LAS VEGAS Regulator priorities used to be somewhat clear making sure lenders were originating and servicing residential mortgage loans in accordance with applicable requirements. But more recently the focus has been on fair lending and disparate impact.
Attorney Kris Kully said this change has resulted in an environment where there are “no easy choices” for financial institutions. Kully, a partner at Washington, D.C.’s K & L Gates LLP, noted it is unavoidable that there are going to be disparities in lending, for a variety of reasons.
“And the lender must be able to explain anything that appears to be discriminatory practices,” she told an audience at the American Credit Union Mortgage Association’s annual conference here Monday. “Even practices that are legal, but are unfair or deceptive in some way, may bring scrutiny.”
Kully, who formerly was an attorney with the Department of Housing and Urban Development, advised CU mortgage lenders to examine all of their marketing efforts and all new product rollouts.
“You need to document, document, document,” she told the crowd. “Indicate if a consumer reports he/she got a better mortgage elsewhere.”
Next: regulators are looking at vendor management. Kully said regulators want to make sure lenders “have the power to comply” with the many rules on the books by examining lenders’ relationships with third parties. She told CUs they need to make sure vendor contracts clearly outline expectations about compliance.
“You must have a written vendor management policy in place showing internal controls, monitoring and corrective actions,” she said.
TILA/RESPA Disclosures
Mortgage lenders will have to use new disclosure forms in less than 11 months per the “
According to Kully, the Real Estate Settlement Procedures Act (RESPA) was anti-kickback legislation designed to eliminate abusive practices that drive up prices for consumers and instead offer full disclosure. The Truth In Lending Act, or TILA, was supposed to result in informed use of credit.
“TILA and RESPA had similar timing as to when disclosures had to be released, but overlaps between the two and inconsistent language led to confusion and complaints by lenders that they were burdensome,” she said.
The Dodd-Frank Act required combining TILA and RESPA disclosure forms, Kully continued. The stated goal is easier-to-use mortgage disclosure forms that will allow consumers to do comparison shopping. The Loan Estimate is to be supplied three business days after loan application submitted, while the Closing Disclosure is to be received by consumers three days prior to consummation.
“Substantial changes” had to be made to TILA regulations to incorporate the combined disclosure forms,” Kully said. The new forms will apply to most closed-end consumer mortgages, but not to HELOCs, reverse mortgages, mortgages secured by mobile homes or by dwellings not attached to property. Creditors that make five or fewer mortgages in one year are exempt.
Applications made on Aug. 1, 2015, must get new forms, she noted, but not applications made the day before. “There is an on/off switch, and the reasoning is not altogether clear,” she said.
Top Takeaways
Kully said the final rule resulted in a number of key takeaways CUs should be following closely.
First, it narrowed the definition of “application.” Neither the TILA nor RESPA statutes define what constitutes an “application.” Kully said the distinction affects when the clock starts for the lender to deliver the Loan Estimate to applicant. Application now defined by six elements: borrower name, income, Social Security Number, property address, estimated value of property and mortgage loan amount.
The nature of the new disclosures is the “good faith estimate” does not have a lot of room for error, she warned. There can be “no variation from Loan Estimate to Closing Disclosure on a number of fees and costs,” she said. “The only variance allowed is for charges paid to unaffiliated settlement service providers that consumers cannot shop for.”
A small bit of good news: changed circumstances still exist to permit lenders to make some revisions to Loan Estimate fees.
Another new impact is lenders must give a Settlement Service Providers List, with at least one provider for each service for which the consumer may shop. This SSPL must be given within three business days of application.
“The three-business-day trigger is very important you must get the Loan Estimate to the consumer on time,” she said. “The CFPB offers a calendar that shows what factors affect the timeline, which is very helpful.”
One of the “stickiest” issues is the Closing Disclosure, which must be received three business days before consummation. “At least the new rule addressed what happens when amounts change,” said Kully. “It allows borrowers to provide a corrected disclosure at or before consummation. This is welcome compared to the proposed rule, which had a $100 limit on changes or else it triggered a new waiting period.”
Either the creditor or settlement agent may provide Closing Disclosures, but settlement agents still must meet all rules or creditor is on the hook, she noted.
The new rules place strict limits on up-front fees that consumers have to pay for. Only the credit report fee can be charged before early disclosures. Creditors cannot impose fees before consumer has received the Loan Estimate and has expressed an intent to proceed with the transaction.
“If a credit report fee is charged to a consumer’s credit card, separate authorization is needed to charge subsequent fees,” she said. “It is important to have documentation in file of the consumer’s intent to proceed.”
Fees and charges cannot be bundled, but instead must be listed separately alphabetically, Kully continued. The lender or SSP may charge a consumer the average charge for a settlement service but must use same average charge for every transaction.
Penalties and liability: “The CFPB has indicated to me there will be penalties for errors,” Kully said, adding the Bureau is not clear exactly what or how much. She said RESPA did not have penalties but TILA did. Creditors must use information “reasonably available” to make fee disclosures.
“All of these changes likely mean longer closings,” she said. “The three-day advance submission of the Closing Disclosure may lead to more questions, and therefore fewer closings per day. Also, more employee training will be needed and costs of implementation will be substantial.”
Bob McKay, EVP and chief operating officer for Baxter Credit Union in Vernon Hills, Ill., who attended Kully’s session said the flood of new regulations has become some numbing.
“We just keep hearing there is something new, something new,” he said. “It gets to the point where we just say What is next’? But then we keep going.”
