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Consumer Financial Protection Bureau RESPA/TILA Harmonization Proposal

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By Ken Trepeta

On July 9, 2012, the Consumer Financial Protection Bureau (CFPB) issued a 1,100 page proposal to harmonize the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act’s (TILA) disclosures, forms and procedures. As with any proposal of this length, it is a mixed bag of good, bad and ugly. The good is the upfront disclosure. While it is a far cry from the simple one-page form promised by CFPB when it began what it called its “Know Before You Owe” campaign, it does seem to do a reasonable job aligning the RESPA Good Faith Estimate (GFE) and the TILA disclosure (TIL) in the document they refer to as the “loan estimate.”

The bad or ugly is the transformation of the two laws and the attempt to create a unified settlement statement incorporating the HUD-1 and the final TIL called the “closing disclosure.” The CFPB has decided to implement essentially a three-day waiting period for the combined document, meaning it must be in the consumer’s hand and accurate three days prior to closing. While in theory this is a nice idea, in actual practice, it could be problematic for a number of reasons. Yet, the CFPB did listen to NAR and others and created a few exceptions from the mandatory three-day period:

1) Buyer and seller negotiations relating to the real estate transaction.
2) A change of $100 or less in any given numbers.
3) Changes that may occur after closing.
4) Clerical errors/technical changes.
5) Bona fide financial emergency (the only example they give of what this means is to prevent an imminent foreclosure).

At present, it is unclear whether these exceptions will be sufficient to cover the majority or vast majority of scenarios that could lead to a required reissuance of the closing disclosure. What is most obviously problematic is the fundamental change to the closing process. It is still unclear whether this final document is to be prepared by the settlement agent, the lender, or both in some manner. Also, the volume of changes that will be required to computer systems, the increased paperwork and additional training that will be required to handle this conversion has the potential to be immense.

Other major changes and items of note:

1) The finance charge is being completely revamped.

2) The loan estimate, which replaces the GFE, will be required to be issued within three days of receiving only six pieces of information instead of six plus a catchall seventh as HUD had done. This is important because the six pieces of information are likely not enough information to provide a true estimate.

3) RESPA will now apply to all TILA loans with minor exceptions. Construction loans and land loans will be covered by RESPA.

4) Mortgage brokers will be allowed to issue GFEs; however, the lender will still be ultimately responsible for them.

5) CFPB proposes to apply a “0” tolerance to affiliates on the loan estimate. Previously, many of the affiliate charges came under the 10 percent tolerance in the RESPA reg.

6) CFPB seeks to mandate that all documents be “machine readable,” which could be very costly to implement.

7) CFPB acknowledges that six other rules yet to be finalized will affect this rule. These rules may not be finalized before the comment period ends for this rule, which means commenters must guess and the CFPB will have to use their own judgment—without public input—as to how to integrate these other rules.

8) CFPB proposes to keep certain itemizations of charges noting that consumers liked them. This is consistent with NAR advocacy as well. However, they do ask for additional comments.

9) CFPB proposes to make the forms mandatory, which means they will be consistent no matter what part of the country you are in or what lender you are dealing with.

10) CFPB proposes that the buyer sign the closing disclosure to acknowledge receipt.

Obviously, these 10 items do not encompass the full rule, which has many more changes, not all of which are bad. What is unpalatable is the sheer number of changes proposed, as well as the lack of clarity particularly with regard to the closing documents and process. While few of these changes affect real estate agents directly, the proposal will certainly affect their clients and their transactions in many ways and likely affect the housing industry significantly for at least a period of time as it is implemented. This alone may not even be as great a concern, except in the context of five or six other rulemakings that will also be imposed on the industry around the same time. The aggregate costs of doing all this could be monumental and the impact highly significant. Therefore, working with industry partners, NAR will comment extensively. Comments are due November 6, 2012 for most of the proposal.

This column is brought to you by the NAR Real Estate Services group.

Ken Trepeta is the director of Real Estate Services for the National Association of REALTORS®.

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