Timothy A. Raty – DocuTech Compliance Specialist
September 8, 2012
The Consumer Financial Protection Bureau (CFPB) is in the process of implementing new regulations and new or revised disclosures to implement certain amendments to the Truth-in-Lending Act (82 Stat. 146) made by the Dodd-Frank Act (124 Stat. 1376).
According to Section XIV of the Dodd-Frank Act (aka the “Mortgage Reform and Anti-Predatory Lending Act” or “MRAPLA”), final regulations must be issued to implement the disclosures required under MRAPLA by January 21st, 2013. However, the CFPB will be effectively delaying final rules for many of these disclosures by setting forth a broad exemption to providing them, the rules for which exemption will be finalized by January 21st.
Nevertheless, regulations concerning five of the disclosures required under MRAPLA will be finalized by January 21st and become effective on dates set forth in these final rules (see 77 FR 51133 – 51136), including possibly January 21st itself. These regulations are:
1. A disclosure concerning hybrid adjustable rate mortgages (ARMs) (124 Stat. 1376 §1418[a]);
2. A loan originator identifier disclosure requirement (Ibid. §1402[b][B]);
3. A disclosure concerning waiver of escrow after consummation (Ibid. §1462);
4. A consumer notification regarding appraisals for high-risk mortgages (Ibid. §1471); and
5. A consumer notification regarding the right to receive a copy of an appraisal (Ibid. §1474)
DocuTech will be making all necessary changes to have all things ready for clients to have compliant document packages for when these regulations take effect. The following is a brief summary of these disclosure requirements and any proposed regulations that have been issued in connection with them:
Disclosure Concerning Hybrid ARMs
This disclosure is required to be given “during the 1-month period that ends 6 months before the date on which the interest rate in effect during the introductory period of a hybrid adjustable rate mortgage adjusts or resets to a variable interest rate . . .” (124 Stat. 1376 §1418[b]; codified as 15 USCA §1638a[b]). A “hybrid adjustable rate mortgage” is “a consumer credit transaction secured by the consumer’s principal residence with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate after such period.” (15 USCA §1638a[a])
Since this disclosure is required to be given well after closing, it falls outside of the scope of DocuTech’s business; therefore, DocuTech will not be supporting this disclosure.
Disclosure of Loan Originator Identifier Requirement
124 Stat. 1376 §1402(b)(1) (codified as 15 USCA §1639b[b]) requires the following (in relevant part):
“Subject to regulations prescribed under this subsection, each mortgage originator shall, in addition to the duties imposed by otherwise applicable provisions of State or Federal law—
(B) include on all loan documents any unique identifier of the mortgage originator provided by the Nationwide Mortgage Licensing System and Registry.”
The CFPB has issued proposed regulations implementing this requirement in their rules primarily revising loan origination compensation (see 77 FR 55272). These proposed rules would amend 12 CFR §1026.36 to include a new Subsection (g), which requires disclosure of the names and NMLSR identification numbers of both the loan originator organization and
the individual loan originator primarily responsible for the origination of a loan.
This proposed regulation also clarifies what is meant by “loan documents.” Clause (2) of Subsection (g) promulgates that the “loan documents” are:
“(i) The credit application;
(ii) The disclosure provided under section 5(c) of the Real Estate Settlement Procedures Act of 1974 (12 USCA §2604[c]; [the Good Faith Estimate and Loan Estimate]);
(iii) The disclosure provided under section 128 of the Truth in Lending Act (15 USCA §1638 [the Truth-in-Lending Disclosure]);
(iv) The note or loan contract;
(v) The security instrument; and
(vi) The disclosure provided to comply with section 4 of the Real Estate Settlement Procedures Act of 1974 (12 USCA §2603 [the HUD-1 and Closing Disclosure]).
Proposed Official Staff Commentary to this section further elaborates that disclosure of the loan originator’s information on the note or loan contract and the security instrument also includes “any amendment, rider, or addendum to the note or security instrument made at consummation.” (see proposed 12 CFR Pt. 1026, Supp. I, Paragraph 36[g]).
