CFPB – Countdown to August 1st Concerns.
Like many of my of my real estate contemporaries, it’s with a certain calculated apprehension that I count the days until August 1st when the Consumer Financial Protection Bureau (“CFPB”) implements a host of revolutionary changes to the real estate closing process. By now you have heard of CFPB, but the question still remains, “How will it impact me?” While CFPB will not significantly impact the day-to-day processing of sales for real estate professionals, their seller and buyer clients will be looking to them for general information about the new rules and forms, as well as the impact on both the loan process and the closing of the transaction. When we asked a high ranking CFPB official in March if the published rules are final, she replied yes … but they’re still subject to change. And that my friends, rather deftly represents the changes to come.
For purposes of this discussion, the section numbers referenced in this Newsletter refer to Title 12 of the Code of Federal Regulations (CFR). By way of background, the CFPB and its new rules stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into federal law July 10, 2010. This Newsletter limits its focus to three important components of the new laws: (1) the integrated mortgage disclosure forms, (2) the new time-lines for consumer review, and (3) dangers of “referral fees” for real estate agents.
New Forms: Loan Estimate & Closing Disclosure
As of the date of this article, there are less than 4 months remaining until the integrated mortgage disclosure rules go into effect, significantly changing the real estate closing process as we know it. The CFPB rules collapse four forms from our present system into two entirely new forms. At the beginning stage of the process, a borrower receives both the Good Faith Estimate and the early Truth in Lending forms from their lender; these two forms will be merged into a new Loan Estimate. The funny thing is that it is not really an estimate in many respects, lenders will be held to the exact number to even more of the charges listed and have to come in within 10% on many of the others. This new three-page Loan Estimate form must be provided to borrowers on a timetable similar to the current receipt of the GFE: within three business days after six (6) items of information are collected:
- the consumer’s name,
- the consumer’s income,
- the consumer’s Social Security Number,
- the address of the property,
- the estimated value of the property, and
- the loan amount
There is no catch all seventh item, so either lenders will collect less information up front or they will have to issue loan estimates fairly early in the process.
At the final stage of the process, the borrower signs both the HUD-1 Settlement Statement and the final Truth in Lending Statement, which are both to be merged into a new Closing Disclosure Statement. These two new forms will apply to all closings involving closed-end consumer mortgages where the loan application was received by the creditor on or after August 1, 2015; these forms, however, will not be required for transactions involving :
- Reverse mortgages;
- Home Equity Line of Credit (HELOC);
- Mobile home;
- Cash closings;
- Commercial purpose loans;
- Community no-interest loans; or
- Creditors making 5 or fewer loans per year.
The line numbering on the HUD-1 familiar to most of us is gone. Instead, the fees and charges are placed on the Closing Disclosure in one of seven areas:
- Origination Charges;
- Services Borrower Did Not Shop For;
- Services Borrower Did Shop For;
- Taxes and Other Government Fees;
- Initial Escrow Payment at Closing; and
Individual charges within each of these major groupings are listed alphabetically. Columns are provided to separate charges of buyer, seller and others, as well as columns for both payments before and at closing.
Some complications created by this new Closing Disclosure have not been adequately addressed by the CFPB at this time, and many closing professionals are still praying for guidance before the August 1 deadline. For example, in most jurisdictions, title insurers offer a discount (often called a simultaneous-issue discount) on the loan policy premium when purchased at the same time as an owner’s policy. In some parts of the country, however, the standard purchase of an owner’s policy of title insurance is not as well established. As a result, CFPB determined consumers were better served by showing the full, not discounted, loan policy premium in all situations on both the Loan Estimate and the Closing Disclosure instead of, where applicable, the discounted premium. If an owner’s policy is also purchased in the transaction, a formula is used to discount the owner’s policy. In those areas where custom and practice provide that a buyer/borrower pay for both the owner’s and lender’s policies, the total actual amount paid for both policies is the same, even though the actual premium amounts are incorrect on the form.
Although not applicable in South Carolina but perhaps even more problematic are those areas where custom provides the seller pay for the owner’s policy and the buyer purchase the lender’s policy. In these areas, the policy premium for the lender’s policy will be overstated and the owner’s policy premium understated. As a result, look for an adjustment to be made on page 3 of the new Closing Disclosure form to correct premium amounts to those contemplated by the parties in their contract.
These new forms pose the challenge of disrupting a process that has been in place for approximately 40 years. It wasn’t perfect by any standard, but I believe most would defend it as a system that worked and was familiar to all repeat clients. The bigger concern, however, is not the inconvenience of getting used to new forms but rather the impact the Closing Disclosure delivery will have on the timing of our real estate closings.
