The Consumer Financial Protection Bureau (CFPB) has released two new proposed rules which could have major effects on mortgage lending.

The first proposes new forms which attempt to combine the disclosures required under the federal Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The second aims to expand protections to more homeowners by covering a wider pool of loan types.

Lenders are glancing with trepidation at the new regulations – which run to almost 1,100 closely printed pages – especially after having gone through another tumultuous round of changes less than two years ago.

Lenders will be required to return a “loan estimate” form, similar to the current “good faith estimate,” of all costs associated with a loan to consumers within three days of receiving an application – with little to no margin for error on many of the line items. And the rule also redefines the way the annual percentage rate (APR) is calculated, so that it covers almost all of the up-front costs of the loan.

However, the proposal would allow for some last minute changes without requiring a new estimate be generated – any change which results in less than $100 total to the final fee or which comes about as a result of negotiations between buyer and seller prompted by the final walk-through can be accommodated.

“We’re trying to strike a balance between making sure consumers have [loan forms] as early as possible, while making sure the lender has all the information they need,” said Ben Olson, managing counsel for the CFPB, in a conference call announcing the new rules.

All lenders will have to use the same standard forms for the disclosure. Some lenders had lobbied to be allowed to come up with their own.

Up In The Air

Left up in the air by the current version of the rule is who will have ultimate responsibility for the form, lenders or settlement agents (a role performed by attorneys in Massachusetts). Back when there were two forms, the “HUD-1” settlement document and a TILA form, each was responsible for one set of disclosures. TILA, the lender’s purview, contained info pertaining to the loan itself, while the HUD-1 was a comprehensive listing of all the fees involved in closing the loan, including title searches, attorneys’ fees and miscellanea.

Combining all the fees attached to the loan on one form may make things simpler for consumers, but requires that either lenders or settlement agents be given the responsibility for preparing a crucial legal document. Lenders are naturally anxious to have that responsibility on their shoulders, since any mistakes made between what’s actually charged and what’s on the form could land them in hot water.
“It’s the investor who’s on the line – if you give the info to the attorney [and there’s a typo] who’s at fault? Who does it come to?” said Debbie Sousa, executive director of the Massachusetts Mortgage Bankers Association.

But settlement agents fear having full responsibility for all fee disclosure placed in lenders’ hands could diminish their role in the closing process.

“We should remember title insurance and settlement companies didn’t cause the housing crisis and didn’t take advantage of consumers and investors,” American Land Title Association CEO Michelle Korsmo wrote in an open letter to the CFPB. “Consumers deserve an independent, third party at the settlement table and this rule should ensure this role remains in the real estate transaction.”

High Cost

But it’s the second rule proposal which could have a more comprehensive effect. The Dodd-Frank act requires certain protections for homeowners enshrined in the 1998 Homeowner and Equity Protection Act to be expanded to cover “high-cost” loans.

The CFPB’s interpretation of the rule would mean that many loan features that marked the boom-year lending of the mid-2000s would be banned, including balloon payments, pre-payment prohibitions, home equity lines of credit offered without assessing a borrower’s credit-worthiness. The rule also says that borrowers with a “high-cost” loan can’t be charged a fee when seeking to have their loan modified or deferred, and that such loans can’t be sold to borrowers who have previously defaulted on their mortgage.

The rules will be open for public comment through November, with final approval expected early next year. The new rules are expected to kick in late in 2013.