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Combining Mortgage Disclosures Presents Challenges for Credit Unions
by John Zasada
The Consumer Financial Protection Bureau (CFPB) has set in motion one of the biggest consumer protection regulatory changes for credit unions since the Truth in Savings Act was passed in 1991.
If implemented, the proposed changes would apply to most consumer mortgages, with the exception of home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or dwelling that is not attached to land. They would not apply to loans made by a creditor who makes five or fewer mortgages in a year. The final rule is expected in early 2013.
CFPB proposes combining initial and closing disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). As credit unions sift though and analyze the proposed changes, it becomes obvious that a clear understanding of the new rules will be essential to proper implementation.
Two disclosure forms to replace four
The Dodd-Frank Act of 2010 directed the CFPB to consolidate the TILA and RESPA disclosures. After 10 rounds of testing with consumers and commercial interests, and feedback from the public on multiple prototype forms over an 18-month period, the 1,099-page proposed rule was finally issued in July 2012.
Currently, consumers obtaining mortgages are faced with four different, but often redundant, mortgage disclosure forms. The proposed rules require only two forms: the loan estimate and the closing disclosure.
This form presents the costs and risks of a mortgage. It is three pages long, which is less than the current five pages of early disclosure forms and would replace two current federal forms: the Good Faith Estimate designed by the Department of Housing and Urban Development, and the “early” Truth in Lending disclosure form designed by the Federal Reserve System.
Lenders must provide the Loan estimate form to consumers within three business days of their applying for a mortgage. The proposed rule contains a specific definition of what constitutes an application, and along with official interpretations, contains detailed instructions on how each line on the form would be completed. There are sample forms for different types of loan products on the CFPB website.
This five-page form would replace the HUD-1, which is currently used to close a loan. It would also replace the revised Truth in Lending disclosure. 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 actual closing, the consumer must be provided with a new form. When that happens, the consumer generally must be given three additional business days to review that form before closing.
The closing disclosure contains final loan terms and a detailed breakdown of closing costs. Consumers can compare the form to the loan estimate so that any changes to the costs and terms are readily apparent. This will allow consumers to see if the deal is more expensive or less expensive than what they expected.
According to the CFPB, the new loan estimate and closing disclosure forms will help consumers to understand and compare different mortgages more effectively, and to better examine their estimated and final terms and costs. Interest rates, monthly payments, the loan amount, and closing costs are all on the first page of the proposed forms. The first page also explains how the interest rates, payments, and loan amount might change over the life of the loan, including the highest they can go. In addition, the forms provide warnings about features some consumers may want to avoid, such as prepayment penalties and an increase in the loan balance (negative amortization).
Although CFPB believes that these new disclosures are a huge improvement compared to the current forms, credit unions are faced with the monumental task of totally replacing existing disclosures, making major mortgage system modifications, and retraining mortgage lending staff on the new forms and requirements. While mortgage lending changes are long overdue, the costs that these changes impose on credit unions could be enormous.
Any thoughts of getting ahead of these proposed regulations is probably premature because the date for the final rule is not expected until early 2013, and because the effective date would likely not be until 12 to 18 months after the effective date. Stay tune, there is almost surely more to come.