September 2015 Legal Briefs

• Integrated Disclosures Crunch Time

Integrated Disclosures Crunch Time

By Mary Beth Guard

TRID deadline looms

It is hard to believe that if the CFPB had not taken action to delay the effective date of the TILA/RESPA Integrated Disclosures rule to October 3, 2015, we would be a month into compliance as I write this article.  That seems unfathomable because the reports we are getting from many bankers is that they simply aren’t ready yet and the implementation date is mere weeks away.

There seem to be two primary factors behind the lack of readiness.  The first is the status of updates to loan origination software.  In some instances, a vendor is taking longer than hoped.  In other instances, the lenders’ IT departments have not made installing the updates a priority, so progress has gotten bogged down internally, leaving little time to test and tweak.  The second factor is that after laboring under so much pressure and so many deadlines for the last several years, compliance folks just had to let up on the gas a little when the CFPB stepped in with its reprieve.  There were plenty of other time-sensitive projects sitting on the to-do list.  What was not anticipated, however, was how tough it is to get fully back up to speed on all the crazy details of the TRID rule once they had been placed on the backburner for a few weeks.  It’s like our brains couldn’t rid itself fast enough of this subject matter.

Now it’s time to get on with the show.  The really great thing is that since the original adoption of the rule on November 20, 2013, every sentence has been analyzed and dissected.  Endless possible scenarios have been discussed and re-discussed.  We have the benefit of collective thought and well-reasoned opinions.  The task now is to put them all together, grasp the requirements, understand the pitfalls and how to navigate around them and proceed fearlessly into the “new normal” for closed end consumer credit transactions secured by real estate.

In this edition of Legal Briefs, we highlight a selection of key questions and issues from the Integrated Disclosures rule.

Your Home Loan Toolkit.

Is your Loan Origination Software going to give you the new Your Home Loan Toolkit (which is the new term for the modified Special Information Booklet)?  If not, have you obtained an ample supply of hard copies of the booklet?  For applications received on or after 10/3/15, you must use the new booklet on a TRID loan, but only if the purpose of the transaction involves purchase of a one-to-four family residential property.  Refinancings and subordinate lien loans are not covered.

Acknowledgement of receipt.

It is permissible for you to have an acknowledgement of receipt on the Loan Estimate or Closing Disclosure, so long as you use the required wording.  If you are going to do so, your goal will be to achieve consistency across the board and document why you chose to not do the receipt acknowledgment on some loans where it is not practical to do so.  Examiners will be asking.

Have a good spreadsheet or other tool to use for tracking timeframes.

Lots of timing rules to juggle, from when you have to provide the Loan Estimate to the waiting period before consummation.  Plus, in certain situations, where there are borrower-requested changes or changed circumstances, you need to track when you became aware of these and must get the revised Loan Estimate (or Closing Disclosure, if you are within the time period for providing the Closing Disclosure when the changes arise) out on time.  The change in timing for the Closing Disclosure is a big deal.  Getting it into the hands of the borrower at least three business days prior to closing is going to take bullet-proof procedures – and an early start to give you a little pad for unforeseen circumstances.  You also have timeframes for corrections and cures.   If you are fortunate, your LOS vendor has provided a tool for this purpose.  If not, there is a free online calendar calculator from ppdocs.com.

Tracking tolerance limits.

The current GFE/HUD-1 combo makes it easy to see at a glance if you have a tolerance limit problem.  The new forms do not.  You will have to have a mechanism for doing off-form calculations.  Some software vendors are including a module that will pull items from each of the tolerance categories (l) items that can change in amount without creating a problem; 2) items that cannot change without being out of compliance; and 3) items where the “cluster” of charges in the category cannot increase, in the aggregate by more than 10% above what was estimate.  If your software doesn’t assist you with this task, you will need to work out a way to get the job done and save documentation of your tolerance analysis.

Purpose types.

On each Loan Estimate, you must designate the purpose for which the consumer will use the credit.  There are only four purpose types permissible and they aren’t entirely intuitive.  Always work from the top down.  Determine if it might be a purchase purpose first.  To fall into that category, the proceeds would be going to finance the acquisition of the real property that would serve as collateral for the loan.  If the consumer is going to give you a mortgage on Property A in order to get funds to buy Property B, it is not a purchase loan because the property being acquired is not the property that is going to serve as collateral.

