Lenders could face tougher enforcement and higher penalties if they make errors on the new mortgage disclosure forms that are slated to go in effect next August.
The basic disclosures that borrowers receive today are known as the Good Faith Estimate and the HUD-1 settlement statement that were created by the Department of Housing and Urban Development. Both disclosures are governed by the Real Estate Settlement Procedures Act, which has milder penalties than the Truth-in-Lending Act.
However, Congress directed the Consumer Financial Protection Bureau to combine the Respa and TILA disclosures and create a new "Closing Disclosure" that will replace the HUD-1. Starting Aug. 1, 2015, lenders must provide this new integrated Closing Disclosure to the borrower three days before closing.
"Most of the disclosure items, some of which had been subject to the Respa regime, now are under TILA and, therefore, carry very significant potential liabilities for even minor errors," said Anne Canfield, the executive director for the Consumer Mortgage Coalition.
Lenders will also face higher risks because the CFPB places more emphasis on enforcement actions than HUD. And TILA opens the door for class action lawsuits and punitive damages, according to Rod Alba, regulatory counsel for the American Bankers Association.
"Our analysis, and advice of expert legal counsel, concluded that TILA penalties will now apply to both TILA and Respa-mandated disclosures," Alba said in an interview. So errors on the GFE might trigger a lawsuit by the borrower under the new TILA disclosure regime.
Alba cautioned, however, that this is new territory and "people are still trying to figure this out." But the ABA's regulatory counsel noted that it does not seem realistic to assume a judge is going pick out which disclosure errors are Respa related or TILA related in deciding what remedies to apply.
One reason Wells Fargo recently announced that it plans to compile and deliver its own Closing Disclosure involves the higher level of risk lenders will face under the new disclosure regime, according to Wells Fargo spokesman Tom Goyda.
"Since the new Closing Disclosure is governed by TILA, not Respa, it will be subject to higher accuracy expectations, tighter timing requirements and enforcement provisions that are more strict than Respa, which governs the current HUD-1 closing document," Goyda said in a statement.
Lenders will also be directly responsible for the accuracy of new closing disclosure come next August, not the settlement agent.