5 minutes
More than a year has passed since the Consumer Financial Protection Bureau finalized the most-talked-about lending regulatory change in recent history: combining Truth in Lending Act and Real Estate Settlement Procedures Act of 1974 disclosures. With less than four months remaining until the required implementation of these “game-changing” disclosure rules on Aug. 1, 2015, credit unions need to start preparing now to avoid noncompliance.
Regulatory officials, including the National Credit Union Administration, have already stressed that ensuring institutions have made good faith efforts to comply will be a priority for examiners. Is your institution ready?
Changing Industry ‘Normals’
Both TILA and RESPA have similar goals and disclosure requirements aimed at curbing unfair and unethical conduct on the part of financial institutions. So, it’s no surprise these rules would eventually be consolidated. However, you may be wondering what this means for your consumer mortgage lending operations. Here are some of the most significant changes you need to prepare for:
Consolidated forms. For more than 30 years, the industry has been using the same forms to originate and close consumer closed-end residential mortgages, but things are about to change drastically. At origination, the new “loan estimate” will replace the “good faith estimate,” as well as the initial Truth in Lending document, the mortgage servicing disclosure and the appraisal disclosure. The new closing disclosure combines the HUD-1 Settlement Statement with the final TIL document, and will be provided at closing.
Not only has the number of forms required decreased, but the appearance and functionality of the new forms is significantly changed. Equipped with dynamic required output fields related to loan types and other specific information, entering “not applicable” or leaving empty fields will no longer be an acceptable way to convey information.
Timing requirements.
The rules also established new timing requirements for providing related forms to consumers.
- The loan estimate
- must be provided within three business days of application.
- must be received at least four business days prior to consummation.
- The closing disclosure
- must be received at least three business days prior to consummation.
Be aware that for the closing disclosure, changing the APR, loan product or adding a pre-payment penalty will re-start the three-business day time frame!
Tolerances. An important aspect of the new requirements is the zero tolerance category. Fees for services you do not allow consumers to shop for things like credit reports, appraisals and surveys, or fees for services performed by affiliates, are subject to a zero percent tolerance.
This means that unless there is a RESPA-changed circumstance that directly affects a fee, the amount charged at closing cannot exceed the cost provided on the loan estimate. Ultimately, institutions will no longer be able to offset any increases in other fees by using fees for services not performed.
Revised loan estimates. Similar to current re-disclosure requirements for the good faith estimate, the new loan estimate must be re-disclosed when the rate is locked and may be re-disclosed if there is a change in fees directly related to a changed circumstance. However, to be able to re-disclose increased fees, there must be at least a 10 percent change in the total charges subject to the tolerance, not just a 10 percent change in one fee. If the fees subject to a tolerance do not change by more than 10 percent, the loan estimate is considered to be in good faith and creditors are prohibited from re-disclosure.
Start Preparing Today
To effectively comply with the sweeping changes of how an institution must document consumer mortgage loans under the new regulations, training and procedures will need to be in place long before the Aug. 1, 2015 implementation date.
Start preparing by asking yourself these 10 questions:
- Does your staff understand the new rules?
- Who is going to be responsible for issuing the loan estimate and closing disclosure?
- Will loan officers, who typically prepare and give the good faith estimate to members, continue to prepare and provide the loan estimate?
- Will you train processors or even a smaller group of individuals to be responsible for preparing the forms to ensure consistency?
- How will you track and monitor that time frames are being met?
- Is your system capable of programmatically prohibiting issuance of closing documents until required time frames are met? If not, you will need to set up manual checklists or reports indicating the earliest day for when closings can be set.
- Are your systems capable of providing an accurate loan estimate for Internet loans? If not, should you change the way you take mortgage loan applications online so you do not collect all of the required information up front, and therefore give yourself more time to send an accurate loan estimate?
- What checks will be in place to ensure the loan estimate is not re-disclosed improperly, and the correct figures from the loan estimate are shown on the closing disclosure?
- Are your fees set correctly for each different type of transaction to avoid curing tolerance violations?
- Have you set up audit procedures to make sure the forms are being completed correctly?
From a high level, these are all important questions to consider. Once you have the answers, don’t forget to document the decisions in your written procedures and make sure all employees understand their important role in complying with the “game-changing” regulations.
Kia Hekneby, CRCM, MBA, is senior compliance specialist with the financial institutions group of Doeren Mayhew, Troy, Mich.
