By Robert Jaworski
Robert M. Jaworski is a partner in the Financial Industry Group of Reed Smith, LLP in Princeton, New Jersey. He is a former deputy commissioner of the New Jersey Department of Banking, a former chair of the New Jersey Bar Association’s Banking Law Section and co-chair of the RESPA and Housing Finance Subcommittee of the American Bar Association’s Consumer Financial Services Committee, a former editor of Pratt’s Mortgage Compliance letter, a national publication on mortgage compliance issues, and a Fellow of the American College of Consumer Financial Services Lawyers.
When, after years of effort, the Consumer Financial Protection Bureau (Bureau) finally adopted its Truth in Lending/Real Estate Settlement Procedures Act Integrated Disclosures Rule (TRID or Rule) near the end of 2013, it inadvertently created a “black hole” or “gap” with respect to creditors’ ability to “reset tolerances.” These tolerances define the limits on how much certain settlement charges a residential mortgage loan borrower is required to pay at or before closing are permitted to increase from the amounts disclosed on the borrower’s initial Loan Estimate. After industry members brought the existence of this gap to the Bureau’s attention, the Bureau sought to close it by means of a proposed rule published in the Federal Register on August 15, 2016, which also sought to resolve a number of other issues with the Rule. When it came time to adopt a final rule, however, the Bureau decided not to adopt its proposed black hole fix and, instead, to propose a slightly different fix.
This article presents a detailed explanation of the black hole and discusses various issues surrounding it, including (1) why it is important to the industry that it be closed, (2) the Bureau’s initial proposal to fix it and the reasons why the Bureau elected not to adopt it, (3) the Bureau’s current proposal to fix it and how it differs from the earlier proposal, (4) whether the new proposal will actually fix the problem, and (5) how likely it is that the new proposal will be adopted in its current form.
Requirement to Provide Loan Estimate . To help consumers shop for a home mortgage loan, TRID requires creditors, within three business days after receiving a loan application from a consumer, to give the consumer a written Loan Estimate (LE) on a prescribed form. The LE sets forth the basic terms of the loan for which the consumer is applying and “good faith” estimates of the various fee and charges the consumer will have to pay in connection with the loan. The disclosed loan terms and fee estimates on the LE must remain fixed for at least 10 business days. During this 10-day period (10-Day Shopping Period), the consumer may use the LE to shop with other mortgage lenders for better terms and fees. If, by the end of this 10-Day Shopping Period, the consumer has not informed the creditor that he/she wishes to proceed with the application, the LE expires and the creditor is free to issue a different one.
Good Faith/Tolerances . With two exceptions, TRID provides that fee estimates on the LE are subject to a “zero tolerance,” meaning that to be considered in “good faith,” they must not exceed the amounts the consumers actually have to pay for those particular services (Zero Tolerance Fees). The two exceptions are for estimates on the LE for (1) certain fees paid to third party service providers, which are considered to be in “good faith” so long as the sum of the actual amounts the consumer pays for these services does not exceed by more than 10% the sum of the estimates (10% Tolerance Fees), and (2) certain other fees, which are considered to be in “good faith” so long as they were based on the best information reasonably available to the creditor at the time (Changeable Fees). Creditors must make refunds or provide credits to consumers whenever these tolerances are exceeded.
Ability to Reset Tolerances Using Revised LEs . Because LEs must be given to the consumer very early in the process and based on very limited information and recognizing that the mortgage loan process is a fluid one, TRID permits creditors under limited circumstances to issue revised LEs, which can then be used, in place of any previous LE, to determine whether the actual charges the consumers pay exceed the applicable tolerance (to reset tolerances). The circumstances permitting tolerance resets include “changed circumstances” (as defined in TRID) that affect settlement charges or eligibility, consumer-requested changes, interest rate dependent changes, and expiration of the 10-Day Shopping Period with no indication from the consumer of an intent to proceed with the application (collectively, Changed Circumstances).
