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RESPA-TILA: Big Changes Are Coming

by James F. McClister

For four decades, RESPA and TILA have run parallel to each other. On August 1, 2015, they’ll be consolidated, and the changes will be significant.

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In 1974, in an effort to stop widespread corruption in the housing industry, Congress passed the Real Estate Settlement Procedures Act (RESPA). The bill’s language was very specific in its intentions: to prohibit “specific practices, such as kickbacks, and (place) limitations upon the use of escrow accounts.”

For decades, RESPA provided the public with anti-kickback and consumer disclosure protection, while another piece of legislation, the Truth and Lending Act of 1968 (TILA), offered more financial safeguards, such as informed use of credit and projected payment schedules.

However, in 2011, agreeing the responsibilities of RESPA and TILA were competing, Congress, as part of the Dodd-Frank Act, asked the Consumer Financial Protection Bureau (CFPB) to integrate existing mortgage disclosure forms into the RESPA-TILA Final Rule, which meant condensing the Good Faith Estimates and Truth in Lending disclosures into the new Loan Estimate (LE) form, and replacing the HUD-1 Settlement Statement with the Closing Disclosure (CD).

Below are some significant details regarding the changes agents and lending professionals should be prepared for by August 1, 2015, when the changes take effect:

The New Rule of Three (Business Days) – The RESPA-TILA Final Rule consolidation will birth the LE and CD. The most glaring difference from the original disclosures is the new three-day timetables for disclosures.

The LE form is sent when a loan extension is needed. Following collection of six basic items of consumer information required for the application – name, income, social security number, property address, property value estimation and the loan amount – lenders will have three business days to send the LE to the consumer (it needs to be postmarked by the third day) and it must be seven days prior to closing, pending any significant financial emergencies. It’s important to note that creditors will be responsible for ensuring figures presented in the LE are made in “good faith” and are consistent with the most up-to-date information available. Third party charges and service fees paid by or levied on consumers will also be subject to a 10 percent cumulative tolerance, where creditors may charge consumers more than what was originally disclosed.

The CD, which will replace the HUD-1 while rehashing some of the items in the LE, is likely to provide little in the way of complication in terms of language. However, the most controversial change is that lenders will now have to deliver the CD three business days prior to closing, which means any changes made in that three-day period could result in the closing’s delay. The CFPB did add that a major financial emergency would warrant restarting the three-day waiting period, but lenders would be liable for the CD, which will likely limit the acceptance of last-minute changes.

Defining “Business Day” – The new rule of three is a pivotal point of the RESPA-TILA changes: three days to provide the LE, and a three-day buffer for the CD prior to closing. The CFPB is very particular about how they define “business day,” though, describing it for the purposes of delivering an LE as a “day on which the creditor’s offices are open to the public to carry on substantially all functions.” However, for other purposes, such as ensuring consumers receive a CD on time, “all calendar days except Sunday and certain federal holidays,” according to the official CFPB compliance guide.

No Tolerance Buckets, Only Variations – Prior to consolidation, Good Faith Estimates outlined the changes and fees a buyer could anticipate throughout the closing process. Attached to each of those charges was something called tolerance buckets, which determined the range of increase allowed at closing. Those tolerances are still included in the LE. However, they’re now called “variations.” So, where previous regulations phrased tolerances as “zero bucket,” “10 percent bucket” and “no tolerance bucket,” the LE will now read “no variations,” “limited increases” and “variations permitted.”

Post-Closing CD Revisions – In the event of CD changes post-closing, agents will need to resubmit disclosures along different timetables depending on circumstance. If the event is related to settlement 30 days after closing and to an amount paid by a consumer or seller, the re-disclosure must take place within 30 days following the event’s discovery. For non-numerical clerical errors, which agents should be careful to avoid, re-disclosure is required 60 days after consummation. And finally, for variation violations, re-disclosure, as well as refunds, agents and lenders will have a 60-day window following consummation.

Itemizing Fees and Charges – The standard established by the GFE and HUD-1 assumes that consumers care exclusively about final figures, which is why services and charges are presented in a bundle. Under the CFPB, those fees and charges will be separately itemized, allowing consumers an understanding of what they are paying and why.

 

Additionally, we’ve provided page-by-page breakdowns of both the LE and CD to give agents and lenders a better idea of what they should expect.

LE:

  • First Page
    • Loan terms
    • Projected payments
    • Escrow information
    • Total estimated costs
  • Second Page
    • Estimated settlement fees
    • Cash to close
    • Adjustable payment and interest rate tables
  • Third Page
    • Comparisons with other loans, including APR and total amount of interest
    • Appraisal, assumption and servicing transfer disclosures
    • Borrower acknowledgment and signature (not required)

CD: 

  • First Page
    • Same as LE
  • Second Page
    • Closing cost details
    • Very similar to page two of HUD-1
  • Third Page
    • Calculating cash to close table
    • Borrower and seller transaction summaries
  • Fourth Page
    • Loan disclosures for: assumption, demand feature, late payment, negative amortization, partial payments, security interest and escrow account.
    • Adjustable payment and interest rate tables
  • Fifth Page
    • Loan Calculations
    • Other disclosures, including appraisal (if applicable), contract details, liability after foreclosure, refinance and tax deducations
    • Contact information
    • Signature line (not required)

There are still a few months left until the rule changes take effect, so check out Chicago Agent for continuing, more detailed updates.

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