WASHINGTON — While banks applaud the Consumer Financial Protection Bureau's goal of simplifying the tangled mass of required mortgage disclosures, the industry has found that simpler is not always better in the agency's proposal for streamlined forms.
In more than 2,000 letters responding to the CFPB's plan, bankers said several requirements — including a rigorous timeline for presenting borrowers with the new forms, limited deviation of estimated charges between initial and final disclosures, and an "all-in" annual percentage rate — will add constraints and confusion.
"We are concerned that some aspects of the proposal will add to 'information overload,' detract from the quality of disclosures, and impose unwarranted and unnecessary burdens on creditors," Sy Naqvi, chief executive of PNC Mortgage, wrote in a letter dated Nov. 6, which was the comment deadline.
Many of the proposed reforms had been floated by the Federal Reserve Board before the CFPB — created under the Dodd-Frank Act — assumed rulemaking for disclosures and launched the project of melding Truth in Lending Act and Real Estate Settlement Procedures Act forms.
Bankers have consistently embraced the objective behind the plan, but remain concerned about its implementation.
Financial institutions and other stakeholders — including Realtors, title companies and consumer advocates — most consistently focused on the proposed inclusion of more information in estimates for finance charges and the APR.
But institutions also objected to submitting a "closing disclosure" three days before closing, as well as reducing permitted "tolerances" — or the types of charges that can be higher on the "closing disclosure" than they were in the earlier "loan estimate" form.
"Overly strict timeframes, lack of tolerances on fees and charges, and the inability to accommodate last minutes changes to avoid re-disclosure create a market environment where consumers will see higher charges for certain services, inflexible and extended timelines to complete the mortgage origination process, and possible restriction of mortgage credit for certain consumers," wrote Ron Haynie, executive vice president for mortgage services with the Independent Community Bankers of America.
Commenters said consolidating the TILA and Respa forms should not get bogged down with the imposition of too many more requirements that were not established in regulation before the bureau undertook the project to integrate the two regimes.
"The bureau should continue to focus its energy on the enormous job of integrating the forms, which MBA fully supports, without making undue changes to the rules," David Stevens, president and chief executive officer of the Mortgage Bankers Association, said in a Nov. 6 letter. "MBA recognizes that Respa and TILA disclosure requirements differ, necessitating some changes to the rules. Nevertheless, other proposed changes to the definition of application tolerances, timing and the introduction of a new APR, to name a few, extend far beyond what is needed and threaten to divert energy and support from this important effort."
To be sure, several commenters appeared to see promise in the bureau's attempts to simplify the forms (The CFPB's proposal included model examples of what the loan estimate and closing disclosure forms would look like).
Bill Himpler, executive vice president of the American Financial Services Association, noted "problems with the proposed closing disclosure" as they would pertain to certain types of loans. Yet, he said, "The proposed disclosures are much clearer and more understandable for consumers for many transactions, particularly the standard home purchase money mortgage."
But bankers and others urged the bureau to rethink the all-encompassing finance charges and other proposed features. Specifically, commenters said in including more fees in rate calculations, the new requirements could result in loans appearing to be higher-cost.
In turn, they said, such loans could hit triggers disqualifying them for regulatory status under other regulations, such as the CFPB's pending rule on verifying a borrower's "ability to repay", and therefore restrict credit in some cases.
"The 'all-in' finance charge would result in higher 'points and fees' figures, which are calculated using the finance charge as a starting point," wrote Michael S. Malloy, mortgage policy and counterparty relations executive at Bank of America. "Consequently, this would reduce the number of loans that would otherwise be 'qualified mortgages' under Dodd-Frank's ability-to-repay requirements, given that qualified mortgages, as proposed, will not have points and fees in excess of three percent of the 'total loan amount.'"
Even some consumer advocacy groups cited similar concerns about the more inclusive rate calculation.
A Nov. 6 letter submitted by the Center for Responsible Lending said, "The bureau should not pursue a change in the finance charge definition at this time."
"While the bureau correctly identifies the consumer benefits that could come from an all-in finance charge definition in terms of greater transparency and improved shopping ability, the inter-related nature of current mortgage laws makes change at this time a complicated undertaking," the group wrote.
Some bankers suggested that institutions that do not view themselves as high-cost lenders would be pushing the envelope with the new requirement.
"Macon Bank does not presently originate high cost loans. However, the proposed changes to the definition of finance charge will cause APR's to increase and more loans will exceed the high cost, higher priced and higher risk thresholds," wrote Patti Morgan, lending compliance specialist at the $818 million-asset institution in Franklin, N.C. "This will have a negative effect on low to moderate income borrowers since lenders will be reluctant to make high cost or higher priced mortgage loans due to the stringent requirements."
Banks also warned that a provision requiring lenders to give consumers a closing form three days early — which in most cases would obligate lenders to restart the three-day period if an estimate changed before the actual closing — overlooks the common last-minute changes that are hard to control.
"Bank of America requests that the CFPB expand the category of changes that allow for provision of an updated disclosure at the closing table, instead of requiring redisclosure and a new three-day waiting period, to include changes in costs that are outside the control of the lender," Malloy wrote.
Under the proposal, certain elements of the disclosure would get an exception from the three-day requirement. These include changes stemming from negotiations between a buyer and seller following a final walk-through, and other minor changes that result in less than $100 in increased costs.
But lenders called for more flexibility.
"Regarding subsequent redisclosures, we believe the rule needs to provide more flexibility to ensure that an additional three business day waiting period is imposed only when it will truly benefit the customer," Michael J. Heid, president of Wells Fargo Home Mortgage, wrote in a Nov. 5 letter.
Similarly, they said the reduction in tolerances allowed following release of the initial disclosure form would go too far. Under the rule, certain charges could not increase between when the lender first presents the loan estimate and the closing. Those include what the lender charges for its own services, charges for services provided by a lender's affiliate and charges accrued when the lender forbids a borrower to shop around for a better price. Also, charges for other services could not jump by 10% or more.
Yet commenters said they saw little reason for a reduction in the tolerances.
"There is no indication that current tolerances are inadequate, and CFPB should not make such changes unless it has data that a tightening of tolerances is necessary to prevent ongoing abuses at closing, and that unintended consequences will not result," Robert Davis, the American Bankers Association's executive vice president of mortgage markets, financial management and public policy, wrote in a Nov. 6 letter.