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Rule

Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act(Regulation Z)

Action

Final Rule; Official Interpretation.

Summary

Sections 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the Bureau to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. Consistent with this requirement, the Bureau is amending Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd-Frank Act, the final rule provides extensive guidance regarding compliance with those requirements.

Unified Agenda

Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)

4 actions from August 23rd, 2012 to November 2013

  • August 23rd, 2012
  • September 6th, 2012
  • November 6th, 2012
    • NPRM Comment Period End
  • November 2013
    • Final Rule
 

Table of Contents Back to Top

DATES: Back to Top

The rule is effective August 1, 2015.

FOR FURTHER INFORMATION CONTACT: Back to Top

David Friend, Jane Gao, Eamonn K. Moran, Nora Rigby, Michael Scherzer, Priscilla Walton-Fein, Shiri Wolf, Counsels; Richard B. Horn, Senior Counsel & Special Advisor, Office of Regulations, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552 at (202) 435-7700.

SUPPLEMENTARY INFORMATION: Back to Top

I. Summary of the Final Rule Back to Top

A. Background

For more than 30 years, Federal law has required lenders to provide two different disclosure forms to consumers applying for a mortgage. The law also has generally required two different forms at or shortly before closing on the loan. Two different Federal agencies developed these forms separately, under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). The information on these forms is overlapping and the language is inconsistent. Not surprisingly, consumers often find the forms confusing. It is also not surprising that lenders and settlement agents find the forms burdensome to provide and explain.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) directs the Bureau to integrate the mortgage loan disclosures under TILA and RESPA sections 4 and 5. [1] Section 1032(f) of the Dodd-Frank Act mandated that the Bureau propose for public comment rules and model disclosures that integrate the TILA and RESPA disclosures by July 21, 2012. [2] The Bureau satisfied this statutory mandate and issued a proposed rule and forms on July 9, 2012 (the TILA-RESPA Proposal or the proposal). [3] To accomplish this, the Bureau engaged in extensive consumer and industry research, analysis of public comment, and public outreach for more than a year. After issuing the proposal, the Bureau conducted a large-scale quantitative validation study of its integrated disclosures with 858 consumers, which concluded that the Bureau's integrated disclosures had on average statistically significant better performance than the current disclosures under TILA and RESPA. The Bureau is now finalizing a rule with new, integrated disclosures (the TILA-RESPA Final Rule or the final rule). [4] The final rule also provides a detailed explanation of how the forms should be filled out and used.

The first new form (the Loan Estimate) is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form will be provided to consumers within three business days after they submit a loan application. The second form (the Closing Disclosure) is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form will be provided to consumers three business days before they close on the loan.

The forms use clear language and design to make it easier for consumers to locate key information, such as interest rate, monthly payments, and costs to close the loan. The forms also provide more information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loans over time.

In developing the new Loan Estimate and Closing Disclosure forms, the Bureau has reconciled the differences between the existing forms and combined several other mandated disclosures, such as the appraisal notice under the Equal Credit Opportunity Act and the servicing application disclosure under RESPA. The Bureau also has responded to industry complaints of uncertainty about how to fill out the existing forms by providing detailed instructions on how to complete the new forms. [5] This should reduce the burden on lenders and others in preparing the forms in the future.

B. Scope of the Final Rule

The final rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (in other words, land). The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. [6]

C. The Loan Estimate

The Loan Estimate form replaces two current Federal forms. It replaces the Good Faith Estimate designed by the Department of Housing and Urban Development (HUD) under RESPA and the “early” Truth in Lending disclosure designed by the Board of Governors of the Federal Reserve System (the Board) under TILA. [7] The final rule and the Official Interpretations (on which creditors and other persons can rely) contain detailed instructions as to how each line on the Loan Estimate form should be completed. [8] There are sample forms for different types of loan products. [9] The Loan Estimate form also incorporates new disclosures required by Congress under the Dodd-Frank Act. [10]

Provision by mortgage broker. Recognizing that consumers may work more closely with a mortgage broker, under the final rule and similar to the current rules, either a mortgage broker or creditor is required to provide the Loan Estimate form upon receipt of an application by a mortgage broker. However, even if the mortgage broker provides the Loan Estimate, the creditor remains responsible for complying with all requirements concerning provision of the form. [11]

Timing. The creditor or broker must give the form to the consumer no later than three business days after the consumer applies for a mortgage loan. [12] The final rule contains a definition of what constitutes an “application” for these purposes, which consists of the consumer's name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought. [13]

Limitation on fees. Consistent with current law, the creditor generally cannot charge consumers any fees until after the consumers have been given the Loan Estimate form and the consumers have communicated their intent to proceed with the transaction. There is an exception that allows creditors to charge fees to obtain consumers' credit reports. [14]

Disclaimer on early estimates. Creditors and other persons may provide consumers with written estimates prior to application. The rule requires that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer is not required for advertisements. [15]

D. The Closing Disclosure

The Closing Disclosure form replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth in Lending disclosure designed by the Board under TILA. [16] The rule and the Official Interpretations (on which creditors and other persons can rely) contain detailed instructions as to how each line on the Closing Disclosure form should be completed. [17] The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.

Timing. The creditor must give consumers the Closing Disclosure form to consumers so that they receive it at least three business days before the consumer closes on the loan. [18] If the creditor makes certain significant changes between the time the Closing Disclosure form is given and the closing—specifically, if the creditor makes changes to the APR above1/8of a percent for most loans (and1/4of a percent for loans with irregular payments or periods), changes the loan product, or adds a prepayment penalty to the loan—the consumer must be provided a new form and an additional three-business-day waiting period after receipt of the new form. Less significant changes can be disclosed on a revised Closing Disclosure form provided to the consumer at or before closing, without delaying the closing. [19] This is a change from the proposal, which would have required that most changes cause an additional three-business-day waiting period before the consumer could close on the loan. The Bureau received extensive public comment raising concerns about this aspect of the proposal, especially about its impact to cause frequent closing delays in the residential real estate market. In response to the public comments received on this issue, the Bureau decided to limit the types of changes that will result in an additional three-business-day waiting period to the three changes described above. This requirement will provide the important protection to consumers of an additional three-day waiting period for these significant changes, but will not cause closing delays for less significant costs that may frequently change.

Provision of disclosures. Currently, settlement agents are required to provide the HUD-1 under RESPA, while creditors are required to provide the revised Truth in Lending disclosure under TILA. Under the final rule, the creditor is responsible for delivering the Closing Disclosure form to the consumer, but creditors may use settlement agents to provide the Closing Disclosure, provided that they comply with the final rule's requirements for the Closing Disclosure. [20] The final rule acknowledges settlement agents' longstanding involvement in the closing of real estate and mortgage loan transactions, as well as their preparation and delivery of the HUD-1. The final rule avoids creating uncertainty regarding the role of settlement agents and also leaves sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers.

E. Limits on Closing Cost Increases

Similar to existing law, the final rule restricts the circumstances in which consumers can be required to pay more for settlement services—the various services required to complete a loan, such as appraisals, inspections, etc.—than the amount stated on their Loan Estimate form. Unless an exception applies, charges for the following services cannot increase: (1) The creditor's or mortgage broker's charges for its own services; (2) charges for services provided by an affiliate of the creditor or mortgage broker; and (3) charges for services for which the creditor or mortgage broker does not permit the consumer to shop. Charges for other services can increase, but generally not by more than 10 percent, unless an exception applies. [21]

The exceptions include, for example, situations when: (1) The consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the creditor; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the creditor generally must provide an updated Loan Estimate form within three business days.

F. Proposals Not Adopted in the Final Rule

The proposed rule would have redefined the way the Annual Percentage Rate or “APR” is calculated. Under the proposal, the APR would have encompassed almost all of the up-front costs of the loan. [22] The Bureau explained in the proposal that it believed the change would make it easier for consumers to use the APR to compare loans and easier for industry to calculate the APR. The proposed rule also would have required creditors to keep records of the Loan Estimate and Closing Disclosure forms provided to consumers in an electronic, machine readable format to make it easier for regulators to monitor compliance. [23]

Based on public comments it received raising implementation and cost concerns regarding these two proposals, the Bureau has determined not to finalize these provisions in the final rule. The Bureau continues to believe these ideas may have benefits for consumers and industry, however, and intends to continue following up on both issues. For example, the Bureau intends to work closely with industry on private data standard initiatives to promote consistency in data transmission and storage. After additional study, the Bureau may propose rules on either or both topics.

The Bureau also decided not to require in the final rule a disclosure item that had been mandated by the Dodd-Frank Act, but that caused confusion at its consumer testing. Specifically, the Dodd-Frank Act requires creditors to disclose, in the case of residential mortgage loans, “the approximate amount of the wholesale rate of funds in connection with the loan.” [24] To implement this requirement, the proposal would have required creditors to disclose the approximate cost of funds used to make a loan on the Closing Disclosure. [25] Because consumer testing conducted by the Bureau prior to its issuance of the proposal suggested that consumers do not understand the disclosure and that it would not provide a meaningful benefit to consumers, the Bureau alternatively proposed to exempt creditors from the cost of funds disclosure requirement.

The Bureau considered the comments it received on this disclosure in addition to the consumer testing results. The comments echoed the Bureau's concerns regarding consumer confusion from this disclosure, and also raised implementation, compliance, and cost concerns. The Bureau has decided to exempt creditors from the cost of funds disclosure requirement. The Bureau believes this approach will simplify the disclosure forms, making them more effective for consumers, and reduce compliance burden. [26]

G. Effective Date

The final rule is effective on August 1, 2015. The final rule applies to transactions for which the creditor or mortgage broker receives an application on or after that date, except that new § 1026.19(e)(2) and the amendments of this final rule to § 1026.28(a)(1) and the commentary to § 1026.29 become effective on that date, without respect to whether an application has been received on that date. [27]

II. Background Back to Top

A. The Mortgage Market

Overview of the Market and the Mortgage Crisis

The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $9.4 trillion in loans outstanding. [28] During the last decade, the market went through an unprecedented cycle of expansion and contraction that was fueled in part by the securitization of mortgages and creation of increasingly sophisticated derivative products designed to mitigate accompanying risks to investors. So many other parts of the American financial system were drawn into mortgage-related activities that when the bubble collapsed in 2008, it sparked the most severe recession in the United States since the Great Depression. [29] In the last quarter of 2008 and early in 2009, GDP was falling at an annual rate of roughly 6 percent. [30] By the Fall of 2009, unemployment reached a peak of 10 percent. [31] The percentage of loans in the foreclosure process reached its peak of 4.63 in both the first and the fourth quarters of 2010. [32] From peak to trough, the fall in housing prices is estimated to have resulted in about $7 trillion in household wealth losses. [33] Further, five years after the collapse of Lehman Brothers and AIG, the United States continues to grapple with the fallout.

The expansion in this market was accompanied by particular economic conditions (including an era of low interest rates and rising housing prices) and changes within the industry. Interest rates dropped significantly—by more than 20 percent—from 2000 through 2003. [34] Housing prices increased dramatically—about 152 percent—between 1997 and 2006. [35] Driven by the decrease in interest rates and the increase in housing prices, the volume of refinancings increased rapidly, from about 2.5 million loans in 2000 to more than 15 million in 2003. [36]

In the mid-2000s, the market experienced a steady deterioration of credit standards in mortgage lending, with evidence that loans were made solely against collateral, or even against expected increases in the value of collateral, and without consideration of ability to repay. This deterioration of credit standards was particularly evidenced by the growth of “subprime” and “Alt-A” products. [37] Subprime products were sold primarily to consumers with poor or no credit history, although there is evidence that some consumers who would have qualified for “prime” loans were steered into subprime loans as well. [38] The Alt-A category of loans permitted consumers to take out mortgage loans while providing little or no documentation of income or other evidence of repayment ability. Because these loans involved additional risk, they were typically more expensive to consumers than “prime” mortgages, although many of them had very low introductory interest rates. In 2003, subprime and Alt-A origination volume was about $400 billion; in 2006, it had reached $830 billion. [39]

So long as housing prices were continuing to increase, it was relatively easy for consumers to refinance their existing loans into more affordable products to avoid interest rate resets and other adjustments. When housing prices began to decline in 2005, however, refinancing became more difficult and delinquency rates on subprime and Alt-A products increased dramatically. [40] More and more consumers, especially those with subprime and Alt-A loans, were unable or unwilling to make their mortgage payments. An early sign of the mortgage crisis was an upswing in early payment defaults—generally defined as borrowers being 60 or more days delinquent within the first year. Prior to 2006, 1.1 percent of mortgages would end up 60 or more days delinquent within the first two years. [41] Taking a more expansive definition of early payment default to include 60 days delinquent within the first two years, this figure was double the historic average during 2006, 2007 and 2008. [42] First payment defaults—mortgages taken out by consumers who never made a single payment—exceeded 1.5 percent of loans in early 2007. [43] In addition, as the economy worsened, the rates of serious delinquency (90 or more days past due or in foreclosure) for the subprime and Alt-A products began a steep increase from approximately 10 percent in 2006, to 20 percent in 2007, to more than 40 percent in 2010. [44]

The impact of this level of delinquencies was severe on creditors who held loans on their books and on private investors who purchased loans directly or through securitized vehicles. Prior to and during the bubble, the evolution of the securitization of mortgages attracted increasing involvement from financial institutions that were not directly involved in the extension of credit to consumers and from investors worldwide. Securitization of mortgages allows originating creditors to sell off their loans (and reinvest the funds earned in making new ones) to investors who want an income stream over time. Securitization had been pioneered by what are now called government-sponsored enterprises (GSEs), including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). But by the early 2000s, large numbers of private financial institutions were deeply involved in creating increasingly complex mortgage-related investment vehicles through securities and derivative products. The private securitization-backed subprime and Alt-A mortgage market ground to a halt in 2007 in the face of the rising delinquencies on subprime and Alt-A products. [45]

While there remains debate about which market issues definitively sparked this crisis, there were several mortgage origination issues that pervaded the mortgage lending system prior to the crisis and are generally accepted as having contributed to its collapse. First, the market experienced a steady deterioration of credit standards in mortgage lending, particularly evidenced by the growth of subprime and Alt-A loans, which consumers were often unable or unwilling to repay. [46]

Second, the mortgage market saw a proliferation of more complex mortgage products with terms that were often difficult for consumers to understand. These products included most notably2/28and3/27Hybrid Adjustable Rate Mortgages and Option ARM products. [47] These products were often marketed to subprime and Alt-A customers. The appetite on the part of mortgage investors for such products often created inappropriate incentives for mortgage originators to originate these more expensive and profitable mortgage products. [48]

Third, responsibility for the regulation of consumer financial protection laws was spread across seven regulators including the Board, HUD, the Office of Thrift Supervision, the Federal Trade Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration. Such a spread in responsibility may have hampered the government's ability to coordinate regulatory monitoring and response to such issues. [49]

In the wake of this financial crisis, Congress passed the Dodd-Frank Act to address many of these concerns. In this Act, among other things, Congress created the Bureau and consolidated the rulemaking authority for many consumer financial protection statutes, including the two primary Federal consumer protection statutes governing mortgage origination, the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), in the Bureau. [50] Congress also provided the Bureau with supervision authority for certain consumer financial protection statutes over certain entities, including insured depository institutions with total assets of over $10 billion and their affiliates, and certain other non-depository entities, including all companies that offer or provide origination, brokerage, or servicing of consumer mortgages. [51]

At the same time, Congress significantly amended the statutory requirements governing mortgage practices with the intent to restrict the practices that contributed to the crisis. For example, in response to concerns that some lenders made loans to consumers without sufficiently determining their ability to repay, section 1411 of the Dodd-Frank Act amended TILA to require that creditors make a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan. [52] Sections 1032(f), 1098, and 1100A of the Dodd-Frank Act address concerns that Federal mortgage disclosures did not adequately explain to consumers the terms of their loans (particularly complex adjustable rate or optional payment loans) by requiring new disclosure forms designed to improve consumer understanding of mortgage transactions (which is the subject of this final rule). [53] In addition, the Dodd-Frank Act established other new standards concerning a wide range of mortgage lending practices, including compensation for mortgage originators [54] and mortgage servicing. [55] For additional information, see the discussion below in part II.F.

Size of the Current Mortgage Origination Market

Even with the economic downturn and tightening of credit standards, approximately $1.9 trillion in mortgage loans were originated in 2012. [56] In exchange for an extension of mortgage credit, consumers promise to make regular mortgage payments and provide their home or real property as collateral. The overwhelming majority of homebuyers continue to use mortgage loans to finance at least some of the purchase price of their property. In 2012, 93.7 percent of all home purchases were financed with a mortgage credit transaction. [57]

Consumers may obtain mortgage credit to purchase a home, to refinance an existing mortgage, to access home equity, or to finance home improvement. Purchase loans and refinancings together produced 8.6 million new first-lien mortgage loan originations in 2012. [58] The proportion of loans that are for purchases as opposed to refinances varies with the interest rate environment and other market factors. In 2012, 72 percent of the market was refinance transactions and 28 percent was purchase loans, by volume. [59] Historically the distribution has been more even. In 2000, refinances accounted for 44 percent of the market while purchase loans comprised 56 percent; in 2005, the two products were split evenly. [60]

With a home equity transaction, a homeowner uses his or her equity as collateral to secure consumer credit. The credit proceeds can be used, for example, to pay for home improvements. Home equity credit transactions and home equity lines of credit resulted in an additional $41 billion in mortgage loan originations in 2012. [61]

Shopping for Mortgage Loans

When shopping for a mortgage loan, research has shown that consumers are most concerned about the interest rate and their monthly payment. [62] Consumers may underestimate the possibility that interest rates and payments can increase later on, or they may not fully understand that this possibility exists. They also may not appreciate other costs that could arise later, such as prepayment penalties. [63] This focus on short term costs while underestimating long term costs may result in consumers taking out mortgage loans that are more costly than they realize. [64]

Research points to a relationship between consumer confusion about loan terms and conditions and an increased likelihood of adopting higher-cost, higher-risk mortgage loans in the years leading up to the mortgage crisis. A study of data from the 2001 Survey of Consumer Finances found that some adjustable rate mortgage loan borrowers, particularly those with below median income, underestimated or did not realize how much their interest rates could change. [65] These findings are consistent with a 2006 Government Accountability Office study, which raised concerns that mortgage loan disclosure laws did not require specific disclosures for adjustable rate loans. [66] This evidence suggests that borrowers who are not presented with clear, understandable information about their mortgage loan offer may lack an accurate understanding of the loan costs and risks.

The Mortgage Origination Process

Borrowers must go through a mortgage origination process to take out a mortgage loan. During this process, borrowers have two significant factors to consider: the costs that they pay to close the loan, and the costs over the life of the loan. For a given consumer seeking a mortgage of a given size, both factors can vary significantly, making the home purchase or refinance especially complex. Furthermore, for purchase transactions and to a much lesser extent for refinances, there are many actors involved in a mortgage origination. In addition to the lender and the borrower, a single transaction may involve a seller, mortgage broker, real estate agent, settlement agent, appraiser, multiple insurance providers, and local government clerks' and tax offices. These actors typically charge fees or commissions for the services they provide. Borrowers learn about the loan costs and the sources of those costs through a variety of sources, including disclosures provided throughout the mortgage origination process.

Loan Terms. The loan terms affect how the loan is to be repaid, including the type of loan product, [67] the interest rate, the payment amount, and the length of the loan term. Among other things, the type of loan product determines whether the interest rate can change and, if so, when and by how much. A fixed rate loan sets the interest rate at origination, and the rate stays the same until the borrower pays off the loan. However, the interest rate on an adjustable rate loan is periodically reset based on an interest rate index. This shifting rate could change the borrower's monthly payment. Typically, an adjustable rate loan will combine both types of rates, so that the interest rate is fixed for a certain period of time before adjusting. For example, a 5/1 adjustable rate loan would have a fixed interest rate for five years, and then adjust every year until the loan ends. Any changes in the interest rate after the first five years would change the borrower's payments. Adjustable rate mortgages accounted for 30 percent of mortgage loan volume in 2000, and reached a recent high of 50 percent in 2004. [68] By contrast, adjustable rate mortgages accounted for only 10 percent of the mortgage loan market in 2012 ; [69] however, there is some early indication that adjustable rate mortgages are gaining market share again as interest rates for fixed rate mortgages are on the rise: the share of new mortgage applications for adjustable rate mortgages rose by 75% (from 4% to 7%) from March to August of 2013. [70]

Borrowers are usually required to make payments on a monthly basis. These payments typically are calculated to pay off the entire loan balance by the time the loan term ends. [71] The way a borrower's payments affect the amount of the loan balance over time is called amortization. Most borrowers take out fully amortizing loans, meaning that their payments are applied to both principal and interest so that the loan's principal balance will gradually decrease until it is completely paid off. The typical 30-year fixed rate loan has fully amortizing monthly payments that are calculated to pay off the loan in full over 30 years. However, loan amortization can take other forms. An interest only loan would require the borrower to make regular payments that cover interest but not principal. In some cases, these interest only payments end after a period of time (such as five years) and the borrower must begin making significantly higher payments that cover both interest and principal to amortize the loan over the remaining loan term. In other cases, the entire principal balance must be paid when the loan becomes due. Similarly, in a balloon loan, monthly payments are not fully amortizing, requiring the borrower to pay off a portion of the principal balance or the remaining principal balance in a larger “balloon payment” at specific points in the loan term or at the end of the loan term, respectively.

The time period that the borrower has to repay the loan is known as the loan term, and is specified in the mortgage contract. Many loans are set for a term of 30 years. Depending on the amortization type of the loan, it will either be paid in full or have a balance due at the end of the term.

Closing Costs. Closing costs are the costs of completing a mortgage transaction, including origination fees, appraisal fees, title insurance, taxes, settlement services, and homeowner's insurance. The borrower may pay an application or origination fee. Lenders generally also require an appraisal as part of the origination process in order to determine the value of the home. The appraisal helps the lender determine whether the home is valuable enough to act as collateral for the mortgage loan. The borrower is generally responsible for the appraisal fee, which may be paid at or before closing. Finally, lenders typically require borrowers to take out various insurance policies. Insurance protects the lender's collateral interest in the property. Homeowner's insurance protects against the risk that the home is damaged or destroyed, while title insurance protects the lender against the risk of claims against the borrower's legal right to the property. In addition, the borrower may be required to take out mortgage insurance which protects the lender in the event of default.

Application. In order to obtain a mortgage loan, borrowers must first apply through a loan originator that accepts applications for mortgage loans. There are two different kinds of such loan originators. A retail originator works directly for a mortgage lender. A mortgage lender that employs retail originators could be a bank or credit union, or it could be a specialized mortgage finance company. Some of these mortgage lenders may sell the loan soon after it is originated to an investor, and they are referred to as correspondent lenders. The other kind of loan originator is a mortgage broker. Mortgage brokers work with many different lenders and facilitate the transaction for the borrower.

A loan originator may help borrowers determine what kind of loan best suits their needs, and will collect their completed loan application. The application includes borrower credit and income information, along with information about the home to be purchased. A mortgage broker will pass this information on to a lender that will evaluate the borrower's credit risk using various factors, as described below. Consumers can apply to multiple lenders directly or through a mortgage broker in order to compare the loans that they are being offered. Once he or she has decided to move forward with the loan, the applicant notifies the loan originator or lender. An applicant can decide to pursue loans at multiple lenders at one time, but could incur fees in connection with each application. The loan originator will wait to receive notification from the consumer before taking more information from the borrower and giving the consumer's application to a loan underwriter.

Mortgage Application Processing. A loan underwriter reviews the application and additional information provided by the borrower, and verifies certain information in connection with regulatory requirements. The underwriter will assess whether the lender should take on the risk of making the mortgage loan. In order to make this decision, the underwriter considers whether the borrower can repay the loan, and whether the home is worth enough to act as collateral for the loan. If the underwriter finds that the borrower and the home qualify, the underwriter will approve the borrower's mortgage application.

Depending on the loan terms, including the loan amount, as discussed above, lenders may require borrowers to obtain title insurance, homeowner's insurance, private mortgage insurance, and other services. The borrower may shop for certain closing services on his or her own.

Closing. After being accepted for a mortgage loan, completing any closing requirements, and receiving necessary disclosures, the borrower can close on the loan. Multiple parties may participate at closing, including the borrower, the settlement agent or a notary, and attorneys for the borrower, the seller, and the lender.

The settlement agent ensures that all the closing requirements are met, that all closing documents are completed in full, and that all fees are collected. The settlement agent makes sure that the borrower signs these closing documents, including a promissory note and the security instrument. This promissory note is evidence of the loan debt, and documents the borrower's promise to pay back the loan. It states the terms of the loan, including the interest rate and length. The security instrument, in the form of a mortgage, provides the home as collateral for the loan. A deed of trust is similar to a mortgage, except that a trustee is named to hold title to the property as security for the loan. The borrower receives title to the property after the loan is paid in full. Both a mortgage and deed of trust allow the lender to foreclose and sell the home if the borrower does not repay the loan.

In the case of a purchase loan, the funds to purchase the home and pay closing costs are distributed at closing or shortly thereafter. In the case of a refinance loan, the funds from the new loan are used to pay off the old loan and, in some cases, to pay some or all of the closing costs, with any additional amount going to the borrower or to pay off other debts. Refinance loans also have closing costs, which may be paid by the borrower at closing or, in some cases, rolled into the loan amount. In home equity loans, the borrower's funds and the closing costs are provided upon closing. A settlement agent makes sure that all amounts are given to the appropriate parties. After the closing, the settlement agent records the deed at the local government registry.

B. RESPA and Regulation X

Congress enacted the Real Estate Settlement Procedures Act of 1974 based on findings that significant reforms in the real estate settlement process were needed to ensure that consumers are provided with greater and more timely information on the nature and costs of the residential real estate settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that Congress found to have developed. 12 U.S.C. 2601(a). With respect to RESPA's disclosure requirements, the Act's purpose is to provide “more effective advance disclosure to home buyers and sellers of settlement costs.” 12 U.S.C. 2601(b)(1). In addition to providing consumers with appropriate disclosures, the purposes of RESPA include, but are not limited to, effecting certain changes in the settlement process for residential real estate that will result in (1) the elimination of kickbacks or referral fees that Congress found to increase unnecessarily the costs of certain settlement services; and (2) a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance. 12 U.S.C. 2601(b). In 1990, Congress amended RESPA by adding a new section 6 covering persons responsible for servicing mortgage loans and amending statutory provisions related to mortgage servicers' administration of borrowers' escrow accounts. [72]

RESPA's disclosure requirements generally apply to “settlement services” for “federally related mortgage loans.” Under the statute, the term “settlement services” includes any service provided in connection with a real estate settlement. 12 U.S.C. 2602(3)(a). The term “federally related mortgage loan” is broadly defined to encompass virtually any purchase money or refinance loan, with the exception of temporary financing, that is “secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families . . .” 12 U.S.C. 2602(1).

Section 4 of RESPA requires that, in connection with a “mortgage loan transaction,” a disclosure form that includes a “real estate settlement cost statement” be prepared and made available to the borrower for inspection at or before settlement. [73] 12 U.S.C. 2603. The law further requires that the form “conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement. . . .” 12 U.S.C. 2603(a). Section 5 of RESPA provides for a booklet to help consumers applying for federally related mortgage loans to understand the nature and costs of real estate settlement services. 12 U.S.C. 2604(a). Further, each lender must “include with the booklet a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement . . .” 12 U.S.C. 2604(c). The booklet and the good faith estimate must be provided not later than three business days after the lender receives an application, unless the lender denies the application for credit before the end of the three-business day period. 12 U.S.C. 2604(d).

Historically, HUD's Regulation X, 24 CFR part 3500, has implemented RESPA. On March 14, 2008, after a 10-year investigatory process, HUD proposed extensive revisions to the good faith estimate and settlement forms required under Regulation X, as well as new accuracy standards with respect to the estimates provided to consumers. 73 FR 14030 (Mar. 14, 2008) (HUD's 2008 RESPA Proposal). [74] In November 2008, HUD finalized the proposed revisions in substantially the same form, including new standard good faith estimate and settlement forms, which lenders, mortgage brokers, and settlement agents were required to use beginning on January 1, 2010. 73 FR 68204 (Nov. 17, 2008) (HUD's 2008 RESPA Final Rule). HUD's 2008 RESPA Final Rule implemented significant changes to the rules regarding the accuracy of the estimates provided to consumers. The final rule required redisclosure of the good faith estimate form when the actual costs increased beyond a certain percentage of the estimated amounts, and permitted such increases only under certain specified circumstances. 73 FR 68240 (amending 24 CFR 3500.7). HUD's 2008 RESPA Final Rule also included significant changes to the RESPA disclosure requirements, including prohibiting itemization of certain amounts and instead requiring the disclosure of aggregate settlement costs; adding loan terms, such as whether there is a prepayment penalty and the borrower's interest rate and monthly payment; and requiring use of a standard form for the good faith estimate. Id. The standard form was developed through consumer testing conducted by HUD, which included qualitative testing consisting of one-on-one cognitive interviews. [75] HUD issued informal guidance regarding the final rule on its Web site, in the form of frequently asked questions [76] (HUD RESPA FAQs) and bulletins [77] (HUD RESPA Roundups).

The Dodd-Frank Act (discussed further in part I.D, below) transferred rulemaking authority for RESPA to the Bureau, effective July 21, 2011. See sections 1061 and 1098 of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation X, 12 CFR part 1024, implementing RESPA. 76 FR 78978 (Dec. 20, 2011). This rule did not impose any new substantive obligations but did make certain technical, conforming, and stylistic changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act. The Bureau's Regulation X took effect on December 30, 2011. RESPA section 5's requirements of an information booklet and good faith estimate of settlement costs (RESPA GFE) are implemented in Regulation X by §§ 1024.6 and 1024.7, respectively. RESPA section 4's requirement of a real estate settlement statement (RESPA settlement statement) is implemented by § 1024.8.

C. TILA and Regulation Z

Congress enacted the Truth in Lending Act based on findings that the informed use of credit resulting from consumers' awareness of the cost of credit would enhance economic stability and would strengthen competition among consumer credit providers. 15 U.S.C. 1601(a). One of the purposes of TILA is to provide meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit. Id. TILA's disclosures differ depending on whether credit is an open-end (revolving) plan or a closed-end (installment) loan. TILA also contains procedural and substantive protections for consumers.

TILA's disclosure requirements apply to a “consumer credit transaction” extended by a “creditor.” Under the statute, consumer credit means “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment,” where “the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” 15 U.S.C. 1602(f), (i). A creditor generally is “a person who both (1) regularly extends . . . consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.” 15 U.S.C. 1602(g).

TILA section 128 requires that, for closed-end credit, the disclosures generally be made “before the credit is extended.” 15 U.S.C. 1638(b)(1). For closed-end transactions secured by a consumer's dwelling and subject to RESPA, good faith estimates of the disclosures are required “not later than three business days after the creditor receives the consumer's written application, which shall be at least 7 business days before consummation of the transaction.” 15 U.S.C. 1638(b)(2)(A). Finally, if the annual percentage rate (APR) disclosed in this early TILA disclosure statement becomes inaccurate, “the creditor shall furnish an additional, corrected statement to the borrower, not later than 3 business days before the date of consummation of the transaction.” 15 U.S.C. 1638(b)(2)(D).

Historically, the Board's Regulation Z has implemented TILA. Effective July 21, 2011, the Dodd-Frank Act generally transferred rulemaking authority for TILA to the Bureau. [78] See Dodd-Frank Act sections 1061 and 1100A.

TILA section 128's requirement that the disclosure statement be provided before the credit is extended (final TILA disclosure) is implemented in the Bureau's Regulation Z by § 1026.17(b). The requirements that a good faith estimate of the disclosure be provided within three business days after application and at least seven business days prior to consummation (early TILA disclosure) and that a corrected disclosure be provided at least three business days before consummation (corrected TILA disclosure), as applicable, are implemented by § 1026.19(a). The contents of the TILA disclosures, as required by TILA section 128, are implemented by § 1026.18.

On July 30, 2008, Congress enacted the Mortgage Disclosure Improvement Act of 2008 (MDIA). [79] MDIA, in part, amended the timing requirements for the early TILA disclosures, requiring that these TILA disclosures be provided within three business days after an application for a dwelling-secured closed-end mortgage loan also subject to RESPA is received and before the consumer has paid any fee (other than a fee for obtaining the consumer's credit history). [80]

Creditors also must mail or deliver these early TILA disclosures at least seven business days before consummation and provide corrected disclosures if the disclosed APR changes in excess of a specified tolerance. The consumer must receive the corrected disclosures no later than three business days before consummation. The Board implemented these MDIA requirements in final rules published May 19, 2009, which became effective July 30, 2009, as required by the statute. 74 FR 23289 (May 19, 2009) (MDIA Final Rule).

MDIA also requires disclosure of payment examples if the loan's interest rate or payments can change, along with a statement that there is no guarantee the consumer will be able to refinance the transaction in the future. Under the statute, these provisions of MDIA became effective on January 30, 2011. The Board worked to implement these provisions of MDIA at the same time that it was completing work on a several year review of Regulation Z's provisions concerning home-secured credit. As a result, the Board issued two sets of proposals approximately one year apart. On August 26, 2009, the Board published proposed amendments to Regulation Z containing comprehensive changes to the disclosures for closed-end credit secured by real property or a consumer's dwelling, including revisions to the format and content of the disclosures implementing MDIA's payment examples and refinance statement requirements, and several new requirements. 74 FR 43232 (Aug. 26, 2009) (2009 Closed-End Proposal).

For the 2009 Closed-End Proposal, the Board developed several new model disclosure forms through consumer testing consisting of focus groups and one-on-one cognitive interviews. [81] In addition, the 2009 Closed-End Proposal proposed an extensive revision to the definition of “finance charge” that would replace the “some fees in, some fees out” approach for determining the finance charge with a simpler, more inclusive “all-in” approach. The proposed definition of “finance charge” would include a fee or charge if it is (1) “payable directly or indirectly by the consumer” to whom credit is extended, and (2) “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” The finance charge would continue to exclude fees or charges paid in comparable cash transactions. [82]

On September 24, 2010, the Board published an interim final rule to implement MDIA's payment example and refinance statement requirements. 75 FR 58470 (Sept. 24, 2010) (MDIA Interim Rule). The Board's MDIA Interim Rule effectively adopted those aspects of the 2009 Closed-End Proposal that implemented these MDIA requirements, without adopting that proposal's other provisions, which were not subject to the same January 30, 2011 statutory effective date. The Board later issued another interim final rule to make certain clarifying changes to the provisions of the MDIA Interim Rule. 75 FR 81836 (Dec. 29, 2010).

On September 24, 2010, the Board also proposed further amendments to Regulation Z regarding rescission rights, disclosure requirements in connection with modifications of existing mortgage loans, and disclosures and requirements for reverse mortgage loans. This proposal was the second stage of the comprehensive review conducted by the Board of TILA's rules for home-secured credit. 75 FR 58539 (Sept. 24, 2010) (2010 Mortgage Proposal).

The Board also began, on September 24, 2010, issuing proposals implementing the Dodd-Frank Act, which had been signed on July 21, 2010. The Board issued a proposed rule implementing section 1461 of the Dodd-Frank Act, which, in part, adjusts the rate threshold for determining whether escrow accounts are required for “jumbo loans,” whose principal amounts exceed the maximum eligible for purchase by Freddie Mac. [83] 75 FR 58505 (Sept. 24, 2010). On March 2, 2011, the Board proposed amendments to Regulation Z implementing other requirements of sections 1461 and 1462 of the Dodd-Frank Act, which added new substantive and disclosure requirements regarding escrow accounts to TILA. 76 FR 11598 (March 2, 2011) (2011 Escrows Proposal). Sections 1461 and 1462 of the Dodd-Frank Act added section 129D to TILA, which substantially codifies requirements that the Board had previously adopted in Regulation Z regarding escrow requirements for higher-priced mortgage loans (including the revised rate threshold for “jumbo loans” described above), but also adds disclosure requirements, and lengthens the period for which escrow accounts are required.

On May 11, 2011, the Board proposed amendments to Regulation Z to implement section 1411 of the Dodd-Frank Act, which amends TILA to prohibit creditors from making mortgage loans without regard to the consumer's repayment ability. 76 FR 27390 (May 11, 2011) (2011 ATR Proposal). Section 1411 of the Dodd-Frank Act adds section 129C to TILA, codified at 15 U.S.C. 1639c, which prohibits a creditor from making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan, including any mortgage-related obligations (such as property taxes).

As noted above, effective July 21, 2011, the Dodd-Frank Act generally transferred rulemaking authority for TILA to the Bureau. See Dodd-Frank Act sections 1061 and 1100A. Along with this authority, the Bureau assumed responsibility for the proposed rules discussed above. Pursuant to the Dodd-Frank Act and TILA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation Z, 12 CFR part 1026, implementing TILA (except with respect to persons excluded from the Bureau's rulemaking authority by section 1029 of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 2011). This rule did not impose any new substantive obligations but did make certain technical, conforming, and stylistic changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act. The Bureau's Regulation Z took effect on December 30, 2011.

D. The History of Integration Efforts

For more than 30 years, TILA and RESPA have required creditors and settlement agents to give consumers who apply for and obtain a mortgage loan different but overlapping disclosure forms regarding the loan's terms and costs. This duplication has long been recognized as inefficient and confusing for both consumers and industry.

Previous efforts to develop a combined TILA and RESPA disclosure form were fueled by the amount, complexity, and overlap of information in the disclosures. On September 30, 1996, Congress enacted the Economic Growth and Regulatory Paperwork Reduction Act of 1996, [84] which required the Board and HUD to “simplify and improve the disclosures applicable to the transactions under [TILA and RESPA], including the timing of the disclosures; and to provide a single format for such disclosures which will satisfy the requirements of each such Act with respect to such transactions.” [85] If the agencies found that legislative action might be necessary or appropriate to simplify and unify the disclosures, they were to submit a report to Congress containing recommendations for such action. In the same legislation, Congress added exemption authority in TILA section 105(f) for classes of transactions for which, in the determination of the Board (now the Bureau), coverage under all or part of TILA does not provide a meaningful benefit to consumers in the form of useful information or protection. [86]

The Board and HUD did not propose an integrated disclosure pursuant to this legislation. Instead, in July 1998, the Board and HUD issued a “Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act” (Board-HUD Joint Report). [87] The Board-HUD Joint Report concluded that “meaningful change could come only through legislation” and provided Congress with the Board's and HUD's recommendations for revising TILA and RESPA.

The agencies recommended a number of amendments to TILA and RESPA in the report, such as amendment of TILA's definition of “finance charge” to eliminate the “some fees in, some fees out” approach and instead include “all costs the consumer is required to pay in order to close the loan, with limited exceptions”; the amendment of RESPA to require either the guaranteeing of closing costs on the GFE or estimates that are subject to an accuracy standard; and provision of the final TILA disclosure and settlement statement three days before closing, so that consumers would be able to study the disclosures in an unpressured environment.

The Board-HUD Joint Report also recommended several additional changes to the TILA disclosures. In particular, the report recommended significant revisions to the “Fed Box,” which is the tabular disclosure provided to consumers in the early and final TILA disclosures under Regulation Z containing the APR, the finance charge (which is intended to be the cost of credit expressed as a dollar amount), the amount financed (which is intended to reflect the loan proceeds available to the consumer), and the total of payments (which is the dollar amount of the transaction over the loan term, including principal and finance charges). [88] The report recommended, among other things, eliminating the amount financed from the disclosure for mortgage loans because it probably was not useful to consumers in understanding mortgage loans. The report also recommended adding disclosure of the total closing costs in the Fed Box, citing focus groups conducted by the Board in which participants stated that disclosure of the amount needed to close the loan would be useful.

The Board-HUD Joint Report did not result in legislative action. Eleven years later, and four months before the revised RESPA disclosures under HUD's 2008 RESPA Final Rule were to become mandatory, the Board published the 2009 Closed-End Proposal, which proposed significant revisions to the TILA disclosures and stated that the Board would work with HUD towards integrating the two disclosure regimes. The proposal stated that “the Board anticipates working with [HUD] to ensure that TILA and [RESPA] disclosures are compatible and complementary, including potentially developing a single disclosure form that creditors could use to combine the initial disclosures required under TILA and RESPA.” [89] The proposal stated that consumer testing would be used to ensure consumers could understand and use the combined disclosures. However, only ten months later in July 2010, the Dodd-Frank Act was enacted by Congress, which transferred rulemaking authority under both TILA and RESPA to the Bureau and, as described below in part II.E, under sections 1032(f), 1098, and 1100A, mandated that the Bureau establish a single disclosure scheme under TILA and RESPA and propose for public comment rules and model disclosures that integrate the TILA and RESPA disclosures by July 21, 2012. 12 U.S.C. 2603(a), 5532(f); 15 U.S.C. 1604(b).

The Bureau issued proposed integrated disclosure forms and rules for public comment on July 9, 2012 (the TILA-RESPA Proposal or proposal). [90] The TILA-RESPA Proposal provided for a bifurcated comment process. Comments regarding the proposed amendments to § 1026.1(c) were required to have been received on or before September 7, 2012. For all other proposed amendments and comments pursuant to the Paperwork Reduction Act, comments were required to have been received on or before November 6, 2012. [91] Now, more than 17 years after Congress first directed the Board and HUD to integrate the disclosures under TILA and RESPA, the Bureau publishes this final rule.

E. The Dodd-Frank Act

As noted above, RESPA and TILA historically have been implemented by regulations of HUD and the Board, respectively, and the Dodd-Frank Act consolidated most of this rulemaking authority in the Bureau. In addition, the Dodd-Frank Act amended both statutes to mandate that the Bureau establish a single disclosure scheme for use by lenders or creditors in complying comprehensively with the disclosure requirements discussed above. Section 1098(2) of the Dodd-Frank Act amended RESPA section 4(a) to require that the Bureau “publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this section and section 5, in conjunction with the disclosure requirements of [TILA] that, taken together, may apply to a transaction that is subject to both or either provisions of law.” 12 U.S.C. 2603(a). Similarly, section 1100A(5) of the Dodd-Frank Act amended TILA section 105(b) to require that the Bureau “publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this title in conjunction with the disclosure requirements of [RESPA] that, taken together, may apply to a transaction that is subject to both or either provisions of law.” 15 U.S.C. 1604(b).

The amendments to RESPA and TILA mandating a “single, integrated disclosure” are among numerous conforming amendments to existing Federal laws found in subtitle H of the Consumer Financial Protection Act of 2010. [92] Subtitle C of the Consumer Financial Protection Act, “Specific Bureau Authorities,” codified at 12 U.S.C. chapter 53, subchapter V, part C, contains a similar provision. Specifically, section 1032(f) of the Dodd-Frank Act provides that, by July 21, 2012, the Bureau “shall propose for public comment rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA] into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determines that any proposal issued by the [Board] and [HUD] carries out the same purpose.” 12 U.S.C. 5532(f). The Bureau issued the TILA-RESPA Proposal pursuant to that mandate and the parallel mandates established by the conforming amendments to RESPA and TILA, discussed above.

F. Other Rulemakings

In January 2013, the Bureau issued several other rulemakings relating to mortgage credit to implement requirements of the Dodd-Frank Act (the Title XIV Rulemakings), and throughout 2013 has issued proposed and final rules to amend the rulemakings based on public feedback:

HOEPA: On January 10, 2013, the Bureau issued a final rule implementing certain Dodd-Frank Act requirements that expand protections for “high-cost” mortgage loans under HOEPA, pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433 (2013 HOEPA Final Rule). [93] 15 U.S.C. 1602(bb) and 1639. The rule implements certain Title XIV requirements concerning homeownership counseling, including a requirement that lenders provide lists of homeownership counselors to applicants for federally related mortgage loans, pursuant to RESPA section 5(c), as amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). On November 8, 2013, the Bureau issued a final interpretive rule providing lenders with additional instructions on complying with the 2013 HOEPA Final Rule requirements. [94]

Servicing: On January 17, 2013, the Bureau issued the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules (2013 Mortgage Servicing Final Rules). [95] These rules implement Dodd-Frank Act requirements regarding force-placed insurance, error resolution, information requests, and payment crediting, as well as requirements for mortgage loan periodic statements and adjustable rate mortgage reset disclosures, pursuant to sections 6 of RESPA and 128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank Act sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g. These rules establish: (1) Early intervention for troubled and delinquent borrowers, and loss mitigation procedures, pursuant to the Bureau's authority under section 6 of RESPA, as amended by Dodd-Frank Act section 1463; (2) obligations for mortgage servicers that the Bureau found to be appropriate to carry out the consumer protection purposes of RESPA, as well as its authority under section 19(a) of RESPA to prescribe rules necessary to achieve the purposes of RESPA; and (3) requirements for general servicing standards, policies, and procedures and continuity of contact, pursuant to the Bureau's authority under section 19(a) of RESPA.

Loan Originator Compensation: On January 20, 2013, the Bureau issued a final rule to implement provisions of the Dodd-Frank Act requiring certain creditors and loan originators to meet certain duties of care, pursuant to TILA sections 129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 1414(a) (2013 Loan Originator Final Rule). [96] 15 U.S.C. 1639b, 1639c. The rule sets forth certain qualification requirements; requires the establishment of certain compliance procedures by depository institutions; prohibits loan originators, creditors, and their affiliates from receiving compensation in various forms and from sources other than the consumer (with specified exceptions); and establishes restrictions on mandatory arbitration and the financing of single-premium credit insurance. On May 29, 2013, the Bureau issued a final rule delaying the effective date of a prohibition on creditors financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling from its original effective date of June 1, 2013 to January 10, 2014. [97] The delay is meant to permit the Bureau to clarify the provision's applicability to transactions other than those in which a lump-sum premium is added to the loan amount at closing.

Appraisals: On January 18, 2013, the Bureau, jointly with Federal prudential regulators and other Federal agencies (the Agencies), issued a final rule to implement Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471 (2013 Interagency Appraisals Final Rule). [98] 15 U.S.C. 1639h. For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the final rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used. On July 10, 2013, the Agencies issued a proposal to amend the final rule to provide exemptions for: (1) Transactions secured by existing manufactured homes and not land; (2) certain “streamlined” refinancings; and (3) transactions of $25,000 or less. [99]

On the same day it issued the 2013 Interagency Appraisal Final Rule, the Bureau issued a final rule to implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended by Dodd-Frank Act section 1474 (2013 ECOA Appraisals Final Rule). 15 U.S.C. 1691(e). That rule requires that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling and notify applicants in writing that copies of appraisals will be provided to them promptly.

Ability to Repay: On January 10, 2013, the Bureau finalized a proposal issued by the Board to implement provisions of the Dodd-Frank Act (1) requiring creditors to determine that a consumer has a reasonable ability to repay covered mortgage loans and establishing standards for compliance, and (2) establishing certain limitations on prepayment penalties, pursuant to TILA sections 129C as established by Dodd-Frank Act sections 1411, 1412, and 1414 (2013 ATR Final Rule). [100] 15 U.S.C. 1639c. Concurrent with the issuance of the 2013 ATR Final Rule, the Bureau issued a concurrent proposed rule amending certain aspects of the 2013 ATR Final Rule (2013 ATR Concurrent Proposal), which proposal was finalized on May 29, 2013 (May 2013 ATR Final Rule). [101] That rule provides exemptions for certain nonprofit creditors and certain homeownership stabilization programs, provides an additional definition of a “qualified mortgage” for certain loans made and held in portfolio by small creditors, and modifies the requirements regarding the inclusion of loan originator compensation in the points and fees calculation.

Escrows: On January 10, 2013, the Bureau finalized a proposal issued by the Board to implement provisions of the Dodd-Frank Act that require escrow accounts to be established for higher-priced mortgage loans and to create an exemption for certain loans held by creditors operating predominantly in rural or underserved areas, pursuant to TILA section 129D as established by Dodd-Frank Act section 1461 (2013 Escrows Final Rule). [102] 15 U.S.C. 1639d. On April 18, 2013, the Bureau published a proposal setting forth certain clarifying and technical amendments to the 2013 Escrows Final Rule, including a clarification of how to determine whether a county is considered “rural” or “underserved.” [103] The final rule was published on May 23, 2013. [104]

In addition to the foregoing, the Bureau proposed and finalized three additional sets of amendments to the Title XIV Rulemakings. The first set of amendments, proposed in April 2013 and published on July 24, 2013, clarify, correct, or amend provisions on the relation to State law of Regulation X's servicing provisions; implementation dates for adjustable rate mortgage servicing; exclusions from requirements on higher-priced mortgage loans; the small servicer exemption from certain servicing rules; the use of government-sponsored enterprise and Federal agency purchase, guarantee or insurance eligibility for determining qualified mortgage status; and the determination of debt and income for purposes of originating qualified mortgages. [105]

The second set of amendments, proposed on June 21, 2013, was published on October 1, 2013. [106] These amendments focus primarily on clarifying, revising, or amending provisions on loss mitigation procedures under Regulation X's servicing provisions; amounts counted as loan originator compensation to retailers of manufactured homes and their employees for purposes of applying points and fees thresholds under the Home Ownership and Equity Protection Act and the Ability-to-Repay rules in Regulation Z; exemptions available to creditors that operate predominantly in “rural or underserved” areas for various purposes under the mortgage regulations; application of the loan originator compensation rules to bank tellers and similar staff; and the prohibition on creditor-financed credit insurance. The amendments also adjusted the effective dates for certain provisions of the loan originator compensation rules, and incorporated technical and wording changes for clarification purposes to Regulations B, X, and Z.

The third set of amendments was published on October 23, 2013. [107] These amendments focus primarily on clarifying the specific disclosures that must be provided before counseling for high-cost mortgages can occur, and proper compliance regarding servicing requirements when a consumer is in bankruptcy or sends a cease communication request under the Fair Debt Collection Practices Act. The rule also makes technical corrections to provisions of the other Title XIV Rulemakings.

The Bureau regards the foregoing rulemakings as components of a larger undertaking; many of them intersect with one or more of the others. Accordingly, the Bureau has carefully coordinated the development and implementation of the proposals and final rules identified above in an effort to facilitate compliance. As an example, in developing the TILA-RESPA Proposal and Final Rule, the Bureau took care to ensure common terms, such as “prepayment penalty” and “balloon payment” are defined consistent with the Title XIV Rulemakings, as described in more detail below. In addition, each rulemaking includes regulatory provisions to implement the various Dodd-Frank Act mandates and to ensure that the overall undertaking is accomplished efficiently and that it ultimately yields a regulatory scheme for mortgage credit that achieves the statutory purposes set forth by Congress, while avoiding unnecessary burdens on industry.

III. Summary of the Rulemaking Process Back to Top

As noted above, the Dodd-Frank Act established two goals for this rulemaking: “to facilitate compliance with the disclosure requirements of [TILA and RESPA]” and “to aid the borrower or lessee in understanding the transaction by utilizing readily understandable language to simplify the technical nature of the disclosures.” Dodd-Frank Act sections 1098, 1100A; 12 U.S.C. 2603(a), 15 U.S.C. 1604(b). Further, the Bureau has a specific mandate and authority from Congress to promote consumer comprehension of financial transactions through clear disclosures. Section 1021(a) of the Dodd-Frank Act directs the Bureau to “implement . . . Federal consumer financial law consistently for the purpose of ensuring,” inter alia, that “markets for consumer financial products and services are fair, transparent, and competitive.” 12 U.S.C. 5511(a). Section 1021(b) of the Dodd-Frank Act, in turn, authorizes the Bureau as part of its core mission to exercise its authority to ensure that, with respect to consumer financial products and services, “consumers are provided with timely and understandable information to make responsible decisions about financial transactions.” 12 U.S.C. 5511(b). Consistent with these goals and in preparation for proposing integrated rules and forms, the Bureau conducted a multifaceted information gathering campaign, including researching how consumers interact with and understand information, testing of prototype forms, developing interactive online tools to gather public feedback, and hosting roundtable discussions, teleconferences, and meetings with consumer advocacy groups, industry stakeholders, and other government agencies.

A. Early Stakeholder Outreach & Prototype Form Design

In September 2010, the Bureau began meeting with consumer advocates, other banking agencies, community banks, credit unions, settlement agents, and other industry representatives. This outreach helped the Bureau better understand the issues that consumers and industry face when they use the current TILA and RESPA disclosures. For example, as part of this outreach, in December 2010, the Bureau held a mortgage disclosure symposium that brought together consumer advocacy groups, industry representatives, marketing professionals, designers, and other interested parties to discuss various possible concepts and approaches for integrating the disclosures.

