NAFCU’s Comments to CFPB on ‘Know Before You Owe’ Project

April 16, 2012

The Honorable Richard Cordray
Consumer Financial Protection Bureau
1700 G Street, N.W.
Washington, DC 20552

    RE:    Comments on the RESPA-TILA Integration Process

Dear Mr. Cordray:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I am writing to you regarding the Consumer Financial Protection Bureau’s (CFPB) project to consolidate the disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).  The CFPB has released several draft forms to be provided at application and at settlement.  Additionally, in February, the CFPB released a document titled “An overview of the proposals under consideration (the “Overview Document”) which summarized the regulations the CFPB is considering along with the draft forms.  The following letter summarizes NAFCU’s thoughts with the Overview Document.

As a preliminary matter, NAFCU believes the most recent round of draft forms represents an improvement over the current, cumbersome disclosure process.  Nonetheless, there remain a number of problems with the proposal, as outlined in the Overview Document and the most recent version of the draft forms.  Some of these problems are easy to resolve.  Other problems, however, will prove more difficult.  The CFPB has been tasked with the unenviable duty of consolidating and streamlining disclosures that detail two related but very distinct aspects of the home buying process; the lending transaction and the purchase transaction.  Further, the CFPB was tasked with this goal without Congress making any changes to inherent inconsistencies in the underlying statutes.  Practically speaking, we believe it will be impossible for the CFPB to achieve its goals if the Bureau is unwilling to use its authority, when necessary, to alter the disclosures and harmonize the conflicting requirements of the two statutes in a way that accounts for the way these two markets work and interact.  

Integrated TILA and RESPA Disclosures

The integrated disclosures are undoubtedly an improvement over the current disclosure regime.  However, NAFCU remains concerned with some aspects of the proposed forms.  First, the “lender cost of funds” disclosure is of little value to consumers.  The intent behind the Know Before You Owe project is to simplify and clarify mortgage disclosures.  Accordingly, there seems little reason to include a disclosure that virtually no consumer will understand and that provides little of use regarding the cost of the loan.  As the CFPB itself stated, this disclosure will potentially be “difficult to calculate, particularly since the source of funds may not be known when the disclosure is provided.”  Given that the cost of funds may not even be known at the time of disclosure, the publicly available cost of funds index the CFPB proposes is little more than a hypothetical example of what the cost of funds might be.  

Provision of the Loan Estimate

NAFCU does not support the proposal to alter the definition of an “application.”  Currently, lenders are permitted to ask for: (1) the borrower’s name; (2) monthly income; (3) social security number; (4) property address; (5) an estimate of the value of the property; (6) loan amount; and (7) any other information the lender deems necessary.  The CFPB is considering eliminating the seventh factor, which would be problematic and ultimately, counter-productive.

First and foremost there does not appear to be any real problem that this change would solve.  An important factor that many lenders inquire about is the borrower’s assets and liabilities.  Forcing lenders to provide the early disclosures without that vital piece of information will only increase the likelihood that the figures disclosed in the early disclosure will change.  Consequently, there seems little benefit.  The change might speed up the process so that consumers can comparison shop sooner, however, the disclosures will be less accurate, making any attempt to comparison shop considerably less useful.

I am also concerned that the CFPB is requesting that lenders do considerably more with less information.  The Overview Document explains that the CFPB is considering lowering the tolerances for certain settlement costs currently included in the Good Faith Estimate (GFE) and which the CFPB plans to include in the new early disclosure.  As a general matter, NAFCU questions whether it is wise or fair for the CFPB to hold lenders to even tighter standards (regarding third party providers, no less) while simultaneously reducing the amount of information and the amount of time the lender has to perform due diligence and review the application.

It would be helpful if this proposal was considered in light of the ability-to-repay rule that the Bureau is also currently drafting.  Presumably, that proposal will require lenders to consider several factors beyond the six elements that would constitute an “application” under this proposal.  While the proposal would grant lenders the opportunity to make changes between the early disclosure and the settlement disclosure, it is somewhat counterintuitive that the CFPB would require the early disclosures to be based on comparatively little information while requiring borrowers to consider several additional factors in making the ability-to-repay determination.  

In conclusion, NAFCU does not support altering the definition of an “application.”  The change would provide little, if any, tangible benefit to borrowers while placing additional burdens on lenders.

Restrictions on Charging Higher Settlement Costs

NAFCU does support some aspects of the proposal.  First, NAFCU strongly supports the CFPB’s proposal to clarify the instances when a GFE needs to be reissued.  Second, NAFCU applauds the CFPB’s plan to reconcile certain inconsistencies in TILA and RESPA.  Finally, NAFCU also endorses the Bureau’s plan to move the Frequently Asked Questions in RESPA into the rule or the official commentary.  Too much guidance is provided through channels outside of the rules.  As a general rule, NAFCU supports providing clear guidance within the text of the rule and the association is appreciative of the CFPB’s efforts to rely more on the rule and less on informal, non-binding guidance.