Disclosure Time Periods: 3 Day Periods = 8 days?[i]
[i] § 1026.19(f)(1)(ii)
As a part of the final rule creating these two new combined forms, the CFPB mandated borrowers have three business days after receipt of the Closing Disclosure to review the form and its contents. Thus, in the best case scenario, lenders would need to have all final numbers and loan documents prepared at least 3 business days prior to closing. Note, however, that the three-day review period commences upon “receipt” of the form by the borrower.
Under the new CFPB rules, unless some positive confirmation of the receipt of the form can be evidenced in writing, the form is “deemed received” 3 business days after the delivery process is started (e.g., placed in the mail, dropped off to FedEx, emailed, etc.).[i] The only example the present CFPB final rules provide that doesn’t not require this default automatic 3 business days delay until the commencement of the borrower’s review period is by personal delivery. The notes[ii] of the final rules do acknowledge that the borrower may in certain instances provide positive confirmation of receipt of the form and waive the remaining time period before the review period can begin. The borrower cannot waive the 3 day review period except for bona fide personal financial emergencies[iii] (e.g., imminent foreclosure sale). Thus, the combination of the “delivery time period” and the “review time period” results in a total of 6 business days from mailing to loan signing.
[i] § 1026.19(f)
[ii] It is still unclear how much authority the notes will have and to what extent we are able to rely on them.
I wish the bureaucratic confusion ended there. The CFPB has two standards for determining “business days” in calculating its mandatory time periods. For purposes of the Loan Estimate and any of its subsequent revisions, business days include any day the creditor is open for business and offers the majority of its services. Most lenders are not open on Saturdays. For all other purposes (i.e., the Closing Disclosure Statement), business day means all calendar days except Sundays and legal public holidays specified in 5 U.S.C. 6103(a). Thus, Saturday’s are included. In short, if the Closing Disclosure Statement is sent to the Purchaser on a Monday, the first day closing may occur[i] is the following Monday (M-W delivery period and Th-Sat review period).
[i] Consummation is defined as “the time that a consumer becomes contractually obligated on a credit transaction.
Re-Disclosure of Closing Disclosure:
Now, are you ready for a little more heartburn? Since the buyer/borrower will receive a Closing Disclosure several days before the closing (and likely a few days before a walk-through on the property), buyers/borrowers will likely receive a new, adjusted Closing Disclosure at the closing showing any changes that occurred between the initial disclosure and the closing, including adjustments due to timing of the closing, walkthrough adjustments and other matters. But changes may not end there and CFPB mandates that changes in financial disclosure numbers (e.g., last minute cleaning fee, invoice for CL-100, follow-up inspection before closing, etc.) must be re-disclosed, even post-closing.
Note, redisclosing does not necessarily require another 3 business day review period. Essentially, there are 3 changes before closing that will mandate a new waiting period[i]:
[i] § 1026.19(f)(2)(ii)
- Annual Percentage Rate (APR)[i];
- Loan Products (e.g., fixed to ARM)[ii]; or
- Prepayment Penalty.[iii]
The Consumer Financial Protection Bureau tried to give industry leeway by saying that only a change in major loan terms would trigger a new three business day waiting period; the Bureau, however, also made it clear that lenders would essentially be liable for the documents including the Closing Disclosure. Thus lenders are taking a conservative approach for good reason: a loan that has a potential RESPA/TILA error will at a minimum be even more difficult to sell on the secondary market. So closing professionals need to be wary that lenders are soon going to want to make sure there is no chance of this and will therefore not be very tolerant of last minute changes.
Real estate and other industry professionals should no longer expect to be able to make last minute changes at the closing. They should prepare their clients for this as well. A good rule of thumb then is if you want to close on September 30, make sure everything is ready on the 23rd of September. Some may try to point to the “bona fide financial emergency” exception and feel this is a way around the three business day rule, but alas it is not – the bona fide emergency must be a serious emergency – not losing a locked in interest rate for example but rather more like one will be bankrupt if the deal does not close. And one will have to put it in writing in one’s own words, not a form letter. Even then, it will have to be approved by the lender and given the way loans are actually made and closed, the ultimate lender will not likely be present at the closing so this approval (and approval of any other changes for that matter) will not be quick, if it comes at all.
Finally, it is a good idea to add at least a 15 day automatic extension to the closing deadline for delays caused by no fault of either party; this safeguard is preferable to simply extending the stated closing deadline and other contingencies and deadlines as the loan underwriters have a long-standing habit of procrastinating to the very last second of whatever deadline is in the contract. So if you close in 30 days normally, still leave the 30 day deadline in the contract but with the automatic extension, count on 45. If it is 60, then count on 75. We hope and expect that after people get used to the changes, the process will move more quickly again and things will be more flexible. Until then, however, it is best to give yourself and everyone else in the transaction a little extra time to avoid being in default and the arguments that often ensue.