At the same time, the Bureau began to research how consumers interact with and understand information. Given the complexities and variability of mortgage loan transactions and their underlying real estate transactions, the Bureau understood that the integrated disclosures would have to convey a large amount of complex and technical information to consumers in a manner that they could use and understand. Considering that, in January 2011, the Bureau contracted with a communication, design, consumer testing, and research firm, Kleimann Communication Group, Inc. (Kleimann), which specializes in consumer financial disclosures. Kleimann has been hired by other Federal agencies to perform similar design and qualitative testing work in connection with other financial disclosure forms. For example, the Federal Trade Commission and the Federal banking agencies contracted with Kleimann to design and conduct consumer testing for revised model privacy disclosures. [108] Also, HUD contracted with Kleimann to assist in the design and consumer testing for its revised RESPA GFE and RESPA settlement statement forms. [109]

The Bureau and Kleimann reviewed relevant research and the work of other Federal financial services regulatory agencies to inform the Bureau's design of the prototype integrated disclosures. One of the findings of this research was that there is a significant risk to consumers of experiencing “information overload” when the volume or complexity of information detracts from the consumer decision-making processes. “Information overload” has often been cited as a problem with financial disclosures. [110] Researchers suggest that there should be a balance between the types and amount of information in the disclosures, because too much information has the potential to detract from consumers' decision-making processes. [111] In its 2009 Closed-End Proposal, the Board cited a reduction in “information overload” as one of the potential benefits of its plan to harmonize the TILA and RESPA disclosures in collaboration with HUD. [112] The Board's consumer testing in connection with its 2009 Closed-End Proposal found that when participants were asked what was most difficult about their mortgage experience, the most frequent answer was the amount of paperwork. [113] HUD also stated that one of its guiding principles for HUD's 2008 RESPA Proposal was that “the [mortgage loan settlement process] can be improved with simplification of disclosures and better borrower information,” the complexity of which caused many problems with the process. [114]

The potential for “information overload” was also cited by Congress as one of the reasons it amended the TILA disclosures in the Truth-in-Lending Simplification and Reform Act of 1980. [115] According to the Senate Committee on Banking, Housing and Urban Affairs, this legislation arose in part because:

During its hearings the Consumer Affairs Subcommittee heard testimony from a leading psychologist who has studied the problem of `informational overload.' The Subcommittee learned that judging from consumer tests in other areas, the typical disclosure statement utilized today by creditors is not an effective communication device. Most disclosure statements are lengthy, written in legalistic fine print, and have essential Truth in Lending disclosures scattered among various contractual terms. The result is a piece of paper which appears to be `just another legal document' instead of the simple, concise disclosure form Congress intended. [116]

Based on this research, the Bureau is particularly mindful of the risk of information overload, especially considering the large volume of other information and paperwork consumers are required to process throughout the mortgage loan and real estate transaction.

The Bureau began development of the integrated disclosures with certain design objectives. Considering that the quantity of information both on the disclosures and in other paperwork throughout the mortgage loan and real estate transaction may increase the risk of information overload, the Bureau began development of the integrated disclosures with the objective of creating a graphic design that used as few words as possible when presenting the key loan and cost information. The Bureau's purpose for such a design was to make the information readily visible so that consumers could quickly and easily find the information they were seeking, without being confronted with large amounts of text. Accordingly, the Bureau decided to limit the content of the disclosures to loan terms, cost information, and certain textual disclosures and to exclude educational material. The Bureau understood that consumers would receive educational materials required under applicable law, such as the Special Information Booklet required by section 5 of RESPA, through other means. In addition, the Bureau anticipated that it would provide additional educational information and tools on its Web site and place a Web site link on the integrated disclosures directing consumers to that site, which would obviate the need to place educational material directly on the disclosures.

The Bureau believed and continues to believe that the design should highlight on the first page the most important loan information that consumers readily understand and use to evaluate and compare loans, placing more detailed and technical information later in the disclosure. With such a design, the first page could potentially be used by some consumers as a one-page mortgage shopping sheet. In addition, the Bureau believed the design should use plain language and limit the use of technical, statutory, or complex financial terms wherever possible.

The Bureau believes these design objectives best satisfy the purposes of the integrated disclosures set forth by Dodd-Frank Act sections 1098 and 1100A, as well as the Bureau's mandate under Dodd-Frank Act section 1021(b) to ensure that consumers are provided with “understandable information” to enable them to make responsible decisions about financial transactions.

From January through May 2011, the Bureau and Kleimann developed a plan to design integrated disclosure prototypes and conduct qualitative usability testing, consisting of one-on-one cognitive interviews. The Bureau and Kleimann worked collaboratively on developing the qualitative testing plan and several prototype forms for the disclosure to be provided in connection with a consumer's application integrating the RESPA GFE and the early TILA disclosure (the Loan Estimate). The Bureau planned to develop the disclosure provided in connection with the closing of the mortgage loan that integrates the RESPA settlement statement and the final TILA disclosure (the Closing Disclosure) after development and testing of the prototype design for the Loan Estimate. Although qualitative testing is commonly used by Federal agencies to evaluate the effectiveness of disclosures prior to issuing a proposal, the qualitative testing plan developed by the Bureau and Kleimann was unique in that the Bureau conducted qualitative testing with industry participants as well as consumers. Each round of qualitative testing included at least two industry participants, including lenders from several different types of depository institutions (including credit unions and community banks) and non-depository institutions (mortgage companies and mortgage brokers) and, for the Closing Disclosure, settlement agents.

B. Pre-Proposal Prototype Testing and the Know Before You Owe (KBYO) Project

In May 2011, the Bureau selected two initial prototype designs of the Loan Estimate, which were used in qualitative testing interviews in Baltimore, Maryland. In these interviews, consumers were asked to work through the prototype forms while conveying their impressions, and were also asked a series of questions designed to assess whether the forms presented information in a format that enabled them to understand and compare the mortgage loans presented to them. These questions ranged from the highly specific (e.g., asking whether the consumer could identify the loan payment in year 10 of a 30-year, adjustable rate loan) to the highly general (e.g., asking consumers to choose the loan that best met their needs). [117] Industry participants were asked to use the prototype forms to explain mortgage loans as they would to a consumer and to identify implementation issues and areas for improvement.

At the same time, to supplement its qualitative testing, the Bureau launched an initiative, which it titled “Know Before You Owe,” to obtain additional public feedback on the prototype disclosure forms. [118] The Bureau believed this would provide an opportunity to obtain a large amount of feedback from a broad base of consumers and industry respondents around the country. This initiative consisted of either publishing and obtaining feedback on the prototype designs through an interactive tool on the Bureau's Web site or posting the prototypes to the Bureau's blog on its Web site and providing an opportunity for the public to email feedback directly to the Bureau. Individual consumers, loan officers, mortgage brokers, settlement agents, and others provided feedback based on their own experiences with the mortgage loan process by commenting on specific sections of the form, prioritizing information presented on the form, and/or identifying additional information that should be included. [119]

From May to October 2011, Kleimann and the Bureau conducted a series of five rounds of qualitative testing of different iterations of the Loan Estimate with consumer and industry participants. In addition to Baltimore, Maryland, this testing was conducted in Los Angeles, California; Chicago, Illinois; Springfield, Massachusetts; and Albuquerque, New Mexico. Each round focused on a different aspect of the integrated disclosure, such as the overall design, the disclosure of closing costs, and the disclosure of loan payments over the term of the loan. The overall goal of this qualitative testing was to ensure that the forms enabled consumers to understand and compare the terms and costs of the loan.

After each round of testing, Kleimann analyzed and reported to the Bureau on the results of the testing. Based on these results and the supplemental feedback received through the KBYO process, the Bureau would revise the prototype disclosure forms for the subsequent rounds of testing. This iterative process helped the Bureau develop forms that better enable consumers to understand and compare mortgage loans and assist industry in complying with the law. For a detailed discussion of this testing, see the report prepared by Kleimann, Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures (Kleimann Testing Report), which the Bureau posted on its Web site and on Regulations.gov in connection with the TILA-RESPA Proposal. [120]

After completion of the qualitative testing that focused solely on the Loan Estimate, the Bureau and Kleimann began work on the prototype designs for the Closing Disclosure. From November 2011 through March 2012, the Bureau and Kleimann conducted five rounds of qualitative testing of different iterations of the Closing Disclosure with consumer and industry participants. This testing was conducted in five different cities across the country: Des Moines, Iowa; Birmingham, Alabama; Philadelphia, Pennsylvania; Austin, Texas; and Baltimore, Maryland.

Similar to the qualitative testing of the Loan Estimate, the Bureau revised the prototype Closing Disclosure forms after each round based on the results Kleimann provided to the Bureau and the supplemental feedback received from the KBYO process. The Bureau focused on several aspects of the prototypes during each round, such as the settlement disclosures adapted from the HUD-1, new disclosure items required under title XIV of the Dodd-Frank Act, and tables to help identify changes in the information disclosed in the initial Loan Estimate. The overall goal of the qualitative testing of the Closing Disclosure was to ensure that the forms enabled consumers to understand their actual terms and costs, and to compare the Closing Disclosure with the Loan Estimate to identify changes. Accordingly, several rounds included testing of different iterations of the Loan Estimate with the Closing Disclosure.

Overall, the Bureau performed qualitative testing with 92 consumer participants and 22 industry participants, for a total of 114 participants. In addition, through the Bureau's KBYO initiative, the Bureau received over 150,000 visits to the KBYO Web site and over 27,000 public comments and emails about the prototype disclosures.

C. Proposal Stakeholder Outreach

While developing the proposed forms and rules to integrate the disclosures, and throughout its qualitative testing of the prototype disclosure forms, the Bureau continued to conduct extensive outreach to consumer advocacy groups, other regulatory agencies, and industry representatives and trade associations. The Bureau held meetings with individual stakeholders upon request, and also invited stakeholders to meetings in which individual views of each stakeholder could be heard. The Bureau conducted these meetings with a wide range of stakeholders that may be affected by the integrated disclosures, even if not directly regulated by the final rule. The meetings included community banks, credit unions, thrifts, mortgage companies, mortgage brokers, settlement agents, settlement service providers, software providers, appraisers, not-for-profit consumer and housing groups, and government and quasi-governmental agencies. Many of the persons attending these meetings represented small business entities from different parts of the country. In addition to these meetings, after each round of qualitative testing, in response to the Bureau's posting of the prototype integrated disclosures on the KBYO Web site, the Bureau received numerous letters from individuals, consumer advocates, financial services providers, and trade associations, which provided the Bureau with additional feedback on the prototype disclosure forms.

In preparing the TILA-RESPA Proposal, the Bureau also considered comments provided in response to its December 2011 request for information regarding streamlining of regulations for which rulemaking authority was inherited by the CFPB from other Federal agencies, including TILA and RESPA. 76 FR 75825 (Dec. 5, 2011) (2011 Streamlining RFI). That request for information specifically sought public comment on provisions of the inherited regulations that the Bureau should make the highest priority for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary, and sought suggestions for practical measures to make compliance with the regulations easier. Several commenters requested that the Bureau reconcile inconsistencies in the terminology and requirements of Regulations X and Z. Wherever possible, the Bureau proposed to do so in the TILA-RESPA Proposal. In addition, other relevant comments received in response to the 2011 Streamlining RFI were addressed in the TILA-RESPA Proposal and are addressed below.

D. Small Business Review Panel

In February 2012, the Bureau convened a Small Business Review Panel with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB). [121] As part of this process, the Bureau prepared an outline of the proposals then under consideration and the alternatives considered (Small Business Review Panel Outline), which it posted on its Web site for review by the general public as well as the small entities participating in the panel process. [122] The Small Business Review Panel gathered information from representatives of small lenders, mortgage brokers, settlement agents, and not-for-profit organizations and made findings and recommendations regarding the potential compliance costs and other impacts of the proposed rule on those entities. These findings and recommendations are set forth in the Small Business Review Panel Report, which will be made part of the administrative record in this rulemaking. [123] The Bureau considered these findings and recommendations in preparing the TILA-RESPA Proposal and addressed certain specific examples in the proposal, as well as below in this final rule.

In addition, the Bureau held roundtable meetings with other Federal banking and housing regulators, consumer advocacy groups, and industry representatives regarding the Small Business Review Panel Outline. The Bureau considered feedback provided by roundtable participants in preparing the proposal.

E. The Bureau's Proposal

As described above in part II.D, in July 2012, the Bureau proposed for public comment a rule amending Regulation Z to implement sections 1032(f), 1098, and 1100A of the Dodd-Frank Act, which direct the Bureau to combine the mortgage disclosures required under TILA and RESPA. See 77 FR 51116 (August 23, 2012). Consistent with those provisions, the proposed rule would have applied to most closed-end consumer mortgages. The proposed rule would not have applied to home-equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. The proposed rule also would not have applied to loans made by a creditor who makes five or fewer mortgages in a year. In addition, the proposed rule would have amended portions of Regulation X, for consistency with the proposed amendments to Regulation Z.

As discussed above, to accomplish the Dodd-Frank Act's mandate to combine the disclosures required under TILA and RESPA, the Bureau engaged in extensive consumer and industry research and public outreach for more than a year. Based on that input, the Bureau proposed a rule with new, combined forms. The proposed rule also would have provided a detailed explanation of how the forms should be filled out and used. In developing the proposed forms, the Bureau reconciled the differences between the existing forms and combined several other mandated disclosures.

The first proposed form (the Loan Estimate) was designed to provide disclosures that would be helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form would have been provided to consumers within three business days after they submit a loan application. The Loan Estimate would have replaced two current Federal forms: the RESPA GFE and the early TILA disclosure. The proposed rule and commentary would have contained detailed instructions as to how each line on the Loan Estimate would be completed, and also would have contained sample forms for different types of loan products. In addition, the Loan Estimate would have incorporated new disclosures required under the Dodd-Frank Act. Under the proposed rule, the creditor would have been permitted to rely on a mortgage broker to provide the Loan Estimate, but the creditor also would have remained responsible for the accuracy of the form. The creditor or broker would have been required to give the form to the consumer within three business days after the consumer applies for a mortgage loan, and the proposed rule would have contained a specific definition of what constitutes an “application” for these purposes. The proposed rule would have permitted creditors and brokers to provide consumers with written estimates prior to application, but would have required that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate.

The second proposed form (the Closing Disclosure) was designed to provide disclosures that would be helpful to consumers in understanding all of the costs of the transaction. This form would have been provided to consumers three business days before they close on the loan. The form would have used clear language and design to make it easier for consumers to locate key information, such as interest rate, monthly payments, and costs to close the loan. The form also would have provided more information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loans over time. The proposed Closing Disclosure would have replaced the RESPA settlement statement and the corrected TILA disclosure. The proposed rule and commentary would have contained detailed instructions as to how each line on the Closing Disclosure would be completed. In addition, the Closing Disclosure would have contained additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.

Under the proposed rule, the creditor would have been required to give consumers the Closing Disclosure at least three business days before the consumer closes on the loan. Generally, if changes occurred between the time the Closing Disclosure is given and the closing, the consumer would have been provided a new form and also would have been given three additional business days to review that form before closing. However, the proposed rule would have contained an exception from the three-business-day requirement for some common changes, such as changes resulting from negotiations between buyer and seller after the final walk-through and for minor changes which result in less than $100 in increased costs. The Bureau proposed two alternatives for who would be required to provide consumers with the Closing Disclosure. Under the first option, the creditor would have been responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the creditor would have been able to rely on the settlement agent to provide the form. However, under the second option, the creditor also would have remained responsible for the accuracy of the form.

Similar to existing law, the proposed rule would have restricted the circumstances in which consumers can be required to pay more for settlement services than the amount stated on their Loan Estimate. Unless an exception applies, charges for the following services would not have been permitted to increase: (1) The creditor's or mortgage broker's charges for its own services; (2) charges for services provided by an affiliate of the creditor or mortgage broker; and (3) charges for services for which the creditor or mortgage broker does not permit the consumer to shop. Also unless an exception applies, charges for other services generally would not have been permitted to increase by more than 10 percent. The proposed rule would have provided exceptions, for example, when: (1) The consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the creditor; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the creditor generally would have been required to provide an updated Loan Estimate within three business days.

In addition to proposing rules and model forms for the Loan Estimate and Closing Disclosure, the proposed rule would have redefined the way the Annual Percentage Rate or “APR” is calculated and would have required creditors to keep records of compliance, including records of compliance with the requirements to provide the Loan Estimate and Closing Disclosure to consumers in an electronic, machine readable format.

F. Feedback Provided to the Bureau

The Bureau received over 2,800 comments on the TILA-RESPA proposal during the comment period from, among others, consumer advocacy groups; national, State, and regional industry trade associations; banks; community banks; credit unions; financial companies; mortgage brokers; title insurance underwriters; title insurance agents and companies; settlement agents; escrow agents; law firms; document software companies; loan origination software companies; appraisal management companies; appraisers; State housing finance authorities, counseling associations, and intermediaries; State attorneys general; associations of State financial services regulators; State bar associations; government sponsored enterprises (GSEs); a member of the U.S. Congress; the Committee on Small Business of the U.S. House of Representatives; Federal agencies, including the staff of the Bureau of Consumer Protection, the Bureau of Economics, and the Office of Policy Planning of the Federal Trade Commission (FTC staff), and the Office of Advocacy of the Small Business Administration (SBA); and individual consumers and academics. In addition, the Bureau also considered other information on the record. [124] Materials on the record are publicly available at http://www.regulations.gov. This information is discussed below in this part, the section-by-section analysis, and subsequent parts of this notice, as applicable.

As discussed in further detail below, the Bureau sought comment in its 2012 HOEPA Proposal on whether to adopt certain adjustments or mitigating measures in its HOEPA implementing regulations if it were to adopt a broader definition of “finance charge” under Regulation Z, as proposed in the TILA-RESPA Proposal. Subsequently, the Bureau published a notice in the Federal Register making clear that it would defer its decision on whether to adopt the more inclusive finance charge proposal, and therefore any implementation thereof, until it finalized the TILA-RESPA Proposal. 77 FR 54843 (Sept. 6, 2012). Accordingly, the Bureau's 2013 HOEPA Final Rule deferred discussion of comments to the 2012 HOEPA Proposal addressing proposed mitigating measures to account for a more inclusive finance charge under HOEPA. In addition, the Bureau deferred discussion of comments received regarding a more inclusive finance charge definition and potential mitigating measures in connection with the proposals finalized by the 2013 ATR Final Rule, the 2013 Escrows Final Rule, and the 2013 Interagency Appraisals Final Rule, which also would have been affected by a broader definition of the finance charge. Comments regarding such potential mitigating measures and the Bureau's proposal of a more inclusive definition of the finance charge are addressed collectively in the section-by-section analysis of § 1026.4, below.

The Bureau has considered the comments and ex parte communications and has decided to modify the proposal in certain respects and adopt the final rule as described below in the section-by-section analysis.

G. Post-Proposal Consumer Testing

While developing the proposed integrated disclosures, the Bureau received feedback from stakeholders regarding additional testing they believed would be necessary for the integrated disclosures. For example, during the Small Business Review Panel, several small business representatives recommended that the Bureau explore the feasibility of conducting testing of the integrated disclosures on actual loans before issuing a final rule. See Small Business Review Panel Report at 28. In addition, several comments to the proposal suggested that the Bureau conduct additional testing of the integrated disclosures on actual loans in the marketplace. Based on this feedback and public comments and consistent with the Small Business Review Panel's recommendation, the Bureau has considered what additional testing would be appropriate, including the feasibility of testing the integrated disclosures on actual loans.

The Bureau determined that testing the integrated disclosures on actual loans would not be feasible in the course of this rulemaking, nor would it provide the Bureau with significantly better information compared to the information that would be obtained from qualitative and quantitative consumer testing of the integrated disclosures. The length of time that would be necessary to develop and conduct such a study would be extensive. To conduct such a study involving actual loans in the marketplace, the Bureau would need to: develop the methodology of such a study; submit the methodology and any additional information necessary to OMB to obtain prior approval to conduct the study under the Paperwork Reduction Act; recruit and identify industry stakeholders in the lending, title insurance, and settlement industries willing to participate in such a study; assist such industry participants in developing unique systems to produce disclosures in conformity with the TILA-RESPA Proposal; provide sufficient legal protections to such industry participants involved in the study; and collect data from such transactions throughout the application through closing stages, which period of time can last 90 days in many cases. Also, the Bureau had not yet finalized a policy under section 1032(e) of the Dodd-Frank Act during the course of finalizing the proposal, which would set forth standards and safeguards for conducting such a program and providing waivers from Federal disclosure requirements, and thus, formal processes for such a study were not in place. [125] In addition, in a controlled setting in a testing facility, the Bureau was able to conduct a study with a large number of participants (858 participants) in a short period of time (fielded in approximately two months), with a control group using the current disclosures, under which participants in both groups were exposed to the same loans, environment, and minimal level of distractions. The Bureau believes such a controlled setting has enabled the Bureau to obtain data that isolates the performance differences between the current and integrated disclosures. In addition, the Bureau believes that commenters and industry stakeholders suggesting that the Bureau should conduct consumer testing in actual loans in the marketplace are, in part, interested in such testing because of its ability to identify compliance issues with the proposed rule and disclosures. The Bureau believes such compliance issues have been identified through other means, such as through its analysis of the public comments received, review of past disclosure rulemakings (including HUD's 2008 RESPA Final Rule), and extensive outreach prior to issuing the proposal.

However, as described further below, the Bureau has conducted additional qualitative testing of certain revisions the Bureau made to the integrated disclosures based on public comments, as well as of Spanish translations of the integrated disclosures and modified versions of the integrated disclosures for transactions without sellers (in particular, refinance transactions). The Bureau has also conducted a large scale quantitative test of the integrated disclosures to confirm that they aid consumers' understanding of mortgage transactions and evaluate the performance of the integrated disclosures against the current RESPA GFE, RESPA settlement statement, and early and final TILA disclosures. The Bureau again contracted with Kleimann (the research firm with which the Bureau originally contracted to assist with the development of the integrated disclosures and to conduct the pre-proposal qualitative testing) to conduct this post-proposal testing. This qualitative testing after issuance of the proposal utilized identical methodology as the pre-proposal qualitative testing, except that the testing did not include industry participants because of the targeted focus of the testing on consumer understanding of particular aspects of the integrated disclosures.

Spanish Language Testing

There are many consumers in the U.S. for whom English is not their primary language. [126] Spanish speakers make up approximately 62 percent of the people in the United States that speak a language other than English in their homes. [127] During the early stages of the development of the proposed integrated disclosures, the Bureau received informal feedback requesting that the Bureau develop Spanish language versions of the integrated disclosures. Accordingly, as described in the TILA-RESPA Proposal, the Bureau's consumer testing included two rounds of testing with Spanish-speaking consumers of Spanish-language prototype integrated disclosures to determine whether co-development of a non-English version of the integrated disclosures would be beneficial to consumers. The Bureau wanted to determine whether there were any structural issues in the prototype designs that could cause differences in performance for speakers of Spanish.

After two rounds of consumer testing in Spanish, the Bureau determined that co-development of a separate Spanish version of the disclosures would likely yield little benefit to consumers, because any differences in performance with the Spanish prototypes during testing were caused more by translation than design and structure issues. The Bureau also believed that the differences in language would not necessitate changes to the design of the disclosure given that the Bureau intentionally pursued a more graphic than textual design for the Loan Estimate, which used as few words as possible. However, the Bureau was still interested in developing Spanish language versions of the integrated disclosures, as it believed consumers who speak only Spanish or speak a limited amount of English would benefit from improved understanding of their mortgage transactions. While the proposed rule only included English-language disclosure sample forms, it would have permitted the translation of these forms. In addition, the Bureau stated in the proposal that it planned to review issues concerning translations of the integrated disclosures after the proposal and solicited comment on whether the final rule should include sample Spanish-language or other non-English language forms.

The Bureau received several comments requesting that the Bureau publish disclosures in Spanish or other non-English languages, and pursue additional consumer testing of Spanish translations of the integrated disclosures. These comments came from an individual loan officer, several industry trade associations, a national title insurance company, and a consumer advocacy group. The individual loan officer commenter, who worked at a non-depository lender, generally praised the proposed integrated disclosures, but inquired if non-English forms would be made available. The commenter suggested that many non-English speaking consumers were subject to deceptive practices because they could not read the English language disclosures. The consumer advocacy group commenter strongly urged the Bureau to publish Spanish translations of the integrated disclosures, as well as translations in other languages spoken in the U.S., such as Chinese, Korean, Russian, and Vietnamese. An industry trade association representing banks stated that it would be very useful for the Bureau to provide Spanish or other non-English translations of the integrated disclosures so that banks could use them when loan transactions occur in other languages. The commenter also encouraged the Bureau to test these translations to monitor their effectiveness. Several industry trade associations representing banks and mortgage lenders stated that it would greatly facilitate creditors providing disclosures in languages other than English if the Bureau translated the integrated disclosures into all major languages. The commenters stated that it would be more efficient for the Bureau to translate the disclosures, rather than creditors separately translating them, and noted that the Bureau could then assure itself that such translations were accurate.

A national title insurance company stated that providing a blank non-English disclosure form would be useful if consumers that speak other languages could request it in addition to the English language disclosure required under the regulation, because they could compare it to the completed Loan Estimate or Closing Disclosure received in English. However, the commenter stated that requiring creditors or settlement agents to maintain a supply of forms in non-English languages would be unduly burdensome with little benefit to the consumer, especially for small entities.

The Bureau contracted with Kleimann to translate the Loan Estimate and Closing Disclosure into Spanish, adjust the designs as necessary to accommodate any additional space required for the translated text, and qualitatively test the translations with Spanish-speaking consumers.

The Bureau conducted four rounds of testing in Spanish in October 2012, November 2012, December 2012, and July 2013 in Arlington, Virginia; Phoenix, Arizona; Miami, Florida; and Baltimore, Maryland, respectively. This post-proposal Spanish qualitative testing included 29 consumers in total. The first three rounds of Spanish qualitative consumer testing used Spanish translations of the integrated disclosure substantially as proposed, with modifications to the design to accommodate the additional space necessary for the Spanish language text and to revise the order of certain disclosures so that they remain in alphabetical order, as on the English language versions of the integrated disclosures. [128] The fourth round used prototype integrated disclosures that included the potential modifications to the integrated disclosures the Bureau was considering based on the public comments to the proposed rule, including the modifications to the disclosures permitted in this final rule for transactions without sellers, as described in the section-by-section analysis below.

The Spanish language qualitative testing focused on translation issues, with a particular focus on terms that when directly translated into Spanish do not convey the same meaning as in English, such as the term “balloon payment.” The Bureau conducted this testing to ensure that the Spanish translations would be effective for consumers that speak different dialects of Spanish used throughout the country. As described below in the section-by-section analyses of § 1026.37(o) and appendix H to Regulation Z, the Bureau is adopting Spanish language samples of the integrated disclosures in this final rule, which are based on this Spanish language qualitative testing. For a detailed discussion of this testing, see the report prepared by Kleimann, Post-Proposal Testing of the Spanish and Refinance Integrated TILA-RESPA Disclosures (Kleimann Post-Proposal Testing Report), which the Bureau is releasing on its Web site in connection with this final rule. [129]

In addition, as discussed in the section-by-section analysis of appendix H to Regulation Z below, the Bureau is adopting Spanish language versions of some of the English language versions of the Loan Estimates and Closing Disclosures in forms H-24 and H-25 of appendix H, which are based on the Bureau's consumer testing. Regarding the national title insurance company commenter's concerns regarding the burden associated with a requirement to use non-English language disclosures, the Bureau is not requiring in this final rule that creditors use non-English language versions of the integrated disclosures. The final rule permits creditors to translate the disclosures into other languages, as discussed in the section-by-section analysis of §§ 1026.37(o) and 1026.38(t). The Bureau believes, as suggested by other comments, that including in the final rule versions of the integrated disclosures in Spanish that the Bureau has tested with consumers will assist industry in communicating with Spanish-speaking consumers, and facilitate industry compliance with any applicable State laws requiring the use of non-English versions of the integrated disclosures.

Quantitative Study

In the TILA-RESPA Proposal, the Bureau stated that it may conduct quantitative testing of the integrated disclosures to confirm that the forms aid consumers' understanding of mortgage transactions, if it determined such testing to be appropriate. The Bureau understood from its work with Kleimann that validation testing, in the form of a quantitative study, can be an important phase of the user-centered design process. A quantitative test would supplement the Bureau's pre-proposal qualitative data and validate the results of the Bureau's qualitative consumer testing conducted before issuance of the proposal, by providing the Bureau with statistical data and evidence about the performance of the integrated disclosures. However, generally, these studies cannot occur until the disclosure design to be tested has been determined, and thus, the Bureau delayed conducting such testing until after the proposed rule was issued and it had received public comment on the proposed designs. Accordingly, the Bureau determined to investigate whether such a study would be appropriate after issuance of the proposed rule.

The Bureau also received several comments to the TILA-RESPA Proposal regarding the benefits of conducting a quantitative test of the integrated disclosures. The FTC staff commended the Bureau's qualitative testing; however, they also highlighted the benefits of quantitative testing, stating that such testing would allow the Bureau to confirm that the integrated disclosures do, in fact, aid consumer understanding. The FTC staff encouraged the Bureau to conduct a quantitative test with two key elements: (1) A focus on the actual performance of the disclosures, rather than consumers' preferences; and (2) a control group in the study using the current disclosure forms, to isolate and measure the impact of the integrated disclosures. The FTC staff noted that the integrated disclosures may contain more information than what is included on the current disclosures, but still encouraged the Bureau to conduct such a study to compare the information that was the same between the disclosures. A State attorney general supported the use of quantitative testing and stated that it concurred with the FTC staff's comment letter.

A State association of financial services regulators commented that further quantitative testing of consumer comprehension would be a helpful exercise and give the Bureau a more precise idea as to how many consumers properly understand mortgage terms, costs and differences across products. The commenter suggested that the Bureau's consumer testing should be supplemented by more quantitative data and controlled testing of comprehension, and that, without statistically sound quantitative evaluation, understanding the effect of the integrated disclosures would be imprecise.

The Bureau also solicited comments on conducting such quantitative testing under the Paperwork Reduction Act, as it would be an information collection requiring the approval of OMB under that statute. See 44 U.S.C. 3506(c)(2)(A). In March 2012, the Bureau published a notice in the Federal Register soliciting comment for 60 days, to obtain comments prior to the Bureau's planning the quantitative testing. 77 FR 18793 (Mar. 28, 2012). The Bureau did not receive any comments in response to that notice. In February 2013, the Bureau also published a subsequent notice to solicit comment on the Bureau's proposed quantitative testing under the Paperwork Reduction Act, which was open for 30 days. 78 FR 8113 (Feb. 5, 2013). In response to that notice, the Bureau received six comments from national and State industry trade associations. The Bureau addressed those comments in the Supporting Statement it submitted to OMB to obtain that agency's approval to conduct the quantitative testing under the Paperwork Reduction Act. On March 26, 2013, the Bureau received OMB's approval to conduct the quantitative testing, which was assigned OMB control number 3170-0033.

The Bureau contracted with Kleimann to conduct the quantitative test of the integrated disclosures to confirm that the disclosures aid consumers' understanding of mortgage transactions and evaluate the performance of the forms against the current RESPA GFE, RESPA settlement statement, and early and final TILA disclosures (the Quantitative Study). The Quantitative Study's goal was to confirm that the Bureau's integrated disclosures (the Loan Estimate and the Closing Disclosure) aided consumers in understanding mortgage loan transactions, including enabling consumers to identify and compare loan terms and costs, choose between loans, and identify and compare changes between estimated and final amounts. In addition, the goal of the baseline test was to confirm that the integrated disclosures perform better on those measures than the current disclosures.

The Quantitative Study design consisted of a sample of 858 consumer participants, and a 2 by 2 by 2 by 2 between-subjects experimental design. The study factors, or independent variables, included the following: (1) Form type (current or integrated disclosures); (2) loan type (fixed or adjustable rate loans); (3) difficulty type (relatively easier or more challenging loans); and (4) consumer type (experienced or inexperienced with mortgage loans). The study consisted of a 60-minute session in which consumer participants answered questions on a written questionnaire about different loan transactions that were presented to them. As this was a between-subjects design, consumer participants only used either the current or integrated disclosures to enable the Bureau to better evaluate the performance differences between the two form types. The Bureau conducted the study in 20 locations across the country (specifically, the continental United States), which covered the four Census regions and the Census sub-regions and included participants from urban, suburban, and rural areas. To qualify for the main survey, participants had to be age 18 years or older, live in a household within 50 miles of the location used for the study, have purchased or refinanced a home in the last five years or have plans to purchase or refinance in the next two years, and agree to participate in the in-person testing session.

The Quantitative Study used an analysis that examined the accuracy of participant responses to the questions in the study for the current and the integrated disclosures. This analysis is similar to the analysis reported by the FTC staff in a 2007 study evaluating prototype mortgage disclosures in comparison to then-current TILA and REPSA disclosures. [130] The Quantitative Study concluded that the proposed integrated disclosures, with the minor modifications made in response to public comments, [131] performed better than the current disclosures based on aggregate measures of the data. That data showed a statistically significant performance advantage of around 16 percentage points for the proposed disclosures that was consistent across the variables of the study: experienced as well as inexperienced consumers, relatively easier as well as more challenging loans, and fixed rate as well as adjustable rate loans. The integrated disclosures performed better than the current disclosures with respect to specific tasks in the study as well. The integrated disclosures showed a performance advantage of about 24 percentage points for comparing two loans using the application disclosures; about 10 percentage points for understanding one loan using the application disclosures; about 17 percentage points for comparing the application and closing disclosures; and about 29 percentage points for understanding the final loan terms and costs using the closing disclosures. In addition to measuring the accuracy of responses to questions about particular loans, participants in the Quantitative Study were asked to select between two loans using the application disclosures (either early TILA disclosures and RESPA GFEs or Loan Estimates), and then asked in an open-ended question to provide reasons for their selection. In response to the open-ended question, participants using the integrated disclosures on average provided a greater total number of reasons for their selection of a particular loan, which difference was statistically significant and consistent across the variables of the study. This result suggests that participants using the integrated disclosures were able to articulate and explain more reasons for their choice. For a detailed discussion of this testing, see the report prepared by Kleimann, Quantitative Study of the Current and Integrated TILA-RESPA Disclosures (Kleimann Quantitative Study Report), which the Bureau is releasing on its Web site in connection with this final rule. [132]

Qualitative Testing of Revisions to the Proposed Disclosures

The Bureau reviewed comments regarding the design of the proposed Loan Estimate and Closing Disclosure. Many of the disclosure-related comments were suggestions of minor modifications to the disclosures to ensure greater consistency within and between the Loan Estimate and Closing Disclosure. The Bureau determined that some of the suggested minor modifications to the proposed integrated disclosures were appropriate, as described in the section-by-section analyses of the respective sections of §§ 1026.37 and 1026.38 below.

However, some comments suggested more substantial modifications to the proposed Loan Estimate and Closing Disclosure with respect to the Calculating Cash to Close table in refinance transactions and the Cash to Close table in all transactions. The Bureau considered these comments and feedback and determined that modifications to such disclosures may benefit consumer understanding, but because they involved more than minor modifications, should be developed and evaluated through further qualitative consumer testing, as described in more detail below.

In addition, a joint ex parte letter from three industry trade associations suggested that the Bureau's proposed integrated disclosures do not accommodate certain types of loans, such as loans with buydowns; closed-end second-lien loans originated simultaneously with a first-lien loan; refinances and cash-out refinances; refinances of loans with a co-borrower added or removed; or loans with a guarantor or non-occupant co-borrower. The trade associations also suggested that the Bureau conduct further testing of the disclosures for all loan products available through the GSEs and FHA. The trade associations also suggested that consumers would not be able to identify changed information between an original and revised Loan Estimate. The Bureau believes that consumers can compare two Loan Estimates and identify changes. As described above, in the Bureau's Quantitative Study, the Bureau's integrated disclosures showed a performance advantage of approximately 24 percentage points over the current disclosures for comparing two loans. See Kleimann Quantitative Study Report at 43.

With respect to the trade associations' suggestion that the Bureau's integrated disclosures do not accommodate certain factual scenarios or loan products, the letter only stated a conclusion and did not explain how the Bureau's proposed disclosures would not accommodate such scenarios or products. The Bureau is not aware of any reasons why such factual scenarios or loan products would not be accommodated by the Bureau's integrated disclosures. Indeed, some of the factual scenarios and loan products identified by the letter are specifically addressed in current Regulation Z as well as in this final rule, such as loans with buydowns, refinance transactions, and loans with multiple borrowers. For example, this final rule amends comments 17(c)(1)-3 and -4 to provide further guidance regarding buydowns. See the section-by-section analysis of § 1026.17(c)(1); see also the section-by-section analysis of § 1026.17(d) (regarding loans with multiple borrowers). Further, as described in this part and in the section-by-section analyses of § 1026.37(d) and (h) and § 1026.38(d) and (e) below, the Bureau is making modifications to the integrated disclosures that can be used in transactions not involving a seller, including refinance transactions.

Specifically, the Bureau received several comment letters questioning the ability of consumers to understand easily from the proposed disclosures that they received funds at the consummation of a refinance transaction. Accordingly, as noted above, the Bureau determined that testing a modification to the integrated disclosures for refinance transactions (and other transactions without sellers) would be appropriate.

In addition, as also described below in the section-by-section analysis of § 1026.37(d), the Bureau received comments critical of the emphasis placed on the cash to close amount on the first page of the proposed Loan Estimate and Closing Disclosure. Further, although the Bureau learned from the Quantitative Study that the Bureau's integrated disclosures generally performed better than the current disclosure forms, the Bureau also learned that consumer participants performed better at identifying the total estimated closing costs using the RESPA GFE and early TILA disclosure than with the Loan Estimate. [133] Accordingly, the Bureau determined that it would be appropriate to test a modification to the Cash to Close table on the first page of the proposed Loan Estimate to place equal emphasis on the cash to close and total estimated closing costs amounts and to enable easier identification of the total estimated closing costs.

The Bureau contracted with Kleimann to assist in the design, research, and qualitative consumer testing of potential modifications to the proposed integrated disclosures. The Bureau conducted one round of qualitative testing in June 2013, and two rounds in July 2013, in Bethesda, Maryland; Baltimore, Maryland; and Richmond, Virginia, respectively. This post-proposal qualitative consumer testing included 21 consumers in total. For a detailed discussion of this testing, see the Kleimann Post-Proposal Testing Report. [134]

H. Delay of Title 14Disclosures

Title XIVDisclosures

In addition to the integrated disclosure requirements in title X of the Dodd-Frank Act, various provisions of title XIV of the Dodd-Frank Act amend TILA, RESPA, and other consumer financial laws to impose new disclosure requirements for mortgage transactions (the Title XIV Disclosures). These provisions generally require disclosure of certain information when a consumer applies for a mortgage loan or shortly before consummation of the loan, around the same time that consumers will receive the TILA-RESPA integrated disclosures required by sections 1032(f), 1098, and 1100A of the Dodd-Frank Act, and after consummation of the loan if certain events occur. Dodd-Frank Act title XIV provisions generally take effect within 18 months after the designated transfer date (i.e., by January 21, 2013) unless final rules implementing those requirements are issued on or before that date and provide for a different effective date pursuant to Dodd-Frank Act section 1400(c)(3). [135]

The Title XIV Disclosures generally include the following:

  • Warning regarding negative amortization features. Dodd-Frank Act section 1414(a); TILA section 129C(f)(1). [136]
  • Disclosure of State law anti-deficiency protections. Dodd-Frank Act section 1414(c); TILA section 129C(g)(2) and (3).
  • Disclosure regarding creditor's partial payment policy prior to consummation and, for new creditors, after consummation. Dodd-Frank Act section 1414(d); TILA section 129C(h).
  • Disclosure regarding mandatory escrow or impound accounts. Dodd-Frank Act section 1461(a); TILA section 129D(h).
  • Disclosure prior to consummation regarding waiver of escrow in connection with the transaction. Dodd-Frank Act section 1462; TILA section 129D(j)(1)(A).
  • Disclosure regarding cancellation of escrow after consummation. Dodd-Frank Act section 1462; TILA section 129D(j)(1)(B).
  • Disclosure of monthly payment, including escrow, at initial and fully-indexed rate for variable-rate residential mortgage loan transactions. Dodd-Frank Act section 1419; TILA section 128(a)(16).
  • Repayment analysis disclosure to include amount of escrow payments for taxes and insurance. Dodd-Frank Act section 1465; TILA section 128(b)(4).
  • Disclosure of aggregate amount of settlement charges, amount of charges included in the loan and the amount of such charges the borrower must pay at closing, the approximate amount of the wholesale rate of funds, and the aggregate amount of other fees or required payments in connection with a residential mortgage loan. Dodd-Frank Act section 1419; TILA section 128(a)(17).
  • Disclosure of aggregate amount of mortgage originator fees and the amount of fees paid by the consumer and the creditor. Dodd-Frank Act section 1419; TILA section 128(a)(18).
  • Disclosure of total interest as a percentage of principal. Dodd-Frank Act section 1419; TILA section 128(a)(19).
  • Optional disclosure of appraisal management company fees. Dodd-Frank Act section 1475; RESPA section 4(c).
  • Disclosure regarding notice of reset of hybrid adjustable rate mortgage. Dodd-Frank Act section 1418(a); TILA section 128A(b).
  • Loan originator identifier requirement. Dodd-Frank section 1402(a)(2); TILA section 129B(b)(1)(B).
  • Consumer notification regarding appraisals for higher-risk mortgages. Dodd-Frank Act section 1471; TILA section 129H(d).
  • Consumer notification regarding the right to receive an appraisal copy. Dodd-Frank Act section 1474; Equal Credit Opportunity Act (ECOA) section 701(e)(5).

As noted in the list above, the Title XIV Disclosures include certain disclosures that may need to be provided to consumers both before and after consummation. For example, the Title XIV Disclosures include disclosures regarding a creditor's policy for acceptance of partial loan payments both before consummation and, for persons who subsequently become creditors for the transaction, after consummation as required by new TILA section 129C(h), added by Dodd-Frank Act section 1414(d). [137] In addition, the Title XIV Disclosures include disclosures for consumers who waive or cancel escrow services both before and after consummation, added by Dodd-Frank Act section 1462. Specifically, new TILA section 129D(j)(1)(A) requires a creditor or servicer to provide a disclosure with the information set forth under TILA section 129D(j)(2) when 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 (the Pre-Consummation Escrow Waiver Disclosure). New TILA section 129D(j)(1)(B) requires a creditor or servicer to provide disclosures post-consummation with the information set forth under TILA section 129D(j)(2) when a consumer chooses, and provides written notice of the choice, to close his or her escrow account established in connection with a consumer credit transaction secured by real property in accordance with any statute, regulation, or contractual agreement (the Post-Consummation Escrow Cancellation Disclosure). 15 U.S.C. 1639d(j)(1)(A), 1639d(j)(1)(B). The statute sets forth an identical set of information for both of these disclosures. [138]

Board's 2011 Escrows Proposal

Sections 1461 and 1462 of the Dodd-Frank Act create new TILA section 129D, which substantially codifies requirements that the Board had previously adopted in Regulation Z regarding escrow requirements for higher-priced mortgage loans, but also adds disclosure requirements and lengthens the period for which escrow accounts are required. 15 U.S.C. 1639d. On March 2, 2011, the Board proposed amendments to Regulation Z implementing certain requirements of sections 1461 and 1462 of the Dodd-Frank Act. 76 FR 11598 (Mar. 2, 2011) (Board's 2011 Escrows Proposal). The Board proposed, among other things, to implement the disclosure requirements under TILA section 129D(j)(1) in Regulation Z under a new § 226.19(f)(2)(ii) and § 226.20(d) of the Board's Regulation Z, including both the Pre-Consummation Escrow Waiver Disclosure and the Post-Consummation Escrow Cancellation Disclosure.

The comment period for the Board's 2011 Escrows Proposal closed on May 2, 2011. The Board did not finalize the 2011 Escrows Proposal. Subsequent to the issuance of the Board's 2011 Escrows Proposal, the authority for finalizing the proposal was transferred to the Bureau pursuant to the Dodd-Frank Act. [139]

TILA-RESPA Proposal To Delay Certain Title XIV Disclosures

The TILA-RESPA Proposal requested comment on the proposed rules and forms to integrate the disclosure requirements of TILA and RESPA, as required by sections 1032(f), 1098, and 1100A of the Dodd-Frank Act. [140] In addition, the TILA-RESPA Proposal requested comment on an amendment to § 1026.1(c) of Regulation Z, which would have temporarily exempted persons from compliance with the following Title XIV Disclosures (collectively, the Affected Title XIV Disclosures) so that the disclosures could instead be incorporated into the TILA-RESPA integrated disclosures that would be finalized in the future:

  • Warning regarding negative amortization features. Dodd-Frank Act section 1414(a); TILA section 129C(f)(1).
  • Disclosure of State law anti-deficiency protections. Dodd-Frank Act section 1414(c); TILA section 129C(g)(2) and (3).
  • Disclosure regarding creditor's partial payment policy prior to consummation and, for new creditors, after consummation. Dodd-Frank Act section 1414(d); TILA section 129C(h).
  • Disclosure regarding mandatory escrow or impound accounts. Dodd-Frank Act section 1461(a); TILA section 129D(h).
  • Disclosure prior to consummation regarding waiver of escrow in connection with the transaction. Dodd-Frank Act section 1462; TILA section 129D(j)(1)(A).
  • Disclosure of monthly payment, including escrow, at initial and fully-indexed rate for variable-rate residential mortgage loan transactions. Dodd-Frank Act section 1419; TILA section 128(a)(16).
  • Repayment analysis disclosure to include amount of escrow payments for taxes and insurance. Dodd-Frank Act section 1465; TILA section 128(b)(4).
  • Disclosure of aggregate amount of settlement charges, amount of charges included in the loan and the amount of such charges the borrower must pay at closing, the approximate amount of the wholesale rate of funds, and the aggregate amount of other fees or required payments in connection with a residential mortgage loan. Dodd-Frank Act section 1419; TILA section 128(a)(17).
  • Disclosure of aggregate amount of mortgage originator fees and the amount of fees paid by the consumer and the creditor. Dodd-Frank Act section 1419; TILA section 128(a)(18).
  • Disclosure of total interest as a percentage of principal. Dodd-Frank Act section 1419; TILA section 128(a)(19).
  • Optional disclosure of appraisal management company fees. Dodd-Frank Act section 1475; RESPA section 4(c).

The TILA-RESPA Proposal provided for a bifurcated comment process. Comments regarding the proposed amendments to § 1026.1(c) were required to have been received on or before September 7, 2012. For all other proposed amendments and comments pursuant to the Paperwork Reduction Act, comments were required to have been received on or before November 6, 2012. [141]

Affected Title XIV Disclosures. As described above, the Affected Title XIV Disclosures impose certain new disclosure requirements for mortgage transactions. Section 1400(c)(3) of the Dodd-Frank Act [142] provides that, if regulations implementing the Affected Title XIV Disclosures are not issued on the date that is 18 months after the designated transfer date (i.e., by January 21, 2013), the statutory requirements will take effect on that date.

The Bureau provided in the TILA-RESPA Proposal that it believed that implementing integrated disclosures that satisfy the applicable sections of TILA and RESPA and the Affected Title XIV Disclosures would benefit consumers and facilitate compliance for industry with TILA and RESPA. The Bureau provided further that consumers would benefit from a consolidated disclosure that conveys loan terms and costs to consumers in a coordinated way, and industry would benefit by integrating two sets of overlapping disclosures into a single form and by avoiding regulatory burden associated with revising systems and practices multiple times. 77 FR 51116, 51133.

However, given the broad scope and complexity of TILA-RESPA Proposal and the 120-day comment period provided, the Bureau stated that it believed a final rule would not be issued by January 21, 2013. The Bureau was concerned that absent a final rule implementing the Affected Title XIV Disclosures, institutions would have to comply with those disclosures beginning January 21, 2013 due to the statutory requirement that any section of Dodd-Frank Act title XIV for which regulations have not been issued by January 21, 2013 are self-effectuating as of that date. The Bureau stated that this likely would result in widely varying approaches to compliance in the absence of regulatory guidance, creating confusion for consumers, and would impose a significant burden on industry. For example, this could result in a consumer who shops for a mortgage loan receiving different disclosures from different creditors. The Bureau noted that it believed such disclosures would not only be unhelpful to consumers, but likely would be confusing since the same disclosures would be provided in widely different ways, and, moreover, implementing the Affected Title XIV Disclosures separately from the TILA-RESPA integrated disclosures would increase compliance costs and burdens on industry. The Bureau also noted in the TILA-RESPA Proposal that nothing in the Dodd-Frank Act itself or its legislative history suggests that Congress contemplated how the separate requirements in titles X and XIV would work together. [143]

Accordingly, in the TILA-RESPA Proposal, the Bureau proposed to implement the Affected Title XIV Disclosures for purposes of Dodd-Frank Act section 1400(c) by providing a temporary exemption from the requirement to comply with such requirements until the TILA-RESPA integrated disclosure requirements become effective. [144] The Bureau proposed the temporary exemption pursuant to the Bureau's authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a) and, for residential mortgage loans, Dodd-Frank Act section 1405(b). 15 U.S.C. 1604(a); 12 U.S.C. 2617(a); 12 U.S.C. 5532(a); 15 U.S.C. 1601 note. The Bureau explained that fully implementing the Affected Title XIV Disclosures as part of the broader integrated TILA-RESPA rulemaking, rather than issuing rules implementing each requirement individually or allowing those statutory provisions to take effect by operation of law, will improve the overall effectiveness of the integrated disclosures for consumers and reduce burden on industry. The proposed exemption would be, in effect, a delay of the effective date of the Affected Title XIV Disclosures.

The Bureau proposed to delay the Affected Title XIV Disclosures for all transactions to which they would otherwise apply, including to transactions not covered by the proposed integrated disclosure provisions, including open-end credit plans, transactions secured by dwellings that are not real property, and reverse mortgages. The Bureau specifically solicited comment on the exemption's scope and on whether the exemption should sunset on a specific date instead of upon the effective date of the final rule for the integrated disclosures.

Other Title XIV Disclosures. The Bureau proposed to exclude the following Title XIV Disclosures from the list of Affected Title XIV Disclosures in the TILA-RESPA Proposal, stating they would be implemented in separate rulemakings:

  • Disclosure regarding notice of reset of hybrid adjustable rate mortgage. Dodd-Frank Act section 1418(a); TILA section 128A(b).
  • Loan originator identifier requirement. Dodd-Frank section 1402(a)(2); TILA section 129B(b)(1)(B).
  • Consumer notification regarding appraisals for higher-risk mortgages. Dodd-Frank Act section 1471; TILA section 129H(d).
  • Consumer notification regarding the right to receive an appraisal copy. Dodd-Frank Act section 1474; ECOA section 701(e)(5).
  • Post-Consummation Escrow Cancellation Disclosure. Dodd-Frank Act section 1462; TILA section 129D(j)(1)(B).

The Bureau stated generally that these disclosures were expected to be proposed separately in the summer of 2012 and finalized by January 21, 2013, except for the Post-Consummation Escrow Cancellation Disclosure which the Board had already proposed for comment in its 2011 Escrows Proposal. [145]

As such, the Bureau proposed, as part of the TILA-RESPA Proposal, to provide a temporary exemption from compliance with the Pre-Consummation Escrow Waiver Disclosure in TILA section 129D(j)(1)(A), but not for the Post-Consummation Escrow Cancellation Disclosure in the TILA-RESPA Proposal. Absent the Bureau's issuance of a final rule implementing TILA section 129D(j)(1)(B) by January 21, 2013, the provision would have gone into effect as of such date by operation of law under the Dodd-Frank Act section 1400(c)(3). [146]

Final Rule Delaying Certain Title XIV Disclosures

On November 23, 2012, the Bureau issued a final rule delaying implementation of the Affected Title XIV Disclosures provisions and the Post-Consummation Escrow Cancellation Disclosure by providing an exemption in § 1026.1(c) of Regulation Z for persons from these statutory disclosure requirements (2012 Title XIV Delay Final Rule). [147] The Bureau issued the final rule implementing the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure prior to the statutory provisions becoming self-effectuating on January 21, 2013. Accordingly, persons were not required to comply with these statutory disclosure requirements beginning on January 21, 2013, and are exempted from such requirements until such time as the Bureau removes the exemptions, which the Bureau is doing for certain transactions in this final rule.

