements apply
to mortgage brokers. The disclosure requirements of Regulation Z also
do not apply to mortgage brokers. Section 1024.7(b) of Regulation X,
however, currently permits mortgage brokers to deliver the GFE,
provided that the mortgage broker otherwise complies with the relevant
requirements of Regulation X, and provided that the lender remains
responsible for ensuring that the mortgage broker does so.
The Bureau recognizes that, in some cases, permitting mortgage
brokers to deliver the integrated disclosure may benefit consumers.
Some consumers may have better relationships with mortgage brokers than
with creditors, which may enable mortgage brokers to assist those
consumers with understanding the GFE more effectively and efficiently.
However, there are concerns regarding the ability of mortgage brokers
to provide the information required by the integrated Loan Estimate
accurately and reliably. For example, it is not clear that mortgage
brokers have the ability to inform the consumer whether the lender
intends to service the consumer's loan, or whether the lender will
permit a person to assume the consumer's loan on the original terms.
Similarly, it is uncertain that mortgage brokers have the ability to
estimate taxes and insurance, which is a new disclosure on the Loan
Estimate that is not included on the current RESPA GFE, to the level
[[Page 51160]]
of specificity required for the Loan Estimate under proposed Sec.
1026.19(e)(3). There is an additional concern that mortgage brokers do
not have the technology necessary to comply with TILA's requirements
regarding delivery of estimates, delivery of revised disclosures, and
recordkeeping.
The Bureau proposes to exercise its authority under TILA section
105(a) and, with respect to residential mortgage loans, Dodd-Frank Act
section 1405(b) to preserve the flexibility in current Regulation X by
permitting the mortgage broker to provide the integrated Loan Estimate
under Sec. 1026.19(e)(1)(ii), subject to certain limitations. This
proposed provision is consistent with TILA's purpose in that consumers
will be able to compare more readily the credit terms available if
mortgage brokers and creditors are able to disclose available credit
terms by use of the Loan Estimate. In addition, this modification will
be in the interest of consumers and the public because consumer
understanding and awareness will be improved if consumers can rely on
the Loan Estimate regardless of whether it is provided by a creditor or
mortgage broker, consistent with Dodd-Frank Act section 1405(b).
Specifically, proposed Sec. 1026.19(e)(1)(ii) provides that, in
providing the Loan Estimate, the mortgage broker must act as the
creditor in every respect, including complying with all of the
requirements of proposed Sec. 1026.19(e) and assuming all related
responsibilities and obligations. The Bureau also seeks comment on the
ability of mortgage brokers to comply with the requirements of TILA. In
addition, the Bureau seeks comment on the ability of creditors to
coordinate their operations with mortgage brokers in a manner that
provides the same or better information to consumers than if the
creditor alone were permitted to provide the disclosures.
Proposed comment 19(e)(1)(ii)-1 explains that a mortgage broker may
provide the disclosures required under Sec. 1026.19(e)(1)(i) instead
of the creditor. By assuming this responsibility, the mortgage broker
becomes responsible for complying with all of the relevant requirements
as if it were the creditor, meaning that ``mortgage broker'' should be
read in the place of ``creditor'' for all the relevant provisions of
Sec. 1026.19(e), except where the context indicates otherwise. The
creditor and mortgage broker must effectively communicate to ensure
timely and accurate compliance with the requirements of Sec.
1026.19(e). Proposed comment 19(e)(1)(ii)-2 provides further guidance
on the mortgage broker's responsibilities in the event that the
mortgage broker provides the disclosures required under Sec.
1026.19(e), explaining that if a mortgage broker issues any disclosure
under Sec. 1026.19(e), the mortgage broker must comply with the
requirements of Sec. 1026.19(e). For example, if the mortgage broker
receives sufficient information to complete an application, the
mortgage broker must issue the disclosures required under Sec.
1026.19(e)(1)(i) within three business days in accordance with Sec.
1026.19(e)(1)(iii). If the broker subsequently receives information
sufficient to establish that a disclosure provided under Sec.
1026.19(e)(1)(i) must be reissued under Sec. 1026.19(e)(3)(iv), then
the mortgage broker is responsible for ensuring that a revised
disclosure is provided.
Proposed comment 19(e)(1)(ii)-3 discusses the creditor's
responsibilities in the event that a mortgage broker provides
disclosures under Sec. 1026.19(e). The proposed comment explains that
if a mortgage broker issues any disclosure required under Sec.
1026.19(e) in the creditor's place, the creditor remains responsible
under Sec. 1026.19(e) for ensuring that the requirements of Sec.
1026.19(e) have been satisfied. For example, the creditor must ensure
that the broker provides the disclosures required under Sec.
1026.19(e) not later than three business days after the mortgage broker
received information sufficient to constitute an application, as
defined in Sec. 1026.2(a)(3)(ii). The creditor does not satisfy the
requirements of Sec. 1026.19(e) if it provides duplicative
disclosures. For example, a creditor does not meet its burden by
issuing disclosures required under Sec. 1026.19(e) that mirror
disclosures already issued by the broker for the purpose of
demonstrating that the consumer received timely disclosures. If the
broker provides an erroneous disclosure, the creditor is responsible
and may not issue a revised disclosure correcting the error. The
creditor is expected to maintain communication with the broker to
ensure that the broker is acting in place of the creditor. This comment
is consistent with guidance provided by HUD in the HUD RESPA FAQs p. 8-
10, 16, 26, 29 (``GFE--General''). Disclosures provided by a
broker in accordance with Sec. 1026.19(e)(1)(ii) satisfy the
creditor's obligation under Sec. 1026.19(e)(1)(i).
Proposed comment 19(e)(1)(ii)-4 discusses when mortgage brokers
must comply with Sec. 1026.19(e)(2)(ii), regarding the provision of
preliminary written estimates specific to the consumer. The proposed
comment explains that Sec. 1026.19(e)(1)(ii) requires mortgage brokers
to comply with Sec. 1026.19(e)(2)(ii) if a mortgage broker provides
any disclosures under Sec. 1026.19(e). For example, if a mortgage
broker never provides disclosures required by Sec. 1026.19(e), the
mortgage broker need not include the disclosure required by Sec.
1026.19(e)(2)(ii) on written information provided to consumers.
19(e)(1)(iii) Timing
Section 128(b)(2)(A) of TILA provides that good faith estimates of
the disclosures under section 128(a) shall be delivered or placed in
the mail not later than three business days after the creditor receives
the consumer's written application. 15 U.S.C. 1638(b)(2)(A). Section
128(b)(2)(A) also requires these disclosures to be delivered at least
seven business days before consummation. RESPA requires lenders to
provide the GFE not later than three business days after receiving the
consumer's application, but does not require provision at least seven
business days before consummation. These requirements are implemented
in Sec. 1026.19(a)(1)(i) and (a)(2)(i) of Regulation Z and Sec.
1024.7(a)(2) of Regulation X, respectively.
The Bureau believes that, for the proposed rule to be consistent
with the requirements of both statutes, both the three-business-day
delivery requirement and the seven-business-day waiting period should
apply to the integrated Loan Estimate. Although RESPA does not contain
a seven-business-day waiting period, this waiting period is consistent
with the purposes of RESPA, and adopting it for the integrated
disclosures may best effectuate the purposes of both TILA and RESPA by
enabling the informed use of credit and ensuring effective advance
disclosure of settlement charges. Accordingly, pursuant to its
authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank
Act section 1032(a), and, for residential mortgage loans, section
1405(b) of the Dodd-Frank Act, the Bureau proposes Sec.
1026.19(e)(1)(iii), which provides that the creditor shall deliver the
disclosures required by Sec. 1026.19(e)(1)(i) not later than the third
business day after the creditor receives the consumer's application, as
defined in proposed Sec. 1026.2(a)(3)(ii), and that the creditor shall
deliver these disclosures not later than the seventh business day
before consummation of the transaction. This proposed provision is
consistent with TILA's purposes in that consumers will be able to
compare more readily the various credit terms available and avoid the
uninformed use of credit, thereby assuring a meaningful
[[Page 51161]]
disclosure of credit terms. This proposed regulation is consistent with
section 19(a) of RESPA because it achieves the purposes of RESPA by
requiring more effective advance disclosure to consumers of settlement
costs. In addition, the Bureau is proposing this provision pursuant to
its authority under Dodd-Frank Act section 1032(a) because the proposal
ensures that the features of the credit transaction are fully,
accurately, and effectively disclosed to the consumer in a manner that
permits consumers to understand the costs, benefits, and risks
associates with the mortgage loan by providing sufficient time to
review, question, and understand the entire cost of the transaction,
which is also in the best interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b).
Proposed comment 19(e)(1)(iii)-1 further clarifies this provision
and provides illustrative examples. Proposed comment 19(e)(1)(iii)-2
discusses the waiting period, providing that the seven-business-day
waiting period begins when the creditor delivers the disclosures or
places them in the mail, not when the consumer receives or is presumed
to have received the disclosures. For example, if a creditor delivers
the early disclosures to the consumer in person or places them in the
mail on Monday, June 1, consummation may occur on or after Tuesday,
June 9, the seventh business day following delivery or mailing of the
early disclosures, because, for the purposes of Sec.
1026.19(e)(1)(iii), Saturday is a business day, pursuant to Sec.
1026.2(a)(6).
Proposed comment 19(e)(1)(iii)-3 relates to denied or withdrawn
applications, explaining that the creditor may determine within the
three-business-day period that the application will not or cannot be
approved on the terms requested, such as when a consumer's credit score
is lower than the minimum score required for the terms the consumer
applied for, or the consumer applies for a type or amount of credit
that the creditor does not offer. In that case, or if the consumer
withdraws the application within the three-business-day period, the
creditor need not make the disclosures required under Sec.
1026.19(e)(1)(i). If the creditor fails to provide early disclosures
and the transaction is later consummated on the terms originally
applied for, then the creditor violates Sec. 1026.19(e)(1)(i). If,
however, the consumer amends the application because of the creditor's
unwillingness to approve it on the terms originally applied for, no
violation occurs for not providing disclosures based on those original
terms. But the amended application is a new application subject to
Sec. 1026.19(e)(1)(i).
19(e)(1)(iv) Delivery
Section 128(b)(2)(E) of TILA provides that, if the disclosures are
mailed to the consumer, the consumer is considered to have received
them three business days after they are mailed. 15 U.S.C.
1638(b)(2)(E). RESPA provides that the GFE may be delivered either in
person or by placing it in the mail. 12 U.S.C. Sec. 2604(c) and (d).
Regulation Z provides that if the disclosures are provided to the
consumer by means other than delivery in person, the consumer is
considered to have received the disclosures three business days after
they are mailed or delivered. See Sec. 1026.19(a)(1)(ii). Regulation X
contains a similar provision. See Sec. 1024.7(a)(4).
To establish a consistent standard for the integrated Loan
Estimate, pursuant to its authority under TILA section 105(a), RESPA
section 19(a), Dodd-Frank Act section 1032(a), and, for residential
mortgage loans, section 1405(b) of the Dodd-Frank Act, the Bureau
proposes Sec. 1026.19(e)(1)(iv), which states that, if the disclosures
are provided to the consumer by means other than delivery in person,
the consumer is presumed to have received the disclosures three
business days after they are mailed or delivered to the address
specified by the consumer.
Proposed comment 19(e)(1)(iv)-1 explains that if any disclosures
required under Sec. 1026.19(e)(1)(i) are not provided to the consumer
in person, the consumer is presumed to have received the disclosures
three business days after they are mailed or delivered. This is a
presumption which may be rebutted by providing evidence that the
consumer received the disclosures earlier than three business days. The
proposed comment also contains illustrative examples. Proposed comment
19(e)(1)(iv)-2 clarifies that the presumption established in Sec.
1026.19(e)(1)(iv) applies to methods of electronic delivery, such as
email. However, creditors using electronic delivery methods, such as
email, must also comply with Sec. 1026.17(a)(1). The proposed comment
also contains illustrative examples.
19(e)(1)(v) Consumer's Waiver of Waiting Period Before Consummation
Section 128(b)(2)(F) of TILA provides that the consumer may waive
or modify the timing requirements for disclosures to expedite
consummation of a transaction, if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. Section 128(b)(2)(F) further provides that: (1) the term
``bona fide personal financial emergency'' may be further defined in
regulations issued by the Bureau; (2) the consumer must provide the
creditor with a dated, written statement describing the emergency and
specifically waiving or modifying the timing requirements, which bears
the signature of all consumers entitled to receive the disclosures; and
(3) the creditor must provide, at or before the time of waiver or
modification, the final disclosures. 15 U.S.C. 1638(b)(2)(F). This
provision is implemented in Sec. 1026.19(a)(3) of Regulation Z.
Neither RESPA nor Regulation X contains a similar provision.
Although the Bureau understands that waivers based on a bona fide
personal financial emergency are rare, this exception serves an
important purpose: consumers should be able to waive the protection
afforded by the waiting period if, in the face of a financial
emergency, the waiting period does more harm than good. Accordingly,
pursuant to its authority under TILA section 105(a) and RESPA section
19(a) the Bureau is proposing Sec. 1026.19(e)(1)(v), which allows a
consumer to waive the seven-business-day waiting period in the event of
a bona fide personal financial emergency. In addition, the Bureau seeks
comment on the nature of waivers based on bona fide personal financial
emergencies. The Bureau also seeks comment on whether the bona fide
personal financial emergency exception is needed more in some contexts
than in others (e.g., in refinance transactions or purchase money
transactions).
Proposed comment 19(e)(1)(v)-1 explains that a consumer may modify
or waive the right to the seven-business-day waiting period required by
Sec. 1026.19(e)(1)(iii) only after the creditor makes the disclosures
required by Sec. 1026.19(e)(1)(i). The consumer must have a bona fide
personal financial emergency that necessitates consummating the credit
transaction before the end of the waiting period. Whether these
conditions are met is determined by the individual facts and
circumstances. The imminent sale of the consumer's home at foreclosure,
where the foreclosure sale will proceed unless loan proceeds are made
available to the consumer during the waiting period, is one example of
a bona fide personal financial emergency. Each consumer who is
primarily liable on the legal obligation must sign the written
statement for the waiver to be effective. Proposed comment 19(e)(1)(v)-
2
[[Page 51162]]
provides illustrative examples of this requirement.
19(e)(1)(vi) Shopping for Settlement Service Providers
Neither TILA nor RESPA nor Regulation Z requires creditors to
inform consumers about settlement service providers for whom the
consumer may shop. However, as explained above, Regulation X provides
that where a lender or mortgage broker permits a borrower to shop for
third party settlement services, the lender or broker must provide the
borrower with a written list of settlement services providers at the
time the GFE is provided on a separate sheet of paper. 12 CFR part 1024
app. C. HUD intended this requirement to enable consumers to shop for
settlement service providers, thereby enhancing market competition and
lowering settlement service costs for consumers. See 73 FR at 14030.
The Bureau agrees that the written list of settlement service providers
may benefit consumers by fostering settlement service shopping.
Therefore, the Bureau proposes Sec. 1026.19(e)(1)(vi). As an
initial matter, proposed Sec. 1026.19(e)(1)(vi)(A) provides that a
creditor permits a consumer to shop for a settlement service if the
creditor permits the consumer to select the provider of that service,
subject to reasonable minimum requirements regarding the qualifications
of the provider. Comment 19(e)(1)(vi)-1 provides examples of minimum
requirements that are and are not reasonable. For example, the creditor
may require that a settlement agent chosen by the consumer must be
appropriately licensed in the relevant jurisdiction. In contrast, a
creditor may not require the consumer to choose a provider from a list
provided by creditor. This comment also clarifies that the requirements
of Sec. 1026.19(e)(1)(vi)(B) and (C) do not apply if the creditor does
not permit the consumer to shop.
Proposed Sec. 1026.19(e)(1)(vi)(B) provides that the creditor
shall identify the services for which the consumer is permitted to shop
in the Loan Estimate. Comment 19(e)(1)(vi)-2 clarifies that Sec.
1026.37(f)(3) contains the content and format requirements for this
disclosure.
Proposed Sec. 1026.19(e)(1)(vi)(C) provides that, if the creditor
permits a consumer to shop for a settlement service, the creditor shall
provide the consumer with a written list identifying available
providers of that service and stating that the consumer may choose a
different provider for that service. It further requires that the list
be provided separately from the Loan Estimate but in accordance with
the timing requirements for that disclosure (i.e., within three days
after application).
Comment 19(e)(1)(vi)-3 explains that the settlement service
providers identified on the written list must correspond to the
settlement services for which the consumer may shop, as disclosed on
the Loan Estimate pursuant to Sec. 1026.37(f)(3). It also refers to
the model list provided in form H-27.
Comment 19(e)(1)(vi)-4 clarifies that a creditor does not comply
with the requirement in Sec. 1026.19(e)(1)(vi)(C) to ``identify''
providers unless it provides sufficient information to allow the
consumer to contact the provider, such as the name under which the
provider does business and the provider's address and telephone number.
It also clarifies that a creditor does not comply with the availability
requirement in Sec. 1026.19(e)(1)(vi)(C) if it provides a written list
consisting of only settlement service providers that are no longer in
business or that do not provide services where the consumer or property
is located. However, if the creditor determines that there is only one
available settlement service provider, the comment clarifies that the
creditor need only identify that provider on the written list of
providers. The guidance regarding availability is consistent with
guidance provided by HUD in the HUD RESPA FAQs p. 15, 7
(``GFE--Written list of providers'').
Comment 19(e)(1)(vi)-5 refers to form H-27 for an example of a
statement that the consumer may choose a provider that is not included
on that list. Comment 19(e)(1)(vi)-6 clarifies that the creditor may
include a statement on the written list that the listing of a
settlement service provider does not constitute an endorsement of that
service provider. It further clarifies that the creditor may also
identify in the written list providers of services for which the
consumer is not permitted to shop, provided that the creditor expressly
and clearly distinguishes those services from the services for which
the consumer is permitted to shop. This may be accomplished by placing
the services under different headings.
Finally, comment 19(e)(1)(vi)-7 discusses how proposed Sec.
1026.19(e)(1)(vi) relates to the requirements of RESPA and Regulation
X. The proposed comment explains that Sec. 1026.19 does not prohibit
creditors from including affiliates on the written list under Sec.
1026.19(e)(1)(vi). However, a creditor that includes affiliates on the
written list must also comply with Sec. 1024.15 of Regulation X. This
comment is consistent with guidance provided by HUD in its RESPA FAQs
p. 16, 9 (``GFE--Written list of providers''). The proposed
comment also explains that the written list is a ``referral'' under
Sec. 1024.14(f). This comment is consistent with guidance provided by
HUD in the HUD RESPA FAQs p. 14, 4 (``GFE--Written list of
providers'').
In addition to these proposed regulations and comments, the Bureau
solicits comment regarding whether the final rule should provide more
detailed requirements for the written list of providers. The Bureau
also solicits comment regarding whether the final rule should include
additional guidance regarding the content and format of the provider
list.
This proposal is made pursuant to the Bureau's authority under
sections 105(a) of TILA, 19(a) of RESPA, and, for residential mortgage
loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. This
proposed provision is consistent with TILA's purposes in that it will
increase consumer awareness of the costs of the transaction by
informing consumers that settlement costs can be influenced by
shopping, thereby promoting the informed use of credit. This provision
is consistent with section 129B(e) of TILA because failing to inform
borrowers of available settlement service providers increases the
difficulty of shopping for those services, which is not in the interest
of the borrower. It achieves the purposes of RESPA because disclosure
of available settlement service providers encourages consumer shopping
and settlement service provider competition, which will result in the
elimination of kickbacks, referral fees, and other practices that tend
to increase unnecessarily the costs of certain settlement services. In
addition, the requirements in proposed Sec. 1026.19(e)(1)(vi) are in
the interest of consumers and in the public interest because they will
improve consumer understanding and awareness of the mortgage loan
transaction through the use of disclosure by informing consumers about
shopping for settlement service providers and making consumers aware of
different settlement service providers available for the transaction,
consistent with Dodd-Frank Act section 1405(b).
19(e)(2) Pre-Disclosure Activity
19(e)(2)(i) Imposition of Fees on Consumer
19(e)(2)(i)(A) Fee Restriction
Section 128(b)(2)(E) of TILA provides that the ``consumer shall
receive the disclosures required under [TILA
[[Page 51163]]
section 128(b)] before paying any fee to the creditor or other person
in connection with the consumer's application for an extension of
credit that is secured by the dwelling of a consumer.'' 15 U.S.C.
1638(b)(2)(E). This provision is implemented in Sec.
1026.19(a)(1)(ii). Although RESPA does not expressly contain a similar
provision, Regulation X does. See Sec. 1024.7(a)(4). However, unlike
Regulation Z, Regulation X prohibits a consumer from paying a fee until
the consumer indicates an intent to proceed with the transaction after
receiving the disclosures. Id. As discussed below, both Regulation Z
and Regulation X provide an exception only for the cost of obtaining a
credit report.
Thus, Regulation X requires consumers to take an additional
affirmative step before new fees may be charged. The Bureau believes
that the goals of the integrated disclosure are best served by adopting
the approach under Regulation X. The Bureau intends for consumers to
use the integrated disclosure to make informed financial decisions.
This goal may also be inhibited if fees are imposed on consumers before
a consumer indicates intent to proceed. For example, after reviewing
the Loan Estimate a consumer may be uncertain that the disclosed terms
are in the consumer's best interest or that the disclosed terms are
those for which the consumer originally asked. If fees may be imposed
before the consumer decides to proceed with a particular loan,
consumers may not take additional time to understand the costs and
evaluate the risks of the disclosed loan. The Bureau also intends for
consumers to use the integrated disclosure to compare loan products
from different creditors. If creditors can impose fees on consumers
once the Loan Estimate is delivered, but before the consumer indicates
intent to proceed, shopping may be inhibited. For example, after
reviewing the Loan Estimate a consumer may be uncertain that the
disclosed terms are the most favorable terms the consumer could receive
in the market. If fees may be imposed before the consumer decides to
proceed with a particular loan, consumers may determine that too much
cost has been expended on a particular Loan Estimate to continue
shopping, even though the consumer believes more favorable terms could
be obtained from another creditor. Or, consumers may determine that
obtaining a Loan Estimate from multiple creditors is too costly if each
creditor can impose fees for each Loan Estimate.
Accordingly, pursuant to its authority under TILA section 105(a)
and RESPA section 19(a), the Bureau proposes Sec. 1026.19(e)(2)(i)(A),
which provides that no person may impose a fee on a consumer in
connection with the consumer's application before the consumer has
received the disclosures required by Sec. 1026.19(e)(1)(i) and
indicated to the creditor an intent to proceed with the transaction
described by those disclosures. This proposed regulation carries out
the purposes of TILA because requiring the specific identification of
the fee imposed assures meaningful disclosures of credit terms,
consistent with section 105(a) of TILA, and it achieves the purposes of
RESPA because the more specific identification of the fee is a more
effective method of advance disclosure, consistent with section 19(a)
of RESPA.
Proposed comment 19(e)(2)(i)(A)-1 explains that a creditor or other
person may not impose any fee, such as for an application, appraisal,
or underwriting, until the consumer has received the disclosures
required by Sec. 1026.19(e)(1)(i) and indicated an intent to proceed
with the transaction. The only exception to the fee restriction allows
the creditor or other person to impose a bona fide and reasonable fee
for obtaining a consumer's credit report, pursuant to Sec.
1026.19(e)(2)(i)(B). Proposed comment 19(e)(2)(i)(A)-2 explains that
the consumer may indicate intent to proceed in any manner the consumer
chooses, unless a particular manner of communication is required by the
creditor, provided that the creditor does not assume silence is
indicative of intent. The creditor must document this communication to
satisfy the requirements of Sec. 1026.25. The proposed comment also
includes illustrative examples.
Proposed comment 19(e)(2)(i)(A)-3 discusses the collection of fees
and provides that at any time prior to delivery of the required
disclosures, the creditor may impose a credit report fee as provided in
Sec. 1026.19(e)(2)(i)(B). However, the consumer must receive the
disclosures required by Sec. 1026.19(e)(1)(i) and indicate an intent
to proceed with the mortgage loan transaction before paying or
incurring any other fee imposed by a creditor or other person in
connection with the consumer's application for a mortgage loan that is
subject to Sec. 1026.19(e)(1)(i). Proposed comment 19(e)(2)(i)(A)-4
provides illustrative examples regarding these requirements.
Proposed comment 19(e)(2)(i)(A)-5 discusses determining when a
particular charge is ``imposed by'' a person. The proposed comment
provides that, for purposes of Sec. 1026.19(e), a fee is ``imposed
by'' a person if the person requires a consumer to provide a method for
payment, even if the payment is not made at that time. For example, a
creditor may not require the consumer to provide a $500 check to pay a
``processing fee'' before the consumer receives the disclosures
required by Sec. 1026.19(e)(1)(i) and the consumer subsequently
indicates intent to proceed. The creditor in this example does not
comply even if the creditor does not deposit the check until after the
disclosures required by Sec. 1026.19(e)(1)(i) are received by the
consumer and the consumer subsequently indicates intent to proceed.
Similarly, a creditor may not require the consumer to provide a credit
card number before the consumer receives the disclosures required by
Sec. 1026.19(e)(1)(i) and the consumer subsequently indicates intent
to proceed, even if the creditor promises not to charge the consumer's
credit card for the $500 processing fee until after the disclosures
required by Sec. 1026.19(e)(1)(i) are received by the consumer and the
consumer subsequently indicates intent to proceed. In contrast, a
creditor complies with Sec. 1026.19(e)(2) if the creditor requires the
consumer to provide a credit card number before the consumer receives
the disclosures required by Sec. 1026.19(e)(1)(i) and subsequently
indicates intent to proceed if the consumer's authorization is only to
pay for the cost of a credit report. This is so even if the creditor
maintains the consumer's credit card number on file and charges the
consumer a $500 processing fee after the disclosures required by Sec.
1026.19(e)(1)(i) are received and the consumer subsequently indicates
intent to proceed, provided that the creditor requested and received a
separate authorization for the processing fee charge from the consumer
after the consumer received the disclosures required by Sec.
1026.19(e)(1)(i).
19(e)(2)(i)(B) Exception to Fee Restriction
Section 1026.19(a)(1)(iii) of Regulation Z currently provides that
a person may impose a fee for obtaining a consumer's credit history
prior to providing the good faith estimates, which is the lone
exception to the general rule established by Sec. 1026.19(a)(1)(ii)
that fees may not be imposed prior to the consumer's receipt of the
disclosures. Section 1024.7(a)(4) of Regulation X contains a similar
exception, but it differs in two important respects. First, Regulation
Z provides that the fee may be imposed for a consumer's ``credit
history,'' while
[[Page 51164]]
Regulation X specifies that the fee must be for the consumer's ``credit
report.'' The Regulation Z provision could be read as permitting a
broader range of activity than just acquiring a consumer's credit
report. The Bureau believes that the purposes of the integrated
disclosure are better served by adopting the terminology used by
Regulation X. Consumers should be able to receive a reliable estimate
of mortgage loan costs with as little up-front expense and burden as
possible, while creditors should be able to receive sufficient
information from the credit report alone to develop a reasonably
accurate estimate of costs.
Another issue stems from existing commentary under Regulation Z,
which provides that the fee charged pursuant to Sec.
1026.19(a)(1)(iii) may be described or referred to as an ``application
fee,'' provided the fee meets the other requirements of Sec.
1026.19(a)(1)(iii). The Bureau believes that the better approach, for
purposes of the integrated disclosure, is to require a fee for a credit
report to be disclosed with the more precise label. Consumers may be
more likely to understand that a credit report fee is imposed if a fee
for the purpose of obtaining a credit report is clearly described as
such. Additionally, compliance costs are generally reduced when
regulatory requirements are standardized. Accordingly, the Bureau
proposes Sec. 1026.19(e)(2)(i)(B), which provides that a person may
impose a bona fide and reasonable fee for obtaining the consumer's
credit report before the consumer has received the disclosures required
by Sec. 1026.19(e)(1)(i). Proposed comment 19(e)(2)(i)(B)-1 clarifies
that a creditor or other person may impose a fee before the consumer
receives the required disclosures if it is for purchasing a credit
report on the consumer, provided that such fee is bona fide and
reasonable in amount. Also, the creditor must accurately describe or
refer to this fee, for example, as a ``credit report fee.''
19(e)(2)(ii) Written Information Provided to Consumer
The Bureau understands that consumers often request written
estimates of loan terms before receiving the RESPA GFE. The Bureau
recognizes that these written estimates may be helpful to consumers.
However, the Bureau is concerned that consumers may confuse such
written estimates, which are not subject to the good faith requirements
of TILA section 128(b)(2)(A) and RESPA section 5 and may be unreliable,
with the disclosures required under Sec. 1026.19(e)(1)(i), which must
be made in good faith. The Bureau is also concerned that unscrupulous
creditors may use formatting and language similar to the disclosures
required under Sec. 1026.19(e)(1)(i) to deceive consumers into
believing that the creditor's unreliable written estimate is actually
the disclosure required under Sec. 1026.19(e)(1)(i). These concerns
are particularly important in light of section 1405(b) of the Dodd-
Frank Act, which places emphasis on improving ``consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures.''
Creditors may choose to issue, and consumers may want, preliminary
written estimates based on less information than is needed to issue the
disclosures required under Sec. 1026.19(e)(1)(i). However, mortgage
loan costs are often highly sensitive to the information that triggers
the disclosures. Thus, the disclosures required under Sec.
1026.19(e)(1)(i) may be more accurate indicators of cost than
preliminary written estimates. Consumers may better understand the
sensitivity of mortgage loan costs to information about the consumer's
creditworthiness and collateral value if consumers are aware of the
difference between preliminary written estimates and disclosures
required under Sec. 1026.19(e)(1)(i). Additionally, section 1032(a) of
the Dodd-Frank Act authorizes the Bureau to prescribe rules to ensure
the full, accurate, and effective disclosure of mortgage loan costs in
a manner that permits consumers to understand the associated risks.
Consumers may not appreciate that preliminary written estimates, which
are not subject to the good faith requirements, may not constitute a
full, accurate, and effective description of costs, as opposed to
relying on the disclosures required under Sec. 1026.19(e)(1)(i), which
must be made in good faith. The Bureau seeks to foster consumer
understanding of the reliability of the cost information provided,
while permitting the use of preliminary written estimates which may be
beneficial to consumers.
Accordingly, pursuant to its authority under section 105(a) of
TILA, section 1032(a) of the Dodd-Frank Act, and, for residential
mortgage loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank
Act, the Bureau proposes to require creditors to distinguish between
preliminary written estimates of mortgage loan costs, which are not
subject to the good faith requirements under TILA and RESPA, and the
disclosures required under Sec. 1026.19(e)(1)(i), which are. Proposed
Sec. 1026.19(e)(2)(ii) would require creditors to provide consumers
with a disclosure indicating that the written estimate is not the Loan
Estimate required by RESPA and TILA, if a creditor provides a consumer
with a written estimate of specific credit terms or costs before the
consumer receives the disclosures under Sec. 1026.19(e)(1)(i) and
subsequently indicates an intent to proceed with the mortgage loan
transaction. This proposed provision is consistent with section 105(a)
of TILA in that it will increase consumer awareness of the costs of the
transaction by informing consumers of the risk of relying on
preliminary written estimates, thereby assuring a meaningful disclosure
of credit terms and promoting the informed use of credit. This proposed
provision is consistent with section 129B(e) of TILA because permitting
creditors to provide borrowers with a preliminary written estimate and
the Loan Estimate required by TILA and RESPA without a disclosure
indicating the difference between the two is not in the interest of the
borrower.
Proposed comment 19(e)(2)(ii)-1 explains that this requirement
applies only to written information specific to the consumer. For
example, if the creditor provides a document showing the estimated
monthly payment for a mortgage loan, and the estimate was based on the
estimated loan amount and the consumer's estimated credit score, then
the creditor must include a notice on the document. In contrast, if the
creditor provides the consumer with a preprinted list of closing costs
common in the consumer's area, the creditor need not include the
warning. The proposed comment also clarifies that this requirement does
not apply to an advertisement, as defined in Sec. 1026.2(a)(2). This
proposed comment also contains a reference to comment 19(e)(1)(ii)-4
regarding mortgage broker provision of written estimates specific to
the consumer.
19(e)(2)(iii) Verification of Information
Section 1024.7(a)(5) of Regulation X currently provides that a
creditor may collect any information from the consumer deemed
necessary, but the creditor may not require the consumer to provide
documentation verifying any information the consumer provided in
connection with the application. In order to minimize the cost to
consumers of obtaining Loan Estimates, the Bureau believes that this
provision should apply to the integrated disclosure. The Bureau
proposes Sec. 1026.19(e)(2)(iii), which provides that a creditor shall
not require a consumer to submit documents verifying information
related
[[Page 51165]]
to the consumer's application before providing the disclosures required
by Sec. 1026.19(e)(1)(i).
The Bureau makes this proposal pursuant to its authority under
section 105(a) of TILA, section 19(a) of RESPA, and, for residential
mortgage loans, section 129B(e) of TILA. The proposed regulation will
effectuate the purposes of TILA by reducing the burden to consumers
associated with obtaining different offers of available credit terms,
thereby facilitating consumers' ability to compare credit terms,
consistent with section 105(a) of TILA. This proposed provision is
consistent with section 129B(e) of TILA because requiring documentation
to verify the information provided in connection with an application
increases the burden on borrowers associated with obtaining different
offers of available credit terms, which is not in the interest of the
borrower. This proposed regulation will enable consumers to receive
information about the mortgage loan without imposing costs or burdens
on the consumer, which will facilitate shopping, thereby effecting
changes in the settlement process that will result in the elimination
of kickbacks, referral fees, and other practices that tend to increase
unnecessarily the costs of certain settlement services, consistent with
the Bureau's authority under section 19(a) of RESPA.
Proposed comment 19(e)(2)(iii)-1 explains that the creditor may
collect from the consumer any information that it requires prior to
providing the early disclosures, including information not listed in
Sec. 1026.2(a)(3)(ii). However, the creditor is not permitted to
require, before providing the disclosures required by Sec.
1026.19(e)(1)(i), that the consumer submit documentation to verify the
information provided by the consumer. For example, the creditor may ask
for the names, account numbers, and balances of the consumer's checking
and savings accounts, but the creditor may not require the consumer to
provide bank statements, or similar documentation, to support the
information the consumer provides orally before providing the
disclosures required by Sec. 1026.19(e)(1)(i).
19(e)(3) Good Faith Determination for Estimates of Closing Costs
Background
As noted above, section 102(a) of TILA provides: ``The Congress
finds that economic stabilization would be enhanced and the competition
among the various financial institutions and other firms engaged in the
extension of consumer credit would be strengthened by the informed use
of credit. The informed use of credit results from an awareness of the
cost thereof by consumers.'' 15 U.S.C. 1601(a). This section further
provides that the purpose of TILA is ``to assure a meaningful
disclosure of credit terms so that the consumer will be able to compare
more readily the various credit terms available to him and avoid the
uninformed use of credit.'' Id.
To further these goals, TILA requires creditors to disclose certain
information about the cost of credit. In the context of certain
mortgage loans, the disclosures required under section 128(a) of TILA
generally are either costs imposed in connection with the extension of
credit, or measures of such costs, such as the annual percentage rate.
15 U.S.C. 1638(b). Examples of items that affect the APR are fees and
charges imposed by creditors, such as points and underwriting fees.
Section 128(b)(2)(A) provides that these disclosures must be delivered
not later than three business days after the creditor receives the
consumer's written application. Section 128(b)(2)(D) requires the
creditor to inform the consumer, no later than three business days
before consummation, if the costs of the mortgage loan, as reflected in
the annual percentage rate, change from what was originally disclosed.
15 U.S.C. 1638(b)(2)(A), (D).
TILA contains tolerances for determining whether an estimated
disclosure is accurate. For example, section 106(f) provides that the
finance charge is not accurate if the estimated finance charge
disclosed to the consumer changes by more than a certain amount. 15
U.S.C. 1605(f). If disclosures such as these become inaccurate, TILA
requires creditors to provide revised disclosures with the corrected
amounts. 15 U.S.C. 1638(b)(2)(D). TILA also permits the creation of new
tolerances if the Bureau deems them necessary. Specifically, section
121(d) provides that the ``Bureau shall determine whether tolerances
for numerical disclosures other than the annual percentage rate are
necessary to facilitate compliance with [TILA], and if it determines
that such tolerances are necessary to facilitate compliance, it shall
by regulation permit disclosures within such tolerances.'' 15 U.S.C.
1631(d). Section 121(d) further provides that the ``Bureau shall
exercise its authority to permit tolerances for numerical disclosures
other than the annual percentage rate so that such tolerances are
narrow enough to prevent such tolerances from resulting in misleading
disclosures or disclosures that circumvent the purposes of [TILA].''
Id.
Historically, TILA has generally focused on the costs imposed by
creditors alone. In contrast, RESPA, in broadly focusing on all costs
associated with real estate transactions, was designed to address
market failures in the real estate settlement services industry.
Echoing TILA, Congress enacted RESPA to ``[e]nsure that consumers
throughout the Nation are provided with greater and more timely
information on the nature and costs of the settlement process and are
protected from unnecessarily high settlement charges caused by certain
abusive practices.'' 12 U.S.C. 2601(a). Congress identified ``more
effective advance disclosure to home buyers and sellers of settlement
costs'' as a specific purpose of RESPA. Id.
RESPA requires early disclosure of settlement costs to further
Congress's stated purpose that consumers should receive effective
advance disclosures of such costs. As discussed above, RESPA requires
lenders to provide consumers with good faith estimates of settlement
costs, which include most fees charged in connection with a real
property settlement, within three days of receiving a consumer's
application for a mortgage loan. 12 U.S.C. 2602(3), 2604(c), (d).
Regulation Z also contains a good faith estimate requirement, which
implements the requirements of TILA section 128(b)(2)(A), in the
context of certain mortgage loans. Section 1026.19(a)(1)(i) of
Regulation Z provides that ``the creditor shall make good faith
estimates of the disclosures required by Sec. 1026.18 and shall
deliver or place them in the mail not later than the third business day
after the creditor receives the consumer's written application.''
Section 1026.18 includes several disclosures related to the cost of
credit, such as the amount financed, finance charge, and annual
percentage rate. Section 1026.18(c)(3) also provides that the
itemization of amount financed need not be delivered if the RESPA GFE
is provided.
After a 10-year investigatory process, HUD amended Regulation X to
establish new regulatory requirements surrounding the content,
accuracy, and delivery of the GFE. HUD's 2008 RESPA Final Rule added
``tolerance'' categories limiting the variation between the estimated
amounts of settlement charges included on the GFE and the actual
amounts included on the RESPA settlement statement. Section
1024.7(e)(1) of Regulation X provides that the actual charges at
settlement may not exceed the amounts included on the
[[Page 51166]]
GFE for (1) the origination charge, (2) while the borrower's interest
rate is locked, the credit or charge for the interest rate chosen, (3)
while the borrower's interest rate is locked, the adjusted origination
charge; and (4) transfer taxes. Section 1024.7(e)(2) provides that the
sum of the charges at settlement for the following services may not be
greater than 10 percent above the sum of the estimated charges for
those services included on the GFE for (1) lender-required settlement
services, where the lender selects the third party settlement service
provider, (2) lender-required services, title services and required
title insurance, and owner's title insurance, when the borrower uses a
settlement service provider identified by the loan originator, and (3)
government recording charges. Section 1024.7(e)(3) provides that all
other estimated charges may change by any amount prior to settlement.
The 2008 RESPA Final Rule also provided that the estimates included
on the GFE are binding, with certain limited exceptions and subject to
variations permitted by the tolerance categories. 73 FR at 68218-19.
Section 1024.7(f)(1) provides: ``If changed circumstances result in
increased costs for any settlement services such that the charges at
settlement would exceed the tolerances for those charges, the loan
originator may provide a revised GFE to the borrower.'' Section
1024.7(f)(2) provides: ``If changed circumstances result in a change in
the borrower's eligibility for the specific loan terms identified in
the GFE, the loan originator may provide a revised GFE to the
borrower.''
``Changed circumstances'' are defined as (1) acts of God, war,
disaster, or other emergency; (2) information particular to the
borrower or transaction that was relied on in providing the GFE and
that changes or is found to be inaccurate after the GFE has been
provided, which may include information about the credit quality of the
borrower, the amount of the loan, the estimated value of the property,
or any other information that was used in providing the GFE; (3) new
information particular to the borrower or transaction that was not
relied on in providing the GFE; or (4) other circumstances that are
particular to the borrower or transaction, including boundary disputes,
the need for flood insurance, or environmental problems. 12 CFR
1024.2(b). Changed circumstances, however, do not include the
borrower's name, the borrower's monthly income, the property address,
an estimate of the value of the property, the mortgage loan amount
sought, and any information contained in any credit report obtained by
the loan originator prior to providing the GFE, unless the information
changes or is found to be inaccurate after the GFE has been provided,
or market price fluctuations by themselves. Id.
Additionally, Sec. 1024.7(f)(3) provides: ``If a borrower requests
changes to the mortgage loan identified in the GFE that change the
settlement charges or the terms of the loan, the loan originator may
provide a revised GFE to the borrower.'' Section 1024.7(f)(4) provides:
``If a borrower does not express an intent to continue with an
application within 10 business days after the GFE is provided, or such
longer time specified by the loan originator * * * the loan originator
is no longer bound by the GFE.''
The exception provided by Sec. 1024.7(f)(4) relates to the ability
of consumers to use the GFE to shop and compare mortgage loans, which
is one of the primary purposes of the 2008 RESPA Final Rule. A related
provision, Sec. 1024.7(c), provides that ``the estimate of the charges
and terms for all settlement services must be available for at least 10
business days from when the GFE is provided, but it may remain
available longer, if the loan originator extends the period of
availability.''
Section 1024.7(f)(5) provides: ``If the interest rate has not been
locked, or a locked interest rate has expired, the charge or credit for
the interest rate chosen, the adjusted origination charges, per diem
interest, and loan terms related to the interest rate may change. When
the interest rate is later locked, a revised GFE must be provided
showing the revised interest rate-dependent charges and terms. All
other charges and terms must remain the same as on the original GFE,
except as otherwise provided [under] this section.''
Section 1024.7(f)(6) provides: ``In transactions involving new
construction home purchases, where settlement is anticipated to occur
more than 60 calendar days from the time a GFE is provided, the loan
originator may provide the GFE to the borrower with a clear and
conspicuous disclosure stating that at any time up until 60 calendar
days prior to closing, the loan originator may issue a revised GFE. If
no such separate disclosure is provided, the loan originator cannot
issue a revised GFE, except as otherwise provided [under] this
section.''
Although settlement charges have historically been the subject of
RESPA, section 1419 of the Dodd-Frank Act amended TILA section 128(a)
to require creditors to disclose: ``In the case of a residential
mortgage loan, the aggregate amount of settlement charges for all
settlement services provided in connection with the loan, the amount of
charges that are included in the loan and the amount of such charges
the borrower must pay at closing * * * and the aggregate amount of
other fees or required payments in connection with the loan.'' 15
U.S.C. 1638(a)(17). ``Settlement charges'' is not defined under TILA.
This amendment expands the disclosure requirements of TILA section
128(a) beyond the cost of credit to include all charges imposed in
connection with the mortgage loan. No distinction is made between
whether those charges relate to the extension of credit or the real
estate transaction, or whether those charges are imposed by the
creditor or another party, so long as the charges arise in the context
of the mortgage loan settlement.
Furthermore, as discussed above, section 1032(f) of the Dodd-Frank
Act requires integration of the disclosure provisions under TILA and
RESPA. Sections 1098 and 1100A of the Dodd-Frank Act further provide
that the purpose of the integrated disclosure is ``to facilitate
compliance with the disclosure requirements of [RESPA] and [TILA], and
to aid the borrower or lessee in understanding the transaction by
utilizing readily understandable language to simplify the technical
nature of the disclosures.'' 15 U.S.C. 1604(b), 12 U.S.C. 2603(a).
These amendments require integration of the regulations related to the
accuracy and delivery of the disclosures, as well as their content.
Issues With Integrating Different Approaches to Good Faith Estimates,
Tolerances, and Redisclosure
As discussed above, TILA generally focused on redisclosure in
response to changes in the cost of credit that occurred during the
mortgage loan origination process. Over time, practices developed that
diminished the value of the disclosures. Congress addressed these
problems by revising TILA from time to time, seeking to ensure that
consumers could use the disclosures to shop for credit.\134\ However,
problems
[[Page 51167]]
in the market persisted, and evidence suggests that consumers were
often surprised by the difference between their expectations of the
cost of credit, based on the good faith estimates provided during the
shopping phase, and the actual cost of credit revealed at
settlement.\135\
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\134\ In explaining the 1980 amendment to TILA, Congress stated
that the amendment ``would also make disclosures more meaningful to
the consumer in mortgage transactions in two respects. First, the
creditor would be required to give truth in lending disclosures
within 3 days after receiving a consumer's written application. * *
* Under current law, Truth in Lending disclosures are provided for
the first time at the real estate closing, making them all but
useless for credit shopping.'' S. Rep. No. 368, 96th Cong., 1st
Sess. 1979, reprinted in 1980 U.S. Code Cong. & Ad. News 236, 266.
Congress also amended the disclosure requirements in 1994 to provide
more extensive disclosure on high-cost mortgage loans. Riegle
Community Development and Regulatory Improvement Act of 1994, Public
Law 103-325, Title I, Sec. 152(d), 108 Stat. 2191 (Sept. 23, 1994);
15 U.S.C. 1639(a). Congress amended the TILA disclosure requirements
again in 1996 to provide disclosures related to variable-rate
mortgage loans. Economic Growth and Regulatory Paperwork Reduction
Act of 1996, Public Law 104-208, Title I, Subtitle A, Sec. 2105,
110 Stat. 3009 (Sept. 30, 1996); 15 U.S.C. 1638(a).
\135\ ``For refinancings and second mortgages that fall below
the HOEPA triggers, the only required written disclosure of the APR
and finance charge is usually given at closing on the TILA
disclosure, after which the borrower has only the three day
rescission period for price shopping, again too short a period to
obtain competing offers.'' Lauren E. Willis, Decisionmaking and the
Limits of Disclosure: The Problem of Predatory Lending: Price, 65
Md. L. Rev. 707, 750 (2006). ``[T]he prices on subprime loans often
turned out to be a moving target. A lender or broker might have the
customer apply for one type of loan, price A, say a fixed rate loan;
changed the loan during underwriting to an adjustable rate mortgage,
price B; and then finally change the loan at closing to something
different at price C, say an interest only mortgage.'' Federal
Reserve Board Public Hearing Re: Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice, 155 (July 11,
2006) (testimony of Patricia McCoy), available at http://www.federalreserve.gov/events/publichearings/hoepa/2006/20060711/transcript.pdf.
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The issues arising under TILA were even more pronounced under
RESPA. HUD spent over ten years investigating problems in the
settlement services industry.\136\ HUD found that the principles of
RESPA were undermined by market forces operating against
consumers.\137\ In the context of home purchases, consumers' actual
settlement costs were sometimes dramatically different from those
originally estimated. Consumers did not realize this until immediately
before settlement--the point in time where consumers are in the weakest
bargaining position. As a result, consumers were often unable to
challenge increases in settlement costs when confronted with them at
the closing table.\138\ HUD found that these high closing costs were
exacerbated by the fact that consumers rarely shopped for settlement
service providers.\139\ Accordingly, settlement service providers were
not accountable to the consumer, and creditors had little motivation to
monitor the legitimacy of settlement costs because those costs were
simply passed on to the consumer.\140\
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\136\ Joint Report to the Congress Concerning Reform of the
Truth in Lending Act and the Real Estate Settlement Procedures Act,
(July 1998); 2000 HUD-Treasury Report; 2002 RESPA Proposal (67 FR
49134).
\137\ ``Estimates appearing on the GFEs can be significantly
lower than the amount ultimately charged at settlement and do not
provide meaningful guidance on the costs borrowers will incur at
settlement. While unforeseeable circumstances can drive up costs in
particular circumstances, in most cases loan originators have the
ability to estimate final settlement costs with great accuracy.'' 73
FR 14030, 14039 (March 14, 2008).
\138\ ``After agreeing to the price of a house, too many
families sit down at the settlement table and discover unexpected
fees that can add hundreds, if not thousands, of dollars to the cost
of their loan. And at that point, they have no other options. On the
spot, the borrower is forced to make an impossible choice: either
hand over the extra cash and sign, or lose either the house or the
funds needed to refinance.'' Reforming the Real Estate Settlement
Procedure: Review of HUD's proposed RESPA Rule, 107th Cong. (October
3, 2002) (testimony of Mel Martinez, Secretary of the U.S.
Department of Housing and Urban Development).
\139\ See 73 FR 14030, 14034 (March 14, 2008).
\140\ ``There is not always an incentive in today's market for
originators to control these costs. Too often, high third-party
costs are simply passed through to the consumer.'' U.S. Dep't. of
Housing and Urban Dev., Office of Pol'y Dev. and Research, RESPA:
Regulatory Impact Analysis and Initial Regulatory Flexibility
Analysis, FR-5180-F-02, Final Rule to Improve the Process of
Obtaining Mortgages and Reduce Consumer Costs, iv (2008). See also
Eskridge, supra note 83, at 1184-1185.
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These problems led HUD to the determination that a subjective
requirement that estimates be made in ``good faith'' was not sufficient
to achieve the purposes of RESPA. The tolerances included in the 2008
RESPA Final Rule established objective measures of good faith that were
designed to ensure that consumers were provided with estimates more
closely tied to the actual costs. The provisions related to
redisclosure provided industry with the flexibility to revise the
charges originally estimated when legitimate and unforeseen issues
arose that affected the cost of settlement services, while also
ensuring that consumers were not pressured into paying unwarranted
costs. The 2008 RESPA Final Rule established a requirement that costs
be available for at least 10 business days, along with requirements
related to allowing consumers to shop for settlement service providers,
sought to re-introduce competition into the markets for both mortgage
loan origination and settlement service providers, in accordance with
RESPA's original principles.
These revisions to Regulation X took effect in 2010. Some concerns
were identified during the implementation process. In particular,
concerns have been raised regarding the treatment of fees charged by
affiliates of the lender.\141\ Under the 2008 rule, affiliates' fees
are permitted to increase by as much as 10 percent prior to the real
estate closing, in addition to increases based on changed circumstances
and other similar events. Settlement service providers such as
appraisal management companies and title companies may be affiliated
with the creditor. Fees paid to these affiliates may constitute a large
percentage of the total settlement service fees paid by consumers at
consummation. Permitting these fees to vary by ten percent may
significantly increase the actual cost of obtaining a mortgage loan.
This variance is of particular concern given the nature of the
relationship between creditors and their affiliates. Regulation X
subjects fees paid to creditors to a zero percent tolerance because
credit providers are expected to know their own costs. The same
reasoning may apply to services provided by affiliates. An affiliate
relationship between a creditor and a provider should facilitate
greater communication and coordination than a relationship between
independent entities acting at arm's length. This is especially so
given that the rules require precise estimates only of costs that are
likely to occur and provide flexibility for cost revisions when an
unexpected event occurs, such as a changed circumstance or a change
requested by the consumer.
---------------------------------------------------------------------------
\141\ For purposes of this proposal, ``affiliate'' means any
company that controls, is controlled by, or is under common control
with another company, as set forth in the Bank Holding Company Act
of 1956 (12 U.S.C. 1841 et seq.).
---------------------------------------------------------------------------
Additional concerns about affiliate relationships stem from the
fact that no justification is required if affiliate fees increase by as
much as ten percent. Given that the affiliate relationship is
beneficial to the creditor, this may create an incentive to increase
fees at the real estate closing without justification, solely to obtain
all money available under the tolerance. A rule that encourages such
rent-seeking behavior could harm consumers by unjustifiably increasing
settlement costs, which is contrary to the purposes of RESPA.
Another concern with Regulation X centers on the ability of
consumers to shop for settlement service providers. Regulation X
requires loan originators to provide borrowers with a written list of
providers in some cases.\142\ This provision was intended to enable
consumers to shop for settlement
[[Page 51168]]
service providers, based on the principle that such shopping would spur
competition in the settlement service market, thereby reducing the
incidence of unnecessarily high settlement service charges. However,
concerns have been raised that, rather than simply providing consumers
with lists of available settlement service providers to facilitate
shopping, creditors have instead developed ``closed'' lists that
include only the creditor's ``preferred'' providers and are requiring
consumers to select one of those providers. This practice effectively
may limit competition among settlement service providers instead of
promoting competition, contrary to the goals of the regulation.
---------------------------------------------------------------------------
\142\ ``Where a loan originator permits a borrower to shop for
third party settlement services, the loan originator must provide
the borrower with a written list of settlement services providers at
the time of the GFE, on a separate sheet of paper.'' 12 CFR 1024,
app. C.
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The Bureau's Proposal
An enhanced reliability standard. The Bureau believes that
consumers would benefit from having more reliable estimates of costs. A
meaningful ``good faith'' estimate should be based on the best
information reasonably available to the person providing the estimate.
In many cases, a creditor should be able to estimate costs with
considerable precision based on its familiarity with its own
underwriting process and its knowledge of the real estate settlement
process. A creditor originating a loan in a geographical area with
which it is unfamiliar, or using settlement service providers with whom
it is not familiar, may not be able to estimate the settlement service
costs as accurately. In cases such as these, the ten-percent tolerance
currently provided by Regulation X may be appropriate.
However, creditors who have affiliate relationships with service
providers should have access to the providers' data about the actual
costs of those services, including how often changed circumstances
occur, and the magnitude of resulting cost increases. Thus, in many
cases, creditors may be able to provide accurate estimates of
settlement costs for services provided by affiliates, and therefore
should not need to rely on the ten-percent tolerance. In addition to
the increased level of knowledge and communication suggested by the
affiliate relationship, the frequency of business with a particular
affiliate provides creditors with even more data, which may be used to
develop more accurate estimates. It may be reasonable to expect
creditors to use the significant amount of historical settlement cost
data available to them, by virtue of the repeat business from affiliate
relationships, to develop highly accurate estimates of costs.
Accordingly, the Bureau proposes to include charges paid to affiliates
of the creditor in the category of fees that may not vary from the
estimated amount disclosed, subject to legitimate reasons for revision
such as changed circumstances and revisions requested by the consumer.
The Bureau also believes that consumers would benefit from a more
competitive market for settlement service providers. A list of service
providers offers consumers the opportunity to speak with multiple
providers and select the providers and services that best fit
consumers' needs. Although the Bureau understands the concerns
regarding preferred provider lists identified above, such lists may be
a natural outgrowth of creditors' business and are not necessarily
harmful to consumers. Indeed, it would be much more difficult for
creditors to provide good faith estimates of settlement service charges
without basing such estimates on charges imposed by actual settlement
service providers in a particular area with whom the creditor has
established relationships and regularly does business.
Creditors that assemble preferred provider lists are in a superior
position of knowledge with respect to the expected costs of the
services of those providers, for reasons similar to those seemingly
inherent in the creditor-affiliate relationship. The relationship
between creditor and preferred provider suggests a level of
communication and knowledge that is absent from a relationship between
a creditor and a settlement service provider who do not regularly do
business. The repeat business afforded by the preferred provider
relationship should also give creditors access to statistically
significant amounts of historical settlement charge data, with which
the creditor can accurately predict the cost of a settlement service,
in the absence of a valid reason for revision such as a changed
circumstance. It may be reasonable to expect the creditor to use this
relationship for the benefit of consumers in the form of more accurate
initial estimates of costs.
The creditor's knowledge may be less certain with preferred
providers, with whom the creditor has some pre-existing relationship or
agreement, than for affiliates, with whom the creditor has an actual
control-based relationship. But this difference is countered when the
creditor does not permit the consumer to shop independently for the
settlement service. Such closed lists require consumers to choose
providers preferred by the creditor and prohibit consumers from
choosing more cost efficient, or perhaps higher quality, settlement
service providers. Consumers presented with a closed list of preferred
providers are neither benefitted by more accurate estimates nor able to
protect their own financial interests. Consumers should have the
ability to influence the quality and cost of settlement services
related to what, for most consumers, will be the most significant
financial obligation of their lives. If the creditor arrogates that
opportunity, then the creditor should also take a greater
responsibility for estimating accurately and assume some of the risk of
under-estimation if it does not. Thus, the Bureau proposes to include
charges paid to non-affiliated third party service providers in the
category of fees that may not vary from the estimated amount disclosed
if the creditor does not permit the consumer to shop for those
services, subject to legitimate reasons for revision such as changed
circumstances and revisions requested by the consumer.
This proposal seeks to strike the appropriate balance between
consumers' need for accurate, timely, and reliable information about
the costs of a mortgage loan and industry's need for flexibility for
the wide range of unexpected issues that arise during the mortgage loan
origination process. Creditors are routine participants in the mortgage
market, but individual consumers are not. As a result, creditors have
access to important cost data that are unavailable to consumers. It
therefore may be reasonable to expect creditors to use this advantage
to provide consumers with reasonably accurate estimates of the costs
associated with a real estate settlement. This consideration is more
compelling when creditors have pre-existing, and advantageous,
relationships with affiliated and ``preferred'' settlement service
providers. More reliable estimates are inherently beneficial because
they enable consumers to make informed and responsible financial
decisions, they promote honest competition among the majority of
industry providers who want a fair and level playing field, and they
prevent financial surprises at the real estate closing that may greatly
harm consumers.
More reliable estimates also make it more likely that consumers
will shop for mortgage loans based on all relevant costs among multiple
providers, furthering one of the key principles of TILA and RESPA.
Encouraging consumers to shop for settlement services further
facilitates a competitive market for those services, thereby preventing
unnecessarily high settlement costs and achieving one of the key
purposes of RESPA. This approach furthers the goals of the 2008
[[Page 51169]]
RESPA Final Rule and the principles upon which TILA and RESPA are
founded.
Legal authority. The Bureau is proposing to adopt an enhanced
reliability standard for settlement costs pursuant to its authority to
prescribe standards for ``good faith estimates'' under TILA section 128
and RESPA section 5, as well as its general rulemaking, exception, and
exemption authorities under TILA sections 105(a) and 121(d), RESPA
section 19(a), section 1032(a) of the Dodd-Frank Act, and, for
residential mortgage loans, section 1405(b) of the Dodd-Frank Act and
section 129B(e) of TILA.
The Bureau has considered the purposes for which it may exercise
its authority under TILA section 105(a) and, based on that review,
believes that the proposed adjustments and exceptions may be
appropriate. The proposal is consistent with the statute's purpose in
that it seeks to ensure that the cost estimates are more meaningful and
better inform consumers of the actual costs associated with obtaining
credit. The proposal has the potential to effectuate the statute's
goals by ensuring more reliable estimates, which may increase the level
of shopping for mortgage loans and foster honest competition for
prospective consumers among financial institutions. The Bureau believes
that technological advances in the mortgage loan origination market,
coupled with the relationships that currently exist between creditors
and the settlement service industry, may have improved the ability of
creditors to provide accurate estimates, subject to reasonable
exceptions. The proposal could also prevent potential circumvention or
evasion of TILA by penalizing underestimation to gain a competitive
advantage in situations where TILA requires good faith.
Section 121(d) of TILA generally authorizes the Bureau to adopt
tolerances necessary to facilitate compliance with the statute,
provided such tolerances are narrow enough to prevent misleading
disclosures or disclosures that circumvent the purposes of the statute.
15 U.S.C. 1631(d). The Bureau has considered the purposes for which it
may exercise its authority under TILA section 121(d) and, based on that
review, believes that the proposed tolerances may be appropriate. The
proposal has the potential to facilitate compliance with the statute by
providing bright line rules for the determination of ``good faith''
based on the knowledge of costs that creditors have, or reasonably
should have. The narrowed tolerances may also prevent misleading
disclosures by forcing creditors who have access to accurate cost
information through affiliate networks or exclusive provider
arrangements, and today use such information strategically to
underestimate cost estimates, to absorb any overages.
The proposal also may prevent circumvention of TILA by preventing
creditors from using the tolerances to capture rent through their
affiliates, and thereby unnecessarily increasing the cost of credit.
The proposed tolerances may be sufficiently narrow by focusing on areas
where the creditor is, or reasonably should be, in a position of
superior knowledge, while maintaining the existing tolerances in areas
where the creditor is providing estimates based on less certain
information, such as cost estimates for services provided by
independent providers.
In addition, the proposed regulation is consistent with Dodd-Frank
Act section 1032(a) because requiring more accurate initial estimates
of the costs of the transaction, thereby limiting the possibility of
strategic underestimation to gain a competitive advantage, will ensure
that the features of mortgage loan transactions and settlement services
will be more fully, accurately, and effectively disclosed to consumer
in a manner than permits consumers to understand the costs, benefits,
and risks associated the mortgage loan. It is also in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b), because providing consumers with more accurate
estimates of the cost of the mortgage loan transaction will improve
consumer understanding and awareness of the mortgage loan transaction
through the use of disclosure.
Section 129B(e) of TILA generally authorizes the Bureau to adopt
regulations prohibiting or conditioning terms, acts, or practices
relating to residential mortgage loans that are not in the interest of
the borrower. The Bureau has considered the purposes for which it may
exercise its authority under TILA section 129B(e) and, based on that
review, believes that the proposed regulations are appropriate because
unreliable estimates are not in the interest of the borrower.
Section 19(a) of RESPA authorizes the Bureau to prescribe
regulations and make interpretations to carry out the purposes of
RESPA, which include more effective advance disclosure of settlement
costs. 12 U.S.C. 2601(a), 2617(a). The Bureau has considered the
purposes for which it may exercise its authority under RESPA section
19(a) and, based on that review, believes that the proposed rules and
interpretations may be appropriate. The proposal has the potential to
ensure more effective advance disclosure of settlement costs by
requiring creditors to disclose accurate estimates when such creditors
are in a position to do so.
The Bureau solicits comment on all aspects of this proposal,
including the cost, burden, and benefits to consumers and to industry
regarding the proposed revisions to the good faith requirements. The
Bureau solicits comment on the frequency, magnitude, and causes of
settlement cost increases. The Bureau also requests comment on any
alternatives to the proposal that would further the purposes of TILA,
RESPA, and the Dodd-Frank Act and provide consumers with more useful
disclosures.
19(e)(3)(i) General Rule
Regulation X currently provides that the amounts imposed for the
origination charge and transfer taxes may not exceed the amounts
included on the RESPA GFE, unless certain exceptions are met. Sec.
1024.7(e)(1). The items included under this category are generally
limited to charges paid to lenders and brokers, in addition to transfer
taxes.
The Bureau is proposing to incorporate this provision in new Sec.
1026.19(e)(3)(i). Furthermore, as discussed above, the Bureau is
proposing to expand the scope of the current regulation. Under the
proposed rule, the default rule is that any charge paid by the consumer
that exceeds the amount originally estimated on the disclosures
provided pursuant to Sec. 1026.19(e)(1)(i) was not provided in good
faith. This default rule is subject to legitimate cost revisions when
an unexpected event occurs, such as a changed circumstance or a change
requested by the consumer. Also, the charges for certain items are
subject to exceptions allowing other increases as permitted under Sec.
1026.19(e)(3)(ii) and (iii). Thus, the Bureau believes that the rule
offers a level of flexibility similar to the current rules under
Regulation X. The Bureau believes that the primary impact of adopting
this bright line default rule will be to protect consumers from
unnecessary increases in charges.
Consequently, the Bureau proposes Sec. 1026.19(e)(3)(i), which
provides that the charges paid by or imposed on the consumer may not
exceed the estimated amounts of those charges provided pursuant to
Sec. 1026.19(e)(1)(i), subject to permissible reasons for revision
such as changed circumstances and revisions requested by the consumer,
and except
[[Page 51170]]
as otherwise provided under Sec. 1026.19(e)(3)(ii) and (iii).
During the Small Business Panel Review process, several small
entity representatives expressed concern about the unintended
consequences that may result from applying the zero-percent tolerance
rule currently under Regulation X to affiliates of the lender or
mortgage broker and to providers selected by the lender. See Small
Business Review Panel Report at 34, 37-38, 40, 64, 67, and 71. The
Small Business Review Panel recommended that the Bureau consider
alternatives to expanding application of the zero-percent tolerance
that would increase the reliability of cost estimates while minimizing
the impacts on small entities. See id. at 29. The Bureau has given
careful consideration to this recommendation, but has not yet
identified any alternatives that would increase disclosure reliability
while minimizing small entity impact. The Bureau solicits comment on
any such alternatives. The Panel also recommended that the Bureau
solicit comment on the effectiveness of the current tolerance rules.
Id. Consistent with the Small Business Review Panel's recommendation,
the Bureau solicits comment on whether the current tolerance rules have
sufficiently improved the reliability of the estimates that lenders
give consumers, while preserving lenders' flexibility to respond to
unanticipated changes that occur during the loan process.
Proposed comment 19(e)(3)(i)-1 explains that Sec. 1026.19(e)(3)(i)
imposes a general rule that an estimated charge disclosed pursuant to
Sec. 1026.19(e) is not in good faith if the charge paid by or imposed
on the consumer exceeds the amount originally disclosed. Although Sec.
1026.19(e)(3)(ii) and (e)(3)(iii) provide exceptions to the general
rule for certain types of charges, those exceptions generally do not
apply to (1) fees paid to the creditor; (2) fees paid to a broker; (3)
fees paid to an affiliate of the creditor or a broker; (4) fees paid to
an unaffiliated third party if the creditor did not permit the consumer
to shop for a third party service provider; and (5) transfer taxes.
Proposed comment 19(e)(3)(i)-2 provides guidance on the issue of
whether an item is ``paid to'' a particular person. In the mortgage
loan origination process, individuals often receive payments for
services and subsequently pass those payments on to others. Similarly,
individuals often pay for services in advance of the real estate
closing and subsequently seek reimbursement from the consumer. This
comment provides examples of how situations such as these are treated
for the purposes of Sec. 1026.19.
Proposed comment 19(e)(3)(i)-3 discusses when items are
characterized as transfer taxes, as opposed to recording fees. Transfer
taxes are analyzed under Sec. 1026.19(e)(3)(i) for purposes of
determining whether an estimate is provided in good faith. Recording
fees are analyzed under Sec. 1026.19(e)(3)(ii) for purposes of
determining whether an estimate is provided in good faith.
Proposed comment 19(e)(3)(i)-4 provides examples illustrating the
good faith requirement in the context of specific credits, rebates, or
reimbursements. An item identified, on the disclosures provided
pursuant to Sec. 1026.19(e), as a payment from a creditor to the
consumer to pay for a particular fee, such as a credit, rebate, or
reimbursement are not subject to the good faith determination
requirements in Sec. 1026.19(e)(3)(i) or (ii) if the increased
specific credit, rebate, or reimbursement actually reduces the cost to
the consumer. Specific credits, rebates, or reimbursements may not be
disclosed or revised in a way that would otherwise violate the
requirements of Sec. 1026.19(e)(3)(i) and (ii). The proposed comment
also provides illustrative examples of these requirements.
Proposed comment 19(e)(3)(i)-5 discusses how to determine ``good
faith'' in the context of lender credits. The proposed comment explains
that the disclosure of ``lender credits,'' as identified in Sec.
1026.37(g)(6)(ii), is required by Sec. 1026.19(e)(1)(i). These are
payments from the creditor to the consumer that do not pay for a
particular fee on the disclosures provided pursuant to Sec.
1026.19(e)(1)(i). These non-specific credits are negative charges to
the consumer--as the lender credit decreases the overall cost to the
consumer increases. Thus, an actual lender credit provided at the real
estate closing that is less than the estimated lender credit provided
pursuant to Sec. 1026.19(e)(1)(i) is an increased charge to the
consumer for purposes of determining good faith under Sec.
1026.19(e)(3)(i). For example, if the creditor provides a $750 estimate
for lender credits in the disclosures required by Sec.
1026.19(e)(1)(i), but only a $500 lender credit is actually provided to
the consumer at the real estate closing, the creditor does not comply
with Sec. 1026.19(e)(3)(i) because, although the actual lender credit
was less than the estimated lender credit provided in the revised
disclosures, the overall cost to the consumer increased and, therefore,
did not comply with Sec. 1026.19(e)(3)(i). See also Sec.
1026.19(e)(3)(iv)(D) and comment 19(e)(3)(iv)(D)-1 for a discussion of
lender credits in the context of interest rate dependent charges.
19(e)(3)(ii) Limited Increases Permitted for Certain Charges
Regulation X Sec. 1024.7(e)(2) currently provides that the sum of
the amounts charged for all lender-required settlement services where
the consumer does not independently choose a provider, title insurance,
and recording charges may increase by as much as 10 percent prior to
settlement, subject to revisions arising from exceptions such as
changed circumstances. The Bureau believes that a more narrow
regulation may be appropriate in this context. The Bureau therefore
proposes Sec. 1026.19(e)(3)(ii), which permits the sum of all charges
for lender-required settlement services where the lender permits the
consumer to shop for a provider other than those identified by the
creditor and recording fees to increase by 10 percent for the purposes
of determining good faith. As explained in the general discussion under
Sec. 1026.19(e)(3) above, the Bureau believes that the purposes of
TILA and RESPA are better served by removing affiliate fees from this
category and including other settlement services in this category only
if the consumer is permitted to shop independently for a service
provider. Proposed comment 19(e)(3)(ii)-1 explains that Sec.
1026.19(e)(3)(ii) provides that certain estimated charges are in good
faith if the sum of all such charges paid by or imposed on the consumer
does not exceed the sum of all such charges disclosed pursuant to Sec.