To take advantage of this ability to reset tolerances, creditors must issue revised LEs within three business days after receiving information sufficient to establish that a Changed Circumstance exists. Also, creditors must ensure that the consumer receives any revised disclosures no later than four business days before consummation. Unrelated, but very important, TRID also prohibits creditors from issuing a revised LE once they have provided a Closing Disclosure (CD) to the consumer—and requires them to provide a CD to the consumer by no later than three business days before consummation.
Ability to Reset Tolerances Using CDs . Recognizing that some Changed Circumstances can occur very near to consummation, TRID also permits creditors in certain circumstances to reset tolerances using the CD. It states: “If … there are less than four business days between the time [a] revised [LE] … is required to be provided [i.e., within three business days after learning of the Changed Circumstance] … and consummation, creditors comply with the [good faith] requirements … if the revised disclosures are reflected in the [CD]” (Four-Day Limit). Since creditors are required to provide revised LEs within three business days after learning of a Changed Circumstance, the Four-Day Limit translates into a requirement that creditors may use the CD to reset tolerances only in situations where they first learn of the Changed Circumstance no later than the sixth business day before consummation.
The Black Hole . The “black hole” refers to several “gaps” within which creditors that learn of a Changed Circumstance—after having provided the CD to the consumer—are nevertheless not explicitly permitted under TRID to reset tolerances. One such “gap” is where the creditor learns of a Changed Circumstance more than six business days before the scheduled closing. Another “gap” is where the creditor learns of a Changed Circumstance six business days or less before the scheduled closing but for some reason the closing must be postponed, causing consummation to occur more than six business days after the creditor learned of the Changed Circumstances. In addition, by not specifically permitting creditors that learn of a Changed Circumstance after having provided the CD to reset tolerances using a corrected CD, TRID casts doubt on creditors’ ability to do that even in situations where the creditor learns of the Changed Circumstance six business days or less before consummation.
The Bureau proposed in 2016 to close the black hole by adding Comment 19(e)(4)(ii)-2 to the Official Staff Commentary to Regulation Z (Commentary) (81 Fed. Reg. 54317 (August 15, 2016)). This Comment states: “If there are fewer than four business days between the time the revised [LE] is required to be provided … and consummation or the [CD] … has already been provided to the consumer, creditors comply with the [good faith] requirements … if the revised disclosures are reflected in [a] corrected [CD]…, subject to the … requirement[s] to provide revised disclosures within three business days after learning of a Changed Circumstance].” This Comment appears to allow creditors to reset tolerances not only by means of a CD where they learn of a Changed Circumstance six business days or less before consummation but also by means of a corrected CD where they already provided a CD to the consumer before learning of the Changed Circumstance.
Many industry commenters interpreted this proposed fix to mean that, in instances where CDs have already been delivered to the consumer when the creditor learns of a Changed Circumstance, corrected CDs could be used to reset tolerances regardless of when consummation is expected to occur so long as the creditor provides the corrected CD to the consumer within three business days after learning of the Changed Circumstance, even if that is at the closing table. In other words, these commenters read the proposal as eliminating the Four-Day Limit in situations where the CD has already been issued when the creditor learns of a Changed Circumstance. Other industry commenters expressed concern that adoption of the Bureau’s proposed fix would still leave uncertainty concerning the situation where creditors that have not yet provided a CD to the consumer learn of a Changed Circumstance six business days or less before consummation. The first part of the proposed Comment would appear still to apply in that instance and to prohibit the creditor from using the CD to reset tolerances.
Consumer advocacy groups, on the other hand, warned that the Bureau’s proposed fix could encourage creditors to deliver CDs to the consumer very early in the loan process, which would be inconsistent with the Bureau’s intent that the CD be a statement of actual costs. They also expressed concerns that allowing creditors to issue corrected CDs to consumers under these circumstances could result in information overload.
