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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2017

Fixing TRID's Catch-22 Rules

Proposed changes to consumer disclosures promise to bring welcomed clarity

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It’s been more than a year since the effective date of the TRID consumer-disclosure rules, and a lingering fear of violating its requirements still remains for many mortgage professionals.

Despite some helpful clarifications of the TRID rules from the Consumer Financial Protection Bureau (CFPB), ambiguities persist that complicate the preparation and delivery to borrowers of the new Loan Estimate (LE) and Closing Disclosure (CD) forms. The CFPB recognizes that regulatory amendments are necessary to memorialize the informal guidance that mortgage originators have relied upon when providing the completed LE and CD forms to borrowers — and lessen the risk of consumer refunds or actual and/or statutory damages under the federal Truth in Lending Act (TILA).

In July of 2016, the CFPB issued a Notice of Proposed Rulemaking (NPRM) that outlined a number of proposed amendments to TRID that would incorporate certain of the agency’s informal positions into law and make other technical additions and changes to the TRID rules. The NPRM does not address every ambiguity or issue that has been raised by loan originators, but it does include many proposals that indicate the CFPB has been listening and understands the current challenges for the mortgage industry created by the original TRID rules.

If adopted, the changes proposed under the NPRM should help to reduce the potential liability that originators currently face under TRID. These proposals include extending TRID rules to loans secured by cooperative units across all states; closing the “black hole” that prevents lenders from resetting tolerance limits after a CD has been provided to the borrower; and extending existing finance-charge tolerances to the Total of Payments consumer disclosure.

Cooperative units

An originator must provide an LE and CD for loan applications involving closed-end mortgages secured by real property. TRID, however, does not define real property, and a lender must defer to state law to determine what constitutes real property. In the case of cooperative housing units, they are treated as real property in some states, personal property in other states, and both real and personal property in yet other states — depending on the context. 

As a result, when consumers apply for mortgage loans secured by units in cooperatives, lenders have been left to determine whether the LE and CD forms are required on a state-by-state basis — often under laws that are unclear. If a lender provides the LE and the CD to a consumer in a state that treats cooperative units as personal property, the lender could face liability for failing to provide the correct disclosure.

To remove uncertainty related to cooperatives and to level the playing field for all consumers purchasing units in cooperatives, the NPRM proposes to require the provision of the TRID disclosures in all closed-end consumer credit transactions secured by cooperative units, regardless of whether state law classifies the interests as real or personal property. If finalized, this change will help to reduce the risk of liability that lenders currently face if they provide the wrong disclosure. 

Black-hole tolerances

Lenders are well acquainted with the concept of tolerances. That is, if a lender discloses a certain fee for a settlement service on the LE, and the actual amount charged to the borrower for that service on the CD increases, the lender owes the consumer a refund for the difference to cure the “tolerance” violation. 

If, prior to closing, a change occurs in accordance with the TRID rules that results in higher fees, the lender can avoid a tolerance violation and a consumer refund by issuing a new LE to the borrower and disclosing the higher amount of the fee — as long as this new disclosure is provided to the borrower within three business days of the change. The lender also must ensure that the consumer receives the revised LE no later than four business days prior to loan consummation.

TRID, however, prohibits a lender from issuing a new LE on or after the day on which the lender provides the consumer with the initial CD. The CFPB issued informal guidance that if a valid change occurs after the initial CD is provided, the lender may issue a revised CD to reset tolerances if there are less than four business days remaining between the date the revised disclosure is required to be provided and loan consummation. While this guidance is helpful in certain transactions, it is not enough.

If the lender has already provided the initial CD and a valid change results in higher fees more than four business days prior to the scheduled loan-closing date, this transaction falls into the “black hole” and lenders are unable, under the current rule, to issue a revised CD to reset the tolerance limits. Instead, lenders are forced to issue refunds to the borrower to ensure the borrower pays no more than the prior disclosed-fee amount.

The CFPB has acknowledged informally that it never intended to require lenders to make refunds to borrowers when changes occur outside of the lender’s control in the days prior to closing. In the NPRM, the CFPB seeks to close the “black hole” by permitting a lender to reset tolerance limits using a revised CD at any time after the initial CD is provided to the borrower, as long as the revision is provided within three business days after the lender receives information sufficient to establish that a valid change occurred.

This is a welcome proposal for lenders that, if finalized, should allow lenders to avoid TRID liability without a refund to the consumer when fees charged at closing are higher than the amounts previously disclosed to the borrower.

Finance-charge tolerances

For certain credit transactions that are secured by real property, TILA sets forth tolerances for disclosure accuracy for “the finance charge and other disclosures affected by any finance charge.” TILA states that the consumer disclosure will be considered accurate — other than for rescission purposes (for which separate tolerances apply) — if the amount disclosed as the finance charge does not vary from the actual finance charge by more than $100, or is greater than the actual amount required to be disclosed. Based on these tolerances, if a lender’s finance charge-related disclosure is technically inaccurate, but it falls within the tolerances established under the law, the lender is not liable for an inaccurate disclosure.

TILA also requires a lender to disclose the Total of Payments (TOP), which it defines as the “sum of the amount financed and the finance charge.” Because the TOP is affected by the finance charge, it is subject to the finance-charge tolerance rule. TRID, however, altered how the TOP disclosure is calculated to include the sum of the “principal, interest, mortgage insurance, and loan costs.” By no longer basing this disclosure on a component of the finance charge, the TOP under TRID is arguably not a disclosure “affected by any finance charge” and is not subject to the finance-charge tolerances established by TILA. Thus, even the smallest error in disclosing the amount of the TOP, which is a material disclosure under TILA, could subject lenders to liability.

The NPRM seeks to clarify that the finance-charge tolerances also apply to the TOP disclosure by amending the regulations to explicitly reference the finance-charge tolerances, as well as the tolerances that apply for purposes of the right of rescission. The CFPB explains in the NPRM that it never intended to remove the tolerances for the TOP disclosure when it changed the calculation for TOP under the TRID rules. Thus, if the proposal is finalized, the CFPB would eliminate the possibility that a lender could be held liable for a violation of TILA based on minor miscalculations and disclosures of the TOP.

•  •  •

The NPRM includes many other proposals that should provide much-needed clarity for the LE and CD disclosures. Once adopted, the changes should lessen the overall risk of liability for the disclosures required under TRID.


 


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