1026.19(e) by more than 10 percent. Section 1026.19(e)(3)(ii) permits
this limited increase for only: (1) fees paid to an unaffiliated third
party if the creditor permitted the consumer to shop for the service,
consistent with Sec. 1026.19(e)(1)(vi)(A), and (2) recording fees.
Proposed comment 19(e)(3)(ii)-2 clarifies that pursuant to Sec.
1026.19(e)(3)(ii), whether an individual estimated charge subject to
Sec. 1026.19(e)(3)(ii) is in good faith depends on whether the sum of
all charges subject to Sec. 1026.19(e)(3)(ii) increase by more than 10
percent, even if a particular charge does not increase by more than 10
percent. This proposed comment also clarifies that Sec.
1026.19(e)(3)(ii) provides flexibility in disclosing individual fees by
focusing on aggregate amounts, and provides illustrative examples.
Proposed comment 19(e)(3)(ii)-3 discusses the determination of good
[[Page 51171]]
faith when a consumer is permitted to shop for a settlement service,
but either does not select a settlement service provider, or chooses a
settlement service provider identified by the creditor on the list
required by Sec. 1026.19(e)(1)(vi)(C). The proposed comment explains
Sec. 1026.19(e)(3)(ii), which provides that if the creditor requires a
service in connection with the mortgage loan transaction, and permits
the consumer to shop, then good faith is determined pursuant to Sec.
1026.19(e)(3)(ii)(A), instead of Sec. 1026.19(e)(3)(i) and subject to
the other requirements in Sec. 1026.19(e)(3)(ii)(B) and (C). For
example, if, in the disclosures provided pursuant to Sec.
1026.19(e)(1)(i), a creditor includes an estimated fee for an
unaffiliated settlement agent and permits the consumer to shop for a
settlement agent, but the consumer does not choose a settlement agent,
or chooses an agent identified by the creditor on the list required by
Sec. 1026.19(e)(1)(vi)(C), then the estimated settlement agent fee is
included with the fees that may, in aggregate, increase by no more than
10 percent for the purposes of Sec. 1026.19(e)(3)(ii). If, however,
the consumer chooses a provider that is not on the written list, then
good faith is determined according to Sec. 1026.19(e)(3)(iii).
Proposed comment 19(e)(3)(ii)-4 discusses how the good faith
determination requirements apply to recording fees. Recording fees are
mandated by State or local law and paid to a government agency.
Consequently, several of the requirements regarding good faith do not
apply. The proposed comment explains that the condition specified in
Sec. 1026.19(e)(3)(ii)(B), that the charge not be paid to an affiliate
of the creditor, is inapplicable in the context of recording fees. The
condition specified in Sec. 1026.19(e)(3)(ii)(C), that the creditor
permits the consumer to shop for the service, is similarly
inapplicable. Therefore, estimates of recording fees need only satisfy
the condition specified in Sec. 1026.19(e)(3)(ii)(A) (i.e., that the
aggregate amount increased by no more than 10 percent) to meet the
requirements of Sec. 1026.19(e)(3)(ii).
19(e)(3)(iii) Variations Permitted for Certain Charges
Section 1024.7(e)(3) of Regulation X currently provides that the
amounts charged for services, other than those identified in Sec.
1024.7(e)(1) and Sec. 1024.7(e)(2), may change at settlement. The
Bureau agrees that certain types of estimates, such as those for
property insurance premiums, may change significantly between the time
that the original disclosures are provided and consummation. However,
the Bureau believes that the regulation will be improved by
specifically identifying which items are included in this category.
Clear delineation of these items should facilitate compliance by
reducing the need to question how to categorize those items. Thus, the
Bureau proposes Sec. 1026.19(e)(3)(iii), which provides that estimates
of prepaid interest, property insurance premiums, amounts placed into
an escrow, impound, reserve, or similar account, and charges paid to
third-party service providers selected by the consumer consistent with
Sec. 1026.19(e)(1)(vi)(A) that are not on the list provided pursuant
to Sec. 1026.19(e)(1)(vi)(C) are in good faith regardless of whether
the amount actually paid by the consumer exceeds the estimated amount
disclosed, provided such estimates are consistent with the best
information reasonably available to the creditor at the time the
disclosures were made.
Proposed comments 19(e)(3)(iii)-1, 19(e)(3)(iii)-2, and
19(e)(3)(iii)-3 explain that the disclosures for items subject to Sec.
1026.19(e)(3)(iii) must be made in good faith, even though good faith
is not determined pursuant to a comparison of estimated amounts and
actual costs. The comments clarify that the disclosures must be made
according to the best information reasonably available to the creditor
at the time the disclosures are made. The Bureau is concerned that
unscrupulous creditors may underestimate, or fail to include estimates
for, the items subject to Sec. 1026.19(e)(3)(iii) and mislead
consumers into believing the cost of the mortgage loan is less than it
actually is. This concern must be balanced against the fact that some
items may change significantly and legitimately prior to consummation.
Furthermore, while the creditor should include estimates for all fees
``the borrower is likely to incur,'' it may not be reasonable to expect
the creditor to know every fee, no matter how uncommon, agreed to by
the consumer, for example in the purchase and sale agreement, prior to
providing the estimated disclosures. The proposal strikes a balance
between these considerations by imposing a general good faith
requirement. Thus, proposed comment 19(e)(3)(iii)-1 explains that
estimates of prepaid interest, property insurance premiums, and impound
amounts must be consistent with the best information reasonably
available to the creditor at the time the disclosures are provided.
Differences between the amounts of such charges disclosed pursuant to
Sec. 1026.19(e)(1)(i) and the amounts of such charges paid by or
imposed upon the consumer do not constitute a lack of good faith, so
long as the original estimated charge, or lack of an estimated charge
for a particular service, was based on the best information reasonably
available to the creditor at the time the disclosure was provided. For
example, if the creditor requires homeowner's insurance but fails to
include a homeowner's insurance premium on the estimates provided
pursuant to Sec. 1026.19(e)(1)(i), then the creditor has not complied
with Sec. 1026.19(e)(3)(iii). However, if the creditor does not
require flood insurance and the subject property is located in an area
where floods frequently occur, but not located in a zone where flood
insurance is required, failure to include flood insurance on the
original estimates provided pursuant to Sec. 1026.19(e)(1)(i) does not
constitute a lack of good faith. Or, if the creditor knows that the
loan must close on the 15th of the month but estimates prepaid interest
to be paid from the 30th of that month, then the under-disclosure
violates Sec. 1026.19(e)(3)(iii).
Proposed comment 19(e)(3)(iii)-2 discusses the good faith
requirement for required services chosen by the consumer that has been
permitted to shop consistent with Sec. 1026.19(e)(1)(vi)(A). The
proposed comment explains that, if a service is required by the
creditor, the creditor permits the consumer to shop for that service
consistent with Sec. 1026.19(e)(1)(vi)(A), the creditor provides the
list required by Sec. 1026.19(e)(1)(vi)(C), and the consumer chooses a
service provider that is not on the list to perform that service, then
the actual amounts of such fees need not be compared to the original
estimates for such fees to perform the good faith analysis required by
Sec. 1026.19(e)(3)(i) or (ii). Differences between the amounts of such
charges disclosed pursuant to Sec. 1026.19(e)(1)(i) and the amounts of
such charges paid by or imposed on the consumer do not necessarily
constitute a lack of good faith. However, the original estimated
charge, or lack of an estimated charge for a particular service, must
be made based on the best information reasonably available to the
creditor at that time. For example, if the consumer informs the
creditor that the consumer will choose a settlement agent not
identified by the creditor, and the creditor subsequently discloses an
unreasonably low estimated settlement agent fee, then the under-
disclosure does not comply with Sec. 1026.19(e)(3)(iii). The comment
also
[[Page 51172]]
clarifies that, if the creditor permits the consumer to shop consistent
with Sec. 1026.19(e)(1)(vi)(A) but fails to provide the list required
by Sec. 1026.19(e)(1)(vi)(C), good faith is determined pursuant to
Sec. 1026.19(e)(3)(ii) instead of Sec. 1026.19(e)(3)(iii) regardless
of the provider selected by the consumer, unless the provider is an
affiliate of the creditor in which case good faith is determined
pursuant to Sec. 1026.19(e)(3)(i).
Proposed comment 19(e)(3)(iii)-3 discusses the good faith
requirement for non-required services chosen by the consumer.
Differences between the amounts of estimated charges for services not
required by the creditor disclosed pursuant to Sec. 1026.19(e)(1)(i)
and the amounts of such charges paid by or imposed on the consumer do
not necessarily constitute a lack of good faith. For example, if the
consumer informs the creditor that the consumer will obtain a type of
inspection not required by the creditor, the creditor may include the
charge for that item in the disclosures provided pursuant to Sec.
1026.19(e)(1)(i), but the actual amount of the inspection fee need not
be compared to the original estimate for the inspection fee to perform
the good faith analysis required by Sec. 1026.19(e)(3)(iii). However,
the original estimated charge, or lack of an estimated charge for a
particular service, must still be made based on the best information
reasonably available to the creditor at the time that the estimate was
provided. For example, if the subject property is located in a
jurisdiction where consumers are customarily represented at the real
estate closing by their own attorney, but the creditor fails to include
a fee for the consumer's attorney, or includes an unreasonably low
estimate for such fee, on the original estimates provided pursuant to
Sec. 1026.19(e)(1)(i), then the creditor's failure to disclose, or
under-estimation, does not comply with Sec. 1026.19(e)(3)(iii).
19(e)(3)(iv) Revised Estimates
Regulation X Sec. 1024.7(f) currently provides that the estimates
included on the RESPA GFE are binding, subject to six exceptions. If
the lender establishes one of these six exceptions, the RESPA GFE may
be re-issued with revised estimates. The Bureau agrees that there are
certain situations that may legitimately cause increases over the
amounts originally estimated, and that the regulations should provide a
clear mechanism for providing revised estimates in good faith. The
Bureau proposes Sec. 1026.19(e)(3)(iv), which provides that, for
purposes of determining good faith, a charge paid by or imposed on the
consumer may exceed the originally estimated charge if the revision is
caused by one of the six reasons identified in Sec.
1026.19(e)(3)(iv)(A) through (F). Proposed comment 19(e)(3)(iv)-1
illustrates this provision.
Consistent with current Regulation X,\143\ proposed comment
19(e)(3)(iv)-2 clarifies that, to satisfy the good faith requirement,
revised estimates may increase only to the extent that the reason for
revision actually caused the increase and provides illustrative
examples of this requirement. Proposed comment 19(e)(3)(iv)-3 discusses
the documentation requirements related to the provision of revised
estimates. Regulation X Sec. 1024.7(f) contains a separate regulatory
provision related to documentation requirements. The Bureau believes
that this requirement is encompassed within the requirements of Sec.
1026.25. The proposed comment clarifies that the regulations include a
documentation requirement related to the disclosures, but the
requirements are located under Sec. 1026.25, instead of Sec. 1026.19.
As discussed below, the Bureau is proposing to impose enhanced
recordkeeping requirements under Sec. 1026.25.
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\143\ See Sec. 1024.7(f)(1), (2), (3), and (5).
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19(e)(3)(iv)(A) Changed Circumstance Affecting Settlement Charges
In general. Regulation X Sec. 1024.7(f)(1) currently provides that
a revised RESPA GFE may be provided if changed circumstances result in
increased costs for any settlement service such that charges at
settlement would exceed the tolerances for those charges. The Bureau
agrees that creditors should be able to provide revised estimates if
certain situations occur that increase charges. The Bureau proposes
Sec. 1026.19(e)(3)(iv)(A), which provides that a valid reason for re-
issuance exists when changed circumstances cause estimated charges to
increase or, for those charges subject to Sec. 1026.19(e)(3)(ii),
cause the sum of all such estimated charges to increase by more than 10
percent. Proposed comment 19(e)(3)(iv)(A)-1 provides further
explanation of this requirement and includes several practical
examples.
Changed circumstance. As explained in the general discussion under
Sec. 1026.19(e)(3) above, Regulation X Sec. 1024.2 generally defines
changed circumstances as information and events that warrant revision
of the estimated amounts included on the RESPA GFE. The Bureau
generally agrees with the information and events included in the
current definition. However, the Bureau has received feedback that the
current definition is confusing. Thus, the Bureau proposes, within
Sec. 1026.19(e)(3)(iv)(A), a new definition of changed circumstance,
which provides that a changed circumstance is an extraordinary event
beyond the control of any interested party or other unexpected event
specific to the consumer or transaction, information specific to the
consumer or transaction that the creditor relied upon when providing
the disclosures and that was inaccurate or subsequently changed, or new
information specific to the consumer or transaction that was not relied
on when providing the disclosures.
This proposed definition, most significantly, omits the fourth
prong of the existing definition, which provides that: ``[o]ther
circumstances that are particular to the borrower or transaction,
including boundary disputes, the need for flood insurance, or
environmental problems'' is considered a changed circumstance. The
Bureau believes that this prong is not needed because it is covered
elsewhere in the definition, and may be contributing to the current
industry uncertainty surrounding what constitutes a changed
circumstance. However, the Bureau seeks comment on whether this
proposal is appropriate, and specifically on whether there are
scenarios that should be considered a changed circumstance that would
not be captured under any of the other three prongs. Proposed comment
19(e)(3)(iv)(A)-2 provides additional elaboration on this issue and
provides several examples of changed circumstances.
Proposed comment 19(e)(3)(iv)(A)-3 discusses how the definition of
application under Sec. 1026.2(a)(3) relates to the definition of
changed circumstances under Sec. 1026.19(e)(3)(iv)(A). The proposed
comment explains that a creditor is not required to collect the
consumer's name, monthly income, or social security number to obtain a
credit report, the property address, an estimate of the value of the
property, or the mortgage loan amount sought. However, for purposes of
determining whether an estimate is provided in good faith under Sec.
1026.19(e)(1)(i), a creditor is presumed to have collected these six
pieces of information. For example, if a creditor provides the
disclosures required by Sec. 1026.19(e)(1)(i) prior to receiving the
property address from the consumer, the creditor cannot subsequently
claim that the receipt of the property address is a
[[Page 51173]]
changed circumstance, under Sec. 1026.19(e)(3)(iv)(A) or (B).
19(e)(3)(iv)(B) Changed Circumstance Affecting Eligibility
Regulation X Sec. 1024.7(f)(2) currently provides that a revised
RESPA GFE may be provided if a changed circumstance affecting borrower
eligibility results in increased costs for any settlement service such
that charges at settlement would exceed the tolerances for those
charges. The Bureau proposes Sec. 1026.19(e)(3)(iv)(B), which provides
that a valid reason for reissuance exists when a changed circumstance
affecting the consumer's creditworthiness or the value of the
collateral causes the estimated charges to increase. Proposed comment
19(e)(3)(iv)(B)-1 explains that if changed circumstances cause a change
in the consumer's eligibility for specific loan terms disclosed
pursuant to Sec. 1026.19(e)(1)(i) and revised disclosures are provided
reflecting such change, the actual amounts paid by the consumer may be
measured against the revised estimated disclosures to determine if the
actual fee has increased above the estimated fee. The proposed comment
also provides several illustrative examples.
19(e)(3)(iv)(C) Revisions Requested by the Consumer
Regulation X Sec. 1024.7(f)(3) currently provides that a revised
RESPA GFE may be provided if a borrower requests changes to the
mortgage loan identified in the GFE that change the settlement charges
or the terms of the loan. The Bureau agrees that creditors should be
able to provide revised estimates that increase charges from the
original estimates due to revisions requested by the consumer. The
Bureau proposes Sec. 1026.19(e)(3)(iv)(C), which provides that a valid
reason for reissuance exists when a consumer requests revisions to the
credit terms or the settlement that cause estimated charges to
increase. Proposed comment 19(e)(3)(iv)(C)-1 illustrates this
requirement.
19(e)(3)(iv)(D) Interest Rate Dependent Charges
Regulation X Sec. 1024.7(f)(5) currently provides that, if the
interest rate has not been locked, or a locked interest rate has
expired, the charge or credit for the interest rate chosen, the
adjusted origination charges, per diem interest, and loan terms related
to the interest rate may change, provided, however, that when the
interest rate is later locked, a revised GFE must be provided showing
the revised interest rate-dependent charges and terms. The Bureau
agrees that disclosures related to the interest rate should be able to
fluctuate if the consumer's rate has not been set. The Bureau also
agrees that revised disclosures should be provided when the consumer's
rate is later set. However, the Bureau is concerned that this provision
may be used to harm consumers. There is a possibility that unscrupulous
creditors could use this provision to engage in rent-seeking behavior,
or to attempt to circumvent the requirements of TILA or RESPA. The
Bureau acknowledges these concerns, but the Bureau is unaware of any
evidence that creditors are using current Regulation X Sec.
1024.7(f)(5) to harm consumers or to circumvent RESPA. The Bureau
believes that the correct balance may be to retain the current
regulation while monitoring the market to determine if the regulation
is being used to the detriment of consumers. Thus, the Bureau proposes
Sec. 1026.19(e)(3)(iv)(D), which provides that a valid reason for
reissuance exists when a consumer's rate is set, and also provides that
revised disclosures must be provided reflecting the revised interest
rate, bona fide discount points, and lender credits. Proposed comment
19(e)(3)(iv)(D)-1 illustrates this requirement. The Bureau also seeks
comment on the frequency and magnitude of revisions to the interest
rate dependent charges, the frequency of cancellations of contractual
agreements related to interest rate dependent charges, such as rate
lock agreements, and the reasons for such revisions and cancellations.
19(e)(3)(iv)(E) Expiration
Regulation X Sec. 1024.7(f)(4) currently provides that if a
borrower does not express an intent to continue with the transaction
within ten business days after the RESPA GFE is provided, or such
longer time specified by the loan originator, then the loan originator
is no longer bound by the RESPA GFE. The Bureau believes that consumers
should be able to rely on the estimated charges for a sufficient period
of time to permit shopping. The Bureau also believes that, if the
consumer does not indicate intent to proceed within the ten-day period,
creditors should be able to provide revised disclosures reflecting new
charges. The Bureau proposes Sec. 1026.19(e)(3)(iv)(E), which provides
that a valid reason for reissuance exists when a consumer expresses an
intent to proceed more than ten business days after the disclosures are
provided. Proposed comment 19(e)(3)(iv)(E)-1 illustrates this
requirement.
19(e)(3)(iv)(F) Delayed Settlement Date on a Construction Loan
Regulation X Sec. 1024.7(f)(6) currently provides that in
transactions involving new construction home purchases, where
settlement is expected to occur more than 60 calendar days from the
time a GFE is provided, the loan originator cannot issue a revised GFE
unless the loan originator provided the borrower with a clear and
conspicuous disclosure stating that at any time up until 60 calendar
days prior to the real estate closing, the loan originator may issue a
revised GFE. The Bureau believes that the current law under Regulation
X should apply to the integrated disclosures. The Bureau agrees that
creditors should be able to issue revised disclosures for construction
loans where consummation will not occur until well into the future,
likely after construction is completed, provided that the consumer is
aware of this fact. The Bureau proposes Sec. 1026.19(e)(3)(iv)(F),
which provides that a valid reason for revision exists on construction
loans when consummation is scheduled to occur more than 60 days after
delivery of the estimated disclosures, provided that the consumer was
alerted to this fact when the estimated disclosures were provided.
Proposed comment 19(e)(3)(iv)(F)-1 clarifies that a loan for the
purchase of a home either to be constructed or under construction is
considered a construction loan to purchase and build a home for the
purposes of Sec. 1026.19(e)(3)(iv)(F). For example, a loan to build a
home that has yet to be constructed, or a loan to purchase a home on
which construction is currently underway, is a construction loan to
build a home for the purposes of Sec. 1026.19(e)(3)(iv)(F). However,
if a use and occupancy permit has been issued for the home prior to the
issuance of the Loan Estimate, then the home is not considered to be
under construction and the transaction would not be a construction loan
to purchase and build a home for the purposes of Sec.
1026.19(e)(3)(iv)(F). This comment is consistent with guidance provided
by HUD in the HUD RESPA FAQs p. 21, 2 (``GFE--New
construction'').
19(e)(4) Provision of Revised Disclosures
Timing Requirements for Provision of Revised Disclosures
TILA's requirement that creditors provide corrected disclosures is
not linked to the time when a creditor discovers that a correction is
necessary. Instead, section 128(b)(2)(D) of TILA
[[Page 51174]]
provides that the creditor shall furnish additional, corrected
disclosures to the borrower not later than three business days before
the date of consummation of the transaction, if the previously
disclosed annual percentage rate is no longer accurate, as determined
under TILA section 107(c). 15 U.S.C. 1638(b)(2)(D). Regulation Z
implements this requirement in Sec. 1026.19(a)(2)(ii). RESPA does not
expressly address timing requirements for the delivery of revised GFEs,
but Regulation X generally requires that a revised GFE must be provided
within three business days of the creditor receiving information
sufficient to establish a reason for revision.\144\
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\144\ ``If a revised GFE is to be provided, the loan originator
must do so within 3 business days of receiving information
sufficient to establish changed circumstances.'' 12 CFR 1024.7(f)(1)
and (2). ``If a revised GFE is to be provided, the loan originator
must do so within 3 business days of the borrower's request.'' 12
CFR 1024.7(f)(3). ``The loan originator must provide the revised GFE
within 3 business days of the interest rate being locked or, for an
expired interest rate, re-locked.'' 12 CFR 1024.7(f)(5).
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While both regulations contain redisclosure requirements, their
approaches are different. Regulation Z ensures that the consumer is
made aware of changes at a specific point in time before consummation,
but does not require the creditor to keep the consumer informed of
incremental changes during the loan origination process. In contrast,
Regulation X ensures that the consumer is kept aware of certain changes
during the process, but those changes may occur up to the day of
settlement. These different approaches may stem from the underlying
purposes of the respective statutes: TILA focuses primarily on the
disclosure of high-level measures of the costs imposed by the creditor,
such as the APR, while RESPA requires itemized disclosure of all
charges associated with the settlement of a federally related mortgage
loan and any underlying real estate transaction, regardless of who
imposes the charge.
The Bureau believes that the policy goals of both statutes are best
served by adopting the Regulation X requirement that revised
disclosures be delivered within three business days of the creditor
establishing that a valid reason for revision exists. Intermittent
redisclosure of the integrated Loan Estimate is necessary under RESPA
because settlement service provider costs typically fluctuate during
the mortgage loan origination process. Furthermore, intermittent
redisclosure is consistent with the purposes of TILA because it
promotes the informed use of credit by keeping the consumer apprised of
changes in costs.
Accordingly, the Bureau is proposing Sec. 1026.19(e)(4)(i), which
provides that, if a creditor delivers a revised Loan Estimate, the
creditor must do so within three business days of establishing that a
valid reason for revision exists. Proposed comment 19(e)(4)-1 provides
illustrative examples of this requirement.
The Bureau proposes this provision pursuant to its authority under
TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section
1032(a), and, for residential mortgage loans, sections 129B(e) of TILA
and 1405(b) of the Dodd-Frank Act. This proposed provision is
consistent with TILA's purposes in that alerting consumers to
significant settlement cost increases as they occur, rather than prior
to consummation, increases consumer awareness during the mortgage loan
origination process, enabling consumers to avoid the uninformed use of
credit. This provision is consistent with section 129B(e) of TILA
because failing to inform borrowers of significant settlement cost
increases as they occur is not in the interest of the borrower. This
also achieves RESPA's purposes because informing consumers of
significant settlement cost increases as they occur is a more effective
method of advance disclosure of settlement costs than only informing
consumers at or shortly prior to consummation. In addition, the
proposed regulation is consistent with Dodd-Frank Act section 1032(a)
because the features of mortgage loan transactions and settlement
services will be more fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the mortgage loan and settlement
services if consumers are made aware of significant settlement cost
increases as they occur, rather than prior to consummation. It is also
in the interest of consumers and in the public interest, consistent
with Dodd-Frank Act section 1405(b), because alerting consumers to
significant settlement cost increases during the process will improve
consumer understanding and awareness of the mortgage loan transaction
through the use of disclosure.
Prohibition Against Delivering Early Disclosures at the Same Time as
Final Disclosures
As explained above, the purposes of RESPA and TILA include
effective advance disclosure of settlement costs, and the informed use
of credit by consumers. See TILA section 102; RESPA section 2. Section
105(a) of TILA also permits the Bureau to prescribe regulations that
would improve consumers' ability to understand the mortgage loan
transaction. The Dodd-Frank Act enhances TILA's focus by placing
special emphasis on the requirement that disclosures must be made in a
way that is clear and understandable to the consumer. Section 1405 of
the Dodd-Frank Act focuses on improving ``consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures.'' The Bureau is aware that, in some
cases, creditors have provided a revised GFE at the real estate closing
along with the RESPA settlement statement. The Bureau is concerned that
this practice may be confusing for consumers and may diminish their
awareness and understanding of the transaction.
The Bureau recognizes that there are cases in which a consumer may
not be confused by receiving good faith estimates on the same day, or
even at the same time, as the consumer receives the actual settlement
costs. However, because the estimated costs will match the actual
costs, the Bureau is concerned that consumers may be confused by
seemingly duplicative disclosures. The Bureau is also concerned that
this duplication may contribute to information overload stemming from
too many disclosures, which may, in turn, inhibit the consumer's
ability to understand the transaction. Accordingly, proposed Sec.
1026.19(e)(4)(ii) prohibits creditors from providing a consumer with
disclosures of estimated and actual costs at the same time. To draw a
clear line to facilitate compliance, the creditor does not comply with
the requirements of proposed Sec. 1026.19(e) if the consumer receives
revised versions of the disclosures required under Sec.
1026.19(e)(1)(i) on the same business day as the consumer receives the
disclosures required by Sec. 1026.19(f)(1)(i).
Accordingly, the Bureau is proposing Sec. 1026.19(e)(4)(ii), which
provides that the creditor shall deliver revised versions of the
disclosures required by Sec. 1026.19(e) in a manner that ensures such
revised disclosures are not received on the same business day as the
consumer receives the disclosures required by Sec. 1026.19(f)(1)(i).
The Bureau proposes this provision pursuant to its authority under TILA
section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a),
and, for residential mortgage loans, Dodd-Frank Act section 1405(b).
The
[[Page 51175]]
proposed provision is consistent with TILA's purposes because
prohibiting simultaneous provision of a revised Loan Estimate and the
Closing Disclosure promotes the informed use of credit by reducing the
potential for consumer confusion and information overload. Similarly,
this provision achieves RESPA's purposes because the receipt of
settlement cost information on a single disclosure is a more effective
method of advance disclosure of settlement costs. In addition, the
proposed regulation is consistent with Dodd-Frank Act section 1032(a)
because consumers will understand the costs, benefits, and risks
associated with the mortgage loan and settlement services if the actual
terms and costs of the transaction are disclosed on the Closing
Disclosure only. It is also in the interest of consumers and in the
public interest, consistent with Dodd-Frank Act section 1405(b),
because ensuring that consumers do not receive duplicative disclosures
will improve consumer understanding and awareness of the mortgage loan
transaction through the use of disclosure.
Proposed comment 19(e)(4)-2 discusses the requirement that revised
disclosures may not be delivered at the same time as the final
disclosures. The proposed comment explains that creditors comply with
the requirements of Sec. 1026.19(e)(4) if the revised disclosures are
reflected in the disclosures required by Sec. 1026.19(f)(1)(i) (i.e.,
the Closing Disclosure). This comment also includes illustrative
examples of the requirement.
19(f) Mortgage Loans Secured by Real Property--Final Disclosures
As discussed in the preamble text introducing Sec. 1026.19, TILA
applies only to creditors and requires, for certain mortgage
transactions, creditors to furnish a corrected disclosure to the
borrower not later than three business days before the date of
consummation of the transaction if the prior disclosed APR has become
inaccurate. 15 U.S.C. 1638(b)(2)(A), (D). In contrast, RESPA generally
applies to settlement agents and requires the person conducting the
settlement (e.g., the settlement agent) to complete a settlement
statement and make it available for inspection by the borrower at or
before settlement. 12 U.S.C. 2603(b). RESPA also provides that, upon
the request of the borrower, the person who conducts the settlement
must permit the borrower to inspect those items which are known to such
person on the settlement statement during the business day immediately
preceding the day of settlement. Id.
Regulation Z implements TILA's requirement that the creditor
deliver corrected disclosures and provides that, if the annual
percentage rate disclosed in the early TILA disclosure becomes
inaccurate, the creditor shall provide corrected disclosures with all
changed terms. Sec. 1026.19(a)(2)(ii). Regulation Z further provides
that the consumer must receive the corrected disclosures no later than
three business days before consummation. Id. Regulation X provides that
the settlement agent shall permit the borrower to inspect the RESPA
settlement statement, completed to set forth those items that are known
to the settlement agent at the time of inspection, during the business
day immediately preceding settlement. Sec. 1024.10(a).
Section 1032(f) of the Dodd-Frank Act provides that the Bureau
shall propose for public comment rules that combine the disclosures
required under TILA and sections 4 and 5 of RESPA. As noted above,
although the Dodd-Frank Act amended TILA and RESPA to reflect section
1032(f)'s mandate to integrate the rules under TILA and RESPA, Congress
did not reconcile the timing requirements or amend the division of
responsibilities between creditor and settlement agent in TILA and
RESPA.
19(f)(1) Provision
19(f)(1)(i) Scope
As discussed above, the integrated disclosure mandate requires the
Bureau to reconcile what Congress did not. Thus, pursuant to its
authority under sections 105(a) of TILA, 19(a) of RESPA, and 1032(f) of
the Dodd-Frank Act, the Bureau is proposing to integrate the disclosure
requirements in TILA section 128 and RESPA section 4 in Sec.
1026.19(f)(1)(i). This section provides that in a closed-end consumer
credit transaction secured by real property, other than a reverse
mortgage subject to Sec. 1026.33, the creditor shall provide the
consumer with the disclosures in Sec. 1026.38 reflecting the actual
terms of the credit transaction. Proposed comment 19(f)(1)(i)-1
provides illustrative examples of this provision.
19(f)(1)(ii) Timing
19(f)(1)(ii)(A) In General
The Bureau must determine when the integrated disclosures must be
provided, given that the statutory requirements are not in sync. The
Bureau believes that, to comply with both TILA and RESPA, the
integrated disclosure must be delivered no later than three days before
consummation. The Bureau recognizes that RESPA requires settlement
agents to permit borrower inspection of the settlement statement only
one business day in advance of settlement, and even then RESPA requires
disclosure of only the information to the extent that it is known to
the settlement agent. However, the fact that Congress did not alter the
timing requirements under RESPA does not imply that the timing
requirements under TILA were eliminated. It can be safely presumed that
Congress was aware of the requirement that creditors must deliver final
disclosures three business days before consummation because Congress
created the three-business-day waiting period in 2008. Furthermore,
section 1098 of the Dodd-Frank Act, which amends RESPA section 4 to
require integrated disclosures, specifically provides that such
integrated disclosures shall ``include real estate settlement cost
statements.'' This suggests that Congress intended creditors to deliver
the settlement cost statements with the TILA disclosures required to be
delivered no later than three business days before consummation, even
though the language in RESPA section 4 related to settlement agent
delivery remains.\145\
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\145\ The language in section 4 of RESPA requiring settlement
statement delivery one business day in advance of settlement was
added in 1976. See section 3 of Public Law 94-205 (Jan. 2, 1976).
Interpreting the recent amendments in a way that overrides the
legacy language is consistent with Supreme Court precedent. See FDA
v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)
(``[T]he meaning of one statute may be affected by other Acts,
particularly where Congress has spoken subsequently and more
specifically to the topic at hand.'').
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The expansion of the items required to be disclosed three business
days prior to consummation also supports the Bureau's interpretation.
As discussed above, section 1419 of the Dodd-Frank Act also amended
TILA by adding section 128(a)(17), which requires creditors to disclose
the aggregate amount of settlement charges for all settlement services
provided in connection with the loan and the aggregate amount of other
fees or required payments in connection with the loan. The items
included in this amendment are nearly all of the items that are
included on the RESPA settlement statement, which suggests that
Congress intended for creditors to disclose information that was
traditionally known only to settlement agents in advance of
consummation. This amendment, coupled with the fact that Regulation Z
requires redisclosure of all changed terms three business days before
consummation when the APR is inaccurate, implies that Dodd-Frank
requires provision of the integrated
[[Page 51176]]
disclosure no later than three business days before consummation.
The determination of how to integrate these conflicting statutory
provisions also must be made in light of section 1405(b) of the Dodd-
Frank Act, which focuses on improving ``consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures.'' Consumers may be more aware of and
better understand their transactions if consumers receive the
disclosures reflecting all of the terms and costs associated with their
transactions three days before consummation. This should afford
consumers sufficient time to review, analyze, and question the
information reflected in the disclosure, such that consumers are aware
of and understand the transactions by the time consumers are required
to obligate themselves. This should also provide consumers with
sufficient time to identify and correct errors, discuss and negotiate
cost increases, and have the necessary funds available. This may also
eliminate the opportunity for bad actors to surprise consumers with
unexpected costs at the closing table, when consumers are less able to
question such costs.
In addition, the Bureau is concerned that consumers would not
receive the disclosures far enough in advance of consummation to review
and understand the transaction under an alternate reading of the
statute. As explained above, Regulation Z currently requires creditors
to ensure that consumers receive the corrected TIL disclosures no later
than three business days prior to consummation. A less stringent rule
that allowed consumers to receive the disclosures on the day of
consummation would be inconsistent with both TILA and the goals this
proposal seeks to achieve. However, the Bureau is also concerned that
it would be impractical to require delivery earlier than three business
days before consummation. Thus, the Bureau believes that the proposal
should provide flexibility to industry by requiring creditors to ensure
that consumers receive the disclosures no later than the third business
day before consummation. Under this approach, a creditor need not
complete the disclosures until the third business day before
consummation, provided it can ensure that the consumer will receive the
disclosures that day, such as via electronic mail consistent with
applicable requirements or hand delivery.
As discussed above, the integrated disclosure mandate requires the
Bureau to reconcile what Congress did not. Section 105(a) of TILA
authorizes the Bureau to modify and add requirements under certain
circumstances, and the Bureau believes that requiring redisclosure in
cases where it is not currently required under Regulation Z or
Regulation X is necessary to effectively integrate the disclosures.
Accordingly, the Bureau proposes Sec. 1026.19(f)(1)(ii)(A), which
provides that, except for transactions secured by timeshares, or as
provided under Sec. 1026.19(f)(2), the creditor shall ensure that the
consumer receives the disclosures no later than three business days
before consummation. Proposed comment 19(f)(1)(ii)-1 provides
illustrations of this requirement. Proposed comment 19(f)(1)(ii)-2
explains the requirement that consumers must receive disclosures no
later than three days in advance of consummation, and provides
practical examples illustrating appropriate delivery methods.
The Bureau informed the Small Business Review Panel that the Bureau
was considering requiring reissuance if the APR increased by more than
\1/8\ of 1 percent, certain loan features were added, or if the amount
needed to close increased beyond a certain tolerance. See Small
Business Panel Review Report at 11. While this proposal includes the
tolerance for the amount needed to close and would require reissuance
if certain loan features are added, this proposal does not include an
additional APR tolerance for reissuance. Based on further review, the
Bureau believes that the $100 amount needed to close tolerance provides
sufficient flexibility, thereby making an additional APR tolerance
unnecessary. The Bureau was also concerned that the additional APR
tolerance would harm consumers by allowing potentially large costs to
change immediately prior to closing. Importantly, the Bureau believes
that this proposal is substantially similar to the possibilities
discussed with the Small Business Review Panel. In virtually all cases
where the APR increases by more than \1/8\ of 1 percent, the amount
needed to close would also have increased by more than $100, requiring
re-disclosure. However, the Bureau solicits comment on whether the use
of an APR tolerance would provide any additional benefits.
The Bureau recognizes that this modification would require
redisclosure three days before consummation in circumstances that are
not currently required under Regulation Z. This proposal removes the
condition, provided for under TILA section 128(b)(2)(D), that corrected
disclosures need not be delivered if the estimated APR included in the
early TILA disclosure is accurate at the time of consummation. The
Bureau has received extensive feedback indicating that APR estimates
included in the early TILA disclosures are so rarely accurate that most
creditors provide corrected disclosures as a standard business
practice, instead of analyzing the accuracy of the disclosed APR. Thus,
the Bureau believes that the benefit afforded by the condition under
TILA section 128(b)(2)(D) is more illusory than real, and may, in fact,
impose an unnecessary compliance burden on industry. In addition, the
Bureau suspects that the expansion of the list of items included in the
APR, pursuant to the proposed amendments to Sec. 1026.4, may make it
less likely that a creditor will be able to accurately estimate the APR
within three business days of application. Therefore, this proposal
does not condition disclosure prior to consummation on APR accuracy.
These proposals are made pursuant to the Bureau's legal authority
under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd-
Frank Act, and, for residential mortgage transactions, sections 129B(e)
of TILA and 1405(b) of the Dodd-Frank Act. The Bureau has considered
the purposes for which it may exercise its authority under section
105(a) of TILA and, based on that review, believes that the proposed
modifications are appropriate. The proposal may help consumers avoid
the uninformed use of credit by ensuring that consumers receive
disclosures of the actual terms and costs associated with the mortgage
loan transaction early enough that consumers have sufficient time to
become fully informed as to the cost of their credit. This provision is
consistent with section 129B(e) of TILA because failing to provide
borrowers with enough time to become fully informed of the actual terms
and costs of the transaction is not in the interest of the borrower.
The Bureau has also considered the purposes for which it may
exercise its authority under section 19(a) of RESPA and, based on that
review, believes that the proposed rules and interpretations are
appropriate. The proposal has the potential to ensure more effective
advance disclosure of settlement costs by requiring creditors to
disclose the actual settlement costs associated with the transaction
three business days before consummation.
Proposed Sec. 1026.19(f)(1)(ii)(A) is consistent with Dodd-Frank
Act section 1032(a) because the features of mortgage loan transactions
and settlement services will be more fully, accurately, and effectively
disclosed to consumer in
[[Page 51177]]
a manner than permits consumers to understand the costs, benefits, and
risks associated consumers will understand the costs and risks
associated with the mortgage loan and settlement services if consumers
receive the disclosures reflecting all of the terms and costs
associated with their transactions three days before consummation.
In addition, the Bureau has considered the purposes for which it
may exercise its authority under section 1405(b) of the Dodd-Frank Act
and, based on that review, believes that the proposed modifications are
appropriate. The proposal may improve consumer awareness and
understanding of the mortgage loan transaction by ensuring that
consumers receive the disclosures reflecting all of the terms and costs
associated with their transactions three days in advance of
consummation. The proposal may also be in the interest of consumers and
in the public interest because the proposal may eliminate the
opportunity for bad actors to surprise consumers with unexpected costs
at the closing table, when consumers are less able to question such
costs.
The Bureau recognizes that this is a change from current industry
practice. During the Small Business Review process, several small
entity representatives were opposed to this modification. See Small
Business Review Panel report at 35, 38, 40, 45, 53-54, 59-60, 67-68,
72, and 77. The Small Business Review Panel recommended that the Bureau
explore ways to mitigate the potential impact of the three business day
requirement on small entities. See id at 29. Based on this feedback and
consistent with the Small Business Review Panel's recommendation, the
Bureau solicits comment on alternative approaches, including any that
can minimize the burden on industry, especially small entities, while
serving the needs of consumers and effectively integrating the
disclosures, as required by the Dodd-Frank Act.
19(f)(1)(ii)(B) Timeshares
As explained above, in 2008 Congress amended TILA to require
delivery of final disclosures three business days prior to
consummation. However, Congress explicitly exempted mortgage loans
secured by timeshares, as defined by 11 U.S.C. 101(53D), from the
three-day requirement.\146\ Accordingly, pursuant to its authority
under sections 105(a) of TILA, 19(a) of RESPA, and 1405(b) of the Dodd-
Frank Act, the Bureau proposes Sec. 1026.19(f)(1)(ii)(B), which states
that for transactions secured by a consumer's interest in a timeshare
plan described in 11 U.S.C. 101(53D), the creditor shall ensure that
the consumer receives the disclosures required under paragraph
(f)(1)(i) of this section as soon as reasonably practicable, but no
later than consummation. This proposed regulation carries out the
purposes of TILA and RESPA by ensuring meaningful disclosure of credit
terms and effective advance disclosure of settlement costs, consistent
with section 105(a) of TILA and 19(a) of RESPA, respectively. Also,
this proposed regulation will improve consumer awareness and
understanding of transactions involving residential mortgage loans by
requiring effective disclosure within a timeframe appropriate for loans
secured by a timeshare, which will be in the best interest of consumers
and the public consistent with Dodd-Frank Act section 1405(b).
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\146\ Mortgage Disclosure Improvement of 2008, Public Law 110-
289, Title V, Sec. 2502(a)(6), 122 Stat. 2654, 2857 (July 30,
2008); 15 U.S.C. 1638(b)(2)(G).
---------------------------------------------------------------------------
Proposed comment 19(f)(1)(ii)-3 explains that for loans secured by
timeshares, as defined under 11 U.S.C. 101(53D), Sec.
1026.19(f)(1)(ii)(B) requires a creditor to ensure that the consumer
receives the disclosures required under Sec. 1026.19 (f)(1)(i) as soon
as reasonably practicable, but no later than consummation. The proposed
comment also includes illustrative examples of this requirement.
19(f)(1)(iii) Delivery
Section 128(b)(2)(E) of TILA provides that, if the disclosures are
mailed to the consumer, the consumer is considered to have received
them three business days after they are mailed. 15 U.S.C.
1638(b)(2)(E). RESPA does not expressly address delivery requirements.
Regulation Z provides that if the disclosures are provided to the
consumer by means other than delivery in person, the consumer is deemed
to have received the disclosures three business days after they are
mailed or delivered. See Sec. 1026.19(a)(1)(ii). Regulation X provides
that the settlement agent shall deliver the completed RESPA settlement
statement at or before the settlement, except if the borrower waives
the right to delivery of the completed RESPA settlement statement, in
which case the completed RESPA settlement statement shall be mailed or
delivered as soon as practicable after settlement. Sec. 1024.10(b),
(c).
To establish a consistent standard for the integrated Closing
Disclosure, pursuant to its authority under sections 105(a) of TILA,
19(a) of RESPA, and 1405(b) of the Dodd-Frank Act, the Bureau proposes
to adopt Sec. 1026.19(f)(1)(iii), which provides that, if any
disclosures required under Sec. 1026.19(f)(1)(i) are not provided to
the consumer in person, the consumer is presumed to have received the
disclosures three business days after they are mailed or delivered to
the address specified by the consumer.
Proposed comment 19(f)(1)(iii)-1 explains that if any disclosures
required under Sec. 1026.19(f)(1)(i) are not provided to the consumer
in person, the consumer is presumed to have received the disclosures
three business days after they are mailed or delivered. This is a
presumption which may be rebutted by providing evidence that the
consumer received the disclosures earlier than three business days. The
proposed comment also contains illustrative examples. Proposed comment
19(f)(1)(iii)-2 clarifies that the presumption established in Sec.
1026.19(f)(1)(iii) applies to methods of electronic delivery, such as
email. However, creditors using electronic delivery methods, such as
email, must also comply with Sec. 1026.17(a)(1). This proposed comment
also contains illustrative examples.
The Bureau recognizes that this requirement is different than the
current requirement in Regulation Z. As explained above, the current
rules deem corrected disclosures mailed or delivered to the consumer by
a method other than in-person delivery to be received three business
days after mailing or delivery. In contrast, the proposed rule instead
creates a presumption that the disclosures are received three business
days after they are mailed or delivered to the address provided by the
consumer. While the current rule may be appropriate for the disclosures
provided under Sec. 1026.19(a), the Bureau is concerned that the
current rule may not be appropriate for the integrated Closing
Disclosure, which contains much more information than the final TILA
disclosures subject to the current rule, and therefore will require
more time to review and understand. It therefore may be appropriate to
create a presumption of receipt, which would provide additional
encouragement for lenders to ensure that the disclosures are received
in a timely manner. However, the Bureau solicits feedback regarding
whether the proposed rules will create uncertainty regarding
compliance. The Bureau also solicits comment on whether the rules
should be analogous to the current rule under Sec. 1026.19(a)(2),
which uses ``deem'' instead of ``presume.'' Finally, the Bureau seeks
feedback regarding
[[Page 51178]]
whether Sec. 1026.19(a) should be modified to reflect Sec.
1026.19(f)(1)(iii), if the final rule adopts the presumption of
receipt.
This proposed provision is consistent with section 105(a) of TILA
in that it may help consumers avoid the uninformed use of credit by
ensuring that consumers receive disclosures of the actual terms and
costs associated with the mortgage loan transaction early enough that
consumers have sufficient time to become fully informed as to the cost
of credit. This proposed provision is also consistent with section
19(a) of RESPA because it has the potential to ensure more effective
advance disclosure of settlement costs by requiring creditors to make
sure that the disclosures are delivered to the address specified by the
consumer three business days before consummation. In addition, the
proposal is consistent with section 1405(b) of the Dodd-Frank Act
because the proposal may improve consumer awareness and understanding
of the mortgage loan transaction by ensuring that disclosures
reflecting all of the terms and costs associated with their
transactions are delivered to the address specified by the consumer
three business days in advance of consummation. Ensuring that consumers
receive disclosures in a timely manner is also in the interest of
consumers and in the public interest because the proposal may allow
consumers to receive the disclosure early enough to question and
understand their mortgage loan transaction.
19(f)(1)(iv) Consumer's Waiver of Waiting Period Before Consummation
Section 128(b)(2)(F) of TILA provides that the consumer may waive
or modify the timing requirements for disclosures to expedite
consummation of a transaction, if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. Section 128(b)(2)(F) further provides that: (1) The term
``bona fide personal financial emergency'' may be further defined in
regulations issued by the Bureau; (2) the consumer must provide the
creditor with a dated, written statement describing the emergency and
specifically waiving or modifying the timing requirements, which bears
the signature of all consumers entitled to receive the disclosures; and
(3) the creditor must provide, at or before the time of waiver or
modification, the final disclosures. 15 U.S.C. 1638(b)(2)(F). This
provision is implemented in Sec. 1026.19(a)(3) of Regulation Z.
Neither RESPA nor Regulation X contains a similar provision.
Although the Bureau understands that waivers based on a bona fide
personal financial emergency are rare, this exception serves an
important purpose: consumers should be able to waive the protection
afforded by the waiting period if, in the face of a financial
emergency, the waiting period does more harm than good. Accordingly,
the Bureau is proposing Sec. 1026.19(f)(1)(iv), which allows a
consumer to waive the three-business-day waiting period in the event of
a bona fide personal financial emergency. In addition, the Bureau seeks
comment on the nature of waivers based on bona fide personal financial
emergencies. The Bureau also seeks comment on whether the bona fide
personal financial emergency exception is needed more in some contexts
than in others (e.g., in refinance transactions or purchase money
transactions).
Proposed comment 19(f)(1)(iv)-1 states that, a consumer may modify
or waive the right to the three-business-day waiting period required by
Sec. 1026.19(f)(1)(ii) only after the creditor makes the disclosures
required by Sec. 1026.19(f)(1)(i). This comment is modeled after
comment 19(a)(3)-1, which is based on the same statutory text, and is
consistent with commentary on waiving the rescission period and the
pre-consummation waiting period required for certain high-cost mortgage
transactions. The consumer must have a bona fide personal financial
emergency that necessitates consummating the credit transaction before
the end of the waiting period. Whether these conditions are met is
determined by the facts surrounding individual situations. The imminent
sale of the consumer's home at foreclosure, where the foreclosure sale
will proceed unless loan proceeds are made available to the consumer
during the waiting period, is one example of a bona fide personal
financial emergency. Each consumer who is primarily liable on the legal
obligation must sign the written statement for the waiver to be
effective.
Alternative--Proposed 19(f)(1)(v) Settlement Agent
As discussed above, neither TILA nor Regulation Z contain
requirements related to settlement agents, but RESPA and Regulation X
generally apply to settlement agents with respect to closing disclosure
requirements. Section 1032(f) of the Dodd-Frank Act requires the Bureau
to propose for public comment rules that combine the disclosures
required under TILA and sections 4 and 5 of RESPA. The Dodd-Frank Act
amended TILA and RESPA to reflect section 1032(f)'s mandate to
integrate the rules under TILA and RESPA, but Congress did not
reconcile the division of responsibilities between creditor and
settlement agent in TILA and RESPA.
The Bureau recognizes that people who conduct settlements, such as
settlement agents and closing attorneys, play a valuable role in the
real estate settlement process. The Bureau also believes that
settlement agents may be able to assist consumers with issues that
arise during a real estate settlement as, or perhaps more, effectively
than creditors. However, the Bureau is concerned that, in the context
of providing disclosures, settlement agents may not be able to fulfill
the obligations imposed by TILA. The Bureau is also concerned that
consumers will receive duplicative, inaccurate, or unreliable
disclosures if the responsibility to provide disclosures is divided.
As discussed above, proposed Sec. 1026.19(f)(1)(i) makes the
creditor solely responsible for the provision of the disclosures
required by Sec. 1026.19(f). Although this may be the appropriate
solution, an alternative approach that permits creditors and settlement
agents to split responsibility may also be appropriate. This
alternative would require the creditor and settlement agent to agree on
a division of responsibilities regarding the delivery of the
disclosures. Accordingly, pursuant to its authority under sections
105(a) of TILA, 19(a) of RESPA, and 1405(b) of the Dodd-Frank Act, the
Bureau proposes alternative Sec. 1026.19(f)(1)(v), which provides that
a settlement agent may provide a consumer with the disclosures required
under Sec. 1026.19(f)(1)(i), provided the settlement agent complies
with all requirements of Sec. 1026.19(f) as if it were the creditor.
As discussed under proposed alternative comment 19(f)(1)(v)-3 below,
this proposed regulation is not intended to relieve the creditor's
responsibility under TILA. The creditor would remain responsible for
ensuring that disclosures are provided in accordance with the
requirements of Sec. 1026.19(f). Disclosures provided by a settlement
agent in accordance with the requirements of Sec. 1026.19(f) satisfy
the creditor's obligation under Sec. 1026.19(f)(1)(i). As discussed
under proposed alternative comment 19(f)(1)(v)-3 below, this proposed
regulation is not intended to relieve the creditor's responsibility
under TILA. The creditor would remain responsible for ensuring that
disclosures are provided in accordance with the requirements of Sec.
1026.19(f). Disclosures provided by a settlement agent in accordance
with the requirements of Sec. 1026.19(f) satisfy the creditor's
[[Page 51179]]
obligation under Sec. 1026.19(f)(1)(i). In addition, the Bureau
invites comment on other methods of dividing responsibility between
creditors and settlement service providers, provided that such other
methods ensure that consumers are provided with prompt, accurate, and
reliable disclosures.
The Bureau informed the Small Business Review Panel that the Bureau
was considering an alternate proposal where the lender would be
responsible for preparing the TILA-required information, the settlement
agent would be responsible for preparing the RESPA-required
information, and the lender and settlement agent would be jointly
responsible for providing the consumer with an integrated Closing
Disclosure three business days before closing. See Small Business Panel
Review Report at 12. While the alternate proposal in this proposed rule
permits shared responsibility, it does not delineate responsibility
between RESPA and TILA content. Based on further review, the Bureau
determined that such a division would be impracticable. There is
significant overlap between the disclosures required by the statutes,
and creditors and settlement agents have access to both RESPA and TILA
information. The Bureau believes that the better approach is to permit
shared responsibility, but allow creditors and settlement agents to
decide how to most effectively divide that responsibility. However, the
Bureau solicits comment on the benefits and costs associated with this
alternative, especially regarding any impact on small businesses that
was not raised during the Small Business Review process.
This proposed regulation carries out the purposes of TILA because
requiring the involvement of a settlement agent could result in
increased consumer awareness and more meaningful disclosure of credit
terms, consistent with section 105(a) of TILA. This proposed regulation
could also achieve the purposes of RESPA by resulting in more effective
advance disclosure of settlement costs, consistent with section 19(a)
of RESPA. This proposed regulation could also improve consumer
understanding and awareness of the transaction by permitting the form
to be completed and provided by settlement agents, who often assist
consumers during a real estate closing, which is in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b).
Proposed alternative comment 19(f)(1)(v)-1 clarifies that a
settlement agent may provide the disclosures required under Sec.
1026.19(f)(1)(i) instead of the creditor. By assuming this
responsibility, the settlement agent becomes responsible for complying
with all of the relevant requirements as if it were the creditor,
meaning that ``settlement agent'' should be read in the place of
``creditor'' for all the relevant provisions of Sec. 1026.19(f),
except where the context indicates otherwise. The creditor and
settlement agent must effectively communicate to ensure timely and
accurate compliance with the requirements of this section.
Proposed alternative comment 19(f)(1)(v)-2 clarifies that if a
settlement agent issues any disclosure under Sec. 1026.19(f), the
settlement agent must comply with the requirements of Sec. 1026.19(f).
This proposed alternative comment also clarifies that the settlement
agent may assume the responsibility to provide some or all of the
disclosures required by Sec. 1026.19(f), provides that the consumer
receives one single disclosure form containing all of the information
required to be disclosed pursuant to Sec. 1026.19(f)(1)(i), in
accordance with the other requirements in Sec. 1026.19(f), such as
requirements related to timing and delivery. The comment also includes
illustrative examples.
Proposed alternative comment 19(f)(1)(v)-3 explains that if a
settlement agent provides disclosures required under Sec. 1026.19(f)
in the creditor's place, the creditor remains responsible under Sec.
1026.19(f) for ensuring that the requirements of Sec. 1026.19(f) have
been satisfied. For example, the creditor does not comply with Sec.
1026.19(f) if the settlement agent does not provide the disclosures
required under Sec. 1026.19(f)(1)(i), or if the consumer receives the
disclosures later than three business days before consummation.
The proposed comment also clarifies that the creditor does not
satisfy the requirements of Sec. 1026.19(f) if it provides duplicative
disclosures. For example, a creditor does not satisfy its obligation by
issuing disclosures required under Sec. 1026.19(f) that mirror ones
already issued by the settlement agent for the purpose of demonstrating
that the consumer received timely disclosures. The creditor is expected
to maintain communication with the settlement agent to ensure that the
settlement agent is acting in place of the creditor. Disclosures
provided by a settlement agent in accordance with Sec.
1026.19(f)(1)(v) satisfy the creditor's obligation under Sec.
1026.19(f)(1)(i).
Proposed alternative comment 19(f)(1)(v)-4 clarifies that the
settlement agent may assume the responsibility to provide some or all
of the disclosures required by Sec. 1026.19(f). However, the consumer
must receive one single disclosure form containing all of the
information required to be disclosed pursuant to Sec.
1026.19(f)(1)(i), in accordance with the other requirements in Sec.
1026.19(f), such as requirements related to timing and delivery. The
proposed alternative comment also includes illustrative examples.
19(f)(2) Subsequent Changes
There are several circumstances where the strict application of the
three-day-waiting period required by Sec. 1026.19(f)(1)(ii) may
operate to the consumer's detriment. The Bureau seeks to provide
flexibility where doing so would benefit the consumer. Thus, the Bureau
is proposing Sec. 1026.19(f)(2), which provides that creditors need
not comply with the timing requirements in Sec. 1026.19(f)(1)(ii) if
the disclosure provided pursuant to Sec. 1026.19(f)(1)(i) is
subsequently revised for any of the reasons described in Sec.
1026.19(f)(2)(i) through (v).
The Bureau proposes Sec. 1026.19(f)(2) pursuant to its authority
under sections 105(a) of TILA and 19(a) of RESPA. As explained in more
detail below, the Bureau believes that these proposed regulations will
carry out the purposes of TILA and RESPA by ensuring meaningful
disclosure of credit terms, more effective advance disclosure of
settlement costs, and will result in the elimination of kickbacks,
referral fees, and other practices that tend to increase unnecessarily
the costs of certain settlement services, consistent with sections
105(a) of TILA and 19(a) of RESPA, respectively.
19(f)(2)(i) Changes Due to Consumer and Seller Negotiations
The Bureau recognizes that sellers and buyers frequently alter the
terms of the real estate transaction based on the condition of the
house at the time of the walk-though inspection, which is often the day
before the scheduled real estate closing, and in some cases even
continue to negotiate the deal at the closing table. These negotiations
may affect items included on the Closing Disclosure, which, under the
proposal, must be delivered three days prior to consummation. The
Bureau believes that the regulations should provide flexibility to
address this common occurrence, so that these changes do not trigger an
additional three-day-waiting period. Thus, pursuant to its authority
under section 105(a) of TILA and section 19(a) of RESPA, the Bureau
proposes Sec. 1026.19(f)(2)(i), which states that if, after the
creditor provides the consumer with the disclosures, the consumer and
the seller agree to make changes to the transaction that affect
[[Page 51180]]
items disclosed, the creditor shall deliver revised disclosures
reflecting such changes at or before consummation. Proposed comment
19(f)(2)(i)-1 provides illustrative examples of this requirement. This
proposed regulation will carry out the purposes of TILA by ensuring
meaningful disclosure of credit terms and enable the informed use of
credit by enabling buyers and sellers to conduct final negotiations
informed by the final credit terms provided in the disclosures, and by
ensuring that the disclosures can be modified to reflect such
negotiations immediately prior to the real estate closing, consistent
with section 105(a) of TILA. This will also help to achieve the
purposes of RESPA by enabling more effective advance disclosure of
settlement costs, and will result in the elimination of kickbacks,
referral fees, and other practices that tend to increase unnecessarily
the costs of certain settlement services, by enabling buyers and
sellers to conduct final negotiations informed by the final credit
terms provided in the disclosures, and by ensuring that the disclosures
can be modified to reflect such negotiations immediately prior to the
real estate closing, consistent with section 19(a) of RESPA.
19(f)(2)(ii) Changes to the Amount Actually Paid by the Consumer
The Bureau does not believe that small miscalculations or minor
changes to the transaction should result in closing delays. Therefore,
the Bureau proposes Sec. 1026.19(f)(2)(ii), which provides that, if
the amount actually paid by the consumer does not exceed the amount
disclosed under Sec. 1026.38(d)(1) by more than $100, the creditor
shall deliver revised disclosures at or before consummation. The Bureau
believes that $100 may be the correct tolerance based on feedback
received regarding the items most likely to change prior to
consummation. The Bureau seeks comment on whether the threshold to
accommodate small miscalculations or minor changes prior to
consummation should be higher or lower than the proposed $100.
The Bureau proposes Sec. 1026.19(f)(2)(ii) pursuant to its
authority under section 105(a) of TILA and section 19(a) of RESPA. This
proposed regulation will carry out the purposes of TILA by ensuring
meaningful disclosure of credit terms and enable the informed use of
credit by permitting minor underestimation in the final amount paid by
the consumer, which will lessen the likelihood that creditors will
overestimate the final amount paid by the consumer, consistent with
section 105(a) of TILA. This will also help to achieve the purposes of
RESPA by enabling more effective advance disclosure of settlement
costs, and will result in the elimination of kickbacks, referral fees,
and other practices that tend to increase unnecessarily the costs of
certain settlement services by permitting minor underestimation in the
final amount paid by the consumer, which will lessen the likelihood
that creditors will unnecessarily increase the cost of settlement
services by overestimating the final amount paid by the consumer,
consistent with section 19(a) of RESPA.
Proposed comment 19(f)(2)(ii)-1 discusses the requirements of Sec.
1026.19(f)(2)(ii), which states that the creditor may provide revised
disclosures without regard to the timing requirements in Sec.
1026.19(f)(1)(ii) if the amount actually paid by the consumer does not
exceed the amount disclosed pursuant to Sec. 1026.38(d)(1) by more
than $100, provided that the creditor delivers revised disclosures at
or before consummation. This proposed comment also includes
illustrative examples of these requirements.
Proposed comment 19(f)(2)(ii)-2 clarifies that revised disclosures
provided at consummation may reflect adjustments pursuant to both Sec.
1026.19(f)(2)(i) and Sec. 1026.19(f)(2)(ii). Thus, although Sec.
1026.19(f)(2)(ii) limits the difference between the amount disclosed
pursuant to Sec. 1026.19(f)(1)(i) and the amount actually paid at the
real estate closing by the consumer to $100, the amount actually paid
by the consumer at the real estate closing may vary by more than $100,
to the extent permitted by Sec. 1026.19(f)(2)(i). This proposed
comment also includes illustrative examples of this provision.
19(f)(2)(iii) Changes Due to Events Occurring After Consummation
The Bureau is aware that some costs are not known with absolute
certainty until the documents are recorded. For example, it is possible
that a locality could change its schedule of recording fees, without
advance notice, the day after the consumer signs the mortgage loan
documents, but before the documents are recorded. The regulations need
to provide sufficient flexibility to accommodate issues, such as these,
when such changes are caused by a government entity. Thus, pursuant to
its authority under section 105(a) of TILA and section 19(a) of RESPA,
the Bureau proposes Sec. 1026.19(f)(2)(iii), which provides that, if
an event occurs after consummation that causes the disclosures to
become inaccurate, and such inaccuracy results solely from payments to
a government entity in connection with the transaction, the creditor
shall deliver revised disclosures to the consumer no later than the
third business day after the event occurs, provided the consumer
receives the corrected disclosures no later than 30 days after
consummation. This proposed regulation will prevent circumvention and
evasion of, and will facilitate compliance with, TILA, by ensuring that
consumers receive correct disclosures of the final terms and costs of
the transaction, consistent with section 105(a) of TILA. This proposed
regulation is also made pursuant to the Bureau's authority to implement
section 4 of RESPA, consistent with section 19(a) of RESPA. Proposed
comment 19(f)(2)(iii)-1 clarifies that this provision applies to
payments imposed by government entities, such as taxes, recording fees,
and other taxes related to the real estate transaction, and provides
several illustrative examples. The Bureau also solicits feedback on
whether changes, other than payments to government entities, may occur
after the real estate closing, and whether the regulation should
provide additional flexibility for such changes.
19(f)(2)(iv) Changes Due to Clerical Errors
Regulation X Sec. 1024.8(c) provides that an inadvertent or
technical error in completing the HUD-1 or HUD-1A shall not be deemed a
violation of section 4 of RESPA if a revised HUD-1 or HUD-1A is
provided within 30 calendar days after settlement. Section 130 of TILA
has a similar provision, with respect to civil liability, which
relieves creditors of civil liability under certain circumstances,
including if, within 60 days of identifying an error, the creditor
notifies the person concerned and makes whatever adjustments are
necessary.\147\ There is no similar provision in RESPA or Regulation Z.
Pursuant to its authority under section 105(a) of TILA and 19(a) of
RESPA, the Bureau proposes
[[Page 51181]]
Sec. 1026.19(f)(2)(iv), which provides that a creditor does not
violate Sec. 1026.19(f)(1)(i) if the disclosures contain non-numeric
clerical errors, provided the creditor delivers corrected disclosures
as soon as reasonably practicable and no later than 30 days after
consummation. Proposed comment 19(f)(2)(iv)-1 clarifies that clerical
errors are errors such as typographical errors, or other minor errors
that do not affect the amount owed by the consumer. This proposed
regulation will prevent circumvention and evasion of, and will
facilitate compliance with, TILA, by ensuring that consumers receive
correct disclosures consistent with section 105(a) of TILA. This
proposed regulation will also result in the elimination of kickbacks,
referral fees, and other practices that tend to increase unnecessarily
the costs of certain settlement services by ensuring that the
consumers' records correctly reflect the terms, payments, and entities
involved in the transaction, consistent with section 19(a) of RESPA.
The Bureau also solicits feedback on whether the regulations should
provide flexibility for numeric clerical errors, and how such
flexibility could be provided without undermining the reliability of
the disclosures provided to consumers at or before consummation.
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\147\ ``A creditor or assignee has no liability under this
section or section 108 or section 112 for any failure to comply with
any requirement imposed under this chapter or chapter 5, if within
sixty days after discovering an error, whether pursuant to a final
written examination or notice issued under section 108(e)(1) or
through the creditor's or assignee's own procedures, and prior to
the institution of an action under this section or the receipt of
written notice of the error from the obligor, the creditor or
assignee notifies the person concerned of the error and makes
whatever adjustments in the appropriate account are necessary to
assure that the person will not be required to pay an amount in
excess of the charge actually disclosed, or the dollar equivalent of
the annual percentage rate actually disclosed, whichever is lower.''
15 U.S.C. 1640(b).
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19(f)(2)(v) Refunds Related to the Good Faith Analysis
Neither RESPA nor Regulation Z expressly require creditors to
refund money to the consumer based on variations between the disclosed
estimated costs of settlement services and the amounts for such
settlement services actually paid by the consumer. Section 1024.7(i) of
Regulation X, however, provides that a lender or mortgage broker
violates section 5 of RESPA if any charges at settlement exceed the
charges listed on the GFE by more than the permitted tolerances,
provided, however, that the loan originator may cure the tolerance
violation by reimbursing to the borrower the amount by which the
tolerance was exceeded at settlement or within 30 calendar days after
settlement. As noted above, section 130 of TILA has a similar
provision, with respect to civil liability, which relieves creditors of
civil liability under certain circumstances, including if, within 60
days of identifying an error, the creditor notifies the person
concerned and makes whatever adjustments are necessary to assure that
the person will not be required to pay an amount in excess of the
charge actually disclosed.
Accordingly, pursuant to its authority under sections 105(a) of
TILA, 19(a) of RESPA, and 1405(b) of the Dodd-Frank Act, the Bureau
proposes Sec. 1026.19(f)(2)(v), which provides that, if amounts paid
by the consumer exceed the amounts specified under Sec.
1026.19(e)(3)(i) or (ii), the creditor complies with Sec.
1026.19(e)(1)(i) if the creditor refunds the excess to the consumer as
soon as reasonably practicable and no later than 30 days after
consummation, and the creditor complies with Sec. 1026.19(f)(1)(i) if
the creditor provides revised disclosures that reflect such refund as
soon as reasonably practicable and no later than 30 days after
consummation. This proposed regulation will enable meaningful
disclosure of credit terms, prevent circumvention and evasion of TILA,
and will facilitate compliance with TILA by enabling creditors to
refund amounts collected in excess of the good faith requirements,
consistent with TILA section 105(a). This will also result in the
meaningful advance disclosure of settlement costs and the elimination
of kickbacks, referral fees, and other practices that tend to increase
unnecessarily the costs of certain settlement services by enabling
creditors to refund amounts collected in excess of the good faith
requirements, thereby furthering the meaningfulness and reliability of
the estimated disclosures, consistent with section 19(a) of RESPA.
Proposed comment 19(f)(2)(v)-1 discusses refunds related to the
good faith analysis. The proposed comment explains the requirement
under Sec. 1026.19(f)(2)(v) providing that, if amounts paid by the
consumer exceed the amounts specified under Sec. 1026.19(e)(3)(i) or
(ii) of this section, the creditor does not violate Sec.
1026.19(e)(1)(i) if the creditor delivers disclosures revised to
reflect the refund of such excess as soon as reasonably practicable and
no later than 30 days after consummation. This proposed comment also
includes illustrative examples of these requirements.
19(f)(3) Charges Disclosed
19(f)(3)(i) Actual Charge
Neither TILA nor Regulation Z addresses the amounts paid to
settlement service providers for settlement services. However, section
4 of RESPA provides that the settlement statement shall contain the
amount imposed upon the consumer in connection with the settlement. 12
U.S.C. 2603(a). Section 1024.8(b)(1) of Regulation X provides the
general rule that the settlement agent shall state the actual charges
paid by the borrower and seller on the HUD-1, or by the borrower on the
HUD-1A. Pursuant to its authority under section 105(a) of TILA, section
19(a) of RESPA, Dodd-Frank Act section 1032(a), and, for residential
mortgage loans, Dodd-Frank Act section 1405(b), the Bureau proposes
Sec. 1026.19(f)(3)(i), which provides that the amount imposed upon the
consumer for any settlement service shall not exceed the amount
actually received by the service provider for that service, except if
the charge is an average charge, as provided under Sec.
1026.19(f)(3)(ii).
This proposed regulation will prevent circumvention and evasion of,
and will facilitate compliance with, TILA by requiring disclosure of
the actual terms and costs of the transaction, consistent with section
105(a) of TILA. The proposed regulation implements the requirements of
RESPA section 4, pursuant to the Bureau's implementation authority
under RESPA section 19(a). This will also result in the elimination of
kickbacks, referral fees, and other practices that tend to increase
unnecessarily the costs of certain settlement services, consistent with
RESPA sections 2(b) and 8. This will also ensure that the features of
the consumer's mortgage loan are fully and accurately disclosed to the
consumer, consistent with Dodd-Frank Act section 1032(a). The proposed
regulation will also improve consumer awareness and understanding of
transactions involving residential mortgage loans and is in the
interest of consumers and in the public interest, consistent with Dodd-
Frank Act section 1405(b).
Proposed comment 19(f)(3)(i)-1 explains that Sec. 1026.19(f)(3)(i)
provides the general rule that the amount imposed upon the consumer for
any settlement service shall not exceed the amount actually received by
the service provider for that service. Except as otherwise provided in
Sec. 1026.19(f)(3)(ii), a creditor violates Sec. 1026.19(f)(3)(i) if
the amount imposed upon the consumer exceeds the amount actually
received by the service provider for that service.
19(f)(3)(ii) Average Charge
As part of the 2008 RESPA Final Rule, HUD adopted a limited
exception to the requirement that the settlement statement shall
contain the amount imposed on the consumer, which shall not be more
than the amount received by the settlement service provider. 12 U.S.C.