If it is not a purchase purpose, move to the next possibility, which is refinance.  It would be a refinance if the credit will be used to refinance an existing obligation secured by the property that will serve as collateral for the loan.  It does not matter whether you were the original creditor or holder or servicer of the original obligation.

If the transaction purpose would be neither purchase nor refinance, the third possibility is construction.  This purpose category is to be used if the credit will be used to finance the initial construction of a dwelling on the real estate that will serve as collateral for the loan.  The tie between the flow of proceeds and the collateral security is required in each of the three categories just discussed.

The “garbage” category that you use as the loan purpose is “home equity loan.”  It is to be used in any instance where none of the previous three categories is applicable.  Disregard the fact that there may be no “home” involved whatsoever.  Just think of this as the default category that will hold everything that doesn’t fit within one of the other three purpose types.

Early review.

The sooner  you know about an error or issue with your Closing Disclosure that will require correction, the better.  If you can provide a corrected Closing Disclosure at the time of consummation and reflect any cures on it, you are smart to do so.

Just three sections.

Remember that all your research in connection with TRID will be confined to three areas of Regulation Z.  Section 1026.19 has been amended to add new subsections e, f, and g.  That’s where you look to get the scoop on when and how to provide the Loan Estimate and Closing Disclosure.  That’s where you find the guidance on changed circumstances.   The content and format requirements for the Loan Estimate are all found in 1026.37.  Section 1026.38 has the format and content requirements for the Closing Disclosure.    Keeping in mind precisely where to go will save you a great deal of time during your research.

No more lumping.

When the RESPA forms changed in 2010, you had to lump together the various components of the origination charges and you also had to (separately) lump together the various components of the title-related services.  With TRID, we must do just the opposite.  Unclump.  Itemize.  Since different title companies may use slightly different descriptions for the various fees they charge, you have to be on top of it so that your descriptive breakdown is commensurate with what is charged.

Assess the loan transaction to ensure your form output is appropriate.

Do you have a seller?  Or is it a refinance situation?  Perhaps it’s a situation where there is no existing loan.  Those factors will affect what goes into the Loan Estimate and Closing Disclosure.   Other considerations include whether the interest rate is fixed or adjustable, whether there will be interest only for a period of time, whether there is a balloon (or more than one balloon).  Hopefully, your software will guide you through input in a way that will ensure correct output, but particularly in the early days, check, recheck, and check some more.

Loan ID#.

The purpose of the Loan ID# is to enable you to find a particular TRID-covered transaction at any point in time.  You show the Loan ID# on the Loan Estimate, the Closing Disclosure, and any iterations of those documents.  It does not have to be the same as your loan number, but you need to be thinking about how you will make it unique, whether it makes sense to use a number that you may already be assigning for other purposes (although, keep in mind, the Loan Estimate is supposed to be a shopping tool and it may never result in the consumer moving forward and obtaining a loan from you).  There is no one right answer for how do come up with the Loan ID#.  It should be something that works for you.

Non-required Services.

If you are not requiring a particular service, then you don’t list it in blocks A, B or C on page two of the Loan Estimate.  [That’s where the “Loan Costs” go, brorken down into Block A for Origination Charges, Block B for Services Borrower Did Not Shop For, and Block C, Services Borrower Did Shop For.  Those blocks only show required services. ]   The same is true for the Closing Disclosure.  An example would be Owner’s Title Insurance.   If you don’t require it, you show it on Section H on the Loan Estimate and on the Closing Disclosure.  If the borrower wants to obtain a radon inspection, or some other thing that you don’t require, the shopping/no shopping classification simply doesn’t come into play.

If you know, you must show.

On the other hand, any charges or fees that you know about that are going to be incurred  by the borrower must be shown – even if they are for services you do not require.  You are going to show them under “Other” and you must provide a good faith estimate of what the charge is likely to be.

Seller stuff.