In analyzing these comments, the Bureau recognized that the industry commenters’ interpretation of the Bureau’s proposed fix as eliminating the Four-Day Limit was a plausible reading of the language in Comment 19(e)(4)(ii)-2, but noted that the preamble to the proposal “does not describe that the Bureau intended such a change.” The Bureau also acknowledged that if the proposal were to be adopted as is, it would not end the uncertainty surrounding this issue and, further, could produce unforeseen and, perhaps, adverse consequences for consumers. Accordingly, the Bureau determined not to adopt the proposed Comment and to instead propose a new fix.
The 2017 proposal (82 Fed. Reg. 37794 (August 11, 2017)) appears to satisfy most if not all of the industry’s concerns. It removes any doubt that both corrected CDs and initial CDs may be used to reset tolerances regardless of when consummation occurs so long as the creditor provides the CD or corrected CD to the consumer within three business days after learning of the Changed Circumstance. It also includes, as proposed new Comments 19(e)(4)(ii)-1(iii) and (iv), the following two helpful examples illustrating exactly how the proposed fix works in real life scenarios:
Example 1: Consummation is scheduled for Thursday. The creditor hand delivers the [CD] on Monday, and, on Tuesday, the consumer requests a change to the loan that would [justify issuance of] a revised disclosure … but would not require a new [three business day] waiting period pursuant to § 1026.19(f)(2)(ii). The creditor complies with the [good faith] requirements … by hand delivering [a corrected CD] reflecting the consumer-requested changes on Thursday. Example 2: Consummation is originally scheduled for Wednesday. The creditor hand delivers the [CD] on the Friday before the scheduled consummation date and the APR becomes inaccurate on the Monday before the scheduled consummation date, such that the creditor is required to delay consummation and provide [a] corrected [CD], including any other changed terms, so that the consumer receives [it] at least three business days before consummation…. Consummation is rescheduled for Friday. The creditor complies with the [good faith] requirements … by hand delivering the [corrected CD] … reflecting the revised APR and any other changed terms to the consumer on Tuesday….
The Bureau gives several reasons for putting forth this new proposal to close the black hole. It indicates that if creditors cannot recoup increases in costs resulting from Changed Circumstances that occur late in the loan process, they may likely charge higher fees to all of their customers, refuse to agree to consumer-requested changes and/or refuse to close and force the consumer to start the loan process all over again. It also suggests that eliminating the Four-Day Limit for issuance of corrected CDs but not for the initial CD would provide an incentive to creditors to issue CDs very early in the process, which in some circumstances “might be inconsistent with the description of the [CD] as a “’statement of the final loan terms and closing costs,’ and the requirement … that the disclosures on the [CD] are to be a statement of ‘the actual terms of the transaction.’” Finally, the Bureau recognizes that the “current timing rules regarding resetting tolerances with [CDs] have led to uncertainty in the market and created implementation challenges that could have unintended consequences for both consumers and creditors.
Whether or not the Bureau will adopt the proposal in its current form is unclear. While the Bureau has indicated that there are several good reasons to do so, as set forth above, it is obviously concerned about some of the possible ramifications and unintended consequences that could result. Because of this concern, it solicits comments from interested parties concerning the possible effects of the changes it has proposed. (The comment period expires on October 10, 2017.)
Among the items of information sought by the Bureau in this regard are the following:
Most of the Bureau’s concerns about unintended and possibly adverse consequences for consumers resulting from adoption of the 2017 Proposal consumer confusion, information overload and receipt of early CDs that will likely have to be revised appear to be highly speculative. As a result, unless consumer advocacy groups are able to offer actual examples of adverse consumer consequences along the lines suggested in the Bureau’s request for comments and perhaps some evidence that these consequences are not merely isolated events, it does not seem likely that the Bureau will back off from finalizing this proposal as published. On the other hand, if the Bureau is provided with some real-world evidence of adverse consumer consequences, it could adopt the proposal with limitations, on either the types of third-party costs and creditor fees that will qualify for a tolerance reset under the new rule or the number of days before the scheduled closing date within which a CD may be delivered, or both. In any event, one thing is certain - the TRID beat will go on.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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