2603(a), 2607(b). A lender or settlement service provider may charge
more for a settlement service than the amount paid for that service if
the charge is an average charge. Specifically, Regulation X Sec.
1024.8(b) provides that the average charge for a settlement service
shall be no more than the average amount paid for a settlement
[[Page 51182]]
service by one settlement service provider to another settlement
service provider on behalf of borrowers and sellers for a particular
class of transactions involving federally related mortgage loans, and
that the total amounts paid by borrowers and sellers for a settlement
service based on the use of an average charge may not exceed the total
amounts paid to the providers of that service for the particular class
of transactions.
Section 1024.8(b)(2) also provides that, the settlement service
provider shall define the particular class of transactions for purposes
of calculating the average charge as all transactions involving
federally related mortgage loans for a period of time as determined by
the settlement service provider, but not less than 30 calendar days and
not more than 6 months, a geographic area as determined by the
settlement service provider, and a type of loan as determined by the
settlement service provider. Regulation X also requires a settlement
service provider to use an average charge in the same class of
transactions for which the charge was calculated, and if the settlement
service provider uses the average charge for any transaction in the
class, then the settlement service provider must use the same average
charge in every transaction within that class for which a GFE was
provided. Id. Regulation X prohibits the use of an average charge for
any settlement service if the charge for the service is based on the
loan amount or property value, such as transfer taxes, interest
charges, reserves or escrow, or any type of insurance, including
mortgage insurance, title insurance, or hazard insurance, and also
requires the settlement service provider to retain all documentation
used to calculate the average charge for a particular class of
transactions for at least three years after any settlement for which
that average charge was used. Id.
Pursuant to its authority under section 105(a) of TILA and 19(a) of
RESPA, the Bureau proposes Sec. 1026.19(f)(3)(ii), which provides that
a creditor or settlement service provider may charge a consumer or
seller the average charge for a settlement service if the average
charge is no more than the average amount paid for that service by or
on behalf of all consumers and sellers for a class of transactions, the
creditor or settlement service provider defines the class of
transactions based on an appropriate period of time, geographic area,
and type of loan, the creditor or settlement service provider uses the
same average charge for every transaction within the defined class, and
the creditor or settlement service provider does not use an average
charge for any type of insurance, for any charge based on the loan
amount or property value, or if doing so is otherwise prohibited by
law. HUD adopted average-charge pricing pursuant to its authority under
section 19(a) of RESPA after finding that average-charge pricing would
benefit consumers by lowering settlement costs and enabling more
effective advance disclosure of such costs, consistent with RESPA
sections 2(b), 4, 5, 8(c)(5), and 19(a).\148\ In addition to this
authority, the Bureau finds that proposed Sec. 1026.19(f)(3)(ii) will
prevent circumvention and evasion of, and will facilitate compliance
with, TILA, consistent with section 105(a) of TILA. This proposed
regulation will also improve consumer awareness and understanding of
the transaction, which will be in the interest of consumers and in the
public interest, consistent with Dodd-Frank Act section 1405(b).
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\148\ See 73 FR 14030, 14051-14052 (March 14, 2008). Section
8(c)(5) of RESPA provided that: ``Nothing in this section shall be
construed as prohibiting * * * such other payments or classes of
payments or other transfers as are specified in regulations
prescribed by the Secretary.'' 12 U.S.C. 2607(c)(5)(2008).
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Proposed comment 19(f)(3)(ii)-1 explains that average-charge
pricing is the exception to the rule in Sec. 1026.19(f)(3)(i) that
consumers shall not pay more than the exact amount charged by a
settlement service provider for the performance of that service. If the
creditor develops representative samples of specific settlement costs
for a particular class of transactions, the creditor may charge the
average cost for that settlement service instead of the actual cost for
such transactions. An average-charge program may not be used in a way
that inflates the cost for settlement services overall.
Proposed comment 19(f)(3)(ii)-2 explains how an appropriate period
of time, geographic area, and type of loan may be defined, and provides
illustrative examples of issues a person may encounter when defining an
appropriate geographic area and an appropriate type of loan. Proposed
comment 19(f)(3)(ii)-3 provides further explanation related to the
requirement that if a creditor chooses to use an average charge for a
settlement service for a particular loan within a class, then the
creditor must use that average charge for that service on all loans
within the class. Proposed comment 19(f)(3)(ii)-3 also provides
practical examples illustrating the uniform use requirement.
Proposed comment 19(f)(3)(ii)-4 illustrates the requirement that
the average charge must be calculated according to the average amount
paid for a settlement service in a prior period, and clarifies that
updates to the average charge may be delayed for an amount of time
sufficient to re-calculate the average charge, provided that such
delays are applied uniformly from one time period to the next.
Proposed comment 19(f)(3)(ii)-5 discusses the requirement that the
total amount of average charges paid by consumers for settlement
services may not exceed the total amount paid for those settlement
services overall. The Bureau has received extensive feedback from
industry that this requirement, which currently exists under RESPA and
Regulation X, has impeded industry adoption of average-charge pricing.
Prohibiting industry from collecting more money than is actually paid
to settlement service providers means that industry cannot actually
average costs over time, and must instead operate at a loss in the long
term if industry chooses to use average-charge pricing. The Bureau
believes that the use of average-charge pricing promotes greater
reliability for consumers. Therefore, the Bureau seeks to address this
concern to facilitate the adoption of average-charge pricing. Proposed
comment 19(f)(3)(ii)-5 addresses this issue and discusses the ways in
which a person may comply with this requirement. A person may refund
the excess amounts collected or may factor in the excesses when
determining the average charge for the next period. A person may also
comply by establishing a rolling monthly period of re-evaluation. A
person complies by re-calculating the average amount every month, and
will be deemed to be in compliance with Sections 4 and 8 of RESPA if
the person uses this method, even if the person collects more for
settlement services than the total amount paid for those settlement
services over time.
Proposed comment 19(f)(3)(ii)-6 explains that adjustments to the
average charge based on prospective analysis are permitted if the
creditor or settlement service provider develops a statistically
accurate and reliable method for doing so. However, the Bureau is
concerned that prospective adjustments may not be practicable in the
context of determining average charges. Accordingly, the Bureau seeks
comment on whether such a provision is appropriate.
Proposed comment 19(f)(3)(ii)-7 discusses the requirement that
average charges may not be used for insurance premiums or for items
that vary according to the loan amount or property value, such as
transfer taxes. Proposed comment 19(f)(3)(ii)-8
[[Page 51183]]
clarifies that an average charge may not be used where prohibited by
any applicable State or local law. Proposed comment 19(f)(3)(ii)-9
explains how the recordkeeping requirements in Sec. 1026.25 apply to
the documents related to the calculation of average charge.
19(f)(4) Transactions Involving a Seller
Neither TILA nor Regulation Z contain requirements related to the
seller. Section 4 of RESPA provides that the integrated disclosure
shall conspicuously and clearly itemize all charges imposed upon the
seller in connection with the settlement. 12 U.S.C. 2603(a). Regulation
X states that the settlement agent shall provide a completed HUD-1 to
any seller at or before the settlement, unless the borrower waives the
right to delivery of the HUD-1 at or before settlement, in which case
the HUD-1 shall be mailed to the seller as soon as practicable after
settlement. Sec. 1024.10(b) and (c). Pursuant to its authority under
sections 105(a) of TILA, 19(a) of RESPA, Dodd-Frank Act section
1032(a), and, for residential mortgage loans, Dodd-Frank Act section
1405(b), the Bureau proposes Sec. 1026.19(f)(4)(i), (ii), and (iii).
Proposed Sec. 1026.19(f)(4)(i) provides that in a closed-end consumer
credit transaction secured by real property, other than a reverse
mortgage subject to Sec. 1026.33, the person conducting the settlement
shall provide the seller with the disclosures in Sec. 1026.38 that
relate to the seller. Proposed Sec. 1026.19(f)(4)(ii) provides that
the person conducting the settlement shall provide these disclosures no
later than the day of consummation. If an event occurs after
consummation that causes such disclosures to become inaccurate, and
such inaccuracy results solely from payments to a government entity,
the person conducting the real estate closing shall deliver revised
disclosures to the seller no later than 30 days after consummation.
Proposed Sec. 1026.19(f)(4)(iii) provides that the amount imposed upon
the seller for any settlement service shall not exceed the amount
actually received by the service provider for that service, except for
average charges calculated pursuant to Sec. 1026.19(f)(3)(ii).
This proposed regulation will prevent circumvention and evasion of,
and will facilitate compliance with, TILA, consistent with section
105(a) of TILA. The proposed regulation implements the requirements of
RESPA section 4, pursuant to the Bureau's implementation authority
under RESPA section 19(a). This proposed regulation will also result in
the meaningful advance disclosure of settlement costs and the
elimination of kickbacks, referral fees, and other practices that tend
to increase unnecessarily the costs of certain settlement services by
ensuring that the terms of the transaction that relate to the seller,
which include amounts owed to the seller, are fully and accurately
disclosed to the seller, consistent with RESPA sections 8 and 19(a).
Receipt of the integrated disclosures in accordance with this proposed
regulation will also ensure that the features of the transaction and
settlement services will be more fully and accurately disclosed to the
consumer in a manner that permits sellers to understand the costs of
the transaction, consistent with Dodd-Frank Act section 1032(a). The
proposed regulation, by requiring sellers to receive the integrated
disclosure, will also improve seller's awareness and understanding of
the seller's transaction, which involves a residential mortgage loan,
which is in the interest of consumers and in the public interest,
consistent with Dodd-Frank Act section 1405(b).
Proposed comment 19(f)(4)(ii)-1 explains that, if an event occurs
after consummation that causes such disclosures to become inaccurate
and such inaccuracy results solely from payments to a government
entity, the person conducting the real estate closing shall deliver
revised disclosures to the seller no later than 30 days after
consummation. Section 1026.19(f)(4)(i) requires disclosure of the items
that relate to the seller's transaction. Thus, the person conducting
the real estate closing need only provide revised disclosures if an
item related to the seller's transaction becomes inaccurate and such
inaccuracy results solely from payments to a government entity. The
proposed comment also provides illustrative examples of this
requirement.
19(f)(5) No Fee
Although TILA does not address fees related to the preparation of
disclosures, RESPA provides that no fee may be imposed on any person,
as a part of settlement costs or otherwise, by a lender in connection
with a federally related mortgage loan made by such lender for the
preparation or delivery of the settlement statement required by section
4 of RESPA or for statements required by TILA. 12 U.S.C. 2610. Although
Regulation Z does not contain a similar requirement, Sec. 1024.12 of
Regulation X implements RESPA's requirement. Pursuant to its authority
under sections 105(a) of TILA and 19(a) of RESPA, the Bureau proposes
Sec. 1026.19(f)(5), which provides that no fee may be imposed on any
person, as a part of settlement costs or otherwise, by a creditor or by
a servicer for the preparation or delivery of the disclosures required
under Sec. 1026.19(f)(1)(i), escrow account statements required
pursuant to section 10 of RESPA, or other statements required by TILA.
This proposed regulation will strengthen the informed use of credit by
ensuring that consumers are not informed that consumers must pay fees
prohibited by law, and enhance competition by ensuring that creditors
do not attempt to gain a competitive advantage by charging prohibited
fees, both of which are consistent with section 105(a) of TILA. This
proposal is also made pursuant to the Bureau's authority to implement
section 10 of RESPA, consistent with section 19(a) of RESPA. This
proposed regulation will also result in the meaningful advance
disclosure of settlement costs and the elimination of kickbacks,
referral fees, and other practices that tend to increase unnecessarily
the costs of certain settlement services by ensuring that illegal fees
are not included on the disclosures, consistent with section 19(a) of
RESPA.
19(g) Special Information Booklet at Time of Application
Section 1024.6 of Regulation X contains the provisions related to
the Special Information Booklet, which is required by section 5 of
RESPA. 12 U.S.C. 2604. The Bureau plans to update the booklet
consistent with the amendments to section 5 of RESPA in section 1450 of
the Dodd-Frank Act and to reflect the integrated disclosures, once
those disclosures are finalized. Pursuant to its authority under TILA
section 105(a) and RESPA section 19(a), the Bureau proposes Sec.
1026.19(g), which is substantially similar to the existing requirements
in Regulation X, but modified to conform to the usage associated with
TILA. The Bureau also solicits feedback on whether the CHARM booklet,
required under Sec. 1026.19(b)(1), should be incorporated into the
Special Information Booklet. This proposed provision is consistent with
TILA's purposes in that it will increase consumer awareness of the
costs of the transaction by informing consumers that settlement costs
can be influenced by shopping, thereby promoting the informed use of
credit. This proposed regulation will enhance consumers' ability to
shop for a mortgage loan, which will effect changes in the settlement
process that will result in the elimination of kickbacks, referral
fees, and other
[[Page 51184]]
practices that tend to increase unnecessarily the costs of certain
settlement services, consistent with the Bureau's authority under
section 19(a) of RESPA.
Proposed comment 19(g)(1)-1 provides that the Bureau may, after
publishing a notice in the Federal Register, issue a revised or
separate special information booklet that addresses transactions
subject to Sec. 1026.19(g). The Bureau may also choose to permit the
forms or booklets of other Federal agencies, in which case the
availability of the booklet or alternate materials for these
transactions will be set forth in a notice in the Federal Register.
Proposed comment 19(g)(1)-2 clarifies that when two or more persons
apply together for a loan, the creditor complies with Sec. 1026.19(g)
if the creditor provides a copy of the booklet to one of the persons
applying.
Proposed comment 19(g)(2)-1 explains that the special information
booklet may be reproduced in any form, provided that no changes are
made, except as otherwise provided under Sec. 1026.19(g). Provision of
the special information booklet as a part of a larger document does not
satisfy the requirements of Sec. 1026.19(g). Any color, size and
quality of paper, type of print, and method of reproduction may be used
so long as the booklet is clearly legible. Proposed comment 19(g)(2)-2
clarifies that the special information booklet may be translated into
languages other than English.
Section 1026.22 Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
The Bureau is proposing conforming amendments to Sec. 1026.22 to
reflect the fact that proposed Sec. 1026.38(o)(2) sets forth finance
charge tolerances for mortgage transactions subject to Sec.
1026.19(f), as discussed below. The tolerances set forth in Sec.
1026.18(d)(1) continue to apply to closed-end transactions that are not
subject to proposed Sec. 1026.19(f). Accordingly, the Bureau proposes
to revise Sec. 1026.22(a)(4) and (5) and comment 22(a)(4)-1 to add
references to Sec. 1026.38(o)(2).
Section 1026.24--Advertising
24(d) Advertisement of Terms That Require Additional Disclosures
24(d)(2) Additional Terms
Comment 24(d)(2)-2 currently provides guidance on how to state the
terms of repayment in an advertisement, as required in Sec.
1026.24(d)(2)(ii). The Bureau is proposing to exercise its authority
under TILA section 105(a) to revise the comment to conform with the
additional forms of repayment term disclosures that may apply to
various types of mortgage transactions under this proposal. Proposed
comment 24(d)(2)-2 clarifies that, in advertisements for closed-end
credit secured by real property or a dwelling, the repayment terms
disclosed in the interest rate and payment summary table or the
projected payments table in Sec. Sec. 1026.18(s) or 1026.37(c) and
1026.38(c), as applicable, can be provided in an advertisement pursuant
to Sec. 1026.24(d)(2)(ii). The use of either the payment schedule
described in Sec. 1026.18(g) or the interest rate and payments summary
table described in Sec. 1026.18(s) to state the terms of repayment can
be provided for transactions secured by real property or a dwelling
under comment 24(d)(2)-2. In light of the existence of the interest
rate and payment summary table described in Sec. 1026.18(s) and the
addition of the projected payments table described in Sec. Sec.
1026.37(c) and 1026.38(c) of this proposed rule, the Bureau believes
that the format of disclosure applicable to a particular transaction is
also the most appropriate format for advertising purposes. Comment
24(d)(2)-2 would therefore be revised to clarify that disclosing the
terms of repayment in the interest rate and payment summary table and
the projected payment tables described in Sec. 1026.18(s) or
Sec. Sec. 1026.37(c) and 1026.38(c), as applicable, satisfies the
requirements in Sec. 1026.24(d)(2)(ii). These revisions would also
make clear that the payment schedule described in Sec. 1026.18(g) is
not the only permissible disclosure under Sec. 1026.24(d)(2)(ii).
Section 1026.25 Record Retention
As discussed below, the Bureau proposes to amend Sec. 1026.25 to
apply the recordkeeping requirements currently under Regulation X to
the proposed integrated disclosures and to require creditors to keep
such records in an electronic, machine readable format.
25(a) General Rule
The Bureau proposes to amend Sec. 1026.25(a) to exempt the
requirements of Sec. Sec. 1026.19(e) and (f). Instead, the record
retention requirements for compliance with these sections will be
established under a new Sec. 1026.25(c)(1).
25(c) Records Related to Certain Requirements for Mortgage Loans
25(c)(1) Records Related to Requirements for Loans Secured by Real
Property
25(c)(1)(i) General Rule
Neither TILA nor RESPA contain record retention requirements.
Section 1026.25 of Regulation Z requires creditors to retain evidence
of compliance with TILA for two years after the date disclosures are
required to be made or action is required to be taken. Section
1024.7(f) of Regulation X requires lenders to retain documentation of
any reason for providing a revised GFE for no less than three years
after settlement. Furthermore, Sec. 1024.10(e) of Regulation X
requires lenders to retain each completed RESPA settlement statement
and related documents for five years after settlement, unless the
lender disposes of its interest in the mortgage and does not service
the mortgage.
The Bureau proposes to reconcile these provisions by generally
requiring a creditor to retain evidence of compliance with the
requirements of Sec. 1026.19(e) and (f) for three years. The Bureau
recognizes that extending the record retention requirement from two
years, as currently provided in Regulation Z, to three years may
increase costs. However, the Bureau is unaware of any issues related to
complying with the three year period currently required by Regulation
X. Creditors may be able to use existing recordkeeping systems to
maintain the integrated disclosure data at no additional cost.
Additionally, several sections of RESPA are subject to a three year
statute of limitations.\149\ Adopting a document retention period of
less than three years may affect legal actions brought under RESPA.
Thus, it may be appropriate to require creditors to maintain records
related to compliance for three years, as opposed to the two year
requirement currently under Regulation Z.
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\149\ ``[A]ctions [under sections 6, 8, or 9] brought by the
Bureau, the Secretary, the Attorney General of any State, or the
insurance commissioner of any State may be brought within 3 years
from the date of the occurrence of the violation.'' RESPA section
16, 12 U.S.C. 2614.
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Pursuant to its authority under section 105(a) of TILA and section
19(a) of RESPA, the Bureau proposes Sec. 1026.25(c)(1)(i), which
states that, except as provided under Sec. 1026.25(c)(1)(ii), a
creditor shall retain evidence of compliance with the requirements of
Sec. 1026.19(e) and (f) for three years after the later of the date of
consummation, the date disclosures are
[[Page 51185]]
required to be made, or the date the action is required to be taken.
The Bureau believes that this proposed modification will ensure that
records associated with the integrated disclosures are kept long enough
to facilitate compliance with both TILA and RESPA, which is necessary
to both prevent circumvention of and facilitate compliance with TILA
and RESPA. The Bureau also solicits comment on whether the three year
period is appropriate, whether the retention requirement should be
extended to five years to match the recordkeeping requirement in
proposed Sec. 1026.25(c)(1)(ii), and whether a shorter time period
would conflict with the statute of limitations under section 16 of
RESPA.
Proposed comment 25(c)(1)(i)-1 applies guidance currently
applicable under Sec. 1026.25(a) to proposed Sec. 1026.25(c). The
proposed comment clarifies that the creditor must retain evidence that
it performed the required actions as well as made the required
disclosures. This includes, for example, evidence that the creditor
properly differentiated between affiliated and independent third party
settlement service providers for determining good faith under Sec.
1026.19(e)(3); evidence that the creditor properly documented the
reason for revisions under Sec. 1026.19(e)(3)(iv); or evidence that
the creditor properly calculated average cost under Sec.
1026.19(f)(3)(ii). Proposed comment 25(c)(1)(i)-2 provides a cross-
reference to Sec. 1026.19(e)(1)(ii), which imposes responsibilities on
mortgage brokers in some situations and may implicate Sec. 1026.25(c).
25(c)(1)(ii) Closing Disclosures
As noted above, while Sec. 1026.25 of Regulation Z generally
requires creditors to retain evidence of compliance with TILA for two
years after the date disclosures are required to be made or action is
required to be taken, Sec. 1024.10(e) of Regulation X requires lenders
to retain each completed RESPA settlement statement and related
documents for five years after settlement, unless the lender disposes
of its interest in the mortgage and does not service the mortgage. If
the lender disposes of its interest and does not service the mortgage,
Sec. 1024.10(e) requires the lender to provide the lender's copy of
the RESPA settlement statement to the owner or servicer of the mortgage
as part of the transfer of the loan file. The owner or servicer to whom
the files are transferred must retain the RESPA settlement statement
for the remainder of the five-year period.
Because the Closing Disclosure contains the settlement information
that is currently provided on the RESPA settlement statement, the
Bureau proposes to adopt the five-year requirement. This information
serves an important purpose as both the record of all fees associated
with the transaction and as part of the official disbursement record.
As such, this information may be needed for more than two years after
the transaction. For example, State and local laws related to
transactions involving real property may depend on the information
being available for five years. Additionally, the current five-year
recordkeeping requirement under Regulation X has been in effect since
1992.\150\ The Bureau is unaware of any problems caused by the five
year requirement and does not believe the time period should be
shortened without evidence that the rule is not operating as intended,
is unnecessary, or otherwise harms consumers. Thus, it appears that
requiring creditors to retain copies of the Closing Disclosure for five
years is appropriate.
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\150\ 57 FR 49600, 49607 (Nov. 2, 1992).
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Pursuant to its authority under section 105(a) of TILA and section
19(a) of RESPA, the Bureau proposes Sec. 1026.25(c)(1)(ii). Proposed
Sec. 1026.25(c)(1)(ii)(A) states that the creditor shall retain each
completed disclosure required under Sec. 1026.19(f)(1)(i) and
(f)(4)(i), and all documents related to such disclosures, for five
years after settlement. The Bureau believes that this proposed
modification will ensure that records associated with the integrated
disclosures are kept long enough to facilitate compliance with both
TILA and RESPA, which is necessary to both prevent circumvention of and
facilitate compliance with TILA. The proposed recordkeeping requirement
will also enable accurate supervision, which will result in the more
effective advance disclosure of settlement costs, consistent with
section 19(a) of RESPA. Proposed Sec. 1026.25(c)(1)(ii)(B) provides
that, if a creditor sells, transfers, or otherwise disposes of its
interest in a mortgage and does not service the mortgage, the creditor
shall provide a copy of the disclosures required under Sec.
1026.19(f)(1)(i) or (f)(4)(i) to the owner or servicer of the mortgage
as a part of the transfer of the loan file. Such owner or servicer
shall retain such disclosures for the remainder of the five-year
period. Proposed Sec. 1026.25(c)(1)(ii)(C) provides that the Bureau
shall have the right to require provision of copies of records related
to the disclosures required under Sec. 1026.19(f)(1)(i) or (f)(4)(i).
The Bureau recognizes that this proposal is different from the
current requirements under Regulation X, which does not require a
creditor to maintain these documents if the creditor disposes of its
interest in the mortgage loan and does not service the mortgage loan.
However, the Bureau believes that the current requirement provides
little practical benefit to creditors, because other provisions of
Regulations Z and X require creditors to maintain records of compliance
for several years, even if the creditor transfers, sells, or otherwise
disposes of its interest in the mortgage loan. The Bureau solicits
feedback regarding whether it is appropriate for creditors that
transfer, sell, or otherwise dispose of their interest in the mortgage
loan, and do not service the mortgage loan, to keep these records for
the five-year period. The Bureau also requests feedback on the
additional costs that would result from such a requirement.
25(c)(1)(iii) Electronic Records
Issues Related to Adopting a Standard, Machine Readable, Electronic
Data Format. Neither TILA nor RESPA address electronic recordkeeping.
Regulation Z permits, but does not require, electronic recordkeeping.
Comment 25(a)-2 provides that records can be maintained by any method
that reproduces disclosures accurately, including computer programs.
Regulation X also permits, but does not require, electronic records.
See Sec. 1024.23 and HUD RESPA FAQs p.3, 4 (``GFE--
General'').
The Bureau has sought information regarding the costs of keeping
records in an electronic, machine readable format. ``Machine readable''
means a format where the individual data elements comprising the record
can be transmitted, analyzed, and processed by a computer program, such
as a spreadsheet or database program. Data formats for image
reproductions (e.g., PDF) or document text, such as those used by word
processing programs, are not machine readable for purposes of this
proposal. Based on these discussions, including information learned
from the Small Entity Representatives participating in the Small
Business Review Panel process, the Bureau recognizes that requiring
records in an electronic, machine readable format will impose new costs
on industry. Industry would incur costs for either acquiring a system
to create records in electronic, machine readable format, or for
modifying their current systems to use a standard format required by
regulation. See Small
[[Page 51186]]
Business Review Panel Report at 30. However, feedback provided to the
Small Business Review Panel indicates that creditors currently rely on
electronic systems for most aspects of the mortgage loan origination
process, which include electronic record creation and storage. See id.
Thus, any new costs caused by a machine readable recordkeeping
requirement would be limited to the up-front costs of upgrading
existing computer systems and additional, ongoing data storage costs.
In contrast, the benefits of keeping records in machine readable
format may be significant. A prescribed electronic format may reduce
costs across the entire mortgage loan origination industry due to
efficiency gains associated with a standardized data format.
Information received by the Bureau suggests that creditors, mortgage
brokers, title companies, investors, and other mortgage technology
providers use systems with proprietary data formats. As a result, data
must be translated between formats as it is transmitted from one point
to another throughout the mortgage loan origination process. A standard
electronic record format may eliminate these multiple data formats,
thereby increasing efficiency in the origination process, reducing
industry costs in the long term, and reducing costs to consumers. Also,
the Bureau is aware that many firms currently face significant internal
costs for maintaining multiple internal technological systems. A single
data format may lower overall and long-term costs by enabling creditors
to migrate from older data formats to a single, standard data format.
Other benefits may be realized from a standard, electronic, machine
readable format. A standard format may facilitate innovation in the
financial services industry by making it easier for technology
companies to create new programs that improve the mortgage origination
process and lower industry costs, instead of tailoring programs to each
firm's unique proprietary data format. A standard machine readable
format may also facilitate industry adoption of mortgage documentation
technology. Such developments would reduce industry's reliance on paper
files, which would lower ongoing costs while reducing the paperwork
burden on both industry and consumers. Furthermore, electronic, machine
readable records may allow regulators to monitor some aspects of
compliance remotely. Remote examinations may benefit creditors by
easing the burden associated with devoting staff time and resources to
on-site examinations. All of these benefits may reduce industry cost
and burden in the long run, thereby reducing costs to consumers as
well.
The Bureau believes that the benefits of a standard, machine
readable electronic data format may outweigh the costs associated with
adopting and maintaining such a format. Thus, pursuant to its authority
under section 105(a) of TILA, the Bureau proposes Sec.
1026.25(c)(1)(iii), which provides that a creditor shall retain
evidence of compliance in electronic, machine readable format. The
Bureau believes that this proposed requirement will ensure that records
associated with the integrated disclosures are readily available for
examination, which is necessary to both prevent circumvention of and
facilitate compliance with TILA. This proposed regulation may also
facilitate compliance with TILA by easing the burden of examinations
and ensuring that all entities subject to TILA keep records in a
standard format. Proposed comment 25(c)(1)(iii)-1 clarifies that the
requirements of Sec. 1026.25(c)(1)(iii) are in addition to any other
formats that may be required by administrative agencies responsible for
enforcing the regulation. The Bureau solicits comment on this approach,
including the costs associated with such a requirement.
As discussed in the Initial Regulatory Flexibility Analysis,
section VIII.B.4.b below, the proposed electronic recordkeeping
requirement may not be appropriate for certain classes of entities,
such as small creditors that do not currently have such electronic
filing systems or use vendor software. The upfront and ongoing costs of
such a requirement on small creditors may outweigh any benefits.
However, the Bureau does not have sufficient data to determine whether
and which small creditors should be exempt from the requirements.
Accordingly, pursuant to its authority under section 105(f) of TILA,
the Bureau proposes that, as an alternative to requiring electronic
records, that a class of entities consisting of small creditors be
exempted based on either entity size or the number of loans originated.
The Bureau has considered the factors in TILA section 105(f) and
believes that an exception could be appropriate under that provision if
the costs imposed on small entities outweigh the benefits to consumers.
In such circumstances, an exemption would be appropriate for all
affected borrowers who receive mortgage loans from small entities,
regardless of their other financial arrangements and financial
sophistication and the importance of the loan to them. Similarly, an
exemption would be appropriate for all affected loans issued by exempt
small entities, regardless of the amount of the loan and whether the
loan is secured by the principal residence of the consumer.
Furthermore, on balance, the proposed exemption would simplify the
credit process for small entities without undermining the goal of
consumer protection or denying important benefits to consumers. The
Bureau recognizes that its exemption and exception authorities apply to
a class of transactions, and proposes to apply these authorities to the
loans covered under the proposal of the entities proposed for potential
exemption.
Consistent with the recommendation of the Small Business Review
Panel, the Bureau solicits comment on whether a small business
exemption is appropriate, whether such small business exemption should
be based on entity size or the number of loans originated, and the
appropriate exemption threshold in terms of institution size or the
number of loans originated, respectively. The Bureau solicits feedback
on whether such an exemption for depository institutions should be
different than an exemption for non-depository institutions. The Bureau
also solicits feedback on small business' current technology costs, and
how such costs might be affected by an electronic recordkeeping
requirement.
Based on the Bureau's discussions with industry regarding machine
readable data formats, the Bureau believes that XML may be the most
appropriate format for electronic recordkeeping. However, the Bureau
solicits comment on the costs and challenges associated with adopting
an XML format. The Bureau also solicits feedback on other data formats
that may be more appropriate than XML.
Smart Disclosure. ``Smart disclosure'' generally refers to a
requirement that data be kept in standard, machine readable format that
is also available to the public. In the context of mortgage loans, any
regulation implementing smart disclosure would require creditors to
provide consumers with data related to the loan origination process.
Smart disclosure can facilitate intelligent decision-making by
consumers and encourage innovation. For example, if consumers were
provided with Loan Estimates in electronic format, computer programs
and applications may be developed to allow consumers to compare Loan
Estimates between different creditors. Or, programs may be developed
that assist consumers in assessing the ongoing costs, risks, and
affordability of a single Loan Estimate for the individual consumer.
[[Page 51187]]
The Bureau recognizes that smart disclosures may encourage the
informed use of credit and promote innovation in the consumer financial
services industry. While the Bureau supports these goals, the Bureau is
not proposing a smart disclosure requirement at this time. The Bureau
intends to continue monitoring the consumer financial services market
and will revisit this issue if, in the future, the Bureau determines
that such a requirement is appropriate.
Section 1026.28 Effect on State Laws
TILA preempts State laws to the extent of their inconsistency with
that statute and permits States, creditors, and other interested
parties to request a determination by the Bureau regarding such
inconsistency. Specifically, section 111(a)(1) states that the
provisions of chapters 1 (General Provisions), 2 (Credit Transactions),
and 3 (Credit Advertising and Limits on Credit Card Fees) of TILA do
not annul, alter, or affect the laws of any State relating to the
disclosure of information in connection with credit transactions,
except to the extent that those laws are inconsistent with the
provisions of TILA and then only to the extent of the inconsistency. 15
U.S.C. 1610(a)(1). Upon its own motion or upon the request of any
creditor, State, or other interested party that is submitted in
accordance with procedures prescribed in regulations of the Bureau, the
Bureau shall determine whether any such inconsistency exists. Id. If
the Bureau determines that a State-required disclosure is inconsistent,
creditors located in that State may not make disclosures using the
inconsistent term or form, and shall incur no liability under the State
law for failure to use such term or form, notwithstanding that such
determination is subsequently amended, rescinded, or determined by
judicial or other authority to be invalid for any reason. Id. Section
111(b) generally provides that TILA does not otherwise annul, alter, or
effect in any manner the meaning, scope, or applicability of the laws
of any State, including, but not limited to, laws relating to the
types, amounts, or rates of charges, or any elements of charges,
permissible under such laws in connection with the extension or use of
credit, and neither does TILA extend the applicability of those laws to
any class of persons or transactions to which they would not otherwise
apply. 15 U.S.C. 1610(b).
Regulation Z Sec. 1026.28 implements TILA section 111. Section
1026.28(a) provides that State law requirements that are inconsistent
with the requirements contained in chapters 1 through 3 of TILA and the
implementing provisions of Regulation Z are preempted to the extent of
the inconsistency.\151\ Under Sec. 1026.28(a), a State law is
inconsistent with a TILA provision if it requires a creditor to make
disclosures or take actions that contradict the requirements of TILA. A
State law contradicts a requirement of TILA if it requires the use of
the same term to represent a different amount or a different meaning
than TILA, or if it requires the use of a term different from that
required in TILA to describe the same item. A creditor, State, or other
interested party may request the Bureau to determine whether a State
law requirement is inconsistent, and if the Bureau makes such a
determination a creditor may not make disclosures using the
inconsistent term or form.\152\ The specific procedures for requesting
a State law preemption determination are set forth in Sec. 1026.28(c)
and appendix A to part 1026. Appendix A states, among other things,
that the Bureau reserves the right to reverse a determination for any
reason bearing on the coverage or effect of State or Federal law.
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\151\ There are different rules regarding preemption of State
laws relating to the disclosure of credit information in any credit
or charge card application or solicitation that is subject to the
requirements of section 127 of TILA and the correction of billing
errors, but those rules are outside the scope of this rulemaking.
See Sec. 1026.28(a)(2), (d).
\152\ TILA section 111(a)(2) and Sec. 1026.28(b) generally
permit a creditor, State, or other interested party to request that
the Bureau determine whether a State-required disclosure is
substantially the same in meaning as a TILA disclosure, and if the
Bureau makes such a determination, creditors in the State can
provide the State-required disclosure in lieu of the TILA
disclosure. Comment 28(b)-1 clarifies that under Sec. 1026.28, a
State disclosure can be substituted for a Federal disclosure only
after a determination of substantial similarity. State exemptions
are addressed in more detail under Sec. 1026.29 and associated
commentary.
---------------------------------------------------------------------------
Current Regulation Z commentary provides further guidance on the
TILA preemption rules. Comment 28(a)-2 includes examples of State laws
that would be preempted (e.g., a State law requiring use of the term
``finance charge'' but defining the term to include fees that TILA
excludes, or to exclude fees that TILA includes). Comment 28(a)-3
explains that State law requirements calling for disclosure of items
not covered by TILA or that require more detailed disclosures generally
do not contradict the TILA requirements, provides examples of State
laws that would not be preempted, and gives guidance as to whether a
State law requiring itemization of the amount financed would be
preempted. Comment 28(a)-4 explains that a creditor, prior to a
preemption determination, may either (1) give the State disclosures or
(2) apply the preemption standards to a State law, conclude that it is
inconsistent, and choose not to give the State-required disclosures
(but that no immunity is given under Sec. 1026.28(a) for violations of
State law if the creditor chooses not to make State disclosures and the
Bureau later determines that the State law is not preempted). The
comment also states that the Bureau will give sufficient time to
creditors to revise their forms and procedures as necessary to conform
with its preemption determinations. Comments 28(a)-8 through -15
discuss prior determinations made by the Federal Reserve Board prior to
July 21, 2011, and recognized by the Bureau unless and until the Bureau
makes and publishes any contrary determinations, to preempt certain
State laws. For example, comment 28(a)-15 notes that, in Wisconsin,
disclosure of the annual percentage rate under the particular State law
referenced in the comment is preempted, because while the statute
refers to ``annual percentage rate,'' it requires disclosure of a
different amount than under TILA.
Section 18 of RESPA and Regulation X Sec. 1024.13 provide that
State laws that are inconsistent with RESPA or Regulation X are
preempted to the extent of the inconsistency. 12 U.S.C. 2616; 12 CFR
1024.13. RESPA and Regulation X do not annul, alter, affect, or exempt
any person subject to their provisions from complying with the laws of
any State with respect to settlement practices, except to the extent of
the inconsistency. Id. Upon request by any person, the Bureau is
authorized to determine whether such inconsistencies exist, and the
Bureau may not determine that any State law is inconsistent with any
provision of RESPA if the Bureau determines that such law or regulation
gives greater protection to the consumer. 12 CFR 1024.13(b). In making
this determination, the Bureau must consult with ``appropriate Federal
agencies.'' Id.; see also 12 U.S.C. 2616. Section 1024.13(c) sets forth
the process by which the Bureau makes a preemption determination.
Unlike Regulation Z, Regulation X does not list any State laws
preempted by RESPA, and the Bureau is not aware of any.
The preemption provisions in TILA and RESPA and their implementing
regulations thus contain similar language as far as scope of the
preemption (i.e., in both cases State laws generally are preempted only
``to the extent of the inconsistency''), but include different
authority and
[[Page 51188]]
procedures for determining whether State laws are preempted. For
example, unlike Regulation X, Sec. 1026.28 provides a regulatory
standard for determining ``inconsistency'' (i.e., disclosures or
actions that contradict Federal law requirements) along with detailed
commentary. RESPA, but not TILA, requires the preemption determination
to be made by the Bureau in consultation with other appropriate Federal
agencies. Moreover, while the Regulation Z provision addresses the
relationship between Federal and State laws governing credit
transactions, Sec. 1024.13 refers to laws regarding settlement
practices.
As noted previously, section 1032(f) of the Dodd-Frank Act requires
the Bureau to propose rules and forms that combine the disclosures
required under TILA and sections 4 and 5 of RESPA into a single,
integrated disclosure for mortgage loan transactions covered by those
laws. In addition, the Dodd-Frank Act amended sections 105(b) of TILA
and 4(a) of RESPA, respectively, to require the integration of those
disclosure requirements. However, the Dodd-Frank Act did not specify
whether the TILA or the RESPA State law preemption provision applies to
the provision of the integrated mortgage disclosures. In order to meet
the Dodd-Frank Act's mandate, the proposed rule must reconcile the
differences regarding these State law preemption regimes.
Furthermore, there are certain transactions subject to TILA, but
not RESPA, for which the integrated mortgage disclosures must be
delivered under the proposed rule. Pursuant to Sec. 1026.19(e) and
(f), the proposed rule covers all closed-end consumer credit
transactions secured by real property, other than reverse mortgages.
Some of these transactions are not subject to RESPA (i.e., if they are
not a federally related mortgage loan as defined in Regulation X Sec.
1024.2), but consumers in such transactions will receive integrated
mortgage disclosures containing certain content mandated by RESPA. This
may create confusion as to which preemption provision controls were a
State law preemption question to arise with respect to the RESPA-
mandated content on the integrated mortgage disclosures.
Accordingly, Dodd-Frank Act section 1032(f), TILA section 105(b),
and RESPA section 19(a) provide the Bureau with authority to reconcile
the provisions of TILA and RESPA to carry out the integrated disclosure
requirement. Based on such authority and the Bureau's authority under
TILA section 105(a) and RESPA section 19(a) to make rules consistent
with the purposes of those statutes, the Bureau is proposing to require
that the State law preemption provisions of Regulation Z, Sec.
1026.28, apply to any State law preemption question arising with
respect to the requirements of sections 4 and 5 of RESPA (other than
the RESPA section 5(c) requirements regarding provision of a list of
certified homeownership counselors), and Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38. By applying the Regulation Z State law preemption
provision to any State law preemption question arising with respect to
the requirements of Sec. Sec. 1026.19(e) and (f), 1026.37, and
1026.38, this requirement encompasses all closed-end consumer credit
transactions secured by real property that are covered by the proposed
rule, regardless of whether they are independently subject to RESPA.
However, Sec. 1024.13 applies to State law preemption questions
arising with respect to other aspects of RESPA and Regulation X,
including the RESPA section 5(c) requirements regarding provision of a
list of certified homeownership counselors.
To effectuate this change, the Bureau is proposing two
modifications to Sec. 1026.28 and its associated commentary. First,
the proposed rule modifies Sec. 1026.28(a) to provide that a
determination of whether a State law is inconsistent with the
requirements of sections 4 and 5 of RESPA (other than the RESPA section
5(c) requirements regarding provision of a list of certified
homeownership counselors) and proposed Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38 shall be made in accordance with Sec. 1026.28 and
not Regulation X Sec. 1024.13. Second, the proposed rule adds text to
comment 28(a)-1 providing that, to the extent applicable to a
transaction subject to Sec. 1026.19(e) and (f), any reference to
``creditor'' in Sec. 1026.28 includes a creditor, a mortgage broker,
or a closing agent, as applicable. This change coincides with the
alternative proposed Sec. 1026.19(f)(1)(v), which permits the closing
agent to deliver the Closing Disclosure in place of the creditor. If
the alternative permitting the closing agent to deliver the Closing
Disclosure is not adopted, the closing agent reference in the proposed
edit to comment 28(a)-1 will not be adopted.
The Bureau notes that proposed Sec. 1026.28 and associated
commentary do not incorporate the language in RESPA section 18 and
Regulation X Sec. 1024.13(b) providing that the Bureau may not
determine that any State law is inconsistent with any RESPA provision
if the Bureau determines that such law or regulation gives greater
protection to the consumer. However, the Bureau believes that proposed
Sec. 1026.28 is consistent with RESPA section 18. Specifically, a
State disclosure is likely to confuse consumers if it uses the same
term to represent a different amount or a different meaning than, or if
it requires the use of a different term to describe the same item as,
the integrated mortgage disclosures developed in this rulemaking
through extensive consumer testing. Accordingly, for purposes of this
rulemaking, the Bureau believes that such State disclosures generally
do not provide greater protection for consumers.
Nevertheless, the Bureau intends to take a cautious case-by-case
approach to evaluating inconsistency under RESPA section 18. The Bureau
also intends to consult with other Federal agencies, as appropriate,
within the scope of RESPA concerning any evaluations of inconsistency
under RESPA section 18. Furthermore, the Bureau emphasizes that nothing
in this proposed rule is intended to preempt State laws that offer
greater substantive consumer protections than those provided under
sections 4 and 5 of RESPA \153\ and Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38 (e.g., a State law imposing stricter limits on
closing cost increases or requiring disclosures of the final closing
costs seven days before consummation). A more protective State law
would not be inconsistent with such RESPA and Regulation Z provisions,
and therefore would not be preempted by Sec. 1026.28, because a
creditor's compliance with the more protective State law would also
satisfy the requirements of such RESPA and Regulation Z provisions.
---------------------------------------------------------------------------
\153\ As discussed above, proposed revised Sec. 1026.28 and
associated commentary do not govern State law preemption questions
arising under the RESPA section 5(c) requirements for provision of a
list of certified homeownership counselors.
---------------------------------------------------------------------------
The Bureau believes that the proposed revisions to the regulatory
text and commentary to Sec. 1026.28 effectively specify whether the
Regulation Z or RESPA State law preemption provision applies to any
State law preemption question arising with respect to the requirements
of sections 4 and 5 of RESPA (other than the RESPA section 5(c)
requirements regarding provision of a list of certified homeownership
counselors) and proposed Sec. Sec. 1026.19(e) and (f), 1026.37, and
1026.38.
Section 1026.29 State Exemptions
TILA has several provisions that permit the Bureau to grant State
exemptions from certain TILA disclosure provisions. Section 111(a)(2)
allows the Bureau, upon its own motion
[[Page 51189]]
or upon the request of any creditor, State, or other interested party
that is submitted in accordance with procedures prescribed in
regulations of the Bureau, to determine whether any disclosure required
under any State law is substantially the same in meaning as a
disclosure required under TILA. 15 U.S.C. 1610(a)(2). If the Bureau
makes such a determination, TILA section 111(a)(2) provides that
creditors located in that State may make such disclosure in compliance
with such State law in lieu of the TILA disclosure, except that (1) the
annual percentage rate and finance charge must be disclosed as required
by section 122 of TILA, and (2) State-required disclosures may not be
made in lieu of the high-cost mortgage disclosures under section 129 of
TILA. Section 123 of TILA allows the Bureau by regulation to exempt any
class of credit transactions within any State from the requirements of
chapter 2 of TILA (Credit transactions) if the Bureau determines that
the law of the State subjects the class of transactions to requirements
substantially similar to those imposed under chapter 2 of TILA, and
that there is adequate provision for enforcement.\154\ 15 U.S.C. 1633.
---------------------------------------------------------------------------
\154\ Section 171(b) of TILA also addresses State exemptions and
contains nearly identical language to section 123, but section
171(b) applies with respect to TILA chapter 4 (credit billing),
which is not affected by this rulemaking. 15 U.S.C. 1661j(b).
---------------------------------------------------------------------------
Regulation Z Sec. 1026.29 and appendix B to part 1026 implement
the TILA State exemption provisions.\155\ Pursuant to Sec. 1026.29(a),
a State may apply to the Bureau to exempt a class of transactions
within the State from the requirements of chapter 2 (Credit
transactions) or chapter 4 (Credit billing) of TILA and the
corresponding provisions of Regulation Z. The Bureau shall grant an
exemption if it determines that (1) the State law is substantially
similar to the Federal law or, in the case of chapter 4 of TILA,
affords the consumer greater protection than the Federal law, and (2)
there is adequate provision for enforcement. Comment 29(a)-2 clarifies
that State law is ``substantially similar'' for purposes of Sec.
1026.29(a) if the State statutory or regulatory provisions and State
interpretations of those provisions are generally the same as TILA and
Regulation Z. Comment 29(a)-3 clarifies that, generally, there is
adequate provision for enforcement if appropriate State officials are
authorized to enforce the State law through procedures and sanctions
comparable to those available to Federal enforcement agencies. Comment
29(a)-4 states that the Bureau recognizes certain TILA exemptions
granted by the Federal Reserve Board to Maine, Connecticut,
Massachusetts, Wyoming, and Oklahoma prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Comment 29(a)-4.i through -4.v currently provides, in relevant part,
that credit transactions in these five States that are subject to the
State consumer credit codes or truth in lending acts enumerated in such
comment are exempt from the requirements of chapter 2 of TILA, which
sets forth, among other provisions, the disclosure requirements for
closed-end mortgages. The specific procedures for requesting a State
exemption are set forth in Sec. 1026.29(c) and appendix B to part
1026. Appendix B states, among other things, that the Bureau reserves
the right to revoke an exemption if at any time it determines that the
standards required for an exemption are not met.
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\155\ As noted earlier, Sec. 1026.28(b) generally permits a
creditor, State, or other interested party to request that the
Bureau determine whether a State-required disclosure is
substantially the same in meaning as a TILA disclosure, and if the
Bureau makes such a determination, creditors in the State can
provide the State-required disclosure in lieu of the TILA
disclosure. Comment 28(b)-1 clarifies that under Sec. 1026.28, a
State disclosure can be substituted for a Federal disclosure only
after a determination of substantial similarity.
---------------------------------------------------------------------------
Unlike TILA, RESPA does not contain a State exemption provision for
credit transactions subject to RESPA. Rather, as discussed above with
respect to Sec. 1026.28, section 18 of RESPA and Regulation X Sec.
1024.13 provide that State laws that are inconsistent with RESPA or
Regulation X are preempted to the extent of the inconsistency. 12
U.S.C. 2616; 12 CFR 1024.13.
As noted above, sections 1032(f), 1098, and 1100A of the Dodd-Frank
Act require the Bureau to propose for public comment, rules and forms
that combine the disclosures required under TILA and sections 4 and 5
of RESPA into a single, integrated disclosure for mortgage loan
transactions covered by those laws. However, the Dodd-Frank Act did not
address a number of inconsistencies between TILA and RESPA that affect
the provision of the integrated mortgage disclosures, including
inconsistent provisions regarding the application of State law. In
order to meet the Dodd-Frank Act's mandate, the proposed rule must
reconcile the State exemption provisions.
Accordingly, pursuant to its authority under Dodd-Frank Act section
1032(f), TILA section 105(b), and RESPA section 19(a) as well as its
authority under TILA section 105(a) and RESPA section 19(a) to make
rules consistent with the purposes of those statutes, the Bureau is
proposing to require that the TILA State exemption provision apply to
transactions subject to proposed Sec. 1026.19(e) and (f) (i.e., all
closed-end consumer credit transactions secured by real property, other
than a reverse mortgage). By applying the TILA State exemption
provision to transactions subject to Sec. 1026.19(e) and (f), rather
than the RESPA State preemption provision (which is silent as to the
granting of State exemptions under RESPA), this requirement would cover
all closed-end consumer credit transactions secured by real property
that are covered by the proposed rule, including those subject to
RESPA. The Bureau believes this is consistent with the intent of TILA's
State exemption provision and the integrated disclosure mandate in
Dodd-Frank Act section 1032(f), TILA section 105(b), and RESPA section
19(a) because it allows States to maintain their existing exemptions so
long as consumers receive disclosures and protections that are
substantially similar to those in the proposed rule. Furthermore, using
the TILA State law exemption provision for transactions subject to
Sec. 1026.19(e) and (f) will facilitate compliance with the disclosure
requirements of TILA and RESPA and promote the informed use of credit
and more effective advance notice of settlement costs since creditors,
consistent with TILA section 105(a) and RESPA section 19(a), by
applying a consistent standard to those transactions.
To effectuate this change, the Bureau is proposing two substantive
modifications to the commentary to Sec. 1026.29, in addition to
relabeling some of the section numbering and lettering. First, proposed
revised comment 29(a)-2 modifies the guidance regarding the
``substantially similar'' standard set forth in Sec. 1026.29(a)(1)
(i.e., one of the two preconditions to the granting of an exemption).
Proposed revised comment 29(a)-2 clarifies that, in order for
transactions that would otherwise be subject to the integrated
disclosures required by Sec. 1026.19(e) and (f) to be exempt from
those disclosure requirements, the State statutory or regulatory
provisions and State interpretations of those provisions must require
disclosures that are generally the same as those prescribed by Sec.
1026.19(e) and (f), in the forms prescribed by Sec. Sec. 1026.37 and
1026.38. This means that, in order for an existing State exemption to
be maintained, the State's law must require disclosures that are
generally the same as the integrated disclosures, including the RESPA
content.
Second, proposed revised comment 29(a)-4 states that, although
RESPA and Regulation X do not provide procedures
[[Page 51190]]
for State exemptions, for transactions subject to Sec. 1026.19(e) and
(f), compliance with the requirements of Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38 satisfies the requirements of sections 4 and 5 of
RESPA (other than the RESPA section 5(c) requirements regarding
provision of a list of certified homeownership counselors).
Furthermore, the proposed revised comment states that if the
transaction is subject to a previously-granted State exemption, then
compliance with the requirements of any State laws and regulations
incorporating the requirements of Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38 likewise satisfies the requirements of sections 4
and 5 of RESPA (other than the RESPA section 5(c) requirements
regarding provision of a list of certified homeownership counselors).
Thus, in Maine, Connecticut, Massachusetts, Oklahoma, and Wyoming,
creditors, mortgage brokers, and settlement agents, as applicable, may
satisfy sections 4 and 5 of RESPA (other than the RESPA section 5(c)
requirements regarding provision of a list of certified homeownership
counselors) through compliance with State law so long as the
``substantially similar'' State statutory and regulatory provisions
(i.e., the State consumer codes or truth in lending acts enumerated in
comment 29(a)-4.1 through -4.v, as applicable) expressly mandate
delivery of the integrated mortgage disclosures required by the Dodd-
Frank Act and implemented by the proposed rule.
The Bureau believes that the proposed revisions to the commentary
to Sec. 1026.29 effectively reconcile the conflicting TILA and RESPA
provisions by clarifying the standards for the Bureau's granting of
exemptions from certain relevant TILA and RESPA provisions going
forward. The proposed revisions also clarify how compliance with
sections 4 and 5 of RESPA (other than the RESPA section 5(c)
requirements regarding provision of a list of certified homeownership
counselors) may be accomplished with respect to transactions subject to
the previously-granted TILA exemptions in light of the Dodd-Frank Act's
mandate to integrate the mortgage disclosures under TILA and sections 4
and 5 of RESPA. Finally, the proposed revisions do not change the
existing language in comment 29(a)-4 and appendix B to part 1026
reserving the Bureau's right to make and publish any contrary
determination regarding State exemptions previously granted by the
Federal Reserve Board and, more generally, to revoke State exemptions
if the standards for granting them are no longer met.
The Bureau understands these proposed changes will likely require
some of the five States previously granted State exemptions under 12
CFR 226.29, the predecessor to Sec. 1026.29, to change their laws and/
or regulations, which may be a lengthy process.\156\ This is because to
the extent the ``substantially similar'' State laws and regulations
underlying the TILA State exemptions do not currently require the
integrated disclosures mandated by the Dodd-Frank Act (specifically,
the portions mandated by RESPA), there is a gap in these States'
current statutory and regulatory regimes that must be filled in order
to maintain the State exemptions. As such, the Bureau hereby solicits
comment on the amount of time that will be needed for these States to
change their laws and/or regulations.
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\156\ While these proposed changes may require some of these
five States to change their laws and/or regulations, others
incorporate TILA and Regulation Z into their State laws and/or
regulations by reference. Therefore, the Bureau anticipates that
these other States should not have to take any action to maintain
their existing exemptions directly as a result of this proposed
rule.
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Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
Proposed Sec. 1026.37 sets forth the required content of the
integrated Loan Estimate disclosures, required by proposed Sec.
1026.19(e) to be provided to a consumer within three business days of
the creditor's receipt of the consumer's application.
As discussed above, the Loan Estimate integrates the disclosures
currently provided in the RESPA GFE and the early TILA disclosure. In
addition, the Loan Estimate integrates several disclosures that would
otherwise be provided separately under various Federal laws. The Bureau
believes the three-page Loan Estimate integrates at least seven pages
of disclosures. Specifically, the Loan Estimate incorporates: (i) three
pages of the RESPA GFE; (ii) two pages typically used for the early
TILA disclosure; (iii) one page typically used for the appraisal
notification provided under ECOA section 701(e); and (iv) one page
typically used for the servicing disclosure provided under RESPA
section 6. In addition, the Loan Estimate incorporates the disclosure
of: (i) The total interest percentage under TILA section 128(a)(19),
which was added by section 1419 of the Dodd-Frank Act; (ii) the
aggregate amount of loan charges and closing costs the consumer must
pay at consummation under TILA section 128(a)(17), which was added by
section 1419 of the Dodd-Frank Act; (iii) for refinance transactions,
the anti-deficiency protection notice under TILA section 129C(g)(3),
which was added by section 1414(c) of the Dodd-Frank Act; and (iv) the
homeowner's insurance disclosure in TILA section 106(c) and Sec.
1026.4(d)(2)(i), which is required to exclude homeowner's insurance
premiums from the finance charge. In absence of the Bureau's
integration of the early TILA disclosure and the RESPA GFE, some these
new disclosures would have been added to the early TILA disclosure,
which potentially could have increased that disclosure's typical two
pages to three pages.
Proposed Sec. 1026.37 provides that the information set forth in
Sec. 1026.37(a) through (n) shall be disclosed ``as applicable.'' The
Bureau is proposing a new comment 37-1 to clarify that a disclosure
that is not applicable to a transaction generally may be eliminated
entirely or may be included but marked ``not applicable'' or ``N/A.''
As discussed below, proposed Sec. 1026.37(o) provides rules for
the form of the disclosures required by Sec. 1026.37(a) through (n).
Proposed comment 37-2 directs creditors to Sec. 1026.37(o) and its
commentary for guidance on format and permissible modifications to the
form of the disclosures.
37(a) General Information
The Bureau proposes Sec. 1026.37(a), which combines and modifies
disclosures currently provided under Regulations X and Z and adds
additional disclosures in the Loan Estimate for transactions subject to
proposed Sec. 1026.19(e). For the reasons discussed below and
consistent with TILA section 105(a), RESPA section 19(a), and the
purposes of those statutes, proposed Sec. 1026.37(a) will promote the
informed use of credit and more effective advance disclosure of
settlement costs. In addition, proposed Sec. 1026.37(a) will enable
consumers to better understand the costs, benefits, and risks
associated with mortgage transactions, consistent with Dodd-Frank Act
section 1032(a). Furthermore, proposed Sec. 1026.37(a) will improve
consumer awareness and understanding of transactions involving
residential mortgage loans and is therefore in the interest of
consumers and the public, consistent with Dodd-Frank Act section
1405(b).
[[Page 51191]]
37(a)(1) Form Title
Although the Dodd-Frank Act requires the Bureau to combine the TILA
and RESPA mortgage disclosures that are currently provided to consumers
within three business days after application, the Act does not
prescribe a title for the integrated form. Under Sec. 1024.2(b) of
Regulation X, the form providing consumers with the RESPA good faith
estimate of settlement charges they are likely to incur is called the
``Good Faith Estimate'' or ``GFE.'' Regulation Z does not prescribe a
name for the TILA good faith estimate required by Sec. 1026.19(a)(1),
although comment 17(a)(1)-5.ix permits the creditor to provide ``[a]
brief caption identifying the disclosures'' and provides as examples of
acceptable titles, ``Federal Truth in Lending Disclosures'' and ``Real
Estate Loan Disclosures.''
Proposed Sec. 1026.37(a)(1) requires the creditor to use the term
``Loan Estimate'' as the title of the integrated disclosures creditors
provide pursuant to proposed Sec. 1026.19(e). The Bureau believes the
adoption of a standardized form name may eliminate confusion for
consumers seeking to compare estimates for different loans and thereby
promote the informed use of credit and more effective advance notice of
settlement costs, consistent with TILA section 105(a) and RESPA section
19(a), and will enable consumers to better understand the costs,
benefits, and risks associated with mortgage transactions, consistent
with Dodd-Frank Act section 1032(a). In addition, the use of standard
terminology for the integrated disclosures will facilitate compliance
for industry, which is a purpose of this rulemaking under Dodd-Frank
Act sections 1098 and 1100A.
37(a)(2) Form Purpose
Proposed Sec. 1026.37(a)(2) requires the creditor to include a
statement regarding one of the primary uses of the Loan Estimate for
consumers, which is to compare with the Closing Disclosure to verify
the loan terms and costs. Specifically, proposed Sec. 1026.37(a)(2)
requires the creditor to provide the following statement at the top of
all Loan Estimates, ``Save this Loan Estimate to compare with your
Closing Disclosure.'' The proposed language may benefit consumers and
promote the informed use of credit by encouraging consumers to use the
Loan Estimate as a tool to help them readily identify any changes to
the loan transaction or costs that may have occurred between issuance
of the initial Loan Estimate and the Closing Disclosure.
Requiring creditors to disclose the purpose for the Loan Estimate
and related disclosures is not a new requirement. Appendix C of
Regulation X currently requires specific language regarding the purpose
of the GFE.\157\ And while the Bureau's proposed language differs from
that prescribed by HUD, the Bureau believes that the disclosure in
proposed Sec. 1026.37(a)(2) accomplishes the same goal in a clearer
and more succinct manner. Accordingly, this disclosure promotes the
informed use of credit and more effective advance notice of settlement
costs, consistent with TILA section 105(a) and RESPA section 19(a), and
will enable consumers to better understand the costs, benefits, and
risks associated with mortgage transactions, consistent with Dodd-Frank
Act section 1032(a).
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\157\ Appendix C to Regulation X requires the following
statement on the GFE under the heading ``Purpose'': ``This GFE gives
you an estimate of your settlement charges and loan terms if you are
approved for this loan. For more information, see HUD's Special
Information Booklet on settlement charges, your Truth-in-Lending
Disclosures, and other consumer information at www.hud.gov/respa. If
you decide you would like to proceed with this loan, contact us.''
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37(a)(3) Creditor
TILA section 128(a)(1) requires disclosure of the ``identity of the
creditor required to make [the] disclosure.'' 15 U.S.C. 1638(a)(1).
Regulation Z Sec. 1026.18(a) implements TILA section 128(a)(1) and
requires for each transaction the identity of the creditor making the
disclosure. HUD imposed a similar requirement in appendix C to
Regulation X, requiring the name and contact information for the ``loan
originator.''
Pursuant to TILA section 105(a), RESPA section 19(a), and Dodd-
Frank Act section 1032(a), proposed Sec. 1026.37(a)(3) mirrors Sec.
1026.18(a) and requires the name of the creditor making the disclosure.
By allowing the consumer to identify the name of the creditor providing
the Loan Estimate, this disclosure will promote the informed use of
credit and more effective advance notice of settlement costs and will
enable consumers to better understand the costs, benefits, and risks
associated with mortgage transactions.
Proposed comment 1026.37(a)(3)-1 cross-references Sec. 1026.17(d)
and comment 17(d)-1 and clarifies that, in transactions with multiple
creditors, only the creditor making the disclosure must be identified.
Proposed comment 37(a)(3)-2 states that, in transactions where the loan
is originated by a mortgage broker, the name of the creditor, if known,
must still be provided even if the mortgage broker provides the
disclosure to the consumer.
37(a)(4) Date Issued
Appendix C to Regulation X requires creditors to provide the date
of the GFE. Proposed Sec. 1026.37(a)(4) mirrors this requirement by
mandating disclosure of the date the Loan Estimate is mailed or
delivered to the consumer. Proposed comment 1026.37(a)-1 clarifies that
the ``date issued'' is the date the creditor delivers the Loan Estimate
to the consumer and is not affected by the creditor's method of
delivery.
The Bureau is proposing this requirement pursuant to its authority
under TILA section 105(a) and RESPA section 19(a) because disclosure of
the date the Loan Estimate is issued will promote the informed use of
credit and more effective advance disclosure of settlement costs, which
are purposes of TILA and RESPA respectively, by enabling consumers to
compare the Loan Estimate with any revised Loan Estimates that may be
issued. In addition, this comparison will enable consumers to identify
changes in loan terms and costs and thereby understand the costs,
benefits, and risks associated with the mortgage transaction,
consistent with Dodd-Frank Act section 1032(a).
37(a)(5) Applicants
Appendix C to Regulation X requires disclosure of the name of the
applicants for the mortgage loan transaction. Similarly, pursuant to
TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section
1032(a), proposed Sec. 1026.37(a)(5) requires creditors to disclose
the name of the applicants for the loan transaction. By enabling
consumers to confirm that the Loan Estimate is intended for them, this
disclosure will promote the informed use of credit and more effective
advance notice of settlement costs and will enable consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions. Proposed comment 37(a)(5)-1 clarifies that the names of
all applicants for the mortgage loan must be disclosed on the form and
that if the form cannot accommodate the names of all the applicants,
the creditor may attach to the back of the form a separate page listing
the remaining applicants.
37(a)(6) Property
Appendix C to Regulation X requires at the top of the GFE the
``address or location of the property'' for which the financing is
sought. The Bureau proposes to use its authority in TILA
[[Page 51192]]
section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-
Frank Act to impose a similar requirement for the Loan Estimate
required by proposed Sec. 1026.19(e). The Bureau believes that, by
providing the consumer with basic information about the property that
is the subject of the loan transaction, this disclosure will promote
the informed use of credit and more effective advance notice of
settlement costs and will enable consumers to better understand the
costs, benefits, and risks associated with mortgage transactions.
Accordingly, proposed Sec. 1026.37(a)(6) requires the creditor to
disclose the street address or location of the property that secures
the transaction that is the subject of the Loan Estimate. Proposed
comment 37(a)(6)-1 instructs creditors to provide a legal description
or other locator for the property in cases where there is no street
address. The proposed comment also clarifies that a zip code would be
required in all instances.
37(a)(7) Sale Price
Proposed Sec. 1026.37(a)(7)(i) requires disclosure of the contract
sale price for the property identified in proposed Sec. 1026.37(a)(6).
For transactions that do not involve a seller, proposed Sec.
1026.37(a)(7)(ii) requires disclosure of the estimated value for the
property identified in proposed Sec. 1026.37(a)(6). Proposed comment
37(a)(7)-1 provides guidance regarding the requirement to provide the
estimated value of the property, if a creditor has performed its own
estimate or obtained an appraisal or valuation of the property.
The disclosure of the contract sale price and estimated property
value, as applicable, is a new requirement, which the Bureau proposes
pursuant to its authority under TILA section 105(a), RESPA section
19(a), and section 1032(a) of the Dodd-Frank Act for transactions
subject to proposed Sec. 1026.19(e). The Bureau believes that
including the contract sales price or estimated property value in the
Loan Estimate will help promote the informed use of credit and more
effective advance notice of settlement costs and will enable consumers
to better understand the costs, benefits, and risks associated with
mortgage transactions by ensuring that consumers have in a single
location all the information needed to decide whether to enter into a
legal obligation.
37(a)(8) Loan Term
Existing appendix C to Regulation X requires the loan originator to
disclose the loan term as part of the ``Summary of Your Loan''
disclosure. Regulation Z does not have a similar requirement, although
TILA provides for such a disclosure.\158\ Proposed Sec. 1026.37(a)(8)
essentially mirrors appendix C to Regulation X and requires the
creditor to disclose the term to maturity of the credit. The prototype
mortgage disclosures used at the Bureau's consumer testing displayed
this in terms of years, and consumers were able to understand and
evaluate easily the term to maturity. The Bureau believes that this
unit of time provides a frame of reference to consumers that they use
more regularly and that is easier to understand than months, which may
result in large numbers that are unfamiliar to consumers, such as 180
or 360 months. Accordingly, proposed Sec. 1026.37(a)(8) requires the
loan term to be expressed in years.
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\158\ TILA section 128(a)(6) requires disclosure of the
``number, amount, and due dates or period'' of periodic payments
which, in effect, makes disclosure of the loan term a statutory
requirement. Section 1026.18(g) implements TILA section 128(a)(6)
for non-mortgage transactions, but there is no corresponding
disclosure requirement for mortgage loan transactions in existing
Sec. 1026.18(s). In this proposal, the Bureau intends to implement
TILA section 128(a)(6) by requiring disclosure of the loan term for
mortgages in proposed Sec. 1026.37(a)(8).
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The Bureau understands from industry feedback provided in
connection with the Bureau's stakeholder outreach that some adjustable
rate loans may be structured so that the periodic principal and
interest payment is fixed and increases in the interest rate increase
the loan term instead of the payment. Accordingly, proposed comment
37(a)(8)-1 provides guidance regarding compliance with the requirement
of proposed Sec. 1026.37(a)(8) if the term to maturity is adjustable
under the terms of the legal obligation.
The Bureau proposes Sec. 1026.37(a)(8) pursuant to its authority
under TILA section 105(a), RESPA section 19(a), and section 1032(a) of
the Dodd-Frank Act to implement TILA section 128(a)(6) and because
disclosing the loan term will help promote the informed use of credit
and more effective advance notice of settlement costs and will enable
consumers to better understand the costs, benefits, and risks
associated with mortgage transactions.
37(a)(9) Purpose
Neither Regulation Z nor Regulation X currently requires disclosure
of the purpose of the loan. With the number of loan products available
on the market, some of which are targeted for a particular purpose,
inclusion of this information on the Loan Estimate will promote the
informed use of credit and more effective advance notice of settlement
costs and will enable consumers to better understand the costs,
benefits, and risks associated with mortgage transactions. Accordingly,
the Bureau proposes to use its authority under TILA section 105(a),
RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act to
require creditors to disclose the intended purpose of the extension of
credit.
Under proposed Sec. 1026.37(a)(9), the creditor is required to
disclose as the purpose of the loan one of the following: (1) Purchase;
(2) refinance; (3) construction; or (4) home equity loan. Proposed
comment 37(a)(9)-1 provides general guidance on identifying the most
accurate loan purpose and clarifies that, in disclosing the loan
purpose, the creditor must consider all relevant information available
to the creditor at the time of the disclosure and that, if there is
uncertainty, the creditor may rely on the consumer's stated purpose.
The Bureau seeks comment on whether additional loan purposes should be
added to Sec. 1026.37(a)(9).
37(a)(9)(i) Purchase
If the credit is to finance the acquisition of the property that is
the subject of the loan transaction, proposed Sec. 1026.37(a)(9)(i)
requires the creditor to disclose that the loan is a ``Purchase.''
Proposed comment 37(a)(9)-1.i clarifies the meaning of the term
``purchase.''
37(a)(9)(ii) Refinance
Proposed Sec. 1026.37(a)(9)(ii) requires the creditor to disclose
that the loan is for a ``Refinance'' if, consistent with Sec.
1026.20(a) other than with regard to the identity of the creditor, the
credit is to refinance an existing obligation already secured by the
property that is the subject of the transaction. Like Sec. 1026.20(a),
whether a transaction is a refinancing under proposed Sec.
1026.37(a)(9)(ii) depends on whether the original obligation has been
satisfied or extinguished and replaced by a new obligation, based on
the parties' contract and applicable law. This may include an
obligation under which amounts other than principal remain due under
the existing obligation and are to be paid with the new obligation to
satisfy the existing obligation. Proposed comment 37(a)(9)-1.ii
clarifies the meaning of the term ``refinance'' and that the consumer
may or may not receive cash from the transaction. Proposed comment
37(a)(9)(ii)-1.ii also provides a description of a refinancing with and
without cash provided and provides an example of how a consumer may use
cash received in a refinancing transaction with cash provided. Proposed
comment 37(a)(9)-2 also
[[Page 51193]]
clarifies that proposed Sec. 1026.37(a)(9)(ii), unlike Sec.
1026.20(a), applies to all such transactions even if the refinancing is
undertaken by a new creditor.