Concomitantly, NAFCU does not support some of the other aspects of the proposal.  Specifically, NAFCU does not support the proposal to impose stricter rules in regards to the tolerances for settlement costs.  As a preliminary matter, it would be helpful to have more information regarding the CFPB’s thoughts on this important issue.  The Overview Document states that the CFPB is considering applying “the zero tolerance to a larger range of charges” but does not illuminate exactly what charges would be subject to the zero tolerance rule.

The proposal may have the unintended consequence of limiting competition in this market; a result the CFPB, presumably, does not wish to occur.  The CFPB indicated that it is considering applying the zero tolerance to any service provided by a company selected by the lender.  The CFPB reasons that the lender should have a firm grasp on the cost of the service in cases where it requires a specific provider.  Making lenders liable for additional changes in the GFE will naturally lead lenders to exert more control over the process.  NAFCU’s concern is that this perfectly understandable response by lenders will lead them to choose a single reliable provider that is unlikely to exceed the GFE.  This result will advance the Bureau’s goals in terms of providing cost certainty.  However, all other concerns; service, timeliness, competition driving down prices, etc. will all naturally become secondary to ensuring the final cost does not exceed the GFE.
Potential Impact on Small Entities
The changes to the mortgage loan process will inevitably have a significant impact on credit unions and other small entities.  Accordingly, NAFCU suggests the following guidelines for minimizing the burden on small entities.

  • Coordinate all of the mortgage rulemakings.  The Bureau is currently working on several different mortgage rules, such as the qualified mortgage rule that implements the ability-to-repay requirements.  Other agencies are also working on closely related rules, such as the qualified residential mortgage (QRM) rule.  The CFPB should do everything in its power to ensure each rule is written in a complimentary manner that takes into consideration the new requirements, forms and effective dates of the other mortgage rules.  The worst case scenario in this regard is for small entities to implement one rule only to discover that the other mortgage rules impose conflicting or duplicative requirements or confusing directives that do not mesh with the other new mortgage rules.
  • Do not impose sweeping new obligations on lenders.  The CFPB is considering requiring the lender to fill out the TILA and the RESPA portion of the new settlement disclosures.  This is just one example of significant proposed changes in the way mortgage transactions are conducted.  Most credit unions do not have the existing expertise on staff to carry out this task.  Further, given the complexity and legal liabilities, this is not the type of job for which an existing employee might easily be trained.  Requiring lenders to fill out, and be responsible for, all of the RESPA portions of the settlement document would create a significant new cost and burden that will be disproportionately difficult for small entities.  The CFPB should take care to ensure the new regulations do not pose an undue burden on small lenders.
  • Consider the resources and time constraints for small entities.  The CFPB, as discussed above, is considering new rules that would require the early estimate to be more accurate, with less information, while being provided in a shorter period of time.  Given that all financial institutions have limited resources and personnel, I encourage the CFPB to consider the impact on small entities when it finalizes these rules.  Requiring more and more out of lenders while giving them less time and smaller margins upon which to work will ultimately disadvantage credit unions and other small entities, and further undermine the mortgage market.

Provision of Settlement Disclosures
As previously noted, NAFCU is concerned with the possibility that the CFBP will make lenders responsible for filling out the RESPA portion of the settlement document.  TILA is intended to cover the lending transaction while RESPA was written to cover the purchase transaction.  I understand the CFPB is required to consolidate these two forms; however, lenders do not necessarily have expertise in the purchase portion of the transaction.  Making lenders responsible for disclosing charges that they do not collect and do not control for services they did not provide is problematic.  

Further complicating the issue is the potential consequences for the lender if it accurately discloses a figure reported by a third party provider that ultimately turns out to be inaccurate.  Presumably, the CFPB can address this issue in the rulemaking process.  Those rules will be buttressed by state law and contracts that exist between the lender and the settlement service provider.  Nonetheless at this early stage, with so little information, the possible liability issues are highly problematic.

Forcing lenders to be responsible for filling out the RESPA portion of the settlement would require credit unions to (1) contract that work out to a qualified third party, (2) provide considerable training to an existing employee, or (3) hire a new employee who has experience with closing transactions.  None of these options are attractive as they are all costly and burdensome.

I am similarly concerned with the CFPB’s proposal to require the settlement disclosures three days before closing.  The Bureau has indicated it will provide exceptions for items that are routinely negotiated up until the time of settlement.  That is helpful, but several concerns remain.  First, such a rule will presumably result in borrowers having two similar yet slightly different set of documents; one provided three days before closing and a second set provided some time shortly after closing.  I question whether consumers will understand the difference or the reasoning behind the two different sets of disclosures.  