The Bureau stated in the 2012 Title XIV Delay Final Rule that it believes that the exemption overall provides a benefit to consumers by facilitating a more effective, consolidated disclosure scheme. Absent an exemption, the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure would have complicated and hindered the mortgage lending process because consumers would have received inconsistent disclosures and, likely, numerous additional pages of Federal disclosures that would not work together in a meaningful, synchronized way. The Bureau also stated it believed that the credit process could be more expensive and complicated if the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure had taken effect independent of the larger TILA-RESPA integration rulemaking because industry would be required to revise systems and practices multiple times. The Bureau also considered the status of mortgage borrowers in issuing the exemptions, and believes the exemption is appropriate to improve the informed use of credit. The Bureau stated it did not believe that the goal of consumer protection would be undermined by the exemption, because of the risk that layering the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure on top of existing mandated disclosures would lead to consumer confusion. The Bureau stated in the 2012 Title XIV Delay Final Rule that the exemption allows the Bureau to coordinate the changes in a way that improves overall consumer understanding of the disclosures.

The Bureau also stated that although the Post-Consummation Escrow Cancellation Disclosure was not included in the Affected Title XIV Disclosures in the TILA-RESPA Proposal, the Bureau nevertheless received comment requesting that it delay implementation of the disclosure, as described above. Furthermore, as discussed above, the Board received similar requests from commenters on the Board's 2011 Escrows Proposal, which on July 21, 2011 became the Bureau's responsibility. The Bureau considered the comments received by the Board and the Bureau and concluded that delaying implementation of the Post-Consummation Escrow Cancellation Disclosure and coordinating such implementation with that of the TILA-RESPA integrated disclosures was in the interest of industry and consumers alike. The Bureau noted that the Dodd-Frank Act statutory requirements for the content of the Pre-Consummation Escrow Waiver Disclosure and the Post-Consummation Escrow Cancellation Disclosure are the same, and the Bureau tested language for the Pre-Consummation Escrow Waiver Disclosure at its consumer testing conducted in connection with the TILA-RESPA Proposal and proposed to integrate this disclosure into the Closing Disclosure (which integrates the final TILA disclosure and the RESPA settlement statement). [148] The Bureau stated that implementing the Post-Consummation Escrow Cancellation Disclosure along with the TILA-RESPA integrated disclosures will allow the Bureau to use feedback it has received from consumer testing conducted prior to the TILA-RESPA Proposal, the comments on the proposal, and any consumer testing conducted subsequent to the proposal to harmonize the content and format of the Post-Consummation Escrow Cancellation Disclosure, the Pre-Consummation Escrow Waiver Disclosure, and the TILA-RESPA integrated disclosures. The Bureau stated that consumers, therefore, would benefit from a more fully integrated and synchronized overall mortgage disclosure scheme, and industry would benefit from a more coordinated implementation of the overall mortgage disclosure scheme mandated by the Dodd-Frank Act and implemented by the Bureau.

As discussed below in the section-by-section analysis of § 1026.1(c), the Bureau is now removing the exemptions for the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure in § 1026.1(c) for the mortgage transactions for which this final rule implements those disclosures. Because § 1026.1(c)(5), as finalized in the 2012 Title XIV Delay Final Rule, exempts persons from the disclosure requirements of the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure, and comment 1(c)(5)-1 clarifies that the exemption is intended to be temporary, lasting only until regulations implementing the integrated disclosures required by sections 1032(f), 1098, and 1100A of the Dodd-Frank Act become mandatory, the Bureau is amending § 1026.1(c)(5) to revoke the temporary exemption for transactions subject to the TILA-RESPA Final Rule, but is retaining the exclusion for all other transactions subject to the statutory provisions for which requirements have not yet been implemented.

IV. Legal Authority Back to Top

The final rule was issued on November 20, 2013, in accordance with 12 CFR 1074.1. The Bureau issued this final rule pursuant to its authority under TILA, RESPA, and the Dodd-Frank Act. On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to the Bureau all of the HUD Secretary's consumer protection functions relating to RESPA. [149] Accordingly, effective July 21, 2011, the authority of HUD to issue regulations pursuant to RESPA transferred to the Bureau. Section 1061 of the Dodd-Frank Act also transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board. The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.” [150] Title X of the Dodd-Frank Act, including section 1061 of the Dodd-Frank Act, along with TILA, RESPA, and certain subtitles and provisions of title XIV of the Dodd-Frank Act, are Federal consumer financial laws. [151] Accordingly, the Bureau has authority to issue regulations pursuant to TILA and RESPA, including the disclosure requirements added to those statutes by title XIV of the Dodd-Frank Act, as well as title X of the Dodd-Frank Act.

A. The Integrated Disclosure Mandate

Section 1032(f) of the Dodd-Frank Act requires that, “[n]ot later than one year after the designated transfer date [of July 21, 2011], the Bureau shall propose for public comment rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determines that any proposal issued by the [Board] and [HUD] carries out the same purpose.” 12 U.S.C. 5532(f). In addition, the Dodd-Frank Act amended section 105(b) of TILA and section 4(a) of RESPA to require the integration of the TILA disclosures and the disclosures required by sections 4 and 5 of RESPA. [152] The purpose of the integrated disclosure is to facilitate compliance with the disclosure requirements of TILA and RESPA, and to help the borrower understand the transaction by utilizing readily understandable language to simplify the technical nature of the disclosures. Dodd-Frank Act sections 1098, 1100A. The Dodd-Frank Act did not impose on the Bureau a deadline for issuing a final rule to implement the integrated disclosure requirements.

Although Congress imposed this integrated disclosure requirement, it did not harmonize the underlying statutes. In particular, TILA and RESPA establish different timing requirements for disclosing mortgage credit terms and costs to consumers and require that those disclosures be provided by different parties. TILA generally requires that, within three business days of receiving the consumer's application and at least seven business days before consummation of certain mortgage transactions, creditors must provide consumers a good faith estimate of the costs of credit. [153] TILA section 128(b)(2)(A); 15 U.S.C. 1638(b)(2)(A). If the annual percentage rate that was initially disclosed becomes inaccurate, TILA requires creditors to redisclose the information at least three business days before consummation. TILA section 128(b)(2)(D); 15 U.S.C. 1638(b)(2)(D). These disclosures must be provided in final form at consummation. TILA section 128(b)(2)(B)(ii); 15 U.S.C. 1638(b)(2)(B)(ii). RESPA also requires that the creditor or broker provide consumers with a good faith estimate of settlement charges no later than three business days after receiving the consumer's application. However, unlike TILA, RESPA requires that, at or before settlement, “the person conducting the settlement” (which may or may not be the creditor) provide the consumer with a statement that records all charges imposed upon the consumer in connection with the settlement. RESPA sections 4(b), 5(c); 12 U.S.C. 2603(b), 2604(c).

The Dodd-Frank Act did not reconcile these and other statutory differences. Therefore, to meet the Dodd-Frank Act's express requirement to integrate the disclosures required by TILA and RESPA, the Bureau must do so. Dodd-Frank Act section 1032(f), TILA section 105(b), and RESPA section 4(a) provide the Bureau with authority to issue regulations that reconcile certain provisions of TILA and RESPA to carry out Congress' mandate to integrate the statutory disclosure requirements. For the reasons discussed in this notice, the Bureau is issuing regulations to carry out the requirements of Dodd-Frank Act section 1032(f), TILA section 105(b), and RESPA section 4(a).

B. Other Rulemaking and Exception Authorities

The final rule also relies on the rulemaking and exception authorities specifically granted to the Bureau by TILA, RESPA, and the Dodd-Frank Act, including the authorities discussed below.

Truth in Lending Act

TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. A purpose of TILA is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” TILA section 102(a); 15 U.S.C. 1601(a). This stated purpose is informed by Congress' finding that “economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit[.]” TILA section 102(a). Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes.

Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. However, Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This amendment clarified the Bureau's authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking authority over certain high-cost mortgages pursuant to section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the provisions of TILA section 129 [154] that apply to the high-cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb).

For the reasons discussed in this notice, the Bureau is issuing regulations to carry out the purposes of TILA, including such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion, or to facilitate compliance. In developing these aspects of the final rule pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, facilitating consumers' ability to compare credit terms, and helping consumers avoid the uninformed use of credit, and the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization.

TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or part of TILA all or part of any class of transactions, other than transactions involving any mortgage described in section 1602(aa) of TILA, for which the Bureau determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. In exercising this authority, the Bureau must consider the factors identified in section 105(f) of TILA and publish its rationale at the time it proposes an exemption for public comment. Specifically, the Bureau must consider:

(a) The amount of the loan and whether the disclosures, right of rescission, and other provisions provide a benefit to the consumers who are parties to such transactions, as determined by the Bureau;

(b) The extent to which the requirements of this subchapter complicate, hinder, or make more expensive the credit process for the class of transactions;

(c) The status of the borrower, including—

(1) Any related financial arrangements of the borrower, as determined by the Bureau;

(2) The financial sophistication of the borrower relative to the type of transaction; and

(3) The importance to the borrower of the credit, related supporting property, and coverage under this subchapter, as determined by the Bureau;

(d) Whether the loan is secured by the principal residence of the consumer; and

(e) Whether the goal of consumer protection would be undermined by such an exemption.

For the reasons discussed in this notice, the Bureau is issuing regulations that exempt certain classes of transactions from the requirements of TILA pursuant to its authority under TILA section 105(f). In developing this final rule under TILA section 105(f), the Bureau has considered the relevant factors, published its rationale in the proposed rule, and determined that the exemptions are appropriate.

TILA section 129B(e). Dodd-Frank Act section 1405(a) amended TILA to add new section 129B(e), 15 U.S.C. 1639B(e). That section authorizes the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the Bureau finds to be abusive, unfair, deceptive, predatory, necessary, or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of sections 129B and 129C of TILA, necessary or proper to effectuate the purposes of sections 129B and 129C of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections, or are not in the interest of the borrower. In developing rules under TILA section 129B(e), the Bureau has considered whether the rules are in the interest of the borrower, as required by the statute. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under TILA section 129B(e).

Real Estate Settlement Procedures Act

Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to prescribe such rules and regulations and to make such interpretations and grant such reasonable exemptions for classes of transactions as may be necessary to achieve the purposes of RESPA. One purpose of RESPA is to effect certain changes in the settlement process for residential real estate that will result in more effective advance disclosure to home buyers and sellers of settlement costs. RESPA section 2(b); 12 U.S.C. 2601(b). In addition, in enacting RESPA, Congress found that consumers are entitled to be “provided with greater and more timely information on the nature and costs of the settlement process and [to be] protected from unnecessarily high settlement charges caused by certain abusive practices in some areas of the country.” RESPA section 2(a); 12 U.S.C. 2601(a). In the past, RESPA section 19(a) has served as a broad source of authority to prescribe disclosures and substantive requirements to carry out the purposes of RESPA.

In developing rules under RESPA section 19(a), the Bureau has considered the purposes of RESPA, including to effect certain changes in the settlement process that will result in more effective advance disclosure of settlement costs. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under RESPA section 19(a).

Dodd-Frank Act

Dodd-Frank Act section 1021. Section 1021(a) of the Dodd-Frank Act provides that the Bureau shall seek to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial services and that markets for consumer financial products and services are fair, transparent, and competitive. 12 U.S.C. 5511(a). In addition, section 1021(b) of the Dodd-Frank Act provides that the Bureau is authorized to exercise its authorities under Federal consumer financial law for the purposes of ensuring that, among other things, with respect to consumer financial products and services: (1) Consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (4) Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (5) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation. 12 U.S.C. 5511(b). Accordingly, in developing this final rule, the Bureau has sought to ensure that it is consistent with the purposes of Dodd-Frank Act section 1021(a) and with the objectives of Dodd-Frank Act section 1021(b), specifically including Dodd-Frank Act section 1021(b)(1) and (3).

Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” 12 U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, TILA and RESPA are Federal consumer financial laws. Accordingly, in adopting this final rule, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules under TILA, RESPA, and Title X that carry out the purposes and objectives and prevent evasion of those laws. See part VII for a discussion of the Bureau's standards for rulemaking under Dodd-Frank Act section 1022(b)(2).

Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act provides that the Bureau “may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” 12 U.S.C. 5532(a). The authority granted to the Bureau in section 1032(a) is broad, and empowers the Bureau to prescribe rules regarding the disclosure of the “features” of consumer financial products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features.

Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to section 1032, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” 12 U.S.C. 5532(c). Accordingly, in developing the final rule under Dodd-Frank Act section 1032(a), the Bureau has considered available studies, reports, and other evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services. See parts II and III, above. Moreover, the Bureau has considered the evidence developed through its consumer testing of the integrated disclosures as well as prior testing done by the Board and HUD regarding TILA and RESPA disclosures. See part III for a discussion of the Bureau's consumer testing. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under Dodd-Frank Act section 1032(a).

In addition, Dodd-Frank Act section 1032(b)(1) provides that “any final rule prescribed by the Bureau under this [section 1032] requiring disclosures may include a model form that may be used at the option of the covered person for provision of the required disclosures.” 12 U.S.C. 5532(b)(1). Any model form issued pursuant to that authority shall contain a clear and conspicuous disclosure that, at a minimum, uses plain language that is comprehensible to consumers, contains a clear format and design, such as an easily readable type font, and succinctly explains the information that must be communicated to the consumer. Dodd-Frank Act 1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed in the section-by-section analyses of §§ 1026.37(o) and 1026.38(t), the final rule contains certain model disclosures for transactions subject only to TILA, and not both TILA and RESPA. For the reasons discussed in this notice, the Bureau is issuing these model disclosures pursuant to its authority under Dodd-Frank Act section 1032(b).

Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, “[n]otwithstanding any other provision of [title 14 of the Dodd-Frank Act], in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the Bureau may, by rule, exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest.” 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, which amends TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5), generally defines a residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling other than an open-end credit plan or an extension of credit secured by a consumer's interest in a timeshare plan. Notably, the authority granted by section 1405(b) applies to “disclosure requirements” generally, and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority to exempt from or modify the disclosure requirements of TILA and RESPA.

In developing rules for residential mortgage loans under Dodd-Frank Act section 1405(b), the Bureau has considered the purposes of improving consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, and the interests of consumers and the public. For the reasons discussed in this notice, the Bureau is issuing portions of this rule pursuant to its authority under Dodd-Frank Act section 1405(b).

V. Section-by-Section Analysis of the Final Rule Back to Top

Integrated mortgage disclosure requirements implemented in Regulation Z. The Bureau is adopting its proposal to implement this final rule in Regulation Z. TILA's mortgage disclosure requirements are currently implemented in Regulation Z, whereas RESPA's mortgage disclosure requirements are currently implemented in Regulation X. Regulation Z contains detailed regulations and official interpretations regarding disclosures for mortgage transactions, whereas Regulation X largely relies on the RESPA GFE and RESPA settlement statement forms and their instructions. The Bureau proposed to establish the integrated disclosure requirements in Regulation Z, because it believed that the additional detail in Regulation Z facilitates industry's compliance. [155] The proposal included conforming and other amendments to Regulation X. [156]

However, the Bureau solicited comment on whether the level of detail in the proposed regulations and official interpretations (including the number of examples illustrating what is and is not permitted) will make compliance more burdensome and whether the Bureau should adopt a less prescriptive approach in the final rule. While most industry commenters requested that the Bureau add additional detail and illustrations to specific provisions of the final rule, as described in their respective section-by-section analyses, some commenters criticized the level of detail and illustrations in the proposal.

One regional trade association representing credit unions suggested that the Bureau adopt a less prescriptive approach and issue a notice of final rulemaking of a shorter length than the Bureau's notice of proposed rulemaking. One individual industry commenter stated that the Bureau's final rule should only State the regulatory requirements and not include further explanations or guidance; however, the commenter also provided suggestions for specific guidance and clarifications to include in the final rule. Another individual industry commenter stated that the regulations were not well written, and suggested that the final rule should instruct a software programmer or data entry employee on how to complete the disclosures. An individual consumer commenter stated that the proposal had overly extensive guidance.

As noted above, most industry commenters requested additional detail and clarifications in specific provisions of the final rule. In addition, some industry commenters commented generally on the level of detail. Some commenters specifically stated that the level of detail would be beneficial to industry. For example, a title insurance company commenter stated that, while the level of detail in the proposed regulations and guidance may initially make compliance more burdensome, over the longer term the level of detail will make compliance less burdensome by addressing many situations that will arise and providing guidance and analogies for handling other situations that are not expressly addressed. The commenter also stated that the level of detail will foster greater industry-wide consistency in the implementation of the rule and will help prevent increased costs of compliance consulting which can result from a less detailed approach. In addition, several other industry commenters stated that clear guidance was important for industry, and suggested that the proposal's level of detail is preferred. Many commenters requested still more clarifying examples and guidance with respect to various provisions of the integrated disclosures, as discussed in more detail in relation to the applicable sections below.

In light of the benefits cited by commenters from the level of detail in the proposal and requests for additional guidance and clarifications, as well as the feedback the Bureau received from the Small Business Review Panel regarding the costs faced by small entities from the ambiguity in the current rules and requests for clear guidance in the final rule, the Bureau has determined to maintain a similar level of detail in the final rule as in the proposal, and to provide additional guidance and clarifying examples where appropriate. [157] The Bureau believes that the level of detail and guidance in the final rule will facilitate compliance with the disclosure requirements of TILA and RESPA, which is one of the purposes of the integrated disclosures set forth by the Dodd-Frank Act. See Dodd-Frank Act sections 1098 and 1100A.

Liability. TILA provides for a private right of action, with statutory damages for some violations, whereas RESPA does not provide a private right of action related to the RESPA GFE and RESPA settlement statement requirements. Some industry commenters expressed concern that if the final rule implements the combined disclosure requirements in Regulation Z, consumers would bring lawsuits seeking TILA's remedies for RESPA violations. These commenters, which included several trade associations, several title companies, two large banks, and a large non-bank lender, requested that the Bureau specify which provisions of the integrated disclosure rules relate to TILA requirements and which relate to RESPA requirements. One title industry trade association commenter suggested that the Bureau implement the TILA disclosure requirements in Regulation Z and the RESPA disclosure requirements in Regulation X to discourage litigation invoking TILA's liability scheme for RESPA violations.

While the final regulations and official interpretations do not specify which provisions relate to TILA requirements and which relate to RESPA requirements, the section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provisions. As stated in part IV, above, the authority for the integrated disclosure provisions is based on specific disclosure mandates in TILA and RESPA, as well as certain rulemaking and exception authorities granted to the Bureau by TILA, RESPA, and the Dodd-Frank Act. The details of the Bureau's use of such authority are described in the section-by-section analysis. The Bureau believes these detailed discussions of the statutory authority for each of the integrated disclosure provisions provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.

The Bureau does not believe that implementing the integrated disclosure requirements in two separate regulations is feasible. As noted in the proposed rule and in this part, the Bureau is implementing the integrated disclosure provisions in Regulation Z because it contains detailed regulations regarding disclosures for mortgage transactions, which facilitates compliance. The Bureau believes that an approach that places a portion of the integrated disclosure rules in Regulation Z and a portion in Regulation X would be unworkable and would ultimately result in compliance burden for industry with no apparent benefits for consumers.

Scope of TILA and RESPA. As discussed in detail below with respect to proposed § 1026.19, certain mortgage transactions that are subject to TILA are not subject to RESPA and vice versa. As proposed, the integrated mortgage disclosures would have applied to most closed-end consumer credit transactions secured by real property. Certain types of loans that are currently subject to TILA but not RESPA (construction-only loans and loans secured by vacant land or by 25 or more acres) would have been subject to the proposed integrated disclosure requirements, whereas others (such as mobile home loans and other loans that are secured by a dwelling but not real property) would have remained solely subject to the existing Regulation Z disclosure requirements. Reverse mortgages were excluded from coverage of the proposed integrated disclosures and would therefore have remained subject to the current Regulation X and Z disclosure requirements until the Bureau addressed those unique transactions in a separate, future rulemaking. Finally, consistent with the current rules under TILA, the integrated mortgage disclosures would not have applied to mortgage loans made by persons who are not “creditors” as defined by Regulation Z (such as persons who make five or fewer mortgage loans in a year), although such loans would continue to be subject to RESPA.

The Bureau is adopting the scope of the integrated disclosures as proposed as described in the section-by-section analysis for § 1026.19. Accordingly, reverse mortgage disclosures will continue to be governed by Regulation X. The Bureau proposed revisions to the disclosure provisions of Regulation X in light of this change in scope, as described in more detail below.

A. Regulation X

Section 1024.5Coverage of RESPA

5(a) Applicability

For the reasons discussed below under § 1024.5(d), the Bureau proposed to use its authority under RESPA section 19(a) and, for residential mortgage loans, Dodd-Frank Act section 1405(b) to exempt certain transactions from the existing RESPA GFE and RESPA settlement statement requirements of Regulation X. The Bureau, therefore, proposed a conforming amendment to § 1024.5(a) to reflect these partial exemptions pursuant to the same authority. The Bureau did not receive any comments on the proposed revisions to § 1024.5(a) and is therefore adopting the revisions to § 1024.5(a) as proposed, with a modification to reflect that proposed § 1024.5(c) is being adopted as § 1024.5(d), as discussed below.

5(b) Exemptions

5(b)(1)

Section 1024.5(b)(1) currently exempts from the coverage of RESPA and Regulation X loans on property of 25 acres or more. The Bureau proposed to exercise its authority under RESPA section 19(a) and, for residential mortgage loans, Dodd-Frank Act section 1405(b) to eliminate this Regulation X exemption to render the TILA and RESPA regimes more consistent. The Bureau believed that most loans that fall into this category are separately exempt under a provision excluding extensions of credit primarily for business, commercial, or agricultural purposes, set forth in § 1024.5(b)(2). In addition, the Bureau believed that this consistency would have improved consumer awareness and understanding of transactions involving residential mortgage loans and, therefore, would have been in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b). Because it was unclear to the Bureau whether any mortgage loans are exempt based solely on § 1024.5(b)(1), the Bureau solicited comment on the number of loans that may be affected by this aspect of the proposal and any reasons for the continued exemption of loans on property of 25 acres or more.

One non-depository rural lender commenter stated that the exemption for loans on property of 25 acres or more should be retained because approximately 55 percent of its consumer purpose loans did not require a RESPA GFE and 61 percent of its closed-end consumer-purpose loans secured by real property did not require a RESPA settlement statement under this exemption. The commenter gave several examples of consumer purposes for these types of loans, such as loans financing the transfer of property interests pursuant to divorce settlements, cash-out refinancing for nursing home expenses for the borrowers themselves or their parents, and financing the purchase of second homes. Other commenters generally did not express opposition to the proposed elimination of the 25-acres-or-more exemption, but rather requested that the final rule reiterate that the test for coverage for the integrated disclosures should be whether the primary purpose of the loan is for consumer purposes. One industry State trade association stated that consumer purpose loans are structured the same whether secured by 24 or 25 acres or more and have similar costs, and therefore, their members generally do not object to providing the integrated disclosures to all consumer purpose loans secured by real property, regardless of property size. A title insurance company commenter agreed with the Bureau that there is no reason to retain the 25-acres-or-more exemption because most of those loans would also be exempt under the exemption for business, commercial, or agricultural purposes.

Generally, TILA has longstanding requirements for disclosures to be provided in connection with loans secured by real property. Dodd-Frank Act sections 1032(f), 1098, and 1100A directed the integration of the TILA and RESPA forms, implicitly authorizing the Bureau to harmonize statutory differences, as discussed above. The Bureau believes that consumers of closed-end credit transactions secured by real property of 25 acres or more should obtain the integrated disclosures provided pursuant to § 1026.19 below. In addition, Congress in section 1032(a) of the Dodd-Frank Act authorized the Bureau to prescribe rules to ensure that the features of any consumer financial product or service are fully, accurately and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service. 12 U.S.C. 5532(a). The Bureau believes that consumers of consumer-purpose loans secured by property of 25 acres or more should obtain the integrated disclosures, as they would be just as useful to such consumers as to consumers of loans secured by smaller areas of real property. See section-by-section analysis of § 1026.19 in general, below. The Bureau believes such disclosure is consistent with section 1032(a) of the Dodd-Frank Act. The Bureau therefore exercises its authority under Dodd-Frank Act section 1032(a), RESPA section 19(a) and, for residential mortgage loans, Dodd-Frank Act section 1405(b) to eliminate the exemption for loans secured by property of 25 acres or more in § 1024.5(b)(1) of Regulation X. This amendment will render the TILA and RESPA regimes more consistent, which promotes more effective advance disclosure of settlement costs (which is a purpose of RESPA). In addition, this consistency will improve consumer awareness and understanding of transactions involving residential mortgage loans and is therefore in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b).

5(d) Partial Exemptions for Certain Mortgage Loans

The Bureau proposed § 1024.5(c) to exempt creditors from certain RESPA requirements for loans subject to the integrated disclosure requirements and also certain federally related mortgage loans that satisfy specified criteria associated with certain housing assistance loan programs for low- and moderate-income persons. Specifically, creditors would be exempt from the requirement to provide the RESPA settlement cost booklet, RESPA GFE, RESPA settlement statement, and application servicing disclosure statement requirements of §§ 1024.6, 1024.7, 1024.8, 1024.10, and 1024.21(b) and (c). The Bureau proposed this exemption under RESPA section 19(a), Dodd-Frank Act section 1032(a) and, for residential mortgage loans, Dodd-Frank Act section 1405(b). This proposed exemption would have cross-referenced proposed § 1026.3(h), which codifies an exemption issued by HUD on October 6, 2010. Under the HUD exemption, lenders need not provide the RESPA GFE and RESPA settlement statement when six prerequisites are satisfied: (1) The loan is secured by a subordinate lien; (2) the loan's purpose is to finance downpayment, closing costs, or similar homebuyer assistance, such as principal or interest subsidies, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention; (3) interest is not charged on the loan; (4) repayment of the loan is forgiven or deferred subject to specified conditions; (5) total settlement costs do not exceed one percent of the loan amount and are limited to fees for recordation, application, and housing counseling; and (6) the loan recipient is provided at or before settlement with a written disclosure of the loan terms, repayment conditions, and costs of the loan.

To facilitate compliance, the Bureau proposed to codify this exemption in Regulations X and Z for the same reasons and under the same authority as cited by HUD. Specifically, HUD invoked its authority under RESPA section 19(a) to grant “reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of [RESPA].” HUD determined that, for transactions meeting the criteria listed above, the RESPA GFE and RESPA settlement statement forms would be difficult to complete in a meaningful way and likely would confuse consumers who received them. Moreover, because of the limited, fixed fees involved with such transactions, the comparison shopping purpose of the RESPA GFE would not be achieved. Finally, the alternative written disclosure required as a prerequisite of the exemption would ensure that consumers understand the loan terms and settlement costs charged.

In addition, the Bureau proposed this exemption based on its authority under Dodd-Frank Act section 1405(b) because the Bureau believed the proposed exemption would improve consumer awareness and understanding of residential mortgage loan transactions of the type discussed above and therefore would be in the interest of consumers and the public. These exemptions would have created consistency with the proposed integrated disclosure requirements under Regulation Z and codified a disclosure exemption previously granted by HUD. However, the exemptions would have retained coverage of affected loans for all other requirements of Regulation X, such as provisions implementing the servicing requirements in RESPA section 6 (other than the application servicing disclosure statement), prohibitions on referral fees and kickbacks in RESPA section 8, and limits on amounts to be deposited in escrow accounts in RESPA section 10.

The Bureau did not receive any comments on proposed § 1024.5(c). However, the Bureau adopted a regulation on July 10, 2013 that added § 1024.5(c) concerning RESPA's relation to State laws. 78 FR 44686 (July 24, 2013). [158] Accordingly, the Bureau adopts proposed § 1024.5(c) without modification but renumbered as § 1024.5(d).

Section 1024.30Scope

30(c) Scope of Certain Sections

The Bureau is adopting a modification to § 1024.30(c) to clarify that the servicing disclosure statement requirement of § 1024.33(a) only applies to reverse mortgage transactions, for the reasons discussed in relation to the section-by-section analysis of § 1024.33(a) below.

Section 1024.33 Mortgage Servicing Transfers

33(a) Servicing Disclosure Statement

In the Bureau's 2012 RESPA Mortgage Servicing Proposal, the Bureau proposed to limit the scope of the servicing disclosure statement to closed-end reverse mortgage transactions to conform § 1024.33(a) to the comprehensive amendments to consumer mortgage disclosures proposed by the Bureau in the TILA-RESPA Proposal. Because the Bureau intended to incorporate the servicing disclosure statement requirements of RESPA section 6(a) into the consolidated disclosure forms for the TILA-RESPA Proposal, the Bureau had proposed to limit the scope of the servicing disclosure statement provisions in new § 1024.33 to closed-end reverse mortgage transactions because those transactions would not be covered by the TILA-RESPA Proposal.

After additional consideration, because the TILA-RESPA Proposal would not be finalized until after the 2013 RESPA Mortgage Servicing Final Rule became effective, in the 2013 RESPA Mortgage Servicing Final Rule the Bureau decided not to finalize the language in proposed § 1024.33(a) that would have limited the scope of the provision to closed-end reverse mortgage transactions. Instead, the Bureau finalized § 1024.33(a) by conforming the scope to “mortgage loans” other than subordinate-lien mortgage loans, as discussed in the section-by-section analysis of § 1024.30(c) of the 2013 RESPA Mortgage Servicing Final Rule. Accordingly, in the 2013 RESPA Mortgage Servicing Final Rule, the Bureau added language to § 1024.33(a) so that applicants for “first-lien mortgage loans” must receive the servicing disclosure statement, as indicated at § 1024.30(c)(1). Thus, applicants for both reverse and forward mortgage loans must receive currently the servicing disclosure statement under Regulation X.

Because the Bureau has incorporated the servicing disclosure statement under RESPA section 6(a) into the Loan Estimate, as described in the section-by-section analysis of § 1026.37(m) below, the Bureau is adopting in this final rule an amendment to § 1024.33(a), which limits the requirement to provide the servicing disclosure statement to reverse mortgage transactions. The Bureau intends this amendment to reflect the requirement that the Loan Estimate include the servicing disclosure statement under § 1026.37(m)(6) for transactions subject to § 1026.19(e), thereby eliminating a duplicative disclosure requirement.

Appendix A—Instructions for Completing HUD-1 and HUD-1A Settlement Statements; Sample HUD-1 and HUD-1A Statements

The Bureau proposed to require creditors to use the integrated Closing Disclosure required by §§ 1026.19(f) and 1026.38 to satisfy the disclosure requirements under RESPA section 4 for closed-end transactions covered by RESPA, except for reverse mortgage transactions. The Bureau recognized in the proposed rule that the manner in which reverse mortgage transactions are disclosed on the RESPA settlement statement (the HUD-1 or HUD-1A) under appendix A to Regulation X is a source of confusion for creditors and settlement agents. HUD attempted to clarify the use of the RESPA settlement statement in reverse mortgage transactions by issuing frequently-asked questions, the HUD RESPA FAQs, the most recent of which was released on April 2, 2010. The Bureau proposed to exercise its authority under RESPA section 19(a) to modify appendix A to Regulation X to incorporate the guidance provided by the HUD RESPA FAQs regarding reverse mortgage loans because, under the proposed rule, the closing of reverse mortgage transactions would have continued to be disclosed using the RESPA settlement statement. The proposed revisions would have been located in the instructions for lines 202, 204, and page 3, loan terms.

The Bureau believed that incorporating this guidance into appendix A to Regulation X would have improved the effectiveness of the disclosures when used for reverse mortgages, thereby reducing industry confusion and advancing the purpose of RESPA to provide more effective advanced disclosure of settlement costs to both the borrower and the seller in the real estate transaction, consistent with RESPA section 19(a).

One industry trade association commenter supported the revisions related to proposed appendix A to Regulation X, but requested that compliance with the modifications be considered optional. The proposed changes to appendix A to Regulation X were intended merely to incorporate the existing disclosure requirements for reverse mortgage transactions as clarified by HUD in the HUD RESPA FAQs. The Bureau believes that making the revisions optional would detract from the intent of clarifying appendix A to Regulation X for reverse mortgage transactions and conflict with the purpose of RESPA to provide more effective advance disclosure of settlement costs. The Bureau did not receive any other comments related to proposed appendix A to Regulation X. Accordingly, the Bureau adopts the revisions to appendix A to Regulation X as proposed.

Appendix B—Illustrations of Requirements of RESPA

Illustration 12 in appendix B to part 1024 provides a factual situation where a mortgage broker provides origination services to submit a loan to a lender for approval. The mortgage broker charges the borrower a uniform fee for the total origination services, as well as a direct up-front charge for reimbursement of credit reporting, appraisal services, or similar charges. To address this factual situation, illustration 12 provides a comment explaining that the mortgage broker's fee must be itemized in the RESPA GFE and on the RESPA settlement statement; other charges that are paid for by the borrower and paid in advance of consummation are listed as paid outside closing on the RESPA settlement statement and reflect the actual provider charge for such services; and any other fee or payment received by the mortgage broker from either the lender or the borrower arising from the initial funding transaction, including a servicing release premium or yield spread premium, is to be noted on the RESPA GFE and listed in the 800 series of the RESPA settlement statement.

Subsequent to the guidance provided in illustration 12, Regulation Z § 1026.36(d)(2) was adopted. Section 1026.36(d)(2) states:

If any loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling: (i) No loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; and (ii) No person who knows or has reason to know of the consumer-paid compensation to the loan originator (other than the consumer) shall pay any compensation to a loan originator, directly or indirectly, in connection with the transaction.

The last sentence in illustration 12 clearly contemplates the loan originator, a mortgage broker, receiving compensation from the lender as well as the borrower, which therefore describes a factual situation prohibited by § 1026.36(d)(2). Accordingly, for consistency with § 1026.36(d)(2), the Bureau proposed to exercise its authority under RESPA section 19(a) to delete the last sentence of the comment provided in illustration 12 in appendix B to Regulation X.

The Bureau did not receive any comments related to the proposed revision to appendix B to Regulation X. Accordingly, the Bureau adopts the revision to appendix B to Regulation X as proposed for the reasons stated above.

Appendix C—Instructions for Completing Good Faith Estimate (GFE) Form

The Bureau proposed to require creditors to use the integrated Loan Estimate required by §§ 1026.19(e) and 1026.37 to satisfy the disclosure requirements under RESPA section 5 for closed-end transactions covered by RESPA, except for reverse mortgage transactions. The Bureau recognized that the manner in which reverse mortgage transactions are disclosed on the RESPA GFE under appendix C to Regulation X is a source of confusion for creditors and other loan originators. HUD clarified the use of the RESPA GFE in reverse mortgage transactions in the HUD RESPA FAQs. The Bureau proposed to exercise its authority under RESPA section 19(a) to modify appendix C to Regulation X to incorporate the guidance provided by the HUD RESPA FAQs because, under the proposed rule, reverse mortgage transactions would have continued to be disclosed using the RESPA GFE. The proposed revisions would have been found in the instructions for the “Summary of your loan” and “Escrow account information” sections. The Bureau believed that these revisions would have satisfied the purpose of RESPA to provide more effective advance disclosure of settlement costs to both the consumer and the seller in the real estate transaction, consistent with RESPA section 19(a).

One industry trade association commenter supported the changes related to proposed appendix C to Regulation X, but as with the proposed modifications to appendix A to Regulation X discussed above, requested that compliance with the modifications be considered optional. The proposed revisions to appendix C to Regulation X were intended merely to incorporate the existing disclosure requirements for reverse mortgage transactions, as clarified by HUD in the HUD RESPA FAQs. The Bureau believes that making the changes optional would detract from the intent of clarifying appendix C to Regulation X for reverse mortgage transactions and conflict with the purpose of RESPA to provide more effective advance disclosure of settlement costs.

One industry commenter pointed out that as Regulation Z allows that delivery to one consumer is considered to be delivery for all consumers in a transaction, whereas Regulation X requires each applicant receive the GFE. The commenter suggested that Regulation X be amended so it follows the Regulation Z provision for delivery of the RESPA GFE. The proposed rule did not include any substantive modification to the delivery requirements of Regulation X. In addition, given the nature of a reverse mortgage transaction and the potential loss of a residence due to a termination event, the Bureau believes more analysis must be conducted, as stated above, before any modification of the disclosure requirements for reverse mortgages is proposed. The Bureau did not receive any other comments related to proposed appendix C to Regulation X. Accordingly, the Bureau adopts the revisions to appendix C to Regulation X as proposed.

B. Regulation Z

Section 1026.1Authority, Purpose, Coverage, Organization, Enforcement, and Liability Statutory Scope

In the TILA-RESPA Proposal, the Bureau proposed conforming amendments to § 1026.1 to reflect the fact that, under the proposal, Regulation Z would implement not only TILA, but also certain provisions of RESPA. To reflect the expanded statutory scope of Regulation Z, the proposed conforming amendments would have revised § 1026.1(a) (authority), (b) (purpose), (d)(5) (organization of subpart E), and (e) (enforcement and liability) to include references to the relevant provisions of RESPA.

The Bureau did not receive comment on this aspect of the proposed rule. The Bureau adopted the proposed changes to § 1026.1(a) in the 2012 Title XIV Delay Final Rule that temporarily exempted creditors from implementing certain Dodd-Frank Act disclosure requirements pending the resolution of the broader rulemaking as discussed below. See 77 FR 70105, 70114 (Nov. 23, 2012). The Bureau is now finalizing § 1026.1(b), (d)(5), [159] and (e) as proposed, with a modification to § 1026.1(b) for greater clarity and a technical change to § 1026.1(d)(5) to delete a reference to § 1026.19(g).

1(c) Coverage

The TILA-RESPA Proposal also would have provided a temporary exemption from certain disclosure requirements added to TILA and RESPA by the Dodd-Frank Act. Specifically, the proposal would have exempted persons temporarily from the disclosure requirements of sections 128(a)(16) through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129C(h), 129D(h), and 129D(j)(1)(A) of TILA and section 4(c) of RESPA (collectively the Affected Title XIV Disclosures), until regulations implementing the integrated disclosures required by section 1032(f) of the Dodd-Frank Act take effect. [160] Proposed § 1026.1(c)(5) would have implemented this exemption by stating that no person is required to provide the disclosures required by the statutory provisions listed above. Proposed comment 1(c)(5)-1 would have explained that § 1026.1(c)(5) implements the above-listed provisions of TILA and RESPA added by the Dodd-Frank Act by exempting persons from the disclosure requirements of those sections. The comment would have clarified that the exemptions provided in proposed § 1026.1(c)(5) are intended to be temporary and will apply only until compliance with the regulations implementing the integrated disclosures required by section 1032(f) of the Dodd-Frank Act become mandatory. Proposed comment 1(c)(5)-1 also would have clarified that the exemptions in proposed § 1026.1(c)(5) would not exempt any person from any other requirement of Regulation Z, Regulation X, or of TILA or RESPA.

The Bureau recognized in the TILA-RESPA Proposal that the Affected Title XIV Disclosures varied in scope from, and in some cases were broader in scope than, the proposed integrated disclosures. For example, certain of the Affected Title XIV Disclosures apply to open-end credit plans, transactions secured by dwellings that are not real property, and/or reverse mortgage transactions, which would not have been subject to the integrated disclosure requirements of the proposed rule. At the same time, because the final scope of the integrated disclosures was not known at the time of the proposal, the Bureau chose to delay the Affected Title XIV Disclosures to the fullest extent those requirements could apply under the statutory provisions. The Bureau sought comment on whether the final rule implementing the integrated disclosures should implement the Affected Title XIV Disclosures for transactions not covered by the integrated disclosures, including open-end credit plans, transactions secured by dwellings other than real property, and reverse mortgages.

The TILA-RESPA Proposal provided for a bifurcated comment process, with comments regarding the proposed amendments to § 1026.1(c)(5) receiving a 60-day comment period and all other proposed provisions receiving a 120-day comment period. Pursuant to section 1400(c)(3) of the Dodd-Frank Act, if regulations implementing the Affected Title XIV Disclosures were not issued on the date that is 18 months after the designated date of transfer of TILA and RESPA rulewriting authority to the Bureau (i.e., by January 21, 2013), the statutory requirements would have taken effect on that date. In the TILA-RESPA Proposal, the Bureau stated its belief that implementing integrated disclosures that satisfy the applicable sections of TILA and RESPA, including the Affected Title XIV Disclosures, would benefit consumers and facilitate compliance for industry with TILA and RESPA. The Bureau also stated its belief that consumers would benefit from a consolidated disclosure that conveys loan terms and costs to consumers in a coordinated way and that industry would benefit by integrating two sets of overlapping disclosures into a single form and by avoiding regulatory burden associated with revising systems and practices multiple times. The Bureau was concerned that, absent a final rule implementing the exemptions, the self-executing statutory requirements would have resulted in widely varying approaches to compliance, thereby potentially creating confusion for consumers and imposing significant burden on industry.

For the reasons cited in the TILA-RESPA Proposal, on November 16, 2012, the Bureau issued the 2012 Title XIV Delay Final Rule, adopting, among other provisions, proposed § 1026.1(c)(5), pursuant to its authority under and consistent with TILA section 105(a) and (f), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b). See 77 FR 70105 (Nov. 23, 2012). As finalized, § 1026.1(c)(5) exempted persons from providing the Affected Title XIV Disclosures. The final rule extended the exemption to apply also to the Post-Consummation Escrow Cancellation Disclosure. The Bureau determined that extending the temporary exemption to the Post-Consummation Escrow Cancellation Disclosure would benefit consumers and industry after evaluating comments the Bureau received requesting that it delay implementation of the disclosure, as well as similar requests received by the Board in response to its 2011 Escrows Proposal. The final rule also adopted comment 1(c)(5)-1, which provided that the exemptions in § 1026.1(c)(5) are intended to be temporary and that the provision does not exempt any person from any other part of TILA, RESPA, or those statutes' implementing regulations. Because the Bureau did not receive any comments seeking to limit the scope of the proposed exemption, the temporary exemptions as adopted applied to all transactions subject to the Affected Title XIV Disclosures. The final rule took effect on November 23, 2012. [161] Accordingly, the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure were implemented for purposes of Dodd-Frank Act section 1400(c)(3) by § 1026.1(c)(5) and did not take effect on January 21, 2013.

The TILA-RESPA Final Rule implements the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure for consumer credit transactions secured by a first lien on a consumer's principal dwelling (other than a consumer credit transaction under an open-end credit plan or a reverse mortgage). The Bureau is now amending § 1026.1(c)(5) to revoke the temporary exemption for transactions subject to the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure as implemented by the TILA-RESPA Final Rule: § 1026.19(e) and (f) of the TILA-RESPA Final Rule implements sections 128(a)(16) through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129D(h), and 129D(j)(1)(A) of TILA; § 1026.20(e) implements section 129D(j)(1)(B) of TILA; § 1026.39(d)(5) implements section 129C(h) of TILA; and section 4(c) of RESPA. Accordingly, the temporary exemption for those transactions that are subject to § 1026.19(e) and (f) is no longer necessary. However, if the Bureau were to revoke the temporary exemption for all transactions that are not covered by the final rule, the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure would become required for open-end credit plans, transactions secured by dwellings that are not real property, and reverse mortgages.

The Bureau received several comments from industry objecting to this result. For example, a national trade association representing the reverse mortgages industry commented in support of continuing to exempt reverse mortgages from the Affected Title XIV Disclosures. In addition, a national trade association representing banks and bank holding companies that provide retail financial services commented that the exemption should apply to the fullest extent provided under the statute, and not be limited to loans that are subject to the TILA-RESPA integrated disclosures. The Bureau considered these comments, and was persuaded that the exemption should continue to apply for all other transactions subject to the statutory provisions for which requirements have not yet been implemented. Accordingly, the final rule provides that, except in transactions subject to the integrated disclosure requirements in § 1026.19(e) and (f), no person is required to provide the disclosures required by sections 128(a)(16) through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129D(h), or 129D(j)(1)(A) of TILA, section 4(c) of RESPA, or the disclosure required prior to settlement by section 129C(h) of TILA. Final § 1026.1(c)(5) also provides that, except in transactions subject to the Post-Consummation Escrow Cancellation Disclosure requirements in § 1026.20(e), no person is required to provide the disclosures required by section 129D(j)(1)(B) of TILA. Lastly, the final rule provides that, except in transactions subject to the partial payment disclosure requirements in § 1026.39(d)(5), no person becoming a creditor with respect to an existing residential mortgage loan is required to provide the disclosure required by section 129C(h) of TILA.

The Bureau is modifying comment 1(c)(5)-1 to clarify that the exemptions from the disclosure requirements only apply to certain mortgage transactions for which the disclosures are not otherwise implemented in Regulation Z. The comment sets forth a list of the transactions for which the disclosures are required under Regulation Z. The Bureau is no longer referring to the exemption as a temporary exemption in the commentary as that term was used primarily to refer to the transactions that would be subject to the integrated disclosure requirements under the TILA-RESPA Proposal.

Specifically, the comment clarifies that §§ 1026.37 and 1026.38 implement sections 128(a)(16) through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129D(h), and 129D(j)(1)(A) of TILA and section 4(c) of RESPA for transactions subject to § 1026.19(e) and (f). Section 1026.38(l)(5) implements the disclosure requirements of section 129C(h) of TILA for transactions subject to § 1026.19(f), and § 1026.39(d)(5) implements the disclosure requirements of section 129C(h) of TILA for transactions subject to § 1026.39(d)(5). Section 1026.20(e) implements the disclosure requirements of section 129D(j)(1)(B) of TILA for transactions subject to § 1026.20(e).

The details of the regulatory implementation of the statutory requirements are discussed below, under the applicable sections of Regulation Z. For a discussion of the Bureau's plans to implement integrated disclosures for open-end mortgage transactions, dwellings not secured by real property, and reverse mortgage transactions that are not covered by the TILA-RESPA Final Rule, see the section-by-section analysis of § 1026.19.

1(d) Organization

1(d)(5)

As discussed in part I above, the Bureau is adopting rules and disclosures that combine the pre-consummation disclosure requirements of TILA and sections 4 and 5 of RESPA. The Dodd-Frank Act does not impose a deadline for issuing final rules and disclosures in connection with its mandate to integrate disclosure requirements or provide a specific amount of time for entities subject to those rules to come into compliance. As also discussed in part II.E above, the Dodd-Frank Act establishes two goals for the TILA-RESPA mortgage disclosure integration: to improve consumer understanding of mortgage loan transactions; and to facilitate industry compliance with TILA and RESPA. Dodd-Frank Act sections 1098 and 1100A. In addition, TILA section 105(d) generally provides that a regulation requiring any disclosure that differs from the disclosures previously required shall have an effective date no earlier than “that October 1 which follows by at least six months the date of promulgation,” except that the Bureau may at its discretion lengthen the period of time permitted for creditors or lessors to adjust their forms to accommodate new requirements. 15 U.S.C. 1604(d). The Bureau must balance these statutory objectives and requirements in considering the length of the implementation period.

As described in part VI below, the final rule applies to transactions for which the creditor or mortgage broker receives an application on or after August 1, 2015, with the exception of new § 1026.19(e)(2), and the amendments to § 1026.28(a)(1) and the commentary to § 1026.29, which become effective on that date without respect to whether an application has been received on that date. The Bureau is adding comment 1(d)(5)-1 to provide clarity regarding the application of the effective date to transactions covered by the final rule. The comment summarizes the effective date, clarifies that §§ 1026.19(e)(2), 1026.28, and comments 29(a)-2 and -4 in the final rule become effective on August 1, 2015, and sets forth examples to illustrate the application of the effective date for the final rule. The Bureau believes this comment will facilitate compliance with the final rule, which is one of the purposes of the integrated disclosures, as discussed above.

Section 1026.2Definitions and Rules of Construction

2(a) Definitions

2(a)(3) Application

The Bureau's Proposal

In the TILA-RESPA Proposal, the Bureau proposed to revise the current definition of the term “application” that applies to the RESPA GFE and early TILA disclosure. Under the final rule, receipt of an “application” triggers a creditor's obligation to provide the Loan Estimate within three business days. Specifically, the Bureau would have revised the definition of application to remove the seventh “catch-all” element of the current definition under 12 CFR 1024.2(b), that is, “any other information deemed necessary by the loan originator.” The Bureau believed that deleting this element from the definition would enable consumers to receive the Loan Estimate earlier. The proposed definition would help ensure that consumers have information on the cost of credit while they have bargaining power to negotiate for better terms and time to compare other financing options.

Currently, although neither TILA nor RESPA defines the term “application,” section 1024.2(b) of Regulation X defines application as “the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower's name, the borrower's monthly income, the borrower's social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator.” 12 CFR 1024.2(b). Regulation Z does not define this term, but instead provides that creditors may rely on the Regulation X definition of application for purposes of the provision of the early TILA disclosure. See§ 1026.19(a)(1)(i) and comment 19(a)(1)(i)-3. The inclusion of the seventh “catch-all” element in the definition in Regulation X was adopted in response to, among other things, concerns that a narrow definition of “application” might inhibit preliminary underwriting. HUD's 2008 RESPA Final Rule, 73 FR 68210-11.

The Bureau's proposed definition of application would have consisted of two parts. First, the Bureau proposed to add § 1026.2(a)(3)(i) to define application as the submission of a consumer's financial information for purposes of obtaining an extension of credit. This would have established a broad definition of application for all transactions covered by Regulation Z, not just closed-end mortgage loans. Second, the Bureau proposed to add § 1026.2(a)(3)(ii) to provide that an application consists of six pieces of information, except for purposes of subpart B (open-end loans), subpart F (student loans), and subpart G (special rules for credit card accounts and open-end credit offered to college students). The proposed six pieces of information were the consumer's name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought. The Bureau stated in the proposal that these items of information had an established significance in the context of closed-end loans secured by real property, but could be less significant or even inapplicable to other types of credit. Thus, this definition limiting the term application to collection of these six pieces of information would not have been applied to subpart B, subpart F, and subpart G.

Proposed comment 2(a)(3)-1 would have explained that the submission may be in written or electronic format and includes a written record of an oral application. The proposed comment would have also explained that the definition does not prevent a creditor from collecting whatever additional information it deems necessary in connection with the request for the extension of credit; however, once a creditor has received the six pieces of information listed in § 1026.2(a)(3)(ii), the creditor has received an application for purposes of § 1026.2(a)(3)(ii). The proposed comment also would have provided examples of this requirement.

Proposed comment 2(a)(3)-2 would have explained that if a consumer does not have a social security number, the creditor may instead request whatever unique identifier the creditor uses to obtain a credit report. For illustrative purposes, the proposed comment would have clarified that a creditor has obtained a social security number to obtain a credit report for purposes of § 1026.2(a)(3)(ii) if the creditor collects a Tax Identification Number from a consumer who does not have a social security number, such as a foreign national. The Bureau stated in the proposal that the comment would be consistent with guidance provided by HUD in the HUD RESPA FAQs p. 7, #14 (“GFE-General”).

Proposed comment 2(a)(3)-3 would have clarified that the creditor's receipt of a credit report fee does not affect whether an application has been received. It would have stated that § 1026.19(a)(1)(iii) permits the imposition of a fee to obtain the consumer's credit history prior to the delivery of the disclosures required under § 1026.19(a)(1)(i), and that § 1026.19(e)(2)(i)(B) permits the imposition of a fee to obtain the consumer's credit report prior to the delivery of the disclosures required under § 1026.19(e)(1)(i). The proposed comment would have also explained that whether, or when, such fees are received is irrelevant for the purposes of the definition in § 1026.2(a)(3) and the timing requirements in § 1026.19(a)(1)(i) and (e)(1)(iii). The proposed comment would also have provided an example of this provision.