37(a)(9)(iii) Construction
If the extension of credit is to finance the construction of a
dwelling on the property, proposed Sec. 1026.37(a)(9)(iii) requires
the creditor to disclose that the loan is for ``Construction.''
Proposed comment 37(a)(9)-1.iii clarifies that the creditor is required
to disclose that the loan is for ``construction'' both in transactions
where the extension of credit is to cover the costs of a construction
project only (``construction-only'' loan), whether it is a new
construction or a renovation project, and in transactions where a
multiple advance loan may be permanently financed by the same creditor
(``construction-to-permanent'' loan). The proposed comment also
clarifies that, in construction-only transactions, the consumer may be
required to make interest-only payments during the construction phase
of the project with the loan balance due at the completion of the
construction project. Finally, proposed comment 37(a)(9)-1.iii cross-
references Sec. 1026.17(c)(6)(ii) and comments 17(c)(6)-2 and -3 for
further guidance regarding construction-to-permanent transactions.
37(a)(9)(iv) Home Equity Loan
If the extension of credit does not involve the purchase of real
property as described in proposed Sec. 1026.37(a)(9)(i) or the
construction of a dwelling as described in proposed Sec.
1026.37(a)(9)(iii) and will not be used to refinance an existing
obligation as described in proposed Sec. 1026.37(a)(9)(ii), proposed
Sec. 1026.37(a)(9)(iv) requires the creditor to state that the
extension of credit is for a ``Home Equity Loan.'' Proposed comment
37(a)(9)(iv)-1.iv clarifies that the home equity loan disclosure
applies whether the transaction will be secured by a first or
subordinate lien on the property.
37(a)(10) Product
Pursuant to TILA section 128(b)(2)(C)(ii), under existing Sec.
1026.18(s), the creditor is required to provide certain information
about the interest rate and payments, which is based on the loan
product. In proposed Sec. 1026.37(a)(10), the Bureau requires a
description of the loan product. The Bureau proposes this new
requirement pursuant to its authority under TILA section 105(a), RESPA
section 19(a), section 1032(a) of the Dodd-Frank Act, and section
1405(b) of the Dodd-Frank Act with respect to residential mortgage
loans. The Bureau believes that requiring the disclosure of the loan
product on the Loan Estimate promotes the informed use of credit and
more effective advance disclosure of settlement charges by providing
consumers with key loan terms early in the transaction and in a clear
and conspicuous manner. This disclosure also enables consumers to
better understand the costs, benefits, and risks associated with
mortgage transactions. In addition, the disclosure of the loan product
may improve consumer awareness and understanding of transactions
involving residential mortgage loans through the use of disclosures,
and is in the interest of consumers and in the public interest.
Specifically, proposed Sec. 1026.37(a)(10)(i) requires the
creditor to identify the type of loan product for which the consumer
has applied and proposed Sec. 1026.37(a)(10)(ii) requires a
description of certain loan features added to the loan product that may
change the consumer's periodic payment. Proposed Sec.
1026.37(a)(10)(iii) provides instructions on how to disclose loan
products that contain one or more loan features, states that the
creditor may disclose only one loan feature, and cross-references
proposed Sec. 1026.37(a)(10)(ii) as establishing the following
hierarchy to be adhered to when disclosing a loan product with more
than one loan feature: (1) Negative amortization; (2) interest-only;
(3) step payment; and (4) balloon payment. Proposed Sec.
1026.37(a)(10)(iv) requires that the disclosure of any loan product or
loan feature be preceded by any introductory rate periods, adjustable
features, and applicable time periods. This aspect of the proposal
would not apply to fixed rate loans with no additional features.
Finally, comments to proposed Sec. 1026.37(a)(10) provide further
descriptions and examples of the loan products and features to be
disclosed, as discussed below.
37(a)(10)(i)
Proposed Sec. 1026.37(a)(10)(i) requires disclosure of one of the
following as the product for which the consumer has applied:
37(a)(10)(i)(A) Adjustable Rate
If the annual percentage rate may increase after consummation, but
the rates that will apply or the periods for which they will apply are
not known at consummation, proposed Sec. 1026.37(a)(10)(i)(A) requires
that the loan be disclosed as an ``Adjustable Rate.'' Proposed comment
37(a)(10)-1.i clarifies the proper format for disclosure of an
adjustable-rate product.
37(a)(10)(i)(B) Step Rate
Under proposed Sec. 1026.37(a)(10)(i)(B), the loan product is
required to be disclosed as a ``Step Rate'' if the interest rate will
change after consummation and the applicable rates and the periods for
the applicable rates are known. Proposed comment 37(a)(10)-1.ii
clarifies that the proper format for disclosure of a step-rate product.
37(a)(10)(i)(C) Fixed Rate
Proposed Sec. 1026.37(a)(10)(i)(C) requires the creditor to
disclose the loan product as a ``Fixed Rate'' if the product is neither
an Adjustable Rate nor a Step Rate, as described in Sec.
1026.37(a)(10)(i)(A) and (B), respectively. Proposed comment 37(a)(10)-
1.iii provides guidance regarding the disclosure required by Sec.
1026.37(a)(10)(i)(C).
37(a)(10)(ii)
Proposed Sec. 1026.37(a)(10)(ii) requires the disclosure of loan
features that may change the consumer's periodic payment. As noted
above, although structured differently, Sec. 1026.18(s) requires a
similar disclosure. Proposed Sec. 1026.37(a)(10)(ii) requires the
consumer to disclose one of the following features, as applicable:
Negative amortization, interest-only, step payment, balloon payment, or
seasonal payment. Proposed comment 37(a)(10)-2 clarifies the
requirements of Sec. 1026.37(a)(10)(iii) and (iv) with respect to the
feature that is disclosed and the time period or the length of the
introductory period and the frequency of the adjustment periods, as
applicable, that preceded the feature. For example: an adjustable-rate
product with an introductory rate that is interest-only for the first
five years and then adjusts every three years starting in year six
would be disclosed as ``5 Year Interest Only, 5/3 Adjustable Rate''; a
step-rate product with an introductory interest rate that lasts for
seven years, and adjusts every year thereafter for the next five years
at a predetermined rate would be disclosed as ``7/1 Step Rate''; and a
fixed rate product that is interest-only for ten years with a balloon
payment due at the end of the ten-year period would be disclosed as
``10 Year Interest Only, Fixed Rate.'' The balloon payment feature,
however, would be disclosed elsewhere on the form as described in the
section-by-section analysis of proposed Sec. 1026.37(b) and (c).
[[Page 51194]]
37(a)(10)(ii)(A) Negative Amortization
Proposed Sec. 1026.37(a)(10)(ii)(A) requires that the creditor
disclose a ``Negative Amortization'' loan feature if, under the terms
of the legal obligation, the loan balance may increase. Proposed
comment 37(a)(10)-2.i provides an example of the disclosure of a loan
product with a negative amortization feature.
37(a)(10)(ii)(B) Interest Only
Proposed Sec. 1026.37(a)(10)(ii)(B) requires that the creditor
disclose an ``Interest Only'' loan feature if, under the legal
obligation, one or more regular periodic payments may be applied only
to interest accrued and not to the loan principal. Proposed comment
37(a)(10)-2.ii provides an example of the disclosure of a loan product
with an interest only feature.
37(a)(10)(ii)(C) Step Payment
Proposed Sec. 1026.37(a)(10)(ii)(C) requires that the creditor
disclose a ``Step Payment'' loan feature if the terms of the legal
obligation include a feature that involves scheduled variations in the
periodic payment during the term of the loan that are not caused by
changes in the interest rate. Proposed comment 37(a)(10)-2.iii
clarifies that the term ``step payment'' is sometimes also called a
``graduated payment'' and provides an example and guidance on the
format to be used when disclosing a loan product with a Step Payment
feature.
37(a)(10)(ii)(D) Balloon Payment
Proposed Sec. 1026.37(a)(10)(ii)(D) requires that the creditor
disclose a ``Balloon Payment'' loan feature if the transaction includes
a balloon payment as defined in proposed Sec. 1026.37(b)(5). Proposed
comment 37(a)(10)-2.iv clarifies that the term ``balloon payment'' has
the same meaning as in proposed Sec. 1026.37(b)(5) and provides
further guidance on the format to be used when disclosing a loan
product with a balloon payment feature.
37(a)(10)(ii)(E) Seasonal Payment
Proposed Sec. 1026.37(a)(10)(ii)(E) requires that the creditor
disclose whether the terms of the legal obligation expressly provide
that regular periodic payments are not scheduled for specified unit-
periods on a regular basis, disclosed as a ``Seasonal Payment''
feature. The Bureau understands from industry feedback provided in
connection with the Bureau's stakeholder outreach that some loans,
which may be more prevalent in the community bank market, may be
structured so that periodic principal and interest payments are not
scheduled to be made by the consumer in between specified unit-periods
on a regular basis. For example, such a loan may be structured so that
payments are not required to be made by the consumer during the months
of June through August each year of the loan term. These loans are
sometimes called ``teacher loans.'' Accordingly, proposed Sec.
1026.37(a)(10)(ii)(E) provides for the disclosure of such a product
feature. Proposed comment 37(a)(10)-2.v provides guidance regarding
this requirement.
37(a)(10)(iii)
Proposed Sec. 1026.37(a)(10)(iii) requires that if more than one
loan feature is applicable to the transaction, the creditor disclose
only the first applicable loan feature from the order in which they are
presented in proposed Sec. 1026.37(a)(10)(ii). This proposed order of
loan features prioritizes the loan features to ensure that consumers
receive information about potential costs and risks in a readily
visible format, understanding that consumers will receive information
about some applicable features elsewhere in the Loan Estimate. For
example, the existence of a balloon payment is also disclosed under
both proposed Sec. 1026.37(b) and (c), and thus, is later in the order
of loan features under proposed Sec. 1026.37(a)(10)(iii). In addition,
seasonal payments do not pose as great a risk to consumers as do
negatively amortizing or non-amortizing payments, and thus, disclosure
of these features is earlier than seasonal payments in the order under
proposed Sec. 1026.37(a)(10)(iii).
37(a)(10)(iv)
Finally, proposed Sec. 1026.37(a)(10)(iv) requires the creditor to
include in the disclosures required by Sec. 1026.37(a)(10)(i) and (ii)
information regarding any introductory rate period, adjustment period,
or time period, as applicable, and that this information should precede
both the loan product and any features disclosed, as applicable. For
example, if the consumer applies for an adjustable-rate loan that
includes a scheduled regular periodic payment that results in negative
amortization in years one through three, interest-only payments in
years four and five, and an interest rate that adjusts every two years
after year three, the creditor would disclose the product as ``3 Year
Negative Amortization, 3/2 Adjustable Rate.''
37(a)(11) Loan Type
Existing appendix A to Regulation X requires disclosure of the loan
type in section B of the RESPA settlement statement. The Bureau
proposes to use its authority under TILA section 105(a), RESPA section
19(a), and Dodd-Frank Act 1032(a) to require a similar disclosure. The
types of transactions disclosed under proposed Sec. 1026.37(a)(11) may
include different cost structures or underwriting requirements. The
disclosure of the type of transaction enables consumers to evaluate
whether it is the type of transaction that is best suited for their
personal situation. The Bureau believes that including information
regarding the type of transaction for which the consumer has applied
will promote the informed use of credit and more effective advance
disclosure of closing costs, and will enable consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions by providing consumers with information regarding
important characteristics of the loan early in the transaction.
Accordingly, under proposed Sec. 1026.37(a)(11), creditors are
required to disclose one of the following loan types: Conventional,
FHA, VA, or Other.
37(a)(11)(i) Conventional
If the loan is not guaranteed or insured by a Federal or State
government agency, proposed Sec. 1026.37(a)(11)(i) requires the
creditor to disclose that the loan is a ``Conventional.''
37(a)(11)(ii) FHA
If the loan is insured by the Federal Housing Administration,
proposed Sec. 1026.37(a)(11)(ii) requires the creditor to disclose
that the loan is a ``FHA.''
37(a)(11)(iii) VA
If the loan is guaranteed by the U.S. Department of Veterans
Affairs, proposed Sec. 1026.37(a)(11)(iii) requires the creditor to
disclose that the loan is a ``VA.''
37(a)(11)(iv) Other
For federally-insured or guaranteed loans that do not fall within
the categories described in proposed Sec. 1026.37(a)(11)(i) through
(iii) and loans insured or guaranteed by a State agency or other
entity, proposed Sec. 1026.37(a)(11)(iv) requires the creditor to
disclose the loan type as ``Other'' and provide a brief description of
the loan. Proposed comment 1026.37(a)(11)-1 provides details on the
type of loans that would be categorized as ``Other'' and an example of
an acceptable description of a loan that falls within that category.
[[Page 51195]]
37(a)(12) Loan Identification Number (Loan ID )
Appendix A to Regulation X requires the settlement agent to provide
the ``loan number'' in the RESPA settlement statement. The Bureau
proposes to use its authority in TILA section 105(a), RESPA section
19(a), and Dodd-Frank Act section 1032(a) to require disclosure of the
loan number on the Loan Estimate. The Bureau believes that including
this information in a prominent position on the Loan Estimate will
promote the informed use of credit and more effective advance
disclosure of settlement costs and will enable consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions by providing consumers with access to information they may
use repeatedly throughout the transaction.
Accordingly, proposed Sec. 1026.37(a)(12) requires the creditor to
provide a unique number that may be used by the lender, consumer, and
other parties to identify the loan transaction, labeled as ``Loan ID
.'' Proposed comment 37(a)(12)-1 clarifies that the lender has
the discretion to create the unique loan identification number and that
different and unrelated loan transactions with the same creditor may
not share the same loan identification number.
37(a)(13) Rate Lock
Existing appendix C to Regulation X requires the loan originator to
disclose information regarding the expiration date for the interest
rate, charges, and related terms offered by the originator in the GFE.
The Bureau believes that this information is critical to the consumer's
ability to understand the transaction and avoid the uninformed use of
credit. Furthermore, disclosure of this information promotes more
effective advance disclosure of settlement costs and will enable
consumers to better understand the costs, benefits, and risks
associated with mortgage transactions. Thus, the Bureau proposes to use
its authority under TILA section 105(a), RESPA section 19(a), and Dodd-
Frank Act section 1032(a) to require creditors to provide the rate lock
information currently provided in the RESPA GFE.
Consistent with this requirement, proposed Sec. 1026.37(a)(13)
requires the creditor to disclose whether the interest rate identified
under proposed Sec. 1026.37(b)(2) has been locked by the consumer and,
if set, proposed Sec. 1026.37(a)(13)(i) requires disclosure of the
date and time (including the applicable time zone) the locked rate
would expire. Proposed Sec. 1026.37(a)(13)(ii) states that the ``rate
lock'' statement required by proposed Sec. 1026.37(a)(13) is to be
accompanied by a statement notifying the consumer that the interest
rate, points, and lender credits provided in the Loan Estimate are
subject to change unless the rate has been set by the consumer and the
date and time (including the applicable time zone) all estimated
closing costs provided in the Loan Estimate will expire. Proposed
comment 37(a)(13)-1 clarifies that for purposes of proposed Sec.
1026.37(a)(13), a disclosed interest rate is set for a specific period
of time even if subject to conditions set forth in the rate-lock
agreement between the creditor and consumer. Proposed comment
37(a)(13)-2 clarifies that the information provided under proposed
Sec. 1026.37(a)(13) is required whether or not the transaction is
consummated or the terms are otherwise not accepted or extended.
Proposed comment 37(a)(13)-3 states that all times provided in the
disclosure must reference the applicable time zone and provides an
example of an appropriate disclosure of the applicable time zone.
37(b) Loan Terms
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key loan terms offered to them. As
discussed below, the Bureau's consumer testing suggests that the
following are key loan terms that consumers recognize and expect to see
on closed-end mortgage disclosures, together with their settlement
charges: Loan amount; interest rate; periodic principal and interest
payment; whether the loan amount, interest rate, or periodic payment
can increase; and whether the loan has a prepayment penalty or balloon
payment.
TILA requires the disclosure of some of these key loan terms, but
not all. Notably, the loan amount and interest rate are currently not
specifically required to be disclosed by TILA section 128. 15 U.S.C.
1638. Although Regulation Z currently requires the interest rate to be
disclosed in the payment schedule required by Sec. 1026.18(s), it does
not require the loan amount to be disclosed for non-HOEPA loans, and
does not require a summary table identifying these key loan terms for
closed-end credit secured by real property. 12 CFR 1026.18. For
federally related mortgage loans, Sec. 1024.7(d) of Regulation X
currently requires the GFE to contain a table on page 1, labeled
``Summary of your loan terms,'' which contains the following
information: (i) Initial loan amount; (ii) loan term; (iii) initial
interest rate; (iv) initial monthly amount owed for principal,
interest, and mortgage insurance; (v) whether the interest rate can
rise, and if so, the maximum interest rate and the date of the first
interest rate change; (vi) whether the loan balance can rise, and if
so, the maximum loan balance; (vii) whether the monthly amount owed for
principal, interest, and mortgage insurance can rise, and if so, the
payment amount at the first change and the maximum payment; (viii)
whether the loan has a prepayment penalty and the maximum prepayment
penalty; and (xi) whether the loan has a balloon payment, the amount,
and when it is due. 12 CFR 1024.7(d).
Pursuant to its authority under TILA section 105(a), RESPA section
19(a), and Dodd-Frank Act section 1032(a), the Bureau proposes to
require creditors to provide the key loan terms described above in a
summary table as part of the integrated Loan Estimate required by
proposed Sec. 1026.19(e) for closed-end transactions secured by real
property (other than reverse mortgages). At the Bureau's consumer
testing, participants were able to use the summary table to identify
and compare easily the key loan terms for different loans. Based on its
consumer testing, the Bureau believes that a concise loan summary table
will improve consumer understanding of the loan terms presented, such
as an understanding of whether the consumer can afford the loan, enable
comparisons of different credit terms offered by the same or multiple
creditors, and enable consumers to verify information about the loan
provided by the creditor orally or in some other form, such as a
worksheet. The Bureau believes that this disclosure will effectuate the
purposes of TILA by promoting the informed use of credit and assuring a
meaningful disclosure to consumers, including more effective advance
disclosure of settlement costs. Furthermore, consistent with section
1032(a) of the Dodd-Frank Act, this disclosure would ensure that the
features of consumer credit transactions secured by real property are
fully, accurately, and effectively disclosed to consumers in a manner
that permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances.
The table appears under the heading ``Loan Terms'' to enhance
visibility. The individual items of information in the table are also
labeled to enhance visibility. The format provides consumers with a
bold ``yes'' or ``no'' answer to the questions of whether the loan
amount, interest rate, or periodic payment can increase, and whether
the loan has a prepayment penalty or
[[Page 51196]]
balloon payment. The format of the Loan Terms table will help consumers
quickly and easily identify their key loan terms.
The Bureau proposes comment 37(b)-1 to provide additional guidance
to creditors regarding the Loan Terms table. Proposed comment 37(b)-1
clarifies that the Loan Terms table should reflect the terms of the
legal obligation that the consumer will enter into, based on
information the creditor knows or reasonably should know. A discussion
of the specific items included in the table follows.
37(b)(1) Loan Amount
Neither TILA nor RESPA specifically requires the disclosure of the
loan amount for the transaction. TILA section 128(a)(2) requires
disclosure of the amount financed, of which the principal amount of the
loan is the most significant component, but the section does not
require a separate disclosure of the principal amount of the loan. 15
U.S.C. 1638(a)(2). Regulation Z Sec. 1026.32(c)(5) currently requires
the disclosure of the total amount the consumer will borrow, as
reflected by the face amount of the note, for loans subject to HOEPA.
For federally related mortgage loans under RESPA, Sec. 1024.7(d) of
Regulation X currently requires the disclosure of the loan amount in
the summary table on page 1 of the GFE with the text, ``Your initial
loan amount is.''
The Bureau believes, based on its consumer testing, that the loan
amount is important to consumers to understand readily, compare, and
verify the amount of credit offered to them. The principal amount of
the loan is a basic element of the transaction that should be disclosed
to consumers.
Pursuant to its authority under TILA section 105(a), Dodd-Frank Act
section 1032(a), and RESPA section 19(a), the Bureau proposes to
require a disclosure of the principal amount of the transaction for
closed-end transactions secured by real property (other than reverse
mortgages). The Bureau proposes this requirement to effectuate the
purposes of TILA to promote the informed use of credit and ensure a
meaningful disclosure of credit terms to consumers. In addition,
consistent with section 1032(a) of the Dodd-Frank Act, the Bureau
believes that the disclosure of the loan amount in the Loan Terms table
may ensure that the features of consumer credit transactions secured by
real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances. Further, like HUD, the Bureau believes the
loan amount is necessary to understanding the transaction and its
disclosure would effectuate the purposes of RESPA.
Proposed Sec. 1026.37(b)(1) requires creditors to disclose the
``loan amount,'' which is defined as the amount of credit to be
extended under the terms of the legal obligation. This disclosure is
labeled ``Loan Amount'' to enhance visibility. Disclosing the loan
amount may also alert the consumer to fees that are financed in
addition to the amount of credit sought for the consumer's purchase,
refinance, or other purpose.
37(b)(2) Interest Rate
TILA section 128(a)(3) and (4) requires disclosure of the finance
charge and the annual percentage rate, for which the interest rate is a
factor in the calculation. 15 U.S.C. 1638(a)(3), (4).\159\ However, the
statute does not require a separate disclosure of the interest rate.
Currently, Regulation Z requires creditors to disclose the interest
rate only in the interest rate and payment summary table required by
Sec. 1026.18(s). For federally related mortgage loans, Sec. 1024.7(d)
of Regulation X requires that the GFE state the interest rate with the
text ``your initial interest rate is'' in the summary table on page 1.
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\159\ As discussed below, the finance charge disclosure is
implemented in proposed Sec. 1026.38(o)(2). The APR disclosure is
implemented in proposed Sec. Sec. 1026.37(l)(2) and 1026.38(o)(4).
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The Bureau believes that the interest rate is an important loan
term that consumers should be able to locate readily on the disclosure,
because it is the basis for the periodic payments of principal and
interest that the consumer will be obligated to make. Participants in
the Bureau's consumer testing used the interest rate as one of the
primary factors when evaluating, comparing, and verifying loan terms.
The Bureau proposes to use its authority under TILA section 105(a)
to require disclosure of the interest rate for the transaction to
effectuate the purposes of TILA to promote the informed use of credit
and ensure a meaningful disclosure of credit terms to consumers. In
addition, consistent with section 1032(a) of the Dodd-Frank Act, the
Bureau believes that the disclosure of the interest rate in the Loan
Terms table may ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances. Further,
like HUD, which required disclosure of the interest rate in its good
faith estimate form, the Bureau proposes to use its authority under
RESPA section 19(a) to require disclosure of the interest rate, because
the interest rate is important to consumer understanding of the
transaction.
Proposed Sec. 1026.37(b)(2) requires disclosure of the initial
interest rate that will be applicable to the transaction, labeled the
``Interest Rate.'' If the initial interest rate may adjust based on an
index, the creditor must disclose the fully-indexed rate, which is
defined within that paragraph. Proposed comment 37(b)(2)-1 provides
guidance regarding how to calculate the fully-indexed rate to be
disclosed.
37(b)(3) Principal and Interest Payment
TILA section 128(a)(6) requires disclosure of the number, amount,
and due dates or period of payments scheduled to repay the loan. 15
U.S.C. 1638(a)(6). TILA section 128(b)(2)(C)(ii) requires the maximum
principal and interest payment and examples of other potential
principal and interest payments to be disclosed when the ``annual rate
of interest is variable * * * or the regular payments may otherwise be
variable.'' 15 U.S.C. 1638(b)(2)(C)(ii).
Currently, for closed-end transactions secured by real property or
a dwelling, Regulation Z requires creditors to disclose the periodic
principal and interest payment only in the interest rate and payment
summary table required by Sec. 1026.18(s). For federally related
mortgage loans, Sec. 1024.7(d) of Regulation X requires the GFE to
contain the initial periodic payment for principal and interest and
mortgage insurance with the text ``Your initial monthly amount owed for
principal, interest, and any mortgage insurance is.''
The Bureau believes that, like the interest rate, the periodic
principal and interest payment is a key loan term that consumers should
be able to locate readily on the form. The Bureau's consumer testing
indicates that consumers use the periodic principal and interest
payment of the loan as a primary factor in evaluating and comparing a
loan. The Bureau believes that a specific disclosure of the periodic
principal and interest payment in the Loan Terms table will assist
consumers in readily evaluating, comparing, and verifying possible loan
terms. This payment enables consumers to compare loans of one or
multiple creditors based on the same measure, rather than a payment
that may include estimates for escrow payments for property costs or
[[Page 51197]]
mortgage insurance. Accordingly, the Bureau proposes Sec.
1026.37(b)(3) to require the Loan Terms table to include the periodic
principal and interest payment simply labeled ``Principal & Interest,''
with an indication of the applicable unit-period. If the initial
periodic payment may adjust based on changes to an index, the payment
disclosed is required to be based on the fully-indexed rate disclosed
under proposed Sec. 1026.37(b)(2). The unit-period that is applicable
to a transaction is currently described in appendix J to Regulation Z.
Proposed comment 37(b)(3)-1 clarifies that the label of the periodic
principal and interest payment should reflect the appropriate unit-
period for the transaction. Proposed comment 37(b)(3)-2 provides
guidance regarding how to calculate the payment to be disclosed if the
initial interest rate is adjustable based on an index.
The Bureau believes that the total periodic payment the consumer
would be responsible to make to the creditor, including any required
mortgage insurance and escrow payments, is also important for the
consumer to consider when evaluating a loan offer. This amount allows a
consumer to determine the affordability of the credit transaction and
underlying real estate transaction. Accordingly, the Bureau proposes to
include with the principal and interest payment a statement referring
the consumer to the total periodic payment, including estimated amounts
for any escrow and mortgage insurance payments, which is disclosed in
the Projected Payments table under proposed Sec. 1026.37(c),
immediately below the Loan Terms table.
The Bureau proposes to use its authority under TILA section 105(a)
to require disclosure of the periodic principal and interest payment,
along with a reference to the total periodic payment, in the Loan Terms
table to effectuate the purposes of TILA to promote the informed use of
credit and ensure a meaningful disclosure of credit terms to consumers.
In addition, consistent with section 1032(a) of the Dodd-Frank Act, the
Bureau believes that this disclosure may ensure that the features of
consumer credit transactions secured by real property are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances. Further, the Bureau proposes to use its authority under
RESPA section 19(a) to require this disclosure because the disclosure
will improve consumer understanding of the transaction, including
settlement costs. The Bureau also proposes this requirement pursuant to
its authority under section 1405(b) of the Dodd-Frank Act. The Bureau
believes this disclosure may improve consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures, and is in the interest of consumers and
in the public interest.
37(b)(4) Prepayment Penalty
Currently, TILA section 128(a)(11), 15 U.S.C. 1638(a)(11), and
Regulation Z Sec. 1026.18(k)(1) require the creditor to disclose
whether or not a penalty may be imposed if the obligation is prepaid in
full for a transaction that includes a finance charge computed from
time to time by application of a rate to the unpaid principal balance.
For federally related mortgage loans, Sec. 1024.7(d) of Regulation X
requires the summary table on page 1 of the GFE to state whether or not
the loan has a prepayment penalty with the text, ``Does your loan have
a prepayment penalty?''
The Bureau's consumer testing indicates that consumers use the
existence of a prepayment penalty as an important factor in
understanding and evaluating loan offers. Accordingly, because of the
importance to consumers of prepayment penalties, proposed Sec.
1026.37(b)(4) requires disclosure of whether the loan has a prepayment
penalty in the Loan Terms table, labeled ``Prepayment Penalty.'' As
discussed below, under proposed Sec. 1026.37(b)(7), the existence or
non-existence of a prepayment penalty provision in the loan contract is
indicated by an affirmative or negative answer (designed as a simple
``yes'' or ``no'') to the question, ``Does the loan have these
features?'' In the Bureau's consumer testing, consumers were able to
use this disclosure to determine easily if the loan had a prepayment
penalty.
The Bureau proposes to require disclosure of whether the
transaction includes a prepayment penalty under TILA section
128(a)(11), its implementation authority under TILA section 105(a), and
RESPA section 19(a). The Bureau believes this additional information
will promote consumer understanding of the cost of credit and more
effective disclosure of the terms of the credit.
Definition of Prepayment Penalty
TILA establishes certain disclosure requirements for transactions
for which a penalty is imposed upon prepayment, but does not define the
term ``prepayment penalty.'' TILA section 128(a)(11) requires that the
transaction-specific disclosures for closed-end consumer credit
transactions disclose whether (1) a consumer is entitled to a rebate of
any finance charge upon refinancing or prepayment in full pursuant to
acceleration or otherwise, if the obligation involves a precomputed
finance charge, and (2) a ``penalty'' is imposed upon prepayment in
full if the obligation involves a finance charge computed from time to
time by application of a rate to the unpaid principal balance. 15
U.S.C. 1638(a)(11). Also, TILA section 128(a)(12) requires that the
transaction-specific disclosures state that the consumer should refer
to the appropriate contract document for information regarding certain
loan terms or features, including ``prepayment rebates and penalties.''
15 U.S.C. 1638(a)(12).
Section 1026.18(k) implements (and largely mirrors) TILA section
128(a)(11). Section 1026.18(k)(1) provides that ``when an obligation
includes a finance charge computed from time to time by application of
a rate to the unpaid principal balance,'' the creditor must disclose
``a statement indicating whether or not a penalty may be imposed if the
obligation is prepaid in full.'' Comment 18(k)(1)-1 clarifies that such
a ``penalty'' includes, for example, ``interest charges for any period
after prepayment in full is made'' and a minimum finance charge, but
does not include, for example, loan guarantee fees. Section
1026.18(k)(2) provides for the disclosure of a statement indicating
whether or not the consumer is entitled to a rebate of any finance
charge if the obligation is prepaid in full when an obligation includes
a finance charge other than the finance charge described in Sec.
1026.18(k)(1). Comment 18(k)(2)-1 clarifies that Sec. 1026.18(k)(2)
applies to any finance charges that do not take account of each
reduction in the principal balance of an obligation, such as recomputed
finance charges and charges that take account of some but not all
reductions in principal.
In addition, TILA section 129(c)(1) limits the circumstances in
which a high-cost mortgage may include a prepayment penalty where the
consumer pays all or part of the principal before the date on which the
principal is due. 15 U.S.C. 1639(c)(1)(A). In the high-cost mortgage
context, any method of computing a refund of unearned scheduled
interest is a prepayment penalty if it is less favorable than the
actuarial method, as defined by section 933(d) of the Housing and
Community Development Act of 1992. 15 U.S.C. 1639(c)(1)(B). Section
1026.32(d)(6) implements these TILA provisions.
Although the disclosure requirements under current Sec. 1026.18(k)
apply to
[[Page 51198]]
closed-end mortgage and non-mortgage transactions, in its 2009 Closed-
End Proposal, the Board proposed to establish a new Sec. 226.38(a)(5)
for disclosure of prepayment penalties for closed-end mortgage
transactions. See 74 FR at 43334, 43413. In proposed comment 38(a)(5)-
2, the Board stated that examples of prepayment penalties include
charges determined by treating the loan balance as outstanding for a
period after prepayment in full and applying the interest rate to such
``balance,'' a minimum finance charge in a simple-interest transaction,
and charges that a creditor waives unless the consumer prepays the
obligation. 74 FR at 43413. In addition, the Board's proposed comment
38(a)(5)-3 listed loan guarantee fees and fees imposed for preparing a
payoff statement or other documents in connection with the prepayment
as examples of charges that are not prepayment penalties. Id. The
Board's 2010 Mortgage Proposal included amendments to existing comment
18(k)(1)-1 and proposed comment 38(a)(5)-2 stating that prepayment
penalties include ``interest'' charges after prepayment in full even if
the charge results from interest accrual amortization used for other
payments in the transaction. See 75 FR at 58756, 58781.\160\
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\160\ The preamble to the Board's 2010 Mortgage Proposal
explained that the proposed revisions to current Regulation Z
commentary and the proposed comment 38(a)(5) from the Board's 2009
Closed-End Proposal regarding interest accrual amortization were in
response to concerns about the application of prepayment penalties
to certain Federal Housing Administration (FHA) and other loans
(i.e., when a consumer prepays an FHA loan in full, the consumer
must pay interest through the end of the month in which prepayment
is made). See 75 FR at 58586.
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Prepayment penalties were also addressed in the Board's 2011 ATR
Proposal implementing sections 1411, 1412, and 1414 of the Dodd-Frank
Act (codified at 15 U.S.C. 1629c), which expand the scope of the
ability-to-repay requirement under TILA and establish ``qualified
mortgage'' standards for complying with such requirement. See 76 FR at
27482, 27491. Specifically, the Board's proposed Sec. 226.43(b)(10)
generally followed the current Regulation Z guidance on prepayment
penalties (i.e., comment 18(k)(1)-1) and the proposed definitions and
guidance in the Board's 2009 Closed-End Proposal and 2010 Mortgage
Proposal. However, the Board's 2011 ATR Proposal differed from the
prior proposals and current guidance in the following respects: (1)
Proposed Sec. 226.43(b)(10) defined prepayment penalty with reference
to a payment of ``all or part of'' the principal in a transaction
covered by the provision, while Sec. 1026.18(k) and associated
commentary and the Board's 2009 Closed-End Proposal and 2010 Mortgage
Proposal referred to payment ``in full,'' (2) the examples provided
omitted reference to a minimum finance charge and loan guarantee
fees,\161\ and (3) proposed Sec. 226.43(b)(10) did not incorporate,
and the Board's 2011 ATR Proposal did not otherwise address, the
language in Sec. 1026.18(k)(2) and associated commentary regarding
disclosure of a rebate of a precomputed finance charge.
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\161\ The preamble to the Board's 2011 ATR Proposal addressed
why the Board chose to omit these two items. The Board reasoned that
a minimum finance charge need not be included as an example of a
prepayment penalty because such a charge typically is imposed with
open-end, rather than closed-end, transactions. The Board stated
that loan guarantee fees are not prepayment penalties because they
are not charges imposed for paying all or part of a loan's principal
before the date on which the principal is due. See 76 FR at 27416.
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Based on the Bureau's consideration of the existing statutory and
regulatory definitions of ``penalty'' and ``prepayment penalty'' under
TILA sections 128(a) and 129(c) and Sec. Sec. 1026.18(k) and
1026.32(d)(6), the Board's proposed definitions of prepayment penalty,
and the Bureau's authority under TILA section 105(a) and Dodd-Frank Act
sections 1032(a) and, for residential mortgage transactions, 1405(b),
the Bureau is proposing to define ``prepayment penalty'' in proposed
Sec. 1026.37(b)(4) for transactions subject to Sec. Sec. 1026.19(e)
and (f) as a charge imposed for paying all or part of a transaction's
principal before the date on which the principal is due. The proposed
definition of prepayment penalty as applicable to the transactions
subject to Sec. Sec. 1026.19(e) and (f) broadens the existing
statutory and regulatory definitions under TILA section 128(a)(11) and
Sec. 1026.18(k), and thereby may result in more frequent disclosures
of prepayment penalties to consumers than would be made under the
existing definitions. Therefore, the Bureau believes that the
disclosures of prepayment penalties under proposed Sec. 1026.37(b)(4)
will effectuate the purposes of TILA and RESPA by facilitating the
informed use of credit and more effective advance disclosure of
settlement costs. In addition, the revised disclosures will ensure that
the features of mortgage loan products initially and over their terms
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the loan products in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a).
Furthermore, these disclosures will improve consumers' awareness and
understanding of residential mortgage transactions, which is in the
interest of consumers and the public, consistent with Dodd-Frank Act
section 1405(b).
Proposed comment 37(b)(4)-1 clarifies that the disclosure of the
prepayment penalty under Sec. 1026.37(b)(4) applies to transactions
where the terms of the loan contract provide for a prepayment penalty,
even though it is not certain at the time of the disclosure whether the
consumer will, in fact, make a payment to the creditor that would cause
imposition of the penalty. This proposed comment also clarifies that if
the transaction includes a prepayment penalty, Sec. 1026.37(b)(7) sets
forth the information that must be disclosed under Sec. 1026.37(b)(4).
Proposed comment 37(b)(4)-2.i through -2.iv gives the following
examples of prepayment penalties: (1) A charge determined by treating
the loan balance as outstanding for a period of time after prepayment
in full and applying the interest rate to such ``balance,'' even if the
charge results from interest accrual amortization used for other
payments in the transaction under the terms of the loan contract; (2) a
fee, such as an origination or other loan closing cost, that is waived
by the creditor on the condition that the consumer does not prepay the
loan; (3) a minimum finance charge in a simple interest transaction;
and (4) computing a refund of unearned interest by a method that is
less favorable to the consumer than the actuarial method, as defined by
section 933(d) of the Housing and Community Development Act of 1992, 15
U.S.C. 1615(d). Proposed comment 37(b)(4)-2.i further clarifies that
``interest accrual amortization'' refers to the method by which the
amount of interest due for each period (e.g., month) in a transaction's
term is determined and notes, for example, that ``monthly interest
accrual amortization'' treats each payment as made on the scheduled,
monthly due date even if it is actually paid early or late (until the
expiration of any grace period). The proposed comment also provides an
example where a prepayment penalty of $1,000 is imposed because a full
month's interest of $3,000 is charged even though only $2,000 in
interest was earned in the month during which the consumer prepaid.
Proposed comment 37(b)(4)-3 clarifies that a prepayment penalty
does not include: (1) Fees imposed for preparing and providing
documents when a loan is paid in full, whether or not the loan is
prepaid, such as a loan
[[Page 51199]]
payoff statement, a reconveyance document, or another document
releasing the creditor's security interest in the dwelling that secures
the loan; or (2) loan guarantee fees.
Proposed comment 37(b)(4)-4 clarifies that, with respect to an
obligation that includes a finance charge that does not take into
account each reduction in the principal balance of the obligation
(e.g., precomputed finance charges), Sec. 1026.37(b)(4) satisfies
disclosure of whether or not the consumer is entitled to a rebate of
any finance charge if the obligation is prepaid in full or part. The
comment further clarifies that if the transaction involves both a
precomputed finance charge and a finance charge computed by application
of a rate to an unpaid balance, disclosures about both the prepayment
rebate and the prepayment penalty are made under Sec. 1026.37(b)(4) as
one disclosure to the question required by Sec. 1026.37(b)(7). For
example, if in such a transaction, a portion of the precomputed finance
charge will not be provided as a rebate and also a prepayment penalty
based on the amount prepaid is provided for by the loan contract, both
disclosures are made under Sec. 1026.37(b)(4) as one aggregate amount,
stating the maximum amount and time period under Sec. 1026.37(b)(7).
If the transaction instead provides a rebate of the precomputed finance
charge upon prepayment, but imposes a prepayment penalty based on the
amount prepaid, the disclosure required by Sec. 1026.37(b)(4) is an
affirmative answer and the information required by Sec. 1026.37(b)(7).
This proposed comment incorporates existing guidance in Regulation Z
commentary regarding disclosure of whether the consumer is entitled to
a rebate of finance charges that do not take into account each
reduction in principal balance. See comments 18(k)-2 and -3 and
18(k)(2)-1.
The definition of prepayment penalty in proposed Sec.
1026.37(b)(4) and associated commentary substantially incorporates the
definitions of and guidance on prepayment penalty from the Board's 2009
Closed-End Proposal, 2010 Mortgage Proposal, and 2011 ATR Proposal and,
as necessary, reconciles their differences. For example, the Bureau
proposes that the prepayment penalty definition in Sec. 1026.37(b)(4)
refer to payment of ``all or part of a covered transaction's
principal,'' rather than merely payment ``in full,'' because knowledge
of whether a partial prepayment triggers a penalty is important for
consumers. Also, the Bureau is proposing to incorporate the language
from the Board's 2009 Closed-End Proposal and 2010 Mortgage Proposal
but omitted in the Board's 2011 ATR Proposal listing a minimum finance
charge as an example of a prepayment penalty and stating that loan
guarantee fees are not prepayment penalties, because similar language
is found in longstanding Regulation Z commentary. Based on the
differing approaches taken by the Board in its recent mortgage
proposals, however, the Bureau seeks comment on whether a minimum
finance charge should be listed as an example of a prepayment penalty
and whether loan guarantee fees should be excluded from the definition
of prepayment penalty.
The Bureau expects to coordinate the definition of prepayment
penalty in proposed Sec. 1026.37(b)(4) with the definitions in the
Bureau's other pending rulemakings mandated by the Dodd-Frank Act
concerning ability-to-repay, high-cost mortgages under HOEPA, and
mortgage servicing. To the extent consistent with consumer protection
objectives, the Bureau believes that adopting a consistent definition
of ``prepayment penalty'' across its various pending rulemakings
affecting closed-end mortgages will facilitate compliance. As an
additional part of this effort to adopt a consistent regulatory
definition of ``prepayment penalty,'' the Bureau is also proposing
certain conforming revisions to Sec. 1026.18(k) and associated
commentary, as discussed earlier in the section-by-section analysis for
the proposed revised Sec. 1026.18(k).
37(b)(5) Balloon Payment
TILA section 128(a)(6) requires disclosure of the number, amount,
and due dates or period of payments scheduled to repay the loan.
Currently, for closed-end transactions secured by real property or a
dwelling, Regulation Z requires balloon payments to be disclosed only
in connection with the interest rate and payment summary table required
by Sec. 1026.18(s). For federally related mortgage loans, Sec.
1024.7(d) of Regulation X requires the GFE to state in the summary
table on page 1 whether or not the loan has a balloon payment with the
text, ``Does your loan have a balloon payment?''
Pursuant to its authority under TILA section 128(a)(6), TILA
section 105(a), RESPA section 19(a), and Dodd-Frank Act section
1032(a), the Bureau proposes Sec. 1026.37(b)(5), which requires
disclosure of whether the credit transaction requires a balloon
payment, as defined within the provision. This disclosure is provided
in the Loan Terms table, labeled ``Balloon Payment.'' As discussed
below, under proposed Sec. 1026.37(b)(7), the existence or non-
existence of a balloon payment provision is indicated by a ``yes'' or
``no'' answer to the question, ``Does the loan have these features?''
In the Bureau's consumer testing, consumers were able to determine
readily whether a loan had a balloon payment. The Bureau's consumer
testing indicates that consumers consider whether a loan has a balloon
payment to be an important factor in evaluating loans. The Bureau
believes that this disclosure will effectuate the purposes of TILA and
RESPA because it will promote the informed use of credit and assure a
meaningful disclosure to consumers, and thus, will benefit consumers
and the public and result in more effective advance disclosure.
Definition of Balloon Payment
Sections 1412 and 1432(b) of the Dodd-Frank Act both define
``balloon payment'' as ``a scheduled payment that is more than twice as
large as the average of earlier scheduled payments.'' These definitions
are incorporated into TILA sections 129C(b)(2)(A)(ii) and 129(e),
respectively. 15 U.S.C. 1639c(b)(2)(A)(ii), 1639(e). Regulation Z Sec.
1026.18(s)(5)(i), however, defines ``balloon payment'' as ``a payment
that is more than two times a regular periodic payment.''
The Board's 2011 ATR Proposal implementing section 1412 of the
Dodd-Frank Act incorporates Regulation Z's existing definition of
``balloon payment'' in Sec. 1026.18(s)(5)(i) rather than the
definition in section 1412. See proposed Sec. 226.43(e)(2)(i)(C), 76
FR 27390, 27484. The Board noted that this definition is substantially
similar to the statutory one, except that it uses as its benchmark any
regular periodic payment rather than the average of earlier scheduled
payments. 76 FR at 27455. The Board also reasoned that incorporating
the Regulation Z, rather than Dodd-Frank Act, definition of ``balloon
payment'' facilitates compliance by affording creditors a single
definition of the term within Regulation Z. Id. at 27456.
By defining ``balloon payment'' in the 2011 ATR Proposal based on
the Regulation Z definition, the Board proposed to adjust the Dodd-
Frank Act statutory definition. In doing so, the Board stated that it
was relying on TILA section 105(a) authority to make such adjustments
for all or any class of transactions as in the judgment of the Board
are necessary or proper to facilitate compliance with TILA. Id.; 15
U.S.C. 1604(a). The class of transactions for which the adjustment was
proposed encompassed all transactions covered
[[Page 51200]]
by the 2011 ATR Proposal, i.e., closed-end consumer credit transactions
that are secured by a dwelling. The Board, however, solicited comment
on the appropriateness of the proposed adjustment. The Board also
stated that the proposed adjustment was supported by the Board's
authority under TILA section 129B(e) to condition terms, acts, or
practices relating to residential mortgage loans that the Board finds
necessary or proper to facilitate compliance. 15 U.S.C. 1639b(e).
In view of the different definitions of ``balloon payment'' between
the Dodd-Frank Act and Regulation Z and the approach taken by the Board
in the 2011 ATR Proposal, and based on the Bureau's authority under
TILA section 105(a) and Dodd-Frank Act sections 1032(a), and for
residential mortgage loans, Dodd-Frank Act section 1405(b), the Bureau
is proposing a definition of ``balloon payment'' in proposed Sec.
1026.37(b)(5) that largely incorporates the existing Regulation Z
definition in Sec. 1026.18(s)(5)(i), i.e., a payment that is more than
two times a regular periodic payment. For the reasons discussed below,
the Bureau believes that the proposed definition will promote the
informed use of credit and facilitate compliance with TILA, consistent
with TILA section 105(a). In addition, this definition will enhance
consumer understanding of the costs, benefits, and risks associated
with the transaction in light of the facts and circumstances
(consistent with Dodd-Frank Act section 1032(a)), and improve
consumers' awareness and understanding of residential mortgage
transactions, which is in the interest of consumers and the public
(consistent with Dodd-Frank Act section 1405(b)).
The proposed definition in Sec. 1026.37(b)(5) revises the current
regulatory language to state that a balloon payment cannot be a regular
periodic payment. This revision is intended to prevent a regular
periodic payment following a scheduled or permitted payment increase
under the terms of a loan contract (e.g., based on a rate adjustment
under an adjustable rate loan) from being characterized as a balloon
payment if it is more than two times a regular periodic payment
occurring prior to the payment increase. Moreover, proposed commentary
to Sec. 1026.37(b)(5) clarifies the meaning of regular periodic
payment and discusses how all regular periodic payments during the loan
term are used to determine whether a particular payment is a balloon
payment (i.e., if the particular payment is more than two times any one
regular periodic payment during the loan term, it is disclosed as a
balloon payment under Sec. 1026.37(b)(5) unless the particular payment
itself is a regular periodic payment). These clarifications are
intended to resolve ambiguity in the current regulatory definition and
associated commentary, and thereby facilitate compliance.\162\
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\162\ According to existing comment 32(d)(1)(i), a payment is a
``regular periodic payment'' if it is not more than twice the amount
of other payments. This definition, which is essentially the mirror
image of the balloon payment definition in Sec. 1026.18(s)(5)(i)
(i.e., a payment that is more than two times a regular periodic
payment), leaves uncertainty as to how to determine whether a
payment is a balloon payment when there are multiple regular
periodic payments during the loan term (e.g., if the regularly
scheduled payments increase due to an adjustable rate feature).
---------------------------------------------------------------------------
This definition applies to all transactions subject to proposed
Sec. 1026.19(e). The Bureau recognizes that this proposed definition
deviates from that prescribed in the Dodd-Frank Act. However, for the
reasons set forth in the 2011 ATR Proposal, the Bureau believes that
adopting a consistent definition within Regulation Z will promote the
informed use of credit and facilitate compliance and, therefore, will
also benefit consumers and the public. See 76 FR at 27456.
The Bureau recognizes that these additional clarifications may
result in more payments being disclosed as balloon payments than under
the current regulatory definition. The Bureau believes that more
frequent disclosure of balloon payment terms facilitates the informed
use of credit, ensures that the features of mortgage loan products
initially and over their terms are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with the loan products in
light of the facts and circumstances, and improves consumers' awareness
and understanding of residential mortgage transactions, which is in the
interest of consumers and the public. The Bureau seeks comment,
however, on whether the definition of balloon payment in proposed Sec.
1026.37(b)(5) should be revised to exclude any particular type of
payment. Furthermore, the Bureau believes that a payment that is twice
any one regular periodic payment using the regulatory definition, as
revised in this proposed rule, would be equal to or less than a payment
that is twice the average of earlier scheduled payments using the
statutory definition. The Bureau notes that the range of scheduled
payment amounts under the first approach is more limited and defined.
For example, if the regular periodic payment is $200, a payment of
greater than $400 would constitute a balloon payment. Under the
statutory definition, however, the threshold amount for a balloon
payment could be greater than $400 if, for example, the regular
periodic payments were increased by $100 each year. Under this
scenario, the amount constituting a ``balloon payment'' could increase
with the incremental increase of the average of earlier scheduled
payments. The Bureau believes that under the existing regulatory
definition, as revised by the proposed rule, consumers would have a
better understanding of the highest possible regular periodic payment
in a repayment schedule and may experience less ``payment shock'' as a
result. Therefore, the Bureau believes that the existing regulatory
definition may better protect consumers and would be in their interest.
In addition, the Bureau believes that the definition of ``balloon
payment'' based on the existing regulatory definition would facilitate
and simplify compliance by eliminating the need to average earlier
scheduled payments.
Proposed comment 37(b)(5)-1 clarifies that the ``regular periodic
payment'' used to determine whether a payment is a ``balloon payment''
for purposes of Sec. 1026.37(b)(5) is the payment of principal and
interest (or interest only, depending on the loan features) payable
under the terms of the loan contract for two or more unit periods in
succession. The comment also clarifies that all regular periodic
payments during the loan term are used to determine whether a
particular payment is a balloon payment, regardless of whether the
regular periodic payments change during the loan term due to rate
adjustments or other payment changes permitted or required under the
loan contract (i.e., if the particular payment is more than two times
any one regular periodic payment during the loan term, it is disclosed
as a balloon payment under Sec. 1026.37(b)(5) unless the particular
payment itself is a regular periodic payment). Proposed comment
37(b)(5)-1.i gives an example of a step-rate mortgage with two
different regular periodic payment amounts. Proposed comment 37(b)(5)-
1.ii clarifies the definition of ``regular periodic payment'' in the
context of a loan with an adjustable rate, where, under the terms of
the loan contract, the regular periodic payments may increase after
consummation, but the amounts of such payment increases (if any) are
unknown at the time of consummation. In such instance, the proposed
comment clarifies that the ``regular periodic payments'' are based on
the fully-indexed rate, except as otherwise
[[Page 51201]]
determined by any premium or discounted rates, the application of any
interest rate adjustment caps, or any other known, scheduled rates
under the terms specified in the loan contract. The proposed comment
also refers to the analogous guidance provided in current comments
17(c)(1)-8 and -10, and gives an example of an adjustable rate mortgage
with two different periodic payment amounts.
Proposed comment 37(b)(5)-1.iii clarifies that for a loan with a
negative amortization feature, the ``regular periodic payment'' does
not take into account the possibility that the consumer may exercise an
option to make a payment greater than the minimum scheduled periodic
payment. Proposed comment 37(b)(5)-1.iv clarifies that, for purposes of
Sec. 1026.37(c), Sec. 1026.37(b)(5) governs the threshold
determination of whether a loan has a balloon payment feature, but
Sec. 1026.37(c) governs the disclosure of balloon payments in the
``Projected Payments'' table under that section.
The proposed definition of balloon payment in proposed Sec.
1026.37(b)(5) includes the payments of a single or double payment
transaction. Proposed comment 37(b)(5)-2 provides clarification
regarding such single and double-payment transactions, which require a
single payment due at maturity or only two payments during the loan
term, and do not require regular periodic payments. A single payment
transaction does not have regular periodic payments, because regular
periodic payments must be made two or more unit periods in succession
(see proposed comment 37(b)(5)-1, described above). And while a loan
with only two scheduled payments, depending on the circumstances, may
have regular periodic payments (e.g., if the two payments are made
during the last month of years one and two of a two-year loan term),
there is no third payment that could potentially be the balloon payment
(i.e., a payment that is more than twice the amount of the regular
periodic payments). The Bureau believes the payments of such
transactions are essentially equivalent, economically and practically,
from the perspective of a consumer, to a balloon payment. The comment
clarifies that notwithstanding the fact that there is no regular
periodic payment to compare such single or double payments to, any
payment in a single payment transaction or a transaction with only two
scheduled payments is a ``balloon payment'' under Sec. 1026.37(b)(5).
The Bureau is coordinating the definition of ``balloon payment'' in
proposed Sec. 1026.37(b)(5) with the definitions of ``balloon
payment'' in the Bureau's other pending rulemakings under the Dodd-
Frank Act concerning ability-to-repay and high-cost mortgages under
HOEPA. To the extent consistent with consumer protection objectives,
the Bureau believes that adopting a consistent definition of ``balloon
payment'' across the Bureau's Dodd-Frank Act rulemakings affecting
closed-end credit transactions will facilitate compliance, as discussed
in part II above.
37(b)(6) Increases after Consummation
TILA section 128(b)(2)(C)(ii) requires, for closed-end credit
transactions secured by a dwelling in which the interest rate or
payments may vary, the disclosure of examples of adjustments to the
regular required payment based on changes in the interest rates,
including the maximum payment amount of the regular required payments
based on the maximum interest rate under the contract. TILA section
128(b)(2)(C)(ii) also requires the Bureau to conduct consumer testing
so that consumers can easily understand the fact that the initial
regular payments are for a specific time period and will end on a
certain date and that payments will subsequently adjust to a
potentially higher amount. Currently, Regulation Z's disclosures for
closed-end credit transactions secured by real property or a dwelling
require information about whether the interest rate, periodic principal
and interest payment, and loan amount can change. The disclosures are
given in the interest rate and payment table required by Sec.
1026.18(s). For federally related mortgage loans, Sec. 1024.7(d) of
Regulation X requires this information to be disclosed in the summary
table on page 1 of the GFE, as affirmative or negative answers to the
questions ``Can your interest rate rise,'' ``Even if you make payments
on time, can your loan balance rise,'' and ``Even if you make payments
on time, can your monthly amount owed for principal, interest, and any
mortgage insurance rise?''
As discussed above, the Bureau conducted consumer testing of
prototype mortgage disclosures over ten rounds. During each round of
testing, consumers placed significant emphasis when evaluating loans on
whether the loan amount, interest rate, or periodic principal and
interest payment could increase, the amount and timing of such
increases, and whether they were scheduled increases or only potential
increases. Accordingly, the Bureau believes that this information
should be disclosed so that consumers can easily find and understand
it.
The Bureau proposes Sec. 1026.37(b)(6) to require that this
information be disclosed in the Loan Terms table. Specifically,
proposed Sec. 1026.37(b)(6) requires disclosure of whether the amounts
required to be disclosed by proposed Sec. 1026.37(b)(1) through (3)
may increase. If those amounts may increase, the creditor must also
disclose, as applicable: (i) The maximum principal balance for the
transaction and the date when the last payment for which the principal
balance is permitted to increase will occur; (ii) the frequency of
interest rate adjustments, the date when the interest rate begins to
adjust, the maximum interest rate under the terms of the transaction,
and the first adjustment that could result in the maximum interest
rate; (iii) the frequency of adjustments to the periodic principal and
interest payment, the date when the principal and interest payment
begins to adjust, the maximum principal and interest under the
transaction, and the first adjustment that can result in the maximum
principal and interest payment; and (iv) the periods of any features
that permit the periodic principal and interest payment to adjust
without an adjustment to the interest rate, such as information about
interest-only periods. The Bureau also understands from industry
feedback provided in connection with the Bureau's stakeholder outreach
that some adjustable rate loans, which may be more prevalent in the
community bank market, may be structured so that the periodic principal
and interest payment is fixed and increases in the interest rate
increase the loan term instead of the payment. Accordingly, the
information required by proposed Sec. 1026.37(b)(6)(ii) also includes
a statement of that fact for transactions that contain such a feature.
The Bureau proposes a format that provides this information as
affirmative or negative answers to one comprehensive question, ``Can
this amount increase after closing?'' The answers to this question are
capitalized and in bold text. In addition, bullet-pointed text
immediately to the right of these answers provides the maximum amounts,
frequencies of changes, references to more detailed information
disclosed elsewhere on the form, and other relevant information. Bold
text will be used for important information in these statements, to
enable consumers to see it quickly. Proposed form H-24 in appendix H of
Regulation Z illustrates the disclosure of such information, including
the bullet-pointed text required and the portions of such text that are
to be bolded.
The Bureau tested prototype versions of this table in its consumer
testing.
[[Page 51202]]
During testing, consumers were able to understand and use this
information in the proposed format when evaluating and comparing terms
of credit. Based on these results, the Bureau believes that this format
will enable consumers to find the information readily, to use it for
evaluating and comparing terms of credit, and to understand the
information.
Accordingly, pursuant to TILA section 128(b)(2)(C)(ii) and the
Bureau's authority under TILA section 105(a), RESPA section 19(a),
Dodd-Frank Act section 1032(a), and Dodd-Frank Act 1405(b), the Bureau
proposes Sec. 1026.37(b)(6) to require this information in the Loan
Terms table and in the format required to be used by proposed Sec.
1026.37(o). The Bureau believes that this disclosure will effectuate
the purposes of TILA because it will promote the informed use of credit
and assure a meaningful disclosure to consumers, and thus, will benefit
consumers and the public. The Bureau believes this information improves
consumer awareness and understanding of residential mortgage loans and
is in the interest of consumers and the public, consistent with Dodd-
Frank Act section 1405(b). The Bureau also believes that, consistent
with Dodd-Frank Act section 1032(a), this requirement may ensure that
the features of any consumer financial product or service, both
initially and over the term of the product or service, are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances. In addition, like HUD, the Bureau believes this
information is important to consumer understanding of the transaction
and as a result, will promote more effective advance disclosure of
settlement costs and should be provided on the disclosure.
37(b)(7) Details about Prepayment Penalty and Balloon Payment
Currently, for closed-end credit transactions secured by real
property or a dwelling, Sec. 1026.18(k) of Regulation Z does not
require the disclosure of the maximum prepayment penalty that may be
charged. While Sec. 1026.18(s) currently requires the balloon payment
that may be charged on a loan to be disclosed, it is not required to be
disclosed with other key terms of the transaction. For federally
related mortgage loans, Sec. 1024.7(d) of Regulation X currently
requires the maximum prepayment penalty and balloon payment in the
summary table on page 1 of the GFE with the text, ``your maximum
prepayment penalty is $-- and ``you have a balloon payment of $-- due
in -- years.''
Proposed Sec. 1026.37(b)(7) requires the information in proposed
Sec. 1026.37(b)(4) and (5) to be disclosed as an affirmative or
negative answer to the question ``Does the loan have these features?''
The section also requires disclosure of the maximum prepayment penalty,
the period in which a prepayment penalty may be imposed, the amounts of
any balloon payments and the dates of such payments. Like the
information required to be disclosed by proposed Sec. 1026.37(b)(6),
the format required for this information by proposed Sec. 1026.37(o)
emphasizes the maximum amounts by using bold text, to enable consumers
to find these amounts quickly.
In the Bureau's consumer testing, consumers were able to use this
disclosure to determine easily if the loan had a prepayment penalty,
the maximum amount, and the period during which the penalty applied,
and the amount and time of a balloon payment. The Bureau's consumer
testing has indicated that consumers place significant emphasis when
evaluating loans on the potential for large balloon or prepayment
penalty amounts.
The Bureau proposes to use its authority under TILA sections
105(a), Dodd-Frank Act section 1032(a), and RESPA section 19(a) to
require disclosure of this information in the Loan Terms table of the
Loan Estimate. The Bureau believes that placing these details about
prepayment penalties and balloon payments in the summary table with
bold text for the maximum amounts allows consumers to find this
information easily, enabling consumers to understand and evaluate
loans, promoting meaningful disclosure of credit terms to consumers.
The Bureau believes that this disclosure will effectuate the purposes
of TILA because it will promote the informed use of credit and assure a
meaningful disclosure to consumers, and thus, will benefit consumers
and the public. In addition, like HUD, the Bureau believes this
information is important to consumer understanding of the transaction
and as a result, will promote more effective advance disclosure of
settlement costs and should be provided on the disclosure. Proposed
comment 37(b)(7)(i)-1 provides guidance regarding calculating the
maximum amount of the prepayment penalty.
37(b)(8) Timing
The Bureau's consumer testing indicated the references to the dates
required to be disclosed by proposed Sec. 1026.37(b)(6) and (7) are
easily understood by consumers if disclosed in whole years. The
prototype mortgage disclosures used at the Bureau's consumer testing
displayed these dates as years, and consumers were able to understand
and evaluate the risks posed by these maximum amounts. The Bureau
believes that this unit of time provides a frame of reference to
consumers that they use more regularly and that is easier to understand
than ``payments'' or high-number values of ``months,'' such as 60
months.
Accordingly, pursuant to its authority under TILA section 105(a),
Dodd-Frank section 1032(a), and RESPA section 19(a), proposed Sec.
1026.37(b)(8) requires the information required to be disclosed by
paragraphs (b)(6) and (7) to be disclosed by stating the number of the
year in which the payment or adjustment occurs, counting from the date
that interest for the regularly scheduled periodic payment begins to
accrue. Proposed comment 37(b)(8)-1 provides examples of how to
disclose dates using the timing rules of proposed Sec. 1026.37(b)(8).
The Bureau believes this disclosure provides a meaningful disclosure of
credit terms, promotes the informed use of credit by consumers, and may
ensure that the features of consumer credit transactions secured by
real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.
37(c) Projected Payments
Statutory Requirements
TILA section 128(a)(6) requires creditors to disclose the number,
amount, and due dates or period of payments scheduled to repay the
total of payments. 15 U.S.C. 1638(a)(6). TILA section 128(b)(2)(C)(ii)
requires the disclosure of certain payment-related information for
closed-end variable-rate transactions, or transactions where the
regular payment may otherwise be variable, that are secured by a
dwelling, including examples of payments. 15 U.S.C. 1638(b)(2)(C)(ii).
Specifically, creditors must provide examples of adjustments to the
regular required payment on the extension of credit based on the change
in the interest rates specified by the contract for such extension of
credit. Id. Among the examples required is an example that reflects the
maximum payment amount
[[Page 51203]]
of the regular required payments on the extension of credit, based on
the maximum interest rate allowed under the contract. Id. TILA section
128(b)(2)(C)(i) also provides that these examples must be in
conspicuous type size and format and that the payment schedule be
labeled ``Payment Schedule: Payments Will Vary Based on Interest Rate
Changes.'' Section 128(b)(2)(C)(ii) requires the Bureau to conduct
consumer testing to determine the appropriate format for providing the
disclosures to consumers so that the disclosures can be easily
understood.
In addition, TILA section 128(a)(16)(A), added to TILA by section
1419 of the Dodd-Frank Act, provides that, for variable-rate
residential mortgage loans for which an escrow account will be
established, the creditor must disclose both the initial monthly
principal and interest payment, and the initial monthly principal and
interest payment including any amount deposited in an escrow account
for the payment of applicable taxes, insurance, and assessments. 15
U.S.C. 1638(a)(16)(A). New TILA section 128(a)(16)(B) also requires
that, for variable-rate residential mortgage loans for which an escrow
account will be established, the creditor disclose the amount of the
fully-indexed monthly payment due under the loan for the payment of
principal and interest, and the fully-indexed monthly payment including
any amount deposited in an escrow account for the payment of applicable
taxes, insurance, and assessments. 15 U.S.C. 1638(a)(16)(B). TILA
section 128(b)(4)(A), added by section 1465 of the Dodd-Frank Act,
provides that, in the case of any consumer credit transaction secured
by a first mortgage on the principal dwelling of the consumer, other
than an open-end credit plan or reverse mortgage, for which an escrow
account has been or will be established, the disclosures required by
TILA section 128(a)(6) must take into account the amount of any monthly
payment to such account, in accordance with section 10(a)(2) of
RESPA.\163\ 15 U.S.C. 1638(b)(4)(A); 12 U.S.C. 2609(a)(2). New TILA
section 128(b)(4)(B) generally requires creditors to take into account
the taxable assessed value of the property during the first year after
consummation, including the value of any improvements constructed or to
be constructed on the property, if known, and the replacement costs of
the property for hazard insurance, when disclosing taxes and insurance
escrows pursuant to TILA section 128(b)(4)(A). 15 U.S.C. 1638(b)(4)(B).
---------------------------------------------------------------------------
\163\ Section 10(a)(2) of RESPA prohibits the lender, over the
life of the escrow account, from requiring the borrower to make
payments to an escrow account that exceed one-twelfth of the total
annual escrow disbursements that the lender reasonably anticipates
paying from the escrow account during the year, plus the amount
necessary to maintain a one-sixth cushion. 12 U.S.C. 2609(a)(2).
---------------------------------------------------------------------------
Current Rules
Current Sec. 1026.18(s) implements the requirements of TILA
sections 128(a)(6) and 128(b)(2)(C) for all closed-end transactions
secured by real property or a dwelling, other than transactions secured
by the consumer's interest in a timeshare plan described in 11 U.S.C.
101(53D). Section 1026.18(s) requires creditors to disclose the
contract interest rate, regular periodic payment, and any balloon
payment. For adjustable-rate or step-rate amortizing mortgages, the
creditor must disclose up to three interest rates and corresponding
periodic payments. If payments are scheduled to increase independent of
an interest-rate adjustment, the creditor must disclose the increased
payment. If a borrower may make one or more payments of interest only,
all payment amounts disclosed must be itemized to show the amount that
will be applied to interest and the amount that will be applied to
principal. Current Sec. 1026.18(s) requires special interest rate and
payment disclosures for loans that permit negative amortization. Also
under current Sec. 1026.18(s), creditors must separately itemize an
estimate of the amount for taxes and insurance, including mortgage
insurance, if the creditor will establish an escrow account for the
payment of such amounts. The Board adopted this requirement pursuant to
its authority under TILA section 105(a), based on consumer testing
which indicated that consumers compare loans based on the monthly
payment amount and that escrow payment information is necessary for
consumers to understand the monthly amount they will pay. MDIA Interim
Rule, 75 FR at 58476-77. Current Sec. 1026.18(s) also requires the
disclosure of total periodic payments. Creditors must provide the
information about interest rates and payments in the form of a table,
and creditors are not permitted to include other, unrelated information
in the table.
Current Sec. 1026.18(s) expands the scope of TILA section
128(b)(2)(C) to all closed-end transactions secured by real property or
a dwelling, other than transactions secured by the consumer's interest
in a timeshare plan, including transactions in which the interest rate
and regular payments do not vary and those that are secured by real
property that does not include a dwelling. The Board adjusted the scope
of this provision pursuant to its authority under TILA section 105(a).
The Board reasoned that providing examples of increased interest rates
and payments will help consumers understand the risks involved in
certain loans, and that consistent disclosure requirements for all
mortgage-secured, closed-end consumer credit transactions, whether or
not they include a dwelling, would ease compliance burden for mortgage
creditors. MDIA Interim Rule, 75 FR at 58473-74. The Board also stated
that applying Sec. 1026.18(s) to transactions where the interest rate
or regular payments do not vary would simplify compliance for creditors
and make it easier for consumers to compare different loan products.
For all other closed-end credit transactions, Sec. 1026.18(g) provides
the rules for disclosing the payment schedule.
The Bureau's Proposal
Pursuant to its authority under TILA section 105(a) and Dodd-Frank
Act sections 1032(a) and 1405(b), the Bureau proposes to incorporate
the requirements of current Sec. 1026.18(s) into new Sec. 1026.37(c),
for closed-end mortgages subject to proposed Sec. 1026.19(e), with
certain adjustments that are outlined below. The Bureau believes that
these requirements are necessary and proper to effectuate the purposes
of TILA by promoting the informed use of credit. Accordingly, proposed
Sec. 1026.37(c) implements the requirements of TILA sections 128(a)(6)
and 128(b)(2)(C), and also implements the requirements of new TILA
sections 128(a)(16) and (b)(4), for closed-end mortgages subject to
proposed Sec. 1026.19(e). For all other closed-end transactions, Sec.
1026.18(g) and (s) would continue to apply.
Like existing Sec. 1026.18(s), proposed Sec. 1026.37(c) requires
creditors to disclose, in a separate table, an itemization of each
separate periodic payment or range of payments required after
consummation under the terms of the legal obligation. Proposed Sec.
1026.37(c) also requires disclosure of an estimate of taxes, insurance,
and assessments and the payments to be made with escrow account funds.
Specifically, the table required by proposed Sec. 1026.37(c) must
contain the projected principal and interest, mortgage insurance,
estimated escrowed taxes and insurance, estimated total monthly
payment, and estimated taxes, insurance, and assessment disclosures,
required by Sec. 1026.37(c)(1) through (4). Pursuant to proposed Sec.
1026.37(o) and form H-24, the table required by
[[Page 51204]]
proposed Sec. 1026.37(c) will appear on the first page of the Loan
Estimate. The Bureau proposes that, as under Sec. 1026.18(s), the
table required by proposed Sec. 1026.37(c) must be disclosed in all
transactions subject to proposed Sec. 1026.19(e), even in transactions
where the interest rate will not vary and those that are secured by
real property that does not include a dwelling. Unlike current Sec.
1026.18(s), the projected payment table required by proposed Sec.
1026.37(c) applies to transactions secured by the consumer's interest
in a timeshare plan but does not apply to transactions secured by a
dwelling that is not real property, for the reasons discussed in the
section-by-section analysis to proposed Sec. 1026.19.