The three day requirement also compounds some of the concerns discussed above regarding lenders providing the settlement documents.  For example, a third party provider may fail to supply the lender the necessary information in time to meet the proposed three day deadline.  Failure to provide the disclosures in advance may, in turn, harm the borrower; for example, a rate lock may expire as a consequence of a third party’s tardiness.  This creates liability concerns for the lender, even though the issue was beyond the lender’s control.  Even in cases where the lender caused the tardiness, there seems little reason for an absolute three day requirement if the borrower is prepared to move forward.  Lenders and third party providers should be responsible for correcting their mistakes.  However, requiring that the settlement disclosures be provided at least three days in advance, without giving borrowers the opportunity to waive that right, unnecessarily complicates the issue.  A fairly insignificant problem; failing to meet the three day requirement in a situation where the borrower is aware of all of the costs, could needlessly create significant issues if that failure causes the closing to be pushed back for no other reason than to satisfy the three day requirement.
Retention of Compliance Records

NAFCU is concerned with the proposal to require all compliance records to be kept in a machine-readable format.  It is our understanding that most small institutions do not keep their records in such a format.  It appears that the CFPB is proposing the records be kept in a machine-readable format so that the Bureau can more closely monitor compliance and guard against illegitimate increases in settlement costs.  While that goal is understandable, the CFPB should not force lenders to pay to upgrade their systems to a new format so that the CFPB can more closely guard against the mere possibility of illicit activity.

Definition of Finance Charge
The CFPB is considering altering the definition of the finance charge or annual percentage rate (APR).  NAFCU understands the merits in creating an “all in” APR that includes virtually all costs related to the transaction.  However, NAFCU has two concerns with the proposal.  First, as the CFPB is aware a number of other laws and regulations use the APR as a threshold for determining when certain conditions must be met or new disclosures provided.  Consequently, altering the APR without altering those other statutes or regulations would create dramatic new results in terms of the coverage of those statutes and regulations.  NAFCU would request that the CFPB use its authority to minimize the impact the altered APR would have on other issues tied to the APR; such as higher priced mortgage loans and escrow requirements.

Second, the 2009 Federal Reserve proposal on the finance charge, which the CFPB is using as a template, would include in the definition several charges that are specifically excluded by statute.  Accordingly, if the CFPB intends to use its authority to include fees specifically excluded by TILA it should similarly consider using its authority in other areas.  For example, the CFPB could eliminate the virtually worthless lender cost of funds disclosure.

Testing the Forms
Finally, the CFPB should test the forms in the market before finalizing a rule.  Given the considerable feedback the Bureau has received throughout the Know Before You Owe project, there is no doubt that there continue to be issues with the draft forms.  The best way to locate flaws in the forms is by actually testing them.  Simply conducting consumer testing without determining if the forms actually work in a mortgage transaction is not appropriate.  Given the scope of the rule, and the long term implications, the CFPB should test the forms prior to finalizing any rule.

Tupelo Bank Form

On page 1 of the Tupelo Bank Form, there are four columns used to disclose how the payment on this adjustable rate mortgage (ARM) might change over time.  In some cases, four columns might not be sufficient to show all of the changes.  It would be helpful if the proposed rule discusses this issue and how lenders should make the disclosures in the event that four columns are insufficient.

Also on page 1, the form shows an interest rate of 4.375%.  Likewise the initial interest rate in the Adjustable Interest Rate (AIR) Table on page 2 is disclosed as 4.375%.  However, the very next disclosure in that table states the minimum interest rate is 5%.  This disclosure is confusing to consumers and seems to be in clear conflict.

On page 2, the AIR table discloses the index and margin as “Libor + 4%.”  There are, however, several Libor rates and it would be helpful if the lender disclosed exactly which Libor rate was used.  

NAFCU also cautions against using shading for the disclosures as shaded boxes can be difficult to clearly and legibly reproduce.

Settlement Disclosure Form

Again, NAFCU believes these forms represent an improvement over current disclosures; however, there are still problems with the forms, which are indicative of the complexity of the two transactions that are being disclosed, and some of the inconsistencies with TILA and RESPA.

First, some of the changes that are a result of negotiation between the buyer and seller are disclosed in different portions of the forms.  It would be easier for the consumer to understand if all of those changes were consolidated in a single table.  

On page 3 of the form, “Other Adjustments and Credits” are disclosed with instructions to “see details in Sections K and L” to explain the change.  I doubt, however, if many consumers would be able to discern where the $377 adjustment came from by examining those two sections.

The disclosures on page 5 of the settlement form are fairly clear, however, they are disclosed under the heading “Loan Calculations” while the loan estimate provides the same disclosures under the heading “Comparisons.”  The consumer will likely find it easier to compare these forms if consistent language is used.  The settlement disclosure discloses some information under “Other Disclosures” while the loan estimate discloses virtually identical information under “Other considerations.”  The CFPB should make the terminology consistent.  

Also on page five, in the Loan Calculations section, most of the disclosures made are estimates as the loan is for an adjustable rate mortgage.  Some indication that those figures are estimates would be helpful.  

NAFCU appreciates the opportunity to comment on this important issue.  We are appreciative of the CFPB’s outreach efforts and we look forward to continuing to work with the Bureau on this project.  Should you have any questions or concerns, please feel free to contact me or Dillon Shea, NAFCU’s Regulatory Affairs Counsel, at 703-842-2212.

Fred R. Becker, Jr.

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