As noted above, the Bureau believed that one primary purpose of the integrated Loan Estimate is to inform consumers of the cost of credit when they have bargaining power to negotiate for better terms and time to compare other financing options. While the Bureau believed that creditors should be able to collect information in addition to the six specific items of information set forth in the current definition of application, the Bureau was concerned that the catch-all item in the current definition may permit creditors to delay providing consumers with the integrated Loan Estimate, at a point when the consumer has much less opportunity to negotiate or compare other options. The Bureau stated that it did not believe that this principle conflicted with the creditor's critical need to be able to collect the information necessary to originate loans in a safe and sound manner, and that the proposed definition of application would not define or limit underwriting; it instead would establish a point in time at which disclosure obligations would begin.

Based on this premise, the Bureau stated that the proposed definition of application should facilitate consumers' ability to receive reliable estimates early in the loan process, but should not restrict a creditor's ability to determine which information is necessary for sound underwriting, because creditors would be able to continue to collect whatever additional information, in the creditor's view, is necessary for underwriting the consumer's loan application after receiving the six specific items of information that constitute an application under proposed § 1026.2(a)(3)(ii). It further stated that removing the catch-all item from the current definition could ensure that the disclosures are both received early in the loan process and based on the information most critical to providing reliable estimates. The Bureau also stated that creditors would be able to collect whatever information is, in the creditor's view, necessary for a reasonably reliable estimate, provided that it collects the additional information prior to collecting the six pieces of information specified in proposed § 1026.2(a)(3)(ii). The Bureau acknowledged in the proposal that creditors could strategically order information collection in a manner that best suits the needs of the creditor. But the Bureau believed that even if the creditor did so, the proposed definition would still be better than the current definition in facilitating consumers' ability to receive reliable estimates early in the origination process. The Bureau also believed that the proposed change to the definition could facilitate consumer shopping because it could ensure that consumers would not be required to disclose sensitive information, such as the consumer's social security number or income, until after the creditor collects less sensitive information. The more sensitive information the consumer provides, the more the consumer may feel committed to a loan offer and be less likely to continue shopping. The Bureau therefore proposed to remove the catch-all item, but believed that the proposal preserved creditors' ability to collect any additional necessary information, which it believed would strike the appropriate balance between the needs of consumers and the needs of industry.

The Bureau also concluded that the proposed approach would dovetail with the requirements of proposed § 1026.19(e), which establishes limitations on fee increases for the purposes of determining good faith but also establishes exceptions to permit changes that are based on changes in the information the creditor relied on in disclosing the estimated loan costs. Thus, the Bureau stated that the proposed definition of application, which would have required creditors to collect any additional information prior to collecting the six pieces of information specified in proposed § 1026.2(a)(3)(ii), would maintain the flexibility provided by the current definition of application in deciding which additional information is necessary for providing estimates. The Bureau stated its belief that if a creditor chooses to collect a consumer's combined liability information prior to collecting the six pieces of information specified in § 1026.2(a)(3)(ii), the disclosures provided pursuant to § 1026.19(e) may reflect such information.

The Bureau also noted in the proposal that it received feedback, including a comment received in response to the 2011 Streamlining RFI, requesting a single definition of application under Regulation Z, Regulation B, and Regulation C. Regulation B implements the Equal Credit Opportunity Act (ECOA), and Regulation C implements the Home Mortgage Disclosure Act (HMDA). The Bureau stated in the proposal that while it recognized the potential consistency benefits of a single definition of application, it believed that the proposed definition of application would provide important benefits to consumers in the context of closed-end loans secured by real property.

During the Small Business Review Panel process, several small entity representatives expressed concern about eliminating the catch-all item from the definition of application currently under Regulation X. See Small Business Review Panel Report at 33-34, 49, and 67. Based on this feedback and consistent with the recommendation of the Small Business Review Panel, the Bureau solicited comment on what, if any, additional specific information beyond the six items included under the proposed definition of application is needed to provide a reasonably accurate Loan Estimate.

Comments

In general. Commenters representing a wide range of the mortgage origination industry opposed the removal of the catch-all item from the definition of application. In contrast, the only consumer advocacy group to comment on this aspect of the proposal expressed support for the proposed definition of application.

A national fair housing consumer advocacy group asserted that the current definition of application, because of its lack of uniformity, may create confusion for consumers. The commenter stated that predatory mortgage brokers and loan originators in the past have depended in part on the confusing nature of the loan application process to make unaffordable and unsustainable loans to minorities. The commenter asserted that the catch-all item in the current definition of application was vague and supported its removal from the definition. The commenter suggested, however, that the Bureau should move from commentary into the regulation itself the statement that a creditor that has collected a Tax Identification Number will be deemed to have obtained a social security number to obtain a credit report, for purposes of § 1026.2(a)(3)(ii). The commenter asserted that this change would reduce instances of misinformation or discrimination on the basis of race, color, and national origin by creditors.

Industry commenters opposed the removal of the catch-all item from the definition of application, even though some industry stakeholders also believed that the catch-all item was vague. For example, a national trade association representing credit unions requested that if the Bureau retains the current definition of application, it provide further guidance on what information is included in “any other information deemed necessary by the lender” so that credit unions could have a clear understanding of the kinds of information they may collect before issuing a Loan Estimate. Commenters' specific concerns regarding the proposed definition are discussed in more detail below.

Removal of the catch-all item. Many commenters asserted that without the catch-all item, creditors would not be able to obtain information critical to their ability to issue reliable and meaningful Loan Estimates. These commenters stated that the catch-all item currently permits creditors to collect information that could significantly impact loan and closing costs, loan pricing in the secondary market, and the underwriting decisions they make. Many commenters expressed the concern that without the ability to collect such information, they would have to follow up with revised Loan Estimates as they receive additional information.

However, there was no consensus among commenters with respect to what additional specific information beyond the six items included under the proposed definition of application is needed. A number of industry commenters asserted that the loan product must be part of the definition of application, or otherwise they would not know whether the rule would require or permit them to issue more than one Loan Estimate. Other commenters asserted that the definition of application must also include occupancy status, loan purpose, the loan's term, and, for purchase transactions, the sale price of the property the consumer is interested in. In joint comments, two State credit union trade associations asserted that creditors are required to collect information on loan purpose to comply with the Bank Secrecy Act of 1970 and HMDA. Credit union commenters and their trade associations also asserted that credit union membership is information credit unions must collect to process an application.

Several industry commenters, comprising mostly national trade associations representing banks and non-bank mortgage lenders, provided a list of seventeen pieces of information that, according to the commenters, significantly impact loan costs. A State manufactured housing trade association and a large non-depository manufactured housing lender asserted that creditors making such loans must be able to collect information about whether the home will be situated on leased land or on land that will secure the loan because the distinction would determine whether the obligation to provide the Loan Estimate disclosures applies to the creditor. A mortgage company commenter asserted that credit score, not just the consumer's social security number to obtain the score, should be included in the definition of application because the loan terms offered to a consumer depend on the consumer's credit score.

The comments also stated that some creditors require consumers to provide a copy of the purchase and sale contract as part of the application process. For example, a community bank commenter stated that it currently requires the purchase and sale contract as part of applications to help determine whether the buyer or seller is responsible for various costs and to identify the sale price. Another large bank commenter stated that a purchase and sale contract is necessary to determine the sales price. The community bank commenter stated that the regulations must allow creditors to minimize the burden of redisclosure, and that the bank's ability to request the purchase and sale contract reduces such burden. A State association of buyer's real estate agents, however, expressed concern that the lender practice of requiring a purchase and sale contract does not give consumers enough time to shop for a mortgage loan and must be changed.

Impact on industry. Many commenters expressed concern about compliance burden and implementation costs. Commenters stated that they would have to change their application process so that they could collect the information they need before, or at the same time as, they collect the six specific pieces of information that would constitute an application under the proposal. Some commenters asserted that even if a creditor could structure its application process to collect the additional information before collecting the six specific pieces of information that would make up the application, situations might arise, particularly with applications submitted through the internet or applications submitted by mail, where consumers submit the six specific pieces of information, but not the additional information the creditor deems critical to providing accurate and reliable Loan Estimates.

Some commenters, including a large bank commenter and national trade associations representing large banks and large mortgage finance companies, sought clarification on how creditors should treat consumer information they have retained due to prior or existing customer relationships. One of these commenters asked if a creditor would be considered to have received an application if a consumer starts filling out a mortgage application form online, provides the six pieces of information that make up the definition of application, but then saves the mortgage application form to complete at a later time. Some commenters asserted that the risk of having to issue Loan Estimates upon receiving applications that are complete under the Regulation Z definition of application, but that are not complete in the creditor's determination, would be greater for creditors that use independent mortgage brokers.

A number of commenters expressed concern about the interaction among the proposed definition of application, the proposed change to the definition of business day for purposes of determining the original Loan Estimate delivery requirement, and the proposed tightening of the current tolerance rules establishing limitations on fee increases for certain settlement costs. These commenters believed that these changes together would require a creditor to provide a Loan Estimate subject to stricter tolerances in a shorter period of time, with less information than it could currently rely on. A national trade association representing mortgage bankers asserted that creditors may increase their origination costs and estimate third-party charges at higher levels to manage the risk of providing estimates in response to the combined regulatory impact.

Some commenters asserted that changing the definition of application may not have a significant impact on a creditor's ability to delay provision of the Loan Estimate, because a creditor could simply sequence its application process to delay collection of some or all of the six pieces of information included under the new definition of application. Some commenters noted that they were not aware of any issues that have arisen since the current definition of application became effective in 2010 that would lead the Bureau to conclude that the proposed modification was necessary. A trade association representing large banks observed that HUD had previously proposed to require lenders to provide the RESPA GFE upon the receipt of the six items of specific information that would constitute the proposed definition of application, but after reviewing the comments, HUD added the catch-all item to the definition of application.

Some commenters expressed concern that, because the proposal would have required creditors to honor the charges disclosed on a Loan Estimate for ten business days after providing it, creditors would either be forced to accept lower fees disclosed when necessary information is missing or be required to provide revised Loan Estimates to charge the consumer the actual cost of a settlement service. A national trade association representing large bank creditors stated that the proposed definition could reduce the number of rate locks offered at application because creditors may not want to provide such a commitment without information they deem necessary. A large bank commenter asserted that the proposed definition of application may restrict a creditor's ability and reduce the creditor's willingness to provide pre-qualification and web-based home shopping services because currently, when using those services, consumers often provide the six pieces of information that would have constituted an application under the proposal. A national trade association representing banks asserted that a consumer should be allowed to provide the six specific items of information to receive pre-application worksheets, without also triggering the obligation for the creditor to issue a Loan Estimate.

A national trade association representing community-based mortgage bankers asserted that creditors need the flexibility to postpone the issuance of the Loan Estimate to those consumers who only want non-binding pre-application worksheets. A mortgage broker commenter asserted that there should be two definitions of application: one definition to trigger the obligation to provide pre-qualification worksheets, and a different definition to trigger the obligation to issue a Loan Estimate, which should retain the catch-all item or be the same as the definition used in Regulation B.

Some commenters expressed concern that the six items of information that constitute the proposed definition of application would not be adequate for a creditor to consider for ability-to-repay purposes, because creditors must verify certain borrower information to comply with those requirements. Several commenters, including national trade associations representing banks and consumer mortgage companies, additionally requested clarification that the proposed definition of application applies only to Regulation Z, and not to regulations implementing ECOA, HMDA, and the Fair Credit Reporting Act (FCRA). Some commenters expressed a desire for the Bureau to streamline the definition of application so that one definition can be consistently applied across those regulations and Regulation Z. A large-bank trade association expressed concern that adopting the proposed definition of application would add regulatory complexity because the definition would be different from the definitions of application under regulations implementing ECOA and HMDA at a time when banks are struggling to comply with other Dodd-Frank Act requirements.

The SBA stated that the Bureau should not remove the catch-all item from the definition of application because the small entity representatives that participated in the Bureau's Small Business Panel Review process had mixed reactions to the proposed removal of the catch-all item. It additionally suggested that the Bureau should remove “property address” from the list of six specific items that would make up the definition of application. The SBA asserted that the requirement would be problematic based on its consultation with industry representatives and based on the suggestion made by a national trade association representing community banks in connection with the Small Business Review Panel process. The trade association commenter asserted that the “property address” should be an optional item in the definition of application for purchase transactions because the change would enable the consumer to shop for a mortgage loan based on a regulated document, the Loan Estimate, rather than unregulated pre-application worksheets. The commenter made the same assertion in the comment letter it submitted in response to the TILA-RESPA Proposal.

An individual industry commenter echoed SBA's suggestion with respect to the property address. The commenter asserted that the definition of application should be defined as having been received when the creditor has enough information to issue a pre- approval letter, or submit the loan for pre-approval, but that the pre-approval letter must not bind the creditor.

Final Rule

The Bureau has considered the comments but believes that the purpose of the Loan Estimate with respect to consumers that was set forth by the Dodd-Frank Act (see Dodd-Frank Act sections 1098 and 1100A), to aid consumer understanding of the mortgage loan transaction, is better served by removing the catch-all item from the definition of “application.” The Bureau understands that the removal of the seventh catch-all item from the definition may not have a substantial impact on moving the issuance of the Loan Estimate earlier in the transaction. It is apparent from the comments received that many creditors would sequence the information they receive to obtain information they deem necessary in addition to the six items in the definition of “application” before receipt of all six items. However, the Bureau believes that there are other important benefits that will be achieved from a definition of application that only includes the six specific items and not the seventh open-ended catch-all item.

Under the current definition of application under Regulation X, creditors decide when to provide the RESPA GFE and early TILA disclosure based on their own definition of what information is necessary for an application. The Bureau does not have evidence of creditors systematically using the catch-all item after receiving the six items in the definition of application to delay issuance of the RESPA GFE and the early TILA disclosure after receipt of the six items. However, it is apparent from the comments received that creditors use this catch-all item in the current definition of application to obtain additional information after receiving the six specific items in the definition of application. Accordingly, consumers cannot ascertain the point in time when they are entitled to receive the Loan Estimate on which they can rely.

The Bureau believes that the final rule, under which consumers must receive a Loan Estimate after submitting an application that clearly presents the estimated loan terms and costs will provide a significant benefit to consumers by enabling them to shop for different financing options with clear, reliable estimates. Indeed, as described in the section-by-section analysis of § 1026.19(e)(2)(ii) below, the final rule requires a statement on pre-disclosure estimates provided to consumers informing them that the estimated loan terms and costs can be higher, and to “Get an official Loan Estimate before choosing a loan.” Accordingly, to ensure that consumers understand how to obtain a Loan Estimate, the Bureau believes that consumers should be able to discern the point of time in the application process of the transaction at which the creditor is required to provide them with one. The Bureau believes that the fact that under the current definition of application creditors can obtain any additional information past the point of receipt of the six items conflicts with the ability of consumers to understand this aspect of their transaction.

By providing that the submission of six specific items of information constitutes an application, the final rule provides a clear point in time for consumers at which the creditor can no longer delay issuance of the Loan Estimate. Accordingly, the Bureau believes that the definition of application in the final rule will result in consumers having a better understanding of the application process of the transaction, and of how to obtain the Loan Estimate, as directed by the statement required under § 1026.19(e)(2)(ii). The Bureau believes a uniform, bright line definition of application will provide this consumer benefit. With one standard, objective definition of application across all creditors, consumers will more easily understand when a creditor is required to provide them with the Loan Estimate. The Bureau believes consumer understanding can be further enhanced through a consumer education initiative regarding the information the consumer should provide to receive a Loan Estimate, and regarding the reliability of the Loan Estimate. In addition, the Bureau believes a single bright-line definition of application across all creditors will facilitate compliance by industry and supervision by Federal and State regulatory agencies.

The Bureau does not believe that the catch-all element is a necessary component of the definition of application. The final rule permits creditors to collect the information they need to give a reliable estimate before they complete collection of the six items of information that constitute an application. As discussed above, some industry commenters noted that aspect of the Bureau's proposed definition when they asserted that the definition of application may not have a significant impact on a creditor's ability to delay provision of the Loan Estimate, because the creditor could simply sequence its application process to delay collection of some or all of the six pieces of information that would make up the definition of application. Such comments reveal that the catch-all element does not need to be part of the definition of application because creditors do not need it to collect additional information from consumers. In addition, the final rule does not prevent creditors from collecting additional information after they receive the six specific pieces of information for underwriting purposes.

The Bureau also believes that it is unnecessary to add specific items to the definition of application. The fact that the final rule permits creditors to collect the information they need to give a reliable estimate before they complete collecting the six items of information that constitute an application means that each creditor is free to request the particular pieces of information it needs before, or at the same time as the creditor collects the six pieces of information. In addition, commenters did not uniformly suggest particular items to add to the definition. Because creditors can collect the additional information they believe is necessary with this revised definition of application, the Bureau believes that it is unnecessary to add new items to the definition of application to replace the catch-all item, as requested by some industry commenters.

The Bureau does not believe that the deletion of the catch-all item will cause creditors to issue a large number of revised Loan Estimates that would create consumer confusion and information overload. The final rule permits creditors to sequence the application process to gather additional items of information, including the potential loan product a consumer is considering, which some creditors assert are needed to provide reliable estimates. This reduces the likelihood of redisclosures. For similar reasons, creditors should not need to increase their origination costs, over-estimate third-party fees, or reduce rate lock offers. To be sure, the final rule may result in some consumers receiving multiple Loan Estimates concurrently with respect to multiple loan products the consumer is considering. The Bureau does not believe, however, that this will cause confusion. On the contrary, the Bureau believes that receiving multiple Loan Estimates furthers the goal of facilitating consumer shopping. Further, the Bureau believes that it is better that consumers receive Loan Estimates that are subject to the good faith requirements of § 1026.19(e)(3) and that are subject to the standard or model format requirements of § 1026.37(o) than that they receive pre-disclosure estimates, which are not subject to those requirements.

Pre-qualification services. The Bureau also does not believe that the definition of application adopted in this final rule will discourage creditors from providing pre-approval, pre-qualification, or internet-based home-shopping services. The Bureau believes that competition among creditors for consumers will be an effective countervailing force against any such disincentive. Additionally, the Bureau does not believe that the definition of application will restrict creditors' ability to provide pre-qualification cost estimates or grant pre-approvals. The Bureau believes that creditors could provide pre-qualification estimates and grant pre-approvals without obtaining all of the six specific items of information that make up the definition of application. Specifically, the Bureau believes that there is little need for creditors to gather specific information about the loan transaction, such as the property address or loan amount sought, to make pre-qualification estimates because pre-qualification estimates and pre-approvals are not subject to the tolerance rules in § 1026.19(e)(3) and are generally for a range of loan amounts and property values. In fact, comments made by a national trade association representing community banks asked that the Bureau designate “property address” as an optional item in the definition of application for purchase transactions. This suggests to the Bureau that creditors may not need the “property address” to issue pre-qualification estimates.

Industry compliance. The Bureau considered industry commenters' concern that regulatory burden would increase because the final rule would change (i) the definition of business day to include Saturday as a business day for the original Loan Estimate delivery requirement; (ii) the tolerance rules, and (iii) the definition of application. In response to these concerns, the Bureau has decided to use the general definition of business day in Regulation Z for the integrated Loan Estimate delivery requirement. See the section-by-section analysis of § 1026.2(a)(6). Further, the Bureau is addressing concerns about burden by retaining the six exceptions to the general rule that certain settlement charges may not increase from the amounts originally disclosed to the consumer under § 1026.19(e)(1)(i), including exceptions based on the information the creditor relied on in disclosing the estimated loan costs. See the section-by-section analysis of § 1026.19(e)(3)(iv).

As noted above, a number of commenters expressed concerns about compliance with other regulations. The definition being adopted today does not change the current definitions of application under Regulations B and C. The Bureau recognizes the potential benefits of a single definition of application, including reduced regulatory burden. However, the definition of application in this final rule determines when consumers must be given disclosures that enable them to shop for and compare different loan and settlement cost options. The definition of application in this final rule serves a different purpose than the definition of application in Regulations B and C. “Application” as defined by this final rule triggers a creditor's obligation to provide disclosures to aid consumers in shopping for and understanding the cost of credit and settlement. On the other hand, a creditor's receipt of an application under Regulation B triggers a creditor's duty to make a credit decision and notify the borrower within a specified time frame. Under Regulation C, receipt of an application triggers a duty to collect and report information on the disposition of that application and on other aspects of the transaction as well as the applicant's characteristics. Accordingly, the Bureau is not expanding the definition of application adopted in this final rule to regulations that implement ECOA, FCRA, and HMDA, or vice versa. However, the Bureau will continue to consider the comments received on this topic as it evaluates further follow up to the 2011 Streamlining RFI.

With respect to the concern that the definition of application may make it more difficult to comply with other regulatory obligations, given the flexibility the creditor will continue to have under this final rule to sequence the information it collects, there is little need to delay issuance of the Loan Estimate to comply with other regulations. Regulation X currently prohibits creditors from requiring the submission of verifying information as a condition of issuing the RESPA GFE. The final rule prohibits creditors from requiring the submission of verifying information as a condition to issuing a Loan Estimate, as discussed below in the section-by-section analysis of § 1026.19(e)(2)(iii). However, the final rule does not prevent a creditor from fulfilling its obligation to evaluate a borrower's ability to repay. Creditors will be able to collect whatever information they need to evaluate a borrower's ability to repay so long as they sequence the collection of that information to ensure that they provide a Loan Estimate when required by § 1026.19(e)(1)(iii) and without conditioning the issuance on verifying information.

The Bureau recognizes that some creditors may have to restructure their information collection process, such as by changing the manner in which they sequence their information collection and increasing communication with independent mortgage brokers. These changes may impose some costs on creditors. But the Bureau believes that the final rule's bright-line definition of application may provide some benefits to industry. Some commenters requested clarification regarding what information could be collected by creditors under the catch-all element. Because the current definition of application does not contain a standard for the additional information that may be collected before providing the Loan Estimate, the final rule's bright line definition may facilitate industry compliance with the disclosure requirements. In addition, a bright line definition may facilitate due diligence reviews by creditors' secondary market purchasers, securitizers, or other business partners, and thereby reduce overall burden.

Specific comments on the six items. The Bureau received comments on the six items of information, in addition to the removal of the seventh catch-all element. The Bureau is not adopting changes to the six elements. First, the final rule does not replace “social security number to obtain a credit report” with “credit score,” as a mortgage broker commenter suggested. The Bureau believes a creditor would have sufficient time to obtain the credit score information before a Loan Estimate must be issued. Additionally, for reasons stated above, the Bureau does not believe it is necessary to provide that “property address” is an optional piece of information for purposes of the definition of application. As discussed in greater detail below, comment 19(e)(3)(iv)(A)-3 explains that creditors are not required to obtain the property address before they issue a Loan Estimate. The final rule also does not include a separate definition of application for pre-approval estimates or worksheets. Creditors are currently able to issue such documents at any time before issuing the RESPA GFE and the early TILA disclosure, and will continue to be able to do so under this final rule. Further, the Bureau believes that creating another definition of application would create consumer confusion and add to regulatory burden.

Final definition of application. For the reasons discussed above, the Bureau is finalizing the removal of the catch-all item from the definition of application in this final rule as proposed, pursuant to its authority under TILA section 105(a) and its authority under section 19(a) of RESPA. The definition of application adopted in this final rule consists of two parts. First, § 1026.2(a)(3)(i) defines application as the submission of a consumer's financial information for purposes of obtaining an extension of credit. This establishes a general definition for all credit transactions subject to Regulation Z. Second, § 1026.2(a)(3)(ii) provides that an application consists of six pieces of information for transactions subject to § 1026.19(e), (f), or (g) of Regulation Z. The six pieces of information consist of the consumer's name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought.

The Bureau acknowledges that in contrast to the proposed § 1026.2(a)(3)(ii), final § 1026.2(a)(3)(ii) narrows the scope of the definition of application to transactions subject to the integrated disclosure requirements. The Bureau believes that the modification is necessary to facilitate compliance with the final rule. The definition of application in proposed § 1026.2(a)(3)(ii) would have applied to any type of credit subject to subpart C of TILA, including closed-end loans not secured by real property. The Bureau did not intend the definition of application set forth in proposed § 1026.2(a)(3)(ii) to apply to other types of credit. As the Bureau stated in the proposal, the definition of application set forth in proposed § 1026.2(a)(2)(ii) consisted of elements that had an “established significance in the context of closed-end loans secured by real property, but may be less significant, or even inapplicable to other types of credit.” 77 FR 51140.

Comment 2(a)(3)-1 is adopted as proposed, except for adjustments to harmonize the comment with adjustments to the scope of the definition of application set forth in final § 1026.2(a)(3)(ii). The comment provides guidance on when a consumer is considered to have submitted an application for purposes of § 1026.2(a)(3). This final rule does not require the receipt of the six items that make up the definition of an application in a particular order. The final rule permits a creditor to set up systems to collect the six items of information that make up the definition of application in the order that best suits the creditor's needs. Thus, creditors taking applications on paper form, over the phone, or on a Web page can sequence the information requested from the consumer in any order.

The Bureau does not believe that additional guidance is necessary with respect to the collection of information from consumers with whom the creditor has an existing business relationship, or a previous business relationship, with the creditor. The definition of application refers to the “submission” of the six items of information that make up the definition, and as such, merely maintaining such information from a previous transaction or business relationship would not constitute an application for purposes of the definition if the consumer has not submitted any information or indicated that he or she wishes such information maintained by the creditor to be used for an application. Additionally, because the definition of application refers to the “submission” of the six items of information that make up the definition, if a consumer starts filling out a mortgage application form online, enters the six pieces of information that constitute the definition of “application,” but then saves the mortgage application form to complete at a later time, the consumer has not submitted the items of information.

Comments 2(a)(3)-2 and -3 are also adopted as proposed. Comment 2(a)(3)-2 clarifies that if a consumer does not have a social security number, the creditor may instead request a unique identifier the creditor uses to obtain a credit report. For illustrative purposes, the comment provides an example that states that a creditor has obtained a social security number to obtain a credit report for purposes of § 1026.2(a)(3)(ii) if the creditor collects a Tax Identification Number from a consumer who does not have a social security number, such as a foreign national. A national fair housing consumer advocacy group commenter suggested moving this provision into the regulation. However, because the example illustrates how to comply with the requirements of § 1026.2(a)(3) if the consumer does not have a social security number, the Bureau believes that this example's placement should remain in commentary, rather than in the text of the regulation.

Finally, the Bureau understands that some creditors require a purchase and sale agreement prior to issuing the RESPA GFE and the early TILA disclosure. While this practice may be permissible under current Regulation X in some cases, it would conflict with final § 1026.19(e)(2)(iii), which prohibits a creditor from requiring verifying documentation before issuing a Loan Estimate. See the section-by-section analysis of § 1026.19(e)(2)(iii).

2(a)(6) Business Day

The Bureau proposed to apply the specific definition of the term “business day” under Regulation Z, which includes Saturdays, but excludes certain public holidays, to the provisions of § 1026.19(e) and (f) that would be analogous to § 1026.19(a)(1)(i), (a)(1)(ii), and (a)(2), which are the timing requirements for the integrated disclosures.

Although neither RESPA nor TILA defines the term “business day,” that term is defined in Regulations X and Z. Both Regulation X § 1024.2(b) and Regulation Z § 1026.2(a)(6) generally define business day to mean a day on which the offices of the creditor or other business entity are open to the public for carrying on substantially all of the entity's business functions. For certain provisions of Regulation Z, however, the specific definition provided under Regulation Z applies, which includes all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), (i.e., New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day).

The specific definition of business day applies to, among other things, the three-business-day limitation on the imposition of fees in § 1026.19(a)(1)(ii) and the three- and seven-business-day waiting periods in § 1026.19(a)(2). The Bureau proposed to amend § 1026.19 to implement analogous requirements for the integrated disclosures in new paragraphs (e) and (f) of that section. For consistency with the current timing requirements under § 1026.19(a), and to facilitate compliance with TILA, the Bureau proposed to use its authority under TILA section 105(a) to amend § 1026.2(a)(6) to apply the specific definition of business day to the provisions of § 1026.19(e) and (f) that would be analogous to § 1026.19(a)(1)(i), (a)(1)(ii), and (a)(2). The Bureau also proposed conforming amendments to comment 2(a)(6)-2. Under the proposal, in addition to other timing requirements for the integrated disclosures, the specific definition of business day would have applied to the requirement to deliver the Loan Estimate within three business days of a creditor receiving an application.

The Bureau stated in the TILA-RESPA Proposal that it recognized that this issue was previously raised during the Board's 2008-2009 MDIA rulemaking. See 73 FR 74989, 74991 (Dec. 10, 2008) and 74 FR 23289, 23293-23294 (May 19, 2009). However, the Bureau stated that it believed applying the specific definition of business day to the integrated disclosures would facilitate compliance. The Bureau solicited feedback regarding whether the general definition of business day instead should apply to the integrated disclosures delivery requirements. The Bureau also solicited comment on whether the rules should be analogous to the current rules, where the general business day requirement applies to some requirements and the specific business day requirement applies to other requirements. Finally, the Bureau solicited feedback regarding whether the business day usage under current § 1026.19(a) should remain, or if § 1026.19(a) should be modified to use a single definition of business day consistent with proposed § 1026.19(e) and (f).

Comments

In joint comments, two large national consumer advocacy groups asserted that the Bureau should replace both the general and specific definitions of business day currently used in Regulation Z with an alternative definition of business day that would exclude Saturdays, Sundays, and the legal public holidays specified in 5 U.S.C. 6103(a). The consumer advocacy groups asserted that the current specific definition of business day is flawed because people generally do not consider Saturdays as a “business day.” The consumer advocacy groups also opposed the general definition of business day. They argued that it was subjective, varied entity-by-entity, and could be changed without warning. The commenters asserted that they did not believe that excluding Saturday from the definition of business day will have a significant consumer impact, and that any detriment would be outweighed by the benefits of their alternative definition. The consumer advocacy groups asserted that their alternative definition of business day would simplify compliance and training for businesses and help reduce the possibility of errors and litigation that arise from confusion over whether a particular day qualifies as a business day.

Industry commenters had mixed reactions to the proposed application of the specific definition of business day for determining the original Loan Estimate delivery requirement, although most opposed applying the specific definition. A large bank commenter expressed support for using the specific definition of business day for purposes of determining the amount of time a creditor has to deliver the Loan Estimate after receipt of a consumer's application because applying different definitions of business day is confusing to creditors, consumers, and other participants in the settlement process. A regional bank holding company supported applying the specific definition of business day to all mortgage-related provisions of Regulation Z based on its belief that the general definition of business day is vague. A national trade association representing mostly mortgage brokers and a State trade association representing similar entities supported the proposed application of the specific definition of business day for determining the original Loan Estimate delivery requirement. They asserted that most creditors operate at least six days a week. A title agent commenter supported the specific definition because it was easy to understand.

As noted above, most industry commenters strongly opposed using the specific definition of business day to determine the original Loan Estimate delivery requirement. The commenters included large banks, regional banks, community banks, credit unions, and non-depository lenders; several national, regional, and State trade associations representing banks, mortgage bankers, consumer mortgage companies, and credit unions; settlement and title agents, document preparation and software companies, compliance companies, a law firm, SBA, and a national trade association representing house financing agencies. The comments mostly focused on the compliance burden that would result from the adoption of the specific definition, because it would reduce the timeframe in which a creditor or mortgage broker would have to prepare and deliver the Loan Estimate. Commenters stated that creditors are typically not staffed so that they could provide the Loan Estimate within a timeframe determined by the application of the specific definition of business day to the original Loan Estimate delivery requirement. Some commenters stated that they are closed on weekends and others stated that they only offer limited service on weekends. Commenters also stated that the personnel that typically prepare the Loan Estimate do not work on Saturdays. A number of commenters stated that even if a creditor is open for business on a Saturday, third-party settlement service providers that a creditor must contact to obtain information creditors need to prepare the Loan Estimate may not be open. Commenters expressed concern that the specific definition of business day would increase operating and compliance costs substantially for creditors and third-party service providers, particularly if they are small entities, increase mistakes on the Loan Estimate, and increase redisclosures because it would reduce the timeframe in which a creditor or mortgage broker would have to prepare the Loan Estimate. Many of these commenters requested that the Bureau retain the general definition of business day for the original Loan Estimate delivery requirement.

A number of industry commenters supported establishing a consistent definition of business day to promote consistency across the provisions of Regulations X and Z that would be impacted by the TILA-RESPA Proposal to reduce compliance burdens for creditors. A large non-depository lender and a State credit union trade association expressed a preference for the general definition of business day, because applying the specific definition of business day to the preparation of the integrated disclosure would increase compliance burden by reducing the time available to prepare the integrated disclosures and expose creditors to unnecessary liability. A national trade association commenter representing mortgage bankers suggested that the general definition of business day should be clarified. The commenter appears to have sought to narrow the general definition of business day to an entity's mortgage origination functions so that at a multiservice financial institution, the determination of whether a day is a business day under the general definition would be evaluated in the context of the financial institution's mortgage origination business and the schedule of employees that work in that business segment.

Some commenters supported a specific definition of business day, but did not support the current specific definition of business day in Regulation Z, for the reasons discussed above. Some of these commenters supported applying an alternative definition of business day that excludes all Saturdays, Sundays, and the legal public holidays specified in 5 U.S.C. 6103(a), similar to the definition the two national consumer advocacy groups suggested, to the regulatory provisions that would be impacted by the TILA-RESPA Proposal. Several national trade associations representing banks, mortgage bankers, and consumer mortgage companies stated that it was important to continue to apply the specific definition of business day to regulatory provisions that prescribe the timeframe a consumer is given to review disclosures, such as the waiting period before consummation, the consumer's right to rescind, and provisions related to when disclosures are considered to be received by the consumer and when fees may be charged, because consumers can receive mail on Saturday and review disclosures on Saturday. Lastly, one national trade association representing mortgage brokers suggested that the Bureau should eliminate the concept of business day with respect to any regulatory provision that contains a timing requirement related to mortgages. The commenter appeared to suggest that a standard based on calendar days would be easiest to understand.

Final Rule

Original Loan Estimate delivery requirement. The Bureau has considered these comments and has determined to retain the general definition of business day in Regulation Z for determining the original Loan Estimate delivery requirement. The Bureau has concluded that applying the specific definition of business day to the timing requirement to provide the original Loan Estimate within three business days of receipt of an application under § 1026.19(e)(1)(iii) would impose significant compliance costs on creditors that are not currently open for business on Saturdays, especially small creditors. As discussed above, many commenters stated that they do not carry on business on Saturdays. Further, even those that do would need to contact third-party service providers that may not be open for business on Saturdays to obtain information about fees to disclose on the Loan Estimate. The Bureau is concerned that creditors and settlement service providers that currently do not operate on Saturdays, especially smaller entities such as community banks, credit unions, and settlement agents, could disproportionately bear the operating and compliance costs caused by the final rule treating Saturday as a business day for the original Loan Estimate delivery requirement. Such entities might face significant practical pressure to operate on Saturday under the proposed rule, which could significantly increase their operating costs.

The Bureau is also concerned about the unintended consequences to consumers of applying the specific definition of business day for determining the original Loan Estimate delivery requirement. As discussed above, two large national consumer advocacy groups stated that they did not believe excluding Saturday from the definition of business day would have a significant impact on consumers. But as discussed above, many industry commenters expressed concern that the specific definition of business day would substantially increase operating and compliance costs because their operations are not set up to treat Saturday as a business day. Accordingly, the Bureau is concerned that an unintended consequence of applying the specific definition of business day to the original Loan Estimate delivery requirement would be creditors and settlement service providers raising origination charges and fees for settlement services to cover their increased operation costs. The Bureau believes that this result could ultimately harm consumers.

The Bureau also believes that retaining the general definition of business day for the original Loan Estimate delivery requirement would facilitate compliance because as proposed, the general definition of business day in Regulation Z would have been retained for purposes of determining revised Loan Estimate delivery requirement in proposed § 1026.19(e)(4)(i). The Bureau believes that applying the same definition of business day to the original Loan Estimate delivery requirement as the revised Loan Estimate delivery requirement will facilitate compliance for industry.

Consistent definition of business day. The Bureau is also not adjusting the general definition of business day, in the manner requested by a national trade association representing mortgage bankers. As discussed above, the commenter appeared to request that the general definition of business day be evaluated in the context of a financial institution's mortgage origination business and the schedule of employees that work in that business segment. The Bureau believes such a definition would not only be discordant with the current definition that considers whether a creditor's offices are open to the public for carrying on substantially all of its business functions, but would also increase the level of difficulty in evaluating compliance.

The Bureau recognizes that a consistent definition of business day throughout Regulation Z could enhance consumer understanding and facilitate compliance with Regulation Z. However, the Bureau believes such a far reaching amendment to the definition of business day, which affects many provisions throughout Regulation Z, is beyond the scope of this rulemaking and would be inappropriate in this final rule. The Bureau believes it would need to conduct further study of this issue before undertaking such a rulemaking. There would be many issues and alternatives to consider in such a rulemaking. As discussed above, two large national consumer advocacy groups asserted that the Bureau should replace both the general and specific definitions of business day with a single definition that excludes Saturdays, Sundays, and the legal public holidays specified in 5 U.S.C. 6103(a) throughout Regulation Z. But as noted above, several national trade associations asserted that it was important to maintain the current specific definition of business day, which includes Saturday, for provisions such as the waiting period before consummation. The commenters also asserted that the specific definition should continue to apply to provisions related to the consumer's right to rescind in certain mortgage transactions. The Bureau believes further study of these issues would be necessary, and thus, it would be inappropriate to finalize such an amendment in this final rule. However, the Bureau may review such a definition in the context of its 2011 Streamlining RFI.

Final definition of business day. For the reasons discussed above, in the final rule, the Bureau is applying the general definition of business day for the requirement to deliver the initial disclosures within three business days under § 1026.19(e)(1)(iii). The Bureau is otherwise finalizing the definition of business day as proposed. Specifically, the Bureau is adopting the specific definition of business day to the seven-business day waiting period in § 1026.19(e)(1)(iii)(B), § 1026.19(e)(1)(iv) and § 1026.19(e)(2)(i)(A). These provisions are analogous to provisions in § 1026.19(a) of Regulation Z to which the specific definition of business day currently applies, and the Bureau believes such consistency will facilitate compliance for industry.

For reasons set forth in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), the Bureau is also adopting the aspect of the proposal that would have applied the specific definition of business day to § 1026.19(f)(1)(ii) and (iii). Further, for reasons discussed in greater detail in the section-by-section analyses of §§ 1026.19(e)(4)(ii) and 1026.20(e)(5), the Bureau is also adopting the application of the specific definition of business day to these sections, which establish timing requirements for, respectively, the receipt of revised Loan Estimates and the Post-Consummation Escrow Cancellation Disclosure. The Bureau has also made a minor modification to comment 2(a)(6)-2 to refer to real estate-secured loans as well as dwelling-secured loans, as § 1026.19(e) and (f) apply to closed-end credit transactions secured by real property.

2(a)(17) Creditor

Under current Regulation Z, a person who extended consumer credit 25 or fewer times in the past calendar year, or five or fewer times for transactions secured by a dwelling, does not qualify as a “creditor.”See 12 CFR 1026.2(a)(17)(v). The Bureau's 2011 Streamlining RFI requested comment on whether these thresholds should be raised and, if so, to what number of transactions. That proposal also solicited comment on whether a similar exemption should be applied to the integrated disclosures. In response, trade association commenters suggested raising the threshold number of transactions in order to reduce regulatory burden on small lenders. For example, one trade association commenter suggested raising the threshold number of transactions to 50, regardless of transaction type. In light of this feedback, the Bureau requested comment in the TILA-RESPA Proposal on whether the five-loan exemption threshold was appropriate for transactions that would be subject to this final rule and, if not, what number of transactions would be appropriate. The Bureau also solicited comment on whether any transaction-based exemption adopted in this rulemaking should be applied to the pre-consummation disclosure requirements of sections 4 and 5 of RESPA.

Comments

Industry commenters expressed mixed views with respect to whether the definition of creditor should be changed to accommodate small businesses. On the one hand, some industry commenters requested that the Bureau further increase the threshold under Regulation Z for defining creditors or adopt an exemption for small businesses. They included a national trade association representing escrow and settlement agents, two law firm commenters, a community bank commenter, and a national trade association representing Federally-chartered credit unions.

On the other hand, other commenters, including a commenter employed by a software company, several individual commenters, and settlement agents expressed concern that it would be difficult to identify criteria for a small creditor definition and that inconsistent application of the integrated disclosure requirements across the mortgage market would harm consumers because it would impede consumer shopping among different creditors. Lastly, a national trade association representing mortgage brokers objected to the fact that the determination of whether a person is a “creditor” is based on the person's business volume. The commenter asserted that it makes compliance difficult because a creditor would not know in advance how many transactions it will process in any given year. The commenter stated that if disclosures are unnecessary for small entities, they are also unnecessary for large ones.

Final Rule

The Bureau has considered the comments and has concluded that the existing thresholds used to determine whether a person is a creditor under Regulation Z in § 1026.2(a)(17)(v) should be retained in this final rule. TILA section 103(g) provides that the definition of creditor refers to a person who “regularly extends” consumer credit. The Bureau believes that it does not have information in connection with this rulemaking to support a determination that the requirements of TILA should not apply to entities that regularly extend consumer credit solely because they are small businesses. The Bureau believes that the volume-based exemptions in § 1026.2(a)(17)(v) are intended to address the potentially significant differences in abilities to comply with Regulation Z's disclosures requirements between entities that provide disclosures on a frequent basis, because they regularly extend consumer credit, and entities that provide disclosures on an infrequent basis, because they extend consumer credit on an irregular basis. The Bureau did not propose in the TILA-RESPA Proposal new thresholds to replace the existing thresholds used to determine whether a person is a creditor under Regulation Z, and does not currently have information sufficient to support adjusting the existing thresholds. Based on the significant effect such an amendment could potentially have on the market, especially considering that the definition applies to all of Regulation Z, the Bureau believes it would need to obtain additional information, possibly through further notice and comment, and conduct additional study of the issue before issuing a final rule on the issue.

The Bureau believes the numerical thresholds in the current definition of creditor provide clear guidance to determine whether an entity is a creditor for purposes of § 1026.2(a)(17)(v), as the Board believed when it originally finalized numerical thresholds for the definition of creditor in 1981. [162] As discussed above, current § 1026.2(a)(17)(v) provides that the number of transactions that is used to determine whether a person is a creditor is based on the number from the past calendar year. Because the Bureau believes the numerical thresholds in the current definition facilitate compliance with the requirements of Regulation Z for industry and because it does not have sufficient information on which to base an amendment to such thresholds, the Bureau is not amending the definition of creditor in this final rule. Lastly, for reasons discussed below in the general section-by-section analysis of § 1026.19, the Bureau has also concluded that it will not adopt a small business exemption with respect to the integrated disclosure requirements being adopted in this final rule.

2(a)(25) Security Interest

Under the definition of the term “security interest” in current § 1026.2(a)(25), for purposes of the disclosure requirements in §§ 1026.6 and 1026.18, the term does not include an interest that arises solely by operation of law. For consistency and to facilitate compliance with TILA, pursuant to its authority under TILA section 105(a), the Bureau proposed a conforming amendment to the definition of security interest that would have extended this exemption to disclosures required under proposed §§ 1026.19(e) and (f), and 1026.38(l)(6). The same conforming amendment would have been made to comment 2(a)(25)-2. Having received no comments on the conforming amendment, the Bureau is adopting the conforming amendment as proposed, pursuant to its authority under TILA section 105(a), for consistency and to facilitate compliance with TILA. The Bureau received comments from a mortgage broker commenter that appeared to seek clarification from the Bureau with respect to what makes a particular type of property interest a “security interest” for purposes of § 1026.2(a)(25). The Bureau believes that this question is adequately addressed by existing comment 2(a)(25)-1.

Section 1026.3 Exempt Transactions

In the TILA-RESPA Proposal, the Bureau proposed a partial exemption from the disclosure requirements of proposed § 1026.19(e), (f), and (g) for certain mortgage loans, and accordingly, proposed conforming amendments to § 1026.3(h) to reflect this exemption. The Bureau also proposed amendments to the commentary to § 1026.3(a) to clarify the current exemption for certain trusts.

3(a) Business, Commercial, Agricultural, or Organizational Credit

TILA section 104(1), 15 U.S.C. 1603(1), excludes from TILA's coverage extensions of credit to, among others, organizations. Accordingly, § 1026.3(a)(2) provides that Regulation Z does not apply to extensions of credit to other than a natural person. The Bureau proposed revising comments 3(a)-9 and -10 to clarify that credit extended to certain trusts for tax or estate planning purposes is considered to be extended to a natural person rather than to an organization and, therefore, is not exempt from the coverage of Regulation Z under § 1026.3(a)(2).

Existing comment 3(a)-10 discusses land trusts, a relatively uncommon way of structuring consumer credit in which the creditor holds title to the property in trust and executes the loan contract as trustee on behalf of the trust. The comment states that, although a trust is technically not a natural person, such arrangements are subject to Regulation Z because “in substance (if not form) consumer credit is being extended.” This TILA-RESPA Proposal amended comment 3(a)-10 to extend this rationale to more common forms of trusts. Specifically, proposed comment 3(a)-10 would have noted that consumers sometimes place their assets in trust with themselves as trustee(s), and with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates. Further, proposed comment 3(a)-10 would have stated that Regulation Z applies to credit that is extended to such a trust, even if the consumer who is both trustee and beneficiary executes the loan documents only in the capacity of the trustee, for the same reason the existing comment notes with respect to land trusts: such transactions are extensions of consumer credit in substance, if not in form. The Bureau proposed revising comment 3(a)-9 to cross-reference comment 3(a)-10.

A number of industry trade association commenters noted that proposed comment 3(a)-10 was ambiguous in its application to trusts with multiple beneficiaries. Specifically, the commenters asked for clarification with respect to which beneficiary should receive the disclosures required by proposed § 1026.19(e), (f), and (g), and which beneficiary has the right to rescind the transaction under the conditions described in § 1026.23. The same commenters also asked the Bureau to clarify that only revocable trusts are covered by the proposed language, noting that mortgage loans made to other types of trusts are niche products that do not meet GSE underwriting guidelines, are subject to substantial due diligence and as such should not be subject to Regulation Z.

After consideration of the comments received, the Bureau is adopting comments 3(a)-9 and -10 generally as proposed. The proposed comments are intended to clarify that the benefits of the disclosures required by § 1026.19(e), (f), and (g) extend to any consumer involved in a transaction that in substance extends consumer credit, regardless of whether that consumer is the direct mortgage obligor or a beneficiary of a trust to which such credit has been extended. With that rationale in mind, the Bureau believes that the intent of the comment is to clarify that those provisions of Regulation Z that apply to consumers will also apply to trust beneficiaries who are in essence acting as consumers. Accordingly, specific guidance with respect to the commenters' requests for clarification can be found in §§ 1026.17(d) and 1026.23(a)(4) and their associated commentary, which provide guidance with respect to consumers' rights and benefits in transactions that involve multiple obligors and the right to rescind a transaction.

In addition, because the proposed comment clarifies the coverage of loans made to trusts under Regulation Z based on the purpose of the loan, rather than on the loan's frequency in the market or its compliance with GSE underwriting guidelines, the Bureau declines to add language to the comment specifying that the trusts covered by the proposed comments are limited to revocable trusts. Comments 3(a)-9 and (a)-10 are therefore finalized as proposed, except that the Bureau is making modifications to comment 3(a)-10 to add the word “primarily,” in order to bring the language of the comment into conformity with the definition of “consumer credit” provided in § 1026.2(a)(12), and to clarify that the application of the exemption extends to trusts that benefit the consumer but are executed by a third-party trustee, such as a bank or an attorney. The Bureau believes that trusts in which the consumer is a beneficiary but the trustee is a third party, similar to trusts in which the consumer is both the trustee and beneficiary, are in substance (if not form) consumer credit transactions. The Bureau is revising comments 3(a)-9 and -10 accordingly, pursuant to its authority under TILA section 105(a), because it believes it will assure a meaningful disclosure of credit terms to consumers and promote the informed use of credit.

3(h) Partial Exemption for Certain Mortgage Loans

In the TILA-RESPA Proposal, the Bureau proposed a new § 1026.3(h) to provide an exemption from proposed § 1026.19(e), (f), and (g) for transactions that satisfy several criteria associated with certain housing assistance loan programs for low- and moderate-income persons. As discussed below, proposed § 1026.19(e) and (f) would have established the requirement to provide the new integrated disclosures for closed-end transactions secured by real property, other than reverse mortgages, and proposed § 1026.19(g) would have established the requirement to provide a special information booklet for those transactions. The partial exemption in proposed § 1026.3(h) was meant to parallel § 1024.5(c)(3), discussed above; it was designed to create consistency with Regulation X and to codify a disclosure exemption previously granted by HUD. Thus, under each of the two proposed exemptions, lenders would have been exempted from providing the integrated disclosures for transactions that satisfy the exemption's conditions, even if the transaction otherwise would be subject to RESPA.

The Bureau believed that the proposed exemption created consistency with Regulation X and therefore would facilitate compliance with TILA and RESPA. In addition, the Bureau believed that the special disclosure requirements that covered persons must meet to qualify for the proposed exemption helped ensure that the features of these mortgage transactions were fully, accurately, and effectively disclosed to consumers in a manner that would have permitted consumers to understand the costs, benefits, and risks associated with these mortgage transactions, consistent with Dodd-Frank Act section 1032(a). The proposed exemption would have also improved consumer awareness and understanding of transactions involving residential mortgage loans, which is in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b). The Bureau considered the factors in TILA section 105(f) and believed that, for the reasons discussed above, an exemption was appropriate under that provision. Specifically, the Bureau determined that the proposed exemption is appropriate for all affected borrowers, regardless of their other financial arrangements and financial sophistication and the importance of the loan to them. Similarly, the Bureau determined that the proposed exemption was appropriate for all affected loans, regardless of the amount of the loan and whether the loan is secured by the principal residence of the consumer. Furthermore, the Bureau determined that, on balance, the proposed exemption would have simplified the credit process without undermining the goal of consumer protection or denying important benefits to consumers.

The proposed exemption would have applied only to transactions secured by a subordinate lien. For the same reasons discussed in the section-by-section analysis of proposed § 1024.5(c)(3), the Bureau requested comment on whether the exemption in proposed § 1026.3(h) should extend to first liens. In addition, for the reasons discussed above, the Bureau sought comment on whether requirements and features that may serve as interest substitutes should be considered “interest” and, therefore, be impermissible for loans seeking to qualify for this partial exemption. The Bureau also sought comment on the types of loan requirements and features that should be similarly deemed “interest” for purposes of this partial exemption. Alternatively, the Bureau sought comment on whether such requirements and features should be permissible within the exemption on the grounds that the disclosure required by proposed § 1026.3(h)(6) is sufficient to inform consumers of such loan terms.

The Bureau proposed several comments in an effort to provide additional guidance regarding § 1026.3(h). Proposed comment 3(h)-1 would have noted that transactions that meet the requirements of § 1026.3(h) would be exempt from only the integrated disclosure requirements and not from any other applicable requirement of Regulation Z. The comment would have further clarified that § 1026.3(h)(6) required the creditor to comply with the disclosure requirements of § 1026.18, even if the creditor would not otherwise be subject to that section because of proposed § 1026.19(e), (f), and (g). In addition, the comment would have noted that the consumer also had the right to rescind the transaction under § 1026.23, to the extent that provision was applicable.

The Bureau also proposed comment 3(h)-2, which would have explained that the two conditions that the transaction not require the payment of interest under § 1026.3(h)(3) and that repayment of the amount of credit extended be forgiven or deferred in accordance with § 1026.3(h)(4) must be evidenced by terms in the credit contract. The comment would have further clarified that, although the other conditions did not need to be reflected in the credit contract, the creditor would need to retain evidence of compliance with those requirements, as required by § 1026.25(a). The Bureau solicited comment on whether this exemption should be adopted in Regulation Z.

In comments provided to the Bureau, a Federal government agency and a not-for-profit organization, both of which provide housing assistance to consumers, requested that the Bureau extend the exemption to apply to loans secured by first liens. They reasoned that first-lien loan transactions provided to low-income borrowers who do not qualify for other sources of credit have the same characteristics as the subordinate loan transactions that are exempted in proposed § 1026.3(h). The not-for-profit organization further commented that the Bureau should not consider costs such as mortgage insurance or shared equity/shared appreciation to be “interest substitutes” for purposes of determining whether a transaction qualifies for the exemption, but noted that those costs should nonetheless be disclosed by the creditor.

