Loan Estimate Form

The proposed Loan Estimate Form will replace the separate disclosures required under the TILA, called the “initial TIL” and Real Estate Settlement Procedures Act (RESPA), known as the Good Faith Estimate or “GFE”. As described in the proposed rule, the form can be delivered to the consumer by either the lender or a mortgage broker – but the lender is ultimately responsible for the information it contains.

The form is three pages and was developed by the CFPB through nine rounds of iterative testing with consumers. Each round was also posted on the CFPB’s website and accessible to industry and the public. It de-emphasizes APR, which consumers found confusing, and includes new disclosure items mandated by Dodd-Frank such as Total Interest Percentage and the “In 5 Years” calculation.

Closing Disclosure Form

The proposed Closing Disclosure Form will integrate the HUD-1 required by RESPA and the “final TIL” required under TILA. There are multiple versions of the form to account for different transaction types – refinance, purchase and seller-only. Though this new form would be used for closed-end loans in residential transactions, reverse mortgages and home equity lines of credit would still use the HUD-1 form.

The form mixes the lender and settlement costs with loan terms and replaces the HUD line numbers with an alpha-numeric system. The Closing Disclosure Form breaks out the costs and includes section totals rather than “rolling them up” as was the case with the 2010 HUD-1. Because the form is a mixture of loan information/costs and settlement costs, communication and cooperation between the lender and closing agent will be necessary to complete the Closing Disclosure. If the settlement agent is allowed to complete the Closing Disclosure Form, the lender will need to provide a copy of the Loan Estimate Form, as the information it provides will be necessary to complete the Closing Disclosure Form.

See a sample closing disclosure form here.

Three-day Rule

The Loan Estimate must be delivered to the borrower no later than three business days after the lender receives the mortgage application. It is also proposed that the Closing Disclosure must be received by the borrower no later than three business days prior to the consummation of the transaction.

Key points of the Three-day Rule include:

• Proof of receipt for both forms must be obtained
• If disclosures are not hand delivered (such as sent via U.S. Postal Service or by electronic means), an additional three business days is required in order to ensure receipt by the borrower no later than three business days prior to consummation, unless there is other bona fide proof of the consumer’s receipt earlier
• The Closing Disclosure cannot change (except in very limited circumstances) from the time the borrower receives it (three business days prior to closing) and the closing

Delivery of Forms

Two proposed delivery alternatives are under consideration with the lender maintaining responsibility for accuracy, timeliness, security and storage under both alternatives:

• Loan Estimate can be delivered by lender or a mortgage broker
• Closing Disclosure can be delivered by lender or closing agent

It is still to be determined who will provide the Closing Disclosure Form to consumers, but the CFPB has proposed two scenarios – one in which the lender provides the form and another in which the settlement agent provides the form. In either case, the lender would ultimately be responsible for the information it contains.

The CFPB received many comments from the lending industry and settlement services industry as to how and who should complete the Closing Disclosure and its delivery to the consumer. The CFPB is now reviewing all comments received and working on the Final Rule.

Tolerance Levels

As with 2010 HUD regulations, there are categories and restrictions for what charges at consummation (as reflected on the Closing Disclosure) can increase over those given on the Loan Estimate. Although the proposed rule does not use the term “tolerance”, but refers to “good faith”, the proposal carries on the concept and divides charges into buckets: zero tolerance, 10% and no cap.

Zero tolerance bucket – There can be no increase in the amount paid at closing from the estimated amount on the Loan Estimate for borrower paid fees falling within this bucket. The proposed rule does include more items in this bucket than existed under HUD.

• Fees paid to the creditor
• Fees paid to a mortgage broker
• Fees paid to an affiliate of the creditor or mortgage broker (which is not a zero tolerance item under current HUD regulations)
• Fees paid to an unaffiliated service provider if the borrower was not allowed to shop for the provider such that either the creditor selected the provider or the creditor directed the borrower to use only a provider from a list supplied by the creditor (which is not a zero tolerance item under current HUD regulations)
• Transfer taxes

10% bucket – The combined amount paid for borrower paid fees falling within this bucket can increase up to a maximum of 10% from the combined amount for the same items as given on the Loan Estimate.

• Fees paid to an unaffiliated third-party provider if the creditor permitted the borrower to shop and the borrower still selected off the creditor’s provider list
• Recording fees paid by the borrower

No cap bucket – The items falling within this bucket can increase above the amounts given on the Loan Estimate with no cap placed on the size of the increase.

• Prepaid interest
• Property insurance
• Amounts for escrow deposits (taxes, insurance)
• Fees paid to unaffiliated third party providers the borrower selected that are not on the creditor’s list of providers

All-in APR

In order to provide consumers a clearer picture of the overall cost of credit, the proposed rule would now have the APR include many charges and fees previously excluded. These would include:

• Title services
• Closing agent fees
• Appraisal costs
• Credit report

The general effect of including these fees in the new “All-In” format will be an increase to the APR.

Recordkeeping

Under the proposed rule, lenders must maintain electronic records of Loan Estimate Forms for three years after it’s provided to the borrower. Records of Closing Disclosure Forms must be maintained for five years, along with certain loan documents, after the closing date. Both types of records must be kept in a “standard, electronic, machine-readable format”. Standards for this format are being suggested.

In a service provider memo, it is indicated that the same retention requirements will apply to the settlement agents. Although not currently specified, we believe the safety and security of the electronic storage systems will be laid out in subsequent regulations.