So with these few key points to take away from this article:
- Make sure clients are ready 7 days prior to closing;
- Make sure sellers abide by their agreements;
- Have buyers start the loan process immediately;
- Keep communications tight;
- Add a 15 day extension to closing deadline;
- Do the walk-through earlier − enough time to allow for changes without redisclosure
Realtors & Referral Fees
The CFPB is actively policing alleged violations of Section 8 of the Real Estate Settlement Procedures Act (RESPA). Section 8(a) of RESPA prohibits referral fees, kickbacks, or unearned fees with respect to residential mortgage settlement services involving a federally related mortgage loan. For example, Long & Foster Real Estate is presently embroiled in a RESPA suit in which they are alleged to be in cahoots with another company sharing settlement fees and are facing penalties in excess of $11 million dolars. In the past 2 years, the CFPB has acted against a number of settlement service providers and those allegedly referring business to them, including mortgage lenders, mortgage insurers, homebuilders and law firms, with penalties of $50,000 to over $15 million.
Distilled down to its simplest form, the CFPB is looking for any compensation received for referring any business, as opposed to a payment of a bona fide salary or compensation for services actually performed in connection with the real estate transaction. Four elements are required for a Section 8(a) violation:
- A settlement service involving a federally related mortgage loan. RESPA defines a federally related mortgage loan as a loan secured by a first or subordinate lien on a one-to-four family residential dwelling (including manufactured homes) that meets certain other criteria. A federally related mortgage loan means any loan that places a lien on a one-to-four family property and includes both government-insured and conventional mortgage loans.
- A referral of business incident to or part of a settlement service pursuant to an agreement or understanding. Please be aware that the agreement or understanding does not have to be written or verbalized, but may be established by practice, pattern, or course of conduct.
- Payment or receipt of a fee or thing of value. HUD’s regulations provide that a fee or thing of value is virtually anything one receives in consideration for referring a settlement service, including, but not limited to:
- Money or fees
- Duplicate payments of a charge
- Stock, dividends, distribution of profits
- Credits representing money that may be paid at a future date
- Opportunity to participate in a moneymaking program
- Retained or increased earnings
- Increased equity in a parent or subsidiary entity
- Special bank deposits or accounts, or special or unusual banking terms
- Services of all types at special or free rates
- Lease or rental payments based in whole or in part on the amount of business referred
- Trips and payment of another person’s expenses
- Reduction in credit against an existing obligation
- For the referral of settlement service business.
§8(C) – EXCEPTIONS TO THE ANTI-KICKBACK PROHIBITIONS
Despite the prohibitions in Section 8 of RESPA, Congress understood that a number of business referrals that occur in the settlement service industry do not harm consumers. As a result, Congress permitted certain conduct to be exempt from RESPA and HUD’s scrutiny. If a fee or thing of value is paid under one of these exceptions, the person or entity does not violate RESPA.[i]
[i] For a discussion of these exceptions, please see the URL provided at the end of this Article.
Section 8(d) – Enforcement of Section 8
Real estate brokers and agents should be aware that RESPA authorizes harsh penalties for those in violation of Section 8. Specifically, to enforce the prohibitions against kickbacks and the splitting of fees, Section 8(d) gives HUD the authority to impose the following penalties:
- Civil and criminal penalties
- Imprisonment for up to one year
- A fine of up of $10,000
- Both imprisonment and a fine
- Treble damages, which means a person who violates Section 8 of RESPA must pay three times the amount of the charge for the settlement service involved in the violation.
RESPA also authorizes the following entities or persons to sanction violators:
- HUD, in the case of FHA-insured or VA-guaranteed loans
If a person or entity violates the anti-kickback provisions of RESPA, a consumer has one year to bring an action in court in connection with the violation. The government, however, may bring an action within 3 years of the violation. Business competitors have no standing to bring a law suit to enforce RESPA. Over the past couple of years, HUD has increased its enforcement staff and stepped up its pursuit of RESPA violators. From these efforts, note that HUD often has focused its enforcement efforts on real estate brokers and affiliated business arrangements. I have heard the the CFPB is allocating over 70% of its funding towards enforcement. So the bottom line is the RESPA rules governing kickbacks and unearned fee splitting is very serious and poses a nasty threat to the unwary. The specific nuances that determine whether a realtor has treaded on dangerous ground is beyond the scope of this Newsletter. A useful resource can be found on the National Association of Realtors’ website:
This Newsletter is based on current law at the time written and is for informational purposes only and under no circumstances constitutes legal advice. It is important that you discuss all legal options and consequences with a qualified attorney prior to any action. Should you wish to discuss any questions with us, to schedule a consultation, or to request additional Newsletters, please call our office at (843) 795-1909 or visit our website: www.Bradshaw-Company.com.