Integrating the Real Estate Settlement Procedures Act/Truth in Lending Act Disclosure
Is your financial institution ready for the changes coming on August 1, 2015? This has been a common question in banking circles for several months and has caused anxiety for more than a few people. Financial institutions must be prepared to offer the new Loan Estimate and Closing Disclosure on most closed-end consumer credit transactions secured by real property on applications submitted on or after August 1, 2015. This is a significant change from what has been standard practice for many institutions during the past 40 years.
The changes include the new Loan Estimate, which will replace the initial Truth-in-Lending disclosure and Good Faith Estimate. The HUD-1 Settlement Statement and final Truth-in-Lending disclosure also are being replaced by the new Closing Disclosure. According to the Consumer Financial Protection Bureau, the goal is to streamline the application process while offering borrowers a better understanding of mortgage loan costs and terms.
There are a few exceptions to providing the updated disclosures, which are discussed later, but let’s focus on a few of the key changes your institution should be preparing to address.
The Loan Estimate will provide borrowers an overview of the loan terms and an estimate of the loan costs. The creditor must deliver or mail the Loan Estimate no later than three business days after the receipt of an application and at least seven business days before the loan closes. If there are any permissible revisions to the Loan Estimate, the creditor must make the updates no later than three business days after receiving the information.
Note: For purposes of providing the Loan Estimate, a business day is defined as a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions.
The Closing Disclosure provides the actual loan cost and terms to the borrower and must be received by the borrower no later than three business days before closing. Certain changes require a new three-business-day waiting period and updated Closing Disclosure. These include a prepayment penalty being added, the annual percentage rate becoming inaccurate or the loan product changing. Changes that fall outside these scenarios don’t require a revised Closing Disclosure for the borrower.
Certain instances may require a creditor to issue a revised Closing Disclosure after the loan closes. These include the correction of non-numerical errors or a refund due to tolerance violations.
Note: The definition of business days for the Closing Disclosure is Monday through Saturday, excluding federal holidays.
Definition of an Application
This final rule also changes the definition of an application from the current definition in the Real Estate Settlement Procedures Act (RESPA). Under the new definition, an application will be deemed received when the creditor has collected the borrower’s name, income, Social Security number to obtain a credit report, property address, property value estimate and desired mortgage loan amount. The new definition eliminates the catch-all phrase “any other information deemed necessary by the loan originator” in RESPA.
Exceptions to the Loan Estimate & Closing Disclosure
Not all closed-end consumer credit transactions secured by real property require the use of the Loan Estimate and Closing Disclosure. However, if a loan is exempt from the new requirements but covered under the current disclosure rules, the creditor must provide the necessary disclosures under the old rules; no changes are required for applications taken on or after August 1, 2015. Exempt transaction types include:
- Open-end credit, e.g., home equity lines of credit
- Reverse mortgages
- Mortgages secured by a dwelling not attached to real property, e.g., mobile home or houseboat
- Lenders that made five or fewer mortgage loans in the preceding calendar year, unless they made more than one Home Ownership and Equity Protection Act loan in any 12-month period
Are You Ready?
August 1 is quickly approaching—is your financial institution ready? Financial institutions should contact vendors to ensure the required changes will be made to necessary software and forms. Institutions also should work internally to guarantee a smooth transition for applications submitted on or after August 1, 2015.
For more information, contact your BKD advisor.