In response to the requirement that transactions exempted by proposed § 1026.3(h) continue to comply with the disclosure requirements set forth in § 1026.18, several industry trade associations proposed that creditors be given the option of either complying with the requirements of § 1026.18 or complying with the integrated disclosures.

With respect to the comment requesting that the Bureau extend the exemption to first-lien transactions, the Bureau declines to extend the exemption as such. The Bureau understands that some first-lien transactions may be extended that satisfy the conditions of this exemption other than the requirement that the transaction be secured by a subordinate lien. However, the Bureau does not believe that such transactions should be exempted from the requirements of § 1026.19(e), (f), and (g). The disclosure requirements under § 1026.19(e) and (f), as discussed in the section-by-section analyses of §§ 1026.37 and 1026.38 below, provide information regarding costs that consumers in such transactions may still be required to pay with respect to the real property, such as real estate taxes and homeowner's insurance. In addition, the special information booklet required by § 1026.19(g) may provide valuable information to consumers regarding the costs of home ownership. The Bureau has conducted consumer testing of the format in which the information is presented in the integrated disclosures to ensure that the disclosures are effective in aiding consumer understanding of these costs. Unlike with an exempted transaction secured by a subordinate lien in which consumers would receive an integrated disclosure containing this information in connection with the first-lien transaction, consumers in a first-lien transaction, if it were exempted, would not receive this information in the format the Bureau has tested with consumers. In addition, as discussed with respect to the parallel exemption under § 1024.5, as discussed above, the Bureau has decided to keep with its intent to codify the exemption previously granted by HUD, which likewise only applied to subordinate loan transactions. Accordingly, the Bureau has determined to adopt the exemption as proposed.

With respect to the comment that costs such as mortgage insurance or shared equity/shared appreciation not be considered interest for purposes of the condition that the loan not require the payment of interest, but that they be disclosed as non-interest costs in connection with exempted transactions, the Bureau has determined not to expand the condition to cover such costs. The Bureau points the commenter to § 1026.18 and its commentary for the treatment of mortgage insurance and shared equity/shared appreciation programs for purposes of the closed-end disclosures required under that section.

With respect to the comment that creditors be given the option of either complying with the integrated disclosure requirements or § 1026.18, the Bureau declines to provide this option. Because the intent of the exemption is to codify the exemption as provided by HUD, and additionally, decrease the burden of disclosure for creditors involved in the covered transactions, the Bureau declines to amend the proposed rule and its commentary to include the commenters' suggested alternative. For the reasons described above, the Bureau is adopting § 1026.3(h)(6) and comments 3(h)-1 and -2 substantially as proposed, with minor modifications for clarity.

Section 1026.4Finance Charge

Background

Section 106(a) of TILA defines the finance charge as “the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit,” excluding “charges of a type payable in a comparable cash transaction.” 15 U.S.C. 1605(a). Despite this broad general definition of the finance charge, TILA excludes numerous charges from the finance charge. For example, TILA generally includes in the finance charge credit insurance and property and liability insurance charges or premiums, but it also excludes such amounts if certain conditions are met. TILA section 106(b), (c); 15 U.S.C. 1605(b), (c). TILA also specifically excludes from the computation of the finance charge certain charges related to the perfecting of a security interest, and various fees in connection with loans secured by real property, such as title examination fees, title insurance premiums, fees for preparation of loan-related documents, escrows for future payment of taxes and insurance, notary fees, appraisal fees, pest and flood-hazard inspection fees, and credit report fees. TILA section 106(d), (e); 15 U.S.C. 1605(d), (e). Such amounts would otherwise be included in the finance charge under the general definition.

Current § 1026.4 implements TILA section 106 by largely mirroring the statutory definition of finance charge and the specific exclusions from that definition. In addition, § 1026.4 contains certain exclusions from the finance charge that are not specifically excluded in the statute. For example, current § 1026.4(c) specifically excludes application fees and forfeited interest from the definition of finance charge, whereas TILA does not.

There are longstanding concerns about the “some fees in, some fees out” approach to the finance charge in TILA and Regulation Z. In 1995, Congress directed the Board to study the finance charge, including the feasibility of treating as finance charges all costs required by the creditor or paid by the consumer as an incident of the credit. [163] In April 1996, the Board submitted its report to Congress, in which it noted both the compliance difficulties associated with the existing finance charge definition, but also the potential drawbacks of adopting an “all-inclusive finance charge rule,” such as the implementation costs for industry (which it stated “would likely be many millions of dollars”), the necessity of reeducation regarding the resulting increased APRs, and the effects on the usefulness of the APR caused by the inclusion of optional services in the finance charge. [164] The Board did not recommend the adoption of an “all-inclusive finance charge rule” in the report, but instead, stated it believed that “further debate must precede the crafting of any proposals for statutory changes to finance charge disclosures affecting the APR.” [165]

Following that study, in July 1998, the Board and HUD issued the Board-HUD Joint Report, in which the agencies also noted concerns with the “some fees in, some fees out” approach to the finance charge. [166] The Board-HUD Joint Report states that a fundamental problem with the finance charge is that the “cost of credit” has different meanings from the perspective of the consumer and the creditor. [167] From the creditor's perspective, the cost of credit may mean the interest and fee income that the creditor receives in exchange for providing credit to the consumer. [168] However, the consumer views the cost of credit as what the consumer pays for the credit, regardless of the persons to whom such amounts are paid. [169] The current “some fees in, some fees out” approach to the finance charge largely reflects the creditor's, rather than the consumer's, perspective. The Board-HUD Joint Report recommended that the definition of finance charge be expanded to what it titled the “Required Cost of Credit Test” under which the finance charge would include “the costs the consumer is required to pay to get the credit.” [170]

In its 2009 Closed-End Proposal, the Board proposed to broaden the definition of the finance charge in closed-end transactions secured by real property or a dwelling, citing the Board-HUD Joint Report and consumer testing conducted by the Board as support for an expanded approach to the finance charge. 74 FR 43232, 43243 (Aug. 26, 2009). First, the Board reasoned that excluding certain fees from the finance charge undermines the effectiveness of the APR as a measure of the true cost of credit. Id. Second, the Board's 2009 Closed-End Proposal stated that the numerous exclusions from the finance charge encourage lenders to shift the cost of credit to excluded fees. Id. This practice undermines the APR's utility and has resulted in the creation of new so-called “junk fees,” such as fees for preparing loan-related documents, which are not part of the finance charge. Third, the Board cited the complexity of the implementing rules, which create significant regulatory burden and litigation risk, as support for a simplified definition of the finance charge. Id.

In light of these concerns about the finance charge, the Board's 2009 Closed-End Proposal would have replaced the “some fees in, some fees out” approach to the finance charge for mortgage loans with a more inclusive approach to ensure that the finance charge and corresponding APR disclosed to consumers provide a more complete and useful measure of the cost of credit. The Board did not finalize its proposal prior to the transfer of its TILA rulemaking authority to the Bureau in July 2011.

The Bureau's Proposal

For the reasons set forth in the Board's 2009 Closed-End Proposal, the TILA-RESPA Proposal would have revised the test for determining the finance charge in § 1026.4. The Bureau's proposal would have largely mirrored the Board's 2009 Closed-End Proposal, with limited clarifying changes. Pursuant to its authority under TILA section 105(a) and (f), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b), the proposed rule would have amended § 1026.4 to replace the current “some fees in, some fees out” approach to the finance charge with a more inclusive test based on the general definition of finance charge in TILA section 106(a). 15 U.S.C. 1601 note; 1604(a), (f); 12 U.S.C. 5532(a).

Under proposed § 1026.4, the current exclusions from the finance charge would have been largely eliminated for closed-end transactions secured by real property or a dwelling. Specifically, under the proposed rule, a fee or charge would have been included in the finance charge if it is (1) “payable directly or indirectly by the consumer” to whom credit is extended, and (2) “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” However, the finance charge would have continued to exclude fees or charges paid in comparable cash transactions. The proposed rule also would have retained a few narrow exclusions from the finance charge: late fees and similar default or delinquency charges (excluded under current § 1026.4(c)(2)), seller's points (excluded under current § 1026.4(c)(5)), amounts required to be paid into escrow accounts if the amounts would not otherwise be included in the finance charge (excluded under current § 1026.4(c)(7)(v)), and premiums for property and liability insurance under certain conditions (excluded under current § 1026.4(d)(2)).

Effect on Other Rules

The Bureau's proposed rule recognized that a more inclusive finance charge would affect coverage under other laws, such as higher-priced mortgage loan (HPML) and HOEPA protections, and would have implications for the Bureau's HOEPA, Escrows, Appraisals, and Ability-to-Repay rulemakings under title XIV of the Dodd-Frank Act. These rulemakings have since been finalized by the Bureau. [171]

Specifically, absent further action by the Bureau, the more inclusive finance charge would have:

  • Caused more closed-end loans to trigger HOEPA protections for high-cost loans. The protections include special disclosures, restrictions on certain loan features and lender practices, and strengthened consumer remedies. The more inclusive finance charge also would have affected both the points and fees test (which currently uses the finance charge as its starting point) and the APR test (which under the Dodd-Frank Act depends on comparisons to the average prime offer rate (APOR)) for defining what constitutes a high-cost loan. [172]
  • Caused more loans to trigger Dodd-Frank Act requirements to maintain escrow accounts for first-lien HPMLs under the Escrows rulemaking. Coverage depends on comparing a transaction's APR to the applicable APOR.
  • Caused more loans to trigger Dodd-Frank Act requirements to obtain one or more interior appraisals under the Interagency Appraisals rulemaking. Coverage depends on comparing a transaction's APR to the applicable APOR.
  • Reduced the number of loans that would otherwise be “qualified mortgages” under the 2013 ATR Final Rule, given that qualified mortgages cannot have points and fees in excess of three percent of the total loan amount. The changes also would have decreased the number of qualified mortgages that receive a safe harbor from liability under the ability-to-repay provisions because the 2013 ATR Final Rule provides that qualified mortgages that are higher-priced receive a rebuttable presumption of compliance with the ability-to-repay requirements, rather than a safe harbor. In addition, more loans would have been required to comply with separate underwriting requirements applicable to higher-priced balloon loans, and been ineligible for certain exceptions authorizing creditors to offer prepayment penalties on fixed rate, non-higher-priced qualified mortgage loans. [173] Again, status as “higher-priced” depends on comparing APR to the applicable APOR.

The Board previously proposed two means of reconciling an expanded definition of the finance charge with thresholds for loan APR and points and fees. On several occasions, the Board proposed to replace the APR with a “transaction coverage rate” (TCR) as a transaction-specific metric a creditor compares to the APOR to determine whether the transaction meets the higher-priced loan threshold in current § 1026.35(a). See 76 FR 27390, 27411-12 (May 11, 2011); 76 FR 11598, 11608-09 (Mar. 2, 2011); 75 FR 58539, 58660-61 (Sept. 24, 2010). [174] Although adopting the TCR would mean that lenders would have to calculate one metric for purposes of disclosure and another for purposes of regulatory coverage, the Board stated that both metrics would be simpler to compute than APR today using the current definition of finance charge. [175] In addition, the Board proposed to amend the definition of points and fees to retain the existing treatment of certain charges in the definition of points and fees for purposes of determining HOEPA coverage. 75 FR 58539, 58636-38 (Sept. 24, 2010).

In the TILA-RESPA Proposal, the Bureau acknowledged that it is not clear from the legislative history of the Dodd-Frank Act whether Congress was aware of the Board's 2009 Closed-End Proposal to expand the definition of finance charge or whether Congress considered the interplay between an expanded definition and coverage under various thresholds addressed in the Dodd-Frank Act. In light of this fact and the concerns raised by commenters on the Board's 2009 Closed-End Proposal regarding effects on access to credit, the Bureau believed that it was appropriate to explore alternatives to implementation of the expanded finance charge definition for purposes of coverage under HOEPA and the other regulatory regimes.

For this reason, the TILA-RESPA Proposal sought comment on potential coverage threshold modifications. In particular, the proposal sought comment on the prior Board proposals and other potential methods of addressing the impact of a more inclusive approach to the finance charge on affected regulatory regimes. The proposal also requested comment on the potential advantages and disadvantages to both consumers and creditors of using different metrics for purposes of disclosures and for purposes of determining coverage of the affected regulatory regimes. With regard to the TCR, the Bureau stated its belief that the potential compliance burden associated with the two-calculation requirement would be mitigated by the fact that both TCR and APR would be easier to compute than the APR today using the current definition of finance charge. The Bureau also requested comment on whether use of the TCR or other trigger modifications should be optional, so that creditors could use the broader definition of finance charge to calculate APR and points and fees triggers if they preferred.

Finally, the Bureau requested data that would allow it to perform a quantitative analysis to determine the impacts of a broader finance charge definition on APR thresholds for HOEPA and the other regimes. In its 2009 Closed-End Proposal, the Board relied on a 2008 survey of closing costs conducted by Bankrate.com that contained data for hypothetical $200,000 loans in urban areas. Based on that data, the Board estimated that the share of first-lien refinance and home improvement loans that were then subject to HOEPA would increase by 0.6 percent if the definition of finance charge were expanded as proposed. In the TILA-RESPA Proposal, the Bureau stated that it was considering the 2010 version of that survey, but also sought additional data that would provide more representative information regarding closing and settlement costs that would allow for a more refined analysis of the proposals. The Bureau generally sought comment on its plans for data analysis, as well as additional data and comment on the potential impacts of a broader finance charge definition and potential modifications to the triggers.

In addition to the measures proposed by the Board, the Bureau proposed language to adopt the TCR and to exclude the additional charges from the HOEPA points and fees test in its 2012 HOEPA Proposal. 77 FR 49090 (Aug. 15, 2012). The 2012 Interagency Appraisals Proposal also proposed to adopt the TCR. 77 FR 54722 (Sept. 5, 2012). The 2013 HOEPA, Escrows, and Appraisals Final Rules did not adopt the TCR or changes to the points and fees test to account for the expanded finance charge, but those final rules noted the Bureau would consider comments on those aspects of the proposals in conjunction with the rule addressing the expanded finance charge proposal. See 78 FR 6856 (Jan. 31, 2013); 78 FR 4726 (Jan. 22, 2013); 78 FR 10368 (Feb. 13, 2013).

Timing of Implementation

The TILA-RESPA Proposal sought comment on the timing of implementation of any changes to the finance charge definition. The Bureau noted that there is no statutory deadline for issuing final rules to integrate the mortgage disclosures under TILA and RESPA, and that the Bureau expected that it may take some time to conduct quantitative testing of the forms prior to issuing final rules. However, the Bureau also expected to issue several final rules to implement provisions of title XIV of the Dodd-Frank Act by January 21, 2013, including the rules discussed above, that address thresholds for compliance with various substantive requirements under HOEPA and other Dodd-Frank Act provisions. The Bureau noted that, in some cases, the Dodd-Frank Act requires that regulations implementing title XIV of the Dodd-Frank Act take effect within one year of issuance. The Bureau subsequently issued those rules in January 2013. The rules will take effect in January 2014.

In the proposal, the Bureau stated its belief that it would be preferable that any changes to the definition of finance charge and any related adjustments to regulatory triggers take effect at the same time, to provide for consistency and efficient systems modification. The Bureau also believed that it may be advantageous to consumers and creditors to make any such changes at the same time that creditors are implementing new title XIV requirements involving APR and points and fees thresholds, rather than waiting until the Bureau finalizes other aspects of the TILA-RESPA rulemaking, which relates primarily to disclosures. If the Bureau expanded the definition of finance charge, the Bureau believed this approach would likely provide the consumer benefits of the final rule at an earlier date as well as avoid requiring creditors to make two sets of systems and procedures changes focused on determining which loans trigger particular regulatory requirements. However, given that implementation of the disclosure-related elements of the TILA-RESPA Proposal would have required systems and procedures changes, the Bureau noted that there may be advantages to delaying any change in the definition of finance charge and any related adjustments to regulatory triggers until those changes occurred. The Bureau, therefore, requested comment on how to sequence the changes, and the benefits and costs to both consumers and industry of both approaches.

After the Bureau issued the TILA-RESPA Proposal, the Bureau received informal feedback regarding the timing of implementation and determined that it was appropriate to address the expanded finance charge proposal in conjunction with the TILA-RESPA Final Rule, rather than with the Bureau's Title XIV Rulemakings that were issued in January 2013. For this reason, the Bureau extended the comment period for comments related to the expanded finance charge and published its intention regarding the timing of a final rule related to the finance charge definition. See 77 FR 54843 (Sept. 6, 2012).

Comments

The Bureau received several hundred comments on this aspect of the TILA-RESPA Proposal. Industry commenters and one large consumer advocacy group commenter generally opposed finalizing the expanded finance charge at this time. [176] While some industry commenters supported the idea of improving the APR to make it a more useful metric for consumers and simplify the calculation, many asserted that the Bureau had not sufficiently considered the impact of the proposed provisions in light of the significant regulatory changes taking place as a result of the Bureau's Title XIV Rulemakings. They also asserted that sweeping changes to the finance charge calculation would be overly burdensome in light of the Bureau's other rulemakings. One large consumer advocacy group commenter, while generally supporting the expanded definition, argued that the Bureau should not adopt the expanded finance charge definition at this time because of complications that would arise due to the Bureau's other rulemakings. That commenter stated also that the Bureau should further study the impact of the expanded finance charge on its other rulemakings.

Industry commenters and one consumer advocacy group commenter also cited the effect that a more inclusive finance charge would have on coverage thresholds under the HOEPA, HPML, and the ATR-QM rulemakings as a significant factor weighing against finalizing the proposal. Such commenters also noted the impact an expanded finance charge would have on State high-cost lending laws. These commenters asserted that, absent adjustments by the Bureau and State legislatures, the proposal could reduce access to mortgage credit, particularly for smaller loans and for borrowers at the lower end of the credit spectrum. For example, a national consumer advocacy group commenter estimated that the expanded finance charge would add approximately 0.9 percent to 3.5 percent to points and fees, depending on loan size and certain settlement cost assumptions, and would cause the APR to rise by roughly 0.10 percent to 0.52 percent, depending on loan size and interest rate. Small entities, including a national trade association of community banks, expressed concern that if the proposal resulted in more loans being classified as HOEPA loans or HPMLs, they may be forced to exit the mortgage market either due to increased compliance costs associated with these loans (such as the requirement to maintain escrow accounts for HPMLs) or because the loans will not be saleable on the secondary market. These concerns were echoed in comment letters from the U.S. House of Representatives Committee on Small Business and the Small Business Administration Office of Advocacy. Some industry commenters questioned whether the Bureau thoroughly considered the implications of the expanded finance charge on coverage thresholds as they would be revised by the Bureau's Title XIV Rulemakings. Similar concerns were expressed by the Small Business Review Panel and industry feedback provided in response to the Small Business Review Panel Outline. See Small Business Review Panel Report at 25. Some industry commenters also questioned the Bureau's authority to remove statutory exclusions from the finance charge.

Industry commenters (including numerous small entities), the U.S. House of Representatives Committee on Small Business, and the SBA also cited significant upfront implementation costs as a reason not to adopt the expanded finance charge definition. These commenters stated that to accommodate the changes, institutions would be required to reprogram, test, and implement significant changes to current systems, update written materials, and train employees. Commenters noted that this would be particularly burdensome for small creditors, would potentially cause some small creditors to exit the residential mortgage market, and could increase the cost of credit. One credit union commenter and a State credit union trade association estimated costs of $40,000 or more to implement the changes, in addition to the time needed for training. An organization that operates an APR calculation engine used by some credit unions estimated it would take between 500 and 1,000 hours of work time to update that system, in addition to staff training time. In addition, industry commenters cited ongoing compliance costs as a reason not to finalize the proposal. Numerous industry commenters and a national association of State housing agencies argued that the proposed finance charge definition would require maintaining separate systems for calculating the APR for mortgages and non-mortgages, which would increase compliance burdens.

Some industry commenters stated that including third-party closing costs that are not controlled by the creditor in the finance charge may increase litigation risk. For example, one industry trade association commenter noted that litigation risk would increase due to the increased possibility for calculation errors in a material disclosure associated with extended rescission rights. Similarly, one consumer advocacy group commenter noted that the simplified calculation would reduce homeowners' ability to use TILA violations to save their homes from foreclosure, presumably due to the fact that a simplified finance charge definition would lead to fewer technical violations of the rules regarding disclosure of the finance charge and APR, which are material disclosures that, if not provided accurately, toll the time limitations for invoking the right of rescission.

Some industry commenters, including national and State trade associations, stated that the Bureau has not sufficiently demonstrated the benefit of the proposed changes and urged the Bureau to conduct further analysis of the benefits of the expanded finance charge before finalizing the proposed rule. This is similar to industry feedback provided in response to the Small Business Review Panel Outline. For example, some commenters noted that the Bureau has not engaged in any consumer testing to determine if consumers will better understand the finance charge or APR disclosures using an expanded finance charge definition than under the current framework and suggested that the Bureau engage in further testing before finalizing the rule. Similarly, many industry commenters, including a national trade association of community banks, argued that a more inclusive finance charge would not improve consumer understanding of the APR because consumers do not understand the APR and do not use it when comparing loans. Some commenters cited the Bureau's own consumer testing and prior Board consumer testing cited in the TILA-RESPA Proposal as support for this position. They also argued that the aspect of the TILA-RESPA Proposal that would have emphasized other disclosures over the APR and finance charge disclosures undercuts any assertion by the Bureau that the expanded finance charge would aid consumer comprehension. Several small entity commenters argued that some consumers would be confused by the expanded finance charge because they are accustomed to the current APR.

On the other hand, most consumer advocacy group commenters and two State attorneys general supported the proposed changes to the finance charge, generally agreeing with the Board and Bureau analysis that the expanded finance charge would more accurately disclose the cost of credit and enhance consumers' ability to comparison shop, and would therefore benefit consumers. For example, one national non-profit organization focusing on low-income consumer issues noted that eliminating the numerous exclusions from the current definition of finance charge would simplify compliance and examinations, while discouraging fee manipulation. The State attorneys general likewise agreed that a more inclusive definition of finance charge would make it easier for consumers to compare loans and easier for lenders to calculate the APR.

Some industry commenters stated that having separate APR calculations for closed-end and open-end credit could contribute to consumer confusion, particularly for consumers comparing home equity lines of credit (HELOCs) with closed-end home equity loans. Similarly, consumer advocacy group commenters stated that the proposed changes should apply to all forms of credit or, at a minimum, both to HELOCs and closed-end mortgages.

One industry trade association commenter noted that it is not clear that the expanded finance charge would reduce the use of junk fees and third-party service providers because upfront fee-rate tradeoffs are largely determined in the capital markets and are independent of APR considerations. Some industry commenters argued that the proposed changes to the finance charge would lead to price fixing and other anticompetitive behavior by large institutions with the ability to influence settlement service provider fees. In contrast, smaller institutions that do not have the ability to assert such influence over third-party pricing would be priced out of the market. This would reduce consumer choice and raise prices in the long run. However, one consumer advocacy group commenter cited the current approach to the finance charge, which excludes certain third party charges, as creating hundreds of dollars in junk fees for consumers and noted that an expanded finance charge definition could reduce costs to consumers.

Industry commenters generally supported adjustments to coverage thresholds to mitigate the impact of an expanded finance charge, if the expanded finance charge were adopted. Most such commenters favored direct adjustments to the numeric APR-based thresholds over adopting the TCR as a new metric. However, one mortgage company commenter stated that the TCR is complicated, difficult to document, and would create compliance burden. On the other hand, most consumer advocacy group commenters and a joint letter from civil rights organizations opposed any adjustments to the APR-based thresholds to account for an expanded finance charge. Some consumer advocacy group commenters asserted that very few loans would be considered high-cost even under the new rules. These commenters asserted that creditors in these loans can and should reduce their closing costs or interest rate to escape that designation. [177]

Final Rule

For the reasons set forth below, the Bureau has determined not to finalize the proposed change to the definition of finance charge and instead to leave the current definition unchanged at this time. The Bureau will, instead, revisit this issue in conjunction with the assessment that it is required to do of each significant rule it issues no later than five years after the effective date of such rules under Dodd-Frank Act section 1022(d).

As described in the TILA-RESPA Proposal, the Bureau believes that an expanded finance charge definition could result in disclosures that more meaningfully represent the cost of credit, ease compliance and examination burdens in the long run, and reduce the cost of credit for some consumers by discouraging creditors from shifting costs to fees that are excluded from the finance charge. However, before finalizing any changes to the finance charge definition, the Bureau believes it is appropriate to further study the potential impacts of the expanded finance charge under the regulatory regime revised by the Dodd-Frank Act, collect additional data on the impact of changes to the finance charge definition on APR, and evaluate the effect an expanded finance charge definition would have on consumer understanding of the finance charge and APR disclosures in light of the TILA-RESPA Final Rule.

Although changes to the finance charge definition are not being finalized at this time, the Bureau is committed to continuing to collect data and analyze the consumer benefits of an expanded finance charge, as well as the effect of an expanded finance charge on laws with coverage thresholds that are dependent on the finance charge and APR, including State high-cost loan statutes. As noted, the Bureau expects to revisit this issue in conjunction with the mandatory five-year review of the Bureau's Title XIV Rulemakings and the TILA-RESPA Final Rule under section 1022 of the Dodd-Frank Act. As described below, the Bureau believes that it may have access to additional data within the next five years which could be used to conduct such an analysis. To the extent the Bureau concludes that an expanded finance charge definition may be appropriate at that time, the Bureau would issue a new proposed rule, setting forth any new data relied upon, to provide the public an opportunity to comment on that data and on the Bureau's analysis of this issue.

The Bureau believes it is appropriate to postpone any changes to the finance charge definition until industry has fully implemented the Title XIV Rulemakings and the TILA-RESPA Final Rule and those rules have been in effect for a meaningful period of time. This approach would allow the Bureau to take into account the effects of those rules on the mortgage market and access to credit under the revised regulatory regime and allow industry to make changes to systems and processes, as appropriate, without being required subsequently to factor into such changes the increased finance charge and APRs that would result from finalization of the proposed definition of finance charge. As discussed above, an expanded finance charge definition would impact other rules that depend on the finance charge or APR to define coverage, including the Bureau's recently-issued rules related to HOEPA, ATR, Escrows, and Appraisals. For this and other reasons, the Bureau understands that each of its Dodd-Frank Act mortgage rulemakings, including the TILA-RESPA Final Rule, has the potential to affect aspects of the mortgage market, including loan pricing and the types and amounts of settlement charges and other fees that are typically associated with mortgage transactions. For example, the Dodd-Frank Act's three percent limit on points and fees for qualified mortgages may cause some creditors to restructure their current business or pricing models in order to remain below that threshold. The revised rules related to permissible changes in estimated settlement charges discussed below in the section-by-section analysis of § 1026.19(e) may have a similar effect.

As noted above, numerous industry commenters and a large consumer advocacy group commenter cited the Bureau's other rulemakings and the need to evaluate the proposed changes in light of the new regulatory regime as a significant factor in their assessment that the Bureau should not finalize the expanded finance charge definition at this time. The Bureau has considered the potential effects of the Bureau's recently-issued rules on the market and the comments received and determined it is appropriate to further study the expanded finance charge once industry has fully implemented the new rules and the market has adapted to those changes.

In addition, the Bureau currently lacks data to model, across a wide spectrum of the market, the impact of an expanded finance charge on APR. As discussed above, numerous commenters urged the Bureau to conduct further study of the impact of the expanded finance charge before finalizing that aspect of the TILA-RESPA Proposal. Because the Bureau cannot model the effect of an expanded finance charge on APR, the Bureau also cannot fully evaluate at this time whether, and to what extent, to adopt mitigation measures that would address the effect of an expanded finance charge on other rules that use the APR or finance charge as a metric to define coverage. Characterizing the impact of the expanded finance charge on APR requires an understanding of how the cost of fees and services vary with loan size and other observable loan characteristics. The relationship between characteristics such as loan size and interest rate and the difference between the APR under the current definition and the proposed expanded definition cannot be described by a simple formula. Changes to the APR using the formula for determining the APR under appendix J to Regulation Z are not monotonic. For example, the appraisal fee for a low-dollar value rural property may be higher than the appraisal fee for a high-dollar value suburban home, resulting in a larger associated increase in the APR for the lower-dollar value property. This makes the effect of an expanded finance charge on APR difficult to model without itemized data that spans a wide spectrum of the market.

As noted above, the Board's 2009 Closed-End Proposal relied on a 2008 survey of closing costs conducted by Bankrate.com to assess the effect an expanded finance charge definition would have on APR. The TILA-RESPA Proposal did not provide a similar analysis, but noted that it was considering the 2010 version of the Bankrate.com survey as an appropriate dataset to model the impacts of the proposal, and requested additional data that would provide more representative information regarding closing and settlement costs. Since the TILA-RESPA Proposal was issued, the Bureau has determined that an analysis of the 2010 Bankrate.com data is not appropriate because the Bankrate.com survey focuses on closing costs for a single type of fixed rate loans, and also not feasible because the Bureau does not have access to the survey's micro data of itemized charges. In addition, in response to the request for data in the TILA-RESPA Proposal, the Bureau did not receive data with which it could conduct an analysis of the impact of the expanded finance charge on APRs for a wide variety of loans.

Since the proposal, however, the Bureau received voluntary data submissions of electronic RESPA settlement statement information from three large lenders, a possibility discussed in the TILA-RESPA Proposal. See 77 FR 51116, 51270 (Aug. 23, 2012). This voluntary data submission is the only data the Bureau currently has that itemizes fees and charges. Using this data, the Bureau was able to take a preliminary step in considering the economy-wide impact of the proposed changes on the APR and on the coverage of other rules. Analysis of the fixed rate first lien loans in the data did not show a strong correlation between the increase in the finance charge associated with the proposed expanded definition and the APR resulting from such increase, or a strong correlation between the increase in the finance charge and the loan amount. This is consistent with the fact that increases in the finance charge do not result in affine (i.e., correlated or linear) transformations of the APR. Also, since the data is from three lenders, it is not sufficient for the Bureau to model the effect of the expanded finance charge on APRs across the market. For example, to the extent that these three lenders operate in particular segments of the market or have firm-specific conventions for how they itemize charges and fees, the data provided is not representative of the national mortgage market. A more thorough analysis of the effect of an expanded finance charge definition on APR would require more representative data that includes itemized settlement charges, which is not currently available to the Bureau.

The Bureau expects that new sources of data on itemized settlement costs may be available in the next five years. For example, the Bureau believes that electronic retention of data from the integrated disclosure forms may become common practice. If this is the case, more robust data may be available to the Bureau for analysis. In addition, if particular settlement charges are discernible from new data standards required to be reported under HMDA by Dodd-Frank Act section 1094 (which amended section 304 of HMDA), the distribution of these charges for HMDA reporters may be leveraged to construct estimates of the impacts of including or excluding these costs from the APR. [178] These sources of data may assist the Bureau in conducting an analysis of the effect of changes to the finance charge on APR and on coverage thresholds.

As noted in the proposal, the Bureau believes that creditors could ultimately benefit from a streamlined finance charge definition that is simpler to calculate than the current definition, particularly given the increased significance of coverage thresholds under the Title XIV Rulemakings. However, the Bureau does not believe it is appropriate to finalize such changes before the Bureau has had the opportunity to study the effect of the expanded finance charge and APR across the mortgage market and using the coverage thresholds as revised by the Dodd-Frank Act and the Bureau's recently-issued Title XIV Rulemakings.

Further, postponing consideration of any changes to the expanded finance charge definition would allow the Bureau to continue to study the effect of the expanded finance charge on consumer understanding of the APR disclosure. As described in the TILA-RESPA Proposal, the Bureau believes that an expanded finance charge definition could increase consumer understanding of the APR disclosures by more accurately reflecting the cost of credit to consumers. However, the Bureau also recognizes concerns by some commenters that, even under an expanded finance charge definition, the APR is limited in its usefulness as a measure of the cost of credit. For example, it is not always the case that a loan with a lower APR is the “best” loan for a consumer because consumers have different time horizons with respect to their financing decisions and because loans with different interest rate-point combinations will have different APRs. A consumer who expects to sell or refinance a property within a short time horizon may benefit from making a different rate-point tradeoff than a consumer who expects to hold the loan long term. For this reason, the Bureau believes that a rule adopting an expanded finance charge definition would likely need to be accompanied by a broader initiative to assist consumer understanding of the APR. Postponing changes to the finance charge definition will allow the Bureau to study consumer understanding of the disclosures further and, if appropriate, develop other measures to aid consumer understanding that could supplement a revised finance charge definition.

In addition, because of consumer testing that shows that consumers do not rely primarily on the APR when shopping for a loan, and the statutory mandate to combine the disclosures required by TILA and RESPA, the TILA-RESPA Final Rule emphasizes on the first page of the Loan Estimate and Closing Disclosure information that consumers more readily understand (such as the interest rate and the cash to close amount). To reduce potential confusion between the APR and the interest rate and to focus on more readily understandable information, the APR is on the final page of the integrated disclosures. See the section-by-section analysis of §§ 1026.37(l)(2) and 1026.38(o)(4). The Bureau believes it is appropriate to evaluate consumer benefits of an expanded finance charge in light of these changes to the disclosure. However, the Bureau has not tested the APR disclosure on the integrated forms using an expanded finance charge definition, so the Bureau may determine it is appropriate to conduct additional testing of the integrated disclosures with an expanded finance charge before making a determination as to whether changes to the finance charge definition are appropriate.

The Bureau also recognizes that the proposed change to the definition of finance charge would create upfront implementation costs for creditors required to update systems and train staff on the new calculations. As discussed above, numerous commenters suggested that these burdens are significant, particularly for small institutions, and would be especially burdensome in light of the costs and burdens of implementing the Bureau's Title XIV Rulemakings and the TILA-RESPA Final Rule. These commenters stated that industry is under enormous strain to absorb and implement the Bureau's Title XIV Rulemakings, which are required by the Dodd-Frank Act, and that the Bureau should delay discretionary changes to the rules until industry has implemented the required changes. Upfront implementation costs could also be increased if the Bureau were to adopt certain mitigation measures to address the effect of an expanded finance charge on coverage thresholds for other rules. As discussed in the TILA-RESPA Proposal, the Bureau believes that the costs to update systems could be mitigated for some creditors if undertaken in conjunction with implementation of the TILA-RESPA Final Rule. However, some commenters have stated, and the Bureau has heard from other feedback from small creditors, that small creditors may exit the residential mortgage market if upfront implementation costs are too burdensome, which could increase the cost of credit for some consumers. For this reason, the Bureau believes it is appropriate to postpone finalizing any changes to the finance charge definition until the Bureau's other mortgage-related Dodd-Frank Act rulemakings are fully implemented and to evaluate the potential benefits and implementation burdens at that time.

Finally, postponing consideration of changes to the finance charge definition will allow the Bureau to study an additional expansion of the finance charge definition for HELOCs, which could result in a single APR for mortgage credit. This could aid comparison of closed-end and open-end mortgage credit for consumers and address concerns expressed by some commenters that having one APR calculation for open-end mortgage credit and a separate definition for closed-end mortgage credit could impair consumers' ability to compare closed-end home equity loans with HELOCs and increase compliance costs for creditors.

For the aforementioned reasons, the Bureau is not finalizing the expanded definition of the finance charge at this time. The Bureau will study the issue in connection with its five-year review of the TILA-RESPA Final Rule and its other Title XIV Rulemakings under Dodd-Frank Act section 1022. In the event the Bureau determines it may be appropriate to move forward with an expanded finance charge definition, the Bureau will issue a new proposal and publish for public comment any new data in support of that proposal before issuing a final rule.

Section 1026.17General Disclosure Requirements

In the TILA-RESPA Proposal, the Bureau proposed conforming amendments to § 1026.17 to reflect the proposed rules regarding the format, content, and timing of disclosures for closed-end transactions secured by real property, other than reverse mortgages subject to § 1026.33, in proposed §§ 1026.37 and 1026.38.

17(a) Form of Disclosures

TILA section 128(b)(1) provides that the disclosures required by TILA sections 128(a) and 106(b), (c), and (d) must be conspicuously segregated from all other terms, data, or information provided in connection with the transaction, including any computations or itemizations. 15 U.S.C. 1638(a), (b)(1); 15 U.S.C. 1605(b), (c), (d). In addition, TILA section 122(a) requires that the “annual percentage rate” and “finance charge” disclosures be more conspicuous than other terms, data, or information provided in connection with the transaction, except information relating to the identity of the creditor. 15 U.S.C. 1632(a). Current § 1026.17(a) implements these statutory provisions. Current § 1026.17(a)(1) implements TILA section 128(b)(1) by providing that closed-end credit disclosures must be grouped together and segregated from all other disclosures and must not contain any information not directly related to the disclosures. Current § 1026.17(a)(2) implements TILA section 122(a) for closed-end credit transactions by requiring that the terms “annual percentage rate” and “finance charge,” together with a corresponding amount or percentage rate, be disclosed more conspicuously than any disclosure other than the creditor's identity.

The Bureau proposed to revise the introductory language to § 1026.17(a) to reflect the fact that special rules apply to the disclosures required by § 1026.19(e), (f), and (g), by providing that § 1026.17(a) is inapplicable to those disclosures. As discussed below, the Bureau proposed to implement the grouping and segregation requirements of TILA section 128(b)(1) in §§ 1026.37(o) and 1026.38(t). Further, for the reasons set forth in the section-by-section analyses of §§ 1026.37(l)(3) and 1026.38(o)(2) and (4), the Bureau proposed to use its authority under TILA section 105(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b), to modify the requirements of TILA section 122(a) for transactions subject to § 1026.19(e), (f), and (g). Proposed comment 17-1 would have stated that, for the disclosures required by proposed § 1026.19(e), (f), and (g), rules regarding the disclosures' form are found in §§ 1026.19(g), 1026.37(o), and 1026.38(t). In addition, proposed comment 17(a)(1)-7 would have reflected the special disclosure rules for transactions subject to § 1026.18(g) or (s).

The Bureau did not receive comments regarding the proposed changes to the introductory language to § 1026.17(a) or proposed comments 17-1 and 17(a)(1)-7. For the reasons discussed and using the authority described in the proposed rule, the Bureau is finalizing § 1026.17(a) and comments 17-1 and 17(a)(1)-7 substantially as proposed.

17(b) Time of Disclosures

TILA section 128(b)(1) provides that the disclosures required by TILA section 128(a) shall be made before credit is extended. 15 U.S.C. 1638(b)(1). Special timing rules for transactions subject to RESPA are found in TILA section 128(b)(2). 15 U.S.C. 1638(b)(2). Current § 1026.17(b) implements TILA section 128(b)(1) by requiring creditors to make closed-end credit disclosures before consummation. The special timing rules for transactions subject to RESPA are implemented in current § 1026.19(a). As discussed below, the Bureau proposed special timing rules for the disclosures required by § 1026.19(e), (f), and (g) in those provisions. Proposed § 1026.17(b) would have reflected these special rules by providing that § 1026.17(b) is inapplicable to the disclosures required by § 1026.19(e), (f), and (g). Proposed comment 17-1 would have stated that, for to the disclosures required by § 1026.19(e), (f), and (g), rules regarding timing are found in those sections.

The Bureau did not receive comments regarding the proposed changes to § 1026.17(b) or proposed comment 17-1. For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(b) and comment 17-1 substantially as proposed. However, as discussed below in the section-by-section analysis of § 1026.20(e), the Bureau is finalizing separate rules regarding the timing of the Post-Consummation Escrow Cancellation Disclosure required by that section. For that reason, the Bureau is also revising § 1026.17(b) and comment 17-1 to reflect the fact that special rules apply to the disclosure required by § 1026.20(e). As adopted, § 1026.17(b) provides that it does not apply to the disclosures required by § 1026.19(e), (f), and (g) and § 1026.20(e).

17(c) Basis of Disclosures and Use of Estimates

17(c)(1)

Current § 1026.17(c)(1) requires that the disclosures that creditors provide pursuant to subpart C of Regulation Z reflect the terms of the legal obligation between the parties. The commentary to current § 1026.17(c)(1) provides guidance to creditors regarding the disclosure of specific transaction types and loan features.

As discussed more fully in the section-by-section analysis of §§ 1026.37 and 1026.38, the Bureau proposed to integrate the disclosure requirements of TILA and sections 4 and 5 of RESPA in the Loan Estimate that creditors must provide to consumers within three business days after receiving the consumer's application and the Closing Disclosure that creditors must provide to consumers at least three business days prior to consummation. Some disclosures required by RESPA pertain to services performed by third parties, other than the creditor. Accordingly, the Bureau proposed conforming amendments to the commentary to § 1026.17(c) to clarify that the “parties” referred to in the commentary to § 1026.17(c) are the consumer and the creditor and that the “agreement” referred to in the commentary to § 1026.17(c) is the legal obligation between the consumer and the creditor. The proposed conforming amendments to the commentary also would have clarified that the “disclosures” referred to in the commentary to current § 1026.17(c) are the finance charge and the disclosures affected by the finance charge. Finally, the proposed conforming amendments to the commentary would have extended existing guidance on special disclosure rules for transactions subject to § 1026.18(s) to reflect the addition of new special rules under § 1026.19(e) and (f).

The Bureau also proposed amendments to the commentary to § 1026.17(c)(1) to address areas of industry uncertainty regarding TILA disclosures. First, the Bureau proposed to revise comment 17(c)(1)-1 to provide the general principle that disclosures based on the assumption that the consumer will abide by the terms of the legal obligation throughout its term comply with § 1026.17(c)(1). In addition, the Bureau proposed to revise comments 17(c)(1)-3 and -4 regarding third-party and consumer buydowns, respectively. Under existing Regulation Z, whether the effect of third-party or consumer buydowns are disclosed depends on State law. To address uncertainty, the Bureau proposed to revise the examples in comments 17(c)(1)-3 and -4 to clarify that, in the disclosure of the finance charge and other disclosures affected by the finance charge, third-party buydowns must be reflected as an amendment to the contract's interest rate provision if the buydown is reflected in the credit contract between the consumer and the creditor and that consumer buydowns must always be reflected as an amendment to the contract's interest rate provision.

The Bureau did not receive comments on comments 17(c)(1)-1, -3, or -4. Therefore, for the reasons discussed in the proposed rule, the Bureau is finalizing those comments as proposed. However, the Bureau is finalizing an additional change to comment 17(c)(1)-1 to make clear that the Post-Consummation Escrow Cancellation Disclosure required by § 1026.20(e) must reflect the credit terms to which the parties are legally bound when the disclosure is provided, rather than at the outset of the transaction, because that disclosure is provided to consumers after consummation. This clarification is consistent with the comment's existing treatment of the post-consummation disclosure required by § 1026.20(c) (variable-rate adjustments) and the comment's treatment of the post-consummation disclosure required by § 1026.20(d) (initial interest rate adjustment notice) under the Bureau's 2013 Mortgage Servicing Final Rule amending Regulation Z which will take effect on January 10, 2014. [179] For a discussion of the Post-Consummation Escrow Cancellation Disclosure, see the section-by-section analysis of § 1026.20(e), below.

The Bureau also proposed new comment 17(c)(1)-19, regarding disclosure of rebates and loan premiums offered by a creditor. In its 2009 Closed-End Proposal, the Board proposed to revise comment 18(b)-2, which provides guidance regarding the treatment of rebates and loan premiums for the amount financed calculation required by § 1026.18(b). 74 FR 43385. Comment 18(b)-2 primarily addresses credit sales, such as automobile financing, and provides that creditors may choose whether to reflect creditor-paid premiums and seller- or manufacturer-paid rebates in the disclosures required by § 1026.18. The Board stated its belief that such premiums and rebates are analogous to buydowns because they may or may not be funded by the creditor and reduce costs that otherwise would be borne by the consumer. 2009 Closed-End Proposal, 74 FR 43256. Accordingly, their impact on the § 1026.18 disclosures properly depends on whether they are part of the legal obligation, in accordance with § 1026.17(c)(1) and its commentary. The Board therefore proposed to revise comment 18(b)-2 to clarify that the disclosures, including the amount financed, must reflect loan premiums and rebates regardless of their source, but only if they are part of the legal obligation between the creditor and the consumer. The Board also proposed a parallel comment under the section requiring disclosure of the amount financed for transactions subject to the proposed, separate disclosure scheme for transactions secured by real property or a dwelling. 74 FR 43417 (proposed comment 38(e)(5)(iii)-2).

In the TILA-RESPA Proposal, the Bureau stated its agreement with the Board's reasoning in proposing the revisions to comment 18(b)-2 that the disclosures must reflect loan premiums and rebates, even if paid by a third party such as a seller or manufacturer, but only if they are part of the legal obligation between the creditor and the consumer. The Bureau noted, however, that the comment's guidance extends beyond the calculation of the amount financed. For example, the guidance on whether and how to reflect premiums and rebates applies equally to such disclosures as the amount financed, the annual percentage rate, the projected payments table, interest rate and payment summary table, or payment schedule, as applicable, and other disclosures affected by those disclosures. The Bureau therefore proposed to place the guidance in the commentary to § 1026.17(c)(1), as that section is the basis for the underlying principle that the impact of premiums and rebates depends on the terms of the legal obligation.

Several industry trade association commenters noted that there is no clear definition of what is considered a “premium or a rebate” under proposed comment 17(c)(1)-19. Those commenters noted that it is not clear whether any amount that a creditor would pay to a consumer is considered a premium or rebate. For example, if a credit that may be used to pay closing costs is subject to the comment, it is not clear whether the comment requires considering the credit to be applied first to finance charges and then to closing costs that are not finance charges. One such commenter noted that, without uniformity to these terms, borrowers may have difficulty comparing competing offers. Other such commenters recommended clarifying that if a creditor provides a specific credit against a charge that is included in the finance charge, the credit should reduce the total finance charge; whereas if a creditor provides a general credit that the consumer can use to pay closing costs, whether or not those closing costs are included in the finance charge, the credit should lower the finance charge.

The Bureau has considered the comments received regarding new comment 17(c)(1)-19. However, as noted above, comment 17(c)(1)-19 is intended only to clarify existing comment 18(b)-2, that the disclosures must reflect loan premiums and rebates, even if paid by a third party such as a seller or manufacturer, but only if they are part of the legal obligation between the creditor and the consumer. Accordingly, the Bureau is finalizing comment 17(c)(1)-19 as proposed.

Among the proposed conforming amendments, which are noted above, was an amendment to comment 17(c)(1)-10 to reflect the special rules under § 1026.19(e) and (f). Comment 17(c)(1)-10 provides that, in determining the index value used to calculate the disclosures when creditors set an initial interest rate that is not calculated using the index or formula for later adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged, and for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. The comment uses a 45-day look-back period as an example. Although not specifically addressed in the proposed rule, several industry trade association commenters noted that, because Dodd-Frank Act section 128A requires an early notice of the first adjustment on hybrid adjustable rate mortgages, it is likely that, for some adjustable rate mortgages, the look-back period for the first adjustment may be longer than the look-back period for subsequent adjustments. For that reason, the commenters asserted that it would be helpful for commentary to permit the use of the longer look-back period.

After consideration of the comments received, the Bureau is adopting comment 1026.17(c)(1)-10 generally as proposed. The Bureau notes that comment 1026.17(c)(1)-10 is broad and does not specifically prohibit or permit creditors to use a particular look-back period where a transaction is structured to have multiple adjustments with varying look-back periods, so it is not clear that additional commentary regarding the use of specific look-back periods is necessary. Further, the Bureau did not propose changes or solicit comment on comment 1026.17(c)(1)-10 in the TILA-RESPA Proposal with respect to how it might relate the disclosure requirements of Dodd-Frank Act section 128A, so the Bureau does not believe that it would be appropriate to finalize such a change at this time. However, the Bureau is making certain technical changes to proposed comment 1026.17(c)(1)-10 to clarify that the composite rate would apply to the “in five years” disclosure pursuant to § 1026.37(l)(1) and the total interest percentage disclosure pursuant to §§ 1026.37(1)(3) and 1026.38(o)(5), in addition to the disclosures required by § 1026.18(g) and (s) and §§ 1026.37(c) and 1026.38(c), which were included in the proposed conforming amendments.

17(c)(2)

Current § 1026.17(c)(2) and its commentary contain general rules regarding the use of estimates. The Bureau proposed conforming amendments to the commentary to § 1026.17(c)(2) to be consistent with the special disclosure rules for closed-end mortgage transactions subject to proposed § 1026.19(e) and (f).

Comment 17(c)(2)(i)-1 would have provided guidance to creditors on the basis for estimates. The proposed rule would have amended this comment to specify that it applies except as otherwise provided in §§ 1026.19, 1026.37, and 1026.38, and that creditors must disclose the actual amounts of the information required to be disclosed pursuant to § 1026.19(e) and (f), subject only to the estimation and redisclosure rules in those sections. The proposed rule also would have revised comment 17(c)(2)(i)-2, which gives guidance to creditors on labeling estimated disclosures, to provide that, for the disclosures required by § 1026.19(e), use of the Loan Estimate form H-24 of appendix H, pursuant to § 1026.37(o), satisfies the requirement that the disclosure state clearly that it is an estimate. In addition, consistent with the proposed revisions to comment 17(c)(1)-1, the proposed rule would have revised comment 17(c)(2)(i)-3, which provides guidance to creditors regarding disclosures in simple interest transactions, to reflect that the comment applies only to the extent that it does not conflict with proposed § 1026.19. Proposed comment 17(c)(2)(i)-3 also would have clarified that, in all cases, creditors must base disclosures on the assumption that payments will be made on time and in the amounts required by the terms of the legal obligation, disregarding any possible differences resulting from consumers' payment patterns. Finally, proposed comment 17(c)(2)(ii)-1, regarding disclosure of per diem interest, would have provided that the creditor shall disclose the actual amount of per diem interest that will be collected at consummation, subject only to the disclosure rules in § 1026.19(e) and (f).

The Bureau did not receive comments regarding the proposed changes to § 1026.17(c)(2). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(c)(2) as proposed. However, the Bureau is revising comment 17(c)(2)(i)-2 to clarify that the use of the Closing Disclosure form H-25 of appendix H satisfies the requirement that the disclosure state clearly that it is an estimate. Under proposed § 1026.19(f), creditors would have been required to disclose the actual terms of the transaction on the Closing Disclosure. For the reasons discussed below in the section-by-section analysis of § 1026.19(f), however, the final rule requires creditors to disclose the actual terms of the transaction on the Closing Disclosure, but also provides that if any information necessary for disclosure of the actual terms is unknown to the creditor, the creditor shall make such disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer. To account for the fact that the Closing Disclosure may reflect some estimated terms pursuant to § 1026.19(f), comment 17(c)(2)(i)-2, as adopted, provides that, for the disclosures required by § 1026.19(e) or (f), use of the Loan Estimate form H-24 of appendix H to Regulation Z pursuant to § 1026.37(o) or the Closing Disclosure form H-25 of appendix H to Regulation Z pursuant to § 1026.38(t), as applicable, satisfies the requirement that the disclosure state clearly that the disclosure is an estimate.

17(c)(4)

The proposed rule would have revised comment 17(c)(4)-1 to clarify that creditors may disregard payment period irregularities when disclosing the payment summary tables pursuant to §§ 1026.18(s), 1026.37(c), and 1026.38(c), in addition to the payment schedule under § 1026.18(g) discussed in the existing comment.

The Bureau did not receive comments regarding the proposed changes to § 1026.17(c)(4). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(c)(4) as proposed.

17(c)(5)

Current § 1026.17(c)(5) and its commentary contain general rules regarding the disclosure of demand obligations. The proposed rule would have revised comment 17(c)(5)-2, which addresses obligations whose maturity date is determined by a future event, to reflect the fact that special rules would have applied to the disclosures required by § 1026.19(e) and (f). In addition, the proposal would have revised comment 17(c)(5)-3, regarding transactions that convert to demand status only after a fixed period, to delete obsolete references to specific loan programs and to update cross-references. Finally, the proposal would have revised comment 17(c)(5)-4, regarding balloon payment mortgages, to reflect the fact that special rules would have applied to the disclosure of balloon payments in the projected payments tables required by §§ 1026.37(c) and 1026.38(c).

