By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance
The new Integrated Disclosures will be upon us in a few short months and will create some unique difficulties for financial institutions. In the distant past, creditors gave the applicants a Good Faith Estimate. However, the United States Department of Housing and Urban Development (HUD) decided that the information was too scattered, etc., and in 2009 announced a new more consolidated format. The goal that HUD had was laudable, but their form really did not improve the situation much, if at all.
Upon the passage of the Dodd-Frank Act, a new federal agency, the Consumer Financial Protection Bureau was told to remedy this situation once again, and specifically to combine the Good Faith Estimate and early Truth in Lending Disclosure (into the Loan Estimate), as well as combine the HUD-1 and final Truth in Lending Disclosure (into the Closing Disclosure). The new forms are an improvement from the current forms, but are also quite complex. The teaching manual that Young & Associates is using for live training runs several hundred pages to explain how to complete the 8 pages of new forms.
Creditors currently have three categories of charges that exist on the Good Faith Estimate – those that have to be correct, those that (as a group) have to increase no more than 10%, and those that represent the creditor’s best guess (typically escrow, insurance, and odd days interest).
The new forms and instructions maintain the “best guess” category as it exists in the current format, so we will not discuss this category further. The issue is with the first two categories – settlement service charges that must be correct and those that must as a group be within 10%.
Settlement Service Charges
Under the current rule, some settlement service charges must be correct. These items include charges that are fully within the creditor’s control – typically their own charges or the mortgage broker’s charges. Beginning August 1, the new rule will still include the creditor’s own charges, but also expand this area as follows:
- Amounts payable to the creditor’s affiliates and the mortgage broker’s affiliates
- Settlement services for which the creditor will not allow the consumer to shop. These would include:
- Credit bureau
- Tax service companies
- PMI companies
- Governmental fees for government programs
- Flood determination fees
- And perhaps others.
These fees will have to be correct. This is not likely to create much difficulty, as these charges are rarely an issue. For instance, if the creditor only uses two appraisers, every Good Faith Estimate generated now will list the fee for the appraiser that charges the highest amount.
The problem is that all of these items now are removed from the 10% calculation, meaning that the “cushion” that creditors have had for 10% tolerance items will decrease, as the calculation relies on items subject to the 10% tolerance, and those items are shrinking.
You will note that the second bullet point above included settlement services for which the consumer is not permitted to shop. This creates another level of risk for creditors. For instance, if the creditor does not allow the consumer to shop for a title company, then the title company fees also must be accurate, as this fee moves from the “10%” category to the “must be correct” category. This would apply to any other service for which the consumer is not permitted to shop. So the reality is that if you decide to not allow your consumer to shop for any settlement service, every fee will have to be correct, and the only settlement service charge that will appear in your “10%” category will be filing fees.
The only protection here is to allow the consumer to shop. The phrase “allowing the consumer to shop” does not mean giving them a list and making them pick settlement service providers off the list. If creditors do that, then the creditor has not allowed the consumer to shop. Allowing them to shop means giving them a list of settlement service providers (which you should already have at least partially developed), and telling the consumer that they can shop for these services. Often, the response from the consumer will be to say, “I don’t care, use whoever you want.” If this happens, then the creditor may use their “regular” provider, and the settlement service remains in the 10% category. There is a difference between forcing them to choose off a list and the consumer abdicating their shopping rights.
Of course, the best position for the creditor is when the consumer does shop and hires another competent provider for a settlement service. As soon as they decide to do so, the consumer agrees to assume the entire liability for paying that provider. The creditor discloses what the creditor’s provider would charge, and whatever the final fee is, the consumer must pay it with no risk to the creditor.
The regulation is quite clear that in order to explain to the consumer that they have a right to shop for a specific settlement service, the service and one provider must appear on the settlement service provider list. This list, and what needs to appear on it, will now be dictated by a new form, which will become part of the application disclosures.
Preparing for the New System
To prepare for this new system, creditors need to assure that they do the following:
- Determine settlement service providers for each service that the creditor might EVER require, even if it only is required once a year.
- Determine what the charge will be, or determine a method to calculate the charge so that the creditor can get it “right” on the Loan Estimate. Creditors will have to understand that for settlement services that are only required every few months, they may have to telephone the provider prior to completing the Loan Estimate if they have not used that provider recently.
- Work with settlement service providers who add on multiple fees from closing to closing. This area is mostly limited to title companies who have all sorts of small and miscellaneous fees. The discussion should probably be about how to remove these fees, because sooner or later the creditor may well have to pay them, given the smaller “10%” window.
This new structure need not create a massive increase in risk, provided you prepare for it now. Think about the providers, how they calculate their charges, and how you will assure that your staff will know what these charges will be. Just like the current Good Faith Estimate, if the first Loan Estimate has fatal flaws, there will be no legal way to repair the damage.
Integrated Disclosure Review
Young & Associates, Inc. offers an Integrated Disclosure Review service for sample documents and sample loans as you prepare for this transition and set up your loan types. You will need to provide an appropriate narrative to us that explains the loan and its terms, then provide the Loan Estimate and the Closing Disclosure. The purpose of this review is to determine that the loan type is properly set up and ready to go before the mandatory August 1 deadline. Young & Associates, Inc. will not validate APRs and other similar items. For more information, click here.
Reg Z Policy
We will also be releasing our new Regulation Z mortgage loan policy on or about June 15, allowing time for customization of the policy and board approval prior to the mandatory August 1, 2015 date. For more information, contact Bryan Fetty at [email protected] or 1.800.525.9775.