In a transaction that involves a purchase, it is the settlement agent’s responsibility to provide the disclosure to the seller.  Perhaps you don’t act as settlement agent when the loan transaction involves a dwelling, but you typically do close your own loans when it is a raw land transaction.  If it is a TRID-covered loan, that means you have to be able to spit out the seller’s part of the disclosure and provide them in a timely manner.

About good faith.

You may think that the only estimates you really have to worry about are those that have tolerance limits, but that is not the case.  The requirement for estimates to be made in good faith extends to all estimates of all charges.  The rule provides the test for when estimates are in good faith.  For charges subject to tolerance limits, the estimates are in good faith if they don’t exceed the tolerate limits.  For charges for third-party changes not required by the creditor (even if paid to an affiliate),  and also for charges for services you did require where the borrower shopped and went “off list,” the estimates will be deemed to be in good faith if they are consistent with the best information reasonably available to the creditor at the time they are disclosed.  Here’s the kicker.  The Commentary says if any information necessary for an accurate disclosure is unknown to you, you must make the disclosure based on the best information reasonably available to you at the time the disclosure is provided.   It explicitly says that means you must exercise due diligence in obtaining information.  How is that going to work in real life?  Let’s say the consumer tells you they are going to have the granite counters tested for radiation and you have no earthly idea who does that and how much it will cost.  Chat with the consumer about it.  Ask them if they know who performs that type of service, if they have already made contact about pricing, etc.  If they have, ask them to share the cost information with you and use it for the estimate.  Right from the horse’s mouth (or at least secondhand from the horse’s mouth).  If they don’t know at the time they make the application, but tell you that they will be making calls about it in the next day or two, ask if they would mind calling back and supplying you with what they learn about the fees so that you can include that information in the Loan Estimate.

Think about where the services will be obtained.  When you figure out your estimates, keep in mind that they have to be estimates for services from providers reasonably available in the locale where the services will be obtained.  In some instances, that is going to require extra work on your part to nail down those numbers.  And if the service is a required service that you are going to allow the consumer to shop for, you will need to show a provider for each service on the shopping list.

Updating your information.

As you move forward, be attuned to discrepancies between what you thought a particular service from a particular provider would cost and what it actually ends up costing.  Determine the frequency with which you will need to gather and update the information from which you draw your estimates.  Some types of charges may change more frequently than others.  If it is feasible, ask providers to notify you when their fees are going to increase.

Disclosing providers.

For each type of TRID loan that you make, you should have a list of the fees that may come into play for required services and that list should be broken down into services you allow the consumer to shop for and services you do not allow the consumer to shop for.  The shopping list must include at least one available service provider for each required service.  The estimates shown should correspond to what your due diligence indicates that service provider would charge.  While you may include more than one provider on the shopping list for each required shoppable service, the collective wisdom is that the downside of doing so outweighs any benefit to you.  If the consumer goes off list, whatever it costs is what it costs, and you don’t have a potential tolerance problem.  On the services that you do not allow shopping for, you must provide an accurate estimate, but you do not have to disclose, at the time you provide the Loan Estimate, who the actual provider is going to be.  This is a good thing, because with appraisers, for example, you may not know until the consumer evidences an intent to proceed, which appraiser your bank will choose to use for the transaction.

Name everyone on the Closing Disclosure.

As indicated above, you do not need to name the providers that are providers for services that you do not allow the consumer to shop for on the Loan Estimate.  When it is time to create the Closing Disclosure, however, it reflects what actually happened in connection with the application.  Who did what, who is owed what, who paid for what.  At that time, of course, you will indicate the identities of the settlement service providers and the actual cost for their services.

Aim high.

When you are providing an estimate on the Loan Estimate for a service where the consumer is not allowed to choose the provider, but you haven’t chosen yet and the providers you ay choose from have a range of fees, be sure the fee information you have from those providers allows for an apples to apples comparison (e.g., that Appraiser A isn’t giving you a quote for a RE loan that involves lots of acres but no dwelling, while Appraiser B is giving you a quote for an appraisal on a piece of residential real estate on a tiny lot in the middle of town).  Then, to avoid a tolerance violation, if the scope of work is comparable and you truly might choose any one of several, use as an estimate the fee that is highest to avoid a tolerance problem.

Check your math.