The Bureau did not receive comments regarding the proposed changes to § 1026.17(c)(5). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(c)(5) as proposed.

17(d) Multiple Creditors; Multiple Consumers

Current § 1026.17(d) addresses transactions that involve multiple creditors or consumers. The proposed rule would have revised comment 17(d)-2, regarding multiple consumers, to clarify that the early disclosures required by § 1026.19(a), (e), or (g), as applicable, need be provided to only one consumer who will have primary liability on the obligation. Material disclosures, as defined in § 1026.23(a)(3)(ii), under § 1026.23(a) and the notice of the right to rescind required by § 1026.23(b), however, would have been required to be given before consummation to each consumer who has the right to rescind, including any such consumer who is not an obligor. As stated in the proposal and in the Board's 2010 Mortgage Proposal, the purpose of the TILA section 128 requirement that creditors provide early and final disclosures is to ensure that consumers have information specific to their loan to use while shopping and evaluating their loan. See 75 FR 58585. On the other hand, the purpose of the TILA section 121(a) requirement that each consumer with a right to rescind receive disclosures regarding that right is to ensure that each such consumer has the necessary information to decide whether to exercise that right. Id. For this reason, the proposed rule would have required creditors to provide all consumers who have the right to rescind with the material disclosures under §§ 1026.18 and 1026.38 and the notice of the right to rescind required by § 1026.23(b), even if such consumer is not an obligor.

Several industry trade association commenters noted that it is not clear under proposed comment 17(d)-2 whether the Closing Disclosure required by proposed § 1026.19(f) would be required to be provided to one consumer, or whether the fact that § 1026.19(f) is not specifically mentioned in the comment means that the Closing Disclosure must be provided to all consumers. The commenters noted that giving the Closing Disclosure to all consumers would be an operational burden, and requested clarification regarding the requirements of 1026.17(d) with regard to the Closing Disclosure.

The proposed changes to comment 17(d)-2 were intended only to clarify how the existing rule regarding multiple consumers applies to the integrated disclosures and were not intended to alter existing guidance in comment 17(d)-2. However, after consideration of the comments received, the Bureau is finalizing revised language in comment 17(d)-2 to provide further clarification regarding the provision of the Closing Disclosure. Specifically, comment 17(d)-2 provides that when two consumers are joint obligors with primary liability on an obligation, the early disclosures required by § 1026.19(a), (e), or (g), as applicable, may be provided to any one of them. In rescindable transactions, the disclosures required by § 1026.19(f) must be given separately to each consumer who has the right to rescind under § 1026.23. In transactions that are not rescindable, the disclosures required by § 1026.19(f) may be provided to any consumer with primary liability on the obligation. With respect to commenters' concerns that providing the Closing Disclosure to all consumers would be an operational burden, the Bureau notes that separate disclosures must be provided to each consumer only in rescindable transactions and that the commentary is consistent with existing guidance in comment 17(d)-2. In addition, the fact that material disclosures are to be provided to all consumers with a right to rescind would mean that creditors would otherwise be required to provide these disclosures separately, using a separate document, if they did not provide them using the Closing Disclosure. As such, providing a duplicate Closing Disclosure to all consumers with a right to rescind may in fact reduce operational burden, because creditors would not need to create a separate document for such disclosures. The Bureau also acknowledges that some creditors may desire that each obligor to a transaction subject to § 1026.19(f) receive a Closing Disclosure, to obtain a signature of customary recitals or certifications that are appended to the disclosure pursuant to § 1026.38(t)(5).

17(e) Effect of Subsequent Events

Current § 1026.17(e) provides rules regarding when a subsequent event makes a disclosure inaccurate and requires a new disclosure. The proposed rule would have revised comment 17(e)-1 to clarify that special rules apply to transactions subject to proposed § 1026.19(e) and (f). The Bureau did not receive comments regarding the proposed changes to § 1026.17(e). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(e) as proposed, with a minor modification for clarity to refer to the post-consummation disclosure requirements under § 1026.19(f).

17(f) Early Disclosures

Current § 1026.17(f) contains rules regarding when a creditor must redisclose after providing disclosures prior to consummation. As discussed in the section-by-section analyses of § 1026.19(a), (e), and (f), under the proposal, special timing requirements would have applied for transactions subject to those sections. Accordingly, § 1026.17(f) would have been revised to reflect the fact that the general early disclosure rules in § 1026.17(f) would be subject to the special rules in § 1026.19(a), (e), and (f). In addition, comments 17(f)-1 through -4 would have been revised to conform to the special timing requirements under proposed § 1026.19(a) or (e) and (f).

The Bureau did not receive comments regarding the proposed changes to § 1026.17(f). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(f) as proposed.

17(g) Mail or Telephone Orders—Delay in Disclosures

Current § 1026.17(g) and its commentary permit creditors to delay disclosures for transactions involving mail or telephone orders until the first payment is due if specific information, including the principal loan amount, total sale price, finance charge, annual percentage rate, and terms of repayment is provided to the consumer prior to the creditor's receipt of a purchase order or request for extension of credit. As discussed in the section-by-section analyses of § 1026.19(a), (e), and (f), the Bureau proposed special timing requirements for transactions subject to those provisions. Accordingly, the Bureau proposed to revise § 1026.17(g) and comment 17(g)-1 to clarify that § 1026.17(g) does not apply to transactions subject to § 1026.19(a) or (e) and (f).

The Bureau did not receive comments regarding the proposed changes to § 1026.17(g). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(g) as proposed, with technical changes to §§ 1026.17(g) and (h) to clarify that those sections do not apply to mortgage disclosures made in compliance with § 1026.19(e), (f), and (g), and to comment 17(g)-1 to clarify that § 1026.17(g) does not apply to transactions subject to § 1026.19(a) or (e) and (f).

17(h) Series of Sales—Delay in Disclosures

Current § 1026.17(h) and its commentary permit creditors to delay disclosures until the due date of the first payment in transactions in which a credit sale is one of a series made under an agreement providing that subsequent sales may be added to the outstanding balance. As discussed in the section-by-section analyses of § 1026.19(a), (e), and (f), the Bureau proposed special timing requirements for transactions subject to those provisions. Accordingly, the Bureau proposed to revise § 1026.17(h) and comment 17(h)-1 to clarify that § 1026.17(h) does not apply to transactions subject to § 1026.19(a) or (e), (f), and (g).

The Bureau did not receive comments regarding the proposed changes to § 1026.17(h). For the reasons discussed in the proposed rule, the Bureau is finalizing § 1026.17(h) as proposed, with a technical change to comment 17(h)-1 to clarify that § 1026.17(h) does not apply to transactions subject to § 1026.19(a) or (e) and (f).

Section 1026.18 Content of Disclosures

Section 1026.18 sets forth the disclosure content for closed-end consumer credit transactions. As discussed in more detail below, the Bureau proposed to establish separate disclosure requirements for closed-end transactions secured by real property, other than reverse mortgage transactions, through proposed § 1026.19(e) and (f). For that reason, the Bureau proposed to amend § 1026.18's introductory language to provide that its disclosure content requirements would apply only to closed-end transactions other than mortgage transactions subject to proposed § 1026.19(e) and (f).

The Bureau did not receive comments on this proposed amendment to the introductory language to § 1026.18, although the Bureau did receive comments regarding the proposed scope of the integrated disclosures required by §§ 1026.37 and 1026.38, which are discussed in the section-by-section analysis of § 1026.19, below. For the reasons discussed in the proposed rule, the Bureau is finalizing the revisions to the introductory language to § 1026.18 as proposed.

The Bureau also proposed to add a new comment 18-3 which would have clarified that, because of the proposed exclusion for transactions subject to § 1026.19(e) and (f), the disclosures required by § 1026.18 would have applied only to closed-end transactions that are unsecured or secured by personal property (including dwellings that are not also secured by real property) and to reverse mortgages. The comment also would have clarified that, for unsecured transactions and transactions secured by personal property that is not a dwelling, creditors must disclose a payment schedule under § 1026.18(g), and for other transactions that are subject to § 1026.18, creditors must disclose an interest rate and payment summary table under § 1016.18(s), as adopted by the Board's MDIA Interim Rule. 75 FR 58470, 58482-84. The comment would have included a cross-reference to comments 18(g)-6 and 18(s)-4 for additional guidance on the applicability to different transaction types of § 1026.18(g) or (s) and proposed § 1026.19(e) and (f). Finally, the comment would have clarified that, because § 1026.18 would not have applied to most transactions secured by real property, references in the section and its commentary to “mortgages” refer only to transactions secured by personal property that is a dwelling and is not also secured by real property and to reverse mortgages, as applicable.

The Bureau did not receive comments on this aspect of the proposed rule. For the reasons discussed in the proposed rule, the Bureau is finalizing comment 18-3 as proposed.

18(b) Amount Financed

Section 1026.18(b) addresses the calculation and disclosure of the amount financed for closed-end transactions. Comment 18(b)-2 currently provides that creditors may choose whether to reflect creditor-paid premiums and seller- or manufacturer-paid rebates in the disclosures required by § 1026.18. For the reasons discussed under the section-by-section analysis of § 1026.17(c)(1), above, the Bureau proposed to remove comment 18(b)-2 and place revised guidance regarding rebates and loan premiums in proposed comment 17(c)(1)-19.

Several industry commenters requested clarification regarding the definition of “premium” or “rebate” in proposed comment 17(c)(1)-19. For a discussion of those comments, see the section-by-section analysis of § 1026.17(c)(1), above. For the reasons discussed in the proposed rule and in the section-by-section analysis of § 1026.17(c)(1), the Bureau is removing comment 18(b)-2 as proposed.

18(b)(2)

The Bureau proposed certain conforming changes to comment 18(b)(2)-1, which addresses amounts included in the amount financed calculation that are not otherwise included in the finance charge. As discussed above in the section-by-section analysis of § 1026.4, the TILA-RESPA Proposal included a proposal to adopt a simpler and more inclusive definition of the finance charge. Under that aspect of the proposal, references to real estate settlement charges and premiums for voluntary credit life and disability insurance in comment 18(b)(2)-1 would have been inappropriate. Accordingly, proposed comment 18(b)(2)-1 would have removed those references and substituted appropriate examples.

As discussed above in the section-by-section analysis of § 1026.4, the Bureau is not finalizing the proposed revisions to the definition of the finance charge at this time. Accordingly, the Bureau is not finalizing the proposed changes to comment 18(b)(2)-1.

18(c) Itemization of Amount Financed

Section 1026.18(c) requires an itemization of the amount financed and provides guidance on the amounts that must be included in the itemization. The Bureau proposed certain conforming amendments to two comments under § 1026.18(c). Under the proposal, § 1026.18 disclosures, including the itemization of amount financed under § 1026.18(c), would have been required only for closed-end transactions that are not secured by real property and reverse mortgages; transactions secured by real property other than reverse mortgages would have been subject to the disclosure content in proposed §§ 1026.37 and 1026.38. The Bureau therefore proposed technical revisions to comments 18(c)-4 and 18(c)(1)(iv)-2 to limit those comments' discussions of the RESPA disclosures and their interaction with § 1026.18(c) to reverse mortgages.

The Bureau did not receive comments on this aspect of the proposed rule. For the reasons discussed in the proposed rule, the Bureau is finalizing the technical revisions to comments 18(c)-4 and 18(c)(1)(iv)-2 as proposed.

18(f) Variable Rate

18(f)(1)

18(f)(1)(iv)

Section 1026.18(f)(1)(iv) requires that, for variable-rate transactions not secured by a consumer's principal dwelling and variable-rate transactions secured by a consumer's principal dwelling where the loan term is one year or less, creditors disclose an example of the payment terms that would result from an interest rate increase. The Bureau proposed to revise comment 18(f)(1)(iv)-2 by removing paragraph 2.iii, which provides that such an example is not required in a multiple-advance construction loan disclosed pursuant to appendix D, part I. Appendix D, part I provides guidance for disclosing the construction phase of a construction-to-permanent loan as a separate transaction pursuant to § 1026.17(c)(6)(ii) (or for disclosing a construction-only loan). The Bureau's proposal to remove comment 18(f)(1)(iv)-2.iii was intended solely as a conforming amendment, to reflect the Bureau's belief that multiple-advance construction loans would no longer be subject to the § 1026.18 disclosure requirements under the proposal. The proposal stated the Bureau's belief that multiple-advance construction loans are limited to transactions with real property as collateral, and are not used for dwellings that are personal property or in reverse mortgages. The Bureau sought comment, however, on whether any reason remained to preserve comment 18(f)(1)(iv)-2.iii.

One State manufactured housing trade association commenter noted that, in the manufactured housing industry, a home may be sold as personal property and may become real property at some later point in time in the home delivery and installation process. That comment suggested that there may be construction elements to some manufactured home loans, although the commenter did not provide examples of such transactions. That commenter requested an exclusion from the disclosure requirements of proposed §§ 1027.37 and 1026.38 for “land/home stage-funded manufactured home loans,” even those loans that when fully consummated will be secured in whole or in part by real property. In addition, two national industry trade association commenters noted that some loans are secured by both real property and personal property, such as investments or deposits held in a consumer's account, and that it is not clear whether those loans would be subject to the integrated disclosures and, if they are, how the creditor would disclose the security interest in personal property.

The Bureau has considered the comments received on the proposal to remove comment 18(f)(1)(iv)-2.iii. With respect to the State manufactured housing trade association comment, because the commenter suggests that some manufactured home loans may have construction-only phases that may be secured by personal property and not real property, the Bureau has determined it is appropriate to retain comment 18(f)(1)(iv)-2.iii for flexibility. To the extent the loans described in the comment letter are secured by real property, however, such loans would be covered by § 1026.19(e) and (f), and therefore § 1026.18(f) would be inapplicable. For a discussion of the scope of § 1026.19(e) and (f), see the section-by-section analysis of § 1026.19, below. Similarly, with respect to the two industry trade association comments, the Bureau acknowledges that multiple advance construction loans may be secured by both real and personal property. In such a case, however, because the loans are secured by real property, at least in part, such transactions would be subject to the disclosure requirements of § 1026.19(e) and (f), and therefore § 1026.18(f) would be inapplicable. Accordingly, the Bureau is not finalizing the proposed changes to comment 18(f)(1)(iv)-2.

18(g) Payment Schedule

Section 1026.18(g) requires the disclosure of the number, amounts, and timing of payments scheduled to repay the obligation, for closed-end transactions other than transactions subject to § 1026.18(s). Section 1026.18(s) requires an interest rate and payment summary table, in place of the § 1026.18(g) payment schedule, for closed-end transactions secured by real property or a dwelling, other than transactions that are secured by a consumer's interest in a timeshare plan. As noted above, however, the Bureau proposed to remove from the coverage of § 1026.18 transactions secured by real property, other than reverse mortgages, and subject them to the integrated disclosure requirement under §§ 1026.37 and 1026.38. Thus, under the proposal, § 1026.18(g) would have applied only to closed-end transactions that are unsecured or secured by personal property that is not a dwelling. All closed-end transactions that are secured by either real property or a dwelling, including reverse mortgages, would have been subject instead to either the interest rate and payment summary table disclosure requirement under § 1026.18(s) or the projected payments table disclosure requirement under §§ 1026.37(c) and 1026.38(c), as applicable.

In light of these proposed changes to the coverage of § 1026.18 generally, and specifically § 1026.18(g), the Bureau proposed several conforming changes to the commentary under § 1026.18(g). Specifically, comment 18(g)-4 would have been revised to remove a reference to home repairs, and comment 18(g)-5, relating to mortgage insurance, would have been removed and reserved. In addition, comment 18(g)-6, which currently discusses the coverage of mortgage transactions as between § 1026.18(g) and (s), would have been revised to reflect the additional effect of proposed § 1026.19(e) and (f), which would have required the new integrated disclosures set forth in proposed §§ 1026.37 and 1026.38 for most transactions secured by real property. Finally, the Bureau also proposed to amend comments 18(g)(2)-1 and -2 to remove unnecessary, and potentially confusing, references to mortgages and mortgage insurance.

The Bureau did not receive comments on this aspect of the proposed rule. For the reasons discussed in the proposal, the Bureau is finalizing the commentary to § 1026.18(g) as proposed.

18(k) Prepayment

Section 1026.18(k) implements the provisions of TILA section 128(a)(11), which requires that the transaction-specific disclosures for closed-end consumer credit transactions disclose whether (1) a consumer is entitled to a rebate of any finance charge upon prepayment in full pursuant to acceleration or otherwise, if the obligation involves a precomputed finance charge, and (2) a “penalty” is imposed upon prepayment in full of such transactions if the obligation involves a finance charge computed from time to time by application of a rate to the unpaid principal balance. 15 U.S.C. 1638(a)(11). Commentary to § 1026.18(k) provides further guidance regarding the disclosures and provides examples of prepayment penalties and the types of finance charges where a consumer may be entitled to a rebate. For further background on § 1026.18(k), see the section-by-section analysis of § 1026.37(b)(4), below.

The proposal would have defined “prepayment penalty” in proposed § 1026.37(b)(4) for transactions subject to § 1026.19(e) and (f) as a charge imposed for paying all or part of a loan's principal before the date on which the principal is due, and would have provided examples of prepayment penalties and other relevant guidance in proposed commentary. As noted in the proposal, the Bureau's proposed definition of “prepayment penalty” and commentary is based on its consideration of the existing statutory and regulatory definitions of “penalty” and “prepayment penalty” under TILA and Regulation Z; the Board's proposed definitions of prepayment penalty in its 2009 Closed-End Proposal, 2010 Mortgage Proposal, and 2011 ATR Proposal; and the Bureau's authority under TILA section 105(a) and Dodd-Frank Act sections 1032(a) and, for residential mortgage loans, 1405(b). Further background on the Bureau's definition of prepayment penalty and the basis of its legal authority for that definition is provided in the section-by-section analysis of § 1026.37(b)(4), below.

As discussed in the section-by-section analysis of § 1026.37(b)(4), the Bureau sought to coordinate the definition of “prepayment penalty” in proposed § 1026.37(b)(4) with the definitions in the Bureau's other rulemakings under the Dodd-Frank Act concerning ability-to-repay requirements, high-cost mortgages under HOEPA, and mortgage servicing. The Bureau sought to coordinate the definition of “prepayment penalty” due to its belief that, to the extent consistent with consumer protection objectives, adopting a consistent definition of “prepayment penalty” across its various pending rulemakings affecting closed-end mortgages will facilitate compliance. As an additional part of adopting a consistent regulatory definition of “prepayment penalty,” the Bureau proposed certain conforming revisions to § 1026.18(k) and associated commentary.

As stated in the TILA-RESPA Proposal, the Bureau recognized that, with such conforming revisions to § 1026.18(k) and associated commentary, the revised definition of “prepayment penalty” would have applied to both closed-end mortgage and non-mortgage transactions. In particular, the proposed conforming revisions to § 1026.18(k) would have defined “prepayment penalty” with reference to a prepayment of “all or part of” the principal balance of a loan covered by the provision, while TILA section 128(a)(11) and current § 1026.18(k) and its associated commentary refer to prepayment “in full.” The proposal recognized that this revision could lead to an expansion of the set of instances that trigger disclosure under § 1026.18 of a prepayment penalty for closed-end transactions. The proposal stated the Bureau's belief that consumers entering into closed-end mortgage and non-mortgage transactions alike would have benefited from the transparency associated with more frequent and consistent disclosure of prepayment penalties. Therefore, the Bureau proposed to use its authority under TILA section 105(a) to make conforming revisions to § 1026.18(k) because of its belief that those changes would have effectuated the purposes of TILA by promoting the informed use of credit. Similarly, the Bureau believed these revisions would have helped to ensure that the features of these mortgage transactions are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand better the costs, benefits, and risks associated with mortgage transactions, in light of the facts and circumstances, consistent with Dodd-Frank Act section 1032(a). The Bureau also believed the revisions would improve consumer awareness and understanding of residential mortgage loans, and would be in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b). The Bureau solicited comment on this approach to the definition of prepayment penalty.

To conform with the proposed definition of prepayment penalty in § 1026.37(b)(4), proposed § 1026.18(k)(1) would have deleted the phrase “a statement indicating whether or not a penalty may be imposed if the obligation is prepaid in full” and would have replaced it with the phrase “a statement indicating whether or not a charge may be imposed for paying all or part of a transaction's principal before the date on which the principal is due.” Proposed § 1026.18(k)(2) would have added the phrase “or in part” at the end of the phrase “a statement indicating whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.”

Proposed revised comments 18(k)-1 through -3 would have inserted the word “prepayment” before the words “penalty” and “rebate” when used, to standardize the terminology across Regulation Z (i.e.,§ 1026.32(d)(6) currently refers to “prepayment penalty,” and proposed § 1026.37(b)(4) uses the same phrase). Proposed revised comment 18(k)(1)-1 would have replaced the existing commentary text with the language from proposed comments 37(b)(4)-2 and -3 and proposed comment 18(k)(2)-1.A would have been revised with language from proposed comment 37(b)(4)-2.

The Bureau did not receive comments on the proposed changes to § 1026.18(k). However, the Bureau is finalizing certain additional changes to § 1026.18(k) and its commentary in order to adopt a consistent definition of “prepayment penalty” across its various rulemakings affecting closed-end mortgage transactions, as the Bureau stated it sought to do in the proposal. The reasons for these additional changes are discussed in the section-by-section analysis of § 1026.37(b)(4). Specifically, comment 18(k)(1)-1.ii is revised to provide that the term “prepayment penalty” does not include a waived bona fide third-party charge imposed by the creditor if the consumer pays all of a covered transaction's principal before the date on which the principal is due sooner than 36 months after consummation, for consistency with comment 37(b)(4)-2.ii. The comment also provides an illustrative example. In addition, the Bureau is finalizing certain clarifying changes to comment 18(k)(1)-2.i, for consistency with comment 37(b)(4)-3.i. All other proposed amendments to § 1026.18(k) and its commentary are finalized as proposed, for the reasons stated in the proposed rule and in the section-by-section analysis of § 1026.37(b).

18(r) Required Deposit

If a creditor requires the consumer to maintain a deposit as a condition of the specific transaction, current § 1026.18(r) requires that the creditor disclose a statement that the APR does not reflect the effect of the required deposit. Comment 18(r)-6 provides examples of arrangements that are not considered required deposits and therefore do not trigger this disclosure. The Bureau proposed to remove and reserve paragraph 6.vi, which states that an escrow of condominium fees need not be treated as a required deposit. In light of the proposed changes to the coverage of § 1026.18, the only transactions to which this guidance would have applied are reverse mortgages, which do not entail escrow accounts for condominium fees or any other recurring expenses. Accordingly, the Bureau believed that comment 18(r)-6.vi would have been rendered unnecessary by the proposal. The Bureau requested comment, however, on whether any kind of transaction exists for which this guidance would continue to be relevant under § 1026.18, as amended by the proposal.

One small bank commenter noted that the Bureau proposed to exempt transactions subject to proposed § 1026.19(e) and (f) from the disclosures required by current § 1026.18(r), but that the integrated disclosures do not contain a similar disclosure requirement. As noted further in the section-by-section analyses of §§ 1026.37 and 1026.38, the integrated disclosures focus on the most readily understandable information that consumers use when shopping for and understanding their mortgage loans. The Bureau also stated in the TILA-RESPA proposal that it was concerned about the risk to consumers of experiencing information overload, which has often been cited as a problem with financial disclosures. The disclosure required by current § 1026.18(r), which is not specifically required by TILA, is not a disclosure that the Bureau's research and consumer testing indicates is important to consumers in understanding their loans. Accordingly, to reduce the potential for information overload for consumers, the Bureau is not requiring this disclosure in §§ 1026.37 or 1026.38. However, the final rule does not prohibit creditors from providing disclosures or information not specifically required by §§ 1026.37 or 1026.38. But, such additional information must be segregated from the required disclosures. See comment 37(o)(1)-1 and comment 38(t)(1)-1. For the reasons discussed in the proposal, the Bureau is finalizing comment 18(r)-6.vi as proposed.

18(s) Interest Rate and Payment Summary for Mortgage Transactions

Section 1026.18(s) currently requires the disclosure of an interest rate and payment summary table for transactions secured by real property or a dwelling, other than a transaction secured by a consumer's interest in a timeshare plan. Under the TILA-RESPA Proposal, however, § 1026.19(e) and (f) would have required new, separate disclosures for transactions secured by real property, other than reverse mortgages. Generally, the disclosure requirements of § 1026.19(e) and (f) would have applied to transactions currently subject to § 1026.18(s), except that reverse mortgages and transactions secured by dwellings that are personal property would have been excluded. In addition, as discussed in the section-by-section analysis of § 1026.19, transactions secured by a consumer's interest in a timeshare plan would have been covered by the integrated disclosure requirements of § 1026.19(e) and (f), although such transactions are not currently subject to the requirements of § 1026.18(s).

The new, integrated disclosures would have included a different form of payment schedule table, under §§ 1026.37(c) and 1026.38(c), instead of the interest rate and payment summary table under § 1026.18(s). Accordingly, the Bureau proposed to amend § 1026.18(s) to provide that it would have applied to transactions that are secured by real property or a dwelling, other than transactions that are subject to § 1026.19(e) and (f) (i.e., reverse mortgages and dwellings that are not secured by real property). The Bureau proposed parallel revisions to comment 18(s)-1 to reflect this change in the scope of § 1026.18(s)'s coverage. The Bureau also proposed to add a new comment 18(s)-4 to explain that § 1026.18(s) would have governed only closed-end reverse mortgages and closed-end transactions secured by a dwelling that is personal property.

The Bureau did not receive comments on this aspect of the proposed rule. For the reasons discussed in the proposal, the Bureau is finalizing the revisions to § 1026.18(s) and comment 18(s)-1 and adding new comment 18(s)-4 as proposed.

While not specifically addressed in the proposal, one large provider of mortgage origination software commenter suggested the Bureau clarify that the interest rate and payment summary table represents a payment schedule that is a material disclosure for purposes of § 1026.23. Although the Bureau is not adopting such a clarification in the rule at this time, the Bureau notes that current Regulation Z defines “material disclosures” to include the “payment schedule” disclosure, which has historically been implemented under § 1026.18(g), but is currently also implemented in § 1026.18(s) for closed-end transactions secured by real property or a dwelling and, under this final rule, for a transaction that is subject to § 1026.19(e) and (f), in §§ 1026.37(c) and 1026.38(c). Section 1026.18(g) and (s) and §§ 1026.37(c) and 1026.38(c) each implement TILA section 128(a)(6), which requires the creditor to disclose the number, amount, and due dates or period of payments scheduled to repay the total of payments. Accordingly, each of these disclosures is a “payment schedule” for purposes of § 1026.23.

18(s)(3) Payments for Amortizing Loans

18(s)(3)(i)(C)

Current § 1026.18(s)(3)(i)(C) requires creditors to disclose whether mortgage insurance is included in monthly escrow payments in the interest rate and payment summary. The proposal noted that the Bureau understands that some government loan programs impose annual guarantee fees and that creditors typically collect a monthly escrow for the payment of such amounts. Prior to issuing the proposal, the Bureau learned through industry inquiries that uncertainty exists regarding whether such guarantee fees should be disclosed as mortgage insurance under § 1026.18(s)(3)(i)(C) if the guarantee technically is not insurance under applicable law. As stated in the proposal, one way to comply with § 1026.18(s) is to include such guarantee fees in the monthly payment amount, without using the check box for “mortgage insurance.”See comment 18(s)(3)(i)(C)-1 (escrowed amounts other than taxes and insurance may be included but need not be). Although the Bureau recognized that government loan program guarantees may be legally distinguishable from mortgage insurance, they are functionally very similar. Moreover, the Bureau believed that such a technical, legal distinction is unlikely to be meaningful to most consumers. Therefore, the Bureau believed that the disclosure of such fees would be improved by including them in the monthly escrow payment amount and using the check box for “mortgage insurance.”

For these reasons, pursuant to its authority under TILA section 105(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b), the Bureau proposed to revise § 1026.18(s)(3)(i)(C) to provide that mortgage insurance or any functional equivalent must be included in the estimate of the amount of taxes and insurance, payable with each periodic payment. Proposed comment 18(s)(3)(i)(C)-2 would have been revised to conform to § 1026.18(s)(3)(i)(C). Specifically, the proposed comment would have clarified that, for purposes of the interest rate and payment summary disclosure required by § 1026.18(s), “mortgage insurance or any functional equivalent” includes “mortgage guarantees” (such as a United States Department of Veterans Affairs or United States Department of Agriculture guarantee) that provide coverage similar to mortgage insurance, even if not technically considered insurance under State or other applicable law. Since mortgage insurance and mortgage guarantee fees are functionally very similar, the Bureau believed that including both amounts in the estimate of taxes and insurance on the table required by § 1026.18(s) would have promoted the informed use of credit, thereby carrying out the purposes of TILA, consistent with TILA section 105(a). In addition, the proposed disclosure would have ensured that more of the features of the mortgage transaction are fully, accurately, and effectively disclosed to consumers in a manner that will permit consumers to understand the costs, benefits, and risks associated with the mortgage transaction, consistent with Dodd-Frank Act section 1032(a), and would have improved consumer awareness and understanding of residential mortgage loans and would have been in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b). Proposed comment 18(s)(3)(i)(C)-2 would have been consistent with the treatment of mortgage guarantee fees on the projected payments table required by proposed §§ 1026.37(c) and 1026.38(c). See the section-by-section analyses of §§ 1026.37(c) and 1026.38(c) for a description of the treatment of mortgage guarantee fees in those sections.

One mortgage origination software provider commenter noted that the proposed revision to § 1026.18 to include the “functional equivalent” of mortgage insurance in the disclosure would benefit consumers and creditors. However, one GSE commenter stated that the proposed revision to include the “functional equivalent” of mortgage insurance in the disclosure would create uncertainty as to what information must be disclosed because the language in the proposed rule could unintentionally cover a variety of credit enhancement or other structures, such as lender-paid mortgage insurance, that are not incremental to the consumers monthly payment and are disclosed elsewhere. That commenter suggested that the Bureau remove the reference to “any functional equivalent” of mortgage insurance and limit inclusion of the cost of mortgage guarantees to only those associated with United States Department of Veterans Affairs or United States Department of Agriculture guarantees that result in an incremental cost to the consumer that is separate and apart from the consumer's monthly payment of principal and interest. The Bureau otherwise did not receive comments on this aspect of the proposed rule.

For the reasons discussed in the proposal, the Bureau is finalizing the revisions to § 1026.18(s)(3)(i)(C) and comment 18(s)(3)(i)(C)-2 substantially as proposed, with certain clarifying changes to comment 18(s)(3)(i)(C)-2. As proposed, that comment would have provided that “mortgage insurance” means insurance against the nonpayment of, or default on, and individual mortgage. As finalized, however, the comment provides that “mortgage insurance or any functional equivalent” means the amounts identified in § 1026.4(b)(5). The Bureau believes that referencing the component of the finance charge in § 1026.4, rather than adopting a new definition, will facilitate compliance for creditors and avoid regulatory complexity, since the definition in § 1026.4(b)(5) is a longstanding part of Regulation Z. This change is consistent with the definition of “mortgage-related obligations” in the Bureau's 2013 ATR Final Rule and with the references to mortgage insurance or any functional equivalent in § 1026.37(c), described below. The Bureau is also making clarifying changes to the references to mortgage insurance in comments 18(s)(3)(i)(C)-1 and 18(s)(6)-1, for consistency with the changes to comment 18(s)(3)(i)(C)-2.

The Bureau has considered the comment related to the disclosure of the “functional equivalent” of mortgage insurance, but does not believe the comment should be specifically addressed in the rule. Section 1026.18(s)(3)(i)(C) requires disclosure of mortgage insurance or any functional equivalent only if an escrow account will be established, and only requires disclosure of the amount that will be paid with each periodic payment. Because lender-paid mortgage insurance would not be paid with escrow account funds and would not be paid by the consumer with each periodic payment, § 1026.18(s)(i)(C) and its commentary would not apply.

18(t) “No-Guarantee-To-Refinance” Statement

Current § 1026.18(t)(1) provides that, for a closed-end transaction secured by real property or a dwelling, other than a transaction secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53D), the creditor shall disclose a statement that there is no guarantee the consumer can refinance the transaction to lower the interest rate or periodic payments. The TILA-RESPA Proposal would have revised current § 1026.18(t) to provide that transactions subject to proposed § 1026.19(e) and (f) would not be subject to the requirements of § 1026.18(t)(1), and would have removed the exclusion for timeshare plans because transactions secured by a consumer's interest in a timeshare plan would have been subject to proposed § 1026.19(e) and (f).

The Bureau did not receive comments on this aspect of the proposed rule. Accordingly, and for the reasons discussed in the proposal, the Bureau is finalizing the revisions to § 1026.18(t) as proposed.

Section 1026.19 Certain Mortgage and Variable-Rate Transactions

The Bureau proposed to amend § 1026.19 to define the scope of the proposed integrated disclosures and to establish the requirements for provision of those disclosures.

Coverage of Integrated Disclosure Requirements

Background

The Bureau proposed to require delivery of the integrated disclosures for closed-end consumer credit transactions secured by real property, other than reverse mortgages. As discussed above in part IV, section 1032(f) of the Dodd-Frank Act requires that “the Bureau shall propose for public comment rules and model disclosures that combine the disclosures required under [TILA and sections 4 and 5 of RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws.” 12 U.S.C. 5532(f). In addition, sections 1098 and 1100A of the Dodd-Frank Act amended RESPA section 4(a) and TILA section 105(b), respectively, to require the Bureau to publish a “single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of [TILA and sections 4 and 5 of RESPA] that, taken together, may apply to a transaction that is subject to both or either provisions of law.” 12 U.S.C. 2604(a); 15 U.S.C. 1604(b). Accordingly, the Bureau is directed to establish the integrated disclosure requirements for “mortgage loan transactions” that are “subject to both or either provisions of” RESPA sections 4 and 5 (the statutory RESPA GFE and RESPA settlement statement requirements) and TILA. [180]

The Legal Authority discussion in part IV above also notes that, notwithstanding this integrated disclosure mandate, the Dodd-Frank Act did not reconcile important differences between RESPA and TILA, such as the delivery of the RESPA settlement statement and the final TILA disclosure, as well as the persons and transactions to which the disclosure requirements are imposed. Accordingly, to meet the integrated disclosure mandate, the Bureau believes that it must reconcile such statutory differences. The Bureau also recognizes that application of the integrated disclosure requirements of this final rule to certain transaction types may be inappropriate, even though those transaction types are within the scopes of one or both statutes. These issues and the Bureau's decisions for addressing them in the final rule are discussed below.

Differences in coverage of RESPA and TILA. RESPA applies generally to “federally related mortgage loans,” which means loans (other than temporary financing such as construction loans) secured by a lien on residential real property designed principally for occupancy by one to four families and that are: (1) Made by a lender with Federal deposit insurance; (2) made, insured, guaranteed, supplemented, or assisted in any way by any officer or agency of the Federal government; (3) intended to be sold to Fannie Mae, Ginnie Mae, or (directly or through an intervening purchaser) Freddie Mac; or (4) made by a “creditor,” as defined under TILA, that makes or invests in real estate loans aggregating more than $1,000,000 per year, other than a State agency. 12 U.S.C. 2602(1), 2604. [181] RESPA section 7(a) provides that RESPA does not apply to credit for business, commercial, or agricultural purposes or to credit extended to government agencies. 12 U.S.C. 2606(a). Thus, RESPA disclosures essentially are required for consumer-purpose loans that have some Federal nexus (or are made by a TILA creditor with sufficient volume) and that are secured by real property improved by single-family housing.

Regulation X § 1024.5 implements these statutory provisions. Section 1024.5(a) provides that RESPA and Regulation X apply to federally related mortgage loans, which are defined by § 1024.2(b) to parallel the statutory definition described above. Regulation X § 1024.5(b) establishes certain exemptions from coverage, including loans on property of 25 acres or more; loans for a business, commercial, or agricultural purpose; temporary financing, such as construction loans, unless the loan is used to finance transfer of title or may be converted to permanent financing by the same lender; and loans on unimproved property, unless within two years from settlement the loan proceeds will be used to construct or place a residence on the land. 12 CFR 1024.5(b)(1) through (4). Unlike the others, the exemption for loans secured by properties of 25 acres or more is not statutory and is established by Regulation X only.

TILA, on the other hand, applies generally to consumer credit transactions of all kinds, including unsecured credit and credit secured by nonresidential property. 15 U.S.C. 1602(f) (“credit” defined as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment”). Similar to RESPA, TILA excludes, among others, extensions of credit primarily for business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations. 15 U.S.C. 1603(1). In contrast with RESPA and Regulation X, however, TILA and Regulation Z have no exclusion for property of 25 acres or more, temporary financing, or vacant land. Moreover, TILA applies only to transactions made by a person who “regularly extends” consumer credit. Id. 1602(g) (definition of creditor).

Regulation Z §§ 1026.2(a)(14) and (17) and 1026.3(a) implement these statutory provisions. In particular, § 1026.2(a)(17) defines “creditor,” in pertinent part, as a person who regularly extends consumer credit, and § 1026.2(a)(17)(v) further provides that, for transactions secured by a dwelling (other than “high-cost” loans subject to HOEPA), a person “regularly extends” consumer credit if it extended credit more than five times in the preceding calendar year. Section 1026.3(a) implements the exclusion of credit extended primarily for a business, commercial, or agricultural purpose, as well as credit extended to other than a natural person, including government agencies or instrumentalities.

Although TILA generally applies to consumer credit that is unsecured or secured by nonresidential property, Dodd-Frank Act section 1032(f), RESPA section 4(a), and TILA section 105(b) specifically limit the integrated disclosure requirement to “mortgage loan transactions.” The Dodd-Frank Act did not specifically define “mortgage loan transaction,” but did direct that the disclosures be designed to incorporate disclosure requirements that may apply to “a transaction that is subject to both or either provisions of the law.”

As described above, five types of loans are currently covered by TILA or RESPA, but not both. Under the foregoing provisions, loans to finance home construction that do not finance transfer of title and for which the creditor will not extend permanent financing (construction-only loans), loans secured by unimproved land already owned by the consumer and on which a residence will not be constructed within two years (vacant-land loans), and loans secured by land of 25 acres or more (25-acre loans) all are subject to TILA but are currently exempt from RESPA coverage. [182] In addition, loans secured by dwellings that are not real property, such as mobile homes, houseboats, recreational vehicles, and similar dwellings that are not deemed real property under State law, (chattel-dwelling loans) could be considered “mortgage loan transactions,” and they also are subject to TILA but not RESPA. On the other hand, federally related mortgage loans made by persons who are not creditors under TILA, because they make five or fewer such loans per year, are subject to RESPA but not TILA. In addition, some types of mortgage loan transactions are covered by both statutes, but may warrant uniquely tailored disclosures because they involve terms or features that are so different from standard closed-end transactions that use of the same form may cause significant consumer confusion and compliance burden for industry.

The Bureau proposed to use its authority under TILA section 105(a), (b), and (f), RESPA sections 4(a) and 19(a), and Dodd-Frank Act section 1032(a) and (f) and, for residential mortgage loans, 1405(b) to tailor the scope of the proposal so that the integrated disclosure requirements apply to all closed-end consumer credit transactions secured by real property, other than reverse mortgages. Thus, the proposal would have exempted reverse mortgages, open-end transactions, and transactions that are not secured by real property. The proposal also would have expanded the application of the integrated disclosure requirements to transactions secured by real property that do not contain a dwelling. As it explained in the proposal, the Bureau believed that doing so would ensure that, in most mortgage transactions, consumers receive integrated disclosure forms developed by the Bureau through extensive consumer testing that would improve consumers' understanding of the transaction. Furthermore, the Bureau believed that applying a consistent set of disclosure requirements to most mortgage transactions would facilitate compliance by industry. Similarly, the proposal would have both narrowed and expanded the application of other Dodd-Frank Act mortgage disclosure requirements to improve consumer understanding and facilitate compliance. [183]

25-Acre Loans, Vacant-Land Loans, and Construction-Only Loans

The Bureau proposed to apply the integrated disclosure requirements to 25-acre loans, construction-only loans, and vacant-land loans. While these loans are currently exempt from mortgage disclosure requirements under RESPA and Regulation X, see 12 CFR 1024.5(b)(1), (3), and (4), the Bureau proposed to cover them to ensure that, in most mortgage transactions, consumers receive a consistent set of disclosures to improve consumer understanding and facilitate compliance. The Bureau explained that, if such transactions were not subjected to the integrated disclosure requirements, they would remain subject to the existing TILA disclosures under § 1026.18. The Bureau stated its belief that this treatment would deprive consumers in such transactions of the benefits of the disclosures developed for this proposal. Moreover, the Bureau explained that these types of transactions involve real property and, therefore, are amenable to disclosure of the information currently disclosed through the RESPA GFE and RESPA settlement statement requirements. Thus, the Bureau expected that creditors should be able to use existing systems to provide the integrated disclosures for such transactions. The Bureau solicited comment, however, on whether application of the integrated disclosures to these transactions would impose significant burdens on creditors.

Comments

25-acre loans. Several commenters expressed support for covering 25-acre loans. A financial holding company indicated that covering these loans would facilitate compliance. A software company commenter and a title insurance company commenter stated that they did not believe covering these loans would be unduly burdensome on creditors, particularly if the Bureau provided guidance to address the unique characteristics of these loans. The software company commenter also explained that consumers who enter into multiple transactions at once would benefit from receiving consistent disclosures for different types of loans. A trade association representing banks from a midwestern State explained that many loans secured by properties of 25 acres or more are consumer-purpose loans for home construction, home improvement, refinance, or land acquisition. This commenter explained that these loans are typically structured the same as loans secured by properties on 24 or fewer acres and have similar costs, and that it is typically clear when they are being made for a consumer purpose, as opposed to a business purpose. Thus, the commenter explained that its membership generally did not object to providing the integrated disclosures for all consumer-purpose loans secured by real property, without regard to property size.

By contrast, trade associations representing banks, a compliance company, a rural lender, and several community banks explained that many loans on 25 acres or more have more than one purpose and that loans that have a business, commercial, or agricultural purpose should be exempt under Regulation Z. The rural lender also recommended that the Bureau deem in the final rule all loans secured by 25 acres or more to be business, commercial, or agricultural purpose loans. The rural lender commenter explained that its customers often take out consumer-purpose loans on properties of 25 acres or more, and that eliminating the current RESPA exemption for such loans would place a significant burden on rural creditors. [184] The commenter noted that these loans were not subject to abusive mortgage practices in the past, and that the additional disclosures would impose a significant amount of paperwork and compliance burden, which would require it to increase staff. A rural lender commenter argued that covering loans on properties of 25 acres or more would not provide a significant consumer benefit and could hurt customers because additional disclosure requirements would delay closings, inhibit access to credit, and increase costs for customers. Other industry commenters recommended that, if a loan on 25 acres or more has a business, commercial, or agricultural purpose, then the loan's primary purpose should be deemed as such, which would exempt the loan from the rule's coverage, consistent with the current treatment of such loans under Regulation X.

Other creditor and bank trade association commenters were concerned that covering business, commercial, or agricultural loans would decrease lending in that market. A trade association commenter representing banks asserted that the Bureau lacked authority to regulate such transactions because RESPA applies only to consumer mortgage loans, TILA applies only to consumer credit, and Dodd-Frank Act section 1405(b) authorizes modified disclosures for “residential mortgage loans” only for the purpose of improving consumer awareness and understanding.

Vacant-land loans. A credit union commenter and an employee of a software company expressed support for covering vacant-land loans because standardizing loan disclosure for loans secured by real estate would benefit consumers and financial institutions. A title insurance company stated that it did not believe there would be a significant new burden if these loans were covered by the final rule. The software company commenter stated that it did not believe covering these loans would be unduly burdensome on creditors, particularly if the Bureau provided guidance to address the unique characteristics of these loans. This commenter also explained consumers who enter into multiple transactions at once would benefit from receiving consistent disclosures for different types of loans.

By contrast, a rural lender commenter, a compliance company, and a trade association representing credit unions requested that the Bureau exempt loans secured by vacant land. The rural lender commenter specifically requested that the Bureau consider exempting vacant-land loans on which a home will not be constructed or placed using the loan proceeds within two years after settlement of the loan, which would be consistent with the exemption under current Regulation X § 1024.5(b)(4). The commenter explained that these loans, together with loans on properties of 25 acres or more and forms of temporary financing, comprise 55 percent of its consumer-purpose, real estate-secured loan applications and 61 percent of its closed-end consumer-purpose, real estate-secured loans that are currently exempt from RESPA GFE and RESPA settlement statement requirements, respectively. The commenter also observed that these loans were not subject to abusive mortgage practices in the past. Other commenters, including community banks, argued that covering vacant-land loans would not provide a significant consumer benefit and could hurt consumers because additional disclosure requirements would delay and complicate closings, inhibit access to credit, and increase costs for consumers. The trade association representing credit unions argued that many aspects of the proposal would be incongruous for vacant-land loans.

Construction-only loans. A credit union commenter and an employee of a software company expressed support for covering temporary loans because standardizing loan disclosure for loans secured by real estate would benefit consumers and financial institutions. A title insurance company stated that it did not believe there would be significant new burden if these loans were covered by the final rule. The software company commenter stated that it did not believe covering these loans would be unduly burdensome on creditors, particularly if the Bureau provided guidance to address the unique characteristics of these loans. This commenter also explained consumers who enter into multiple transactions at the same time would benefit from receiving consistent disclosures for different types of loans.

By contrast, a compliance company, a law firm submitting comments on behalf of a software company, a credit union, and trade associations representing banks and credit unions argued that temporary financing, particularly construction-only loans and bridge loans, also should be exempt because their unique characteristics make them ill-suited for RESPA disclosures. The trade association representing credit unions indicated that imposing the proposed timing requirements on construction-only loans would be unreasonable because the timing of their consummation is often affected by unforeseeable events, such as weather or material shortages, which would make it difficult to disclose the actual terms of their transactions in advance. The trade association commenter representing banks identified several characteristics of temporary or bridge loans it believed distinguished them from other transaction types: instead of monthly principal and interest payments, such loans typically require interest only payments or irregular quarterly payments with the principal balance due at maturity; no escrow account is established; no mortgage insurance is obtained; prepayment penalties are rare; and, typically closing costs are minimal because most costs are tied to the permanent financing. The commenter expressed concern that these unique features would mean bank software systems would not accurately populate the integrated disclosures and that associated compliance risk would reduce the availability of such products. The community bank commenter also argued that covering construction loans would reduce lending volume, complicate and delay closings, and would not necessarily benefit consumers. This commenter also observed that providing integrated disclosures for temporary and bridge loans would provide little benefit because they typically are made in conjunction with longer-term loans or until permanent financing is secure, and thus usually have lower costs than other loans. The compliance company commenter stated that construction-only loans are not consumer-purpose loans and consumers would receive no benefit from disclosures for such loans. The law firm commenter stated the Bureau was inconsistent by not exempting construction loans, which the company believed were distinct from traditional mortgage loans. This commenter identified several specific characteristics of construction loans that raised questions about the application of the proposal's integrated disclosure requirements, such as disclosure of loan term, adjustable payments, and adjustable interest rates.

A rural lender commenter requested that the Bureau exempt loans for temporary financing unless the loan is used to finance transfer of title or may be converted to permanent financing by the same creditor. The commenter explained that these loans, together with loans on properties of 25 acres or more and vacant land loans, comprise 55 percent of its consumer-purpose, real estate-secured loan applications and 61 percent of its closed-end consumer-purpose, real estate-secured loans that are currently exempt from RESPA GFE and RESPA settlement statement requirements, respectively. The commenter also argued that covering temporary financing would not provide a significant consumer benefit and could harm consumers because additional disclosure requirements would delay closings, restrict access to credit, increase costs for consumers, and impede consumers' ability to purchase new homes. The commenter also noted that these loans were not subject to abusive mortgage practices in the past.

Final Rule

The Bureau has considered the comments received regarding the applicability of the integrated disclosures to 25-acre loans, vacant-land loans, and construction-only loans.

25-acre loans. The Bureau declines to deem loans on properties of 25 acres or more that have a business, commercial, or agricultural purpose as non-consumer-purpose loans, notwithstanding any consumer purpose they may have. [185] TILA and Regulation Z already contemplate transactions that may have multiple purposes, and coverage depends on the primary purpose of the loan. TILA section 103(i) defines a “consumer” credit transaction as one in which the money, property, or services which are the subject of the transaction are “primarily” for personal, family, or household purposes. The definition of “consumer credit” in Regulation Z § 1026.2(a)(12) is consistent with this statutory definition. In addition, currently under Regulation Z, as in the final rule, an extension of credit primarily for business, commercial, or agricultural purpose is already exempt from the requirements of Regulation Z. See§ 1026.3(a)(1). Current comment 3(a)-1 explains that a creditor must determine in each case if the transaction is primarily for an exempt purpose, and other existing commentary to 1026.3(a) provides guidance on whether particular types of credit, including credit for an agricultural purpose, are covered by Regulation Z. Further, loans on 25 acres or more that qualify as closed-end “consumer credit” under Regulation Z are currently subject to disclosure requirements under subpart C of Regulation Z, including those in § 1026.18. Accordingly, creditors should be familiar with determining whether a loan on such properties is exempt.

Although the Bureau received some comments suggesting that properties of 25 acres or more frequently have a non-consumer purpose, the Bureau received other comments, including one from a trade association representing banks located in a midwestern State, that loans on properties of 25 acres or more can be made for consumer purposes, such as home construction, home improvement, refinance, or land acquisition. Thus, even though a large-property loan may have a business, commercial, or agricultural purpose, the Bureau does not believe that fact alone should be sufficient to determine that the loan is not made primarily for a consumer purpose. Further, such an interpretation could have implications beyond this final rule to other parts of Regulation Z and remove existing TILA protections for consumers in rural areas.

The Bureau recognizes that making such loans subject to the integrated disclosure requirements will impose a new burden on industry. However, the Bureau believes covering such loans under the final rule is consistent with the Dodd-Frank Act integration mandate applicable to mortgage loan transactions. Additionally, exempting such loans altogether could deprive these consumers of an important benefit. Further, basing coverage on whether real estate secures the transaction will facilitate compliance because creditors will not have to identify the size of the property before or upon receipt of an application to determine whether a Loan Estimate must be provided.

Vacant-land loans. While vacant-land loans may not pose the same type of risk as dwelling-secured loans in the short term, they could present such risks if a consumer decides to construct a dwelling in the future. In addition, vacant land is itself an important source of value for consumers.

The Bureau believes the integration mandate applies to more than just dwelling-secured loans. Dodd-Frank Act sections 1032(f), 1098, and 1100A, which amend RESPA section 4(a) and TILA section 105(b), limit the integrated disclosure requirement to “mortgage loan transactions.” However, the Dodd-Frank Act did not specifically define that term. The Bureau believes the term extends broadly to real estate-secured transactions as the Dodd-Frank Act did not use the term “residential mortgage loan,” which was defined in Dodd-Frank Act section 1401. Moreover, the Dodd-Frank Act directs the Bureau to develop integrated disclosure requirements that may apply to a transaction that is subject to both or either provisions of TILA and RESPA. Although RESPA and Regulation X exempt vacant-land loans from coverage, TILA and Regulation Z apply to such loans.

Accordingly, the Bureau believes these loans are covered by the integration mandate, and the Bureau believes that the integrated disclosures would be just as useful to a consumer whose closed-end credit transaction is secured by vacant real estate as they would to a consumer whose transaction is secured by real estate with a dwelling. In addition, the Bureau believes covering all real estate-secured closed-end consumer credit transactions (other than reverse mortgages) will facilitate industry compliance. Under the final rule, creditors will not have to determine whether the property includes a dwelling or if the loan proceeds will be used to construct a dwelling within two years from the date of the settlement of the loan [186] before or upon receipt of an application to determine whether a Loan Estimate must be provided.