Disclosure Concerning Waiver of Escrow After Consummation
124 Stat. 1376 §1462 amends 15 USCA §1639d, by including a new Subsection (j) which states the following (in relevant part):
“1. IN GENERAL. –If—
(a) An impound, trust, or other type of account for the payment of property taxes, insurance premiums, or other purposes relating to real property securing a consumer credit transaction is not established in connection with the transaction; or
(b) A consumer chooses, and provides written notice to the creditor or servicer of such choice, at any time after such an account is established in connection with any such transaction and in accordance with any statute, regulation, or contractual agreement, to close such account, the creditor or servicer shall provide a timely and clearly written disclosure to the consumer that advises the consumer of the responsibilities of the consumer and implications for the consumer in the absence of any such account.
2. DISCLOSURE REQUIREMENTS.- Any disclosure provided to a consumer under paragraph (1) shall include the following:
(a) Information concerning any applicable fees or costs associated with either the non-establishment of any such account at the time of the transaction, or any subsequent closure of any such account.
(b) A clear and prominent statement that the consumer is responsible for personally and directly paying the non-escrowed items, in addition to paying the mortgage loan payment, in the absence of any such account, and the fact that the costs for taxes, insurance, and related fees can be substantial.
(c) A clear explanation of the consequences of any failure to pay non-escrowed items, including the possible requirement for the forced placement of insurance by the creditor or servicer and the potentially higher cost (including any potential commission payments to the servicer) or reduced coverage for the consumer in the event of any such creditor-placed insurance.
(d) Such other information as the Board determines necessary for the protection of the consumer.”
The CFPB is proposing text to the new Closing Disclosure that would substantially fulfill this requirement (see 77 FR 51252; see proposed 12 CFR §1026.38[l]). However, the CFPB is planning on proposing separate regulations regarding this rule (see 77 FR 51125), which will be particularly necessary since this disclosure requirement may take effect before final rules concerning the Closing Disclosure become effective, making it necessary for mortgage industry professionals to provide this disclosure separately from the Closing Disclosure.
Notification Regarding Appraisals for Higher-Risk Mortgage Loans
The CFPB, along with other agencies, has issued proposed regulations for this requirement, which is codified as 15 USCA §1639h (see 77 FR 54722). These regulations amend several parts of Title 12 of the Code of Federal Regulations, including Parts 34, 164, 226, 722, 1026, and 1222 in substantially the same manner. For purposes of simplicity, reference to Part 1026 will be used in this article.
Although the exact section of Part 1026 is not known yet (the regulations only refer to “§1026.XX,” but it will be included under Subpart C – Closed-End Credit), it will contain a Subsection (c), which requires the following (in relevant part):
“(1) In general. A creditor shall disclose the following statement, in writing, to a consumer who applies for a higher-risk mortgage loan: `We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.’”
There are two alternative definitions of a “higher-risk mortgage loan” under these regulations, but under either, they basically are substantially similar to current “higher-priced mortgage loans” regulated by 12 CFR §1026.35. The difference between the alternative definitions are that under one a “higher-risk mortgage loan” would be determined by using the annual percentage rate (APR), while under the other it would be determined based on the transaction coverage rate (TCR).
The CFPB is planning on including language in the new Loan Estimate to cover this statutory requirement (see 77 FR 51134), however, it is possible that the regulations concerning this disclosure may go into effect before the Loan Estimate does, so a separate disclosure may be necessary.
Notification Regarding the Right to Receive a Copy of an Appraisal
The CFPB has also proposed regulations for this requirement, which is codified as 15 USCA 1691 (see 77 FR 50390). These proposed regulations would amend 12 CFR §1002.14 (a part of Regulation B) by replacing Subsection (a)(2) with the following requirement:
“For applications subject to paragraph (a)(1) of this section, a creditor shall provide an applicant with a written disclosure, not later than the third business day after the creditor receives an application, of the applicant’s right to receive a copy of all written appraisals and valuations developed in connection with such application.”
These regulations would also modify the model language for the disclosure in 12 CFR Pt 1002, App. C, Form C-9, which would state the following if the proposed change becomes final:
“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close.
You can pay for an additional appraisal for your own use at your own cost.”
The CFPB does note in their proposed rule that they have proposed that this disclosure print in the Loan Estimate, in order to streamline the disclosure process (see 77 FR 50396). Again, however, it may be necessary to give this disclosure in a separate document between the time that this proposed rule takes effect and when the rules governing the Loan Estimate take effect.
Are You Ready For Them?
Again, final rules for these regulations will be published by January 21st of next year – and some may take effect on this day (see 77 FR 51125). DocuTech will continue to monitor these proposed and eventual final rules and ensure that everything is in place for clients to continue providing compliant document packages.