The Bureau proposes to exercise its authority under TILA section
105(a), Dodd-Frank Act 1032(a), and, for residential mortgage loans,
Dodd-Frank Act section 1405(b) to require the information disclosed
pursuant to proposed Sec. 1026.37(c) to appear under the heading
``Projected Payments.'' As discussed above, TILA section
128(b)(2)(C)(i) requires the payment schedule to be labeled ``Payment
Schedule: Payments Will Vary Based on Interest Rate.'' The Bureau
believes that ``Projected Payments'' conveys the same substantive
meaning, in plainer and simpler language, and is a more accurate
heading for the table required by proposed Sec. 1026.37(c) since
payment amounts may vary for reasons other than interest rate, such as
in graduated-payment plans or the termination of mortgage insurance
under applicable law. The heading also performed well in consumer
testing. Using the table under the heading ``Projected Payments,''
participants in the Bureau's consumer testing were able to readily
identify that their monthly payments might change in the future.
Furthermore, the Bureau believes that the Loan Terms table required by
proposed Sec. 1026.37(b) effectively discloses when payments and
interest rate will vary, and that consumers will not benefit from
disclosure of that information in multiple places on the disclosure.
Accordingly, this proposed adjustment promotes the informed use of
credit, improves consumer awareness and understanding of transactions
involving residential mortgage loans, and is in the interest of
consumers and the public, consistent with the purpose of TILA and with
Dodd-Frank Act section 1405(b). In addition, the Bureau believes that
this disclosure would ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances, consistent
with section 1032(a) of the Dodd-Frank Act.
Proposed comment 37(c)-1 provides that, for purposes of proposed
Sec. 1026.37(c), the terms ``adjustable rate,'' ``fixed rate,''
``negative amortization,'' and ``interest-only'' have the meanings
prescribed in Sec. 1026.37(a)(10).
37(c)(1) Periodic Payment or Range of Payments
37(c)(1)(i)
Proposed Sec. 1026.37(c)(1)(i) provides rules regarding the
separate periodic payments or ranges of payments to be disclosed on the
table required by Sec. 1026.37(c). Specifically, proposed Sec.
1026.37(c)(1)(i) provides that the initial periodic payment or range of
payments is a separate periodic payment or range of payments and,
except as otherwise provided in Sec. 1026.37(c)(1)(ii), the following
events require the disclosure of additional separate periodic payments
or ranges of payments: (A) periodic principal and interest payment or
range of such payments may change; (B) a scheduled balloon payment; and
(C) the creditor must automatically terminate mortgage insurance
coverage, or any functional equivalent, under applicable law.
Proposed comments 37(c)(1)(i)-1, 37(c)(1)(i)(A)-1 through -3,
37(c)(1)(i)(B)-1, and 37(c)(1)(i)(C)-1 through -3 provide guidance to
creditors on the events requiring the disclosure of a separate periodic
payment or range of payments. Proposed comment 37(c)(1)(i)-1 clarifies
that, for purposes of Sec. 1026.37(c)(1)(i), the periodic payment is
the regularly scheduled payment of principal and interest, mortgage
insurance, and escrow payments described in Sec. 1026.37(c)(2) without
regard to any final payment that differs from other payments because of
rounding to account for payment amounts including fractions of cents.
Proposed comment 37(c)(1)(i)(A)-1 provides that periodic principal and
interest payments may change when the interest rate, applicable
interest rate caps, required periodic principal and interest payments,
or ranges of such payments may change. Minor payment variations
resulting solely from the fact that months have different numbers of
days are not changes to periodic principal and interest payments. For a
loan that permits negative amortization, proposed comment
37(c)(1)(i)(A)-2 clarifies that periodic principal and interest
payments may change at the time of a scheduled recast of the mortgage
loan and when the consumer must begin making fully amortizing payments
of principal and interest. The comment also provides that the
disclosure should be based on the assumption that the consumer will
make only the minimum payment required under the terms of the legal
obligation, for the maximum amount of time permitted, taking into
account changes to interest rates that may occur under the terms of the
legal obligation, and that the table required by Sec. 1026.37(c)
should reflect any balloon payment that would result from making the
minimum payment required under the terms of the legal obligation. In a
loan that permits payment of only interest for a specified period,
proposed comment 37(c)(1)(i)(A)-3 clarifies that periodic principal and
interest payments may change for purposes of Sec. 1026.37(c)(1)(i)(A)
when the consumer must begin making fully amortizing periodic payments
of principal and interest.
Proposed comment 37(c)(1)(i)(B)-1 states that, for purposes of
Sec. 1026.37(c)(1)(i)(B), whether a balloon payment occurs is
determined pursuant to Sec. 1026.37(b)(5) and its commentary. Although
the existence of a balloon payment is determined pursuant to Sec.
1026.37(b)(5) and its commentary, balloon payment amounts to be
disclosed under Sec. 1026.37(c) are calculated in the same manner as
periodic principal and interest payments under Sec. 1026.37(c). For
example, for a balloon payment amount that can change depending on
previous interest rate adjustments that are based on the value of an
index at the time of the adjustment, the balloon payment amounts are
calculated using the assumptions for minimum and maximum interest rates
described in Sec. 1026.37(c)(1)(iii) and its commentary, and should be
disclosed as a range of payments.
Proposed comments 37(c)(1)(i)(C)-1 through -3 provide guidance to
creditors regarding the disclosure of mortgage insurance. Proposed
comment 37(c)(1)(i)(C)-1 states that ``mortgage insurance'' means
insurance against the nonpayment of, or default on, an individual
mortgage, and that, for purposes of proposed Sec. 1026.37(c),
``mortgage insurance or any functional equivalent'' includes any
mortgage guarantee that provides coverage similar to mortgage insurance
(such as a United States Department of Veterans Affairs or United
States Department of Agriculture guarantee), even if not technically
considered insurance under State or other applicable law. The Bureau
[[Page 51205]]
understands that some governmental loan programs impose an annual
guarantee fee, and that creditors typically collect a monthly escrow
for the payment of such amounts. Current Sec. 1026.18(s) requires
creditors to disclose whether mortgage insurance is included in monthly
escrow payments, but industry uncertainty exists as to whether it is
permissible to identify such guarantees as mortgage insurance on the
disclosure required by Sec. 1026.18(s). Although the Bureau recognizes
that such guarantees are legally distinguishable from mortgage
insurance, they are functionally very similar. Accordingly, proposed
comment 37(c)(1)(i)(C)-1 clarifies that creditors should disclose any
mortgage guarantee that provides coverage similar to mortgage
insurance, even if not considered insurance under State or other
applicable law, as mortgage insurance on the disclosure required by
Sec. 1026.37(c). Proposed comment 37(c)(1)(i)(C)-1 is consistent with
the treatment of mortgage guarantee fees under proposed comment
18(s)(3)(i)(C)-2.
Proposed comment 37(c)(1)(i)(C)-2 gives guidance to creditors on
the calculation and termination of mortgage insurance premiums by
providing that, for purposes of proposed Sec. 1026.37(c)(1)(i)(C),
mortgage insurance premiums should be calculated based on the declining
principal balance that will occur as a result of changes to the
interest rate and payment amounts, assuming the fully-indexed rate at
consummation, taking into account any introductory rates. Finally,
proposed comment 37(c)(1)(i)(C)-3 clarifies that the table required by
proposed Sec. 1026.37(c) reflects the consumer's mortgage insurance
payments until the date on which the creditor must automatically
terminate coverage under applicable law, even though the consumer may
have a right to request that the insurance be cancelled earlier. Unlike
termination of mortgage insurance, a subsequent decline in the
consumer's mortgage insurance premiums is not, by itself, an event that
requires the disclosure of additional separate periodic payments or
ranges of payments in the table required by Sec. 1026.37(c). For
example, some mortgage insurance programs annually adjust premiums
based on the declining loan balance. Such annual adjustment to the
amount of premiums would not require a separate disclosure of a
periodic payment or range payments.
37(c)(1)(ii)
Proposed Sec. 1026.37(c)(1)(ii) contains special rules for the
disclosure of separate periodic payments or ranges of payments
described in Sec. 1026.37(c)(1)(i). Specifically, proposed Sec.
1026.37(c)(1)(ii) provides that the table required by Sec. 1026.37(c)
shall not disclose more than four separate periodic payments or ranges
of payments. For all events requiring disclosure of additional separate
periodic payments or ranges of payments described in Sec.
1026.37(c)(1)(i) after the second to occur, the separate periodic
payments or ranges of payments shall be disclosed as a single range of
payments, subject to the special rules listed in proposed Sec.
1026.37(c)(1)(ii)(A) through (C).
Proposed Sec. 1026.37(c)(1)(ii)(A) contains a special rule for
final balloon payments. That section would require that a final balloon
payment shall always be disclosed as a separate periodic payment or
range of payments and that, if a final balloon payment is disclosed, no
more than three other separate periodic payments or ranges of payments
are disclosed. Proposed comment 37(c)(1)(ii)(A)-1 clarifies that Sec.
1026.37(c)(1)(ii)(A) is an exception to the general rule in Sec.
1026.37(c)(1)(ii), and requires that a balloon payment that is
scheduled as a final payment under the terms of the legal obligation is
always disclosed as a separate periodic payment or range of payments.
Balloon payments that are not final payments, such as a balloon payment
due at the scheduled recast of a loan that permits negative
amortization, are disclosed pursuant to the general rule in Sec.
1026.37(c)(1)(ii). Proposed Sec. 1026.37(c)(1)(ii)(B) provides a
special rule for disclosure of mortgage insurance premiums, requiring
that the automatic termination of mortgage insurance, or any functional
equivalent, under applicable law shall be disclosed as a separate
periodic payment or range of payments only if the total number of
events that require disclosure of additional separate periodic payments
or ranges of payments described in Sec. 1026.37(c)(1)(i), other than
the termination of mortgage insurance or any functional equivalent,
does not exceed two.
Finally, proposed Sec. 1026.37(c)(1)(ii)(C) provides a special
rule for events that require additional separate periodic payments or
ranges of payments that occur during the same year. Under proposed
Sec. 1026.37(c)(1)(ii)(C), if changes to periodic principal and
interest payments described in Sec. 1026.37(c)(1)(i)(A) would require
more than one separate disclosure during a single year, such periodic
payments must be disclosed as a single range of payments.
37(c)(1)(iii)
Proposed Sec. 1026.37(c)(1)(iii) provides rules for the disclosure
of ranges of payments. A range of payments is disclosed when the
periodic principal and interest payment may adjust based on index rates
at the time an interest rate adjustment may occur or multiple events
are combined in a range of payments pursuant to proposed Sec.
1026.37(c)(1)(ii). When a range of payments is required, the creditor
must disclose the minimum and maximum possible payment amount for both
the principal and interest payment under proposed Sec.
1026.37(c)(2)(i) and the total periodic payment under proposed Sec.
1026.37(c)(2)(iv). In the case of an interest rate adjustment, the
maximum payment amounts are determined by assuming that the interest
rate in effect throughout the loan term is the maximum possible
interest, and the minimum payment amounts are determined by assuming
that the interest rate in effect throughout the loan term is the
minimum possible interest rate.
Proposed comment 37(c)(1)(iii)-1 clarifies that a range of payments
must be disclosed when the periodic principal and interest payments are
not known at the time the disclosure is provided because they are
subject to changes based on index rates at the time of an interest rate
adjustment or when multiple events are disclosed as a range of payments
pursuant to Sec. 1026.37(c)(1)(ii). For such transactions, proposed
Sec. 1026.37(c)(3)(iii) requires the creditor to disclose both the
minimum and maximum periodic principal and interest payments, expressed
as a range. In disclosing the maximum possible interest rate for
purposes of Sec. 1026.37(c), the creditor assumes that the interest
rate will rise as rapidly as possible after consummation, taking into
account the terms of the legal obligation, including any applicable
caps on interest rate adjustments and lifetime interest rate cap. For a
loan with no lifetime interest rate cap, the maximum rate is determined
by reference to other applicable laws, such as State usury law. In
disclosing the minimum possible interest rate for purposes of Sec.
1026.37(c), the creditor assumes that the interest rate will decrease
as rapidly possible after consummation, taking into account any
introductory rates, caps on interest rate adjustments, and lifetime
interest rate floor. For an adjustable rate mortgage based on an index
that has no lifetime interest rate floor, the minimum interest rate is
equal to the margin. Proposed comment
[[Page 51206]]
37(c)(1)(iii)-2 clarifies that, when a range of payments is required,
the amount required to be disclosed for mortgage insurance premiums
pursuant to Sec. 1026.37(c)(2)(ii) and the amount payable into escrow
pursuant to Sec. 1026.37(c)(2)(iii) shall not be disclosed as a range.
Proposed comment 37(c)(1)(iii)-3 provides guidance to creditors on the
disclosure of ranges of payments in adjustable rate mortgages.
37(c)(2) Itemization
Proposed Sec. 1026.37(c)(2) requires that each separate periodic
payment or range of payments included in the table required by proposed
Sec. 1026.37(c) must be itemized to include the following: (1) The
amount payable for principal and interest, labeled as ``Principal &
Interest,'' including the term ``only interest'' if the payment or
range of payments includes any interest-only payment; (2) the maximum
amount payable for mortgage insurance premiums corresponding to the
principal and interest payment disclosed pursuant to Sec.
1026.37(c)(2)(i), labeled ``Mortgage Insurance''; (3) the amount
payable into an escrow account to pay for some or all of the charges
described in Sec. 1026.37(c)(4)(ii)(A) through (E), labeled
``Estimated Escrow,'' including a statement that the amount disclosed
can increase over time; and (4) the total periodic payment, calculated
as the sum of the amounts disclosed pursuant to Sec. 1026.37(c)(2)(i)
through (iii), labeled ``Total Monthly Payment.'' As discussed in the
Kleimann Testing Report, the Bureau's consumer testing indicates that
consumers understand the table and can identify the components of their
total monthly payment using this itemization of payments.
Proposed comment 37(c)(2)(ii)-1 clarifies that mortgage insurance
payments should be reflected on the disclosure required by Sec.
1026.37(c) even if no escrow account is established for the payment of
mortgage insurance premiums. If the consumer is not required to
purchase mortgage insurance, the creditor discloses the mortgage
insurance premium as ``0''. Proposed comment 37(c)(2)(ii)-2 clarifies
that the creditor must disclose mortgage insurance pursuant to Sec.
1026.37(c)(2)(ii) on the same periodic basis that payments for
principal and interest are disclosed pursuant to Sec.
1026.37(c)(2)(i), even if mortgage insurance premiums are actually paid
on some other periodic basis.
The Bureau proposes to require creditors to disclose the amount of
estimated escrow payments pursuant to its authority under TILA sections
128(a)(16), 128(b)(4)(A), and 105(a), Dodd-Frank Act section 1032(a),
and, for residential mortgage loans, Dodd-Frank Act section 1405(b). As
discussed above, TILA section 128(a)(16) requires that, for variable-
rate residential mortgage loans for which an escrow account will be
established, the creditor must disclose the initial total monthly
payment, including escrow payments for taxes and insurance. The Bureau
proposes to modify this requirement to cover all transactions subject
to proposed Sec. 1026.19(e) for which an escrow account will be
established, including fixed-rate loans. Additionally, TILA section
128(b)(4)(A) requires that, for any consumer credit transaction secured
by a first lien on the principal dwelling of the consumer for which an
escrow account will be established, the creditor must take into account
escrow payments when making the disclosures required by TILA section
128(a)(6). The Bureau also proposes to modify the scope of this
requirement to cover all transactions subject to proposed Sec.
1026.19(e) for which an escrow account will be established, pursuant to
its authority under TILA sections 128(a)(16), 128(b)(4)(A), and 105(a),
Dodd-Frank Act section 1032(a), and, for residential mortgage loans,
Dodd-Frank Act section 1405(b). These modifications are consistent with
the purposes of TILA, as they may promote the informed use of credit by
allowing consumers to more readily compare loans. Further, applying a
single disclosure rule to all transactions subject to proposed Sec.
1026.19(e) may ease compliance burden for creditors. Accordingly, these
modifications will improve consumer awareness and understanding of
residential mortgage loans and are in the interest of consumers and the
public, consistent with Dodd-Frank Act section 1405(b). In addition,
consistent with section 1032(a) of the Dodd-Frank Act, this disclosure
would ensure that the features of consumer credit transactions secured
by real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.
Further, the Bureau proposes to require creditors to disclose the
maximum periodic payment for mortgage insurance premiums corresponding
to the periodic principal and interest payment disclosed pursuant to
Sec. 1026.37(c)(2)(i), separately from other escrowed amounts,
pursuant to its authority under TILA section 105(a), Dodd-Frank Act
section 1032(a), and, for residential mortgage loans, Dodd-Frank Act
section 1405(b), even if no escrow account is established for the
payment of such amounts. Current Sec. 1026.18(s) requires creditors to
include mortgage insurance in the disclosure of the amounts required to
be paid into escrow. However, Sec. 1026.18(s) does not require
creditors to separately disclose payments for mortgage insurance. The
Bureau believes that consumers would benefit from disclosure of the
periodic amount of mortgage insurance payments required by the
creditor, and believes that consumers would benefit from the disclosure
of any required mortgage insurance payments even if no escrow account
for the payment of such amounts will be established. Requiring such
disclosure in all cases may facilitate comparison between loans and
improve overall understanding of credit terms. Accordingly, the Bureau
believes this requirement promotes the informed use of credit, will
improve consumer awareness and understanding of transactions involving
residential mortgage loans, and is in the interest of consumers and the
public, consistent with the purpose of TILA and with Dodd-Frank Act
section 1405(b). Further, consistent with section 1032(a) of the Dodd-
Frank Act, this disclosure would ensure that the features of consumer
credit transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances.
In addition, the Bureau understands that some mortgage insurance
plans are structured such that periodic mortgage insurance payments
decrease over time. Accordingly, the Bureau proposes to require
creditors to disclose the maximum amount payable for mortgage insurance
premiums, or any functional equivalent, corresponding to the periodic
principal and interest payment disclosed pursuant to Sec.
1026.37(c)(2)(i). The Bureau believes this disclosure will enhance
consumer understanding of and facilitate comparison between loans by
more accurately reflecting the amount of mortgage insurance payments
over time.
Proposed comment 37(c)(2)(iii)-1 clarifies that the disclosure of
taxes and insurance described in Sec. 1026.37(c)(2)(iii) is required
only if the creditor will establish an escrow account for the payment
of the amounts described in Sec. 1026.37(c)(4)(ii)(A) through (E),
consistent with TILA
[[Page 51207]]
section 128(b)(4)(A) and current Sec. 1026.18(s).
37(c)(3) Subheadings
Proposed Sec. 1026.37(c)(3)(i) provides that the labels required
pursuant to Sec. 1026.37(c)(2) must be listed under the subheading
``Payment Calculation.'' Proposed Sec. 1026.37(c)(3)(ii) provides that
each separate, itemized periodic payment or range of payments to be
disclosed under Sec. 1026.37(c) must be disclosed under a subheading
that states the number of years of the loan during which that payment
or range of payments will apply. The subheadings must be stated in a
sequence of whole years from the date that the first such payment is
due. Proposed comment 37(c)(3)(ii)-1 provides additional guidance on
the disclosure of the number of years of the loan during which the
payment or range of payments will apply, and proposed comment
37(c)(3)(ii)-2 provides guidance on disclosure of the years of the loan
for transactions with variable terms, such as transactions where the
loan term may increase based on an adjustment of the interest rate.
37(c)(4) Taxes, Insurance, and Assessments
As discussed above, the Bureau is proposing to require creditors in
transactions subject to proposed Sec. 1026.19(e) to disclose estimated
payments to escrow accounts pursuant to its authority under TILA
sections 128(a)(16), 128(b)(4)(A), and 105(a), Dodd-Frank Act section
1032(a), and, for residential mortgage loans, Dodd-Frank Act section
1405(b). The Bureau also proposes Sec. 1026.37(c)(4) pursuant to this
authority. Proposed Sec. 1026.37(c)(4)(i) provides that creditors must
disclose the label ``Estimated Taxes, Insurance & Assessments.''
Proposed Sec. 1026.37(c)(4)(ii) requires creditors to disclose the sum
of property taxes, mortgage-related insurance premiums required by the
creditor other than amounts payable for mortgage insurance premiums,
homeowner's association, condominium or cooperative fees, ground rent
or leasehold payments, and special assessments, as applicable,
expressed as a monthly amount. The creditor must disclose this amount
even if no escrow account for the payment of some or any such charges
will be established. Proposed comments 37(c)(4)(ii)-1 and -2 provide
guidance to creditors on the meaning of mortgage-related insurance
premiums and special assessments.
Proposed Sec. 1026.37(c)(4)(iii) requires creditors to state that
the amount disclosed pursuant to Sec. 1026.37(c)(4)(ii) can increase
over time. Proposed Sec. 1026.37(c)(4)(iv) requires creditors to state
whether the amount disclosed pursuant to Sec. 1026.37(c)(4)(ii)
includes payments for property taxes, hazard insurance, and other
amounts described in Sec. 1026.37(c)(4)(ii), along with a description
of any such amounts, and an indication of whether such amounts will be
paid by the creditor using escrow account funds. Proposed Sec.
1026.37(c)(4)(v) requires creditors to provide a statement that the
consumer must pay separately any amounts described in Sec.
1026.37(c)(4)(ii) that are not paid by the creditor using escrow funds.
Finally, proposed Sec. 1026.37(c)(4)(vi) requires creditors to provide
a reference to the information disclosed pursuant to Sec.
1026.37(g)(3).
Under proposed Sec. 1026.37(c)(4), the disclosure of estimated
taxes, insurance, and assessments is required even where no escrow
account will be established for the payment some or any such amounts.
The Bureau proposes this requirement pursuant to its authority under
TILA section 105(a), Dodd-Frank Act section 1032(a), and, for
residential mortgage loans, Dodd-Frank Act section 1405(b). As
discussed in the Kleimann Testing Report, consumer testing indicates
that consumers view the total monthly payment amount as a key piece of
information and look for this amount when shopping for mortgages. Even
when no escrow account is established for the payment of taxes and
insurance, this is an important measure of the consumer's ability to
afford the transaction. For this reason, the Bureau believes that
consumers would benefit from the disclosure of the amounts that will
required to be paid for taxes, insurance, and assessments, even if no
escrow account will be established for the payment of such amounts.
Absent such a disclosure, consumers may not fully comprehend the cost
of their home loan on a periodic basis, and may not be as readily able
to compare credit terms and make an informed decision about whether to
proceed with the transaction. Accordingly, the Bureau believes this
modification is consistent with the purpose of TILA to promote the
informed use of credit, and will improve consumer awareness and
understanding of residential mortgage loans and is in the interest of
consumers and the public, consistent with Dodd-Frank Act section
1405(b). In addition, consistent with section 1032(a) of the Dodd-Frank
Act, this disclosure would ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances.
37(c)(5) Calculation of Taxes and Insurance
As previously discussed, section 1465 of the Dodd-Frank Act added
to TILA new section 128(b)(4)(A), which provides that, in the case of
any consumer credit transaction secured by a first mortgage on the
principal dwelling of the consumer, other than an open-end credit plan
or reverse mortgage, for which an escrow account has been or will be
established in connection with the transaction for the payment of
property taxes, homeowner's (also referred to and including hazard) and
flood insurance premiums, as applicable, or other periodic payments
with respect to the property, the disclosures required by TILA section
128(a)(6) must take into account the amount of any monthly payment to
such account, in accordance with section 10(a)(2) of RESPA. In
addition, new TILA section 128(b)(4)(B) requires that the amount taken
into account under TILA section 128(b)(4)(A) for the payment of
property taxes, hazard or flood insurance premiums, or other periodic
payments or premiums with respect to the property shall reflect the
taxable assessed value of the real property securing the transaction
after consummation of the transaction. That amount must include the
value of any improvements on the property or to be constructed on the
property, if known, even if such construction costs are not financed
from the proceeds of the transaction, and the replacement costs of the
property for hazard insurance, in the initial year after the
transaction.
Pursuant to the Bureau's implementation authority under TILA
section 105(a), proposed Sec. 1026.37(c)(5) implements this
requirement for transactions subject to Sec. 1026.19(e) and requires
that the estimated escrow and estimated taxes, insurance, and
assessments disclosures required pursuant to Sec. 1026.37(c)(2)(iii)
and (4)(ii), respectively, reflect (1) the taxable assessed value of
the real property securing the transaction after consummation,
including the value of any improvements on the property or to be
constructed on the property, whether or not such construction will be
financed from the proceeds of the transaction, if known, for property
taxes; and (2) the replacement costs of the property during the initial
year after the transaction, for hazard and flood insurance.
[[Page 51208]]
Pursuant to its authority under TILA section 105(a) and Dodd-Frank
Act sections 1032(a) and 1405(b), the Bureau proposes to expand the
requirements of TILA section 128(b)(4)(A) and (B) to cover all
transactions subject to proposed Sec. 1026.19(e), including
transactions where no escrow account will be established for the
payment of property taxes or hazard insurance, transactions that are
secured by real property that does not include the principal dwelling
of the consumer, and transactions secured by subordinate liens. These
modifications appear to be consistent with the purposes of TILA, as
they may promote the informed use of credit by allowing consumers to
more readily compare loans. Further, applying a single disclosure rule
to all transactions subject to proposed Sec. 1026.19(e) may ease
compliance burden for creditors. Accordingly, these modifications will
improve consumer awareness and understanding of residential mortgage
loans and are in the interest of consumers and the public, consistent
with Dodd-Frank Act section 1405(b). In addition, consistent with
section 1032(a) of the Dodd-Frank Act, the proposed disclosure would
ensure that the features of consumer credit transactions secured by
real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.
37(d) Cash to Close
Pursuant to its authority under TILA section 105(a) and Dodd-Frank
section 1032(a), the Bureau proposes to require creditors to provide
the estimated total closing costs imposed upon the consumer and the
estimated amount of cash needed at consummation from the consumer. This
disclosure will effectuate the purposes of TILA by promoting the
informed use of credit and will ensure the features of the mortgage
transaction are fully, accurately and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the mortgage transaction, in light
of the facts and circumstances, because it will indicate to the
consumer the amount the consumer will have to pay at consummation of
the credit transaction and closing of the real estate transaction.
Accordingly, proposed Sec. 1026.37(d) requires the disclosure of an
estimate of the cash needed from the consumer at consummation of the
transaction, with a breakdown of the amounts of loan costs and other
costs associated with the transaction.
Under Sec. 1026.37(d)(1), the dollar amount due from the consumer
is the same amount as calculated in accordance with proposed Sec.
1026.37(h)(4) and is disclosed under the heading of ``Cash to Close''
and labeled ``Estimated Cash to Close.'' The total dollar amount of the
loan costs to be paid by the consumer at closing as calculated under
proposed Sec. 1026.37(f)(4) is disclosed under proposed Sec.
1026.37(d)(2). The total dollar amount of the other costs to be paid by
the consumer at closing as calculated under proposed Sec.
1026.37(g)(5) is disclosed under proposed Sec. 1026.37(d)(3). The
amount of lender credits disclosed under Sec. 1026.37(g)(6)(ii) is
disclosed under Sec. 1026.37(d)(4). The sum of the amounts disclosed
under proposed Sec. 1026.37(d)(2), through 1026.37(d)(4) is disclosed
with a description of ``Closing Costs'' under Sec. 1026.37(d)(5). A
statement directing the consumer to refer to the location of the Loan
Estimate that contains the tables required under Sec. 1026.37(f) and
(g) is required under Sec. 1026.37(d)(6).
37(e) Web Site Reference
Appendix C to Regulation X includes a statement in the RESPA GFE
that directs consumers to HUD's Web site and other sources of
additional information, stating the following, ``For more information,
see HUD's Special Information Booklet on settlement charges, your
Truth-in-Lending Disclosures, and other consumer information at
www.hud.gov/respa.'' Regulation Z does not contain a similar provision.
The Bureau proposes to use its authority under TILA section 105(a),
RESPA section 19(a), and Dodd-Frank Act section 1032(a) to require
disclosure of the Bureau's Web site in proposed Sec. 1026.37(e). The
Bureau believes that a disclosure in the Loan Estimate directing
consumers to additional information and tools on its Web site may help
consumers understand the mortgage process and the various loan products
in the market, and consequently better understand their loan
transaction and make informed decisions about whether to enter into a
loan transaction or which loan product best meets their needs.
Accordingly, this disclosure will effectuate the purposes of TILA and
RESPA by promoting the informed use of credit and more effective
advance notice of settlement costs, consistent with TILA section 105(a)
and RESPA section 19(a), and will ensure that the features of the
mortgage transactions are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to better understand
the costs, benefits, and risks associated with mortgage transactions,
in light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a).
Therefore, proposed Sec. 1026.37(e) requires creditors to include
a statement notifying the consumer that additional information and
tools regarding mortgage loans may be found at the Bureau's Web site.
Proposed Sec. 1026.37(e) also requires a reference to the link/uniform
resource locator (URL) address for the Bureau's Web site.
37(f) Closing Cost Details; Loan Costs
Under section 5(c) of RESPA creditors must provide mortgage loan
applicants with a good faith estimate of the amount or range of charges
for specific settlement services the applicant is likely to incur in
connection with the consummation of the loan. 12 U.S.C. 2604(c).
Section 1024.7 of Regulation X implements this mandate by requiring
creditors and mortgage brokers to provide the RESPA GFE, which must be
completed in accordance with the instructions in appendix C to
Regulation X. Appendix C sets out specific instructions for the
information that must be disclosed on the RESPA GFE, including the loan
costs that must be included and how to identify those costs on the
disclosure.
As discussed above, Dodd-Frank Act section 1032(f) requires the
Bureau to combine these RESPA disclosures with the disclosures required
by TILA. In addition to existing TILA disclosure requirements, section
1419 of the Dodd-Frank Act amended TILA section 128(a) to require, in
the case of a residential mortgage loan, disclosure of the aggregate
amount of settlement charges for all settlement services provided in
connection with the loan and the aggregate amount of other fees or
required payments in connection with the loan. 15 U.S.C. 1638(a)(17).
Pursuant to its authority under TILA section 105(a), RESPA section
19(a), and Dodd-Frank Act sections 1032(f) and, for residential
mortgage loans, 1405(b), the Bureau proposes to require creditors to
provide the loan costs and other costs imposed upon the consumer in
tables as part of the integrated Loan Estimate. Proposed Sec.
1026.37(f) and (g) implement these early disclosure requirements of
TILA and RESPA by setting out details relating to the costs for
consummating the mortgage loan, including loan costs and other costs.
Based on its consumer testing, the Bureau believes that early
disclosure of estimated loan costs and other costs, as set forth in
proposed
[[Page 51209]]
Sec. 1026.37(f) and (g), will improve consumer understanding of the
credit and property transactions. The Bureau believes that these
disclosures will effectuate the purpose of TILA by promoting the
informed use of credit and assuring a meaningful disclosure to
consumers. The Bureau believes that the disclosures will also satisfy
the RESPA requirement to provide a consumer with a good faith estimate
of the amount or range of charges for specific settlement services the
consumer is likely to incur in connection with the closing. In
addition, these disclosures will ensure that the features of the
mortgage transactions are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the mortgage transaction, in
light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a).
In particular, proposed Sec. 1026.37(f) requires the creditor to
itemize, as ``Loan Costs,'' its fees and other charges to the consumer
for extending the credit or that compensate a mortgage broker for
originating the transaction. The creditor must disclose the individual
itemized charges, along with subtotals for prescribed categories of
those itemized charges, and the total of all such itemized charges. In
general, these charges are currently required to be disclosed--as
itemized or aggregate charges and amounts--on the RESPA GFE, the RESPA
settlement statement, or both.\164\
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\164\ On June 20, 2012, HUD's Office of Policy Development and
Research and the Urban Institute released a study entitled ``What
Explains Variation in Title Charges? A Study of Five Large
Markets,'' http://www.huduser.org/portal/publications/hsgfin/title_charges_2012.html, based on HUD-1 settlement statements of FHA
loans from 2001. See p. 13. The study discusses, among other things,
that an observed positive association between the number of items
listed and net service fees was statistically significant after
taking home prices into account. See p. 29. However, the report
could not determine whether this indicates additional value to the
consumer or additional costs to the settlement agent due to
limitations of the data. Id. The study states that ``there is no way
to ascertain from the data whether an itemized cost is an attempt to
confuse consumers or the provision of an additional, valuable
service that the homebuyer is willing to pay for. Both
interpretations are plausible.'' Id. Under this proposal,
itemization is permitted on the Loan Estimate, but highly visible
subtotals in gray shading and bold font are displayed above the
itemized charges for specific categories of costs. Based on its
consumer testing, the Bureau believes the highly visible subtotals,
along with the highly visible ``Services You Can Shop For''
subcategory of Closing Costs on the Loan Estimate, will inform
consumers that they can shop for their own service providers and
provide them with, along with the itemization, readily comparable
cost categories to shop between creditors and service providers.
Such shopping for settlement service providers, according to the
study, could provide ``significant benefits to consumers.'' See p.
28. The study suggests that future research using more detailed data
on costs incurred by settlement agents would be valuable. See p. 29.
The Bureau welcomes additional comments and studies on the issue of
itemization of costs on the Loan Estimate and Closing Disclosure
during the comment period.
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Proposed comment 37(f)-1 explains that the items disclosed as Loan
Costs pursuant to Sec. 1026.37(f) are those that the creditor or
mortgage broker require for consummation. Proposed comment 37(f)-2
provides a cross-reference to the commentary under Sec.
1026.19(e)(1)(ii), which discusses the requirements and
responsibilities of mortgage brokers that provide the disclosures
required under Sec. 1026.19(e) and Sec. 1026.37(f).
37(f)(1) Origination Charges
Under proposed Sec. 1026.37(f)(1), charges included on the Loan
Estimate under the subheading of ``Origination Charges'' are those that
the consumer will pay to the creditor and any loan originator for
originating and extending the credit. The points that the consumer will
pay to the creditor to reduce the interest rate are specifically
identified and itemized as the first item under this subheading.
As discussed above in part II.F, the Bureau currently is engaged in
six other rulemakings that relate to mortgage credit and intends that
the rulemakings function collectively as a whole. Accordingly, the
Bureau may have to modify aspects of this proposed rule not only in
response to public comment on this proposal, but also to maintain
consistency with final determinations made after opportunity for public
comment in the other, related rulemakings. For example, Dodd-Frank Act
section 1403 amended TILA section 129B(c)(2) to prohibit an origination
fee or charge that is paid to a mortgage originator by any person other
than the consumer, unless the mortgage originator does not receive
compensation directly from the consumer and the consumer does not make
an upfront payment of discount points, origination points, or fees
(other than certain third-party fees). 15 U.S.C. 1639b(c)(2)(B).
Amended TILA section 129B(c)(2) also provides the Bureau with the
authority to waive or create exemptions from this prohibition with
respect to the clause against the consumer making an upfront payment of
discount points, origination points, or fees, where doing so is in the
interest of consumers and in the public interest. Id. As discussed in
the materials distributed for the Small Business Review Panel convened
for the Residential Mortgage Loan Origination Standards rulemaking
implementing amended TILA section 129B(c)(2), the Bureau is considering
exercising its waiver or exemption authority in that rulemaking.\165\
The Bureau will coordinate these rulemakings and, if applicable and
appropriate, will modify the disclosure of origination charges under
Sec. 1026.37(f)(1) for consistency with the final rule implementing
amended TILA section 129B(c)(2). The Bureau invites comment on how, in
light of amended TILA section 129B(c)(2), the Bureau should refine or
modify the way in which origination charges are disclosed under
proposed Sec. 1026.37(f)(1). The public will also have the opportunity
to comment on the Bureau's implementation of amended TILA section
129B(c)(2) when a proposed rule is published later this summer. The
Bureau expects the comment period for the proposal set forth in this
notice will still be open at that time.
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\165\ Small Business Review Panel for Residential Mortgage Loan
Origination Standards Rulemaking: Outline of Proposals Under
Consideration and Alternatives Considered (May 19, 2012), available
at http://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf.
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TILA section 128(a)(18), as added by Dodd-Frank Act section 1419,
requires the creditor to disclose, for residential mortgage loans, the
aggregate amount of fees paid to the mortgage originator in connection
with the loan, the amount of such fees paid directly by the consumer,
and any additional amount received by the originator from the creditor.
In the discussion of proposed Sec. 1026.37(l) below, the Bureau notes
that research regarding consumer comprehension and behavior and the
results of the Bureau's consumer testing suggest that an effective
disclosure regime minimizes the risk of consumer distraction and
information overload by providing only information that will assist
most consumers. The Bureau has evaluated the usefulness to consumers
and others at early stages of the loan process of the disclosures
required by TILA section 128(a)(18), as added by Dodd-Frank Act section
1419. Based on that evaluation, and as discussed further below, the
Bureau is proposing to use its authority under TILA section 105(a) and
(f), RESPA section 19(a), and, for residential mortgage loans, Dodd-
Frank Act section 1405(b), to exempt transactions subject to proposed
Sec. 1026.19(e) from certain of the itemized disclosures required by
TILA section 128(a)(18). In particular, for transactions subject to
proposed Sec. 1026.19(e), proposed Sec. 1026.37(f)(1) requires the
creditor to disclose the amounts of origination fees paid by the
consumer to creditors and loan
[[Page 51210]]
originators in connection with the loan, but not any amounts received
by a loan originator from the creditor. However, as discussed below
with respect to proposed Sec. 1026.38(f)(1), the full disclosure
required by TILA section 128(a)(18) is included in the disclosure
requirements for transactions subject to proposed Sec. 1026.19(f). In
other words, although certain TILA section 128(a)(18) disclosures would
not be included in the Loan Estimate, they would be provided in the
Closing Disclosure.
The RESPA GFE currently required by Regulation X aggregates all
compensation paid to all loan originators and includes a separate item
that reflects as a ``credit'' to the consumer fees received by mortgage
brokers from the creditor rather than the consumer. A major goal of the
RESPA GFE disclosure requirements was to provide consumers with a clear
disclosure of any rate-based payments being made by creditors to
mortgage brokers who may be working with the consumer. Regulation X
provides generally that lender and mortgage broker origination charges
are to be included on page 2 of the RESPA GFE, in Block 1 (``Our
origination charge''), Block 2 (``Your credit or charge (points) for
the specific interest rate chosen''), and Line A (Your Adjusted
Origination Charges''). See 12 CFR part 1024, appendix C (instructions
for ``Your Adjusted Origination Charges''). Under the disclosure
requirements in Regulation X, all charges for services related to the
creation of the mortgage loan are to be included on the RESPA GFE in
the single amount stated in Block 1 and the single amount in Block 2,
as applicable. The RESPA GFE disclosure requirements prohibit creditors
and mortgage brokers from charging any fees for getting the loan that
are in addition to the amounts included in Blocks 1 and 2. Id.
(instructions for ``Block 1'').
The requirements related to the disclosures in Blocks 1 and 2 of
the GFE have been a source of uncertainty for creditors, mortgage
brokers, and consumers. HUD provided informal guidance to address some
of the uncertainty in a number of its HUD RESPA FAQs and HUD RESPA
Roundups, much of which involved where and how to disclose compensation
paid directly and indirectly to mortgage brokers.
In 2010, subsequent to the issuance of HUD's 2008 RESPA Final Rule,
the Board established by regulation in Sec. 1026.36 of Regulation Z
restrictions on the compensation of loan originators, including
mortgage brokers.\166\ The Board adopted these restrictions only after
concluding that disclosure of creditor-paid compensation did not
provide sufficient protection for consumers.\167\
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\166\ 75 FR 58509 (Sept. 24, 2010) (Board's 2010 Compensation
Final Rule).
\167\ The Board's 2010 Compensation Final Rule discussed the
history of efforts by the Board to address concerns regarding
consumers' understanding of fees received by mortgage brokers from
creditors. Before issuing that final rule, the Board considered
proposed disclosures of such compensation, but had withdrawn the
proposed disclosures because of concern that they could confuse
consumers and undermine their decisionmaking rather than improve it.
75 FR at 58511. A 2008 study referenced in the Board's 2010
Compensation Final Rule indicated additional disclosures may not
help consumers understand and avoid financial incentives for loan
originators that may be contrary to consumer interests. Id. The
study found that consumers were confused by, and in some cases did
not appropriately apply, the information provided in disclosures
about mortgage broker compensation arrangements. Macro
International, Consumer Testing of Mortgage Broker Disclosures (July
10, 2008), available at http://www.federalreserve.gov/newsevents/press/bcreg/20080714regzconstest.pdf.
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Section 1403 of the Dodd-Frank Act codified similar restrictions.
15 U.S.C. 1639b(c). As a result of these additional consumer
protections and based on consumer testing, the Bureau believes that
consumers may not benefit from any additional disclosure of rate-based
compensation when shopping for and considering the costs of a mortgage
loan. Therefore, in proposed Sec. 1026.37(f)(1), the Bureau proposes
to eliminate the separate GFE Blocks 1 and 2 disclosures, thereby
eliminating the need to follow different instructions for loans
involving a mortgage broker than for loans originated without one.
Consistent with Dodd-Frank section 1405(b), disclosure of only the
direct charges the consumer will pay will reduce both consumer
confusion and the possibility of information overload, improve consumer
understanding of the Loan Estimate form, and make it easier for
creditors or mortgage brokers to complete the estimates of closing
costs, which is in the interest of consumers and in the public
interest. In addition, consistent with TILA section 105(a) and RESPA
section 19(a), the proposed disclosure will effectuate the purposes of
TILA and RESPA by promoting the informed use of credit and more
effective disclosure of settlement costs by allowing consumers to focus
only on the amounts they will pay. Furthermore, consistent with section
1032(a) of the Dodd-Frank Act, proposed Sec. 1026.37(f) would ensure
that the origination costs for consumer credit transactions secured by
real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.
As noted above, Sec. 1026.37(f) is also proposed pursuant to the
Bureau's exemption authority under TILA section 105(f). The Bureau has
considered the factors in TILA section 105(f) and believes that, for
the reasons discussed above, an exception is appropriate under that
provision. Specifically, the Bureau believes that the proposed
exemption is appropriate for all affected borrowers, regardless of
their other financial arrangements and financial sophistication and the
importance of the loan to them. Similarly, the Bureau believes that the
proposed exemption is appropriate for all affected loans, regardless of
the amount of the loan and whether the loan is secured by the principal
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers. Accordingly, the Bureau is proposing
to exempt the disclosures required pursuant to Sec. 1026.19(e) from
the requirement in TILA section 128(a)(18) to itemize fees received by
loan originators from the creditor.
The Bureau invites comment on whether the final rule should require
that fees received by loan originators from the creditor be included in
the Loan Estimate. In addition, because the foregoing analysis under
TILA section 105(f) and the Bureau's other exemption authorities may
apply to the disclosure of creditor-paid compensation on the Closing
Disclosure pursuant to proposed Sec. 1026.38(f)(1), the Bureau
solicits comments on whether the disclosure should be omitted there as
well. While a goal of the proposed forms and requirements is to develop
clear disclosures that help consumers understand the credit transaction
and closing costs, another goal is to facilitate consumer comparison of
the actual charges at consummation with the charges estimated soon
after application. If, as proposed, the amounts received by loan
originators from the creditor are not itemized in the Loan Estimate,
the consumer-comparison purpose of the disclosure forms is not advanced
by itemizing those amounts in the Closing Disclosure. In fact,
itemizing amounts in the Closing Disclosure that are not itemized on
the Loan Estimate may add to consumer confusion without any offsetting
benefit.
The Bureau believes, however, that certain additional information
about
[[Page 51211]]
origination costs may benefit consumers at early stages of the loan
process. In its 2008 RESPA Final Rule, HUD explained its reason for
limiting to lump-sum amounts certain disclosures, such as for
origination and title charges, as avoiding consumer confusion resulting
from a proliferation of itemized fees. HUD described the RESPA GFE that
was in place before the effective date of the 2008 RESPA final rule as
``not inform[ing] consumers what the major costs are so that they can
effectively shop and compare mortgage offers among different loan
originators.'' 73 FR at 68260. Therefore HUD sought to simplify the
mortgage loan origination process by consolidating costs into a few
major cost categories on the RESPA GFE. Id.
The Bureau understands HUD's reasoning in its 2008 RESPA final rule
for establishing revised requirements for the disclosure of
origination-related charges in the RESPA GFE form. The Bureau notes,
however, that HUD did not specifically test the effect of separating
the lump sum amounts for major categories of loan costs into component
charges.\168\ As discussed in the Kleimann Testing Report, in several
rounds of testing, the Bureau examined the effect of such itemization
of loan costs on consumers' understanding of the loan transaction and
their tendency and ability to shop. As a result of its testing, the
Bureau proposes to modify the requirements for disclosing origination-
related items on the Loan Estimate. As discussed in the Kleimann
Testing Report, at the Bureau's consumer testing, participants were
more likely to question loan costs when they were presented in an
itemized format, rather than as only an aggregate or lump sum of those
costs. While participants commented favorably on lump-sum totals, they
also asked for more detail about the fees that were included in the
lump sum, especially when the total was a significant amount, such as
for origination charges or title fees.
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\168\ See, U.S. Dep't. of Hous. and Urban Dev., Summary Report:
Consumer Testing of the Good Faith Estimate Form (GFE), prepared by
Kleimann Communications Group, Inc. (2008), available at http://www.huduser.org/publications/pdf/Summary_Report_GFE.pdf.
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Further, as discussed in the Kleimann Testing Report, participants
more often indicated a desire to negotiate origination charges and shop
for third-party services when provided the additional details about
these closing costs. Itemized closing costs also prompted participants
to ask more questions about the other costs in the Loan Estimate.
Although participants also responded favorably to lump-sum disclosures,
without the additional information about the cost category they were
less likely to indicate a desire to negotiate costs, shop for
providers, and ask for additional detail about a large cost. As
discussed in the Kleimann Testing Report, testing indicates that
descriptive, itemized listings of the component charges in a category
of closing costs related to improved performance of the participants in
understanding both the underlying services provided and the amounts
imposed for those services. In addition, testing participants stated
that they felt more comfortable with the transaction when provided with
additional detail, in part because they believed they were more
responsible consumers when they were more informed. The more-complete
information also may help a consumer determine whether to shop for a
particular service or services. During its outreach efforts, the Bureau
heard anecdotal reports that creditors are often prepared to provide
consumers with additional detail about aggregate amounts disclosed on
the RESPA GFE, in any event. State law also may require creditors to
provide such additional detail about certain categories of costs by
consummation or before accepting a fee,\169\ or to retain such detail
in their loan files.\170\
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\169\ See, e.g., Tex. Ins. Code Ann. Sec. 2702.053 (title
charges); Ga. Comp. R. & Regs. 80-11-1-.01 (origination charges).
\170\ See, e.g., North Carolina Commissioner of Banks
Memorandum, Disclosure of Origination Fees under HUD's New RESPA
Rules (December 3, 2010), available at http://www.nccob.gov/public/docs/Financial%20Institutions/Mortgage/OCOB_Letter_Regarding_Disclosure_of_Origination_Fees_under_HUDs_new_RESPA_Rules.pdf.
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Therefore, proposed Sec. 1026.37(f)(1) does not limit the
disclosure of origination-related closing costs to an aggregate amount
with two lines under predefined headings (as is the case with the RESPA
GFE). Instead, proposed Sec. 1026.37(f)(1) requires that the Loan
Estimate include a subtotal of the amounts for all ``Origination
Charges,'' but permits the creditor to list up to 13 component items.
The creditor must use a descriptive label for each component fee or
charge, and must disclose the amount of that fee or charge. Proposed
Sec. 1026.37(f)(1) requires the creditor to include under the
subheading ``Origination Charges'' the percentage of the loan amount,
and the resulting calculation of the dollar amount, that is charged to
the consumer as points to lower the interest rate. The Loan Estimate
form H-24, in appendix H to Regulation Z, includes a line for this
disclosure immediately under the subheading ``Origination Charges.''
The line's label reads: ``--% of Loan Amount (Points),'' and the blank
before the percentage sign is to be filled in with the applicable
number.
The Bureau does not propose to eliminate the disclosure of a single
total amount of origination charges from the Loan Estimate form,
however. The RESPA GFE currently shows a subtotal of the origination
charges on Line A (``Your Adjusted Origination Charges''). Pursuant to
Sec. 1026.37(f)(1), the Bureau proposes to show in the Loan Estimate a
similar subtotal accompanying the subheading ``Origination Charges.''
The Bureau's testing of the Loan Estimate forms indicates that
consumers can easily find and use this subtotal of the origination
charges to evaluate and compare loans, as discussed in the Kleimann
Testing Report. Further, the testing indicates that consumers easily
understand that the subtotal represents the sum of the itemized fees
and charges.
The Bureau is proposing the requirements in Sec. 1026.37(f)(1)
pursuant to its implementation authority under TILA section 105(a) and
RESPA section 19(a) because disclosure of the points, component
charges, and total origination charges will promote the informed use of
credit and more effective advance disclosure of settlement costs, which
are purposes of TILA and RESPA respectively. Dodd-Frank Act sections
1032(a) and 1405(b) are also sources of authority for the proposed
requirements in Sec. 1026.37(f)(1). The information disclosed under
Sec. 1026.37(f)(1) will enable consumers to understand and negotiate
fees, shop for origination services, and compare the Loan Estimate with
any revised Loan Estimate and the Closing Disclosure, thereby ensuring
that the features of the mortgage transactions are fully, accurately,
and effectively disclosed to consumers in a manner that permits
consumers to understand the costs, benefits, and risks associated with
the mortgage transaction, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). Furthermore, for the
reasons stated above, the proposed rule is in the interest of consumers
and in the public interest, consistent with Dodd-Frank Act section
1405(b).
The Bureau is aware of concerns that permitting itemization may
encourage creditors to list numerous component charges that the RESPA
GFE currently requires to be consolidated into one
[[Page 51212]]
charge.\171\ Based on its testing, however, the Bureau believes that
proposed Sec. 1026.37(f)(1), which permits some itemization but also
requires disclosure of the subtotal of origination charges, provides
consumers with information they want without encumbering their ability
to compare credit offers among different creditors. The Bureau invites
comment on whether other limits on itemization, in addition to the
proposed limits on the number of charges that may be itemized pursuant
to Sec. 1026.37(f)(1), should be included in the final rule and, if
so, what those limits should be.
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\171\ In its 2008 RESPA Final Rule, HUD stated that: ``Current
RESPA regulations have led to a proliferation of charges that makes
consumer shopping and the mortgage settlement process both difficult
and confusing, even for the most informed shoppers. Long lists of
charges certainly do not highlight the bottom-line costs so
consumers can shop and compare mortgage offers among different
originators.'' 73 FR 68204, 68267 (Nov. 17, 2008).
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Proposed comment 37(f)(1)-1 clarifies that charges that are
included under the subheading ``Origination Charges'' pursuant to Sec.
1026.37(f)(1) are those charges paid by the consumer for which the
amount is paid to the creditor or loan originator for originating and
extending the mortgage credit. The comment includes cross-references to
Sec. 1026.37(o)(4) for rules on rounding amounts disclosed, comment
19(e)(3)(i)-2 for a discussion of when a fee is considered to be ``paid
to'' a person, and comment 36(a)-1 for a discussion of the meaning of
``loan originator.'' Proposed comment 37(f)(1)-2 clarifies that only
loan originator charges paid directly by the consumer are included in
the items listed pursuant to Sec. 1026.37(f)(1), but notes that
charges paid by the creditor through the interest rate are disclosed on
the Closing Disclosure pursuant to Sec. 1026.38(f)(1). Proposed
comment 37(f)(1)-3 provides examples of the items that might be
disclosed as ``Origination Charges'' on the Loan Estimate. Proposed
comment 37(f)(1)-4 explains that if the consumer is not charged any
points for the loan, the creditor may leave blank the percentage of
points required by Sec. 1026.37(f)(1)(i), but must disclose the dollar
amount of ``$0.'' Proposed comment 37(f)(1)-5 clarifies that the
creditor may decide the level of itemization of origination charges
that is appropriate, subject to the limitations in Sec.
1026.37(f)(1)(ii) on the number of lines.
37(f)(2) Services You Cannot Shop For
The fees and charges listed under the subheading ``Services You
Cannot Shop For'' pursuant to proposed Sec. 1026.37(f)(2) are for
services that the creditor would require in connection with the
transaction, but that would be provided by persons other than the
creditor or mortgage broker. Only items for which the creditor does not
permit the consumer to shop in accordance with Sec.
1026.19(e)(1)(vi)(A) are listed under this subheading. As discussed
above, Sec. 1026.19(e)(3)(ii) applies the same criterion in
determining whether an estimated charge is subsequently permitted to
increase by a limited amount, absent other considerations set out in
Sec. 1026.19(e)(3).
Currently, Regulation X provides that third-party services required
by the creditor and for which the creditor does not permit the consumer
to shop are to be included, as applicable, in Blocks 3 (``Required
services that we select'') and 4 (``Title services and lender's title
insurance'') on the RESPA GFE. Regulation X also provides that charges
for title services, like charges for origination services, are not
itemized on the RESPA GFE, but are disclosed only as a total. See
appendix C to Regulation X (instructions for Blocks 3, 4 (``all fees
for title searches, examinations, and endorsements, for example, would
be included in this total''), and 6).
As discussed in connection with proposed Sec. 1026.37(f)(1),
consumer testing performed on Loan Estimate forms indicated that
itemization related to improved performance of the participants in
understanding both the services provided and the charges imposed for
those services. Participants appeared more likely to negotiate fees and
shop for services when provided additional details that helped them to
understand the nature of the services and the potential value of
shopping for a particular service. Pursuant to Sec. 1026.37(f)(2) and
(3), the Bureau proposes to show in the Loan Estimate subtotals and
itemized amounts for loan costs, including for title-related services,
on the highlighted lines with the subheadings ``Services You Cannot
Shop For'' and ``Services You Can Shop For.'' The Bureau's testing of
the forms indicates that consumers can easily find and appropriately
use the subtotals of these amounts, as discussed in the Kleimann
Testing Report.
Pursuant to Sec. 1026.37(f)(2), each item disclosed under the
subheading ``Services You Cannot Shop For'' must include a descriptive
name and the estimated charge, and the creditor must provide a subtotal
of all such items. All items for which the charges relate to the
provision of title insurance and the handling of the closing must be
identified beginning with ``Title--.'' The creditor may use up to 13
lines to itemize charges under the subheading for ``Services You Cannot
Shop For.''
The Bureau is proposing the requirements in Sec. 1026.37(f)(2)
pursuant to its authority under TILA section 105(a) and RESPA section
19(a) because disclosure of third-party services required by a creditor
for consummation of the loan, their component and total charges, and
the fact that the creditor will limit the choice of providers for those
services will promote the informed use of credit and more effective
advance disclosure of settlement costs, which are purposes of TILA and
RESPA respectively. Dodd-Frank Act sections 1032(a) and 1405(b) are
also sources of authority for the proposed requirements in Sec.
1026.37(f)(2). The information disclosed under Sec. 1026.37(f)(2) will
enable consumers to understand and negotiate fees, shop for a mortgage
loan, and compare the Loan Estimate with any revised Loan Estimate and
the Closing Disclosure, thereby ensuring that the features of the
mortgage transactions are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the mortgage transaction, in
light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a). Furthermore, for the reasons stated above, the
proposed disclosure is in the interest of consumers and in the public
interest, consistent with Dodd-Frank Act section 1405(b).
As discussed above, the Bureau is aware of concerns that permitting
itemization may encourage creditors to list numerous component charges
that the RESPA GFE currently requires to be consolidated. The Bureau
invites comment on whether other limits on itemization, in addition to
the proposed limits on the number of charges that may be itemized
pursuant to Sec. 1026.37(f)(2), should be included in the final rule
and, if so, what those limits should be.
Proposed comment 37(f)(2)-1 cross-references comments 19(e)(1)(iv)-
1, 19(3)(i)-1, and 19(e)(3)(iv)-1 through -3 for discussions of the
factors relevant to determining whether a consumer is permitted to shop
and whether a creditor has exercised good faith in providing estimates
of charges. Proposed comment 37(f)(2)-2 provides examples of the
services that might be listed under ``Services You Cannot Shop For.''
Proposed comment 37(f)(2)-3 provides examples of services that would be
listed using a phrase beginning with ``Title--.'' Proposed comment
37(f)(2)-4 clarifies that the
[[Page 51213]]
amount listed for the lender's title insurance coverage is the amount
of the premium without any adjustment that might be made for the
simultaneous purchase of an owner's title insurance policy, and it
cross-references comment 37(g)(4)-1 for the disclosure of the premium
for owner's title insurance.
37(f)(3) Services You Can Shop For
The fees and charges listed under the subheading ``Services You Can
Shop For'' pursuant to proposed Sec. 1026.37(f)(3) are for services
that the creditor would require in connection with its decision to make
the loan, but that would be provided by persons other than the creditor
or mortgage broker. Only items for which the creditor permits the
consumer to shop in accordance with Sec. 1026.19(e)(1)(vi)(A) are
listed under this subheading. Thus, all Loan Costs that are not paid to
the creditor or mortgage broker are itemized exclusively under either
this subheading or the subheading ``Services You Cannot Shop For.''
Currently, Regulation X provides that third-party services required
by the creditor but for which the creditor permits the consumer to shop
are to be included, as applicable, in Blocks 4 (``Title services and
lender's title insurance'') and 6 (``Required services that you can
shop for'') on the RESPA GFE. Regulation X also provides that charges
for title services, like charges for origination services, are not
itemized on the RESPA GFE, but are disclosed only as a total. See
appendix C to Regulation X (instructions for Blocks 3, 4 (``all fees
for title searches, examinations, and endorsements, for example, would
be included in this total''), and 6).
As discussed in connection with proposed Sec. 1026.37(f)(1) and
(2), consumer testing performed on Loan Estimate forms indicated that
itemization related to improved performance of the participants in
understanding both the services charged and the costs of those
services. Participants appeared more likely to negotiate fees and shop
for services when provided additional details that helped them to
understand the nature of the services and the potential value of
shopping for a particular service. Pursuant to Sec. 1026.37(f)(2) and
(3), the Bureau proposes to show in the Loan Estimate subtotals and
itemized amounts for loan costs, including for title-related services,
on the highlighted lines with the subheadings ``Services You Cannot
Shop For'' and ``Services You Can Shop For.'' The Bureau's testing of
the forms indicates that consumers can easily find and appropriately
use the subtotals of these amounts.
Pursuant to Sec. 1026.37(f)(3), each item disclosed under the
subheading ``Services You Can Shop For'' must include a descriptive
name and the estimated charge, and the creditor must provide a subtotal
of all such items. All items for which the fees and charges relate to
the provision of title insurance and the handling of the closing must
be identified beginning with ``Title--.'' The creditor may use up to 14
lines to itemize charges under this subheading.
The Bureau is proposing the requirements in Sec. 1026.37(f)(3)
pursuant to its authority under TILA section 105(a) and RESPA section
19(a) because disclosure of third-party services required by a creditor
for consummation of the loan, their component and total charges, and
the fact that the creditor will permit the consumer to choose the
providers for those services will promote the informed use of credit
and more effective advance disclosure of settlement costs, which are
purposes of TILA and RESPA respectively. Dodd-Frank Act sections
1032(a) and 1405(b) are also sources of authority for the proposed
requirements in Sec. 1026.37(f)(3). The information disclosed under
Sec. 1026.37(f)(3) will enable consumers to understand and negotiate
fees, shop for a mortgage loan, and compare the Loan Estimate with any
revised Loan Estimate and the Closing Disclosure, thereby ensuring that
the features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
mortgage transaction, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). Furthermore, for the
reasons stated above, the proposed disclosure is in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b).
As discussed above, the Bureau is aware of concerns that
itemization may encourage creditors to list numerous component charges
that the RESPA GFE currently requires to be consolidated. The Bureau
invites comment on whether other limits on itemization, in addition to
the proposed limits on the number of charges that may be itemized
pursuant to Sec. 1026.37(f)(3), should be included in the final rule
and, if so, what those limits should be.
Proposed comment 37(f)(3)-1 provides cross-references to comments
19(e)(3)(ii)-1 through -3, 19(e)(3)(iii)-2, and 19(e)(3)(iv)-1 through
-3 for discussions of determining good faith in estimating the costs
for required services when the consumer is permitted to choose the
provider of those services. Proposed comment 37(f)(3)-2 provides
examples of the services that might be listed under ``Services You Can
Shop For.'' Proposed comment 37(f)(3)-3 provides cross-references to
comments 37(f)(2)-3 and -4 for guidance on services that would be
labeled beginning with ``Title--'' and on calculating the amount
disclosed for lender's title insurance, and it cross-references comment
37(g)(4)-1 for the disclosure of the premium for owner's title
insurance.
37(f)(4) Total Loan Costs
Proposed Sec. 1026.37(f)(4) requires the creditor to disclose,
labeled ``Total Loan Costs,'' the sum of the subtotals disclosed under
Sec. 1026.37(f)(1) through (3) for Origination Charges, Services You
Cannot Shop For, and Services You Can Shop For, respectively. This
total represents all costs that the creditor and mortgage broker impose
in connection with the transaction.
Although a comparable total is not required to be stated on the
current RESPA GFE, the same costs are included in other subtotals on
the RESPA GFE. The Bureau believes that grouping and subtotaling these
items in this way will provide better information to the consumer about
costs that are specific to obtaining the mortgage loan from the
creditor. Other costs that the consumer may encounter as part of the
transfer of ownership of the property are generally related to items
and requirements for which the amounts are controlled by other entities
or persons, including governmental jurisdictions and the consumer, and
are addressed in proposed Sec. 1026.37(g). Accordingly, disclosure of
this information will promote the informed use of credit and more
effective advance notice of settlement costs, consistent with TILA
section 105(a) and RESPA section 19(a). It will also ensure that the
features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to better understand the costs, benefits, and risks associated with
mortgage transactions, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). Furthermore, for the
reasons stated above, the proposed disclosure is in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b).
37(f)(5) Item Descriptions and Ordering
Proposed Sec. 1026.37(f)(5) requires the creditor to use
terminology that briefly
[[Page 51214]]
and clearly describes each item disclosed under Sec. 1026.37(f).
Except for the item for points that the consumer will pay, which must
be listed as the first item under the subheading ``Origination
Charges,'' all items must be listed in alphabetical order under the
applicable subheading. The current RESPA GFE and early TILA disclosure
do not include a similar requirement. The Bureau believes that a
consistent listing of the costs that appear on the Loan Estimate and
the Closing Disclosure will facilitate the consumer's comparison of the
two disclosure documents and understanding of the transaction as a
whole. Accordingly, this requirement will effectuate the purposes of
TILA and RESPA by promoting the informed use of credit and more
effective advance notice of settlement costs, consistent with TILA
section 105(a) and RESPA section 19(a), and will ensure that the
features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to better understand the costs, benefits, and risks associated with
mortgage transactions, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a).
37(f)(6) Use of Addenda
Proposed Sec. 1026.37(f)(6) provides that addenda may not be used
to itemize disclosures required by Sec. 1026.37(f)(1) or (2). If the
creditor is not able to itemize all of the charges required to be
disclosed in the number of lines provided under Sec. 1026.37(f)(1)(ii)
and (f)(2)(ii), the remaining charges must be disclosed as an aggregate
amount in the last line permitted under the applicable paragraph. An
addendum may be used to itemize disclosures required by Sec.
1026.37(f)(3), or any remaining charges may be disclosed as an
aggregate amount in the last line permitted under paragraph (f)(3). The
Bureau is proposing the requirements in Sec. 1026.37(f)(6) pursuant to
its authority under TILA section 105(a) and RESPA section 19(a) because
standardization of the information provided on the disclosures required
under Sec. 1026.19(e) will provide consistent information that
consumers will be able to use to better understand the mortgage
transaction, shop for loans, and compare the Loan Estimate with any
revised Loan Estimate and the Closing Disclosure, thereby promoting the
informed use of credit and more effective advance disclosure of
settlement costs, which are purposes of TILA and RESPA respectively.
This standardization will also ensure that the features of the mortgage
transactions are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to more readily understand
the costs, benefits, and risks associated with the mortgage
transaction, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a), which is also a source of authority for
the proposed requirements.
Proposed comment 37(f)(6)-1 clarifies that a creditor is permitted
to provide additional disclosures that are required by State law, as
long as those disclosures are provided on a document whose pages are
separate from, and are not presented as part of, the disclosures
provided in accordance with Sec. 1026.37(f). Proposed comment
37(f)(6)-2 provides an example of a label that may be used to reference
an addendum as permitted under Sec. 1026.37(f)(6)(ii).
37(g) Closing Cost Details; Other Costs
Under section 5(c) of RESPA, creditors must provide mortgage loan
applicants with a good faith estimate of the amount or range of charges
for specific settlement services the applicant is likely to incur in
connection with the consummation of the loan. 12 U.S.C. 2604(c).
Section 1024.7 of Regulation X implements this mandate by requiring
creditors and mortgage brokers to provide the GFE, which must be
completed in accordance with the instructions in appendix C to
Regulation X. Appendix C sets out specific instructions for the
information that must be disclosed on the GFE, including which loan
costs must be included and how to identify those costs on the GFE.
As discussed above, Dodd-Frank Act section 1032(f) requires the
Bureau to combine these RESPA disclosures with the pre-consummation
disclosures required by TILA. In addition to existing TILA disclosure
requirements, section 1419 of the Dodd-Frank Act amended TILA section
128(a) to require, in the case of a residential mortgage loan,
disclosure of the aggregate amount of settlement charges for all
settlement services provided in connection with the loan and the
aggregate amount of other fees or required payments in connection with
the loan. 15 U.S.C. 1638(a)(17).
Pursuant to its authority under Dodd-Frank Act section 1032(f),
TILA section 105(a), and RESPA section 19(a), the Bureau proposes to
require creditors to disclose the loan costs and other costs imposed
upon the consumer in tables as part of the integrated Loan Estimate.
Proposed Sec. 1026.37(f) and (g) implement the early disclosure
requirements in TILA and RESPA by setting out details relating to the
costs for consummating the mortgage loan, including loan costs and
other costs. Based on its consumer testing, the Bureau believes that
early disclosure of estimated loan costs and other costs, as set forth
in proposed Sec. 1026.37(f) and (g), will improve consumer
understanding of the credit and property transactions. The Bureau
believes that these disclosures will effectuate the purpose of TILA by
promoting the informed use of credit and assuring a meaningful
disclosure to consumers. The Bureau believes that the disclosures will
also satisfy the RESPA requirement to provide a consumer with a good
faith estimate of the amount or range of charges for specific
settlement services the consumer is likely to incur in connection with
the closing. Dodd-Frank Act sections 1032(a) and 1405(b) are also
sources of authority for the proposed rule. These disclosures will
ensure that the features of the mortgage transactions are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the mortgage transaction, in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a).
Furthermore, for the reasons stated above, the proposed rule is in the
interest of consumers and in the public interest, consistent with Dodd-
Frank Act section 1405(b).
Proposed Sec. 1026.37(g) requires creditors to disclose as ``Other
Costs'' on the Loan Estimate certain items that are in addition to the
Loan Costs that are specifically required by the creditor before
consummation of a credit transaction and are disclosed pursuant to
Sec. 1026.37(f). The ``Other Costs'' disclosed pursuant to Sec.
1026.37(g) are necessary to complete the real estate closing. These
items usually concern payments for governmental requirements, insurance
premiums, and items that are charged by parties to the property
transaction other than the creditor. The creditor must disclose under
four subheadings individual itemized charges, along with subtotals for
categories of those itemized charges.
Consumer feedback from the Bureau's consumer testing indicated that
clear amounts for the total costs of the loan and real estate closing
were also important to consumers' understanding of the complete
transaction. Consistent with that feedback, under two additional
subheadings, the creditor must disclose the total of Other Costs and
the total of Loan Costs plus Other Costs. In general, all of these
charges are currently required to be disclosed--as itemized or
aggregate charges and
[[Page 51215]]
amounts--on the RESPA GFE, the RESPA settlement statement, or both.
Combining these charges and totals into the disclosures required by
Sec. 1026.19(e) will enable consumers to understand the services and
charges related to the loan and property transactions, shop for the
loan and certain services, and compare the Loan Estimate with any
revised Loan Estimate and the Closing Disclosure, thereby ensuring that
the features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
mortgage transaction, in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). Proposed comment 37(g)-
1 describes the kinds of charges that are disclosed under Sec.
1026.37(g). Proposed comment 37(g)-2 clarifies that items that are paid
at or before closing under the real estate contract are not disclosed
on the Loan Estimate, except to the extent the creditor is aware of
those charges at the time the Loan Estimate is issued. These items will
be disclosed, however, in the Closing Disclosure pursuant to Sec.
1026.38(f), (g), (j) and (k).
37(g)(1) Taxes and Other Government Fees
Proposed Sec. 1026.37(g)(1) requires the disclosure of taxes and
other government fees for recording of documents and transfer taxes
assessed against the purchase price of a real estate contract or the
loan amount. Recording fees differ from transfer taxes because
recording fees are based on the nature or physical characteristics of
the document being recorded and are not based on the sales price or
loan amount. The Bureau is proposing the requirements in Sec.
1026.37(g)(1) pursuant to its authority under TILA section 105(a) and
RESPA section 19(a) because disclosure of taxes and government fees
required to be paid in the real estate closing will educate consumers
about costs they must be prepared to pay in the transaction, thereby
promoting the informed use of credit and more effective advance
disclosure of settlement costs, which are purposes of TILA and RESPA
respectively. Dodd-Frank Act sections 1032(a) and 1405(b) are also
sources of authority for the proposed requirements in Sec.