Construction-only loans. The Bureau believes covering temporary loans secured by real estate will benefit consumers and will facilitate compliance because covering real estate-secured, closed-end consumer credit transactions, other than reverse mortgages, provides a clear compliance rule for industry. The Bureau notes that, while many construction-only loans may not be for a consumer purpose, only those loans made “primarily” for personal, family, or household purposes are covered by the final rule, consistent with the definition of “consumer credit” in Regulation Z § 1026.2(a)(12). Although the Bureau appreciates that the terms of a construction-only transaction may change based on unforeseen circumstances, these loans are not unique in that respect. Moreover, the Bureau has addressed the need for flexibility with respect to the provision of the Loan Estimate and Closing Disclosure under § 1026.19(e) and (f), such that unforeseen circumstances should not interfere with the provision of those disclosures. For example, the good faith estimate requirement applicable to the Loan Estimate is subject to changed circumstances set forth in § 1026.19(e)(3)(iv)(A). In addition, as discussed in the section-by-section analysis of § 1026.19(f)(2), the final rule revises the redisclosure triggers applicable to the Closing Disclosure to account for unforeseen circumstances that could make previously disclosed settlement costs inaccurate. The Bureau appreciates that temporary loans, such as construction-only loans, may have unique characteristics that require special guidance. In response to comments, the final rule provides additional clarity on how to disclose such construction-only loans, as described in the section-by-section analyses of the respective provisions of §§ 1026.37 and 1026.38.

Conclusion. The Bureau believes that including 25-acre loans, vacant-land loans, and construction-only loans within the scope of the integrated disclosure requirements effectuates the purposes of TILA under TILA section 105(a), because it would ensure meaningful disclosure of credit terms to consumers and facilitate compliance with the statute. In addition, consistent with section 1032(a) of the Dodd-Frank Act, coverage of these types of loans will ensure that the features of consumer credit transactions secured by real property are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances. Further, the Bureau adopts these requirements for residential mortgage loans based on its authority under Dodd-Frank Act section 1405(b), as it believes the modification will improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, and will be in the interest of consumers and in the public interest. Accordingly, for the aforementioned reasons, the final rule covers loans secured by properties of 25 acres or more, loans in which vacant land secures a closed-end consumer credit transaction, including loans on which a home will not be constructed or placed using the loan proceeds within two years after settlement of the loan, and construction-only loans and other forms of temporary financing secured by real property.

Reverse Mortgages, HELOCs, and Chattel-Dwelling Loans

As described in more detail below, the Bureau proposed to exempt from the integrated disclosure requirements certain loans that are currently covered by both TILA and RESPA (reverse mortgages and open-end transactions secured by real property or a dwelling), and certain loans that are covered by TILA but not RESPA (chattel-dwelling loans). The Bureau explained in the proposal that, for these mortgage transactions, the Bureau believes application of the integrated disclosure requirements would not improve consumer understanding or facilitate compliance and that these transactions should therefore be exempted from the integrated disclosure requirements.

Reverse mortgages. The Bureau proposed to exempt reverse mortgage loans, as defined under § 1026.33, from the integrated disclosure requirements. The Bureau explained in the proposal that it was aware that lenders and creditors face significant difficulties applying the disclosure requirements of RESPA and TILA to reverse mortgages, in light of those transactions' unusual terms and features. The difficulties appear to stem from the fact that a number of the disclosed items under existing Regulations X and Z are not relevant to such transactions and therefore have no meaning. Moreover, the Bureau explained in the proposal that it developed the proposed integrated disclosure forms for use in “forward” mortgage transactions and did not subject those forms, which implement essentially the same statutory disclosure requirements as do the current regulations, to any consumer testing using reverse mortgage transactions. The Bureau, therefore, was concerned that the use of the integrated disclosures for reverse mortgages may result in numerous disclosures of items that are not applicable, difficult to apply, or potentially even misleading or confusing for consumers. [187] The Bureau expected to address reverse mortgages through a separate, future rulemaking process that would establish a distinct disclosure scheme. [188]

HELOCs. Open-end transactions secured by real property or a dwelling (home-equity lines of credit, or HELOCs) are within the statutory scope of both TILA and RESPA and also reasonably could be considered “mortgage loan transactions.” However, as the Bureau explained in the proposal, HELOCs are, by their nature, fundamentally different from other forms of mortgage credit.

Chattel-dwelling loans. Chattel-dwelling loans (such as loans secured by mobile homes) do not involve real property, by definition. The Bureau estimated in the proposal that approximately one-half of the closing-cost content of the integrated disclosures is not applicable to such transactions because they more closely resemble motor vehicle transactions than true mortgage transactions. Such transactions currently are not subject to RESPA and, unlike the transactions above that involve real property, generally are not consummated with “real estate settlements,” which are the basis of RESPA's coverage. Thus, the Bureau explained that, if these transactions were subject to the integrated disclosures under the proposal, a significant portion of the disclosures' content would be inapplicable. The Bureau explained that permitting those items to be omitted altogether could compromise the overall integrity of the disclosures, which were developed through consumer testing that never contemplated such extensive omissions, and the Bureau therefore had no basis for expecting that they would necessarily be as informative or understandable to consumers if so dramatically altered. The Bureau expressed similar concerns about keeping the overall forms intact but directing creditors to complete the inapplicable portions with “N/A” or simply to leave them blank. Moreover, the Bureau explained that such an approach would risk undermining consumers' understanding of their transactions, which would be inconsistent with the purpose of this rulemaking, because they could be distracted by extensive blank or “N/A” disclosures from the relevant disclosures present on the form.

Comments

Reverse mortgages. A credit union commenter supported an exemption for reverse mortgage loans because of their uniqueness and because the required disclosures would confuse consumers. A settlement agent commenter stated that if reverse mortgage loans are exempt from the final rule, they also should be exempt from RESPA section 4. The commenter recommended a simple closing statement that would itemize debits and credits to the borrower and seller. By contrast, another credit union commenter stated that reverse mortgage loans secured by real estate should be covered because standardizing loan disclosures for all real estate-secured loans would benefit consumers and financial institutions. The commenter recommended that additional disclosures required for reverse mortgages under § 1026.33(b) could be added as an addendum to the integrated disclosures, and that consumers would benefit from the use of standard forms that they could rely on and understand, while financial institutions would benefit from having a single set of rules and disclosures that would apply to similar loans.

HELOCs. A trade association representing credit unions and a credit union commenter supported an exemption for these loans due to their uniqueness and the fact that the required disclosures would not make much sense to the consumer for these types of transactions. A consumer advocacy group stated that HELOCs should have triggers and protections equal to those applicable to closed-end mortgage loans. The commenter explained that many consumers and creditors do not distinguish between open- and closed-end home-secured credit, and that the consequences of default on a HELOC are far more serious than for credit cards and more closely resemble the effects of default on a closed-end mortgage loan.

Chattel-dwelling loans. A non-depository lender for manufactured homes and a trade association representing the manufactured home industry supported the exclusion for chattel-dwelling loans from the integrated mortgage disclosure requirements. The non-depository lender commenter explained that some States have laws that impose requirements that have been interpreted to require mortgage lenders to fully comply with the disclosure requirements of RESPA and/or TILA or their implementing regulations for loans secured by both personal property and real estate. The commenter further explained that the practical effect of dual application of RESPA and TILA under State law is that lenders must provide both old and new forms of the RESPA and TILA disclosures for the same transaction. The commenter stated its position that any State law or regulation that requires a mortgage lender to provide not only the proposed integrated disclosures but also the existing or current versions of the RESPA and Regulation X required disclosures in connection with chattel-dwelling loans is inconsistent with RESPA and Regulation X. The commenter requested that the Bureau exercise its authority pursuant to Regulation X § 1024.13(b), both in connection with this rulemaking and in connection with current requirements regarding chattel-secured mortgage lending, to declare any such State law or regulation to be preempted by RESPA and Regulation X.

A national trade association commenter representing the recreational vehicle industry expressed concern about language in the proposal's preamble about the treatment of transactions not subject to the final rule but that could arguably fall within Dodd-Frank Act sections 1032(f), 1098, and 1100A. The Bureau explained in the proposal that such transactions will remain subject to the existing disclosure requirements under Regulations X and Z, as applicable, until the Bureau adopts integrated disclosures specifically tailored to their distinct features. [189] The commenter expressed concern that the Bureau intends to regulate recreational vehicle dealers through a future rulemaking by adopting integrated disclosures specifically tailored for such dealers. The commenter asked the Bureau to closely review the recreational vehicle market compared to the market for other chattel property, specifically manufactured homes. The commenter noted that signaling recreational vehicle dealers will be regulated by tailored future mortgage transaction disclosures confuses the motor vehicle sales process and would keep lenders out of that market. This commenter and a trade association representing the recreational boat industry were concerned that the definition of “dwelling” in Regulation Z and related commentary would cover types of vessels and vehicles that are generally not included in the definition of dwelling under State laws, and that covering these types of personal property would reduce the availability of credit to individuals living in these structures.

A national trade association commenter representing credit unions and a credit union commenter supported the exemption for loans secured by personal property due to their uniqueness and the fact that the required disclosures would not make much sense to the consumer for these type transactions. A trade association commenter representing the manufactured home industry expressed concern that the proposal ignored that, in the manufactured housing industry, a home may be sold as personal property, and may only become real property at some later point in time in the home delivery and installation process. Commenters requested that the Bureau provide an exclusion from the new integrated disclosure requirements for land/home, staged funded manufactured home loans, even those loans that, when fully consummated, will be secured by real property. Several trade associations commenters representing banks requested that the Bureau clarify whether dual-collateral loans will be subject to the integrated disclosure requirements, and that if they are, that the Bureau consider developing related disclosures.

In contrast, a nonprofit advocacy organization and two consumer advocacy groups submitting a joint comment stated that the Bureau should extend RESPA coverage to all manufactured homes, including those titled as personal or real property. The consumer advocacy groups emphasized that manufactured homes resemble other residential structures and should receive the same protections under RESPA. They also stated that covering vacant land loans but not manufactured homes would be inconsistent and could result in consumer harm. The commenters explained that dwelling-secured credit poses higher risk to consumers than loans secured by vacant land. Consumer advocacy group commenters also requested that the Bureau provide all homeowners adequate disclosures, regardless of whether State law denominates the dwelling as real or personal property. The commenters also argued that this result was imperative because consumers living in manufactured housing are particularly susceptible to abusive lending. The commenters also requested that the Bureau clarify the treatment of manufactured homes under RESPA, in light of guidance provided by HUD that suggested a manufactured home is subject to RESPA depending on the nature of the dwelling's connection to the land. The commenters asked that the Bureau clarify that RESPA applies to all manufactured homes treated as real property under State law.

Final Rule

Reverse mortgages. As the Bureau explained in the proposal, reverse mortgages have unique features that are not amenable to the integrated disclosures, which were developed for forward mortgages. While requiring the integrated disclosures for reverse mortgages may provide a clearer coverage rule for creditors, applying the specific disclosure requirements to such loans would likely result in confusion for consumers and industry. As the Bureau noted in the proposal, the Bureau expects to address disclosures for reverse mortgages in a future rulemaking.

While the final rule exempts reverse mortgage loans from the integrated disclosure requirements of § 1026.19(e) and (f), it declines to exempt them completely from RESPA. As discussed in the section-by-section analysis of appendices A and C of Regulation X above, the Bureau is finalizing amendments to Regulation X to incorporate certain guidance in the HUD RESPA FAQs regarding the completion of the RESPA GFE and the RESPA settlement statement for reverse mortgage transactions. Although, as it noted in the proposal, the Bureau is aware that industry faces difficulties applying the disclosure requirements of RESPA and TILA to reverse mortgages, the Bureau does not believe it would be appropriate to grant an exemption from RESPA for such transactions because it would leave consumers without important RESPA-required disclosures. For the aforementioned reasons, the Bureau declines to include reverse mortgage loans subject to § 1026.33 within the scope of the integrated disclosure requirements of § 1026.19(e) and (f).

HELOCs. While the Bureau recognizes that open-end consumer credit transactions secured by real estate can pose risks to consumers, the Bureau continues to believe they would be inappropriate for coverage under the final rule. As the Bureau explained in the proposal, the integrated disclosures were developed for closed-end consumer credit, and the Bureau believes that using them to disclose open-end credit transactions would likely result in confusion because many parts of the disclosures would be inapplicable to open-end credit transactions, such as the projected payments table, the estimated taxes and insurance disclosure, or the escrow account disclosures under §§ 1026.37(c) and 1026.38(c).

The Bureau notes that HELOCs are open-end credit plans and therefore are subject to different disclosure requirements than closed-end credit transactions under Regulation Z. In recognition of the distinct nature of open-end credit, Regulation X effectively exempts such plans from the RESPA disclosure requirements. Sections 1024.6(a)(2) and 1024.7(h) of Regulation X state that, for HELOCs, the requirements to provide the “special information booklet” regarding settlement costs and the RESPA GFE, respectively, are satisfied by delivery of the open-end disclosures required by Regulation Z. Regulation X § 1024.8(a) exempts HELOCs from the RESPA settlement statement requirement altogether. The Bureau expects to address HELOCs through a separate, future rulemaking that will establish a distinct disclosure scheme tailored to their unique features, which will more effectively achieve the purposes of both RESPA and TILA. [190]

Chattel-dwelling loans. The Bureau has considered the comments on the final rule's coverage with respect to chattel-dwelling loans. The Bureau believes that disclosing loans secured by personal property using the integrated disclosures could reduce the intended consumer benefit of the disclosures because of those loans' unique characteristics. Excluding them from coverage of these integrated disclosures, however, would not excuse them from TILA's disclosure requirements. Rather, they would remain subject to the existing closed-end TILA disclosure requirements under § 1026.18. Thus, the current treatment of chattel-dwelling-secured loans under both RESPA and TILA is preserved if they are excluded from coverage of the integrated disclosure requirements in this final rule. Excluding chattel-dwelling-secured loans from the integrated disclosure requirements means they would not be subjected by this rulemaking to certain new disclosure requirements added to TILA section 128(a) by the Dodd-Frank Act. As discussed under the section-by-section analysis of § 1026.1(c) above, certain other new mortgage disclosure requirements, added to TILA under title XIV of the Dodd-Frank Act are exempted until integrated disclosure requirements are implemented by regulations for such transaction types. As noted above, the Bureau plans to address integrated disclosure requirements for chattel-dwelling-secured loans, as well as reverse mortgages and HELOCs, in future rulemakings. The Bureau believes that the TILA disclosures resulting from that process would be more appropriate and more beneficial to consumers than the integrated disclosures under this final rule.

With respect to commenters concerned about future rulemakings applicable to recreational vehicles, the Bureau notes that TILA currently applies to credit transactions broadly. See 15 U.S.C. 1602(f). The Bureau also notes that closed-end consumer credit transactions not secured by real property, other than reverse mortgages subject to § 1026.33, are already subject to disclosure requirements in subpart C of Regulation Z, including those in § 1026.18. Any subsequent disclosure requirements on creditors subject to the Bureau's authority will be based on a review of the relevant market and the adequacy of existing disclosures, among other factors. With respect to commenters concerned that the definition of “dwelling” in Regulation Z potentially covers recreational vehicles and other vessels, the Bureau did not propose changes to the definition of “dwelling” under § 1026.2(a)(19) in the proposal and is not making such changes in this final rule.

Some commenters were concerned that coverage of multiple-advance construction loans may be secured by real property and personal property and, therefore, it may be unclear how a creditor would disclose such loans. However, the Bureau believes such loans are amenable to the integrated disclosures because such loans are secured by real property. The Bureau believes this treatment is warranted because the mandate to integrate disclosures under TILA and RESPA requires that the Bureau reconcile differences in coverage between the two statutes. The Bureau has addressed how to disclose such transactions in the rule, as described in the section-by-section analyses of § 1026.18 and appendix D to Regulation Z.

While the Bureau believes that most construction-only loans will be secured by real property at consummation, it recognizes that there may be circumstances in which such loans could be secured by personal property. Whether a transaction is secured by real property depends on State law, and the Bureau appreciates that, in some cases, a loan financing the construction phase of a dwelling may be classified as a loan secured by personal property at consummation of that phase of financing. Accordingly, the Bureau has retained existing regulatory provisions in Regulation Z that set forth disclosure requirements for construction loans applicable to closed-end consumer credit transactions not secured by real property.

With respect to commenters who requested that the Bureau extend RESPA coverage to transactions secured by personal property, the Bureau declines to do so because RESPA and Regulation X apply by their terms to “federally related mortgage loans,” which are limited to transactions in which the lender has a lien secured by real property. The Bureau also declines to exercise authority under TILA and the Dodd-Frank Act to extend coverage of the final rule to manufactured homes that are considered chattel under State law. The Bureau believes basing coverage on the characteristic of whether the loan is secured by real property is warranted because a significant portion of the content of the disclosures was developed for real property transactions. The Bureau also believes that basing coverage on the characteristic of whether the loan is secured by real property is necessary to harmonize the coverage of RESPA and TILA and satisfy the integration mandate. Although manufactured homes may resemble other forms of residential property, the Bureau does not believe this characteristic alone should be sufficient to warrant coverage under § 1026.19(e) and (f). Other forms of chattel property besides manufactured homes also may serve as a residence, but more closely resemble motor vehicle transactions than real property transactions, and therefore many parts of the integrated disclosures would be inapplicable and would likely compromise consumer understanding of the disclosures. Finally, as the Bureau explained in the proposal, consumers who receive a loan secured by personal property would continue to be protected under the disclosures required elsewhere in Regulation Z, including those in § 1026.18. The Bureau declines to make a determination under § 1024.13(b), as requested by a commenter, regarding whether State laws conflict with the requirements of Regulation X. The commenter who requested this determination did not identify particular State laws that may conflict, and the Bureau therefore lacks a basis to make a conflict determination. See the section-by-section analysis of § 1026.28 for a discussion of the State law exemption rules applicable to the integrated disclosure requirements of this final rule.

Conclusion. For the reasons discussed above, the final rule does not apply to reverse mortgages, open-end credit transactions, or closed-end consumer transactions secured by personal property and not real property. Such loans will be subject to existing requirements in Regulation Z and reverse mortgages and open-end credit transactions will be subject to existing requirements in Regulation X. As discussed above, those transactions remain subject to the exemption in § 1026.1(c) from providing certain new disclosures under title XIV of the Dodd-Frank Act until the Bureau engages in future rulemakings for these transaction types.

Loans Extended by TILA “Creditors”

As noted above, RESPA applies generally to “federally related mortgage loans,” which means loans (other than temporary financing such as construction loans) secured by a lien on residential real property designed principally for occupancy by one to four families, and that have a Federal nexus or are made by a TILA “creditor” that makes or invests in real estate loans aggregating more than $1,000,000 per year, other than a State agency. 12 U.S.C. 2602(1), 2604. TILA generally covers consumer credit transactions of all kinds, including unsecured credit and credit secured by nonresidential property and applies only to transactions made by a person who “regularly extends” consumer credit. For transactions secured by a dwelling, other than HOEPA loans, Regulation Z defines a “creditor” as a person who extends credit more than five times in the preceding calendar year. [191]

Lenders that do not meet the TILA definition of “creditor” generally are subject to RESPA if they make a real property-secured loan with a Federal nexus. The Bureau proposed to exempt from the integrated disclosure requirements loans extended by these lenders who are covered by RESPA but not TILA. The Bureau explained that, if a lender extends five or fewer consumer credit transactions secured by a consumer's dwelling in a year, it should not be subject to TILA or Regulation Z. This treatment would have preserved the status of such transactions under existing Regulation Z. That is, currently, consumers do not receive Regulation Z disclosures from such lenders because they are not considered “creditors” pursuant to § 1026.2(a)(17)(v). The Bureau explained that eliminating this exemption could represent a significant expansion of TILA coverage and that it was unaware of any significant problems encountered by consumers obtaining credit from these types of creditors that might justify such an expansion. Further, because such creditors may lack the systems to comply with TILA, the Bureau anticipated they may cease to extend credit if forced to establish compliance systems. Although preserving this exemption means that the integrated disclosures would not be received by consumers in such transactions, the Bureau expected the impact of such an exemption to be limited. The Bureau noted in the proposal, based on data reported for 2010 under HMDA, that 569 creditors (seven percent of all HMDA reporters) reported five or fewer originations and, more significantly, that their combined originations of 1,399 loans equaled only 0.02 percent of all originations reported under HMDA for that year. The Bureau further explained that these transactions would remain subject to the RESPA disclosure requirements under Regulation X.

Comments

Commenters did not object to exempting these RESPA-covered lenders from the rule, but they did request that the Bureau further increase the threshold under Regulation Z for defining a TILA “creditor.” A trade association commenter representing settlement agents recommended that the threshold be increased to 25 annual transactions on mortgage loan transactions. A community bank commenter expressed support for a small creditor exemption with a threshold that exempts creditors that originate fewer than 2,500 loans in a calendar year. A law firm commenter recommended increasing the threshold to 100 mortgages a year.

A trade association representing credit unions argued that the proposed threshold of five or fewer mortgages a year was not an appropriate measure to provide regulatory relief for small entities. This commenter was concerned that the Bureau appeared to be defining “small entities” on a basis that appeared to be inconsistent with the Dodd-Frank Act, the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), and the Bureau's past actions in conducting small-entity outreach under SBREFA, which identified small entities based on asset size, rather than lending volume. This commenter was concerned that a low exemption threshold would impose large costs on many credit unions not covered by the exemption and would force some credit unions to close their operations. The commenter recommended an exemption for credit unions that have $175 million or less in assets, which would be consistent with the size thresholds used for purposes of analysis under SBREFA. The commenter argued that the Dodd-Frank Act requires the agency to seriously consider the impact of its regulations on small entities. A commenter employed by a software company, however, stated that the rule should not modify the transaction threshold under § 1026.2(a)(17) because doing so would provide no consumer benefit, and that consistent application across creditors would facilitate shopping by the consumer. Several individual commenters and settlement agents expressed concern that it would be difficult to identify criteria for a small creditor definition. A law firm commenter also recommended that the Bureau include an exemption for small businesses.

Final Rule

The Bureau has considered the comments regarding the final rule's applicability to creditors subject to TILA and RESPA. The Bureau declines to grant an exemption for small creditors, such as one based on asset size, or otherwise make adjustments to the five-or-fewer mortgage threshold included in the definition of “creditor” under § 1026.2(a)(17), as discussed further in the section-by-section analysis of § 1026.2(a)(17). The Bureau does not believe exempting small creditors from the integrated disclosure requirements would be consistent with the integration mandate. The Bureau also believes such an exemption would hinder, rather than enhance, consumer understanding. Exempting a class of creditors from the final rule would result in an inconsistent set of disclosures that would negatively affect a consumer's ability to shop for the best loan. The integrated disclosures were designed to assist a consumer in comparing loans. The Bureau is concerned, for example, that a consumer who receives a Loan Estimate from a larger creditor for one loan would not be able to easily compare its terms to a loan disclosed in a different format from a small creditor exempt from this final rule that would otherwise meet the definition of “creditor” under Regulation Z. The Bureau is concerned that this result would be inconsistent with the aims of Dodd-Frank Act section 1032(a), which authorizes the Bureau to prescribe rules to ensure effective disclosure.

For the reasons discussed above in the section-by-section analysis of § 1026.2(a)(17), the Bureau has concluded that it will not adjust the “creditor” threshold in Regulation Z. Accordingly, for the aforementioned reasons, the Bureau is finalizing the scope of the integrated disclosure requirements with respect to creditors as proposed and pursuant to the authority cited in the proposal.

Other Coverage Issues

Some commenters requested that the Bureau clarify specific aspects of the proposal that relate to other sections of the rule. Trade association commenters representing banks requested clarification on how the rule would apply to trusts. One such trade association commenter observed that proposed comments 3(a)-9 and -10 specifically addressed trusts for tax or estate planning purposes. The commenter requested that the Bureau clarify how a trust's revocability would affect coverage. Another trade association commenter representing banks requested clarification regarding to whom the integrated disclosures and notice of the right of rescission must be provided in the case of certain inter vivos revocable trusts. Commenters also requested that Bureau address coverage with respect to certain housing assistance loan programs, which are currently exempted from Regulation X. See 12 CFR 1024.2(b). One trade association commenter representing banks recommended that creditors should be given the option of either providing the integrated disclosures or the § 1026.18 disclosures for housing assistance loan programs covered by the rule. The Bureau has addressed these comments in the section-by-section analysis of § 1026.3 above.

A trade association representing the timeshare industry commented regarding the Bureau's proposed expansion of the scope of certain disclosure requirements added to TILA by title XIV of the Dodd-Frank Act for “residential mortgage loans” (which, as noted above, is defined in section 1401 of the Dodd-Frank Act to exclude an extension of credit secured by a consumer's interest in a timeshare plan) to apply to transactions secured by a consumer's interest in a timeshare plan. Specifically, the Bureau proposed to include in the Closing Disclosure the disclosure requirements under Dodd-Frank Act sections 1402(a)(2) (requires disclosure of loan originator identifier), 1414(c) (requires disclosure of anti-deficiency protections), 1414(d) (requires disclosure of partial payment policy), and 1419 (requires disclosure of certain aggregate amounts and wholesale rate of funds, loan originator compensation, and total interest as a percentage of the principal amount of the loan), and require them to be included in the Closing Disclosure for transactions secured by a consumer's interest in a timeshare plan. The trade association stated that the Bureau should provide in the final rule a timeshare-specific version of the Closing Disclosure that does not include these disclosures, or expressly permit timeshare lenders to strike out these provisions of the disclosure.

The final rule requires that these disclosures, as implemented by §§ 1026.37 and 1026.38, be provided for transactions secured by a consumer's interest in a timeshare plan. The Bureau acknowledges that in this final rule it has determined to exclude from provision certain disclosures in the Closing Disclosure for other types of transactions, if such disclosure would provide inaccurate information with respect to that type of transaction. For example, for transactions not subject to 15 U.S.C. 1639h or 1691(e), as implemented in Regulation Z or Regulation B (12 CFR part 1002), respectively, the final rule does not require provision of the appraisal disclosure under § 1026.37(m)(1). In addition, the final rule provides alternative formats for certain parts of the Closing Disclosure to aid consumer understanding of particular aspects of such transactions (for example, the Bureau provides for alternative Costs at Closing and Calculating Cash to Close tables for transactions without a seller to aid consumer understanding of the unique aspects of such transactions, as described in the section-by-section analysis of § 1026.37(d) below).

However, the Bureau believes the disclosures for “residential mortgage loans” noted above would not be inaccurate for transactions secured by a consumer's interest in a timeshare plan, and would be just as useful to consumers in transactions secured by the consumer's interest in a timeshare plan as in transactions secured by real property. In addition, the Bureau believes that there is a benefit to consumers from receiving Closing Disclosures in a standardized format even in different types of transactions, because they may become more familiar with the format, which may aid consumer understanding of the disclosure. Further, the Bureau believes it will facilitate compliance for industry to reduce the amount of variability and dynamic aspects of the Closing Disclosure to instances that are technically necessary or that will aid consumer understanding, rather than numerous distinct versions for different types of transactions or security interests.

Accordingly, the Bureau, pursuant to its authority under TILA section 105(a) and Dodd-Frank Act section 1032(a), is applying these disclosure requirements under title XIV of the Dodd-Frank Act to extensions of credit secured by a consumer's interest in a timeshare plan. The Bureau believes that requiring these disclosures in such transactions furthers the purpose of TILA by promoting the informed use of credit. In addition, applying these disclosure requirements to transactions secured by a consumer's interest in a timeshare plan will ensure that the integrated disclosures will permit consumers of such transactions to understand the costs, benefits, and risks associated with the transaction, consistent with Dodd-Frank Act section 1032(a).

Conclusion—Coverage of the Final Rule

For the reasons discussed above, final § 1026.19(e) and (f), discussed further below, requires that the integrated disclosures be provided for closed-end consumer credit transactions secured by real property, other than a reverse mortgage subject to § 1026.33. Final § 1026.19(g) requires provision of the special information booklet for closed-end consumer credit transactions secured by real property and states in § 1026.19(g)(1)(iii)(C) that the requirement does not apply to reverse mortgages.

Accordingly, 25-acre loans, construction-only loans, and vacant-land loans are subject to the integrated disclosure and booklet requirements. Pursuant to final § 1026.19(g)(1)(iii)(C), reverse mortgage transactions are not subject to the integrated disclosure or booklet requirements. Pursuant to final § 1026.19(g)(1)(ii), HELOCs are not subject to the integrated disclosure requirements, but they are subject to the booklet requirements (though compliance is satisfied by providing an alternate brochure described in the final rule). Chattel-dwelling loans are not subject to the integrated disclosure or booklet requirements. Reverse mortgages, open-end transactions secured by real property or a dwelling, and chattel-dwelling loans will remain subject to the existing disclosure requirements under Regulations X and Z, as applicable, until the Bureau adopts integrated disclosures specifically tailored to their distinct features. Finally, federally related mortgage loans extended by a person that is not a creditor, as defined in Regulation Z § 1026.2(a)(17), are not subject to the integrated disclosure or booklet requirements for the reasons set forth above.

The Bureau believes adjusting the application of the provisions of TILA and RESPA is within its general mandate under Dodd-Frank Act sections 1032(f), 1098, and 1100A to prescribe integrated disclosures, which requires that the Bureau reconcile differences in coverage between the two statutes. The Bureau also believes that this approach is expressly authorized by sections 4(a) of RESPA and 105(b) of TILA because both provisions direct the Bureau to prescribe disclosures that “may apply to a transaction that is subject to both or either provisions of law.” (Emphasis added.) The Bureau believes those provisions authorize requiring the integrated disclosures for any transaction that is subject to either RESPA or TILA, and not only a transaction that is subject to both, precisely so that the Bureau has the flexibility necessary to reconcile those statutes' coverage differences for purposes of the integrated disclosure mandate.

Furthermore, the Bureau believes that applying the integrated disclosures to closed-end consumer credit transactions secured by real property other than reverse mortgages will carry out the purposes of TILA and RESPA, consistent with TILA section 105(a) and RESPA section 19(a), by promoting the informed use of credit and more effective advance disclosure of settlement costs, respectively. In addition, the scope will ensure that the integrated disclosure requirements are applied only in circumstances where they will permit consumers to understand the costs, benefits, and risks associated with the mortgage transaction, consistent with Dodd-Frank Act section 1032(a), and will improve consumer awareness and understanding of residential mortgage loans, consistent with Dodd-Frank Act section 1405(b).

Finally, the Bureau exempts from these integrated disclosure requirements transactions otherwise covered by TILA, pursuant to TILA section 105(f). The Bureau has considered the factors in TILA section 105(f) and has determined that an exemption is appropriate under that provision. Specifically, the Bureau believes that the exemption is appropriate for all affected borrowers, regardless of their other financial arrangements and financial sophistication and the importance of the loan to them. Similarly, the Bureau believes that the exemption is appropriate for all affected loans, regardless of the amount of the loan and whether the loan is secured by the principal residence of the consumer. Furthermore, the Bureau believes that, on balance, the exemption will simplify the credit process without undermining the goal of consumer protection or denying important benefits to consumers. Based on these considerations, the results of the Bureau's consumer testing, and the analysis discussed elsewhere in this final rule, the Bureau has determined that the exemptions are appropriate.

19(a) Reverse Mortgage Transactions Subject to RESPA

As discussed above, the final rule narrows the scope of § 1026.19(a) so that all loans currently subject to § 1026.19(a), other than reverse mortgages, are instead subject to § 1026.19(e) and (f), and makes conforming changes to comment 19(a)(1)(i)-1. The final rule also makes technical revisions to proposed § 1026.19(a)(1)(i) to require that the creditor “provide the consumer with” (instead of “make”) the required good faith estimate disclosures, for greater consistency with other language in § 1026.19(e) and (f). The final rule also makes technical revisions to comment 19(a)(1)(i)-1. Specifically, the final comment refers to § 1026.19(a) instead of “this section.” The final comment also further specifies the citation to the definition of “Federally related mortgage loan” in Regulation X. As proposed, the final rule makes conforming changes to § 1026.19(a)(1)(ii), deletes § 1026.19(a)(5), deletes comments 19(a)(5)(ii)-1 through -5, and deletes comments 19(a)(5)(iii)-1 and -2.

Pursuant to its authority under section 105(a) of TILA, the final rule adopts § 1026.19(a)(1)(i), substantially as proposed, to apply only to reverse mortgage transactions subject to both § 1026.33 and RESPA. Final § 1026.19(a), as amended, and its associated commentary are consistent with TILA's purpose in that it seeks to ensure meaningful disclosure of credit terms by requiring the integrated disclosures in this final rule only with respect to the loans for which they were designed: mortgage loans secured by real property other than reverse mortgages. The final rule and commentary also will be in the interest of consumers and the public because consumer understanding will be improved if consumers of reverse mortgages are not provided with inapplicable disclosures, consistent with Dodd-Frank Act section 1405(b).

Provision of the Loan Estimate and Closing Disclosure Under Sections 19(e) and 19(f) Provision of Current Disclosures Under TILA and RESPA

TILA. Section 128(b)(2)(A) of TILA provides that for an extension of credit secured by a consumer's dwelling, which also is subject to RESPA, good faith estimates of the disclosures in section 128(a) shall be made in accordance with regulations of the Bureau and shall be delivered or placed in the mail not later than three business days after the creditor receives the consumer's written application. 15 U.S.C. 1638(b)(2)(A). Section 128(b)(2)(A) also requires these disclosures to be delivered at least seven business days before consummation. Regulation Z implements this provision in § 1026.19(a), which generally tracks the statute except that it does not apply to home equity lines of credit subject to § 1026.40 and mortgage transactions secured by a consumer's interest in a timeshare plan subject to § 1026.19(a)(5).

Section 128(b)(2)(A) and (D) of TILA states that, if the disclosures provided pursuant to section 128(b)(2)(A) contain an annual percentage rate that is no longer accurate, the creditor shall furnish an additional, corrected statement to the borrower not later than three business days before the date of consummation of the transaction. 15 U.S.C. 1638(b)(2)(A), (D). Regulation Z implements TILA's requirement that the creditor deliver corrected disclosures in § 1026.19(a)(2)(ii).

RESPA. Section 5(c) of RESPA states that lenders shall provide, within three days of receiving the consumer's application, a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement as prescribed by the Bureau. [192] 12 U.S.C. 2604(c). Section 3(3) of RESPA defines “settlement services” as:

[A]ny service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement.

12 U.S.C. 2602(3).

Section 1024.7(a)(1) of Regulation X currently provides that, not later than three business days after a lender receives an application, or information sufficient to complete an application, the lender must provide the applicant with the RESPA GFE. In contrast to the TILA and RESPA good faith estimate requirements, which apply to creditors, the RESPA settlement statement requirement generally applies to settlement agents. Specifically, section 4 of RESPA provides that the settlement statement must be completed and made available for inspection by the borrower at or before settlement by the person conducting the settlement. 12 U.S.C. 2603(b). Section 4 of RESPA also provides that, upon the request of the borrower, the person who will conduct the settlement shall permit the borrower to inspect those items which are known to such person on the RESPA settlement statement during the business day immediately preceding the day of settlement. Id. These requirements are implemented in Regulation X § 1024.10(a).

The Dodd-Frank Act. Sections 1098 and 1100A of the Dodd-Frank Act amended RESPA and TILA to require an integrated disclosure that “may apply to a transaction that is subject to both or either provisions of law.” Accordingly, as discussed below, the final rule integrates the TILA and RESPA good faith estimate requirements in final § 1026.19(e), as discussed below. The final rule also integrates the final TILA disclosure requirements and the RESPA settlement statement requirements in final § 1026.19(f), as discussed below. Finally, as appropriate, the final rule incorporates related statutory and regulatory requirements into § 1026.19 and makes conforming amendments.

19(e) Mortgage Loans Secured by Real Property—Early Disclosures

19(e)(1) Provision of Disclosures

19(e)(1)(i) Creditor

Proposed § 1026.19(e)(1)(i) would have provided that in a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to § 1026.33, the creditor shall make good faith estimates of the disclosures listed in § 1026.37. Proposed comment 19(e)(1)(i)-1 would have explained that § 1026.19(e)(1)(i) requires early disclosure of credit terms in closed-end credit transactions that are secured by real property, other than reverse mortgages. It also would have explained that these disclosures must be provided in good faith, and that except as otherwise provided in § 1026.19(e), a disclosure is in good faith if it is consistent with the best information reasonably available to the creditor at the time the disclosure is provided.

Two national consumer advocacy group commenters asserted that the final rule should require the creditor to base disclosures on charges the creditor imposed on other consumers with similar loans, and to obtain pricing information from third-party vendors with which the creditor frequently works. The Bureau believes the tolerance rules in § 1026.19(e)(3) will incentivize creditors to perform the activities suggested by these commenters. Moreover, as a general matter, the Bureau believes that the general good faith requirement set forth in final § 1026.19(e)(1)(i) will strike the appropriate balance between consumer protection and reducing undue compliance burden. As final comment 19(e)(1)(i)-1 clarifies, except as otherwise provided in § 1026.19(e), a disclosure is in good faith if it is consistent with the standard set forth in § 1026.17(c)(2)(i). Section 1026.17(c)(2)(i) provides that disclosures may be estimated based on the best information reasonably available when exact information is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. See comment 17(c)(2)(i)-1.

The Bureau is adopting § 1026.19(e)(1)(i) and comment 19(e)(1)(i)-1 with revisions to enhance clarity. Additionally, for reasons discussed in the section-by-section analysis of § 1026.19(e)(3)(i), the Bureau has determined, based on comments received in response to that section requesting clarification regarding the definition of the term “affiliate,” to add new comment 19(e)-1 to explain that the term “affiliate” used in § 1026.19(e) has the same meaning as in § 1026.32(b)(5). The Bureau believes that because the term “affiliate” will be referenced in other provisions § 1026.19(e), the new comment should be located in § 1026.19(e) instead of § 1026.19(e)(3).

19(e)(1)(ii) Mortgage Broker

Currently, neither the disclosure requirements under TILA nor the disclosure requirements under RESPA expressly apply to mortgage brokers. The disclosure requirements of Regulation Z also do not apply to mortgage brokers. Section 1024.7(b) of Regulation X, however, currently permits mortgage brokers to deliver the RESPA GFE, provided that the mortgage broker otherwise complies with the relevant requirements of Regulation X, such as the RESPA GFE delivery requirements and tolerance rules, and that the creditor remains responsible for ensuring the mortgage broker's compliance. The Bureau proposed to carry this concept into the regulations governing the integrated disclosures in recognition of the fact that permitting mortgage brokers to deliver the integrated disclosures could benefit consumers in some cases. The Bureau stated in the proposal that some consumers may have better relationships with their mortgage brokers than with their creditors, and the mortgage brokers may be better able to assist those consumers with understanding the RESPA GFE more effectively and efficiently.

Accordingly, to preserve the flexibility in current Regulation X, the Bureau proposed § 1026.19(e)(1)(ii) to permit the mortgage broker to provide the Loan Estimate, subject to certain limitations, pursuant to the Bureau's authority under TILA section 105(a) and, with respect to residential mortgage loans, Dodd-Frank Act section 1405(b). Proposed § 1026.19(e)(1)(ii) would have provided that a mortgage broker may provide a consumer with the disclosures required under § 1026.19(e)(1)(i), provided that the mortgage broker acts as the creditor in every respect, including complying with all of the requirements of proposed § 1026.19(e) and assuming all related responsibilities and obligations.

The Bureau also proposed comments 19(e)(1)(ii)-1 through -4 to provide additional guidance regarding proposed § 1026.19(e)(1)(ii). Proposed comment 19(e)(1)(ii)-1 would have explained that a mortgage broker may provide the disclosures required under § 1026.19(e)(1)(i) instead of the creditor. The proposed comment would have further explained that by assuming this responsibility, the mortgage broker becomes responsible for complying with all of the relevant requirements as if it were the creditor, meaning that “mortgage broker” should be read in the place of “creditor” for all the relevant provisions of § 1026.19(e), except where the context indicates otherwise. Proposed comment 19(e)(1)(ii)-1 would have also stated that the creditor and mortgage broker must effectively communicate to ensure timely and accurate compliance with the requirements of § 1026.19(e).

Proposed comment 19(e)(1)(ii)-2 would have provided further guidance on the mortgage broker's responsibilities if a mortgage broker issues any disclosure under § 1026.19(e). The proposed comment provided an example clarifying that if the mortgage broker receives sufficient information to complete an application, the mortgage broker must issue the disclosures required under § 1026.19(e)(1)(i) within three business days in accordance with § 1026.19(e)(1)(iii). The proposed comment further provided that if the broker subsequently receives information sufficient to establish that a disclosure provided under § 1026.19(e)(1)(i) must be reissued under § 1026.19(e)(3)(iv), then the mortgage broker is responsible for ensuring that a revised disclosure is provided.

Proposed comment 19(e)(1)(ii)-3 would have discussed the creditor's responsibilities in the event that a mortgage broker provides disclosures under § 1026.19(e). The proposed comment provided an example clarifying that the creditor must ensure that the mortgage broker provides the disclosures required under § 1026.19(e) not later than three business days after the mortgage broker received information sufficient to constitute an application, as defined in § 1026.2(a)(3)(ii). It would have also stated that the creditor does not satisfy the requirements of § 1026.19(e) if it provides duplicative disclosures. The proposed comment further stated that a creditor does not meet its burden by issuing disclosures required under § 1026.19(e) that mirror disclosures already issued by the mortgage broker for the purpose of demonstrating that the consumer received timely disclosures. The comment further stated that if the mortgage broker provides an erroneous disclosure, the creditor is responsible and may not issue a revised disclosure correcting the error. The proposed comment clarified that the creditor is expected to maintain communication with the mortgage broker to ensure that the mortgage broker is acting in place of the creditor. This proposed comment would have been consistent with guidance provided by HUD in the HUD RESPA FAQs pp. 8-10, ## 16, 26, 29 (“GFE—General”). Proposed comment 19(e)(1)(ii)-3 would have also clarified that disclosures provided by a mortgage broker in accordance with § 1026.19(e)(1)(ii) satisfy the creditor's obligation under § 1026.19(e)(1)(i).

Proposed comment 19(e)(1)(ii)-4 would have explained when mortgage brokers must comply with § 1026.19(e)(2)(ii), regarding the provision of preliminary written estimates specific to the consumer. The proposed comment would have provided the example that if a mortgage broker never provides disclosures required by § 1026.19(e), the mortgage broker need not include the disclosure required by § 1026.19(e)(2)(ii) on written information provided to consumers.

The Bureau recognized that there were potential concerns regarding the ability of mortgage brokers to provide the information required by the integrated Loan Estimate accurately and reliably and sought comment on those issues. For instance, the proposal noted that it is not clear that mortgage brokers have the ability to inform the consumer of certain required disclosures such as whether the creditor intends to service the consumer's loan, or whether the creditor will permit a person to assume the consumer's loan on the original terms. The proposal also sought comment on mortgage brokers' ability to estimate taxes and insurance, which were proposed to be required on the Loan Estimate but are not included on the current RESPA GFE, to satisfy the good faith standard that would have been required for such disclosures under proposed § 1026.19(e)(3)(iii). The Bureau also recognized that mortgage brokers may not have the technology necessary to comply with the requirements under TILA regarding delivery of estimates, delivery of revised disclosures, and recordkeeping. The Bureau also solicited comment on the ability of creditors to coordinate their operations with mortgage brokers in a manner that provides the same or better information to consumers than if the creditor alone were permitted to provide the disclosures.

Comments

The Bureau received a number of comments expressing concern that creditors would not be able to send revised estimates to correct mistakes made by mortgage brokers. The commenters included two GSE commenters and several industry trade association commenters. Industry trade association commenters representing banks and mortgage lenders asserted that it would be inappropriate to require the creditor to ensure that the mortgage broker's disclosures comply with § 1026.19(e) and to be bound by the terms of the Loan Estimate the mortgage broker provides to the consumer unless the creditor has authorized the mortgage broker to issue the Loan Estimate. Additionally, these commenters expressed concern that the proposed rule would not have required the broker to promptly provide information to the creditor for purposes of issuing the original Loan Estimate and the revised Loan Estimate.

The commenters asserted that the final rule should: (1) Require the mortgage broker to make arrangements with creditors so that either the mortgage broker or at least one of the creditors with which the mortgage broker works issues the Loan Estimate within three business days after the mortgage broker receives an application; or (2) require the mortgage broker to either issue the Loan Estimate within three business days after it receives the application or forward the application to the creditor, who would then have three business days from receipt of the application from the mortgage broker to issue the Loan Estimate. With respect to the revised Loan Estimate, the commenters asserted that if a mortgage broker receives information supporting the issuance of a revised Loan Estimate and provides it to the creditor, then the three-business-day redisclosure period proposed in § 1026.19(e)(4) should not begin until the creditor has received and evaluated the information.

A consumer commenter asserted that the Loan Estimate should always be provided by the creditor because permitting mortgage brokers to issue the Loan Estimate would add another party to the mortgage process and could cause consumer confusion. In contrast, a mortgage broker commenter asserted that the loan originator, not the creditor, should provide the Loan Estimate because the loan originator is the party working with the consumer to structure the terms of the mortgage loan. The commenter expressed concern that the consumer would be confused if a creditor were to send a separate Loan Estimate listing different costs for the same item that had been previously disclosed by a broker.

Final Rule

The Bureau has considered the comments and is modifying the final rule to reflect more closely the current requirements under Regulation X that permit mortgage brokers to provide the RESPA GFE. The Bureau believes these modifications will preserve the ability of consumers to work with mortgage brokers with whom they have a relationship and ensure that consumers will receive the Loan Estimate in a timely manner, thus mirroring current Regulation X, while providing clarity that will facilitate compliance and address commenters' concerns. In response to the concern that the proposed rule does not require mortgage brokers to issue a Loan Estimate after the mortgage broker receives a consumer's application for a mortgage loan for which a Loan Estimate must be provided within three days of receipt, § 1026.19(e)(1)(ii)(A) provides that if a mortgage broker receives a consumer's application, either the creditor or the mortgage broker shall provide a consumer with the Loan Estimate within three business days of receipt. This requirement is substantially similar to the requirement on mortgage brokers to provide the RESPA GFE in § 1024.7(b), and thus, the Bureau believes that it will facilitate compliance.

The Bureau. however, declines to adopt some industry commenters' suggestion that for creditors that receive consumer applications from mortgage brokers, the three-business-day period should not begin until such creditors receive consumer applications from mortgage brokers. The Bureau believes that making such a distinction would disadvantage consumers who work with mortgage brokers because compared to consumers who submit mortgage applications directly to creditors, consumers who submit mortgage applications to mortgage brokers would wait longer to receive a Loan Estimate. Additionally, the Bureau believes that treating creditors that receive applications directly from the consumer differently from creditors that receive consumer applications from mortgage brokers would disadvantage creditors that have direct relationships with consumers because they would have less time to provide the Loan Estimate.

Section 1026.19(e)(1)(ii)(A) also provides that if the mortgage broker provides the Loan Estimate, the mortgage broker shall comply with all relevant requirements of § 1026.19(e). This means that the mortgage broker shall comply with all applicable requirements of § 1026.19(e) as if it were the creditor. In this respect, § 1026.19(e)(1)(ii)(A) mirrors Regulation X. As noted above, § 1024.7(b) of Regulation X currently requires mortgage brokers who provide the RESPA GFE to comply with all the relevant provisions of Regulation X such as the RESPA GFE delivery requirements and the tolerance rules.

Further reflecting the current rule in Regulation X, § 1026.19(e)(1)(ii)(A) provides that the creditor shall ensure that the Loan Estimate is provided in accordance with all requirements of § 1026.19(e). Under current § 1024.7(b), the lender is responsible for ensuring that the RESPA GFE has been provided, and that obligation is not contingent on whether the creditor has authorized the mortgage broker to provide the RESPA GFE. Accordingly, the Bureau is not persuaded by the arguments of some commenters that it is inappropriate to require the creditor to ensure that a mortgage broker-provided Loan Estimate complies with § 1026.19(e) unless the creditor has authorized the mortgage broker to provide the Loan Estimate. Section 1026.19(e)(1)(ii)(A) further provides that disclosures provided by a mortgage broker in accordance with the requirements of § 1026.19(e) satisfy the creditor's obligation under § 1026.19(e). This aspect of § 1026.19(e)(1)(ii)(A) substantially reflects current § 1024.7(b), which provides that if the mortgage broker has provided a RESPA GFE, the lender is not required to provide an additional RESPA GFE.

Final § 1026.19(e)(1)(ii)(B) further provides that if a mortgage broker issues any disclosure under § 1026.19(e), the mortgage broker must also comply with the record retention requirements of § 1026.25(c) that apply to the Loan Estimate. This provision was set forth in proposed comment 19(e)(1)(ii)-3, but the Bureau is incorporating it in the text of final § 1026.19(e)(1)(ii) to facilitate compliance by providing greater clarity regarding a mortgage broker's responsibilities if it provides the Loan Estimate. Additionally, the record keeping requirement in § 1026.19(e)(1)(ii)(B) largely reflects the current rule in Regulation X, § 1024.7(f), which requires a mortgage broker to retain documentation of any reasons for providing a revised RESPA GFE for at least three years after settlement.

The Bureau does not believe that permitting mortgage brokers to provide the Loan Estimate will cause consumer confusion, as suggested by some commenters. As discussed above, Regulation X currently permits mortgage brokers to provide the RESPA GFE. The Bureau is not aware of any evidence that the current practice has led to any consumer confusion. The Bureau also believes that generally preserving this aspect of current regulation promotes the informed use of credit, and is thus consistent with the statutory purposes of TILA. In addition, some of the comments suggest that the presence and use of mortgage brokers is an aspect of the origination process that consumers are generally familiar with. Further, because the Bureau has made a number of revisions to § 1026.19(e)(1)(ii) so that the final rule more closely resembles current Regulation X, the Bureau believes that creditors will continue to use mortgage brokers in the origination process.

The final rule does not permit the creditor to issue a separate Loan Estimate or revised disclosures to correct a mortgage broker's error. In this respect, the final rule reflects guidance provided by HUD in the HUD RESPA FAQs pp. 8-10, ##16, 26, 29 (“GFE—General”). Additionally, the final rule permits either the creditor or the mortgage broker to provide revised Loan Estimates based on any of the six legitimate reasons for revisions, described in greater detail below in the section-by-section analysis of § 1026.19(e)(3)(iv). The final rule also does not require mortgage brokers to get authorization from creditors before providing Loan Estimates. Further, creditors are bound by the terms of the Loan Estimate, subject to one of the six legitimate reasons for revisions such as changed circumstances or borrower-requested changes, whether or not the creditor has authorized the mortgage broker to provide the Loan Estimate. In these respects, the final rule reflects current Regulation X, because under current Regulation X, creditors are bound to the terms of the RESPA GFE provided to the consumer by the mortgage broker unless one of the six legitimate reasons for revisions apply (e.g., borrower-requested change, a changed circumstance). Therefore, the Bureau is not persuaded that creditors should only be bound by the terms of a mortgage broker-provided Loan Estimate if the creditor has authorized the mortgage broker to provide the Loan Estimate. Lastly, the final rule does not impose explicit requirements on mortgage brokers with respect to providing application information to the creditor and to establishing additional conditions that mortgage brokers must satisfy before they issue a Loan Estimate. The Bureau believes that the creditor is in the best position to set these requirements contractually.

Finally, the final rule permits both creditors and mortgage brokers to provide the Loan Estimate. In this respect, the final rule is consistent with current Regulation X in that current Regulation X permits both lenders and mortgage brokers to provide the RESPA GFE. The Bureau is not persuaded by the assertion of a mortgage broker commenter that creditors should be prohibited from providing the Loan Estimate. In addition, TILA applies its disclosure requirements to creditors, as does Regulation Z. A rule that prohibited creditors from delivering the Loan Estimate would be incongruous with these longstanding disclosure requirements and statutory requirements.

The Bureau is adopting proposed comment 19(e)(1)(ii)-1 with modifications. The proposed comment would have explained the requirements of proposed § 1026.19(e)(1)(ii). Comment 19(e)(1)(ii)-1. explains the requirements of § 1026.19(e)(1)(ii), as applied to mortgage brokers, and reflects the changes the Bureau is making proposed § 1026.19(e)(1)(ii). Comment 19(e)(1)(ii)-1 also incorporates the relevant provisions of proposed comment 19(e)(1)(ii)-2, which would have explained the requirements of proposed § 1026.19(e)(1)(ii), as applied to mortgage brokers.

