Bankers generally applauded the Consumer Financial Protection Bureau's final rule on mortgage disclosures, But they are raising concerns that some of the changes need to be fixed or mortgage lenders will have to raise the costs of loans to consumers.
On Wednesday, the CFPB released its much-anticipated final rule that merged federal mortgage disclosure forms. The two-year effort was required under the Dodd-Frank Act and was designed to simplify disclosures and help consumers more clearly understand the total costs of a loan.
The rule does not go into effect until Aug. 1, 2015, a win for bankers who had lobbied heavily for more time to implement the changes.
Bob Davis, an executive vice president at the American Bankers Association, says a critical change was the shifting of responsibility for the final closing disclosure to the creditor or lender. Depending on the state, closing documents are typically delivered to consumers by attorneys or title agents.
The change was not something lenders or service providers asked for, Davis says.
"They're shifting a responsibility for the closing documents to the creditor and that realigns business responsibilities and will have some impact on the way services are priced," Davis says. "As long as the creditor is responsible for delivering the closing documents, they have a new responsibility and somehow compensation for providing that final guarantee has to be paid for."
When the rule takes effect, consumers will be given new forms, including a loan estimate, within three days of applying for a mortgage, and a closing disclosure form three days before closing the loan. Those forms replace the current Truth in Lending statements, the good faith estimate and the HUD-1 settlement statement, which is used to itemize fees charged to borrowers by a lender or broker.
Bankers continue to object to the requirement that consumers be given the new closing disclosure form three days before a loan closes. Davis says providing the requirement means lenders should be compensated for the additional "three days of certainty" in the pricing of the loan.
He says the three-day disclosure requirement creates a form of "rate lock," whereas currently the interest rate can float up until the day a loan funds.
"If you have certainty about the date, time is money and somebody has to pay for that somehow," Davis says. "If that certainty is being provided to the consumer, what does it cost the creditors and how are they going to be compensated?"
Still, bankers got plenty of what they wanted in the final rule.
Specifically, the CFPB dropped a controversial proposal that would have changed the definition of a finance charge used to calculate the annual percentage rate on a loan. The industry referred to this as an "all-in APR," because it would have included all charges such as title insurance, in the annual percentage rate, so consumers would have a key metric to shop for the lowest-priced loan.
But the CFPB also conceded that including various charges in the annual percentage rate would make some loans appear to be high cost, and potentially could have excluded some loans from being considered "qualified mortgages." That would have greatly complicated implementation of the CFPB's qualified mortgage rule, which outlines the safest loans and restricts points and fees being charged. The QM rules takes effect Jan. 10.
"All of these rules have to work comprehensively together, they can't be at loggerheads," says Bart Shapiro, a principal at Offit Kurman and a former senior advisor at the CFPB. "If the final rule was put together with that in mind, then it's a good thing."
But Diane Thompson, a staff attorney at the National Consumer Law Center, said she was disappointed that the "all-in APR" was dropped by the final rule, and that the APR itself can be found on the third page of the loan estimate, when it should be prominently displayed on the first page.
"The APR is by far the best measure to determine the total cost of the loan," she says.
Willard Ogburn, the executive director of the National Consumer Law Center, called the exclusion of the "all in APR," and its placement on the new forms "an egregious omission."
Richard Cordray, the CFPB's director, said at a field hearing in Boston on Wednesday that the bureau will continue to study the APR issue, and will weigh in on it within five years as part a requirement under the Dodd-Frank Act.
The new rules had sought to eliminate certain "bait-and-switch" tactics whereby lenders could offer a consumer a specific price for a loan or service, but then change it at the closing table. Consumer advocates say this can still occur.
The reason is that the final rule only requires that lenders "redisclose" to consumers if there is a major change in three areas: to the APR, to the loan product itself changing from a fixed-rate to an adjustable-rate mortgage, for example , or if the lender adds a prepayment penalty.
The CFPB scuttled a requirement in the proposed rule that lenders should reissue a disclosure any time there are more than minor changes made to a loan's terms, which would have been followed by a new three-day waiting period. But lenders won that argument as well, claiming that giving consumers more time to digest changes would lead to more frequent delays in closing loans.