1026.37(g)(1). This information also ensures that the features of the
mortgage transactions are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the mortgage transaction, in
light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a). Furthermore, for the reasons stated above, the
proposed disclosure is in the interest of consumers and in the public
interest, consistent with Dodd-Frank Act section 1405(b).
Proposed comment 37(g)(1)-1 clarifies that recording fees are
assessed by a government authority in order to record and index
documents related to property transfers under State or local law.
Proposed comment 37(g)(1)-2 clarifies that government charges that are
not transfer taxes are disclosed with recording fees under Sec.
1026.37(g)(1)(i). Proposed comment 37(g)(1)-3 explains that, in
general, transfer taxes are State and local government fees on
mortgages and home sales that are based on the loan amount or sales
price. Proposed comment 37(g)(1)-4 clarifies that the only transfer
taxes disclosed under Sec. 1026.37(g)(1) are transfer taxes imposed on
the consumer, as determined under State or local law, and that if
unpaid transfer taxes can result in a lien being placed on the property
of the consumer, the transfer tax is disclosed under Sec.
1026.37(g)(1). The comment further clarifies that if State or local law
is unclear, or does not specifically attribute the transfer tax, the
creditor may use common practice in the locality of the property to
apportion the amount of the transfer tax disclosed as paid by the
consumer under Sec. 1026.37(g)(1). This comment is consistent with
guidance provided by HUD in the HUD RESPA FAQs p.34, 2 (``GFE-
Block 8''). Proposed comment 37(g)(1)-5 explains that although transfer
taxes paid by the seller in a purchase transaction are not disclosed
pursuant to Sec. 1026.37(g), they will be disclosed on the Closing
Disclosure under Sec. 1026.38(g)(1)(ii). Proposed comment 37(g)(1)-6
clarifies that the lines and labels required under Sec. 1026.37(g)(1)
may not be deleted, and that additional items may not be listed under
the subheading.
37(g)(2) Prepaids
Proposed Sec. 1026.37(g)(2) requires the disclosure of prepaid
charges for real estate property taxes, insurance premiums, and other
items that must be paid to insure the property or satisfy real estate
tax obligations, as well as other charges that must be satisfied before
consummation of the credit transaction and the real estate closing.
Proposed Sec. 1026.37(g)(2) also prescribes some of the items, and
additional information about those items, that must be included under
the subheading ``Prepaids.'' The Bureau is proposing the requirements
in Sec. 1026.37(g)(2) pursuant to its authority under TILA section
105(a) and RESPA section 19(a) because disclosure of charges that must
be satisfied as part of the mortgage transaction will educate consumers
about costs they must be prepared to pay, thereby promoting the
informed use of credit and more effective advance disclosure of
settlement costs, which are purposes of TILA and RESPA respectively.
Dodd-Frank Act sections 1032(a) and 1405(b) are also sources of
authority for the proposed requirements. This information ensures that
the features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
transaction, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a). Furthermore, for the reasons stated
above, the proposed disclosure is in the interest of consumers and in
the public interest, consistent with Dodd-Frank Act section 1405(b).
Proposed comment 37(g)(2)-1 provides examples of other periodic
charges that are required to be paid at consummation and are disclosed
under Sec. 1026.37(g)(2). Proposed comment 37(g)(2)-2 clarifies that
the interest rate disclosed under Sec. 1026.37(g)(2)(iii) is the same
interest rate that is disclosed under Sec. 1026.37(b)(2). Proposed
comment 37(g)(2)-3 clarifies that the terms ``property taxes,''
``homeowner's insurance,'' and ``mortgage insurance'' have the same
meaning as those terms are used under Sec. 1026.37(c) and its
commentary. Proposed comment 37(g)(2)-4 clarifies that the lines and
labels required under Sec. 1026.37(g)(2) may not be deleted.
37(g)(3) Initial Escrow Payment at Closing
Proposed Sec. 1026.37(g)(3) requires the disclosure of the initial
payments to establish an escrow account to pay for future recurring
charges. Disclosure of these amounts is required under Sec. 1024.7 and
Sec. 1024.17 of Regulation X, and the items and amounts must be
disclosed in Block 9 of the RESPA GFE. Proposed Sec. 1026.37(g)(3)
also prescribes some of the items, and additional information about
those items, that must be included under the subheading ``Initial
Escrow Payment at Closing.'' The Bureau is proposing the requirements
in Sec. 1026.37(g)(3) pursuant to its authority under TILA section
105(a) and RESPA section 19(a) because disclosure of initial payments
that consumers are required to make to establish escrow accounts for
future recurring charges will educate
[[Page 51216]]
consumers about costs they must be prepared to pay in the mortgage
transaction, thereby promoting the informed use of credit and more
effective advance disclosure of settlement costs, which are purposes of
TILA and RESPA respectively. Dodd-Frank Act sections 1032(a) and
1405(b) are also sources of authority for the proposed requirements.
This information ensures that the features of the mortgage transactions
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the transaction, in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a).
Furthermore, for the reasons stated above, the proposed disclosure is
in the interest of consumers and in the public interest, consistent
with Dodd-Frank Act section 1405(b).
Proposed comment 37(g)(3)-1 clarifies that for any item required to
be listed that is not charged to the consumer, the monthly payment
amount and time period may be left blank, but the dollar amount for the
item must be shown as zero. Proposed comment 37(g)(3)-2 clarifies that
the aggregate escrow account adjustment required for the HUD-1
settlement statement under Regulation X Sec. 1024.17(d)(2) is not
included on the Loan Estimate, but is included on the Closing
Disclosure under Sec. 1026.38(g)(3). Proposed comment 38(g)(3)-3
clarifies that ``property taxes,'' ``homeowner's insurance,'' and
``mortgage insurance'' have the same meaning as those terms are used
under Sec. 1026.37(c) and its commentary. Proposed comment 37(g)(3)-4
clarifies that the lines and labels required under Sec. 1026.37(g)(3)
may not be deleted.
37(g)(4) Other
Proposed Sec. 1026.37(g)(4) requires the disclosure of any other
items that the consumer has become legally obligated to pay in
connection with the transaction, to the extent that the existence of
these items is known by the creditor at the time the Loan Estimate is
issued. The label for any item that is a component of title insurance
must include the description ``Title--'' at the beginning. The label
for all items for which the amounts disclosed are premiums for separate
optional insurance, warranty, guarantee, or event-coverage products
must include the parenthetical ``(optional)'' at the end. The items
disclosed under proposed Sec. 1026.37(g)(4) are not required by the
creditor. These items are also not additional coverage or endorsements
added to products required by the creditor. Accordingly, they are not
disclosed under other paragraphs of proposed Sec. 1026.37(f) or (g)
and are disclosed under the subheading ``Other.'' These items are
voluntary products that the consumer may be likely or may have already
elected to purchase, and of which the creditor knows or is aware. The
Bureau is proposing the requirements in Sec. 1026.37(g)(4) pursuant to
its authority under TILA section 105(a) and RESPA section 19(a) because
disclosure of payments that consumers are likely to pay in a mortgage
transaction will educate consumers about costs they must be prepared to
pay at closing, thereby promoting the informed use of credit and more
effective advance disclosure of settlement costs, which are purposes of
TILA and RESPA respectively. Dodd-Frank Act sections 1032(a) and
1405(b) are also sources of authority for the proposed requirements.
This information ensures that the features of the mortgage transactions
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the transaction in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a).
Furthermore, for the reasons stated above, the proposed disclosure is
in the interest of consumers and in the public interest, consistent
with Dodd-Frank Act section 1405(b).
Proposed comment 37(g)(4)-1 clarifies that any owner's title
insurance policy premium disclosed under Sec. 1026.37(g)(4) is based
on a basic rate, and not an ``enhanced'' premium. This comment is
consistent with guidance provided in the HUD RESPA FAQs p.33,
3 (``GFE-Block 5''). Proposed comment 37(g)(4)-1 also provides
an example of a label for owner's title insurance and cross-references
comment 37(f)(2)-4 for disclosure of the premium for lender's title
insurance. Proposed comment 37(g)(4)-2 clarifies that any title
insurance policy disclosed on the Loan Estimate based on a simultaneous
issuance calculation must be disclosed by adding the full owner's title
insurance premium plus the simultaneous issuance premium, and then
deducting the amount of the lender's title at the full premium rate.
Proposed comment 37(g)(4)-3 provides examples of products to which the
description ``(optional'') applies and cross-references comments
4(b)(7) and (b)(8)-1 through -3 and comments 4(b)(10)-1 and -2 for
descriptions and guidance concerning disclosure of premiums for credit
life, debt suspension, and debt cancellation coverage. Proposed comment
37(g)(4)-4 provides examples of other items that are disclosed under
Sec. 1026.37(g)(4) if known by the creditor at the time the Loan
Estimate is issued and refers to comment 19(e)(3)(iii)-3 concerning
application of the good faith requirement for services that are not
required by the creditor.
37(g)(5) Total Other Costs
Proposed Sec. 1026.37(g)(5) requires disclosure under the
subheading ``Total Other Costs'' of the sum of the subtotals disclosed
pursuant to paragraphs (g)(1) through (g)(4). The Bureau is proposing
the requirements in Sec. 1026.37(g)(5) pursuant to its authority under
TILA section 105(a) and RESPA section 19(a) because disclosure of the
total of the charges consumers must pay, in addition to charges for
consummating the loan, will promote the informed use of credit and more
effective advance disclosure of settlement costs, which are purposes of
TILA and RESPA respectively. Dodd-Frank Act sections 1032(a) and
1405(b) are also sources of authority for the proposed requirements.
This information ensures that the features of the mortgage transactions
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the mortgage transaction in light of the facts
and circumstances, consistent with Dodd-Frank Act section 1032(a).
Furthermore, for the reasons stated above, the proposed disclosure is
in the interest of consumers and in the public interest, consistent
with Dodd-Frank Act section 1405(b).
37(g)(6) Total Closing Costs
Proposed Sec. 1026.37(g)(6) requires the disclosure under the
subheading ``Total Closing Costs'' of a subtotal of the items disclosed
as ``Total Loan Costs'' and ``Total Other Costs'' pursuant to
paragraphs (f)(4) and (g)(5); the amount of any generalized lender
credits to be provided at consummation, stated as a negative number;
and the sum of the subtotal of loan and other costs and the (negative)
amount of lender credits. The Bureau is proposing the requirements in
Sec. 1026.37(g)(6) pursuant to its authority under TILA section 105(a)
and RESPA section 19(a) because disclosure of the total amounts
consumers must pay to consummate the loan and close the property
transaction will promote the informed use of credit and more effective
advance disclosure of settlement costs, which are purposes of TILA and
RESPA respectively. Dodd-
[[Page 51217]]
Frank Act sections 1032(a) and 1405(b) are also sources of authority
for the proposed requirements. This information ensures that the
features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
mortgage transaction in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a). Furthermore, for the
reasons stated above, the proposed disclosure is in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b). Proposed comment 37(g)(6)(iii)-1 clarifies that
generalized lender credits not associated with a particular service are
disclosed under Sec. 1026.37(g)(6)(iii), but lender credits for
specific items disclosed on the Loan Estimate are disclosed as paid by
others on the Closing Disclosure under Sec. 1026.38(f) and (g), as
applicable.
37(g)(7) Item Descriptions and Ordering
In identifying the items listed as Other Costs, the creditor is
required to use terminology that briefly and clearly describes the
item. All items must be listed in alphabetical order following the
items prescribed to be included under the subheading. The current RESPA
GFE and early TILA disclosure do not include a similar requirement. The
Bureau is proposing the requirements in Sec. 1026.37(g)(7) pursuant to
its authority under TILA section 105(a) and RESPA section 19(a) because
a consistent listing of the costs that appear on the Loan Estimate and
the Closing Disclosure will facilitate the consumer's comparison of the
two disclosure documents and understanding of the transaction as a
whole, thereby promoting the informed use of credit and more effective
advance disclosure of settlement costs, which are purposes of TILA and
RESPA respectively. This requirement also will ensure that the features
of the mortgage transactions are fully, accurately, and effectively
disclosed to consumers in a manner that permit consumers to understand
the costs, benefits, and risks associated with the mortgage transaction
in light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a).
37(g)(8) Use of Addenda
Proposed Sec. 1026.37(g)(8) provides that addenda may not be used
to itemize disclosures required by Sec. 1026.37(g). If the creditor is
not able to itemize all of the charges required to be disclosed in the
number of lines provided under a subheading, the remaining charges must
be disclosed as an aggregate amount in the last line permitted under
the applicable subheading. The Bureau is proposing the requirements in
Sec. 1026.37(g)(8) pursuant to its authority under TILA section 105(a)
and RESPA section 19(a) because standardization of the information
provided on the disclosures required under Sec. 1026.19(e) will
provide consistent information that consumers will be able to use to
better understand the mortgage transaction, shop for loans, and compare
the Loan Estimate with any revised Loan Estimate and the Closing
Disclosure, thereby promoting the informed use of credit and more
effective advance disclosure of settlement costs, which are purposes of
TILA and RESPA respectively. This standardization will also ensure that
the features of the mortgage transactions are fully, accurately, and
effectively disclosed to consumers in a manner that permit consumers to
more readily understand the costs, benefits, and risks associated with
the mortgage transaction in light of the facts and circumstances,
consistent with Dodd-Frank Act section 1032(a), which is also a source
of authority for the proposed requirements.
Proposed comment 37(g)(8)-1 clarifies that a creditor is permitted
to provide additional disclosures that are required by State law, as
long as those disclosures are provided on a separate document whose
pages are physically separate from, and are not presented as part of,
the disclosures provided in accordance with Sec. 1026.37.
37(h) Calculating Cash To Close
Pursuant to its authority under TILA section 105(a) and Dodd-Frank
Act section 1032(a), the Bureau proposes Sec. 1026.37(h), which
requires the disclosure of the calculation of an estimate of the cash
needed from the consumer at consummation of the transaction. In
addition to promoting the informed use of credit (which is a purpose of
TILA), this disclosure would ensure that the features of the
transaction are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product, in light of the facts
and circumstances, consistent with section 1032(a) of the Dodd-Frank
Act. Proposed comment 37(h)-1 clarifies that the labels to be used on
the Loan Estimate for each amount must match their description in
proposed Sec. 1026.37(h)(1) to (7).
37(h)(1) Total Closing Costs
37(h)(2) Closing Costs To Be Financed
Under Sec. 1026.37(h)(1), the total closing costs would be
disclosed as calculated under Sec. 1026.37(g)(6) as a positive number.
Under Sec. 1026.37(h)(2), the amount of the closing costs to be paid
from loan proceeds would be disclosed as a negative number.
37(h)(3) Downpayment and Other Funds From Borrower
Under Sec. 1026.37(h)(3), the amount of the downpayment and other
funds from consumer at consummation would be disclosed as a positive
number. In a purchase transaction the downpayment would be calculated
as the difference between the purchase price of the property and the
principal amount of the credit. In all other transactions, the funds
from the consumer would be calculated under Sec. 1026.37(h)(5).
37(h)(4) Deposit
Under proposed Sec. 1026.37(h)(4), the amount that is paid to the
seller or held in trust or escrow by a third party pursuant to the
terms of a contract for sale of real estate disclosed as a negative
number. Proposed comment 37(h)(4)-1 clarifies that in any transaction
other than a purchase transaction, the amount disclosed under proposed
Sec. 1026.37(h)(4) must be $0.
37(h)(5) Funds for Borrower
Under proposed Sec. 1026.37(h)(5), the amounts to be disclosed
under both Sec. 1026.37(h)(3) and Sec. 1026.37(h)(5) are calculated
by subtracting the amount of debt being satisfied by the real estate
transaction and the amount of the credit extended by the new loan,
excluding any amount under Sec. 1026.37(h)(2) since that amount of the
credit extended has already been accounted for in the cash to close
calculation by inclusion in Sec. 1026.37(h)(2). Funds for Borrower''
is intended to generally represent the amount anticipated to be
disbursed to the consumer or used at consumer's discretion at
consummation of the transaction, such as in cash-out refinance
transactions. The determination of whether the transaction will result
in ``Funds for Borrower'' is made under proposed Sec. 1026.37(h)(5).
When the result of the calculation is positive, that amount is
disclosed under Sec. 1026.37(h)(3), and $0.00 is disclosed under Sec.
1026.37(h)(5). When the result of the calculation is negative, that
amount is disclosed under Sec. 1026.37(h)(5), and $0.00 is disclosed
under Sec. 1026.37(h)(3). When the result is $0.00, $0.00 is disclosed
in both Sec. Sec. 1026.37(h)(3) and 1026.37(h)(5).
[[Page 51218]]
37(h)(6) Seller Credits
Under proposed Sec. 1026.37(h)(6), the amount of any seller
credit, to the extent known by the creditor, is disclosed as a negative
number. Proposed comment 37(6)-1 clarifies that seller credits known by
the creditor at the time of application are disclosed under Sec.
1026.37(h)(6), and that seller credits that are not known by the
creditor are not disclosed under Sec. 1026.37(h)(6).
37(h)(7) Adjustments and Other Credits
Under proposed Sec. 1026.37(h)(7) the amount of other credits for
all loan costs and other costs, to the extent known, that are to be
paid by persons other than the loan originator, creditor, consumer, or
seller disclosed as a negative number. Proposed comment 37(h)(7)-1
clarifies that amounts expected to be paid by third parties not
involved in the transaction, such as gifts from family members and not
otherwise identified under Sec. 1026.37(h), would be included in this
amount to the extent known by the creditor. Proposed comment 37(h)(7)-2
clarifies that the term ``persons'' as used in Sec. 1026.37(h)(7)
includes all individuals and any entity, regardless of the legal
structure of such entity. Proposed comment 37(h)(7)-3 clarifies that
only credits from parties other than the creditor or seller can be
disclosed pursuant to Sec. 1026.37(h)(7). Seller credits and credits
from the creditor are disclosed pursuant to Sec. 1026.37(h)(6) and
Sec. 1026.37(g)(6)(ii), respectively. Proposed comment 37(h)(7)-4
clarifies that other credits known by the creditor at the time of
application are disclosed under Sec. 1026.37(h)(7), and that other
credits that are not known by the creditor are not disclosed under
Sec. 1026.37(h)(6).
37(h)(8) Estimated Cash To Close
Under proposed Sec. 1026.37(h)(8) the total of the amounts
disclosed under proposed Sec. 1026.37(h)(1) to (7) is disclosed.
Proposed comment 37(h)(8)-1 clarifies that the sum total of Sec.
1026.37(h)(1) through (7) must be disclosed pursuant to Sec.
1026.37(h)(8) as either a positive number, a negative number, or zero.
A positive number indicates the estimated amount that the consumer can
be expected to pay at consummation to complete the transaction. A
negative number indicates the estimated amount that the consumer can
receive from the transaction at consummation. A result of zero
indicates that the consumer is anticipated to neither need to pay any
amount or receive any amount from the transaction at consummation.
37(i) Adjustable Payment Table
For certain credit transactions secured by a dwelling, TILA section
128(b)(2)(C)(ii) requires the disclosure of examples of adjustments to
the regular required payment on the extension of credit based on the
change in the interest rates specified by the contract. Among the
examples must be the maximum regular required payment based on the
maximum interest rate allowed under the contract. While this section
requires examples based on changes to the interest rates, the
requirement is triggered if either the interest rate may change or the
``regular payments may otherwise be variable.'' 15 U.S.C.
1638(b)(2)(C)(ii). TILA section 128(b)(2)(C)(ii) does not, however,
require the disclosure of the existence of loan terms that may cause
the periodic payment to adjust without a change to the interest rate.
The Bureau believes that, to promote the informed use of credit,
loan terms that may cause the periodic principal and interest payment
to adjust without a change to the interest rate (such as an optional
payment loan) or include a period during which the payment may not pay
principal (such as an interest-only period) or is not required to make
payments should be clearly disclosed to consumers. In the Bureau's
consumer testing, participants generally were able to use this
information to evaluate the credit terms of the loan disclosed.
For example, the Bureau provided mortgage disclosures for interest-
only loans to participants using a prototype of an ``adjustable payment
table'' at its consumer testing. The table displayed whether the loan
had an interest-only, optional-payment, or step-payment period; the
length of such period; the amount of the periodic principal and
interest payment at the first adjustment; the frequency and amounts of
subsequent adjustments; and the maximum possible principal and interest
payment under the terms of the loan. Participants were able to use this
table to determine the presence of the interest-only period and the
length of the period, as well as how the principal and interest
payments would change as a result. Also, participants were able to
understand that the purpose of the table generally was to inform them
about such features. They were able to determine from the prototype
table that the credit terms did not include one of the other features,
such as an optional-payment or step-payment period.
Proposed Sec. 1026.37(i) requires an Adjustable Payment (AP) table
to disclose examples of the required periodic principal and interest
payment, including the maximum possible required principal and interest
payment, for loans with terms that allow the principal and interest
payment to adjust not based on adjustments to the interest rate. In
contrast, proposed Sec. 1026.37(j) requires provision of an Adjustable
Interest Rate table for credit transactions with terms that permit the
interest rate to adjust after consummation. Proposed Sec.
1026.37(i)(1) through (3) requires the disclosure to state
affirmatively or negatively whether the loan has an interest-only,
payment-option, or step-payment period, and the length of such period.
Proposed Sec. 1026.37(i)(4) also requires the disclosure to state
affirmatively or negatively whether the loan has a seasonal payment
feature and the period during which periodic payments are affected by
such feature. As discussed above with respect to proposed Sec.
1026.37(a)(10), the Bureau understands that some loans may be
structured so that periodic principal and interest payments are not
required to be made by the consumer in between specified unit-periods
on a regular basis.
The format of the table as required by proposed Sec. 1026.37(o),
and as illustrated by form H-24 in appendix H to Regulation Z, provides
the affirmative or negative statement in bold text in the form of a
question and answer. In addition, the examples of the periodic
principal and interest payments are set apart from these answers by a
subheading in bold text. The Bureau believes, based on consumer
testing, that this format displays the information in a readily
visible, clear, and understandable manner for consumers.
The Bureau proposes these requirements pursuant to TILA section
128(b)(2)(C)(ii), and its authority under TILA section 105(a), section
1032(a) of the Dodd-Frank Act, and, for residential mortgage loans,
section 1405(b) of the Dodd-Frank Act. The Bureau proposes to use its
authority under TILA section 105(a) to require this information to be
disclosed for all transactions subject to Sec. 1026.19(e) and (f). The
Bureau believes this information may effectuate the purposes of TILA by
allowing consumers to compare more readily the different loan terms
available to them, and specifically, whether they contain such
adjustable or seasonal payment terms. In addition, consistent with
section 1032(a) of the Dodd-Frank Act, this disclosure would ensure
that the features of the transaction are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks. In addition, the Bureau
believes this information may improve consumer awareness and
[[Page 51219]]
understanding of transactions involving residential mortgage loans and
is in the interest of consumers and the public interest.
Proposed comment 37(i)-1 clarifies that under Sec. 1026.37(i), the
AP table may only be disclosed if the periodic principal and interest
payment may change after consummation based on an adjustment that is
not an adjustment to the interest rate, or if the transaction is a
seasonal payment product as described in proposed Sec.
1026.37(a)(10)(ii)(E). The creditor is not permitted to disclose the
table if the loan terms do not meet these requirements, even if the
table is left blank or disclosed with an ``N/A'' within each row. The
Bureau believes that the inclusion of the AP table in such cases would
be unduly distracting and confusing to a consumer and could contribute
to information overload--especially if an entire table is included only
to be marked ``not applicable.'' As the information within the table
must be determined dynamically, depending on each transaction's terms,
the Bureau believes a requirement that it be omitted when not
applicable is unlikely to be a significant additional burden. This
comment references proposed comment 37-1, which clarifies the general
permission in proposed Sec. 1026.37 to provide the required
disclosures ``as applicable'' is subject to the more specific
prohibition in proposed Sec. 1026.37(i), which does not permit
disclosure of the AP table when it is not applicable. As the two
tables' numbers of rows and columns are determined dynamically,
depending on each transaction's terms, the Bureau believes a
requirement that they be omitted when not applicable is unlikely to be
a significant additional burden. The Bureau seeks comment on whether
this dynamic inclusion/exclusion requirement would be unduly burdensome
for creditors.
Proposed comment 37(i)-2 provides guidance and examples of how the
information required by proposed Sec. 1026.37(i)(1) through (4) should
be disclosed. Proposed comment 37(i)(5)-1 clarifies that the applicable
unit-period should be disclosed in the subheading required by proposed
Sec. 1026.37(i)(5). Proposed comment 38(i)(5)-2 provides guidance on
how to disclose the first payment adjustment required to be disclosed
by proposed Sec. 1026.37(i)(5)(i) when the exact payment number is
unknown at the time of the disclosure. Proposed comment 38(i)(5)-3
provides guidance regarding how to disclose the frequency of
adjustments to the periodic principal and interest payment after the
initial adjustment, as required by proposed Sec. 1026.37(i)(5)(ii).
Proposed comment 37(i)(5)-4 provides guidance regarding how to
calculate the maximum periodic principal and interest payment for
purposes of the disclosure required by proposed Sec.
1026.37(i)(5)(iii).
The format required by proposed Sec. 1026.37(o), and illustrated
by forms H-24(b) and (c) in appendix H to this part, provides the
information required by proposed Sec. 1026.37(i) in a concise,
organized table. This table appears immediately adjacent to the
Adjustable Interest Rate (AIR) Table required by proposed Sec.
1026.37(j) for loans that also permit the interest rate to adjust after
consummation. The table uses bold text for the questions and
capitalized ``yes'' and ``no'' text for the answers required by
proposed Sec. 1026.37(i)(1), (2), (3), and (4). The AP table also uses
bold text for the subheading required by proposed Sec. 1026.37(i)(5).
Based on its testing, the Bureau believes this format displays the
information in a clear, readily visible, and understandable manner for
consumers.
37(j) Adjustable Interest Rate Table
Currently, TILA does not expressly require disclosure of the
interest rate for closed-end credit. However, as noted above, for
closed-end credit secured by a dwelling, TILA section 128(b)(2)(C)(ii)
requires disclosure of examples of the periodic principal and interest
payment based on changes to the interest rate, including the maximum
principal and interest payment during the life of the loan. 15 U.S.C.
1638(b)(2)(C)(ii). Regulation Z Sec. 1026.18(s) currently requires,
for closed-end credit transactions with adjustable interest rates
secured by real property or a dwelling, disclosure of examples of the
interest rate and periodic principal and interest payments, including
the maximum of these amounts under the terms of the loan. For federally
related mortgage loans, Sec. 1024.7(d) of Regulation X currently
requires the summary table on page one of the RESPA GFE to disclose the
initial interest rate, labeled ``Your initial interest rate is.'' Then
below another row of the summary table stating the initial monthly
payment, the RESPA GFE states whether the interest rate is adjustable
as an affirmative or negative answer, labeled ``Can your interest rate
rise?'' If the answer is affirmative, the RESPA GFE states the maximum
interest rate and when the first change in the interest rate will occur
within the following sentence: ``It can rise to a maximum of ----%. The
first change will be in ----------.''
The Bureau believes that loan terms that can cause the interest
rate to adjust should be clearly disclosed to consumers. At the
Bureau's consumer testing, participants generally stated that
information regarding potential changes to the interest rate was
important in their evaluation of a loan. Participants generally
understood that the interest rate affected the amount of interest due
under the loan and used the information regarding potential changes to
the interest rate to evaluate loans. Although proposed Sec.
1026.37(b)(2) provides key information about interest rate adjustments,
the Bureau believes more detail regarding an adjustable interest rate
is important because it would provide consumers with additional detail
regarding potential changes to the interest and periodic payments that
may be useful in evaluating and comparing loans.
The Bureau provided mortgage disclosures for adjustable interest
rate loans to participants using a prototype of an ``Adjustable
Interest Rate Table'' at its consumer testing. The table displayed
information about the index and margin applicable to the loan, the
initial interest rate, the minimum and maximum interest rates during
the life of the loan, the frequency of changes to the interest rate,
and limits on the interest rate changes. Participants were able to
understand that the purpose of the table generally was to inform them
about the adjustable interest rate terms under the loan and often used
the table to compare adjustable-rate loans. The table enabled consumers
to determine the interest rate terms of the transaction and to compare
two adjustable-rate loans with different terms.
Therefore, the Bureau proposes to use its authority under TILA
section 105(a), section 1032(a) of the Dodd-Frank Act, and, for
residential mortgage loans, section 1405(b) of the Dodd-Frank Act to
require more detailed information regarding the terms of an adjustable
interest rate to be disclosed in a separate table, called the
Adjustable Interest Rate (AIR) Table, under proposed Sec. 1026.37(j).
The information regarding the index and margin applicable to the
interest rate changes, the lifetime cap and floor on the interest rate,
and limits on interest rate adjustments are not currently provided
together to consumers in a clear, readily visible, and understandable
manner. Consumers can find this information within the promissory note,
but they typically do not receive the promissory note until they are at
the closing table. Disclosure of this information in the Loan Estimate
and Closing Disclosure will enable consumers to verify whether these
terms
[[Page 51220]]
have changed during the loan process. This is especially important if
the index and margin have changed or the lifetime maximum interest rate
has changed, because such changes can significantly affect the amounts
of periodic payments over the life of the loan.
As described above, participants in the Bureau's consumer testing
used much of this information and generally considered interest rate
information to be an important factor in evaluating a loan.
Participants were able to compare this information between loans and
between the disclosures provided after application and prior to loan
closing. The Bureau believes this information may enable consumers to
understand and compare credit terms more readily, effectuating the
purposes of TILA. For similar reasons, the Bureau believes this
disclosure will ensure that the features of the transactions are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks, in
light of the facts and circumstances, consistent with section 1032(a)
of the Dodd-Frank Act. The Bureau also believe this information will
improve consumer awareness and understanding of transactions involving
residential mortgage loans through the use of disclosures, and is in
the interest of consumers and in the public interest.
Proposed Sec. 1026.37(j) requires disclosure of the index and
margin for an adjustable rate loan for which the interest rate will
adjust according to an external index. For a loan with an interest rate
that changes based on scheduled or pre-determined interest rate
adjustments and does not also change based on the adjustment of an
external index, such as a ``step-rate'' product, proposed Sec.
1026.37(j) requires disclosure of the amount of any adjustments to the
interest rate that are scheduled and their frequency. The table also
requires disclosure of: (i) The interest rate at consummation of the
loan transaction; (ii) the minimum and maximum possible interest rates
after the introductory rate expires; (iii) the maximum possible change
for the first adjustment of the interest rate; (iv) the maximum
possible change for subsequent adjustments of the interest rate; (v)
the number of months after interest for the first regularly scheduled
periodic principal and interest payment begins to accrue when the
interest rate may first change; and (vi) the frequency of subsequent
interest rate adjustments.
Proposed comment 37(j)-1 clarifies that the table required by
proposed Sec. 1026.37(j) may only be provided in the Loan Estimate
when the interest rate may change after consummation. The creditor is
not permitted to disclose the table in the Loan Estimate if the
interest rate will remain fixed, even if the table is left blank or
disclosed with an ``N/A'' within each row. As with the AP table, the
Bureau believes that the inclusion of the AIR table in such cases would
be unduly distracting and confusing to a consumer and potentially cause
information overload--especially if an entire table is included only to
be marked ``not applicable.'' As the information within the table must
be determined dynamically, depending on each transaction's terms, the
Bureau believes a requirement that it be omitted when not applicable is
unlikely to be a significant additional burden. In the discussion of
proposed Sec. 1026.37(i) above, the Bureau seeks comment on whether
this dynamic inclusion/exclusion requirement would be unduly burdensome
for creditors.
Proposed comment 37(j)(1)-1 provides guidance regarding how the
name of the index may be shortened. Proposed comment 37(j)(2)-1
clarifies that the table discloses the information required by proposed
Sec. 1026.37(j)(2) only if the loan does not also permit the interest
rate to adjust according to an external index. Proposed comment
37(j)(3)-1 provides guidance regarding the initial interest rate that
must be disclosed. Proposed comment 37(j)(4)-1 clarifies how the
minimum interest rate should be disclosed if the legal obligation does
not state a minimum rate. Proposed comment 37(j)(4)-2 clarifies how the
maximum interest rate should be disclosed if the legal obligation does
not state a maximum interest rate. While Sec. 1026.30 currently
provides that a creditor must include a maximum interest rate in any
closed-end consumer credit contract secured by a dwelling for which the
annual percentage rate may increase after consummation, that section
applies only to transactions secured by a dwelling. The disclosure
required by proposed Sec. 1026.37(j)(4) applies to transactions
subject to Sec. 1026.19(e), which includes consumer credit
transactions secured by real property, which may not include a
dwelling.
Proposed comment 37(j)(5)-1 clarifies that if the exact month of
the first adjustment to the interest rate is not known at the time the
disclosure is provided, the earliest possible month must be disclosed
under proposed Sec. 1026.37(j)(6). Proposed comment 37(j)(6)-1
clarifies that when more than one limit applies to subsequent
adjustments to the interest rate, the largest amount must be disclosed
under proposed Sec. 1026.37(j)(6).
The format required by proposed Sec. 1026.37(o), and illustrated
by proposed form H-24(C) in appendix H to this part, provides the
information required by proposed Sec. 1026.37(j) in a concise, single
table. This table appears immediately adjacent to the AP table required
by proposed Sec. 1026.37(i) for loans that permit the periodic
principal and interest payment to adjust based on an adjustment other
than an adjustment to the interest rate. The table uses concise labels
and bold subheadings for disclosures of the frequency of interest rate
changes and the limits on interest rate changes. Based on its testing,
the Bureau believes this format displays the information in a clear,
readily visible, and understandable manner for consumers.
37(k) Contact Information
Under TILA section 128(a)(1) and Regulation Z Sec. 1026.18(a), the
TILA disclosures must include the identity of the creditor. Comment
18(a)-1 clarifies that the ``identity'' of the creditor must include
the name of the creditor, but may also include the creditor's address
and/or telephone number. As stated in appendix C to Regulation X, the
RESPA GFE must include the name, address, phone number, and email
address (if any) of the loan originator.
TILA, RESPA, and their implementing regulations do not currently
require the disclosure of contact information for the individual loan
officer, however. Therefore, the Bureau is proposing to require that
the Loan Estimate contain certain contact information for the loan
officer as set forth in proposed Sec. 1026.37(k) based on its
authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank
Act section 1032(a), and, for residential mortgage loans, Dodd-Frank
Act section 1405(b). The Bureau believes that this contact information
will effectuate the purposes of TILA and RESPA by facilitating the
informed use of credit and ensuring that consumers are provided with
greater and more timely information on the costs of the settlement
process. Providing consumers with multiple types of contact information
for the loan officers with whom they interact on the transaction will
allow consumers easier access to information relevant to the
transaction (including costs), which in turn ensures that the features
of the transaction are fully, accurately, and effectively disclosed to
consumers in a matter that permits consumers to understand the costs,
benefits, and risks associated with the transaction in light of the
facts and circumstances, consistent with Dodd-Frank Act section
1032(a). The Bureau also believes such
[[Page 51221]]
disclosure will improve consumers' awareness and understanding of
residential mortgage transactions, which is in the interest of
consumers and the public, consistent with Dodd-Frank Act section
1405(b).
In light of the differing requirements under TILA and RESPA with
regard to the types of contact information disclosed on the early TILA
disclosure and RESPA GFE, respectively, the Bureau also is proposing
Sec. 1026.37(k) based on its mandate under sections 1032(f), 1098, and
1100A of the Dodd-Frank Act to propose rules and forms that combine the
disclosures required under TILA and sections 4 and 5 of RESPA into a
single, integrated disclosure for mortgage loan transactions covered by
those laws. As discussed above, appendix C to Regulation X states that
the RESPA GFE must include the name, address, phone number, and email
address (if any) of the loan originator. Thus, as part of the Bureau's
statutory mandate to integrate the TILA and RESPA disclosures, the
Bureau must integrate the disclosures currently required under
Regulation X with the TILA-mandated disclosures of the creditor's
identity, discussed above.
Furthermore, TILA section 129B(b)(1)(B), 15 U.S.C. 1639b(b)(1)(B),
which was added by section 1402(a)(2) of the Dodd-Frank Act, mandates
that each mortgage originator include on all loan documents any unique
identifier of the mortgage originator provided by the Nationwide
Mortgage Licensing System and Registry (NMLSR or NMLS). TILA section
129B(b)(1)(B) will be implemented in a separate rulemaking. The Bureau
proposes to use its authority under TILA section 105(a) and Dodd-Frank
Act sections 1032(a) and, for residential mortgage loans, 1405(b) of
the Dodd-Frank Act to propose Sec. 1026.37(k) for transactions subject
to proposed Sec. 1026.19(e). Proposed Sec. 1026.37(k) requires
creditors to provide certain contact and licensing information for
themselves, the mortgage broker, and their respective loan officers, as
applicable. The Bureau expects to harmonize this proposal with the
rulemaking implementing TILA section 129B(b)(1)(B).
The Bureau believes that requiring on the Loan Estimate the
disclosure of the name and NMLSR identification number (NMLSR ID)
number, if any, for the creditor, mortgage broker, and the loan
officers employed by such entities, as applicable (or, if none, the
license number or other unique identifier, if any, issued by the
applicable State, locality, or other regulatory body with
responsibility for licensing and/or registering such entity's or
individual's business activities) may provide consumers with the
information they need to conduct the due diligence necessary to ensure
that any creditor, mortgage broker, and associated loan officer
selected to originate the loan are appropriately licensed. Having this
information may help consumers assess the risks associated with
services and service providers retained in connection with the
transaction, which in turn promotes the informed use of credit
(consistent with TILA section 105(a)), ensures that consumers are
provided with greater and more timely information on the costs of the
settlement process (consistent with RESPA section 19(a)), ensures that
the features of the transaction are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with the transaction in light
of the facts and circumstances (consistent with Dodd-Frank Act section
1032(a)), and improves consumers' awareness and understanding of
residential mortgage transactions, which is in the interest of
consumers and the public (consistent with Dodd-Frank Act section
1405(b)).
Thus, under the master heading ``Additional Information About This
Loan,'' proposed Sec. 1026.37(k)(1) requires the name and NMLSR ID, if
any, for the creditor and the mortgage broker, if applicable. Proposed
Sec. 1026.37(k)(2) requires the name and NMLSR ID for the loan officer
associated with the creditor and mortgage broker identified in proposed
Sec. 1026.37(k)(1), if applicable. In the event the creditor, mortgage
broker, or individual loan officer has not been assigned an NMLSR ID,
proposed Sec. 1026.37(k)(1) and (2) require the license number or
other unique identifier issued by the applicable jurisdiction or
regulating body with which the creditor or mortgage broker is licensed
and/or registered to be disclosed, if any. Proposed Sec. 1026.37(k)(3)
requires an email address and phone number for each loan officer
identified in proposed Sec. 1026.37(k)(2).
Proposed comment 37(k)-1 provides a description of the NMLSR ID.
Proposed comment 37(k)-1 also references provisions of the Secure and
Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)
requiring individuals to register or obtain a license through the
NMLSR, and clarifies that the information required in Sec.
1026.37(k)(1) and (2) must be provided for any creditor, mortgage
broker, and loan officer that has obtained an NMLSR ID. Proposed
comment 37(k)-2 provides clarification as to the nature of the license
or other unique identifier that is to be disclosed in the event the
creditor, mortgage broker, or individual loan officer has not been
assigned an NMLSR ID. Proposed comment 37(k)-3 clarifies that the loan
officer is the individual who interacts most frequently with the
consumer and who has an NMLSR identification number or, if none, a
license number, or other unique identifier to be disclosed under
proposed Sec. 1026.37(k)(2), as applicable.
37(l) Comparisons
TILA generally focuses on disclosing the long-term cost of credit.
However, many of the disclosures required by the statute have proven
confusing for consumers. As discussed below and in part II above,
Federal agencies have long recognized that certain statutorily-required
disclosures, such as the finance charge and amount financed, are not
effective for communicating the cost of credit to consumers and that,
in some cases, the disclosures hinder consumers' ability to understand
their credit terms.
One problem with the TILA disclosures is consumer confusion between
common contract terms, such as interest rate and loan amount, and the
required statutory disclosures. For example, as discussed below,
consumer testing conducted by the Board indicates that consumers are
confused about the difference between the required TILA disclosure of
the ``amount financed'' and the amount of their loan or sale price of
the property. Similarly, the Board-HUD Joint Report and consumer
testing conducted by the Board and the Bureau indicates consumer
confusion over the difference between the contract interest rate and
the APR, in part because both are expressed in the form of a rate and
in part because of the difficulty in communicating to consumers the
meaning of the APR. Third, the TILA disclosures focus on the cost of
credit over the entire life of the loan, which is of limited use in the
context of mortgage lending since consumers generally do not hold those
loans for the entire loan term. As discussed below and in part III
above, the results of the Bureau's consumer testing is consistent with
these concerns.
The Bureau believes that providing consumers with useful tools to
compare loans is critical to carrying out the purposes of TILA, RESPA,
and the Dodd-Frank Act. Accordingly, for the reasons described below,
the Bureau is proposing to group several key metrics together on the
first page of the Loan Estimate and shift others to the last page of
the Loan Estimate. In addition, the
[[Page 51222]]
Bureau is proposing to provide certain items only on the Closing
Disclosure because they are less useful to consumers early in the
lending process and create the risk of undermining the effectiveness of
the Loan Estimate. The Bureau proposes this approach to the TILA
disclosures because consumer testing conducted by the Bureau, as well
as prior testing conducted by the Board, strongly indicates that
consumers benefit from a disclosure that highlights loan terms that are
useful to consumers in evaluating the cost of credit and consumers'
ability to afford those costs, such as the interest rate, monthly
payment amount, and amount of cash needed to close the loan, and
deemphasizes terms that have proven confusing or unhelpful to
consumers.
The proposed rule shifts some statutorily required disclosures from
the first page because the Bureau's consumer testing shows that
consumers benefit from this approach. The proposed forms focus on
presenting the basic loan terms and risk features to consumers first,
because these disclosures are critical to evaluating affordability and
facilitating comparison of loans. The Bureau's consumer testing
confirms that consumers are able to locate the longer-term measures of
the cost of credit, notwithstanding the fact that the proposed forms
shift those disclosures from the first page of the disclosure.
Moreover, the Bureau's consumer testing suggests that moving the
disclosure of the APR away from the disclosure of the loan's contract
interest rate and placing the APR with other long-term metrics may
reduce consumer confusion and highlight the APR as a special tool for
comparing costs over time.
Accordingly, proposed Sec. 1026.37(l) requires creditors to
disclose, under the master heading ``Additional Information About This
Loan,'' information required by TILA section 128(a)(4), (5), (8), and
(19) in a separate table under the heading ``Comparisons,'' along with
the statement, ``Use these measures to compare this loan with other
loans.'' Specifically, the table required by proposed Sec. 1026.37(l)
must contain the total payments (of principal, interest, mortgage
insurance, and loan costs) a consumer will have made through the end of
the 60th month after the due date of the first periodic payment (In 5
Years), the annual percentage rate (APR), and the total interest
percentage (TIP), as described in Sec. 1026.37(l)(1) through (3).
Pursuant to proposed Sec. 1026.37(o) and proposed form H-24, the table
required by proposed Sec. 1026.37(l) will appear on the final page of
the Loan Estimate, apart from the key loan terms identified on the
first page of the Loan Estimate. Based on research regarding consumer
comprehension and behavior and the results of the Bureau's consumer
testing, as discussed above, the Bureau believes that the disclosure of
these calculations on the final page of the Loan Estimate and apart
from the key loan terms may enhance the overall understanding of the
disclosures.
37(l)(1) In Five Years
TILA section 128(a)(5) and (8) requires creditors to disclose the
sum of the amount financed and the finance charge using the term
``Total of Payments,'' and a descriptive explanation of that term. 15
U.S.C. 1638(a)(5), (8). Current Sec. 1026.18(h) implements these
statutory provisions by requiring creditors to disclose the ``total of
payments,'' using that term, and a descriptive explanation that the
figure represents the amount the consumer will have paid after making
all scheduled payments. Current comment 18(h)-2 provides that creditors
calculate the total of payments amount for transactions subject to
current Sec. 1026.18(s) using the rules in current Sec. 1026.18(g)
and associated commentary and, for adjustable-rate transactions,
comments 17(c)(1)-8 and -10. Current comment 18(g)-1 provides guidance
to creditors on the amounts to be included in the total of payments
calculation. Current comment 18(h)-1 allows creditors to revise the
total of payments descriptive statement for variable-rate transactions
to convey that the disclosed amount is based on the annual percentage
rate and may change. In addition, current comments 18(h)-3 and -4
permit creditors to omit the total of payments disclosure in certain
single-payment transactions and for demand obligations that have no
alternate maturity rate.
The total of payments disclosure has historically been confusing
for consumers. For example, consumer testing conducted for purposes of
the Board's 2009 Closed-End Proposal found that many consumers did not
understand the total of payments disclosure and that, even when
consumers understood the meaning, most did not consider it important in
their decision-making process. Macro 2009 Closed-End Report at 11, v.
Based on the Board's testing and prior research about the total of
payment disclosure, the Bureau considered alternative metrics that
might prove more useful to consumers. As discussed above, one problem
with the TILA-required disclosures is that they are calculated over the
entire length of the loan, although the Bureau understands that
consumers may typically only hold mortgage loans for five to seven
years before selling the property or refinancing. Accordingly, the
total of payments over the life of the loan is such a large number that
consumers often find it overwhelming or unrealistic, and therefore not
a meaningful disclosure of the cost of credit. Furthermore, the total
of payments over the life of the loan does not provide an accurate
basis for identifying the lowest cost loan for the time a consumer will
realistically hold the loan.
Since the Board's testing has already shown that consumers do not
understand the total of payments disclosure, the Bureau's testing
focused on expressions of dollar amounts that are more likely to be
understood and used by consumers. The Bureau also recognized that
simply providing one disclosure would not give consumers an accurate
view of how much their payments actually reduce the principal balance
of the loan, which would help consumers pick the loan that puts them in
the best financial position after the five to seven year mark if they
do not sell the property or refinance. Accordingly, the Bureau
developed a two-element disclosure.
First, proposed Sec. 1026.37(l)(1)(i) requires the creditor to
disclose the dollar amount of the total principal, interest, mortgage
insurance, and loan costs (disclosed pursuant to proposed Sec.
1026.37(f)) scheduled to be paid through the end of the 60th month
after the due date of the first periodic payment, expressed as a dollar
amount, along with the statement ``Total you will have paid in
principal, interest, mortgage insurance, and loan costs.'' Proposed
comment 37(l)(1)(i)-1 clarifies that the amount disclosed pursuant to
Sec. 1026.37(l)(1)(i) is the sum of principal, interest, mortgage
insurance, and loan costs scheduled to be paid through the end of the
60th month after the due date of the first periodic payment. The
comment also clarifies that, for purposes of Sec. 1026.37(l)(1)(i),
interest is calculated using the fully-indexed rate at consummation and
includes any prepaid interest. The comment further provides that, for
purposes of Sec. 1026.37(l)(1)(i), the creditor assumes that the
consumer makes payments as scheduled and on time. In addition, proposed
comment 37(l)(1)(i)-1 provides that, for purposes of Sec.
1026.37(l)(1)(i), mortgage insurance is defined pursuant to comment
37(c)(1)(i)(C)-1, and includes prepaid or escrowed mortgage insurance,
and that loan costs are those costs disclosed
[[Page 51223]]
pursuant to paragraph 1026.37(f). Proposed comment 37(l)(1)(i)-2
provides guidance to creditors on calculating principal and interest
disclosures for loans with negative amortization features.
Second, proposed Sec. 1026.37(l)(1)(ii) requires the creditor to
disclose the dollar amount of principal scheduled to be paid through
the end of the 60th month after the due date of the first periodic
payment, expressed as a dollar amount, along with the statement
``Principal you will have paid off.'' Proposed comment 37(l)(1)(ii)-1
clarifies that the disclosure required by proposed Sec.
1026.37(l)(1)(ii) is calculated in the same manner as the disclosure
required by proposed Sec. 1026.37(l)(1)(i), provided, however, that
the disclosed amount reflects only the total payments to principal
through the end of the 60th month after the due date of the first
periodic payment.
Proposed Sec. 1026.37(l)(1)(i) implements the requirements of TILA
section 128(a)(5) and (8) for transactions subject to proposed Sec.
1026.19(e). The Bureau proposes to modify the total of payments
disclosure to reflect the total payments over five years, rather than
the life of the loan, on the Loan Estimate provided to consumers near
the time of application. The Bureau proposes this modification pursuant
to its authority under TILA section 105(a), Dodd-Frank Act 1032(a),
and, for residential mortgage loans, Dodd-Frank Act section 1405(b). By
reducing the scope of the total of payments disclosure to five years
after the due date of the first periodic payment, the disclosure more
accurately reflects the typical life of a mortgage loan, thus
effectuating the purposes of TILA by enhancing consumer understanding
of mortgage transactions. For this same reason, the proposed
modification will ensure that the features of the mortgage transaction
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the mortgage transaction, in light of the facts
and circumstances, consistent with Dodd-Frank Act section 1032(a), and
will improve consumer awareness and understanding of residential
mortgage loans and is in the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b).
As discussed in the Kleimann Testing Report, consumer testing
conducted by the Bureau indicates that consumers can use the ``In 5
Years'' disclosure to compare loans they are considering and that, in
some instances, these disclosures increase consumers' understanding of
loan costs. For example, some consumers who did not understand from
page one of the Loan Estimate that a loan provided for interest-only
payments for a specified period were able to recognize that they would
be making interest-only payments as a result of the principal paid ``In
5 Years'' disclosure. Consumer participants understood the relationship
of principal and interest and generally wanted to choose loans with
more principal paid off during the first five years. Industry feedback
provided in response to the Bureau's Small Business Review Panel
Outline stated that implementation of the ``In 5 Years'' disclosure
will require additional training and systems changes, and that it is
unclear that the disclosure will assist consumers. The Bureau has
considered this feedback but, in light of the research and consumer
testing results discussed above, nevertheless believes that the ``In 5
Years'' disclosure will provide important benefits to consumers by
disclosing the total of payments over a period that more accurately
reflects the typical life of a mortgage loan.
The Bureau also proposes to exercise its authority under TILA
section 105(a), Dodd-Frank Act section 1032(a), and, for residential
mortgage loans, Dodd-Frank Act section 1405(b) to include mortgage
insurance and other loan costs in the ``In 5 Years'' calculation. TILA
section 128(a)(5) defines the total of payments as the sum of the
amount financed and the finance charge. However, the Bureau believes
including mortgage insurance and other loan costs, rather than the
finance charge, in the calculation may enhance consumer understanding
of mortgage transactions because consumers can cross-reference other
sections of the Loan Estimate to determine what costs are actually
included in the ``In 5 Years'' disclosure, permitting consumers to more
readily compare loans, consistent with the purposes of TILA. In
contrast, as discussed below, consumers have no way to know which costs
are included in the finance charge. For these same reasons, the Bureau
believes that the proposed modification will ensure that the features
of consumer credit transactions secured by real property are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances, consistent with section 1032(a) of the Dodd-Frank Act,
and will improve consumer awareness and understanding of residential
mortgage loans and be in the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b).
Proposed Sec. 1026.37(l)(1)(ii) requires creditors to disclose the
dollar amount of principal scheduled to be paid through the end of the
60th month after the due date of the first periodic payment. The Bureau
proposes this additional requirement pursuant to its authority under
TILA section 105(a) and Dodd-Frank Act section 1032(a). As discussed
above, the Bureau believes the proposed disclosure will enhance
consumer understanding of the allocation of their payments between
principal and interest and help consumers pick the loan that puts them
in the best financial position after the five to seven year mark if
they do not sell the property or refinance, consistent with the
purposes of TILA. For these same reasons, consistent with section
1032(a) of the Dodd-Frank Act, the Bureau believes that the disclosure
would ensure that the features of consumer credit transactions secured
by real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.
The Bureau recognizes, however, that the total of payments
disclosure is commonly used by creditors and supervisory agencies for
compliance purposes, as well as consumer advocates. Therefore, under
the proposal, creditors would be required to disclose a modified total
of payments over the loan's full term in the Closing Disclosure
provided to consumers at least three days prior to consummation. See
proposed Sec. 1026.38(o)(1).
37(l)(2) Annual Percentage Rate
TILA section 128(a)(4) and (8) requires creditors to disclose the
annual percentage rate, together with a brief descriptive statement of
the annual percentage rate. 15 U.S.C. 1638(a)(4), (a)(8). Current Sec.
1026.18(e) implements these statutory provisions by requiring creditors
to disclose the ``annual percentage rate,'' using that term, and a
brief description such as ``the cost of your credit as a yearly rate.''
In addition, TILA section 122(a) requires that the annual percentage
rate be more conspicuous than other disclosures, except the disclosure
of the creditor's identity. 15 U.S.C. 1632(a). This requirement is also
implemented in current Sec. 1026.18(e).
Concerns have been raised repeatedly over the last two decades that
consumers are confused by what the APR represents and do not use it for
its intended purpose: to compare loans.
[[Page 51224]]
The Board-HUD Joint Report noted that consumers generally do not
understand what the APR represents or how to use it, and that some
consumers mistake the APR with the interest rate. Board-HUD Joint
Report at 10. Consumer testing conducted for purposes of the Board's
2009 Closed-End Proposal revealed these same problems with the APR. 74
FR at 43296. The Board tested alternative descriptions and formats for
the APR, but the APR continued to confuse consumers. Id. The Board's
consumer testing also indicated that consumers did not use the APR to
compare loans but, instead, focused on the interest rate, monthly
payment amount, and settlement costs when comparing loan offers. Id. at
43296-97.
As discussed in the Kleimann Testing Report, the Bureau's consumer
testing similarly indicates consumer confusion regarding the APR
disclosure and that consumers do not use the APR when comparing loans.
Like the prior testing, the Bureau's consumer testing indicates that
consumers do not grasp the concept of the APR and often confuse it with
the loan's interest rate. Most consumers confused the APR with the
interest rate and misinterpreted the meaning of the disclosure. In
Round 3 of the Bureau's consumer testing, the statement ``This is not
your interest rate'' was added to the description of the APR to reduce
consumer confusion between the interest rate and the APR. While most
consumer participants understood from that statement that the interest
rate and APR were separate items, they still had trouble understanding
what the APR means, how it relates to the interest rate, and how it is
useful as a comparison. Participants also misunderstood the APR in
other ways, such as the average interest rate of other loans, an
interest rate imposed once a year, and an interest rate listed by the
creditor to mislead the consumer.
Pursuant to its implementation authority under TILA section 105(a),
the Bureau proposes Sec. 1026.37(l)(2) to implement the requirements
of TILA section 128(a)(4) and (8) for transactions subject to proposed
Sec. 1026.19(e) by requiring creditors to disclose the ``annual
percentage rate'' and the abbreviation ``APR,'' together with the
following statement: ``Your costs over the loan term expressed as a
rate. This is not your interest rate.'' Further, in light of consumer
confusion over the APR and the fact that consumers do not appear to use
the APR in comparing loan offers, the Bureau proposes to exercise its
authority under TILA section 105(a) and (f), Dodd-Frank Act section
1032(a) and, for residential mortgage loans, Dodd-Frank Act section
1405(b), to except transactions subject to Sec. 1026.19(e) from the
requirement of TILA section 122(a) that the annual percentage rate
disclosure be more conspicuous than other disclosures, except the
disclosure of the creditor's identity. As discussed above, testing
conducted by the Board and the Bureau consistently indicate consumer
confusion over the APR. When the Bureau added the statement ``this is
not your interest rate'' to the descriptive explanation of the APR
during its consumer testing, although confusion was reduced,
participants still did not understand how to use the APR. Instead,
participants used measures they readily understood, such as the maximum
interest rates, maximum periodic payments, and closing cost details to
evaluate, compare, and verify loan terms. Participants were able to use
these measures to evaluate and compare loans, making sophisticated
trade-offs, often based on rationales involving their personal
circumstances.
Accordingly, the Bureau believes the proposed exemption may enhance
consumer understanding by separating the APR disclosure from the
interest rate disclosure, which could prevent consumer confusion over
the two rates and reduce the possibility of information overload for
consumers attempting to compare loan terms, consistent with the
purposes of TILA. The Bureau believes that grouping the APR with the
``In 5 Years'' and Total Interest Percentage disclosures will also
enhance consumer understanding by emphasizing that the APR is a special
metric created specifically for comparison purposes that may help
consumers think about their costs over their life of the loan. In
addition, the purpose of the integrated disclosure under TILA section
105(b) and RESPA section 4(a) is to ``aid the borrower * * * in
understanding the transaction by utilizing readily understandable
language to simplify the technical nature of the disclosures.'' The
Bureau believes that placing measures that are readily understandable
to consumers on the first page of the Loan Estimate, and complex
measures that consumers find confusing on latter pages, meets this
statutory objective.
The Bureau has also considered the factors in TILA section 105(f)
and believes that an exception is appropriate under that provision.
Specifically, the Bureau believes that the proposed exemption is
appropriate for all affected borrowers, regardless of their other
financial arrangements and financial sophistication and the importance
of the loan to them. Similarly, the Bureau believes that the proposed
exemption is appropriate for all affected loans, regardless of the
amount of the loan and whether the loan is secured by the principal
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers. As discussed above, consumer testing
and historical research indicate that consumers do not understand the
APR and do not use it when shopping for a loan. Highlighting the APR on
the disclosure form contributes to overall consumer confusion and
information overload, complicates the mortgage lending process, and
hinders consumers' ability to understand important loan terms. As such,
the Bureau believes that the proposed exemption from the requirement
that the APR be disclosed more conspicuously than other disclosures
will not undermine the goal of consumer protection but, instead, will
improve consumer understanding of the loans. For all these reasons, the
Bureau believes that the proposed APR disclosure will improve consumer
awareness and understanding of residential mortgage loans and is in the
interest of consumers and the public, consistent with Dodd-Frank Act
section 1405(b), and that, consistent with section 1032(a) of the Dodd-
Frank Act, the disclosure would ensure that the features of consumer
credit transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances.
In response to the Bureau's Small Business Review Panel Outline,
some consumer advocacy groups expressed concern about disclosing the
APR on the final page of the Loan Estimate and, as discussed below, on
the final page of the Closing Disclosure. Specifically, this feedback
stated that the APR is a widely recognized disclosure that is a useful
tool for consumers in comparing and understanding mortgage loans, and
that deemphasizing the APR is not the most effective way of dealing
with known problems with the APR disclosure. Instead, these groups
suggested that the APR disclosure can be improved through an all-in
APR, better descriptive language of the APR, or by supplementing the
APR with other disclosures. For example, consumer advocacy groups
recommended that the APR be more prominent than the
[[Page 51225]]
interest rate on the Loan Estimate and to be disclosed in a graphic
format.
The Bureau has considered this feedback, but based on the long
history of consumer confusion of the APR, the Board's prior efforts to
improve the APR disclosure, and the Bureau's testing of various
descriptive statements of the APR, described above, the Bureau believes
that the proposed approach to the APR could provide important benefits
to consumers by emphasizing the difference between the APR and the
contract interest rate. The Bureau is, however, proposing to improve
the APR disclosure through a more inclusive definition of the finance
charge, as discussed above, and a descriptive statement that clearly
distinguishes the APR from the interest rate. The Bureau also intends
to develop supplemental educational materials in booklets and its Web
site that will further explain how the APR differs from the interest
rate, how it provides a good way of comparing the entire costs of the
loan over the entire term, and why consumers may want to use both the
``In 5 Years'' and APR figures to think about their financial futures.
37(l)(3) Total Interest Percentage
The Dodd-Frank Act amended TILA to add new section 128(a)(19),
which requires that, in the case of a residential mortgage loan, the
creditor disclose the total amount of interest that the consumer will
pay over the life of the loan as a percentage of the principal of the
loan. That section also requires that the disclosure be computed
assuming the consumer makes each monthly payment in full and on time,
and does not make any over-payments.
The Bureau proposes Sec. 1026.37(l)(3) to implement TILA section
128(a)(19) by requiring creditors to disclose the total interest
percentage, using that term and the abbreviation ``TIP,'' and requiring
creditors to disclose the descriptive statement ``The total amount of
interest that you will pay over the loan term as a percentage of your
loan amount.'' Proposed Sec. 1026.37(l)(3) also provides that the
``total interest percentage'' is the total amount of interest that the
consumer will pay over the life of the loan, expressed as a percentage
of the principal of the loan. Proposed comments 37(l)(3)-1 through -3
provide further guidance to creditors on calculation of the total
interest percentage. Proposed comment 37(l)(3)-1 provides that, when
calculating the total interest percentage, the creditor assumes that
the consumer will make each payment in full and on time, and will not
make any additional payments. Proposed comment 37(l)(3)-2 provides
that, for adjustable-rate mortgages, Sec. 1026.37(l)-(3) requires that
the creditor compute the total interest percentage using the fully-
indexed rate and that, for step-rate mortgages, Sec. 1026.37(l)(3)
requires that the creditor compute the total interest percentage in
accordance with Sec. 1026.17(c)(1) and its commentary. Proposed
comment 37(l)(3)-3 provides that, for loans that permit negative
amortization, Sec. 1026.37(l)(3) requires that the creditor compute
the total interest percentage using the minimum payment amount until
the consumer must begin making fully amortizing payments under the
terms of the legal obligation.
As discussed in the Kleimann Testing Report, the Bureau's consumer
testing indicates that consumers are able to use the total interest
percentage to compare loans, and can generally recognize that better
loans disclose a lower total interest percentage. Along with the ``In
Five Years'' disclosure, total interest percentage was cited as the
most useful comparative tool. However, some consumers did not
understand the total interest disclosure and questioned why it is
included on the form. Even consumers who used the total interest
percentage disclosure generally did not understand the more technical
aspects of the total interest percentage disclosure, such as the
difficulty of using the measure in an adjustable-rate loan. Concerns
were also raised during the Bureau's Small Business Review Panel, by
industry in feedback provided in response to the Small Business Review
Panel Outline, and in feedback received through the Bureau's Web site
that the total interest percentage could be difficult to calculate and
explain to consumers, and would not likely be helpful to consumer. See,
e.g., Small Business Review Panel Report at 20.
In light of the Bureau's testing of the total interest percentage
disclosure and the concerns about consumers' ability to understand the
disclosure, the Bureau proposes to require creditors to disclose the
descriptive statement, ``The total amount of interest that you will pay
over the loan term as a percentage of your loan amount.'' The Bureau
proposes this pursuant to its authority under TILA section 105(a),
Dodd-Frank Act section 1032(a), and, for residential mortgage loans,
Dodd-Frank Act section 1405(b). Based on consumer testing, the Bureau
believes that consumer understanding of the total interest percentage
disclosure may be enhanced through the descriptive statement of the
total interest percentage, consistent with the purposes of TILA, and
that the proposed descriptive statement is in the interest of consumers
and the public, consistent with section 1405(b) of the Dodd-Frank Act.
For these reasons, the Bureau also believes that the disclosure of the
descriptive statement regarding the total interest percentage may
ensure that the features of consumer credit transactions secured by
real property are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances, consistent with section 1032(a) of the
Dodd-Frank Act.
Notwithstanding the proposed modifications, based on concerns
raised by the Small Business Review Panel, industry feedback, and its
own consumer testing, the Bureau remains concerned that the total
interest percentage may not be a useful tool for consumers and could
create confusion and contribute to information overload. In light of
these concerns, the Bureau alternatively proposes to use its exception
and modification authority under TILA section 105(a) and (f), Dodd-
Frank Act section 1032(a), and, for residential mortgage loans, Dodd-
Frank Act section 1405(b) to exempt transactions subject to proposed
Sec. 1026.19(e) and (f) from the requirements of TILA section
128(a)(19). The Bureau believes the proposed exemption will carry out
the purposes of TILA, consistent with TILA section 105(a), by avoiding
consumer confusion and information overload, thereby promoting the
informed use of credit. For these same reasons, the proposed exemption
will help ensure that the features of the mortgage transaction are
fully, accurately and effectively disclosed to consumers in a manner
that permits consumers to understand the costs, benefits, and risks
associated with the mortgage transaction, in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a), and will
improve consumer awareness and understanding of residential mortgage
loans and is in the interest of consumers and the public, consistent
with Dodd-Frank Act section 1405(b). Finally, the Bureau has considered
the factors in TILA section 105(f) and believes that, for the reasons
discussed above, an exception may be appropriate under that provision.
Specifically, the Bureau believes that the proposed exemption is
appropriate for all affected borrowers, regardless of their other
financial arrangements and financial sophistication and the importance
of the loan to them. Similarly, the Bureau believes that the proposed
exemption is appropriate for all affected loans, regardless of the
amount of the loan and
[[Page 51226]]
whether the loan is secured by the principal residence of the consumer.
Furthermore, the Bureau believes that, on balance, the proposed
exemption will simplify the credit process without undermining the goal
of consumer protection or denying important benefits to consumers.
Based on these considerations, the results of the Bureau's consumer
testing, and the analysis discussed elsewhere in this proposal, the
Bureau believes that the proposed exemption may be appropriate. The
Bureau solicits comment on the proposed exemption and, alternatively,
whether the Bureau should implement the total interest percentage
disclosure only in the Closing Disclosure.
Other Statutory Disclosures
As discussed above, the research regarding consumer comprehension
and behavior and the results of the Board's and the Bureau's consumer
testing suggest that an effective disclosure regime minimizes the risk
of consumer distraction and information overload by providing only
information that will assist most consumers. The Bureau therefore
carefully evaluated each statutory element required under TILA, whether
the element has been required for decades or is newly imposed by Dodd-
Frank, as to its usefulness to consumers and others at early stages of
the loan process, during the real estate closing process, and as
general reference information over the life of the loan. Based on that
analysis, the Bureau is proposing to use its authority under TILA
section 105(a) and (f), Dodd-Frank Act section 1032(a), and, for
residential mortgage loans, Dodd-Frank Act section 1405(b), to except
from and modify the timing requirements for certain disclosures
required by TILA section 128. Specifically, those disclosures are: The
amount financed (TILA section 128(a)(2)), the finance charge (TILA
section 128(a)(3)), a statement that the creditor is taking a security
interest in the consumer's property (TILA section 128(a)(9)), a
statement that the consumer should refer to the appropriate contract
document for information about their loan (TILA section 128(a)(12)), a
statement regarding certain tax implications (TILA section 128(a)(15)),
and the creditor's cost of funds (TILA section 128(a)(17)).
The Bureau believes the proposed exemptions discussed above will
carry out the purposes of TILA, consistent with TILA section 105(a), by
avoiding consumer confusion and information overload, thereby promoting
the informed use of credit, as discussed above. For these same reasons,
the proposed exemptions will help ensure that the features of the
mortgage transaction are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the mortgage transaction,
consistent with Dodd-Frank Act section 1032(a), and will improve
consumer awareness and understanding of residential mortgage loans and
are in the interest of consumers and the public, consistent with Dodd-
Frank Act section 1405(b). The Bureau has considered the factors in
TILA section 105(f) and believes that, for the reasons discussed above,
an exception is appropriate under that provision. Specifically, the
Bureau believes that the proposed exemption is appropriate for all
affected borrowers, regardless of their other financial arrangements
and financial sophistication and the importance of the loan to them.
Similarly, the Bureau believes that the proposed exemption is
appropriate for all affected loans, regardless of the amount of the
loan and whether the loan is secured by the principal residence of the
consumer. Furthermore, the Bureau believes that, on balance, the
proposed exemption will simplify the credit process without undermining
the goal of consumer protection or denying important benefits to
consumers. Based on these considerations, the results of the Bureau's
consumer testing, and the analysis discussed elsewhere in this
proposal, the Bureau believes that the proposed exemptions are
appropriate. The proposed exclusion of the finance charge and the
amount financed from the Loan Estimate is discussed at length below.
Finance charge. TILA section 128(a)(3) and (8) requires creditors
to disclose the ``finance charge'' and a brief descriptive statement of
the finance charge. 15 U.S.C. 1638(a)(3), (a)(8). For transactions
subject to RESPA, TILA section 128(b)(2)(A) requires creditors to
provide this disclosure not later than three business days after the
creditor receives the consumer's application, and at least seven
business days before consummation. 15 U.S.C. 1638(b)(2)(A). Current
Sec. 1026.18(d) implements TILA section 128(a)(3) and (8) by requiring
creditors to disclose the ``finance charge,'' using that term, and a
brief description such as ``the dollar amount the credit will cost
you.'' For transactions subject to RESPA, current Sec. 1026.19(a)
requires creditors to provide the finance charge disclosure not later
than the third business day after the creditor receives the consumer's
application.
Federal agency research has long recognized consumer confusion over
the finance charge. The Board-HUD Joint Report found that TILA
disclosures fall short of meeting their goal of informing consumers
about the cost of credit, in part because of consumer confusion over
the finance charge. Board-HUD Joint Report at III. Evidence of consumer
confusion over the finance charge was echoed in the Board's 2009
Closed-End Proposal. 74 FR at 43307-08. The Board's consumer testing
indicates that consumers often fail to understand that the finance
charge contains both interest and fees,\172\ and that consumers place
very little value on the finance charge when making decisions regarding
their loan.\173\ The report stated that ``[testing] participants * * *
generally disregarded the finance charge when reading their TILA
statements.''\174\
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\172\ Macro 2009 Closed-End Report at 11, 41 (stating that, in
Round 8 of the testing, ``[m]ost [participants] thought the finance
charges were equal to the amount of interest that the borrower would
pay over time; only a few understood the finance charges shown on
the form included fees as well as interest'').