There are lots of places on the new disclosures where there are calculations of various sorts.  Cash to Close.  Closing Costs.  Total of Payments.  TIP rate.  In 5 years.  Make very sure the calculations are being done correctly.  Trust, but verify, that your LO software has it covered.

The finance charge is the finance charge.

What constitutes a finance charge under Regulation Z has not changed.  It is still calculated under 1026.4.  What you could exclude before from the calculation, you can exclude now.  (And what counts as points and fees for purposes of 1026.32 and 1026.43 also has not changed.)  A lot of questions have arisen about TRID and finance charges, but you absolutely must focus.  TRID does not change what is considered a finance charge or how to calculate the APR.  Some people are making this harder than it needs to be.

Rate locks.

 If you lock a rate before the loan closes, you must provide a new disclosure showing the rate is locked.  A lock is not considered to exist unless there is a written agreement for one.

Lender credits.

Thinking about leaving them off the Loan Estimate so that you have more flexibility when it comes to the amount you actually give?  Yeah.  Not a good idea.  If you know you will be providing a lender credit and you are advertising you will (such as with advertising a no cost loan) or you are telling applicants that you will, you are not providing good faith estimates unless they reflect the lender credits you are committing to.  And you can always go UP from there, if you need to (for example, if the cost for the appraisal you were going to cover with part of the lender credit surprisingly comes in lower), but once you’ve said you are giving $X in lender credits, you can’t reduce that amount, even if the services you intended the lender credit to offset turn out to be less than anticipated.  Of course, if the borrower requests a change in the loan amount and you have a limit on the dollar amount of a loan that qualifies for your “no closing cost” promotion, in that instance you have a borrower requested change that would specifically impact your lender credit and you could change it.

We don’t like surprises.

Maintaining communication with the applicant  during the pendency of the loan application will help alert you to circumstances that may require additional work or additional disclosures, such as the borrower deciding to take title in the name of his estate-planning trust, after the Loan Estimate was given to him as an individual applicant and now a copy of the trust instrument will need to be recorded, and other steps will need to be taken.  There is a point at which things need to be set in stone.

You’ve got mail!

The borrower must receive the Closing Disclosure at least three business days prior to consummation.  If you stick it in the mail, there is a presumption that it takes three business days for it to be received, but the presumption can be overcome by direct evidence of earlier receipt.  If you think that will be an issue (or you’re doing electronic delivery or a courier service), have a workable procedure for documenting when your customer actually received the disclosure.

Closing costs financed.

The Bureau snuck in a change to the Commentary to .37(h)(1)(ii) in January of 2015  to reflect the intended meaning of that part of the reg, which requires disclosure, in the Loan Estimate, of the amount, expressed as a negative number, of any closing costs that are to be paid from the loan proceeds. The Bureau explained in the preamble to the Final Rule that the amount disclosed under § 1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed pursuant to § 1026.37(f) and (g) from the total loan amount so long as the amount is a positive number and does not exceed the total closing costs disclosed under § 1026.37(g)(6), but comment 37(h)(1)(ii)-1 referenced “lender credits” instead of “closing costs.” Accordingly, the removed the words “lender credits” and replace them with the words “closing costs” to harmonize with the preamble, which correctly reflected the Bureau’s intent.  Much better.

Who prepares your docs?

If you use an outside attorney to prepare the note and mortgage, since the fee would be paid to an outside third-party, it wouldn’t be included in the origination charge (it would be, if you were doing the doc prep internally).  Since you choose the outside attorney, and not the borrower, it would go under “services you cannot shop for.”

Rescindable transaction.

If your TRID-covered loan is one subject to the right of rescission, remember that you need to provide the notice of right of rescission to all parties with the right to rescind, along with a copy of the Closing Disclosure to each, even if they are non-applicants.  A copy of the closing disclosure must also be provided, of course, to at least one of the people who will be primary obligors on the debt.   And any obligor entitled to a right of rescission must get the notice of right of rescission and Closing Disclosure.

Non-shopping provider list.

You probably noticed that one of the model forms allows you to disclose names of providers for required services that are non-shoppable.  Your response to the use of that form should be “Thanks, but no thanks.”  You are not required to list identifying infor