\173\ For example, only one of the nine participants in one
round of the Board's testing found the finance charge useful. Id. at
35. In another round, most participants said that they would not use
the finance charge in their decision-making. Id. at 28.
\174\ Id. at 41.
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For these reasons, the Bureau proposes to exercise its authority
under TILA section 105(a) and (f) and Dodd-Frank sections 1032(a) and,
for residential mortgage loans, 1405(b), to except transactions subject
to proposed Sec. 1026.19(e) from the requirements of TILA section
128(a)(3) and (8) as it applies to the Loan Estimate provided to
consumers within three business days of application. As discussed
above, the Bureau believes that the proposed exclusion of the finance
charge disclosure from the Loan Estimate effectuates the purposes of
TILA by avoiding consumer confusion and information overload
historically associated with the finance charge disclosure, thereby
improving the informed use of credit. The Bureau has considered the
factors in TILA section 105(f) and believes that, for the reasons
discussed above, an exception is appropriate under that provision.
Specifically, the Bureau believes that the proposed exemption is
appropriate for all affected borrowers, regardless of their other
financial arrangements and financial sophistication and the importance
of the loan to them. Similarly, the Bureau believes that the proposed
exemption is appropriate for all affected loans, regardless of the
amount of the loan and whether the loan is secured by the principal
[[Page 51227]]
residence of the consumer. Furthermore, the Bureau believes that, on
balance, the proposed exemption will simplify the credit process
without undermining the goal of consumer protection or denying
important benefits to consumers. Based on these considerations, the
results of the Bureau's consumer testing, and the analysis discussed
above, the Bureau believes that the proposed exemption is appropriate.
Specifically, the Bureau does not believe that disclosure of the
finance charge on the Loan Estimate provides a meaningful benefit to
consumers in the form of useful information or protection. Rather, the
Bureau believes that disclosure of the finance charge to consumers
early in the lending process actually complicates and hinders the
process of mortgage lending because consumers do not understand the
disclosure. Removing the finance charge disclosure from the Loan
Estimate that consumers receive early in the lending process may assure
meaningful disclosure of credit terms, facilitate consumer comparison
of credit terms, and improve the informed use of credit by avoiding
information overload and improving consumer understanding of loan
terms, consistent with the purposes of TILA and with section 1405(b) of
the Dodd-Frank Act. As consumer testing indicates that consumers
generally do not use the finance charge when shopping for a loan, the
absence of the finance charge from the Loan Estimate should not detract
from consumers' understanding of their credit terms but, instead, will
permit consumers to focus on other important terms. In addition,
consistent with Dodd-Frank Act section 1032(a), removal of the finance
charge from the Loan Estimate would help ensure that the features of
consumer credit transactions secured by real property are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances.
The Bureau recognizes that creditors, consumer advocates, and State
and Federal supervisory agencies use the finance charge when
calculating or verifying the calculation of the APR, determining
compliance with certain price thresholds, and for a range of other
purposes, including the right of rescission pursuant to TILA section
125. 15 U.S.C. 1635. Accordingly, to preserve the finance charge
disclosure for these purposes, proposed Sec. 1026.38(o)(2) requires
creditors to disclose the finance charge on the Closing Disclosure
provided to consumers at least three days prior to prior to
consummation. Although concerns regarding consumer distraction and
information overload persist at the stage of the transaction where the
consumer receives the Closing Disclosure, the Bureau believes that
disclosing the finance charge with other loan calculations on the final
page of the Closing Disclosure as a general reference for the consumer
after closing will mitigate these concerns. In addition, though the
finance charge is not disclosed on the Loan Estimate, creditors must,
in order to comply with the record retention requirements in Sec.
1026.25, document the finance charge used to calculate the APR
disclosed on the Loan Estimate. As discussed above, the Bureau is
proposing conforming amendments to Sec. 1026.22 to reflect the
accuracy standards applicable to the finance charge disclosed on the
Closing Disclosure under proposed Sec. 1026.38(o)(2). The Bureau seeks
comment on whether the final rule should contain similar accuracy
standards for the finance charge used in the APR calculation for the
Loan Estimate.
Amount financed. TILA section 128(a)(2) and (8) requires creditors
to disclose the ``amount financed,'' using that term, and a brief
descriptive statement of the amount financed. 15 U.S.C. 1638(a)(2),
(a)(8). Current Sec. 1026.18(b) implements this requirement and
requires creditors to disclose the amount financed, using that term,
together with a brief description that the amount financed represents
the amount of credit of which the consumer has actual use. Like the
finance charge disclosure, for transactions subject to RESPA, TILA
section 128(b)(2)(A) requires that creditors provide a good faith
estimate of this disclosure not later than three business days after
the creditor receives the consumer's application, and at least seven
business days before consummation. 15 U.S.C. 1638(b)(2)(A). This
requirement is implemented in current Sec. 1026.19(a).
Like the finance charge, the amount financed disclosure has
historically been viewed as confusing for consumers. The Board-HUD
Joint Report recommended removing the amount financed from consumer
disclosures altogether because it ``is probably not a useful disclosure
for mortgage lending.'' \175\ The Board-HUD Joint Report found that the
primary use of the ``amount financed'' is to help supervisory agencies
confirm APR calculations, and is not a useful shopping tool for
consumers.\176\ The Board's consumer testing in connection with the
2009 Closed-End Proposal also indicated consumer confusion about the
``amount financed.'' Some testing participants incorrectly assumed that
the ``amount financed'' was their loan amount or the sale price of the
home.\177\ Based on this testing, the Board concluded that the ``amount
financed'' disclosure detracted from, rather than enhanced, consumers'
understanding of other disclosures \178\ and that consumers ``would not
consider the amount financed when shopping for a mortgage or evaluating
competing loan offers.'' \179\ The Board also found that ``requiring
creditors to disclose the amount financed in the loan summary with
other key loan terms would add unnecessary complexity and result in
`information overload.' '' \180\
---------------------------------------------------------------------------
\175\ Board-HUD Joint Report at 16.
\176\ Id. at 17.
\177\ Macro 2009 Closed-End Report at v. For example, in Round 8
of testing, participants were ``confused about the difference
between the `loan amount' and the `amount financed.''' Id. at 26. In
Round 9, participants gave a variety of incorrect explanations of
the term, including that it was ``how much escrow they would have,''
the amount they would have to pay back, or the amount that they
borrowed. Id. at 35. In both of these rounds, some participants
believed the ``amount financed'' was equal to the amount of money
they would be borrowing. Id. at 40. In Round 11, the ``amount
financed'' was moved to the second page, under the heading ``Total
Payments'' in the ``More Information About Your Payments'' section.
Id. at 51. As in previous rounds, no participant was able to explain
the meaning of ``amount financed.'' Id. at 55. In Round 12, with the
``amount financed'' in the same place on the second page, two
participants incorrectly believed they were borrowing the ``amount
financed.'' Id. at 55. In the final round of testing, none of the
participants understood the meaning of ``amount financed.'' Id. at
72.
\178\ 74 FR at 43308. For example, ``sample disclosures were
used to try to explain that the difference between the loan amount
and amount financed is attributable to prepaid finance charges, but
this explanation did not appear to improve consumer comprehension.''
Id.
\179\ Id.
\180\ Id.
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For these reasons, the Bureau proposes to exercise its authority
under TILA section 105(a) and (f), Dodd-Frank section 1032(a), and, for
residential mortgage loans, Dodd-Frank Act section 1405(b), to modify
and except transactions subject to proposed Sec. 1026.19(e) from the
requirements of TILA section 128(a)(2) and (8) as it applies to the
Loan Estimate provided to consumers within three business days of
application. As discussed above, the Bureau believes that the proposed
exclusion of the amount financed disclosure from the Loan Estimate
effectuates the purposes of TILA by avoiding consumer confusion and
information overload historically associated with the disclosure,
thereby improving the informed use of credit. In addition, the Bureau
has considered the factors in TILA section 105(f) and
[[Page 51228]]
believes that, for the reasons discussed above, an exception is
appropriate under that provision. Specifically, the Bureau believes
that the proposed exemption is appropriate for all affected borrowers,
regardless of their other financial arrangements and financial
sophistication and the importance of the loan to them. Similarly, the
Bureau believes that the proposed exemption is appropriate for all
affected loans, regardless of the amount of the loan and whether the
loan is secured by the principal residence of the consumer.
Furthermore, the Bureau believes that, on balance, the proposed
exemption will simplify the credit process without undermining the goal
of consumer protection or denying important benefits to consumers.
Based on these considerations, the results of the Bureau's consumer
testing, and the analysis discussed above, the Bureau believes that the
proposed exemption is appropriate.
The Bureau does not believe that disclosure of the amount financed
on the Loan Estimate provides a meaningful benefit to consumers in the
form of useful information or protection. Rather, the Bureau believes
that disclosure of the amount financed to consumers early in the
lending process actually complicates and hinders the process of
mortgage lending because consumers do not understand the disclosure.
Removing the amount financed from the Loan Estimate may improve the
informed use of credit by avoiding information overload and improving
consumer understanding of loan terms, consistent with the purposes of
TILA and will be in the interest of consumers and the public,
consistent with section 1405(b) of the Dodd-Frank Act. Enhanced
consumer understanding of mortgage transactions is also in the interest
of consumers and the public. In addition, consistent with Dodd-Frank
Act section 1032(a), removal of the amount financed from the Loan
Estimate would help ensure that the features of consumer credit
transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances.
However, the Bureau recognizes that, like the finance charge, the
amount financed is commonly used by creditors and supervisory agencies
for compliance purposes, as well as by consumer advocates. Therefore,
under the proposal, creditors would be required to disclose the amount
financed in the Closing Disclosure provided to consumers at least three
business days prior to consummation. Like the finance charge, the
Bureau believes that disclosing the amount financed with other loan
calculations on the final page of the Closing Disclosure as a general
reference for the consumer after closing will mitigate concerns about
consumer distraction and information overload at the Closing Disclosure
stage.
37(m) Other Considerations
Under proposed Sec. 1026.37(m), creditors disclose certain
information pertaining to: (1) The consumer's right to receive copies
of appraisals; (2) future assumability of the loan; (3) at the
creditor's option, homeowner's insurance requirements; (4) the
creditor's late payment policy; (5) loan refinancing; (6) loan
servicing, and (7) in refinance transactions, the consumer's liability
for deficiency after foreclosure. This information is provided under
the master heading ``Additional Information About This Loan'' required
by Sec. 1026.37(k) and under the heading ``Other Considerations.''
As set forth below, consumers already receive most of these
disclosures at or after application or prior to consummation. Thus, by
incorporating all of these disclosures into the Loan Estimate, the
proposed rule will reduce the number of separate disclosures that
consumers receive. Instead, consumers will receive these disclosures in
a single, integrated document, which will reduce the potential for
information overload, promote the informed use of credit by the
consumer, and facilitate compliance by industry.
37(m)(1) Appraisal
Prior to the Dodd-Frank Act, ECOA section 701(e) required creditors
to provide to applicants, upon written request, a copy of the appraisal
report used in connection with the consumer's application for a loan
secured by a lien on residential real property. Section 1474 of the
Dodd-Frank Act amended ECOA section 701(e) to remove the provision
requiring consumers to request a copy of their appraisal. That section
now requires the creditor to provide the consumer with a copy of any
written appraisal or valuation developed in connection with an
application for a loan that is or will be secured by a first lien on a
dwelling promptly upon completion, and no later than three days prior
to the closing of the loan, even if the creditor denies the consumer's
application or the application is incomplete or withdrawn. 15 U.S.C.
1691(e)(1). Under ECOA section 701(e)(5), the creditor must notify the
consumer in writing at the time of application of the right to receive
a copy of any appraisal or valuation. 15 U.S.C. 1691(e)(5).
In addition, section 1471(a) of the Dodd-Frank Act added to TILA
new appraisal requirements for higher-risk mortgages. Specifically, new
TILA section 129H(c) requires creditors to provide consumers, at least
three days prior to closing, a copy of any appraisal prepared in
connection with a higher-risk mortgage. 15 U.S.C. 1639h(c). Section
1471(f) of the Dodd-Frank Act defines the term ``higher-risk mortgage''
generally as a residential mortgage loan, other than a reverse
mortgage, that is secured by a principal dwelling with an APR that
exceeds the average prime offer rate for a comparable transaction by a
specified percentage. 15 U.S.C. 1639h(f). New TILA section 129H(d)
contains a disclosure requirement that creditors must provide
consumers, at the time of the initial mortgage application, a statement
that any appraisal prepared for the mortgage is for the creditor's sole
use and that the consumer may choose to have a separate appraisal
conducted at his or her own expense. 15 U.S.C. 1639h(d).
ECOA section 701(e), as amended by the Dodd-Frank Act, and new TILA
section 129H(c) and (d) will be implemented in separate Bureau and
joint interagency rulemakings, respectively. However, the Bureau
proposes to use its authority under TILA section 105(a) and Dodd-Frank
Act section 1032(a) to include on the Loan Estimate disclosure of the
new requirements regarding the consumer's right to appraisal copies for
loans subject to ECOA section 701(e)(5) or TILA section 129H(c) and
(d). In the integrated TILA-RESPA final rule, the Bureau will harmonize
this proposal with its rulemaking implementing amended ECOA section
701(e) and the interagency rulemaking implementing new TILA section
129H(c) and (d), so that creditors may satisfy the ECOA section
701(e)(5) and TILA section 129H requirements in a single disclosure.
Proposed Sec. 1026.37(m)(1) applies only to closed-end credit
transactions subject to proposed Sec. 1026.19(e) and ECOA section
701(e) or TILA section 129H, as implemented in Regulation B, 12 CFR
part 1002, and Regulation Z, respectively. For such transactions,
proposed Sec. 1026.37(m)(1) requires the disclosure under the label
``Appraisal.'' The disclosure may be omitted for other transactions.
Proposed Sec. 1026.37(m)(1)(i) requires the disclosure to state that
the creditor may order an appraisal to determine the
[[Page 51229]]
value of the property that is the subject of the transaction and may
charge the consumer the cost for any such appraisal. Proposed Sec.
1026.37(m)(1)(ii) requires the disclosure to state that the creditor
will promptly provide the consumer a copy of the appraisal, even if the
transaction is not consummated. Finally, proposed Sec.
1026.37(m)(1)(iii) requires the disclosure to state that the consumer
has the right to order an additional appraisal of the property for the
consumer's own use. Proposed comment 37(m)(1)-1 clarifies that if a
transaction subject to proposed Sec. 1026.19(e) is not also subject to
either ECOA section 701(e) or TILA section 129H, as implemented in
Regulations B and Z, respectively, the disclosure required by proposed
Sec. 1026.37(m)(1) may be omitted from the Loan Estimate.
The Bureau believes that including these appraisal disclosures on
the Loan Estimate is consistent with the purposes of TILA and will
reduce burden on industry. Rather than requiring two separate appraisal
disclosures in addition to the Loan Estimate consumers will receive
after application, the Bureau believes one integrated disclosure will
facilitate compliance for creditors, promote the informed use of credit
by consumers, and ensure effective disclosure to consumers, consistent
with the purposes of TILA and TILA section 105(a). In addition, the
Bureau believes that incorporating the appraisal disclosures into the
Loan Estimate in a way that is consistent with the presentation of
other disclosures will ensure that the features of the transaction are
fully, accurately, and effectively disclosed to consumers in a manner
that permits consumers to understand the costs, benefits, and risks
associated with the mortgage transaction, in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a).
37(m)(2) Assumption
TILA section 128(a)(13) requires the creditor to disclose, in any
residential mortgage transaction, a statement indicating whether a
subsequent purchaser may be permitted to assume the remaining loan
obligation on its original terms. 15 U.S.C. 1638(a)(13). This provision
is currently implemented in Sec. 1026.18(q), and applies only to
residential mortgage transactions. TILA section 103(x) defines
``residential mortgage transaction'' as a ``transaction in which a
mortgage, deed of trust, purchase money security interest arising under
an installment sales contract, or equivalent consensual security
interest is created or retained against the consumer's dwelling to
finance the acquisition or initial construction of a dwelling.'' 15
U.S.C. 1602(x).
Proposed Sec. 1026.37(m)(2) implements TILA section 128(a)(13) for
all transactions subject to Sec. 1026.19(e) by requiring the creditor
to disclose whether a subsequent purchaser of the property may be
permitted to assume the remaining loan obligation on its original
terms. Proposed comment 37(m)(2)-1 clarifies that the creditor must
disclose whether or not a third party may be allowed to assume the loan
on its original terms if the property is sold or transferred by the
consumer. Proposed comment 37(m)(2)-1 also notes that in many
mortgages, the creditor may be unable to determine whether the loan is
assumable at the time the Loan Estimate is provided and cites to the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation as examples of entities that as a common practice
condition assumability on a number of factors such as the subsequent
borrower's creditworthiness. Proposed comment 37(m)(2)-1 clarifies
that, if the creditor can determine that such assumption is not
permitted, the creditor complies with Sec. 1026.37(m)(2) by disclosing
that the loan is not assumable. In all other situations, including
where assumption of a loan is permitted or is dependent on certain
conditions or factors, or uncertainty exists as to the future
assumability of a mortgage, the creditor complies with Sec.
1026.37(m)(2) by disclosing that, under certain conditions, the
creditor may allow a third party to assume the loan on its original
terms. Proposed comment 37(m)(2)-2 clarifies that the phrase ``original
terms'' as used in Sec. 1027.37(m)(2) does not preclude an assumption
fee but may represent different terms, and provides an example of a
modified term.
The Bureau proposes Sec. 1026.37(m)(2) to implement TILA section
128(a)(13) for transactions subject to Sec. 1026.19(e), pursuant to
its authority under TILA section 105(a), Dodd-Frank Act section
1032(a), and, for residential mortgage loans, Dodd-Frank Act section
1405(b). In addition, the Bureau proposes to modify the scope of TILA
section 128(a)(13), pursuant to its authority under TILA section 105(a)
and Dodd-Frank Act sections 1032(a) and 1405(b), to apply to all
transactions subject to proposed Sec. 1026.19(e), even if not a
``residential mortgage transaction'' as defined in TILA section 103(x).
The Bureau believes that consumers in transactions secured by real
property would benefit from the disclosure, even if the property does
not contain a dwelling. Accordingly, the proposed modification promotes
the informed use of credit, consistent with the purposes of TILA. For
this same reason, the proposed modification will ensure that the
features of the transaction are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with the mortgage
transaction, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a), and will improve consumer awareness and
understanding of residential mortgage loans and is in the interest of
consumers and the public, consistent with Dodd-Frank Act section
1405(b). Transactions subject to the disclosure requirements of Sec.
1026.18 continue to be subject to Sec. 1026.18(q).
37(m)(3) Homeowner's Insurance
TILA section 106(c) provides that premiums for homeowner's
insurance written in connection with any consumer credit transaction
shall be included in the finance charge unless a clear and specific
statement in writing is furnished by the creditor to the person to whom
credit is extended, setting forth the cost of the insurance if obtained
from or through the creditor, and stating that the person to whom
credit is extended may choose the insurance provider. 15 U.S.C.
1605(c). Current Sec. Sec. 1026.4(d)(2)(i) and 1026.18(n) implement
this provision.
The Bureau understands that many creditors provide consumers the
disclosure described in TILA section 106(c) and Sec. 1026.4(d)(2)(i)
in order to exclude homeowner's insurance premiums from the finance
charge. To reduce the number of individual disclosures provided to
consumers and facilitate compliance for creditors, the Bureau proposes
Sec. 1026.37(m)(3) which provides that, at the creditor's option, the
creditor may disclose a statement of whether homeowner's insurance is
required on the property and whether the consumer may choose the
insurance provider, labeled ``Homeowner's Insurance.'' Proposed comment
37(m)(3)-1 clarifies that the disclosure required in Sec.
1026.37(m)(3) is optional. Proposed comment 37(m)(3)-2 clarifies that a
creditor satisfies the condition for excluding homeowner's insurance
premiums from the finance charge described in Sec. 1026.4(d)(2)(i) by
disclosing the statement described in Sec. 1026.37(m)(3).
The Bureau proposes Sec. 1026.37(m)(3) pursuant to its authority
under TILA section 105(a), Dodd-Frank Act section 1032(a), and, for
residential mortgage loans, Dodd-Frank Act section 1405(b).
[[Page 51230]]
The Bureau believes that combining the optional disclosure regarding
homeowner's insurance premiums with the other disclosures on the Loan
Estimate may avoid information overload and therefore promote the
informed use of credit, consistent with the purposes of TILA. In
addition, the proposed disclosure will help ensure that the features of
the transaction are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the mortgage transaction,
consistent with Dodd-Frank Act section 1032(a), and will improve
consumer awareness and understanding of residential mortgage loans, in
the interest of consumers and the public, consistent with Dodd-Frank
Act section 1405(b).
37(m)(4) Late Payment
TILA section 128(a)(10) requires disclosure of ``any dollar charge
or percentage amount which may be imposed by a creditor solely on
account of a late payment.'' 15 U.S.C. 1638(a)(10). This requirement is
currently implemented in Sec. 1026.18(l), which requires a statement
detailing any ``dollar or percentage charge that may be imposed before
maturity due to a late payment.''
Proposed Sec. 1026.37(m)(4) implements TILA section 128(a)(10) for
transactions subject to Sec. 1026.19(e) and requires the creditor to
disclose a statement detailing any charge that may be imposed on the
consumer for a late payment and the number of days a payment must be
late before a penalty for late payment may be assessed. Proposed
comment 37(m)(4)-1 clarifies that the late payment disclosure is
required if charges are added to an individual delinquent installment
of a transaction that remains ongoing on its original terms. Proposed
comment 37(m)(4)-1 also clarifies which charges and creditor actions
under the legal obligation do not qualify as a late payment charge and
that an increase in the interest rate is a late payment charge to the
extent of the increase. Comment 37(m)(4)-2 clarifies that the creditor
may make changes to the disclosure to reflect the requirements imposed
and alternatives allowed under State law.
The Bureau proposes Sec. 1026.37(m)(4) to implement TILA section
128(a)(10) for transactions subject to Sec. 1026.19(e), pursuant to
its implementation authority under TILA section 105(a). In addition,
the Bureau proposes to require creditors to disclose the number of days
that a payment must be late to trigger the late payment charge pursuant
to its authority under TILA section 105(a) and Dodd-Frank Act section
1032(a). The Bureau believes the additional disclosure enhances the
late payment disclosure by describing the conditions that may trigger a
late payment charge and therefore promotes the informed use of credit,
consistent with the purpose of TILA. For this same reason, the Bureau
believes the proposed disclosure will ensure that the features of the
transaction are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the mortgage transaction, in light
of the facts and circumstances, consistent with Dodd-Frank Act section
1032(a).
37(m)(5) Refinance
TILA section 128(b)(2)(C)(ii) requires that, for variable-rate
transactions or transactions where the regular payment may otherwise be
variable and that are secured by the consumer's dwelling, the borrower
be provided with a disclosure that there is no guarantee to refinance
to a lower amount. Current Sec. 1026.18(t) implements this provision
by requiring creditors to disclose a statement that there is no
guarantee that the consumer may refinance to lower the interest rate or
monthly payment. Current Sec. 1026.18(t) also expands the no-
guarantee-to-refinance disclosure to apply to, not only variable-rate
or variable-payment transactions, but all closed-end transactions
secured by real property or a dwelling, other than transactions secured
by the consumer's interest in a timeshare.
The Bureau proposes Sec. 1026.37(m)(5) to implement TILA section
128(b)(2)(C)(ii) for transactions subject to proposed Sec. 1026.19(e).
Based on the results of several rounds of consumer testing of language
regarding the refinance disclosure, Sec. 1026.37(m)(5) specifically
requires disclosure of the following statement: ``Refinancing this loan
will depend on your future financial situation, the property value, and
market conditions. You may not be able to refinance this loan.'' As
discussed in the Kleimann Testing Report, consumers in the Bureau's
consumer testing understood this language to mean that they are
permitted to try, but may not be able to refinance their loan in the
future.
In implementing TILA section 128(b)(2)(C)(ii), the Bureau proposes
to use its authority under section TILA section 105(a) and Dodd-Frank
Act sections 1032(a) and 1405(b) to expand the requirement to all
transactions subject to Sec. 1026.19(e). Like the Board, the Bureau is
concerned that some consumers may accept loan terms that could present
refinancing problems similar to those experienced by consumers in
variable-rate or variable-payment transactions (e.g., a three-year
fixed rate mortgage with a balloon payment), and that all consumers
would benefit from a statement that encourages consideration of
possible future market rate increases on refinancing. See 2009 Closed-
End Proposal, 74 FR at 43310. Accordingly, the Bureau believes the
proposed disclosure effectuates the purpose of TILA to help consumers
avoid the uninformed use of credit. In addition, the proposed
disclosure helps to ensure that the features of mortgage transactions
are fully and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with a financial product, in light of the facts and
circumstances, consistent with Dodd-Frank Act section 1032(a), and will
improve consumer awareness and understanding of residential mortgage
loans, which is in is the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b). Transactions subject to
the disclosure requirements of Sec. 1026.18 continue to be subject to
Sec. 1026.18(t).
37(m)(6) Servicing
RESPA section 6(a) requires disclosures to loan applicants
concerning the assignment, sale, or transfer of the servicing of the
loan to another party. 12 U.S.C. 2605(a). Current appendix C to
Regulation X implements RESPA section 6(a) and requires a statement in
the GFE regarding loan servicing under the section ``If your loan is
sold in the future,'' albeit using relatively generic language that
does not express the creditor's actual intent.\181\ Proposed Sec.
1026.37(m)(6) requires the creditor to disclose in the Loan Estimate
whether it intends to service the loan directly or transfer its
servicing. Proposed comment 37(m)(6)-1 clarifies that the disclosure
required in proposed Sec. 1026.37(m)(6) requires only that the
creditor state its intent at the time the disclosure is issued.
---------------------------------------------------------------------------
\181\ The standard RESPA GFE form in appendix C to Regulation X
reads as follows: ``Some lenders may sell your loan after
settlement. Any fees lenders receive in the future cannot change the
loan you receive or the charges you paid at settlement.''
---------------------------------------------------------------------------
For transactions subject to RESPA, the Bureau proposes Sec.
1026.37(m)(6) to implement RESPA section 6(a), pursuant to its
authority under RESPA section 19(a). For transactions subject the
requirements of proposed Sec. 1026.19(e) but that are not subject to
RESPA, the Bureau proposes to require creditors to provide the
servicing disclosure described in Sec. 1026.37(m)(6)
[[Page 51231]]
pursuant to its authority under TILA section 105(a) and Dodd-Frank Act
1032(a). The Bureau believes that requiring the disclosure regarding
loan servicing in these transactions will improve consumer
understanding and avoid the uninformed use of credit, consistent with
the purposes of TILA, and that the disclosure will ensure that the
features of the transaction are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with the mortgage
transaction, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a).
37(m)(7) Liability After Foreclosure
Section 1414(c) of the Dodd-Frank Act created new TILA section
129C(g), which establishes certain requirements for residential
mortgage loans subject to protection under a State anti-deficiency law.
15 U.S.C. 1639c(g). TILA section 129C(g)(2) requires that, prior to
consummation, the creditor or mortgage originator provide a written
notice to the consumer describing the protection provided by the anti-
deficiency law and the significance to the consumer of the loss of such
protection. TILA section 129C(g)(3) requires that any creditor or
mortgage originator that provides an application to a consumer or
receives an application from a consumer, for any type of refinancing
for such loan that would cause the loan to lose the protection of an
anti-deficiency law, the creditor or mortgage originator shall provide
a written notice to the consumer describing the protection provided by
the anti-deficiency law and the significance for the consumer of the
loss of such protection before any agreement for refinancing is
consummated. TILA section 129C(g)(1) defines anti-deficiency law to
mean the law of any State which provides that, in the event of
foreclosure on the residential property of a consumer securing a
mortgage, the consumer is not liable, in accordance with the terms and
limitations of such State law, for any deficiency between the sale
price obtained from a foreclosure sale and the outstanding balance of
the mortgage.
Proposed Sec. 1026.37(m)(7) implements TILA section 129C(g)(3),
which applies to refinance transactions. Specifically, proposed Sec.
1026.37(m)(7) provides that, if the credit is to refinance an extension
of credit as described in Sec. 1026.37(a)(9)(ii) or (iii), the
creditor must disclose a brief statement that certain State law
protections against liability for any deficiency after foreclosure may
be lost upon refinancing, the potential consequences of the loss of
such protections, and a statement that the consumer should consult an
attorney for additional information, labeled ``Liability after
Foreclosure.''
The Bureau proposes this requirement pursuant to its implementation
authority under TILA section 105(a). TILA section 129C(g)(3) requires
creditors to provide the anti-deficiency disclosure prior to
consummation. The Bureau believes that consumers would benefit from
receiving the disclosure in the Loan Estimate provided three days after
application since the disclosure informs consumers of the potentially
significant consequences of refinancing and is therefore an important
consideration for a consumer evaluating whether to proceed with the
loan. Further, the Bureau believes that the anti-deficiency disclosure
is appropriately tied to the submission of the consumer's application
since TILA section 129C(g)(3) requires creditors to provide the
disclosure to all consumers to whom it provides an application or from
whom it receives an application. The Bureau does not believe that it is
feasible to require the disclosure to be provided to any consumer to
whom the creditor ``provides'' a loan application because, as discussed
above in the section-by-section analysis of proposed Sec.
1026.2(a)(3), ``application'' is defined by proposed Sec. 1026.2(a)(3)
as the consumer's submission of certain specific information to a
creditor. The requirements of TILA section 129C(g)(2) are implemented
in proposed Sec. 1026.38(p)(3).
37(n) Signature Statement
TILA section 128(b)(2)(B)(i) requires the following statement in
transactions that are also subject to RESPA and where the extension of
credit is secured by the consumer's dwelling, other than timeshares:
``You are not required to complete this agreement merely because you
have received these disclosures or signed a loan application.'' 15
U.S.C. 1638(b)(2)(B)(i). Current Sec. 1026.19(a)(4) implements this
provision by requiring, for transactions subject to RESPA that are
secured by the consumer's dwelling (other than home equity lines of
credit subject to Sec. 1026.5(b) and timeshares), the statement
required by TILA section 128(b)(2)(B)(i) in the good faith estimates
and corrected disclosures provided pursuant to Sec. 1026.19(a)(1)
and(2).
The Bureau proposes to implement the signature requirement of TILA
section 128(b)(2)(B)(i) in proposed Sec. 1026.37(n), for all
transactions subject to proposed Sec. 1026.19(e). Proposed Sec.
1026.37(n)(1) states that, at the creditor's option, lines for the
signatures of the consumers in the transaction may be provided. The
optional signatures lines would be located under the master heading
``Additional Information About This Loan'' required by proposed Sec.
1026.37(k) and under the heading ``Confirm Receipt.'' Proposed Sec.
1026.37(n)(1) also states that if the creditor includes a line for the
consumer's signature, the creditor is required to disclose to that, by
signing the Loan Estimate, the consumer is only confirming receipt of
the form and is not required to accept the loan. For transactions where
the creditor does not include a line for the consumer's signature,
proposed Sec. 1026.37(n)(2) requires disclosure of the statement that
the consumer does not have to accept the loan because the consumer
received or signed the Loan Estimate. The statement required by
proposed Sec. 1026.37(n)(2) is located under the heading ``Other
Considerations'' required by proposed Sec. 1026.37(m), labeled ``Loan
Acceptance.''
Proposed comment 37(n)-1 clarifies that it is at the creditor's
discretion whether to provide a signature line for the consumer's
signature, but if a signature line is provided, the statement in
proposed Sec. 1026.37(n)(1) must be provided. Proposed comment 37(n)-2
clarifies that, if there is more than one consumer in the transaction,
the first consumer signs as the applicant and each additional consumer
signs as a ``co-applicant.'' Proposed comment 37(n)-2 also clarifies
that the creditor may add an additional signature page to the back of
the form if additional signature lines are necessary to accommodate the
number of consumers in the transaction.
The Bureau proposes to modify the signature language required by
TILA section 128(b)(2)(B)(i) pursuant to its authority under TILA
section 105(a), Dodd-Frank Act section 1032(a), and, for residential
mortgage loans, Dodd-Frank Act section 1405(b). While the substance of
the disclosure required by proposed Sec. 1026.37(n) is the same as the
statutory language, as discussed in the Kleimann Testing Report, the
Bureau's consumer testing indicated that consumers more easily
understand from the proposed language that a signature does not bind
them to accept the loan. Accordingly, the proposed modification
promotes the informed use of credit, consistent with the purposes of
TILA. For this same reason, the proposed modification will ensure that
the features of the transaction are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs,
[[Page 51232]]
benefits, and risks associated with the mortgage transaction,
consistent with Dodd-Frank Act section 1032(a), and will improve
consumer awareness and understanding of residential mortgage loans and
is in the interest of consumers and the public, consistent with Dodd-
Frank Act section 1405(b).
The Bureau also proposes to use its authority under TILA section
105(a), Dodd-Frank Act section 1032(a), and, for residential mortgage
loans, Dodd-Frank Act section 1405(b) to expand the scope of TILA
section 128(b)(2)(B)(i) to apply to all transactions subject to
proposed Sec. 1026.19(e). As discussed above, TILA section
128(b)(2)(B)(i) applies only to transactions subject to both TILA and
RESPA that are secured by the consumer's dwelling, and excludes
transactions secured by the consumer's interest in a timeshare.
However, the Bureau believes that consumers in all transactions subject
to proposed Sec. 1026.19(e) will benefit from the disclosure because
it ensures that consumers understand they are not obligated to complete
the loan transaction just because they signed or received the Loan
Estimate. Accordingly, the proposed disclosure promotes the informed
use of credit, consistent with the purposes of TILA. For these same
reasons, the Bureau believes that the proposed disclosure will ensure
that the features of the transaction are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
mortgage transaction, consistent with Dodd-Frank Act section 1032(a),
and will improve consumer awareness and understanding of residential
mortgage loans and is in the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b).
37(o) Form of Disclosures
TILA section 122(a) provides that the information required to be
disclosed under TILA shall be disclosed clearly and conspicuously, in
accordance with regulations of the Bureau. 15 U.S.C. 1632(a). TILA
section 128(b)(1) provides that the disclosures required by sections
128(a) and 106(b) through (d) generally shall be conspicuously
segregated from all other terms, data, or information provided in
connection with a transaction, including any computations or
itemization. Id. 1638(b)(1). Regulation Z currently implements these
requirements for closed-end transactions in Sec. 1026.17(a)(1), which
provides that the disclosures shall be made clearly and conspicuously
in writing, in a form that the consumer may keep. Section 1026.17(a)(1)
further provides that the disclosures shall be grouped together, shall
be segregated from everything else, and shall not contain any
information not directly related to the disclosures under Sec. 1026.18
(and Sec. 1026.47 for private education loans).
As discussed above, the Bureau is proposing to exclude transactions
subject to Sec. 1026.19(e) and (f) from the coverage of Sec.
1026.17(a) and (b). Consequently, the requirements of TILA sections
122(a) and 128(b)(1) must be implemented elsewhere. The Bureau,
pursuant to its implementation authority under TILA section 105(a),
therefore proposes to implement the statutory segregation and clear and
conspicuous requirements of TILA sections 122(a) and 128(b)(1) for
those disclosures in new Sec. Sec. 1026.37(o) and 1026.38(t). The
Bureau believes these requirements will effectuate the purposes of TILA
by assuring a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit. In addition,
Sec. 1026.37(o) establishes a standard form requirement for
transactions subject to RESPA and provides flexibility for certain
aspects of the integrated disclosures.
37(o)(1) General Requirements
Proposed Sec. 1026.37(o)(1)(i) establishes the requirements that
the disclosures required by Sec. 1026.37 be clear and conspicuous, in
writing, and grouped together, segregated from everything else, and
provided on separate pages that are not commingled with any other
documents or disclosures, including any other disclosures required by
State or other laws. Proposed comment 37(o)-1 clarifies that the clear
and conspicuous standard requires that the disclosures be legible and
in a readily understandable form. This guidance is adopted from
existing comment 17(a)(1)-1. The comment also clarifies that proposed
Sec. 1026.37(o)(1)(i) requires that the disclosures required by Sec.
1026.37 be provided in a form that is physically separate from any
other documents or disclosures, including any other disclosures
required by State or other laws. This requirement is stricter than the
guidance found in existing comment 17(a)(1)-2, which provides that the
disclosures may be grouped together and segregated from other
information in a variety of ways other than a separate piece of paper.
The Bureau recognizes that, in certain credit sale and other non-
mortgage, closed-end credit transactions, creditors include the
disclosures required by Sec. 1026.18 in the loan contract or some
other document and ensure that they are grouped together and segregated
by outlining them in a box or other means authorized by comment
17(a)(1)-2. The Bureau understands, however, that this approach is
virtually never employed for mortgage credit, for which the new
disclosures under proposed Sec. Sec. 1026.19(e) and 1026.37, rather
than Sec. 1026.18 disclosures, are required. Mortgage creditors
generally use a standardized note that cannot accommodate dynamically
generated, transaction-specific disclosures, and they almost
universally employ the model disclosure forms provided in appendix H to
Regulation Z as stand-alone, separate documents for providing required
TILA disclosures. The RESPA GFE and RESPA settlement statement forms
required by RESPA for federally related mortgage loans currently are
delivered as separate documents, in accordance with the standard form
requirements of Regulation X. Moreover, the forms in this proposal were
developed as stand-alone documents through an extensive outreach and
consumer testing process, as discussed above, and the Bureau is
concerned that much of the informative benefit of the forms could be
lost or compromised if they were permitted to be included within other
documents. For these reasons, it appears that requiring the Sec.
1026.37 disclosures to be delivered as a separate document maximizes
the benefits of the forms and does not present any significant new
obligation that mortgage creditors do not already effectively observe.
The Bureau seeks comment, however, on whether there currently are
transactions subject to proposed Sec. 1026.19(e) that may be burdened
by the adoption of this requirement.
Proposed Sec. 1026.37(o)(1)(ii) also provides that, except as
provided in Sec. 1026.37(o)(5), the disclosures shall contain only the
information required by Sec. 1026.37(a) through (n) and that they
generally shall be made in the same order, and positioned relative to
the master headings, headings, subheadings, labels, and similar
designations in the same manner, as shown in form H-24. Proposed
comment 37(o)(1)-2 clarifies that, even if a creditor elects not to use
the form as a model (when so permitted because the transaction is not a
federally related mortgage loan, as discussed above), failure to comply
with these requirements, to designate as ``estimated'' all disclosures
designated as such in the form, or to use letter size paper as shown in
form H-24
[[Page 51233]]
constitutes noncompliance with the requirement of Sec.
1026.37(o)(3)(ii) that the disclosures be made with headings, content,
and format substantially similar to the model form.
37(o)(2) Estimated Disclosures
Proposed Sec. 1026.37(o)(2) provides that, wherever form H-24
discloses the required master heading, heading, subheading, label, or
similar designation for a disclosure as ``estimated,'' that
corresponding master heading, heading, subheading, label, or similar
designation required by Sec. 1026.37 must contain the word
``estimated,'' even if the provision requiring such headings, label, or
similar designation does not. As noted below under Sec. 1026.38, many
of the disclosure items required by that section cross-reference their
estimated counterparts in Sec. 1026.37, although the same items may
not be estimates as required by Sec. 1026.19(f). To avoid confusion
over which items are estimates and which are not, the content
provisions of Sec. 1026.37 do not qualify any of the master headings,
headings, subheadings, labels, and similar designations of the items
disclosed as ``estimated.'' Instead, proposed Sec. 1026.37(o)(2)
incorporates by reference the ``estimated'' designations reflected on
form H-24, and as discussed below, proposed Sec. 1026.38(t)(2)
incorporates by reference the ``estimated'' designations reflected on
form H-25.
37(o)(3) Form
Proposed Sec. 1026.37(o)(3)(i) also provides that, for a
transaction that is a federally related mortgage loan, as defined in
Regulation X, the disclosures must be made using form H-24, set forth
in appendix H to Regulation Z. The Bureau is proposing to require that
creditors use a standard form (form H-24 of appendix H) for federally
related mortgage loans pursuant to RESPA section 4, as amended by the
Dodd-Frank Act. 12 U.S.C. 2603(a). Section 4 has long authorized the
use of standard forms. As discussed above, the Dodd-Frank Act amended
section RESPA section 4(a) to require the integrated disclosures that
are the subject of this proposal, which specifically include both the
settlement statement under section 4 and the good faith estimate under
section 5(c). Although the Dodd-Frank Act eliminated one reference in
section 4(a) to a ``standard'' form, it left another reference in
place, as well as another reference to a ``standard'' form in section
4(c). And by including the cross-reference to section 5(c) in section 4
in relation to the integrated disclosure mandate, Congress effectively
extended RESPA's existing standard-form authority to the good faith
estimate as well as the settlement statement requirement. More notably,
in amending section 4(a), Congress did not include an explicit
prohibition of a mandatory-use form as is found in TILA section
105(b).\182\ For this reason, the Bureau does not believe that Congress
intended to eliminate standard-form authority from RESPA section 4.
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\182\ TILA section 105(b) states that ``nothing in this title
may be construed to require a creditor or lessor to use any such
model form or clause prescribed by the Bureau under this section.''
15 U.S.C. 1604(b).
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The Bureau also proposes a mandatory form pursuant to its authority
under RESPA section 19(a) to prescribe such rules and regulations as
may be necessary to achieve RESPA's purposes. 12 U.S.C. 2617(a).
RESPA's purposes include the establishment of more effective advance
disclosure to home buyers and sellers of settlement costs. Id.
2601(b)(1). The Bureau believes, based on consumer testing results,
that the purpose of more effective advance disclosure of settlement
costs is better achieved if all lenders provide those disclosures in a
standardized format that consumers can recognize and understand.
Moreover, the credit terms included in the Loan Estimate facilitate and
enhance the consumer's ability to shop for the best-priced loan,
including settlement charges, which have a direct relationship to, and
can overlap with, credit terms. Disclosure of the settlement costs
alone, without the context provided by the credit terms, is therefore
far less effective. This is consistent with HUD's rationale in HUD's
2008 RESPA Final Rule for including credit terms in its good faith
estimate form. See 73 FR 68204, 68214-15 (Nov. 17, 2008). Accordingly,
the Bureau is authorized under section 19(a) to require the standard
form for the disclosure of all of the information it contains, both
settlement costs and credit terms alike.
Certain closed-end consumer credit transactions are subject to the
requirements of proposed Sec. 1026.19(e) but do not fall within the
Regulation X definition of ``federally related mortgage loan.'' These
include construction-only loans with terms of less than two years that
do not finance the transfer of title to the borrower and loans secured
by vacant land on which a home will not be constructed or placed using
the loan proceeds within two years after settlement of the loan. See
Sec. 1024.5(b)(3) and (4). In addition, transactions subject to
proposed Sec. 1026.19(e) but not subject to RESPA would include loans
secured by non-residential real property, provided they have a consumer
purpose as required by Sec. 1026.1(c)(1)(iv). See Sec. 1024.2,
definition of ``federally related mortgage loan,'' paragraph (1)(i)
(requiring that the securing property be ``residential real
property'').
For such transactions that are subject to proposed Sec. 1026.19(e)
because they are subject to TILA and are secured by real property, but
that are not subject to RESPA, the Bureau does not mandate the use of
form H-24 as a standard form. As noted above, TILA section 105(b)
explicitly provides that nothing in TILA may be construed to require a
creditor to use any model form or clause prescribed by the Bureau under
that section. Accordingly, proposed Sec. 1026.37(o)(3)(ii) provides
that, for transactions subject to Sec. 1026.37 that are not federally
related mortgage loans, the disclosures must be made with headings,
content, and format substantially similar to form H-24 but does not
mandate the use of that form. Consistent with TILA section 105(b),
proposed comment 37(o)(3)-1 explains that, although use of the form as
a standard form is not mandatory for such transactions, its use as a
model form, if properly completed with accurate content, constitutes
compliance with the clear and conspicuous and segregation requirements
of Sec. 1026.37(o). In consideration of the recommendation of the
Small Business Review Panel, the Bureau seeks comment on the
advantages, such as cost-saving benefits, and disadvantages of
requiring a standard form for the Loan Estimate for federally related
mortgage loans and model forms for other credit transactions subject to
proposed Sec. 1026.19(e). See Small Business Review Panel Report at
28.
Proposed Sec. 1026.37(o)(3)(iii) also provides that the
disclosures may be provided in electronic form, subject to compliance
with the Electronic Signatures in Global and National Commerce Act (15
U.S.C. 7001 et seq.). This provision parallels existing Sec.
1026.17(a)(1).
37(o)(4) Rounding
The prototype disclosure forms used in the Bureau's consumer
testing displayed rounded numbers for certain information required to
be disclosed by proposed Sec. 1026.37. For example, rounded numbers
were disclosed for the information required by proposed Sec.
1026.37(b)(6) and (7), (c)(1)(iii), (c)(2)(ii) and (iii), (c)(4)(ii),
(f), (g), (h), (i), and (l). In addition, the total monthly payment
required by proposed Sec. 1026.37(c)(2)(iv) was rounded if any of its
component amounts were required to be rounded. The loan amount required
[[Page 51234]]
to be disclosed by proposed Sec. 1026.37(b)(1) and percentage amounts
required to be disclosed by proposed Sec. 1026.37(b)(2) and (6),
(f)(1)(i), (g)(2)(iii), (j), and (l)(2) and (3) that did not contain
cents or fractional amounts were disclosed without decimal places.
In the Bureau's consumer testing, using rounded numbers in this
manner, consumers were able to see and evaluate the information
required by the above-mentioned paragraphs of proposed Sec. 1026.37
quickly. The Bureau is concerned that a large number of exact dollar
amounts and percentages has the potential to cause information overload
and reduce the overall effectiveness of the disclosure. The Bureau
believes that rounding certain amounts on the Loan Estimate reduces the
quantity of numbers on the form and the complexity of information about
potential risks. For example, participants at the Bureau's testing were
able to evaluate the risks of maximum payments and interest rates in
the Loan Terms table using rounded numbers, as well as evaluate the
rounded closing cost estimates, enhancing the utility of the disclosure
for consumers. The Bureau believes the exact number of cents or decimal
places for information required to be disclosed by the above-mentioned
paragraphs of proposed Sec. 1026.37 at the time the Loan Estimate is
provided would not provide a benefit to consumers that would outweigh
the risk of information overload.
Accordingly, the Bureau proposes to use its implementation
authority under TILA section 105(a), its authority under section
1032(a) of the Dodd-Frank Act, and its authority under section 1405(b)
of the Dodd-Frank Act with respect to residential mortgage loans, to
require only rounded numbers and percentages without fractional amounts
to be disclosed without decimal places for certain information on the
Loan Estimate. Whole dollar and certain whole percentage amounts appear
to be sufficient to inform consumers of the estimated periodic payment
amounts, estimated closing costs, financial risks posed by maximum
amounts, and ensure a meaningful disclosure of credit terms. In
addition, the disclosure of exact amounts could suggest to consumers a
degree of accuracy that may not be warranted for some of the estimated
figures. The Bureau believes this requirement ensures the meaningful
disclosure of credit terms to consumers and promotes the informed use
of credit. In addition, the Bureau believes this requirement may ensure
that the features of any consumer financial product or service, both
initially and over the term of the product or service, are fully,
accurately, and effectively disclosed to consumers in a manner that
permits consumers to understand the costs, benefits, and risks
associated with the product or service, in light of the facts and
circumstances. Further, the Bureau believes this requirement may
improve consumer awareness and understanding of transactions involving
residential mortgage loans and is in the interest of consumers and in
the public interest.
Proposed Sec. 1026.37(o)(4)(i)(A) requires only rounded numbers
for the information disclosed pursuant to proposed Sec. 1026.37(b)(6)
and (7), (c)(1)(iii), (c)(2)(ii) and (iii), (c)(4)(ii), (f), (g), (h),
(i), and (l). Proposed Sec. 1026.37(o)(4)(i)(B) requires the loan
amount disclosed pursuant to proposed Sec. 1026.37(b)(1) to be
disclosed without decimal places denoting cents if the amount of cents
are zero. Proposed Sec. 1026.37(o)(4)(i)(C) requires the total monthly
payment disclosed pursuant to proposed Sec. 1026.37(c)(2)(iv) to be
disclosed as a rounded number if any of its component amounts are
required to be rounded. Proposed Sec. 1026.37(o)(4)(ii) requires
percentages without fractional amounts that are disclosed pursuant to
proposed Sec. 1026.37(b)(2) and (6), (f)(1)(i), (g)(2)(iii), (j), and
(l)(2) and (3) to be disclosed without decimal places.
Proposed comment 37(o)(4)-1 provides clarifies that consistent with
Sec. 1026.2(b)(4) all numbers are to be disclosed as exact numbers,
unless required to be rounded by proposed Sec. 1026.37(o)(4). Proposed
comments 37(o)(4)-2, 37(o)(4)(i)(A)-1, 37(o)(4)(i)(B)-1, and
37(o)(4)(ii)-1 provide guidance regarding rounding amounts on the Loan
Estimate.
37(o)(5) Exceptions
The Bureau's consumer testing has indicated that the format of
information on the disclosures required by proposed Sec. 1026.37
substantially affects the way in which a consumer interacts with and
understands the information disclosed. In addition, the Bureau
understands that credit and real estate transactions involve
significant variability and believes that it is important to provide
industry with clear guidance regarding permissible changes to the
format requirements to accommodate this variability. Accordingly, the
Bureau believes it must specify the changes to the format that are
required and permissible, to ensure the disclosures provided to
consumers convey the information required by proposed Sec. 1026.37 in
a clear, understandable, and effective manner for consumers.
As described above, pursuant to RESPA section 19(a), 12 U.S.C.
2617(a), Sec. 1024.7 of Regulation X currently requires the use of a
standard from to provide the disclosures required by section 5 of
RESPA, 12 U.S.C. 2604. In contrast, TILA section 105(b), 15 U.S.C.
1604(b), provides for model disclosures instead of a standard form.
However, TILA permits creditors to delete information not required
under the statute, other than numerical disclosures, and rearrange the
format, only if doing so does not affect the substance, clarity, or
meaningful sequence of the disclosure. Pursuant to its authority under
RESPA section 19(a), its implementation authority under TILA section
105(a), and its authority under section 1032(a) of the Dodd-Frank Act,
the Bureau proposes Sec. 1026.37(o)(5), which sets forth the required
changes to the format required to be used by proposed Sec.
1026.37(o)(3), illustrated by form H-24 in appendix H to Regulation Z,
and the permissible changes that do not affect the substance, clarity,
or meaningful sequence of the disclosure. In addition, consistent with
section 1032(a) of the Dodd-Frank Act, providing specified changes to
the form would ensure that the features of consumer credit transactions
secured by real property are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with the product or service,
in light of the facts and circumstances. The Bureau believes providing
for only specified changes to the form effectuates the purposes of TILA
set forth in TILA section 102(a) and the purpose of the integrated
disclosure set forth in TILA section 105(b), because it would ensure
meaningful disclosure of credit terms to consumers, promote the
informed use of credit, and facilitate compliance by providing
flexibility where warranted. In addition, the Bureau believes this
requirement would effectuate the purposes of RESPA by promoting more
effective advance disclosure of settlement costs.
Accordingly, proposed Sec. 1026.37(o)(5) specifies certain changes
to form H-24 that are required or that do not affect the substance,
clarity, or meaningful sequence of the disclosure and therefore are
permissible. Proposed Sec. 1026.37(o)(5)(i) requires the substitution
of the words ``month'' or ``monthly'' on the form H-24, where used to
designate the frequency of payments or the applicable unit-period of
the transaction, with a different word representing the frequency of
payments or unit-period under the transaction's actual terms, if
different from monthly. Proposed Sec. 1026.37(o)(5)(ii) permits the
[[Page 51235]]
deletion of lender credits from the Cash to Close table, required by
proposed Sec. 1026.37(d)(4), if the amount is zero. Proposed Sec.
1026.37(o)(5)(iii) permits the use of a logo for, or addition of a
slogan with, the information required by proposed Sec. 1026.37(a)(3),
and requires the information disclosed pursuant to Sec. 1026.37(a)(3),
if no logo is used, to be disclosed in a similar format as form H-24 of
appendix H to Regulation Z. Proposed Sec. 1026.37(o)(5)(iv) permits
the attachment of a business card over the information required by
proposed Sec. 1026.37(a)(3). Proposed Sec. 1026.37(o)(5)(v) permits
the insertion of administrative information above the information
required to be disclosed by proposed Sec. 1026.37(a)(2) and adjacent
to the information required to be disclosed by proposed Sec.
1026.37(a)(3) to assist in the identification of the form or the
information contained on the form.
Proposed Sec. 1026.37(o)(5)(vi) permits the form to be translated
into languages other than English. The Bureau understands that some
State laws require versions of the disclosures required under TILA and
RESPA to be provided to consumers in a language other than English when
the negotiation of the transaction is conducted in that language.\183\
In addition, some of the regulatory authorities in these States publish
their own translations of these disclosures for use by the public.\184\
The Bureau's consumer testing included two rounds of testing with
Spanish-speaking consumers of Spanish-language prototype disclosure
forms to determine whether co-development of a non-English version of
the disclosure would be beneficial to consumers.\185\ The Bureau
determined that co-development of a separate non-English version of the
disclosures would likely yield little benefit to consumers, because any
differences in performance with the Spanish prototypes during testing
were caused more by translation than design and structure issues. This
may be due, in part, because the Bureau intentionally pursued a more
graphic than textual design for the Loan Estimate with as few words as
possible. This design highlights key information and allows consumers
to quickly recognize and find the key information about the transaction
without large amounts of text. The differences in language did not
necessitate changes to the design of the disclosure. Accordingly, the
proposed rule only includes English-language disclosure forms and
permits the translation of these forms. The Bureau plans to review
issues surrounding translations of the integrated disclosures after
issuance of this proposal. As discussed below with respect to appendix
H, the Bureau solicits comment on whether the final rule should include
sample Spanish-language or other non-English language forms.
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\183\ See Cal. Civ. Code Sec. Sec. 1632, 1632.5, Or. Rev. Stat.
Sec. 86A.198.
\184\ The California Department of Corporations has translated
the RESPA GFE into Chinese, Korean, Tagalog, and Vietnamese,
available at http://www.corp.ca.gov/Forms/Default.asp. The Oregon
Division of Finance and Corporate Securities provides version of the
RESPA GFE and early TILA disclosure in Russian, Spanish, and
Vietnamese, available at http://www.cbs.state.or.us/dfcs/ml/mortgage_disclosures_translations.html.
\185\ According to the U.S. Census Bureau, based on data from
the 2007 American Community Survey, 55.4 million people spoke a
language other than English at home, and of those people, 62 percent
spoke Spanish. U.S. Census Bureau, Language Use in the United
States: 2007, ACS-12 (Apr. 2010), available at http://www.census.gov/hhes/socdemo/language/data/acs/ACS-12.pdf.
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Proposed comment 37(o)(5)-1 clarifies that creditors making any
changes that are not expressly permitted may lose their protection from
civil liability under TILA. Proposed comment 37(o)(5)-2 clarifies that
the form may be completed by hand, typewriter, computer, or other word
processing device, as long as the method produces clear and legible
text and uses the required formatting, including bold font where shown
on form H-24. Such completion by hand or typewriter would not exempt
the creditor from the requirement to keep records in an electronic,
machine readable format under proposed Sec. 1026.25.
Proposed comment 1026.37(o)(5)-3 clarifies that if there are
multiple creditors or mortgage brokers for a transaction, a creditor
may alter the space provided on form H-24 and add labels to disclose
additional contact information under proposed Sec. 1026.37(m), or
disclose the additional information on a separate page with an
appropriate cross-reference, if the space provided does not accommodate
the information to be disclosed on the page. Proposed comment
1026.37(o)(5)-4 clarifies that a creditor may add signature lines to
form H-24 under the ``Confirm Receipt'' heading required by proposed
Sec. 1026.37(n), or an additional page with an appropriate cross-
reference, if the space provided by form H-24 cannot accommodate the
signature lines for multiple applicants. Proposed comment
1026.37(o)(5)-5 clarifies the requirements of proposed Sec. 1026.37(o)
as they apply to the use of a separate page.
Section 1026.38 Content of Disclosures for Certain Mortgage
Transactions (Closing Disclosure)
Proposed Sec. 1026.38 sets forth the required content of the
integrated Closing Disclosure, required by proposed Sec. 1026.19(f) to
be provided to a consumer no later than three business days prior to
consummation.
As discussed above, the Closing Disclosure integrates the
disclosures currently provided in the RESPA settlement statement and
the final TILA disclosure. In addition, the Closing Disclosure
integrates several disclosures, including new disclosures under the
Dodd-Frank Act, that otherwise would likely have been provided
separately. The Bureau believes that the five-page Closing Disclosure
integrates at least nine pages of disclosures. Specifically, the
Closing Disclosure incorporates: (i) Three pages of the RESPA
settlement statement; (ii) two pages typically used for the final TILA
disclosure; (iii) one page for the negative amortization statement
under TILA section 129C(f), which was added by section 1414(a) of the
Dodd-Frank Act; (iv) one page for the anti-deficiency protection notice
under TILA section 129C(g)(2), which was added by section 1414(c) of
the Dodd-Frank Act; (v) one page for the partial payment policy
disclosure under TILA section 129C(h), which was added by section
1414(d) of the Dodd-Frank Act; and (vi) one page for the escrow account
disclosures under TILA sections 129D(h) and (j), which were added by
sections 1461 and 1462 of the Dodd-Frank Act. In addition, the Closing
Disclosure incorporates the disclosure of: (i) The total interest
percentage under TILA section 128(a)(19), which was added by section
1419 of the Dodd-Frank Act; (ii) the approximate amount of the
wholesale rate of funds in connection with the loan under TILA section
128(a)(17), which was added by section 1419 of the Dodd-Frank Act; and
(iii) the aggregate amount of settlement charges for all settlement
services provided in connection with the loan and the aggregate amount
of other fees or required payments in connection with the loan under
TILA section 128(a)(17), which was added by section 1419 of the Dodd-
Frank Act. In absence of the Bureau's integration of the final TILA
disclosure and the RESPA settlement statement, these disclosures would
have been added to the final TILA disclosure, which potentially could
have increased that disclosure's typical two pages to three pages.
As in the case of the disclosure content required by proposed Sec.
1026.37,
[[Page 51236]]
discussed above, Sec. 1026.38 provides that the information set forth
in proposed Sec. 1026.38(a) through (s) shall be disclosed ``as
applicable.'' Accordingly, the Bureau is proposing parallel commentary
under Sec. 1026.38 to that proposed under Sec. 1026.37. Thus,
proposed comment 38-1 clarifies that a disclosure that is not
applicable to a transaction generally may be eliminated entirely or may
be included and marked ``not applicable'' or ``N/A.''
38(a) General Information
As with the Loan Estimate in proposed Sec. 1026.37(a), the Bureau
proposes to use its authority under TILA section 105(a), and its
authority under RESPA section 19(a), Dodd-Frank Act sections 1032(a)
and (f), 1098, and 1100A, and for residential mortgage loans, Dodd-
Frank Act section 1405(b), to combine and modify disclosures and
related requirements currently provided under Regulations X and Z and
add additional disclosures in the Closing Disclosure for transactions
subject to proposed Sec. 1026.19(f).
38(a)(1) Form Title
Like the integrated disclosure provided three business days after
application, TILA, RESPA, and the Dodd-Frank Act do not expressly
prescribe a title for the form that must be provided in connection with
a settlement. RESPA refers to the form as the ``uniform settlement
statement,'' although Sec. 1024.8 of Regulation X uses the titles HUD-
1 and HUD-1A to refer to the forms used to document settlement charges
in connection with the purchase of a property or refinancing of an
existing mortgage loan, respectively. Regulation Z, however, does not
prescribe a title for the disclosures that must be provided to the
consumer three business days prior to settlement.
Proposed Sec. 1026.38(a)(1) requires the creditor to use the term
``Closing Disclosure'' as the name of the integrated disclosures
provided to consumers three business days prior to settlement pursuant
to proposed Sec. 1026.19(f). The Bureau believes the adoption of a
standardized form name will effectuate the purposes of TILA and RESPA
by promoting the informed use of credit and more effective advance
notice of settlement costs, consistent with TILA section 105(a) and
RESPA section 19(a), and will ensure that the features of the
transaction are fully, accurately and effectively disclosed to
consumers in a manner that permits consumers to better understand the
costs, benefits, and risks associated with mortgage transactions in
light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a). In addition, the use of standard terminology for the
integrated disclosures will facilitate compliance for industry, which
is a purpose of this rulemaking under Dodd-Frank Act sections 1098 and
1100A. The Bureau also believes that, consistent with section 1405(b)
of the Dodd-Frank Act, the requirement of a standard form name may
improve consumer awareness and understanding of transactions involving
residential mortgage loans through the use of disclosures, and is in
the interest of consumers and in the public interest.
38(a)(2) Form Purpose
Proposed Sec. 1026.38(a)(2) requires the creditor to include a
statement regarding the purpose of the Closing Disclosure.
Specifically, proposed Sec. 1026.38(a)(2) requires creditors to
provide the following statement: ``This form is a statement of final
loan terms and closing costs. Compare this document with your Loan
Estimate.'' Providing the purpose of the Closing Disclosure is a new
requirement, as neither creditors nor settlement agents are currently
required to provide this type of information in the disclosures
required by TILA, RESPA, and their implementing regulations.
Nonetheless, this disclosure will benefit consumers and promote the
informed use of credit by encouraging consumers to use both the Loan
Estimate and Closing Disclosure as tools to identify changes in costs
and terms that may have occurred after issuance of the Loan Estimate.
Accordingly, this disclosure will benefit consumers and effectuate the
purposes of TILA and RESPA by promoting the informed use of credit and
more effective advance notice of settlement costs, consistent with TILA
section 105(a) and RESPA section 19(a), and will ensure that the
features of the transaction are fully, accurately and effectively
disclosed to consumers in a manner that permits consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a).
38(a)(3) Closing Information
Appendix A to Regulation X currently requires the settlement agent
to include in the RESPA settlement statement basic information about
the settlement process, including the name of the settlement agent, the
place of settlement, the property location, and the settlement date. In
addition to this information, with the exception of the place of
settlement, proposed Sec. 1026.38(a)(3) requires creditors to
disclose: (1) The date the Closing Disclosure is issued; (2) the dates
funds are disbursed to the seller and consumer, as applicable; (3) the
sale price of the property that is the subject of the transaction; and
(4) the file number assigned to the transaction by the closing agent.
All of the aforementioned information would be located under the
heading ``Closing Information.'' The Bureau believes that this
information and the additional information discussed below effectuate
the purposes of TILA and RESPA by promoting the informed use of credit
and more effective advance notice of settlement costs, consistent with
TILA section 105(a) and RESPA section 19(a), and will ensure that the
features of the transaction are fully, accurately and effectively
disclosed to consumers in a manner that permits consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a).
38(a)(3)(i) Date Issued
Proposed Sec. 1026.38(a)(3)(i) requires the creditor to disclose
the date the disclosures required for transactions subject to Sec.
1026.19(f) are issued to the consumer, labeled ``Date Issued.''
Proposed comment Sec. 1026.38(a)(3)(i)-1 cross-references the
commentary to proposed Sec. 1026.37(a)(4).
38(a)(3)(ii) Closing Date
Proposed Sec. 1026.38(a)(3)(ii) requires the creditor to disclose
the consummation date for the mortgage loan transaction, labeled
``Closing Date.''
38(a)(3)(iii) Disbursement Date
Proposed Sec. 1026.38(a)(3)(iii) requires the disclosure of the
date the amounts disclosed pursuant to proposed Sec.
1026.38(j)(3)(iii) and (k)(3)(iii) are expected to be paid to the
consumer and seller, respectively, labeled ``Disbursement Date.''
38(a)(3)(iv) Agent
Proposed Sec. 1026.38(a)(3)(iv) requires the identity of the
settlement agent conducting the closing, labeled ``Agent.'' Proposed
comment 38(a)(3)(iv)-1 clarifies that the name of the agency that
employs the settlement agent should be provided in the disclosure
required by Sec. 1026.38(a)(3)(iv) and that the name of the individual
conducting the closing is not required.
[[Page 51237]]
38(a)(3)(v) File Number
Proposed Sec. 1026.38(a)(3)(v) requires disclosure of the number
assigned to the transaction by the closing agent for identification
purposes, labeled ``File .''
38(a)(3)(vi) Property
Proposed Sec. 1026.38(a)(3)(vi) requires the street address of the
property required to be disclosed under proposed Sec. 1026.37(a)(6),
labeled ``Property.'' Proposed comment 38(a)(3)(iv)-1 cross-references
the commentary to Sec. 1026.37(a)(6), which provides guidance
regarding the information that must be provided in response to this
requirement when a standard property address is unavailable.
38(a)(3)(vii) Sale Price
In credit transactions where there is a seller, proposed Sec.
1026.38(a)(3)(vii)(A) requires disclosure of the contract sale price
for the property identified in proposed Sec. 1026.38(a)(3)(vi),
labeled ``Sale Price.'' In transactions where there is no seller,
proposed Sec. 1026.38(a)(3)(vii)(B) requires disclosure of the
appraised value of the property in proposed Sec. 1026.38(a)(3)(vi),
labeled ``Appraised Prop. Value.'' Proposed comment 38(a)(3)(vii)-1
provides guidance regarding disclosing the property value when there is
no seller that is a party to the transaction.
38(a)(4) Transaction Information
Proposed Sec. 1026.38(a)(4) requires the creditor to disclose the
names and addresses of the parties to the transaction: The borrower,
seller, and lender, as applicable. This information would appear under
the heading ``Transaction Information.'' These disclosures are
currently provided in the RESPA settlement statement. See appendix A to
Regulations X. In addition, TILA section 128(a)(1) and Regulation Z
Sec. 1026.18(a) require disclosure of the identity of the creditor.
The Bureau believes that these disclosures effectuate the purposes of
TILA and RESPA by promoting the informed use of credit and more
effective advance notice of settlement costs, consistent with TILA
section 105(a) and RESPA section 19(a), and will ensure that the
features of the transaction are fully, accurately and effectively
disclosed to consumers in a manner that permits consumers to better
understand the costs, benefits, and risks associated with mortgage
transactions, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a).
Proposed comment 38(a)(4)-1 clarifies that the name and address for
each consumer and seller must be provided and refers creditors to the
commentary to proposed Sec. 1026.37(a)(5) for further guidance.
Proposed comment 38(a)(4)-1 also clarifies that the name and address of
each consumer must be provided and that if the form does not provide
enough space to include the required information for each seller, an
additional page with that information may be appended to the end of the
form, provided the creditor is in compliance with proposed Sec.
1026.38(t)(3). Proposed comment 38(a)(5)-2 clarifies that, in
transactions where there is no seller such as in a refinancing or home
equity loan, the creditor must provide the name of the person or
persons primarily liable under the obligation or who have a right of
rescission. Finally, proposed comment 38(a)(4)-3 cross-references the
commentary to proposed Sec. 1026.37(a)(3) for information regarding
the identification of multiple creditors.
38(a)(5) Loan Information
Proposed Sec. 1026.38(a)(5) requires the creditor to provide
certain information about the mortgage loan that is the subject of the
transaction. With the exception of the mortgage insurance case number
required by proposed Sec. 1026.38(a)(5)(vi), all of the disclosures
required under proposed Sec. 1026.38(a)(5) mirror the disclosures
required by proposed Sec. 1026.37(a)(8) through (12). The Bureau
believes that these disclosures effectuate the purposes of TILA and
RESPA by promoting the informed use of credit and more effective
advance notice of settlement costs, consistent with TILA section 105(a)
and RESPA section 19(a), and will ensure that the features of the
transaction are fully, accurately and effectively disclosed to
consumers in a manner that permits consumers to better understand the
costs, benefits, and risks associated with mortgage transactions, in
light of the facts and circumstances, consistent with Dodd-Frank Act
section 1032(a).
Proposed comment 38(a)(5)-1 refers the creditor to the commentary
to proposed Sec. 1026.37(a)(9) through (11) for further guidance on
the general requirements and definitions applicable to proposed Sec.
1026.38(a)(5)(i) through (v). The disclosures required by proposed
Sec. 1026.38(a)(5) appear under the heading ``Loan Information.''
38(a)(5)(i) Loan Term
Proposed Sec. 1026.38(a)(5)(i) requires disclosure of the term of
the loan, consistent with proposed Sec. 1026.37(a)(8) and labeled
``Loan Term.''
38(a)(5)(ii) Purpose
Proposed Sec. 1026.38(a)(5)(ii) requires disclosure of the purpose
of the loan, consistent with proposed Sec. 1026.37(a)(9) and labeled
``Purpose.''
38(a)(5)(iii) Product
Proposed Sec. 1026.38(a)(5)(iii) requires disclosure of the loan
product, consistent with proposed Sec. 1026.37(a)(10) and labeled
``Product.''
38(a)(5)(iv) Loan Type
Proposed Sec. 1026.38(a)(5)(iv) requires disclosure of the loan
type, consistent with proposed Sec. 1026.37(a)(11) and labeled ``Loan
Type.''
38(a)(5)(v) Loan Identification Number
Proposed Sec. 1026.38(a)(5)(v) requires disclosure of the loan
identification number, consistent with proposed Sec. 1026.37(a)(12)
and labeled ``Loan ID .''
38(a)(5)(vi) Mortgage Insurance Case Number
The mortgage insurance case number currently is disclosed in
section B of the RESPA settlement statement. See appendix A to
Regulation X. Proposed Sec. 1026.38(a)(5)(vi) incorporates this
disclosure into the Closing Disclosure, labeled ``MIC .''
38(b) Loan Terms
For transactions subject to proposed Sec. 1026.19(f), proposed
Sec. 1026.38(b) implements the requirements of TILA section 128(a)(6),
(a)(11), and (b)(2)(C)(ii) by requiring creditors to disclose on the
Closing Disclosure the table of key loan terms provided on the Loan
Estimate pursuant to proposed Sec. 1026.37(b). This information
includes the loan amount; interest rate; periodic principal and
interest payment; whether the loan amount, interest rate, or periodic
payment may increase; and whether the loan has a prepayment penalty or
balloon payment. For a detailed description of the Bureau's
implementation of these statutory provisions and its legal authority
for this proposal, see the section-by-section analysis to proposed
Sec. 1026.37(b).
The requirements of proposed Sec. 1026.38(b) generally mirror
those of proposed Sec. 1026.37(b). Accordingly, proposed comment
38(b)-1 directs creditors to the commentary to proposed Sec.
1026.37(b) for guidance on the disclosures required by proposed Sec.
1026.38(b).
38(c) Projected Payments
Proposed Sec. 1026.38(c) implements the requirements of TILA
section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) for
[[Page 51238]]
transactions subject to proposed Sec. 1026.19(f), by requiring
creditors to disclose on the Closing Disclosure the periodic payment or
range of payments, together with an estimate of the taxes, insurance,
and assessments and the payments to be made with escrow account funds.
15 U.S.C. 128(a)(6), (a)(16), (b)(2)(C), (b)(4). The requirements of
proposed Sec. 1026.38(c) generally mirror those of proposed Sec.
1026.37(c), with certain exceptions which are discussed below.
Accordingly, proposed comment 38(c)-1 directs creditors to Sec.
1026.37(c) and its commentary for guidance on the disclosures required
by Sec. 1026.38(c). For a detailed description of the Bureau's
implementation of these statutory provisions and its legal authority
for this proposal, see the section-by-section analysis to proposed
Sec. 1026.37(c) above. As discussed below in the section-by-section
analysis to proposed Sec. 1026.38(t), the items required to be
disclosed pursuant to Sec. 1026.38 will be actual terms and costs, as
required by Sec. 1026.19(f).
Proposed Sec. 1026.38(c) differs from proposed Sec. 1026.37(c) in
several ways. First, proposed Sec. 1026.38(c)(2) requires an
additional reference to the information required by proposed Sec.
1026.38(l)(7). The Bureau believes, based on consumer testing, that
this additional reference will help consumers to understand the
specific payment amounts to be made with escrow funds and those that
must be paid separately by the consumer. Second, proposed Sec.
1026.38(c) contains different rules for estimating escrow payments. As
discussed in the section-by-section analysis to proposed Sec.
1026.37(c), the Dodd-Frank Act amended TILA to add new requirements
regarding the disclosure of escrow payments in consumer credit
transactions secured by a first mortgage on the principal dwelling of
the consumer, other than an open-end credit plan or reverse mortgage.
Specifically, TILA section 128(b)(4)(A) provides that the disclosures
required by TILA section 128(a)(6) must take into account the amount of
any monthly payment to an escrow account, in accordance with section
10(a)(2) of RESPA. 15 U.S.C. 1638(b)(4)(A); 12 U.S.C. 2609(a)(2). In
addition, new TILA section 128(b)(4)(B) generally requires creditors to
take into account the taxable assessed value of the property during the
first year after consummation, including the value of any improvements
constructed or to be constructed on the property, if known, and the
replacement costs of the property for hazard or flood insurance, when
disclosing estimated escrow payments pursuant to TILA section
128(b)(4)(A). 15 U.S.C. 1638(b)(4)(B). For the Loan Estimate provided
to consumers near the time of application, proposed Sec. 1026.37(c)
generally incorporates these statutory provisions, but expands the
requirements to all transactions subject to Sec. 1026.37(c). However,
the Bureau believes that separate treatment is required for the Closing
Disclosure because the statutory requirements may conflict with certain
provisions of Regulation X, which implements the provisions of RESPA
sections 6(g) and 10, regarding the administration of escrow accounts.
12 U.S.C. 2605(g); 2609.
Regulation X Sec. 1024.17(c)(7) specifies how a creditor
conducting an escrow account analysis must estimate disbursement
amounts. If the creditor knows the charge for a particular escrow item,
the creditor must use that amount in estimating the disbursement. If
the charge is unknown, the creditor may base the estimate on the
preceding year's charge, but may adjust the estimate to account for
inflation. The Regulation X requirement that the creditor use actual
charges, if known, in estimating escrow payment amounts may conflict
with the TILA section 128(b)(4)(B) requirement that the creditor take
into account the replacement costs of the property for hazard insurance
when determining the estimated escrow amount. Under the plain language
of TILA section 128(b)(4)(B), a creditor must base estimated escrows
for hazard insurance on the replacement costs of the property, even if
it knows that the actual charges will be different. While the Bureau
believes that the TILA requirement for estimating escrow payments is
appropriate for the Loan Estimate because it requires creditors to use
a uniform standard for estimates and therefore facilitates comparison,
the disclosure of actual payment amounts, when known, is appropriate
for the Closing Disclosure.
Accordingly, the Bureau proposes to use its authority under TILA
section 105(a), Dodd-Frank Act section 1032(a), and, for residential
mortgage loans, Dodd-Frank Act section 1405(b) to modify the
requirements of TILA section 128(b)(4)(B) for the estimation of escrow
payment amounts on the Closing Disclosure. Proposed Sec. 1026.38(c)
provides that, in disclosing estimated escrow payments as described in
Sec. 1026.37(c)(2)(iii) and (4)(ii), the amount disclosed on the
Closing Disclosure: (1) For transactions subject to RESPA, is
determined under the escrow account analysis described in Regulation X,
12 CFR 1024.17, and (2) for transactions not subject to RESPA, may be
determined under the escrow account analysis described in Regulation X,
12 CFR 1024.17, or in the manner set forth in Sec. 1026.37(c)(5).
Comment 38(c)(1)-1 clarifies that the amount of estimated escrow
payments disclosed on the Closing Disclosure is accurate if it differs
from the estimated escrow payment disclosed on the Loan Estimate due to
the escrow account analysis described in Regulation X, 12 CFR 1024.17.
The Bureau believes the proposed modification will effectuate the
purposes of TILA by promoting the informed use of credit by allowing
disclosure of actual escrow amounts for hazard insurance, when known.
Additionally, the proposed modification will ease compliance burden for
creditors. In particular, permitting creditors in transactions not
subject to RESPA to rely on the accounting rules described in
Regulation X, 12 CFR 1024.17, to calculate the escrow payment
disclosure will avoid requiring creditors to follow a separate
disclosure requirement for the relatively small number of transactions
that are subject to TILA but not RESPA. The proposed modification will
also improve consumer awareness and understanding of residential
mortgage loans and is in the interest of consumers and the public,
consistent with Dodd-Frank Act section 1405(b). The Bureau also
believes that the disclosure ensures that the features of consumer
credit transactions secured by real property are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with the
product or service, in light of the facts and circumstances, consistent
with Dodd-Frank Act section 1032(a).
38(d) Cash To Close
Pursuant to its authority under TILA section 105(a) and Dodd-Frank
section 1032(a), the Bureau proposes to require creditors to provide
the actual total closing costs imposed upon the consumer and the amount
of the cash required at consummation from the consumer. This disclosure
will promote the informed use of credit and consumer understanding of
the costs, benefits, and risks associated with the loan because it will
indicate to the consumer the amount the consumer will pay at
consummation of the credit transaction and closing of the real estate
transaction. Accordingly, proposed Sec. 1026.38(d) requires the
disclosure of the cash required from the consumer at consummation of
the transaction, with a
[[Page 51239]]
breakdown of the amounts of loan costs and other costs associated with
the transaction.
38(d)(1) to (d)(6)
Under proposed Sec. 1026.38(d)(1), the dollar amount due from the
consumer is the same amount as calculated in accordance with proposed
Sec. 1026.38(j)(3)(iii) and is disclosed under a heading of ``Cash to
Close'' and labeled ``Cash to Close.'' The total dollar amount of the
loan costs to be paid by the consumer at closing as calculated under
proposed Sec. 1026.38(f)(4) is disclosed under proposed Sec.
1026.38(d)(2). The total dollar amount of the other costs to be paid by
the consumer at closing as calculated under proposed Sec.
1026.38(g)(5) is disclosed under proposed Sec. 1026.38(d)(3). The
amount of lender credits disclosed under Sec. 1026.38(h)(3) is
disclosed under Sec. 1026.38(d)(4). The sum of the amounts disclosed
under Sec. 1026.38(d)(2), 1026.38(d)(3), and 1026.38(d)(4) is
disclosed with a description of ``Closing Costs'' under Sec.
1026.38(d)(5). A statement directing the consumer to refer to the page
of the Closing Disclosure that contains the tables required under Sec.
1026.38(f) and (g) is required under Sec. 1026.38(d)(6).
38(f),(g), and (h) Closing Cost Details
Currently, RESPA section 4(a) requires that the forms published by
the Bureau ``* * * shall conspicuously and clearly itemize all charges
imposed upon the borrower and all charges imposed upon the seller in
connection with the settlement * * *.'' 12 U.S.C. 2603(a). The current
RESPA settlement statement used in residential real estate transactions
is promulgated under Regulation X Sec. 1024.8, with instructions in
appendix A of Regulation X.
As discussed above, Dodd-Frank Act section 1032(f) requires the
Bureau to combine these RESPA disclosures with the disclosures required
by TILA. However, section 1419 of the Dodd-Frank Act amended TILA
section 128(a) to also require, in the case of a residential mortgage
loan, disclosure of the aggregate amount of settlement charges for all
settlement services provided in connection with the loan and the
aggregate amount of other fees or required payments in connection with
the loan. 15 U.S.C. 1638(a)(17).
Pursuant to its authority under Dodd-Frank Act section 1032(a) and
(f), TILA section 105(a), and RESPA section 19(a), the Bureau proposes
to require creditors to provide the loan costs and other costs imposed
upon the consumer and the seller in tables as part of the integrated
Closing Disclosure for closed-end transactions secured by real property
(other than reverse mortgages). Based on its consumer testing, the
Bureau believes that the disclosure of loan costs and other costs in
the format illustrated in proposed form H-25 of appendix H to
Regulation Z may improve consumer understanding of the loan costs and
other costs being imposed. The Bureau tested several different
prototype formats for disclosing actual closing costs on the Closing
Disclosure, including prototypes that were similar in format to the
current RESPA settlement statement, with a similar three-and four-digit
line numbering system, and other prototypes that more closely matched
the Loan Estimate. Consumer participants at the Bureau's consumer
testing performed better at identifying closing costs, including
whether closing costs had changed between the estimated and actual
amounts, when using a format for closing costs that closely matched
that of the Loan Estimate. Participants gained a familiarity with the
organization of closing costs on the Loan Estimate and benefited from
this experience when engaging with the Closing Disclosure. In addition,
consumer participants often placed the Loan Estimate and Closing
Disclosure prototypes side-by-side to compare the closing costs, and
this method of comparing the two disclosures was better enabled and
assisted by a closely matching organization of closing costs between
them. Accordingly, the Bureau is proposing a format for the disclosure
of closing cost information required by proposed Sec. 1026.38(f) and
(g) that closely matches the format and organization of the closing
cost information on the Loan Estimate, as required by proposed Sec.
1026.38(t) and illustrated by proposed form H-25.
This format of form H-25 also uses a different line numbering
system than that of the current RESPA settlement statement. Both
consumer and industry participants at the Bureau's testing stated that
line numbers would be useful to facilitate conversations between
consumers, creditors, and other participants in the credit and
underlying real estate transaction. However, consumer participants at
the Bureau's testing appeared overwhelmed by the three-and four-digit
line numbers on the prototypes similar to the current RESPA settlement
statement, and performed worse with prototypes containing that system.
As discussed above in part III, the Bureau is particularly mindful of
the potential risk of information overload for consumers, given the
amount of numbers and complexity involved in the credit transaction and
the underlying real estate transaction. The Bureau tested prototypes
with a two-digit line numbering system, which performed better with
both consumer and industry participants at the Bureau's testing, with
some industry participants at the Bureau's testing preferring it over
the system of the current RESPA settlement statement. Accordingly, the
format for the information required by proposed Sec. 1026.38(f) and
(g), as required by proposed Sec. 1026.38(t) and illustrated by form
H-25, also contains a two-digit line numbering system that is different
than the current RESPA settlement statement.
The Bureau believes that this disclosure may effectuate the purpose
of TILA by promoting the informed use of credit and assuring a
meaningful disclosure to consumers. The Bureau believes that this
disclosure may also satisfy the purpose of RESPA to provide more
effective advanced disclosure of settlement costs to both the consumer
and the seller in the real estate transaction. In addition, consistent
with section 1032(a) of the Dodd-Frank Act, this disclosure may ensure
that the features of consumer credit transactions secured by real
property are fully, accurately, and effectively disclosed to consumers
in a manner that permits consumers to understand the costs, benefits,
and risks associated with the product or service, in light of the facts
and circumstances.
As discussed below, proposed Sec. 1026.38(f), (g), and (h) require
the creditor or closing agent to disclose the details of the closing
costs at closing and totals of those costs. The costs related to the
consummation of the credit transaction and the closing of the real
estate transaction would be disclosed under Sec. 1026.38(f), (g), and
(h), as discussed below, regardless of the person responsible for
paying the cost.\186\
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\186\ The permitted itemization of closing costs under Sec.
1026.38(f) and (g) allows creditors to provide itemizations required
by State law without using additional pages. See, e.g., Indiana
Department of Insurance, Title Insurance Division ``New RESPA Rules
and Indiana Code FAQs'' (May 1, 2010) available at http://www.in.gov/idoi/files/Indiana_Department_of_Insurance_FAQs.pdf;
North Carolina Commissioner of Banks Memorandum ``Disclosure of
Origination Fees under HUD's New RESPA Rules'' (December 3, 2010)
available at http://www.nccob.gov/public/docs/Financial%20Institutions/Mortgage/OCOB_Letter_Regarding_Disclosure_of_Origination_Fees_under_HUDs_new_RESPA_Rules.pdf; Tex. Ins. Code Ann. art. Sec. 2702.053 (West 2005).
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During the Small Business Review Panel, several settlement agents
and one mortgage company requested that the
[[Page 51240]]
line numbers from the current RESPA settlement statement be retained,
stating that using the revised line numbers in the prototype integrated
Closing Disclosure would significantly increase programming costs. See
Small Business Review Panel Report at 20, 28-9. Based on this feedback,
the Bureau seeks comment on whether the use of line numbers will lower
software-related costs on industry, and the exact amount of the savings
given the rest of the changes in the integrated closing disclosure
contemplated by this proposal, while improving consumer understanding
of the loan terms and costs at the consummation of the credit
transaction and the closing of the real estate transaction.
38(f) Closing Cost Details; Loan Costs
Under proposed Sec. 1026.38(f), the closing cost details are
disclosed under a master heading of ``Closing Cost Details'' with
columns stating whether the charge is paid at or before consummation by
the consumer or the seller, or paid by others. All loan costs in the
credit transaction would be disclosed in a table under a heading of
``Loan Costs'' in three subcategories.
38(f)(1) Origination Charges
The first subcategory of loan costs would be disclosed under the
label ``Origination Charges,'' which encompasses the same items as
disclosed on the Loan Estimate under proposed Sec. 1026.37(f)(1)
together with any compensation of a loan originator paid by the
creditor. Each cost would be disclosed in the appropriate column
designated borrower-paid at or before closing, seller-paid at or before
closing, or paid by others. Proposed comment 38(f)(1)-1 clarifies that
comments 37(f)(1)-1, -2 and -3 provide additional guidance for the
charges listed under Sec. 1026.38(f)(1). Proposed comment 38(f)(1)-2
clarifies that all compensation paid to a loan originator must be
provided under Sec. 1026.38(f)(1), that compensation from the creditor
to a loan originator must be disclosed in the paid by others column,
and that compensation from both the consumer and the creditor to the
loan originator is prohibited under Sec. 1026.36(d)(2). Proposed
comment 38(f)(1)-3 clarifies that any amount disclosed as paid from the
creditor to the loan originator is calculated as the dollar value of
all compensation to the loan originator and refers to comments
36(d)(1)-1, -2, -3 and -6 for further guidance on the components of
compensation a to loan originator. The Bureau believes that the
origination charges disclosed under Sec. 1026.38(f)(1) satisfies Dodd-
Frank Act section 1419, which amended section 128(a) of TILA to add
paragraph (18), requiring disclosure of the aggregate amount of fees
paid to the mortgage originator, amount of those fees paid directly by
the consumer, and any additional amount received by the originator from
the creditor. As discussed above in part II.F, the Bureau currently is
engaged in six other rulemakings that relate to mortgage credit and
intends that the rulemakings function collectively as a whole.
Accordingly, the Bureau may have to modify aspects of this proposed
rule for consistency with determinations made in the other rulemakings.
For example, the Bureau would modify the disclosure of origination
charges under Sec. 1026.38(f)(1) as appropriate for consistency with
other rulemakings related to permissible mortgage loan originator
compensation.
Alternatively, the Bureau invites comment on whether it should
require itemization in the Closing Disclosure of fees received by loan
originators from the creditor, and whether it should require
itemization of any compensation paid by consumers to loan originators,
which does not include creditors, in the Loan Estimate and Closing
Disclosure. As discussed above with respect to proposed Sec.
1026.37(f)(1), the Bureau is proposing to use its authority under TILA
section 105(a) and (f), RESPA section 19(a), and Dodd-Frank Act section
1405(b) to exempt the disclosures required by proposed Sec. 1026.19(e)
from the TILA section 128(a)(18) requirement that creditors disclose
the amount of origination fees received by loan originators from the
creditor. The Bureau solicits comment on whether a similar exemption
should be applied here.
38(f)(2) Services Borrower Did Not Shop For
The second subcategory of loan costs would be disclosed under the
label ``Services Borrower Did Not Shop For.'' The costs of services
that were required by the creditor and provided by persons other than
the creditor for which the consumer could not or did not shop would
disclosed under Sec. 1026.38(f)(2). All items that were required to be
disclosed under Sec. 1026.37(f)(2), plus those items that would be
disclosed under Sec. 1026.37(f)(3) when the consumer did not shop for
the service under Sec. 1026.19(e)(1)(vi). Any additional items that
were required by the creditor but were not disclosed on the Loan
Estimate under Sec. 1026.37(f)(2) would be disclosed under Sec.
1026.38(f)(2) when the consumer did not shop for the service under
Sec. 1026.19(e)(1)(vi). Each cost would be disclosed in the
appropriate column designated borrower-paid at or before closing,
seller-paid charges at or before closing, or paid by others. Proposed
comment 38(f)(2)-1 refers to comments 37(f)(2)-1, through -4 to provide
additional guidance for the charges listed under Sec. 1026.38(f)(2).
38(f)(3) Services Borrower Did Shop For
The third subcategory of loan costs would be disclosed under the
label ``Services Borrower Did Shop For.'' The services required by the
creditor but for which the consumer independently shopped are disclosed
under Sec. 1026.38(f)(3). Each cost is disclosed in the appropriate
column for borrower-paid at or before closing, seller-paid at or before
closing, or paid by others. Proposed comment 38(f)(3)-1 clarifies that
all items that were disclosed under Sec. 1026.37(f)(3) that the
consumer did not shop for the service under Sec. 1026.19(e)(1)(vi) are
disclosed under Sec. 1026.38(f)(2), and not under Sec. 1026.38(f)(3).
38(f)(4) and (5) Total Loan Costs and Subtotal of Loan Costs
With the label ``Total Loan Costs (Borrower-Paid),'' the total
costs designated borrower-paid charges at closing and borrower-paid
charges before closing would be disclosed under Sec. 1026.38(f)(4).
The costs disclosed under Sec. 1026.38(f)(1), (2), and (3) would be
subtotaled and disclosed in the appropriate column designated borrower-
paid at or before closing under Sec. 1026.38(f)(5). Proposed comment
38(f)(5)-1 clarifies that costs that are seller-paid at or before
closing, or paid by others, are not subtotaled under Sec.
1026.38(f)(5), and that the subtotal of charges that are seller-paid at
or before closing, or paid by others, would be disclosed under Sec.
1026.38(h)(2).
38(g) Closing Cost Details; Other Costs
Under proposed Sec. 1026.38(g), all other costs in the credit
transaction and the real estate transaction are disclosed in a table
under the heading of ``Other Costs'' in four subcategories. Proposed
comment 38(g)-1 would refer to comment 38(f)-1 and comment 37(g)-1 to
provide guidance related to Sec. 1026.38(g).
38(g)(1) Taxes and Other Government Fees
The first subcategory is disclosed under the label ``Taxes and
Other Government Fees.'' The amount of recording fees and an
itemization of transfer taxes would be disclosed under Sec.
1026.38(g)(1). Proposed comment
[[Page 51241]]
38(g)(1)-1 refers to comments 37(g)(1)-1, -2, -3 and -4 for guidance on
disclosures required under Sec. 1026.38(g)(1).
38(g)(2) Prepaids
The second subcategory is disclosed under the label ``Prepaids.''
The items that were identified under are stated with the actual costs
in the applicable columns is disclosed under Sec. 1026.38(g)(2).
Proposed comment 38(g)(2)-1 refers to comment 37(g)(2)-1 to provide
guidance on disclosures required under Sec. 1026.38(g)(2). Proposed
comment 38(g)(2)-2 clarifies that the amount of prepaid interest can be
disclosed as a negative number if the calculation of prepaid interest
results in a negative number. Proposed comment 38(g)(2)-3 clarifies
that if interest is not collected for a portion of a month or other
period between closing and the date from which interest will be
collected with the first monthly payment, then $0.00 must be disclosed
under Sec. 1026.38(g)(2) for prepaid interest. This guidance is
consistent with instructions for RESPA settlement statement line 901 in
appendix A of Regulation X.
38(g)(3) Initial Escrow Payment at Closing
The third subcategory is disclosed under the subheading ``Initial
Escrow Payment at Closing.'' The items that were identified under Sec.
1026.37(g)(3) are stated with their actual cost and the applicable
aggregate adjustment required under 12 CFR 1024.17(d)(2) and disclosed
under Sec. 1026.38(g)(3). Proposed comment 38(g)(3)-1 clarifies that
the creditor would be required to state the amount that it would
require the consumer to place into a reserve or escrow account at
consummation to be applied to recurring charges for property taxes,
homeowner's and similar insurance, mortgage insurance, homeowner's
association dues, condominium dues, and other periodic charges. Each
charge identified would be disclosed with a relevant label, monthly
payment amount, and number of months collected at consummation.
Proposed comment 38(g)(3)-2 clarifies that the method used to determine
the aggregate adjustment for purposes of establishing the reserve or
escrow account is described in Regulation X Sec. 1024.17(d)(2), that
examples of the calculation methodology can be found in appendix E of
Regulation X, and that the result of the calculation will always be a
negative number or zero, except for amounts due to rounding. This
comment incorporates guidance provided in appendix A to Regulation X
relating to the instructions to complete the current RESPA settlement
statement section 1000.
38(g)(4) Other
The fourth subcategory would be disclosed under the label
``Other.'' The services required to be performed or are to be obtained
in the real estate closing by the consumer, seller, or other party are
described and the costs for the services disclosed under Sec.
1026.38(g)(4). The label for any cost that is a component of title
insurance must include the description ``Title--''. The label for costs
of premiums for separate insurance, warranty, guarantee, or event-
coverage products must include the parenthetical ``(optional)'' at the
end. Proposed comment 38(g)(4)-1 clarifies that the charges disclosed
under Sec. 1026.38(g)(4) include all real estate brokerage fees,
homeowner's or condominium association charges paid at closing, home
warranties, inspection fees, and other fees that are part of the real
estate transaction but not required by the creditor or disclosed
elsewhere in Sec. 1026.38. Proposed comment 38(g)(4)-2 clarifies that
any owner's title insurance premium disclosed under Sec. 1026.38(g)(4)
in a jurisdiction that permits simultaneous issuance title insurance
rates is calculated by using the full owner's title insurance premium,
adding any simultaneous issuance premium for issuance of lender's
coverage, and then deducting the full premium for lender's coverage
disclosed under Sec. 1026.38(f)(2) or (f)(3) and that the cost of a
premium for an owner's title insurance policy will be always labeled
with ``Title--'' at the beginning, and labeled ``(optional)'' at the
end when designated borrower-paid at or before closing. Proposed
comment 38(g)(4)-3 refers to comment 37(g)(4)-3 for additional guidance
on the use of the parenthetical ``(optional)'' at the end of label on a
cost under Sec. 1026.38(g)(4)(ii).
38(g)(5) Total Other Costs
38(g)(6) Subtotal of Costs
With the label ``Total Other Costs (Borrower-Paid),'' the total of
the consumer paid charges at closing and the consumer paid charges
before closing would be disclosed under proposed Sec. 1026.38(g)(5).
The costs disclosed under Sec. 1026.38(g)(1) through (4) are be
subtotaled and disclosed in the appropriate column designated borrower-
paid at or before closing under Sec. 1026.38(g)(6). Proposed comment
38(g)(6)-1 would clarify that the only costs subtotaled under Sec.
1026.38(g)(6) are those that are designated borrower-paid at or before
closing. Charges that are other costs seller-paid at closing, seller-
paid before closing, or paid by others are not disclosed under Sec.
1026.38(g)(6), but are subtotaled under Sec. 1026.38(h)(2).
38(h) Closing Cost Totals
38(h)(1) and (2)
Subtotals of closing costs and total closing costs paid by the
consumer must be disclosed under proposed Sec. 1026.38(h). With the
label ``Total Closing Costs (Borrower-Paid),'' the total amount of
consumer paid closing costs would be disclosed under Sec.
1026.38(h)(1). With a description of ``Closing Costs Subtotal (Loan
Costs + Other Costs),'' the subtotal of all charges disclosed under
Sec. 1026.38(f) and (g) in each column described in Sec. 1026.38(f)
would be disclosed under Sec. 1026.38(h)(2). Comment 38(h)(2)-1
clarifies that the loan costs and other costs that are seller-paid at
closing, seller-paid before closing, and paid by others are also
subtotaled under Sec. 1026.38(h)(2).
The Bureau proposes Sec. 1026.38(h) pursuant to its authority
under TILA section 105(a) and Dodd-Frank Act section 1032(a) because
disclosure of this closing cost information will promote the informed
use of credit and consumer understanding of the costs, benefits, and
risks associated with the mortgage transaction. Furthermore, for the
reasons stated above, the proposed rule is in the interest of consumers
and in the public interest, consistent with Dodd-Frank Act section
1405(b). In addition, proposed Sec. 1026.38(h) implements Dodd-Frank
Act Section 1419, which amended section 128(a) of TILA to add a new
paragraph (17) requiring disclosure of, among other amounts, the amount
of settlement charges the borrower must pay at closing and the
aggregate amount of all settlement charges for all settlement services
provided in connection with the loan.
38(h)(3)
Section 1026.38(h)(3) requires the creditor to disclose the amount
of credits provided by the creditor to the consumer at consummation.
Proposed comment 38(h)(3)-1 provides a cross reference to guidance
provided in comments 17(c)(1)-19, 19(e)(3)(i)-4, and 19(e)(3)(i)-5
concerning the disclosure of lender credits, including those that are
disclosed under Sec. 1026.37(g)(6). Proposed comment 38(h)(3)-2
clarifies that any amounts disclosed under Sec. 1026.38(h)(3) can also
be used for disclosing any credits from the creditor to remediate
excess costs determined
[[Page 51242]]
under Sec. 1026.19(e)(3)(i) or (e)(3)(ii). This comment incorporates
guidance provided in the HUD RESPA Roundup dated April 2010.
38(h)(4)
Section 1026.38(h)(4) requires the creditor to use terminology
describing the charges on the Closing Disclosure in a manner that is
consistent with the descriptions used for charges disclosed on the Loan
Estimate under Sec. 1026.37. The creditor would also be required to
list the charges on the Closing Disclosure in the same sequential order
on the Loan Estimate under Sec. 1026.37. Proposed comment 38(h)(4)-1
clarifies that the creditor would be required to use the same
terminology and order to make it easier for the consumer to compare
charges listed on the Loan Estimate and Closing Disclosure. Also, if
charges move between subheadings under Sec. 1026.38(f)(2) and (3),
listing the charges in alphabetical order in each subheading category
would be considered to be in compliance with Sec. 1026.38(h)(4).
38(i) Calculating Cash To Close
As discussed above, the total amount of cash or other funds that
the consumer must provide at consummation is commonly known as the
``cash to close.'' Prior to the enactment of the Dodd-Frank Act,
neither TILA nor Regulation Z expressly required disclosure of the cash
to close amount or its critical components. The Dodd-Frank Act added
section 128(a)(17) to TILA, which requires the disclosure of ``the
aggregate amount of settlement charges for all settlement services
provided in connection with the loan, the amount of charges that are
included in the loan and the amount of such charges the borrower must
pay at closing * * * and the aggregate amount of other fees or required
payments in connection with the loan.'' 15 U.S.C. 1638(a)(17).
The ``Summary of Borrower's Transaction'' on page 1 of the RESPA
settlement statement, line 303, includes a box that shows the amount of
cash due to or from the consumer. See appendix A to Regulation X. Page
3 of the RESPA settlement statement also includes a chart entitled
``Comparison of Good Faith Estimate (GFE) and HUD-1 Charges,'' which
highlights any changes between the estimated and actual amounts for
settlement service charges that are subject to the limitations on
increases under 12 CFR 1024.7(e). However, these settlement service
charges comprise only a portion of the total amount of funds that the
consumer would need to consummate the transaction. Thus, the cash to
close box on line 303 and the comparison chart on page 3 of the RESPA
settlement statement together provide an incomplete picture of how the
cash to close amount is calculated and whether it is different than the
consumer expects based on the GFE.
Consequently, and based on its authority under TILA section 105(a),
RESPA section 19(a), and Dodd-Frank Act sections 1032(a) and, for
residential mortgage loans, 1405(b), the Bureau is proposing to require
that the Closing Disclosure contain a ``Calculating Cash to Close''
table that highlights the cash to close amount and its critical
components and compares those amounts to the corresponding disclosures
shown on the Loan Estimate under Sec. 1026.37(h). The Bureau believes
that this disclosure will effectuate the purposes of TILA and RESPA by
facilitating the informed use of credit and ensuring that consumers are
provided with greater and timelier information on the costs of the
closing process. Providing consumers with information about the cash to
close amount, its critical components, and how such amounts changed
from the estimated amounts disclosed on the Loan Estimate helps ensure
that the features of the transaction are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to better understand the costs, benefits, and risks associated with the
transaction, in light of the facts and circumstances, consistent with
Dodd-Frank Act section 1032(a). The Bureau also believes such
disclosure will improve consumers' awareness and understanding of
residential mortgage transactions, which is in the interest of
consumers and the public, consistent with Dodd-Frank Act section
1405(b).
The ``Calculating Cash to Close'' table in the Closing Disclosure
under proposed Sec. 1026.38(i) mirrors the format of, and updates the
amounts shown on, the ``Calculating Cash to Close'' table in the Loan
Estimate under proposed Sec. 1026.37(h). The Bureau believes that
including separate ``Calculating Cash to Close'' tables on both the
Loan Estimate and the Closing Disclosure will aid the consumer in
ascertaining whether the cash to close amount and its critical
components changed between the Loan Estimate and the Closing
Disclosure, and by how much. The two tables are similar in format and
designed to be used in tandem when the consumer is reviewing the
Closing Disclosure and comparing its content to that shown on the Loan
Estimate. However, the table on the Closing Disclosure includes
additional information under the subheading ``Did this change?'' which
is intended to assist the consumer in identifying and understanding the
reasons for any such changes.
The Bureau's consumer testing indicated that consumers were able to
use the detailed comparison table to understand how and why the actual
cash to close amount on the Closing Disclosure differs from the
estimated amounts shown on the Loan Estimate. During testing, consumers
tended to use the ``Calculating Cash to Close'' table in conjunction
with the ``Closing Cost Details'' tables showing itemized charges and
subtotals on the Closing Disclosure, to identify the differences
between the estimated and actual cash to close amount and its critical
components and to gain a better understanding of the numbers underlying
the cash to close amount. The consumers also benefited from the ``Did
this change?'' subheading containing statements that components of the
cash to close changed and simple explanations as to why. The Bureau has
incorporated this feedback into the design of the table and its choice
of language to be used under the ``Did this change?'' subheading, as
applicable.
Requiring disclosure of the ``Calculating Cash to Close'' table
also complements proposed Sec. 1026.19(f)(1)(ii), which requires
delivery of the Closing Disclosure three business days prior to
consummation. TILA section 128(b)(2)(D) requires that a corrected TILA
disclosure be given to the consumer not later than three business days
prior to consummation if the APR as initially disclosed becomes
inaccurate, and the Bureau understands that the annual percentage rate
changes triggering the redisclosure obligation occur so frequently that
many creditors currently provide the corrected TILA disclosure as a
matter of course even if redisclosure is not required. RESPA section 4
provides that the RESPA settlement statement be provided ``at or before
closing,'' however, and the Bureau understands that it typically is
given the day of closing. As discussed above, proposed Sec.
1026.19(f)(1)(ii) merges the two provisions by requiring that consumers
be given the integrated disclosures three business days prior to
consummation. During this three-business-day period, the consumer can
review the Closing Disclosure, contact the creditor with questions
regarding the information contained on the Closing Disclosure, and
correct any errors prior to consummation. Disclosing the cash to close
amount and how it was calculated three business days in advance of
consummation generally provides the consumer with a
[[Page 51243]]
three-business-day window to make arrangements to have the necessary
funds available for the consummation. This will help alleviate concerns
that, in some cases, consumers may not know until shortly before
consummation--or even the day of consummation--how much of their own
funds they will be expected to bring to the closing table.
The ``Calculating Cash to Close'' table to be disclosed on the
Closing Disclosure under Sec. 1026.38(i) consists of four columns and
nine rows. The first column, which does not have a subheading, includes
labels for the amounts of cash to close (listed in the final row of the
table, in more prominent fashion) and its critical components. Total
closing costs, which are listed in the first row, is the sum total of
creditor, third party settlement service, and other transaction-related
charges disclosed on the ``Closing Cost Details'' tables on the Closing
Disclosure. Subsequent rows list other components of the cash to close
amount, such as the closing costs paid before consummation, closing
costs financed, and the deposit. These component amounts are discussed
in more detail under Sec. 1026.38(i)(1) through (8), below. The second
column, under the subheading ``Estimate,'' includes the estimated
amounts of cash to close and its components. These amounts match the
estimates given on the ``Calculating Cash to Close'' table in the Loan
Estimate, which are shown to the nearest whole dollar amount. The third
column, under the subheading ``Final,'' includes the actual amounts of
the cash to close and its components without rounding. In both the
second and the third columns, the amounts that increase the total cash
to close amount are shown as positive numbers, and the amounts that
reduce the total cash to close amount are shown as negative numbers.
The fourth column, under the subheading ``Did this change?'' contains
in each row (1) a statement, more prominent than other disclosures
under proposed Sec. 1026.38(i), as to whether the actual amount is
different from or increased above the estimated amount and (2) if the
actual amount is different from or increased over the estimated amount,
a simple explanation for the difference or increase along with cross-
references to other relevant information disclosed on the Closing
Disclosure, as applicable.
Proposed comment 38(i)-1 discusses how, under each subparagraph
(iii) of Sec. 1026.38(i)(1) through (i)(8), the statement as to
whether the ``Final'' amount disclosed under each subparagraph (ii) of
Sec. Sec. 1026.38(i)(1) through (i)(8) is greater than, equal to, or
less than the corresponding ``Estimate'' amount disclosed under each
subparagraph (i) of Sec. Sec. 1026.38(i)(1) through (i)(8) is
disclosed more prominently than the other disclosures under Sec.
1026.38(i). The proposed comment clarifies that this more prominent
statement can take the form, for example, of a ``Yes'' or ``No''
disclosed in capital letters and boldface font, as shown on the Closing
Disclosure form H-25 set forth in appendix H to this part, the standard
form or model form, as applicable, pursuant to Sec. 1026.38(t). The
comment also discusses how, in the event a difference or an increase in
costs has occurred, certain words within the narrative text that are
included under the subheading ``Did this change?'' are displayed more
prominently than other disclosures, and gives an example of such a
prominent statement.
Proposed comment 38(i)-2 describes how a final amount shown to two
decimal places on the ``Calculating Cash to Close'' table disclosed
under Sec. 1026.38(i) could appear to be a larger number than its
corresponding estimate shown to the nearest dollar when, in fact, the
apparent increase is due solely to rounding. The comment further
clarifies that any statement disclosed under the subheading ``Did this
change?'' as to whether an actual amount is higher than its
corresponding estimated amount is based on the actual, non-rounded
estimate that would have been disclosed on the Loan Estimate under
Sec. 1026.37(h) if it had been shown to two decimal places rather than
a whole dollar amount. The proposed comment also provides an example of
how a contrary rule could result in inaccurate disclosures of
increases. The proposed comment reflects the Bureau's intention that
the statements of increases to be disclosed under each subparagraph
(iii) under Sec. 1026.38(i)(1) through (i)(8) capture true increases
rather than increases due solely to rounding rules.
Proposed comments 38(i)-3 and 4 provide guidance regarding the
statements required by each of Sec. 1026.38(i)(4)(iii)(A),
1026.38(i)(5)(iii)(A), 1026.38(i)(6)(iii)(A), 1026.38(i)(7)(iii)(A),
and 1026.38(i)(8)(iii)(A) that the consumer should see the details
disclosed pursuant to another subsection or other subsections within
Sec. 1026.38, or that an amount has increased or decreased from an
estimated amount, as applicable. The comments note that, for example,
Sec. 1026.38(i)(7)(iii)(A) requires a statement that the consumer
should see the details disclosed pursuant to Sec. 1026.38(j)(2)(v),
and, as shown on Closing Disclosure form H-25, that statement can read:
``See Seller Credits in Section L.'' These comments also provide
guidance regarding the required statements that are not illustrated as
samples in form H-25 in appendix H.
38(i)(1) Total Closing Costs
Proposed Sec. 1026.38(i)(1)(i) and (ii) requires the disclosure of
a comparison of the consumer's estimated and actual ``Total Closing
Costs'' amounts. The estimated ``Total Closing Costs'' amount is the
same amount that is disclosed on the Loan Estimate in the ``Calculating
Cash to Close'' table under proposed Sec. 1026.37(h)(1). This amount
also matches the ``Total Closing Costs'' amount that is disclosed on
the Loan Estimate under proposed Sec. 1026.37(g)(6). The actual
``Total Closing Costs'' amount is the same amount disclosed on the
Closing Disclosure under Sec. 1026.38(h)(1), reduced by the amount of
any lender credits disclosed under Sec. 1026.38(h)(3). Proposed
comment 38(i)(1)(i)-1 provides guidance regarding the requirement under
Sec. 1026.38(i)(1)(i) that the amount disclosed is labeled ``Total
Closing Costs'' and that such label is accompanied by a reference to
the disclosure of ``Total Closing Costs'' under Sec. 1026.38(h)(1).
Proposed Sec. 1026.38(i)(1)(iii)(A) specifies that if the actual
amount of ``Total Closing Costs'' is different than the estimated
amount of such costs as shown on the Loan Estimate (unless the
difference is due to rounding), the creditor or closing agent must
state, under the subheading ``Did this change?'', that the consumer
should see the total loan costs and total other costs subtotals
disclosed on the Closing Disclosure under Sec. 1026.38(f)(4) and
(g)(5), and must include a reference to such disclosures, as
applicable. This language is intended to direct the consumer to the
more detailed itemization on the Closing Disclosure of the costs that
comprise the ``Total Closing Costs.''
Under proposed Sec. 1026.38(i)(1)(iii)(A), the creditor or closing
agent must also state the dollar amount of any excess amount of closing
costs above the limitations on increases in closing costs under Sec.
1026.19(e)(3), if applicable, along with language stating that the
increase exceeds the legal limits by the dollar amount of the excess.
The dollar amount to be disclosed must reflect the different methods of
calculating such excess amounts under Sec. 1026.19(e)(3)(i) and (ii).
Proposed comment 38(i)(1)(iii)(A)-1 contains examples of how to
calculate such excess amounts
[[Page 51244]]
and clarifies that because certain closing costs, individually, are
subject to the limitations on increases in closing costs under Sec.
1026.19(e)(3)(i) (e.g., origination fees, transfer taxes, charges paid
by the consumer to an affiliate of the creditor), while other closing
costs are collectively subject to the limitations on increases in
closing costs under Sec. 1026.19(e)(3)(ii) (e.g., recordation fees,
fees paid to an unaffiliated third party if the creditor permitted the
consumer to shop for the service provider), the creditor or closing
agent calculates subtotals for each type of excess amount, and then
adds such subtotals together to yield the dollar amount to be disclosed
in the table. The proposed comment also clarifies that the calculation
of the excess amounts above the limitations on increases in closing
costs takes into account the fact that the itemized, estimated closing
costs disclosed on the Loan Estimate will not result in charges to the
consumer if the service is not actually provided at or before
consummation, and that certain itemized charges listed on the Loan
Estimate under the subheading ``Services You Can Shop For'' may be
subject to different limitations depending on the circumstances.
Proposed comments 38(i)(1)(iii)(A)-2.i through -2.iii complement
commentary to proposed Sec. 1026.19(e)(3). Pursuant to proposed Sec.
1026.19(f)(2)(v), the creditor or closing agent must refund to the
consumer any such excess amounts at consummation or within thirty days
thereafter. Accordingly, this disclosure may help the consumer identify
when a refund may be required, and this information can be used by the
consumer to request that the creditor or closing agent provide such
refund at consummation or within thirty days thereafter.
38(i)(2) Closing Costs Subtotal Paid Before Closing
Proposed Sec. 1026.38(i)(2) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Total Closing
Costs'' that are paid before consummation of the transaction. The
estimated ``Closing Costs Subtotal Paid Before Closing'' must be
disclosed as $0. Proposed comment 38(i)(2)(i)-1 clarifies that this
requirement is because the Loan Estimate does not have an equivalent
disclosure under proposed Sec. 1026.37(h). The actual ``Closing Costs
Subtotal Paid Before Closing'' is the sum of the amount disclosed on
the Closing Disclosure under proposed Sec. 1026.38(h)(2) and
designated ``Borrower-Paid Before Closing.'' Proposed Sec.
1026.38(i)(2)(iii) specifies that if the actual amount of ``Closing
Costs Subtotal Paid Before Closing'' is different than the estimated
amount, in this case $0 (unless the difference is due to rounding), the
creditor or closing agent must state under the subheading ``Did this
change?'' that the consumer paid such costs before consummation. This
language is intended to remind the consumer that he or she paid certain
transaction closing costs prior to consummation and that such costs
will be subtracted from the actual cash to close amount. Proposed
comment 38(i)(2)(iii)(B)-1 provides guidance regarding the requirement
to disclose whether the estimated and final amounts are equal.
38(i)(3) Closing Costs Financed
Proposed Sec. 1026.38(i)(3) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Total Closing
Costs'' that are financed. The estimated ``Closing Costs Financed''
amount is the same amount that is disclosed in the ``Calculating Cash
to Close'' table in the Loan Estimate under proposed Sec.
1026.37(h)(2). The actual ``Closing Costs Financed'' amount reflects
any changes to the amount previously disclosed on the Loan Estimate.
Proposed Sec. 1026.38(i)(3)(iii) specifies that if the actual amount
of ``Closing Costs Financed'' is different than the estimated amount
(unless the excess is due to rounding), the creditor or closing agent
must state under the subheading ``Did this change?'' that the consumer
included these closing costs in the loan amount, which increased the
loan amount. The Bureau believes this explanatory language will be
particularly helpful to consumers for two reasons. First, an increase
in closing costs financed may trigger a sizeable decrease in the cash
to close, which in turn could create a false impression that the
overall transaction costs to the consumer decreased. Second, during
consumer testing, when consumers were presented with a scenario
involving a loan amount that increased after delivery of the Loan
Estimate, some of the consumers had difficultly isolating the increase
in closing costs financed as the reason for the increased loan amount.
The Bureau believes this disclosure may assist consumers in
understanding that the financed portion of the closing costs are paid
for through the loan proceeds.
38(i)(4) Downpayment/Funds From Borrower
Proposed Sec. 1026.38(i)(4) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Downpayment/
Funds from Borrower.'' Downpayment and funds from borrower are related
concepts, but downpayment is applicable to a transaction that is a
purchase as defined in proposed Sec. 1026.37(a)(9)(i), while funds
from borrower relates to a transaction other than a purchase. Under
proposed Sec. 1026.38(i)(4)(i), the estimated ``Downpayment/Funds from
Borrower'' amount is the same amount that is disclosed on the
``Calculating Cash to Close'' table in the Loan Estimate under proposed
Sec. 1026.37(h)(3). Under proposed Sec. 1026.38(i)(4)(ii)(A), in a
transaction that is a purchase as defined in proposed Sec.
1026.37(a)(9)(i), the actual amount of the ``Downpayment/Funds from
Borrower'' is the actual amount of the difference between the purchase
price of the property and the principal amount of the credit extended,
stated as a positive number. Under proposed Sec. 1026.38(i)(4)(ii)(B),
in a transaction other than a purchase as defined in proposed Sec.
1026.37(a)(9)(i), the actual amount of ``Funds from Borrower'' is
determined in accordance with Sec. 1026.38(i)(6)(iv), by subtracting
from the total amount of all existing debt being satisfied in the real
estate closing and disclosed under Sec. 1026.38(j)(1)(v) (except to
the extent the satisfaction of such existing debt is disclosed under
Sec. 1026.38(g)) the principal amount of the credit extended. If such
calculation yields a positive number, then the positive number is
disclosed under proposed Sec. 1026.38(i)(4)(ii)(B); otherwise, $0.00
is disclosed.
Proposed comment 38(i)(4)(ii)(A)-1 provides an example of the
downpayment changing in a particular transaction. Proposed comment
38(i)(4)(ii)(B)-1 provides further clarification about how the actual
``Funds from Borrower'' amount is determined under Sec.
1026.38(i)(6)(iv), and gives an example of when that actual amount may
change from the corresponding estimated amount.
Proposed Sec. 1026.38(i)(4)(iii)(A) specifies that if the actual
amount of ``Downpayment/Funds from Borrower'' is different than the
estimated amount (unless the difference is due to rounding), the
creditor or closing agent must state under the subheading ``Did this
change?'' that the consumer increased or decreased the payment, as
applicable, and also state that the consumer should see the details
disclosed under Sec. 1026.38(j)(1) or (j)(2), as applicable. This
language is intended to remind the consumer that he or she will be
contributing a different amount of his or her own funds toward the cash
to close, and therefore must make arrangements prior to the date of
consummation to procure any necessary funds. Comment 38(i)(4)(iii)(A)-1
clarifies the requirement under
[[Page 51245]]
Sec. 1026.38(i)(4)(iii)(A) that a statement be given that the consumer
has increased or decreased this payment, as applicable, along with a
statement that the consumer should see the details disclosed under
Sec. 1026.38(j)(1) or (j)(2), as applicable. The comment notes that,
in the event the purchase price of the property increased, that
statement can read, for example: ``You increased this payment. See
details in Section K.'' In the event the loan amount decreased, that
statement can read, for example, ``You increased this payment. See
details in Section L.'' This language is intended to direct the
consumer to the section within the Closing Disclosure containing the
information that accounts for the increase in the ``Downpayment/Funds
from Borrower'' amount.
38(i)(5) Deposit
Proposed Sec. 1026.38(i)(5) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Deposit.'' The
estimated ``Deposit'' amount is the same amount that is disclosed in
the ``Calculating Cash to Close'' table on the Loan Estimate under
proposed Sec. 1026.37(h)(4). The actual ``Deposit'' amount is the same
amount that is disclosed on the Closing Disclosure under proposed Sec.
1026.38(j)(2)(ii). Proposed Sec. 1026.38(i)(5)(iii) specifies that if
the actual amount of ``Deposit'' is different than the estimated amount
(unless the difference is due to rounding), the creditor or closing
agent must state, under the subheading ``Did this change?'', that the
consumer increased or decreased this payment, as applicable, and should
see the details disclosed under Sec. 1026.38(j)(2)(ii). This language
is intended to direct the consumer to the section within the Closing
Disclosure containing the itemization of the deposit in the Closing
Disclosure.
38(i)(6) Funds for Borrower
Proposed Sec. 1026.38(i)(6) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Funds for
Borrower.'' Like proposed Sec. 1026.37(h)(5), this amount is intended
to generally represent the amount to be disbursed to the consumer or
used at consumer's discretion at consummation of the transaction, such
as in cash-out refinance transactions. The determination of whether the
transaction will result in ``Funds for Borrower'' is made under
proposed Sec. 1026.38(i)(6)(iv). The estimated ``Funds for Borrower''
amount disclosed under Sec. 1026.38(i)(6)(i) is the same amount that
is disclosed in the ``Calculating Cash to Close'' table in the Loan
Estimate under proposed Sec. 1026.37(h)(5). Proposed Sec.
1026.38(i)(6)(ii) provides that the actual ``Funds for Borrower''
amount disclosed is determined pursuant to Sec. 1026.38(i)(6)(iv), by
subtracting from the total amount of all existing debt being satisfied
in the real estate closing and disclosed under Sec. 1026.38(j)(1)(v)
(except to the extent the satisfaction of such existing debt is
disclosed under Sec. 1026.38(g)) the principal amount of the credit
extended (excluding any amount disclosed under Sec.
1026.38(i)(3)(ii)). The exclusion of any amount disclosed under Sec.
1026.38(i)(3)(ii) is necessary since that amount of the credit extended
has already been accounted for in the cash to close calculation by
inclusion in Sec. 1026.38(i)(3)(ii). If such calculation yields a
negative number, then the negative number is disclosed under proposed
Sec. 1026.38(i)(6)(ii); otherwise, $0.00 is disclosed.
Proposed comment 38(i)(6)(ii)-1 provides further clarification
about how the actual ``Funds for Borrower'' amount is determined under
Sec. 1026.38(i)(6)(iv), and to whom such amount is disbursed. Proposed
Sec. 1026.38(i)(6)(iii) clarifies that, if the actual amount of
``Funds for Borrower'' is different than the estimated amount (unless
the difference is due to rounding), the creditor or closing agent must
state in the subheading ``Did this change?'' that the consumer's
available funds from the loan amount have increased or decreased, as
applicable. This language is intended to remind the consumer that a
different amount of loan proceeds will be available following payoff of
existing loans.
38(i)(7) Seller Credits
Proposed Sec. 1026.38(i)(7) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Seller
Credits.'' ``Seller Credits'' are described in proposed
1026.38(j)(2)(v) and corresponding commentary. The estimated ``Seller
Credits'' amount is the same amount that is disclosed on the
``Calculating Cash to Close'' table in the Loan Estimate under proposed
Sec. 1026.37(h)(6). The actual ``Seller Credits'' amount is the same
amount disclosed on the Closing Disclosure under proposed Sec.
1026.38(j)(2)(v). Proposed comment 38(i)(7)(ii)-1 clarifies that the
``Final'' amount reflects any change, following the delivery of the
Loan Estimate, in the amount of funds given by the seller to the
consumer for generalized credits for closing costs or for allowances
for items purchased separately, as distinguished from payments by the
seller for items attributable to periods of time prior to consummation
(which are considered ``Adjustments and Other Credits'' separately
disclosed under proposed Sec. 1026.38(i)(8)).
Proposed Sec. 1026.38(i)(7)(iii) specifies that, if the actual
amount of ``Seller Credits'' is different than the estimated amount
(unless the difference is due to rounding), the creditor or closing
agent must state that fact under the subheading ``Did this change?,''
and state that the consumer should see the details disclosed under
Sec. 1026.38(j)(2)(v). This language is intended to direct the
consumer to the section within the Closing Disclosure containing the
itemization of seller credits.
38(i)(8) Adjustments and Other Credits
Proposed Sec. 1026.38(i)(8) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Adjustments and
Other Credits.'' ``Adjustments and Other Credits'' are described in
proposed Sec. 1026.38(j)(2)(vi) through (xi) and corresponding
commentary. The estimated ``Adjustments and Other Credits'' amount is
the same amount that is disclosed on the ``Calculating Cash to Close''
table in the Loan Estimate under proposed Sec. 1026.37(h)(7). The
actual ``Adjustments and Other Credits'' amount is equal to the total
amount of the adjustments and other credits due from the consumer at
consummation (i.e., the amounts disclosed on the Closing Disclosure
under Sec. Sec. 1026.38(j)(1)(v) through (x)), reduced by the total
amount of the adjustments and other credits paid already by or on
behalf of the consumer at consummation (i.e., the amounts disclosed on
the Closing Disclosure under Sec. Sec. 1026.38(j)(2)(vi) through
(xi)). Proposed Sec. 1026.38(i)(8)(iii) specifies that if the actual
amount of ``Adjustments and Other Credits'' is different than the
estimated amount (unless the difference is due to rounding), the
creditor or closing agent must state that fact under the subheading
``Did this change?,'' and state that the consumer should see the
details disclosed under Sec. Sec. 1026.38(j)(1)(v) through (x) and
(j)(2)(vi) through (xi). This language is intended to direct the
consumer to the sections within the Closing Disclosure containing the
itemization of the adjustments and other credits. Proposed comment
38(i)(8)(ii)-1 gives examples of items that may be adjustments and
other credits, and clarifies that if the calculation required by Sec.
1026.38(i)(8)(ii) yields a negative
[[Page 51246]]
number, the creditor or closing agent discloses it as such.
38(i)(9) Cash To Close
Proposed Sec. 1026.38(i)(9) requires the disclosure of a
comparison of the estimated and actual amounts of the ``Cash to
Close.'' The estimated ``Cash to Close'' amount is the same amount that
is disclosed on the ``Calculating Cash to Close'' table in the Loan
Estimate under proposed Sec. 1026.37(h)(8) as ``Estimated Cash to
Close.'' The actual ``Cash to Close'' amount is the sum of the amounts
disclosed under proposed Sec. Sec. 1026.38(i)(1) through (8). The
label ``Cash to Close'' and the estimated and actual amounts listed in
the table are disclosed more prominently than other disclosures in
Sec. 1026.38(i), as a means of emphasizing the importance of the cash
to close amount. Proposed comment 38(i)(9)(ii)-1 clarifies that the
``Final'' amount of ``Cash to Close'' disclosed under Sec.
1026.38(i)(9)(ii) equals the amount disclosed on the Closing Disclosure
as ``Cash to Close'' under Sec. 1026.38(j)(3)(iii). The proposed
comment also clarifies that if the calculation required by Sec.
1026.38(i)(9)(ii) yields a negative number, the creditor or closing
agent discloses it as such. Proposed comment 38(i)(9)(ii)-2 discusses
how the disclosure of the ``Final'' amount of ``Cash to Close'' under
Sec. 1026.38(i)(9)(ii) is more prominent than the other disclosures
under Sec. 1026.38(i) and clarifies that this more prominent
disclosure can take the form, for example, of boldface font, as shown
on the Closing Disclosure form H-25.
38(j) and (k) Summaries of Borrower's and Seller's Transactions
Currently, RESPA section 4 requires the settlement agent to clearly
and conspicuously itemize all charges imposed upon the borrower and
seller in connection with the settlement. See 12 U.S.C. 2603.
Regulation X implements these requirements by requiring the settlement
agent to provide summaries of the consumer's and seller's transactions
on the RESPA settlement statement. See Regulation X Sec. 1024.8 and
appendix A. Dodd-Frank Act section 1032(f) requires that the Bureau
propose disclosures that combine the disclosures required under TILA
and RESPA sections 4 and 5 into a single, integrated disclosure for
mortgage loan transactions covered under TILA and RESPA.
In addition to effectuating Dodd-Frank Act section 1032(f), the
Bureau believes that including on the Closing Disclosure summaries of
the consumer's and seller's transactions will effectuate the purposes
of TILA and RESPA by promoting the informed use of credit and more
effective advance notice to home buyers and sellers of settlement
costs, respectively. The summaries will assist consumers in
understanding of the resolution of their legal obligations to sellers
under the terms of the sales contract for the property which will be
used to secure the credit extended to facilitate the purchase. The
summaries will also assist sellers in understanding the charges they
are required to pay under the sales contract. In addition, consistent
with section 1032(a) of the Dodd-Frank Act, the addition of the
summaries of the consumer's and seller's transactions would ensure that
the features of consumer credit transactions secured by real property
are fully, accurately, and effectively disclosed to consumers in a
manner that permits consumers to understand the costs, benefits, and
risks associated with the product or service, in light of the facts and
circumstances. Therefore, the Bureau proposes to exercise its authority
under TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act
section 1032(a) to require the creditor or closing agent to provide the
summaries of the consumer's and seller's transactions that are
currently provided in the RESPA settlement statement. The required
information regarding the consumer's transaction would be set forth in
Sec. 1026.38(j) and the required information regarding the seller's
transaction would be set forth in Sec. 1026.38(k). Furthermore, for
the reasons stated above, the proposed rule is in the interest of
consumers and in the public interest, consistent with Dodd-Frank Act
section 1405(b). The Bureau is not proposing to alter the current
method for calculating these summaries as currently provided in
appendix A to Regulation X except as specifically described below.
However, based on the results of consumer testing, the Bureau is
proposing to revise the wording of headings, labels, and references to
make them more understandable for consumers.
In addition, the format required by proposed Sec. 1026.38(t), as
illustrated by proposed form H-25 of appendix H to Regulation Z, for
the information required by proposed Sec. 1026.38(j) and (k) contains
a two-digit line numbering system, in contrast to the three-digit line
numbering system for this information on the current RESPA settlement
statement. At the Bureau's consumer testing, consumer participants
appeared overwhelmed by the three- and four-digit line numbers on
prototypes that contained line numbers similar to the current RESPA
settlement statement. As described above in part III, the Bureau is
also mindful of the risks of information overload to consumers. The
Bureau believes that the increased amount of numbers on the page from
the three- and four-digit line numbering system may significantly
detract from the consumer's ability to engage with the Closing
Disclosure. The prototypes that the Bureau tested that contained only a
two-digit line numbering system performed better with consumers, and
were more effective at enabling them to understand their actual closing
costs and the differences between the estimated and actual amounts. In
addition, as described above in the analysis of proposed Sec.
1026.38(f) and (g), the use of this two-digit line numbering system for
the information required by proposed Sec. 1026.38(f) and (g) allows
the Loan Estimate and Closing Disclosure to match more closely, which
the Bureau's consumer testing indicates better enables consumers to
understand their transaction. See the analysis of proposed Sec.
1026.38(f) and (g) for more detail regarding the two-digit line
numbering system. During the Small Business Review Panel, several
settlement agents and one mortgage company requested that the line
numbers from the current RESPA settlement statement be retained,
stating that using the revised line numbers in the prototype integrated
Closing Disclosure would significantly increase programming costs. See
Small Business Review Panel Report at 20, 28. Based on this feedback,
the Bureau seeks comment on whether the use of line numbers will lower
software-related costs on industry, and the exact amount of the savings
given the rest of the changes contemplated by this proposal, while
improving consumer understanding of the loan terms and costs at the
consummation of the credit transaction and the closing of the real
estate transaction.
38(j) Summary of Borrower's Transaction
Proposed Sec. 1026.38(j) requires that the creditor or closing
agent provide the summaries of the consumer's and seller's transactions
in separate tables under the heading ``Summaries of Transactions'' with
a statement that the purpose of the table is to summarize the
transaction. Proposed Sec. 1026.38(j) also lists the information that
must be provided under the subheading ``Borrower's Transaction.''
Proposed comment 38(j)-1 clarifies that it is permissible to give two
separate Closing Disclosures to the consumer and seller. This comment
incorporates guidance
[[Page 51247]]
provided in the HUD RESPA FAQs p. 44, 4 (``HUD-1--
``General''). Comment 38(j)-2 clarifies that additional lines can be
added to the Closing Disclosure to show customary recitals and
information used locally in real estate closings. This comment
incorporates guidance provided in HUD RESPA FAQs p. 44, 5 and
10 (``HUD-1--General''). Proposed comment 38(j)-3 clarifies
that the amounts disclosed under the following provisions of Sec.
1026.38(j) are the same as the amounts disclosed under the
corresponding provisions of Sec. 1026.38(k): Sec. 1026.38(j)(1)(ii)
and Sec. 1026.38(k)(1)(ii); Sec. 1026.38(j)(1)(iii) and Sec.
1026.38(k)(1)(iii); if the amount disclosed under Sec.
1026.38(j)(1)(v) is attributable to contractual adjustments between the
consumer and seller, Sec. 1026.38(j)(1)(v) and Sec.
1026.38(k)(1)(iv); Sec. 1026.38(j)(1)(vii) and Sec.
1026.38(k)(1)(vi); Sec. 1026.38(j)(1)(viii) and Sec.
1026.38(k)(1)(vii); Sec. 1026.38(j)(1)(ix) and Sec.
1026.38(k)(1)(viii); Sec. 1026.38(j)(1)(x) and Sec.
1026.38(k)(1)(ix); Sec. 1026.38(j)(2)(iv) and Sec. 1026.38(k)(2)(iv);
Sec. 1026.38(j)(2)(v) and Sec. 1026.38(k)(2)(vii); Sec.
1026.38(j)(2)(viii) and Sec. 1026.38(k)(2)(x); Sec. 1026.38(j)(2)(ix)
and Sec. 1026.38(k)(2)(xi); Sec. 1026.38(j)(2)(x) and Sec.
1026.38(k)(2)(xii); and Sec. 1026.38(j)(2)(xi) and Sec.
1026.38(k)(2)(xiii).
38(j)(1) Itemization of Amount Due From Borrower
Proposed Sec. 1026.38(j)(1)(i) requires the creditor or closing
agent to disclose the label ``Due from Borrower at Closing'' and the
total amount due from the consumer at closing, calculated as the sum of
items required to be disclosed under Sec. 1026.38(j)(1)(ii) through
(x), excluding items paid from funds other than closing funds defined
under Sec. 1026.38(j)(4)(i). Below this label Sec. 1026.38(j)(ii)
requires the creditor or closing agent to provide a reference to the
sale price of the property and the amount of the contract sales price
of the property being sold, excluding the price of any items of
tangible personal property if the consumer and seller have agreed to a
separate price for such items. In addition, below the same label, a
reference to the subtotal of closing costs paid at closing by the
consumer with adjustments for items paid by the seller in advance must
also be provided by the creditor or closing agent. Proposed comment
38(j)(1)(ii)-1 clarifies that, for purposes of this disclosure,
personal property is defined by state law, but could include such items
as carpets, drapes, and appliances. Manufactured homes are not
considered personal property for purposes of Sec. 1026.38(j)(1)(ii).
This comment incorporates guidance currently provided in the
instructions for RESPA settlement statement line 102 in appendix A to
Regulation X. Proposed Sec. 1026.38(j)(1)(iii) requires the creditor
or closing agent to provide a reference to the sales price of any
tangible personal property included in the sale that are not included
in the sales price disclosed under Sec. 1026.38(j)(1)(ii).
Proposed Sec. 1026.38(j)(1)(iv) requires the creditor or closing
agent to provide a reference to the subtotal of closing costs paid at
closing by the consumer and to disclose the amount of closing costs
paid by the consumer at closing. Proposed Sec. 1026.38(j)(1)(v)
requires the creditor or closing agent to describe and disclose the
amount of any additional items that the seller has already paid but are
attributable to a time after closing and therefore will be used by the
consumer. Also, proposed Sec. 1026.38(j)(1)(v) requires a description
and the cost of any other items owed by the consumer not otherwise
disclosed under proposed Sec. 1026.38(f), (g), or (j). Proposed
comment 38(j)(1)(v)-1 clarifies that items described and disclosed
under Sec. 1026.38(j)(v) can include: any balance in the seller's
reserve account held in connection with an existing loan, if assigned
to the consumer in a loan assumption case; any rent the consumer would
collect after closing for a time period prior to closing; or to show
the treatment of a security deposit. Proposed comment 38(j)(1)(v)-2
clarifies costs owed by the consumer not otherwise disclosed under
Sec. 1026.38(f), (g), or (j) will not have a parallel amount disclosed
under proposed Sec. 1026.38(k)(1)(iv).
Proposed Sec. 1026.38(j)(1)(vi) requires the creditor or closing
agent to provide a reference to adjustments paid by seller in advance.
Proposed Sec. 1026.38(j)(1)(vii) requires the creditor or closing
agent to provide a reference to city/town taxes, the time period that
the consumer is responsible to reimburse the seller for any such
prepaid taxes, and the prorated amount of any such prepaid taxes due
from the consumer at closing. Proposed Sec. 1026.38(j)(1)(viii)
requires the creditor or closing agent to provide a reference to county
taxes, the time period that the consumer is responsible for reimbursing
the seller for any such prepaid taxes, and the prorated amount of any
such prepaid taxes due from the consumer at closing. Proposed Sec.
1026.38(j)(1)(ix) requires the creditor or closing agent to provide a
reference to assessments, the time period that the consumer is
responsible for reimbursing the seller for any such prepaid
assessments, and the prorated amount of any such prepaid assessment due
from the consumer at closing. Proposed Sec. 1026.38(j)(1)(x) requires
the creditor or closing agent to provide a description and amount of
any additional items paid by the seller prior to closing that are due
from the consumer at closing. Proposed comment 38(j)(1)(x)-1 clarifies
that amounts disclosed under Sec. 1026.38(j)(1)(x) could be for
additional taxes not disclosed under Sec. 1026.38(j)(1)(vii) and
(viii), flood and hazard insurance premiums where the consumer is being
substituted as an insured under the same policy, mortgage insurance in
loan assumptions, planned unit development or condominium association
assessments paid in advance, fuel or other supplies on hand purchased
by the seller which the consumer will use when consumer takes
possession of the property, and ground rent paid in advance. This
comment incorporates instructions for RESPA settlement statement lines
106-112 in appendix A to Regulation X.
38(j)(2) Itemization of Amounts Already Paid by or on Behalf of
Borrower
Proposed Sec. 1026.38(j)(2)(i) requires the creditor or closing
agent to disclose the label ``Paid Already by or on Behalf of Borrower
at Closing'' and the total amount paid by or on behalf of the consumer
prior to closing, calculated as the sum of items required to be
disclosed under Sec. 1026.38(j)(2)(ii) through (xi), excluding items
paid from funds other than closing funds defined under Sec.
1026.38(j)(4)(i). Below this label, Sec. 1026.38(j)(2)(ii) requires
the creditor or closing agent to provide a reference to the amount of
the deposit, the consumer's loan amount, the existing loans assumed or
taken subject to at closing, seller credit, other credits, and
adjustments for items unpaid by seller. Proposed comment 38(j)(2)(ii)-1
clarifies that the deposit is any amount paid into a trust account by
the consumer under the contract of sale for real estate. This is a
change from the current definition of deposit in the instructions for
RESPA settlement statement line 201 in appendix A to Regulation X, that
define the deposit as any amount paid against the sales price prior to
settlement, because the amount of the downpayment or funds from the
consumer disclosed under Sec. 1026.38(i)(4) may also be paid prior to
closing. To differentiate between the downpayment amount and the
deposit amount in Sec. 1026.38(i)(4), the amount of the deposit needs
to be specified separately from other payments by the consumer against
the sales price prior to
[[Page 51248]]
closing. Proposed comment 38(j)(2)(ii)-2 clarifies that the amount of
the deposit should be reduced by a commensurate amount if any of the
deposit is used to pay for a closing cost before closing. Instead, the
charge for the closing cost paid from the deposit will be designated as
borrower-paid before closing under Sec. 1026.38(f)(1) or (g)(1), as
applicable.
Proposed Sec. 1026.38(j)(2)(iii) requires the creditor or closing
agent to provide a reference to the principal amount of the consumer's
new loan and the amount of the new loan made by the creditor or the
amount of the first user loan. Proposed comment 38(j)(2)(iii)-1
clarifies that first user loan amount disclosed under Sec.
1026.38(j)(2)(iii) is used to finance construction of a new structure
or purchase of a manufactured home and that how to disclose a first
user loan will depend on whether it is known if the manufactured home
will be considered real property at the time of consummation. This
comment incorporates guidance currently provided in the instructions
for RESPA settlement statement line 202 in appendix A to Regulation X
and HUD RESPA FAQs p. 47, 2 (``HUD-1--200 series'').
Proposed Sec. 1026.38(j)(2)(iv) requires the creditor or closing
agent to provide a reference to existing loans assumed or taken subject
at closing to by the consumer and the amount of those loans. Proposed
comment 38(j)(2)(iv)-1 clarifies that the amount disclosed under Sec.
1026.38(j)(2)(iv) is the outstanding amount of any loan that the
consumer is assuming, or subject to which the consumer is taking title
to the property, must be disclosed under Sec. 1026.38(j)(2)(iv). This
comment incorporates guidance currently provided in the instructions
for RESPA settlement statement line 203 in appendix A to Regulat