The Bureau is also adding to final comment 19(e)(1)(ii)-1 to clarify the meaning of “mortgage broker” for purposes of § 1026.19(e)(1)(ii). Comment 19(e)(1)(ii)-1 explains that the term “mortgage broker,” as used in § 1026.19(e)(1)(ii), has the same meaning as in § 1026.36(a)(2), and references comment 36(a)(1)-2. Section 1026.36(a)(2) provides that a mortgage broker is any loan originator that is not an employee of the creditor, and comment 36(a)(1)-2 explains that “mortgage broker” can include companies that engage in loan originator activities described in § 1026.36(a) and their employees. The Bureau believes clarifying the meaning of “mortgage broker” will facilitate compliance with the final rule. The definition of “mortgage broker,” as used in § 1026.36(a)(2), is appropriate for § 1026.19(e)(1)(ii) because § 1026.36 applies to mortgage loan transactions that will be covered by § 1026.19(e) and because § 1026.36(a) provides a concise list of activities that are considered “loan originator” activities.

Proposed comment 19(e)(1)(ii)-3, which would have explained creditors' responsibilities under proposed § 1026.19(e)(1)(i), is adopted substantially as proposed as comment 19(e)(1)(ii)-2. The modifications reflect the changes to proposed § 1026.19(e)(1)(ii). The Bureau is not adopting proposed comment 19(e)(1)(ii)-4, which would have clarified the responsibility of mortgage brokers to help consumer distinguish between pre-application worksheets and the Loan Estimate. The proposed comment would have explained that mortgage brokers would only have to provide the disclaimer set forth in § 1026.19(e)(2)(ii) if the mortgage broker provides the Loan Estimate. But as discussed below, § 1026.19(e)(2)(ii) provides that any person that provides preliminary worksheets to consumers must provide the disclaimer. Accordingly, adopting the proposed comment would have been incongruous with § 1026.19(e)(2)(ii). The Bureau adopts § 1026.19(e)(1)(ii) and comments 19(e)(1)(ii)-1 and -2 pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b).

19(e)(1)(iii) Timing

The Bureau proposed to apply to the Loan Estimate the timing requirements in current Regulation Z that apply to the early TILA disclosure. 12 CFR 1026.19(a)(1)(i) and (a)(2)(i). These provisions implement TILA section 128(b)(2)(A). Section 128(b)(2)(A) of TILA provides that good faith estimates of the disclosures under section 128(a) shall be delivered or placed in the mail not later than three business days after the creditor receives the consumer's written application. 15 U.S.C. 1638(b)(2)(A). Section 128(b)(2)(A) also requires these disclosures to be delivered at least seven business days before consummation. RESPA requires lenders to provide the RESPA GFE not later than three business days after receiving the consumer's application, but does not mandate that the disclosures be provided in any particular number of days before consummation. This requirement is implemented in Regulation X, § 1024.7(a)(2).

The proposal would have applied both timing requirements under TILA to the integrated disclosures. Although RESPA does not contain a seven-business-day waiting period, the Bureau concluded that such a waiting period is consistent with the purposes of RESPA and that adopting it for the integrated disclosures would best effectuate the purposes of both TILA and RESPA by enabling the informed use of credit and ensuring effective advance disclosure of settlement charges. Accordingly, pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, section 1405(b) of the Dodd-Frank Act, the Bureau proposed § 1026.19(e)(1)(iii).

Proposed § 1026.19(e)(1)(iii) would have required that the creditor deliver the disclosures required by § 1026.19(e)(1)(i) not later than the third business day after the creditor receives the consumer's application, as defined in proposed § 1026.2(a)(3)(ii), and that the creditor deliver these disclosures not later than the seventh business day before consummation of the transaction. The Bureau also proposed comments 19(e)(1)(iii)-1 through -3 to provide additional guidance regarding proposed § 1026.19(e)(1)(iii). Proposed comment 19(e)(1)(iii)-1 would have further clarified this provision and would have provided illustrative examples. Proposed comment 19(e)(1)(iii)-2 would have discussed the waiting period, clarifying that the seven-business-day waiting period begins when the creditor delivers the disclosures or places them in the mail, not when the consumer receives or is presumed to have received the disclosures, and would have provided an illustrative example.

Proposed comment 19(e)(1)(iii)-3 would have clarified issues related to denied or withdrawn applications, explaining that under § 1026.19(e)(1)(iii) the creditor could determine within the three-business-day period that the application will not or cannot be approved on the terms requested, such as when a consumer's credit score is lower than the minimum score required for the terms the consumer applied for, or the consumer applies for a type or amount of credit that the creditor does not offer. The proposed comment would have clarified that in that case, or if the consumer withdraws the application within the three-business-day period, the creditor would not need to make the disclosures required under § 1026.19(e)(1)(i). The proposed comment would have also clarified that if the creditor failed to provide early disclosures and the transaction is later consummated on the terms originally applied for, then the creditor would have violated § 1026.19(e)(1)(i). The proposed comment would have further clarified that if, however, the consumer amended the application because of the creditor's unwillingness to approve it on the terms originally applied for, no violation occurs for not providing disclosures based on those original terms. The proposed comment would have stated that the amended application would be a new application subject to § 1026.19(e)(1)(i).

Comments

The Bureau received comments from industry commenters and consumer advocacy groups. Two national consumer advocacy group commenters asserted that the Bureau should add a new requirement that applies the same timing requirement that applies to issuance of the Loan Estimate to issuance of notices concerning application denials. The commenters expressed concern that if the proposed timing requirements do not apply to denial notices, creditors can evade liability after failing to provide a Loan Estimate by simply claiming that they had denied the consumer's application and were excused from sending the Loan Estimate. The commenters also asserted that consumers will benefit from receiving a denial notification in the same timeframe in which the creditor is required to deliver the Loan Estimate because the requirement will ensure that consumers understand the reason that they have not received the Loan Estimate that they have requested while there is still a chance to correct errors on their credit report and apply elsewhere. The commenters further asserted that the disclosure for the denial should match requirements established by ECOA and FCRA.

In contrast, industry trade associations representing banks and mortgage lenders asserted that the Loan Estimate should only be required after the consumer indicates an intent to proceed with the application, preferably after 30 days of the consumer making such an indication. The commenters advocated for the suggestion as the best way to resolve the creditor's need for redisclosure without leading to excessive redisclosure. A large bank commenter asserted that the proposal is not clear with respect to whether the creditor is required to place the Loan Estimate in the mail within three business days of receiving a consumer's application or whether the creditor must ensure that the consumer receives the Loan Estimate no more than three business days after the creditor's receipt of the application. The commenter stated that it preferred the first interpretation.

Another large bank commenter sought clarification for purposes of § 1026.19(e)(1)(iii) with respect to treatment of applications involving multiple mortgage applicants and in particular which joint applicant the Bureau considers to be the person primarily liable under the mortgage loan for the purpose of delivering the Loan Estimate and how the creditor should determine who should receive the Loan Estimate in the case of multiple applicants with similar credit qualifying profiles. The large bank commenter also sought clarification on whether the creditor may provide a cover letter along with the Loan Estimate outlining the next steps in the application process. A community bank commenter requested that the Bureau conform the requirements of Regulation X to Regulation Z so that in the case of multiple applicants, the RESPA GFE would only have to be provided to one of the borrowers if the transaction involves more than one borrower.

An industry trade association representing developers of timeshares and similar fractional interest real estate products asserted that timeshare transactions should be exempted from the requirement in proposed § 1026.19(e)(1)(iii) that the Loan Estimate must be received by the consumer no later than seven business days before consummation because TILA exempts such transactions from the statutory seven-day waiting requirement, as does current Regulation Z, § 1026.19(a)(5), and because timeshare transactions are typically consummated on the same or very next day after the creditor receives the application. Further, because timeshare transactions are typically consummated on the same or very next day after the creditor receives the application, the commenter asserted that the Bureau should clarify that a timeshare creditor should be exempted from providing the Loan Estimate altogether if the transaction is consummated on the same day or the next day following the receipt of a consumer's application. The commenter asserted that absent such an exemption, consumers may be confused by receiving seemingly duplicative disclosures.

Final Rule

The Bureau has considered the comments, and continues to believe that it is appropriate to apply the statutory timing requirements under TILA to the integrated disclosures. While not expressly required by RESPA, the Bureau believes the seven-business-day requirement is consistent with RESPA's underlying purposes for the reasons stated in the proposal, described above. The Bureau therefore is adopting § 1026.19(e)(1)(iii) substantially as proposed.

The Bureau does not believe that creditors should only be required to provide the Loan Estimate after the consumer indicates an intent to proceed. Indeed, such an approach would be fundamentally inconsistent with the plain language of both statutes and with the basic purpose of early disclosures. The Loan Estimate contains, among other things, important information about the loan terms and a reliable estimate of settlement costs that is helpful to the consumer in deciding whether to proceed with the transaction and to evaluate and compare financing options. Accordingly, the Bureau believes that the Loan Estimate must be provided to the consumer before the consumer indicates an intent to proceed.

In response to comments, the Bureau has modified the final rule text and commentary so that it is clear that the timing requirement set forth in § 1026.19(e)(1)(iii) imposes on a creditor the obligation to deliver or place the Loan Estimate in the mail within three business days of receiving a consumer's application, instead of imposing on the creditor the obligation to ensure that the consumer receives the Loan Estimate within three business days from the creditor's receipt of the application. The Bureau notes that § 1026.19(e)(1)(iv) sets forth the rule regarding when a consumer is considered to have received the Loan Estimate if it is not provided to the consumer in person.

Additionally, comment 17(d)-2 in this final rule provides guidance with respect to the issue of determining to which consumer the creditor must provide the Loan Estimate in situations where there are two or more consumers. The comment explains that where two consumers are joint obligors with primary liability on an obligation, the Loan Estimate may be provided to any consumer with primary liability on the obligation. Comment 17(d)(2) also provides guidance on distinguishing a consumer who is primarily liable on an obligation from a consumer who is merely a surety or guarantor.

With respect to whether a creditor may provide a cover letter together with the Loan Estimate, the Bureau understands that this is a common practice, and this final rule permits the creditor to provide the Loan Estimate with other documents or disclosures, such as disclosures required by State or other applicable law in accordance with the requirements of § 1026.37(o). With respect to the argument that the Bureau should conform the requirements of Regulation X to Regulation Z so that in the case of multiple borrowers, the RESPA GFE would only have to be provided to one of the borrowers, the comment is addressed above in the section-by-section analysis of Regulation X, appendix C.

The Bureau notes that the comment advocating for requiring creditors to provide application denial notices within the same three business days that are required for the Loan Estimate is outside the scope of the proposal. The Bureau acknowledges that such a requirement may provide some benefit to some borrowers, but would also increase burden as to the timing of existing notification requirements under other regulations. Additionally, comment 19(e)(1)(iii)-3, which the Bureau is adopting without change, explains that if the creditor fails to provide the early disclosures and the transaction is later consummated on the terms originally applied for, then the creditor does not comply with § 1026.19(e)(1)(i). Accordingly, the Bureau does not believe that creditors can evade liability by claiming they denied the consumer's application and were excused from sending the Loan Estimate if the creditor and the consumer later consummate the transaction on the terms for which the consumer applied originally.

The Bureau has considered the comments it received about the application of seven-business-day waiting period set forth in proposed § 1026.19(e)(1)(iii) to timeshare transactions. The Bureau has modified the proposed rule to add § 1026.19(e)(1)(iii)(C), which provides that a transaction secured by a consumer's interest in a “timeshare plan,” as defined in 11 U.S.C. 101(53D) is not subject to the seven-business-day waiting period required by § 1026.19(e)(1)(iii)(B). The Bureau is persuaded that the unique nature of timeshare transactions would make it appropriate for the Bureau to retain the exemption in current § 1026.19(a)(5) that provides the seven-business-day waiting period does not apply to timeshare transactions.

The unique nature of timeshare transactions has also persuaded the Bureau that it would be appropriate to add new comment 19(f)(1)(ii)-4 to clarify that if a consumer provides the creditor with an application for a timeshare transaction, and consummation occurs within three business days after the creditor's receipt of the consumer's application, then the creditor complies with § 1026.19(e)(1)(iii) by providing the disclosures required under § 1026.19(f)(1)(i) instead of the disclosures required by § 1026.19(e)(1)(i). This interpretation essentially mirrors the current rule under § 1026.19(a)(5)(ii), which, with respect to a mortgage transaction subject to RESPA that is secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53D), requires the creditor to provide the early TILA disclosure within three business days after receipt of the consumer's application or before consummation, whichever is earlier. The Bureau believes that receiving a reliable estimate of the cost of the loan early is just as valuable to a consumer whose closed-end transaction is secured by a timeshare plan as a consumer whose closed-end transaction is secured by real property. However, given that timeshare transactions typically occur on the same day or the day after the creditor receives a consumer's application, the Bureau believes that it would be burdensome to creditors of such transactions to provide the Loan Estimate before consummation. But for timeshare transactions that will be consummated more than three business days after the receipt of an “application,” the Bureau believes that the receipt of the Loan Estimate within three business days of the creditor's receipt of the consumer's application will help consumers avoid the uninformed use of credit, which is a purpose of TILA. The Bureau also believes that this will be consistent with section 19(a) of RESPA because it achieves the purposes of RESPA by requiring more effective advance disclosure to consumers of settlement costs.

Finally, for reasons discussed in greater detail above in the section-by-section analysis of § 1026.2(a)(6), the Bureau is adopting the application of the general definition of “business day” to the Loan Estimate delivery requirement in § 1026.19(e)(1)(iii). Accordingly, the Bureau is reorganizing § 1026.19(e)(1)(iii) to reflect that the general definition of “business day” applies to the Loan Estimate delivery requirement, but that the specific definition of “business day” applies to the seven-business-day waiting period. As adopted, § 1026.19(e)(1)(iii)(A) provides that the creditor shall deliver the disclosures required under § 1026.19(e)(1)(i) not later than the third business day after the creditor receives the consumer's application, as defined in § 1026.2(a)(3). Section 1026.19(e)(1)(iii)(B) provides that except as set forth in § 1026.19(e)(1)(iii)(C), the creditor shall deliver the disclosures required under § 1026.19(e)(1)(i) not later than the seventh business day before consummation of the transaction. Lastly, § 1026.19(e)(1)(iii)(C), added for reasons discussed above, provides that for a transaction secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53D), § 1026.19(e)(1)(iii)(B) does not apply. Comments 19(e)(1)(iii)-1 through -3 are adopted substantially as proposed. New comment 19(e)(1)(iii)-4 is adopted to explain that with respect to a transaction secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53D), where consummation occurs within three business days after a creditor's receipt of the consumer's application, a creditor complies with § 1026.19(e)(1)(iii) by providing the disclosures required under § 1026.19(f)(1)(i) instead of the disclosures required under § 1026.19(e)(1)(i). The Bureau adopts § 1026.19(e)(1)(iii) and its commentary pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b).

19(e)(1)(iv) Receipt of Early Disclosures

Section 128(b)(2)(E) of TILA, as amended by the MDIA, provides that if the disclosures are mailed to the consumer, the consumer is considered to have received them three business days after they are mailed. 15 U.S.C. 1638(b)(2)(E). RESPA provides that the RESPA GFE may be delivered either in person or by placing it in the mail. 12 U.S.C. 2604(c) and (d). Regulation Z provides that if the disclosures are provided to the consumer by means other than delivery in person, the consumer is considered to have received the disclosures three business days after they are mailed or delivered. See § 1026.19(a)(1)(ii). Regulation X contains a similar provision. See§ 1024.7(a)(4).

To establish a consistent standard for the integrated Loan Estimate, pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, section 1405(b) of the Dodd-Frank Act, the Bureau proposed § 1026.19(e)(1)(iv). Proposed § 1026.19(e)(1)(iv) would have provided that if the disclosures are provided to the consumer by means other than delivery in person, the consumer is presumed to have received the disclosures three business days after they are mailed or delivered to the address specified by the consumer.

Proposed comment 19(e)(1)(iv)-1 would have explained that if any disclosures required under § 1026.19(e)(1)(i) are not provided to the consumer in person, the consumer is presumed to have received the disclosures three business days after they are mailed or delivered. The proposed comment would have stated that the presumption may be rebutted by providing evidence that the consumer received the disclosures earlier than three business days. The proposed comment would have also contained illustrative examples. Proposed comment 19(e)(1)(iv)-2 would have clarified that the presumption established in § 1026.19(e)(1)(iv) applies to methods of electronic delivery, such as email. The proposed comment would have also explained that creditors using electronic delivery methods, such as email, must also comply with the requirements of the E-Sign Act. The proposed comment would have also contained illustrative examples.

Comments

A number of industry commenters expressed concern that the proposal adjusted the regulatory language used in the current rule that addresses when a consumer is considered to have received the Loan Estimate if it was not delivered in person. As discussed above, current § 1026.19(a)(1)(ii), which is analogous to proposed § 1026.19(e)(1)(iv), provides that if disclosures are provided to the consumer by means other than in-person delivery, the consumer is considered to have received the disclosure three business days after they are mailed or delivered. The Bureau's proposal would have replaced “considered” with “presumed.”

The commenters asserted that the replacement would weaken the strong presumption of receipt under the current rule, which some of the commenters described as a safe harbor. Industry trade associations representing banks and mortgage lenders expressed concern that the proposal would have created a rebuttable presumption of receipt, which would create compliance burden because the creditor would not know that the consumer has not received a mailed disclosure, or that receipt has been delayed, until the consumer has informed the creditor. They asserted that creditors may respond by imposing additional conditions, such as requiring consumers to send back a confirmation of receipt, ensured to allow them to rebut consumer claims. The commenters argued that if these procedures extend the waiting period before closing, then such delays could harm consumers. Industry trade association commenters representing banks and mortgage lenders also observed that the proposed use of “presumed” in the proposed regulatory text deviated from the statutory language in TILA section 128(b)(2)(E). A large bank commenter requested that the Bureau make clear that the presumption cannot be rebutted with evidence that the disclosures were received more than three days after they were mailed, but most commenters expressed a preference for reverting to the current terminology (“considered”).

Some commenters expressed concern about the proposal's treatment of electronic delivery methods. The SBA expressed concern that the industry stakeholders it met with to discuss the proposal did not believe that the rule recognized the uniqueness of these methods because the proposal would apply the same presumption of delivery to disclosures that are mailed to the consumer and to disclosures that are emailed to the consumer. The SBA encouraged the Bureau to adopt a final rule that recognizes instantaneous delivery methods and provide clear guidance on what forms of proof sufficiently demonstrate delivery. A credit union commenter asserted that it should be presumed that disclosures transmitted electronically are received by the consumer on the same day to better reflect the reality of how such transmittals work and to reduce potential inefficiencies associated with treating electronic delivery methods the same as sending the disclosure by mail.

Another community bank commenter asserted that creditors should be able to rely on a consumer's request to receive the Loan Estimate electronically, and should not have to obtain prior consent that must meet the requirements of the E-Sign Act. The commenter asserted that electronic delivery is commonplace, and obtaining demonstrable consent can be difficult for creditors to achieve. If obtaining consent under the E-Sign Act were required, the commenter expressed concern that this would result in over-compliance: the creditor may send both a paper and an electronic copy of the Loan Estimate to the consumer. A different community bank commenter asserted that the Bureau must provide an objective definition of “receipt.”

Final Rule

The Bureau has considered the comments and has decided to conform § 1026.19(e)(1)(iv) to the statutory language under MDIA in determining the date by which disclosures may be “considered” to have been received by the consumer. It appears that there would be implementation burden across the market associated with creditors trying to determine how to comply with a presumption of receipt standard rather than the standard that is in place currently. The Bureau also is persuaded that some of the compliance measures that creditors may adopt could cause unnecessary delays that harm consumers.

The Bureau is not persuaded by the argument that the Bureau should adjust the final rule to reflect that disclosures provided by electronic delivery should be subject to a different standard. The Bureau believes that it would require more information regarding the many different forms of delivery methods available to creditors, including technical information regarding different forms of electronic delivery, before it issues a rule applying different standards than the standard under TILA section 128(b)(2)(E) to the early TILA disclosure. The Bureau notes that this point is also discussed in the section-by-section analyses of § 1026.19(f)(1)(ii) and (iii). The Bureau additionally believes that applying a consistent standard to all Loan Estimates that are not provided to the consumer in person helps to improve consumer understanding of the mortgage origination process and facilitate compliance.

Finally, creditors are currently required to obtain consent that meets the requirements of the E-Sign Act with respect to the provision of the RESPA GFE and the early TILA disclosures in electronic form. See 12 CFR 1024.23; 12 CFR 1026.17(a)(1). Accordingly, requiring creditors to obtain consent that meets the requirements of the E-Sign Act prior to providing the Loan Estimate in electronic form does not impose new burdens on creditors.

The Bureau adopts § 1026.19(e)(1)(iv) pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, section 1405(b) of the Dodd-Frank Act. As finalized, § 1026.19(e)(1)(iv) provides that if the disclosures are provided to the consumer by means other than delivery in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail. As discussed above, the Bureau is modifying proposed § 1026.19(e)(1)(iv) to conform final § 1026.19(e)(1)(iv) to the statutory language under MDIA. The Bureau is also modifying proposed § 1026.19(e)(1)(iv) to harmonize the text of final § 1026.19(e)(1)(iv) with the text of final § 1026.19(f)(1)(iii). Further, as discussed above in the section-by-section analysis of § 1026.19(e)(1)(iii), § 1026.19(e)(1)(iv) sets forth when a consumer is considered to have received the Loan Estimate if it is not provided to the consumer in person. Accordingly, the Bureau is modifying the proposed heading to § 1026.19(e)(1)(iv) to clarify that § 1026.19(e)(1)(iv) addresses the receipt of the Loan Estimate.

The Bureau is modifying proposed comments 19(e)(iv)-1 and -2 to reflect the fact that the Bureau is finalizing the timing currently used under TILA and Regulation Z. Comment 19(e)(1)(iv)-1 explains that § 1026.19(e)(1)(iv) provides that, if any disclosures required under § 1026.19(e)(1)(i) are not provided to the consumer in person, the consumer is considered to have received the disclosures three business days after they are mailed or delivered to the address specified by the consumer. The comment further explains that the creditor may, alternatively, rely on evidence that the consumer received the disclosures earlier than three business days and illustrates this with an example. Comment 19(e)(1)(iv)-2 explains that the three-business-day period provided in § 1026.19(e)(1)(iv) applies to methods of electronic delivery, such as email, and illustrates the requirement with an example. The comment also explains that the creditor may, alternatively, rely on evidence that the consumer received the emailed disclosures earlier, and provides an illustrative example. The comment further explains that creditors using electronic delivery methods, such as email, must also comply with § 1026.37(o)(3)(iii) and illustrates this requirement with an example. As discussed in greater detail below in the section-by-section analysis of § 1026.37(o), § 1026.37(o)(3)(iii) requires a creditor to obtain the consumer's consent pursuant to the E-Sign Act if the creditor provides the disclosures required by § 1026.19(e)(1)(i) in electronic form.

19(e)(1)(v) Consumer's Waiver of Waiting Period Before Consummation

Section 128(b)(2)(F) of TILA provides that the consumer may waive or modify the timing requirements for disclosures to expedite consummation of a transaction, if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. Section 128(b)(2)(F) further provides that: (1) The term “bona fide personal financial emergency” may be further defined in regulations issued by the Bureau; (2) the consumer must provide the creditor with a dated, written statement describing the emergency and specifically waiving or modifying the timing requirements, which bears the signature of all consumers entitled to receive the disclosures; and (3) the creditor must provide, at or before the time of waiver or modification, the final disclosures. 15 U.S.C. 1638(b)(2)(F). This provision is implemented in § 1026.19(a)(3) of Regulation Z. Neither RESPA nor Regulation X contains a similar provision.

The Bureau proposed to incorporate the current rule set forth in § 1026.19(a)(3) in proposed § 1026.19(e)(1)(v), which would have provided that the consumer has the ability to waive the proposed seven-business-day waiting period in § 1026.19(e)(1)(iii)(B) for the Loan Estimate in the case of a “bona fide personal financial emergency.” The Bureau stated in the proposal that, although the Bureau understood that waivers based on a bona fide personal financial emergency were rare, this exception served an important purpose: consumers should be able to waive the protection afforded by the waiting period if, in the face of a financial emergency, the waiting period does more harm than good. Accordingly, pursuant to its authority under TILA section 105(a) and RESPA section 19(a) the Bureau proposed § 1026.19(e)(1)(v). Proposed § 1026.19(e)(1)(v) would have reflected the current rule, because it would have allowed a consumer to waive the seven-business-day waiting period that was proposed in § 1026.19(e)(1)(iii) in the event of a bona fide personal financial emergency. In addition, the Bureau requested comment on the nature of waivers based on bona fide personal financial emergencies. The Bureau also requested comment on whether the bona fide personal financial emergency exception is needed more in some contexts than in others (e.g., in refinance transactions or purchase money transactions).

Proposed comment 19(e)(1)(v)-1 would have explained that a consumer may modify or waive the right to the seven-business-day waiting period required by § 1026.19(e)(1)(iii) only after the creditor makes the disclosures required by § 1026.19(e)(1)(i). The proposed comment would have clarified that the consumer must have a bona fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period, and that whether these conditions are met would be determined by the individual facts and circumstances. The proposed comment would have explained that the imminent sale of the consumer's home at foreclosure, where the foreclosure sale will proceed unless loan proceeds are made available to the consumer during the waiting period, is one example of a bona fide personal financial emergency. The proposed comment would have also clarified that each consumer who is primarily liable on the legal obligation must sign the written statement for the waiver to be effective. Proposed comment 19(e)(1)(v)-2 would have provided illustrative timing examples.

Comments

A number of industry commenters, including industry trade associations representing Federally-charted credit unions and credit unions generally, regional- and State-based credit union trade associations, a State bankers association, and a large bank, asserted that creditors are hesitant to use the current bona fide personal financial emergency exception because it has been interpreted too narrowly. Commenters recommended that the Bureau broaden the scope of the exception by expanding the list of examples illustrating the exception or allowing creditors to rely on what borrowers represent to the creditor to be a bona fide personal financial emergency.

Final Rule

The Bureau has considered the comments, but is finalizing § 1026.19(e)(1)(v) substantially as proposed, with a change to reflect the revisions made to § 1026.19(e)(1)(iii), which is referenced in § 1026.19(e)(1)(v). The Bureau believes that the current exemption is intentionally narrow and is not persuaded that it should be expanded. For most consumers, a mortgage loan will be the most significant financial obligation of their lives. Accordingly, the Bureau believes that the consumer must be given a meaningful opportunity to shop for a mortgage loan, compare the different financing options available, and negotiate for favorable terms. The Bureau believes the seven-business-day waiting period established by TILA section 128(b)(2)(F) is the minimum amount of time in which a consumer could meaningfully shop, compare, and negotiate the terms of the mortgage loan, and should only be waived in the most stringent of circumstances. The Bureau is adopting § 1026.19(e)(1)(v) and comments 19(e)(1)(v)-1 and -2 substantially as proposed, pursuant to its authority under TILA section 105(a) and RESPA section 19(a).

19(e)(1)(vi) Shopping for Settlement Service Providers

Neither TILA nor RESPA nor Regulation Z requires creditors to inform consumers about settlement service providers for whom the consumer may shop. However, Regulation X provides that where a creditor or mortgage broker permits a borrower to shop for third party settlement services, the creditor or broker must inform borrowers of that fact and provide them with a written list of settlement service providers at the time the RESPA GFE is provided on a separate sheet of paper. 12 CFR 1024 app. C. This requirement was intended to enable consumers to shop for settlement service providers, thereby enhancing market competition and lowering settlement service costs for consumers. The Bureau proposed to adopt the same basic requirements for purposes of the integrated disclosures in § 1026.19(e)(1)(vi), agreeing with the conclusion that a written list of settlement service providers could benefit consumers by fostering settlement service shopping.

As an initial matter, proposed § 1026.19(e)(1)(vi)(A) would have provided that a creditor permits a consumer to shop for a settlement service if the creditor permits the consumer to select the provider of that service, subject to reasonable minimum requirements regarding the qualifications of the provider. Proposed comment 19(e)(1)(vi)-1 would have provided examples of minimum requirements that are reasonable or unreasonable. This proposed comment would have also clarified that the requirements to provide lists of settlement service providers under § 1026.19(e)(1)(vi)(B) and (C) do not apply if the creditor does not permit the consumer to shop.

Proposed § 1026.19(e)(1)(vi)(B) would have required that the creditor identify the services for which the consumer is permitted to shop in the Loan Estimate. Proposed comment 19(e)(1)(vi)-2 would have clarified that § 1026.37(f)(3) contains the content and format requirements for this disclosure. Proposed § 1026.19(e)(1)(vi)(C) would have provided that, if the creditor permits a consumer to shop for a settlement service, the creditor shall provide the consumer with a written list identifying available providers of that service and stating that the consumer may choose a different provider for that service. It would have also required that the list be provided separately from the Loan Estimate but in accordance with the timing requirements for that disclosure (i.e., within three business days after application). Proposed comment 19(e)(1)(vi)-3 would have explained that the settlement service providers identified on the written list must correspond to the settlement services for which the consumer may shop, as disclosed on the Loan Estimate pursuant to § 1026.37(f)(3). It would have also referred to the model list provided in form H-27 of appendix H to Regulation Z.

Proposed comment 19(e)(1)(vi)-4 would have clarified that a creditor does not comply with the requirement in § 1026.19(e)(1)(vi)(C) to “identify” providers unless it provides sufficient information to allow the consumer to contact the provider, such as the name under which the provider does business and the provider's address and telephone number. It would have also clarified that a creditor does not comply with the availability requirement in § 1026.19(e)(1)(vi)(C) if it provides a written list consisting of only settlement service providers that are no longer in business or that do not provide services where the consumer or property is located. The proposed comment would have further clarified that if the creditor determines that there is only one available settlement service provider, the creditor would only need to identify that provider on the written list of providers. The Bureau stated that the guidance regarding availability would be consistent with guidance provided by HUD in the HUD RESPA FAQs p. 15, #7 (“GFE—Written list of providers”).

Proposed comment 19(e)(1)(vi)-5 would have referred to form H-27 of appendix H to Regulation Z for an example of a statement that the consumer may choose a provider that is not included on the written list. Proposed comment 19(e)(1)(vi)-6 would have clarified that the creditor may include a statement on the written list that the listing of a settlement service provider does not constitute an endorsement of that service provider. It would have further clarified that the creditor would also be permitted to identify on the written list providers of services for which the consumer is not permitted to shop, provided that the creditor expressly and clearly distinguishes those services from the services for which the consumer is permitted to shop, and that this could be accomplished by placing the services under different headings.

Finally, proposed comment 19(e)(1)(vi)-7 would have explained how proposed § 1026.19(e)(1)(vi) relates to the requirements of RESPA and Regulation X. The proposed comment would have explained that § 1026.19 does not prohibit creditors from including affiliates on the written list under § 1026.19(e)(1)(vi), but that a creditor that includes affiliates on the written list would also have to comply with § 1024.15 of Regulation X. The Bureau stated that this comment would be consistent with guidance provided by HUD in its RESPA FAQs p. 16, #9 (“GFE—Written list of providers”). The proposed comment would have also explained that the written list is a “referral” under § 1024.14(f). The Bureau stated that this comment would be consistent with guidance provided by HUD in the HUD RESPA FAQs p. 14, #4 (“GFE—Written list of providers”).

The Bureau solicited comment regarding whether the final rule should provide more detailed requirements for the written list of providers. The Bureau also solicited comment regarding whether the final rule should include additional guidance regarding the content and format of the written list of providers.

Comments

A number of industry commenters provided comments on proposed § 1026.19(e)(1)(vi). Some of the commenters opposed the general requirement, while others sought clarifications. With respect to the general requirement, a large-bank industry trade association asserted that the proposal would be burdensome to comply with because the information on the written list of providers would require regular updating so that the list would only contain available settlement service providers and reflect the current fees that the providers charge for their services. A large bank commenter stated that it would be a large administrative burden for creditors to maintain current contact information of settlement service providers for various settlement service providers, particular information about street addresses. The same commenter also recommended the Bureau to consider allowing creditors to provide the consumer with a dedicated toll-free number or Web site to receive information about settlement service providers, in lieu of providing the written list. The commenter asserted that allowing the creditor to provide a phone number instead of the written list would reduce paper disclosures and would allow large lenders to tailor recommendations based on the specific geographical area of the consumer. The commenter additionally stated that providing consumers with a provider list that contains contact information for the creditors may suggest to the consumer that the creditor endorses the provider, even if the lender has little knowledge of the provider's service.

A mortgage broker commenter asserted that providing a list of settlement services that a borrower may shop for, rather than a list of providers of the services, would be a more appropriate requirement because it should not be a creditor's responsibility to provide a borrower with a list of providers. The commenter also expressed concern that the creditor would be subject to tolerance rules if the written list of providers must include more than one provider's contact information for a settlement service, but fee estimates are disclosed for only one provider, and the borrower chooses a different provider on the list for the settlement service. A title company commenter expressed concern that it may be difficult for a creditor to prepare a list identifying available providers if the consumer or the property is located in a geographical area with which it is unfamiliar. It further noted that it believed independent settlement service providers are concerned that consumers would only choose the settlement service providers disclosed on the list. Some commenters, including two State bar associations from states where an attorney is required to conduct real estate closings, asserted that the written lists may limit the right of consumers to select settlement agents.

Industry trade associations representing mortgage brokers and banks asserted that the proposal would harm small settlement service providers. The commenters asserted that creditors would want to manage their liability risk unless they are relatively certain of a provider's availability to perform the service for which it was listed and of the fee the provider charges for the service. Accordingly, the commenters asserted that creditors' likely response would be listing a small number of very large providers that offer services over a wide area to reduce their compliance burden. Some commenters objected to the listing of hazard insurance providers on the written list. The commenters asserted that the final rule should not require creditors to list hazard insurance providers because consumers do not have difficulty finding such providers and the requirement may disadvantage small providers of hazard insurance because banks would want to manage the burden of monitoring their fees and availability by listing large providers.

Industry reaction to whether additional guidance on the content and format of the proposed written list was mixed. A national provider of title insurance and settlement services stated that additional guidance regarding the content and format of the written list of providers is unnecessary. In contrast, a number of industry commenters sought guidance on various aspects of the proposal. An industry trade association representing credit unions generally stated that it supported the Bureau's proposal to include more detailed requirements for the written list of providers. Industry trade associations representing banks and mortgage lenders asked the Bureau to clarify whether the creditor must list more than one provider for a settlement service if more than one provider is available. They also asserted that if the creditor must list some minimum number of providers for a settlement service, then the rule must clarify what that minimum number is. The trade association commenters further asserted that there will be significant compliance burden for creditors to list more than one because the creditor must maintain multiple relationships with providers to track their fees and likely availability. The commenters additionally stated that the burden is difficult to justify because information about settlement service providers is readily available online.

The trade group commenters asserted that the burden may be especially great on creditors that maintain lists of providers with whom they prefer to do business because in some cases, such lists contain multiple providers being listed for the same service. The commenters stated that they recommend that if the creditor lists providers that include providers in which they have a preferred client-vendor relationship, the creditor should not be required to list all such providers because it would likely contain too much information. The commenters also expressed concern about compliance burden because creditors would have to monitor the prices charged by their preferred providers and the providers' availability. The commenters further stated that the compliance burden of having to provide the full list of preferred providers for a settlement service would force creditors to direct consumers to lender-required providers.

The trade association commenters also requested clarification on how much flexibility creditors have when listing title services. The commenters stated that the HUD RESPA FAQs about the written list of providers state that title services may be subdivided into two categories: closing services and lender's title insurance and related services. The commenters stated that title service providers offer different title service packages, and accordingly, they asserted that the Bureau should provide additional flexibility to creditors if they list title services on the written list. The trade association commenters also asserted that the rule should clarify that disclosing an affiliate on the written list would not make the affiliate a required provider as long as the creditor lists unaffiliated providers. The commenters additionally sought clarification whether the written list of providers must be provided again if the creditor provides the consumer with a revised Loan Estimate.

A State trade association representing bankers also sought clarification on how many providers for each settlement service must be listed. It additionally asserted that form H-27(B), which the Bureau proposed as a sample form of the written list of providers, made it unclear whether, with respect to a settlement service for which the creditor lists more than one service provider, the creditor must list the estimated fee that each listed service provider charges for that service, because although two providers are identified on form H-27(B) as providing survey services, the form only displays the fee of one of the service providers. The commenter also asserted that if a creditor lists multiple providers of the same service and the fees charged by those providers vary, then the creditor is likely to list the highest fee unless the creditor can disclose the fees as a range of fees. The commenter stated that listing the most expensive fee does not benefit consumers because they may not realize that the fees for a particular service vary by provider.

A national association representing Federally-chartered credit unions sought clarification on whether the written list can be provided in the same transmittal as the Loan Estimate. If the creditor uses mail to send the Loan Estimate, the commenter asked if the list may be included in the same envelope on a separate piece of paper from the disclosures required by § 1026.19(e)(1). If the creditor sends the Loan Estimate electronically, the commenter asked whether the creditor may provide the written list on a separate page from the disclosures required by § 1026.19(e)(1). A large bank commenter asked the Bureau to clarify whether a creditor could satisfy the requirement that the creditor must list service providers that perform the service where the consumer or property is located by listing vendor management companies.

An industry trade association representing settlement and escrow agents stated that the Bureau should expand the scope of § 1026.19(e)(1)(vi) to prohibit creditors from imposing background checks or similar requirements on settlement and title service providers before the creditor agrees to use the provider's services if the providers are in good standing to conduct business in the applicable jurisdiction. The commenter referred to these requirements as vetting requirements. The commenter stated that some creditors are relying on a Bureau-issued supervisory bulletin, CFPB 2012-3 (Apr. 12, 2012), as a pretext to impose vetting requirements on independent settlement and escrow agents, even though the agents are in good standing in their State and are often members of State and industry trade associations. Similarly, the Bureau received comments from settlement and title agents that suggested that the Bureau adopt a final rule that would define the term “third party provider” and then expressly exempt settlement and title agents from the definition. The Bureau believes that it received these comments because a number of settlement and title agent commenters were also concerned about the above-referenced supervisory bulletin and notes that some commenters expressed the concern that the vetting requirements were included in the proposal.

Final Rule

The Bureau has considered the comments and decided to finalize § 1026.19(e)(1)(vi) largely as proposed. Because § 1026.19(e)(1)(vi) reflects the current requirements, the Bureau does not believe that creditors would be unduly burdened by the requirements in this final rule. The Bureau also believes that information asymmetry is pervasive in the mortgage origination process. Accordingly, the Bureau believes that if the creditor permits a consumer to shop for a settlement service, it is appropriate to require creditors to provide consumers with a written list that identifies available providers of that service. The Bureau recognizes that a creditor originating a loan in a geographical area with which it is unfamiliar may have less familiarity with the mortgage market in that area, but the Bureau believes that the creditor nonetheless has better access to information than the consumer about settlement service providers in the geographical area.

The Bureau believes that providing consumers with a toll-free number or a Web site instead of a written list would be inefficient substitutes because they introduce an extra step into the shopping process. A consumer that receives a written list with the service provider's contact information could directly contact the service provider. Additionally, to comply with the current rule, creditors that permit shopping would already have to monitor the availability of settlement service providers and the fees charged by the providers, and thus they currently are ordinary business activities. Accordingly, the final rule should not impose additional burden.

The Bureau also does not believe that it would be burdensome for the creditor to include a service provider's street address. Comment 19(e)(1)(vi)-4 does not state that § 1026.19(e)(1)(vi) requires the provision of addresses. Rather, it explains that to comply with the identification requirement in § 1026.19(e)(1)(vi)(C), the creditor must provide sufficient information to allow the consumer to contact the service provider, and that a creditor that lists the provider's address, along with its telephone number and the name under which the provider conducts business, would have provided sufficient information. Accordingly, listing an available provider's street address is not required by § 1026.19(e)(1)(iv)(C), but a creditor that does not list the street address must demonstrate that the information it provided is sufficient information that allows the consumer to contact the service provider.

With respect to the argument that small settlement service providers may be harmed because a creditor's likely response to reduce compliance burden would be to list a small number of very large providers that offer services over a wide area, the Bureau believes that the creditor would not comply with the availability requirement in § 1026.19(e)(1)(vi)(C) if the service provider listed does not provide services where the consumer or the property is located. But the Bureau understands that small, independent settlement service providers may be more likely to operate outside of large metropolitan areas than larger settlement service providers. Accordingly, creditors may have to list small, independent settlement service providers in some areas, rather than larger providers, to comply with § 1026.19(e)(1)(vi)(C). For additional reasons, the Bureau does not believe independent settlement service providers will be negatively impacted because of the inclusion of affiliate charges in the points and fees thresholds under the Bureau's ATR and HOEPA rulemakings. The Bureau believes that the motivation to avoid exceeding those points and fees thresholds may deter some creditors from using affiliated service providers for settlement services. Accordingly, the Bureau believes that they will be represented on the list because for a given settlement service, the creditor must list settlement service providers that provide services where the consumer or property is located.

In response to the concern that that the written list of providers may suggest to the consumer that the creditor endorses the provider, the Bureau notes that comment 19(e)(1)(vi)-6 clarifies that the creditor may include a statement on the written list that the listing of a settlement service provider does not constitute an endorsement of that service provider. With respect to the assertion that the written list of providers may limit the right of consumers to select settlement agents, the final rule requires (consistent with the proposal) that if a creditor permits the consumer to shop for a settlement service, then the creditor must state on the written list that the consumer may choose a different provider for that service. This statement is illustrated on form H-27(A) of appendix H to Regulation Z in this final rule.

Additional guidance. The Bureau has considered requests related to additional guidance and is finalizing the proposed rule and commentary with modifications to address questions raised by the commenters. With respect to requests for guidance that did not lead the Bureau to adjust the proposed rule and commentary, the Bureau believes that the adjustments were not needed because the final rule text and commentary are sufficiently clear.

As noted above, some commenters expressed concern about how many available providers of a settlement service a creditor must list. The Bureau is adjusting final § 1026.19(e)(1)(vi)(C) to provide that the creditor must identify at least one available provider for each settlement service for which the consumer is permitted to shop. The Bureau understands that this is consistent with the informal guidance provided by HUD with respect to the requirement to provide the written list under current Regulation X, and thus, believes that this adjustment will facilitate compliance.

With respect to the request that the Bureau provide creditors with additional flexibility with respect to the listing of title services, the Bureau notes that this final rule permits the creditor to provide a more detailed breakdown of title-related services than what is currently permitted under existing HUD RESPA FAQs. See comments 37(f)(2)-3, -4, and 37(f)(3)-3. The Bureau also notes that form H-27(B) of appendix H to Regulation Z in this final rule contains a sample written list that illustrates the listing of title services on the written list. With respect to the request that the final rule should clarify that disclosing an affiliated service provider on the written list would not make the affiliated provider a required provider as long as the creditor lists unaffiliated providers, the Bureau declines. The Bureau does not believe that an affiliated provider is a required provider if the creditor lists the affiliated provider under a heading that clearly states that the consumer can select the provider or shop for different providers, and accordingly, does not believe clarification is necessary.

On the question of listing hazard insurance providers on the written list of providers, hazard insurance would not have been among the services that the creditor would have been required to identify pursuant to § 1026.37(f)(3). Therefore, hazard insurance providers do not need to be listed on the written list of providers. Comment 19(e)(1)(vi)-2, which the Bureau is adopting as proposed, explains that the creditor should look to § 1026.37(f)(3) for guidance on how the creditor must identify the services for which the consumer is permitted to shop. However, the Bureau has noted that passing references to homeowner's insurance in proposed comments 19(e)(1)(vi)-1 and -6 could have caused confusion on this point, so it has removed that language in the final commentary adopted in this final rule. With respect to questions about the creditor's obligation to disclose the fees of the settlement service providers the creditor lists on the written list of providers, the Bureau notes § 1026.19(e)(1)(iv) does not require creditors to list the estimated fees of the service providers, although form H-27(A) of appendix H to Regulation Z adopted in this final rule does provide creditors the space to do so.

Section 1026.37(f)(3), as adopted, requires the creditor to itemize on the Loan Estimate the estimated amount for each of the services for which a consumer can shop. Even if the creditor lists on the written list under § 1026.19(e)(1)(vi)(C) more than one service provider for a settlement service that it permits the consumer to shop for, the creditor must itemize on the Loan Estimate only one estimated cost of that service for one of the service providers listed. This estimated cost would be the amount used for purposes of the good faith analysis under § 1026.19(e)(3). However, nothing in the final rule prohibits a creditor from identifying the estimated fee of each service provider listed for a settlement service on the written list under § 1026.19(e)(1)(vi).

With respect to the question of whether the creditor must provide the consumer with a second written list of providers whenever the creditor provides a revised Loan Estimate to the consumer pursuant to § 1026.19(e)(4), the Bureau believes that § 1026.19(e)(1)(vi)(C), which the Bureau is adopting as proposed for reasons set forth in this section-by-section analysis, clearly explains that the creditor is required to provide the written list only once, in accordance with the timing requirement that applies to the delivery of the original Loan Estimate set forth in § 1026.19(e)(1)(iii). With respect to the question of whether the creditor may provide the written list in the same transmittal as the Loan Estimate and whether the creditor must provide the list on a separate page from the disclosures required by § 1026.19(e)(1)(i), the Bureau notes that § 1026.19(e)(vi)(C) requires the written list to be provided separately from the disclosures required under § 1026.19(e)(1)(i). In addition, the requirements set forth in § 1026.37(o)(1) applies whenever the creditor provides the Loan Estimate with any other documents or disclosures. That provision states that the Loan Estimate must be provided on separate pages that are segregated from other documents or disclosures. This final rule does not prohibit a creditor from providing the written list in the same transmittal as the Loan Estimate.

With respect to the question of whether a creditor may comply with the requirements of § 1026.19(e)(1)(vi)(C) by listing vendor management companies, the availability requirement in proposed § 1026.19(e)(1)(vi)(C) requires that an entity that a creditor lists on the written list of providers for a particular service be available to provide the service. A creditor that lists a vendor management company on the written list for a particular service would not comply with § 1026.19(e)(1)(vi)(C) if the vendor management company cannot ensure that the service for which it is listed can be performed by its employees or contractors in the area where the consumer or property is located, because it would not be available for purposes of § 1026.19(e)(1)(iv)(C). Lastly, with respect to requests to adjust the proposal to prohibit creditors from imposing background checks and similar requirements on settlement, and title agents, the proposal would not have imposed on the creditor an obligation to impose vetting requirements on settlement agents, nor prohibited such vetting, nor sought comment on the issue.

Accordingly, for the reasons stated above, the Bureau is adopting § 1026.19(e)(1)(vi)(A) as proposed, and § 1026.19(e)(1)(vi)(B) substantially as proposed, with revisions to enhance clarity. For the reasons discussed above, the Bureau is adjusting proposed § 1026.19(e)(1)(vi)(C) in response to comments received about how many service providers must a creditor identify on the written list for each settlement service for which a consumer is permitted to shop. As adopted, § 1026.19(e)(1)(vi)(C) provides that if the consumer is permitted to shop for a settlement service, the creditor shall provide the consumer with a written list identifying available providers of that settlement service and stating that the consumer may choose a different provider for that service. It additionally provides that the creditor must identify a minimum of one available provider for each settlement service for which the consumer is permitted to shop. Section 1026.19(e)(1)(vi)(C) further provides that the creditor shall provide this written list of settlement service providers separately from the disclosures required by § 1026.19(e)(1)(i) but in accordance with the timing requirements in § 1026.19(e)(1)(iii).

Comments 19(e)(1)(vi)-1 through -7 are adopted substantially as proposed. As noted, the Bureau modified proposed comments 19(e)(1)(vi)-1 and -6 to address confusion about whether hazard insurance carriers must be listed in the written list of providers required by § 1026.19(e)(1)(vi)(C), and the Bureau is modifying proposed comment 19(e)(1)(vi)-4 because final § 1026.19(e)(1)(vi)(C) states expressly that at least one service provider must be identified for each settlement service for which the consumer is permitted to shop. The Bureau is adopting § 1026.19(e)(1)(vi)(A) through (C), and its commentary, pursuant to the Bureau's authority under sections 105(a) of TILA, 19(a) of RESPA, and, for residential mortgage loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act, as described in the proposal.

19(e)(2) Predisclosure Activity

To promote the ability of consumers to shop for and evaluate available options for credit, the Bureau proposed several provisions in proposed § 1026.19(e)(2) that would have restricted certain activities by creditors that may occur prior to the receipt by the consumer of the Loan Estimate. These provisions include restrictions on imposing fees on consumers, a requirement to place a statement on written estimates of loan terms or costs specific to the consumer that creditors may provide to the consumer before providing the Loan Estimate to the consumer to differentiate the written estimates from the Loan Estimate, and a prohibition that the creditor may not require the consumer to submit verifying information related to the consumer's application. These provisions are described in detail below in the section-by-section analyses of § 1026.19(e)(2)(i), (ii), and (iii), respectively. In addition, see part VI for a discussion of the specific effective date applicable to § 1026.19(e)(2).

19(e)(2)(i) Imposition of Fees on Consumer

The Bureau proposed § 1026.19(e)(2)(i), which would have prohibited a creditor or any other person from imposing a fee on a consumer in connection with the consumer's application for a mortgage transaction subject to § 1026.19(e)(1)(i) before the consumer has received the Loan Estimate and indicated an intent to proceed with the transaction, except for a bona fide and reasonable fee for obtaining the consumer's credit report. As set forth below, the general fee restriction was set forth in proposed § 1026.19(e)(2)(i)(A), and the exception was set forth in proposed § 1026.19(e)(2)(i)(B). Both provisions are discussed in greater detail below.

19(e)(2)(i)(A) Fee Restriction

Section 128(b)(2)(E) of TILA provides that the “consumer shall receive the disclosures required under [TILA section 128(b)] before paying any fee to the creditor or other person in connection with the consumer's application for an extension of credit that is secured by the dwelling of a consumer.” 15 U.S.C. 1638(b)(2)(E). This provision is implemented in § 1026.19(a)(1)(ii). Although RESPA does not contain a similar provision, Regulation X does. See§ 1024.7(a)(4). However, unlike Regulation Z, Regulation X prohibits a consumer from paying a fee until the consumer indicates an intent to proceed with the transaction after receiving the disclosures. Id. As discussed below, both Regulation Z and Regulation X provide an exception only for the cost of obtaining a credit history or credit report, respectively.

Thus, Regulation X requires consumers to take an additional affirmative step before new fees may be charged. In the proposal, the Bureau stated its belief that the goals of the integrated disclosures are best served by adopting the approach under Regulation X. The Bureau explained that the integrated disclosures were designed to facilitate the making of informed financial decisions by consumers, and expressed concern that this goal would be inhibited if fees are imposed on consumers before a consumer indicates an intent to proceed. The Bureau noted that for example, after reviewing the Loan Estimate a consumer may be uncertain that the disclosed terms are in the consumer's best interest or that the disclosed terms are those which the consumer originally requested. However, if fees may be imposed before the consumer decides to proceed with a particular loan, consumers may not take additional time to understand the costs and evaluate the risks of the disclosed loan. The Bureau also stated its intent for consumers to use the integrated disclosures to compare loan products from different creditors. The Bureau expressed concern that if creditors can impose fees on consumers once the Loan Estimate is delivered, but before the consumer indicates intent to proceed, shopping may be inhibited.

The Bureau noted that, for example, after reviewing the Loan Estimate a consumer may be uncertain that the disclosed terms are the most favorable terms the consumer could receive in the market. However, if fees may be imposed before the consumer decides to proceed with a particular loan, consumers may determine that too much cost has been expended on a particular Loan Estimate to continue shopping, even though the consumer believes more favorable terms could be obtained from another creditor. The Bureau also expressed concern that consumers would conclude that obtaining a Loan Estimate from multiple creditors is too costly if each creditor can impose fees for each Loan Estimate.

Accordingly, pursuant to its authority under TILA section 105(a) and 128(b)(2)(E) and RESPA section 19(a), the Bureau proposed § 1026.19(e)(2)(i)(A), which would have provided that neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer's application before the consumer has received the disclosures required by § 1026.19(e)(1)(i) and indicated to the creditor an intent to proceed with the transaction described by those disclosures. Proposed comment 19(e)(2)(i)(A)-1 would have explained that a creditor or other person may not impose any fee, such as for an application, appraisal, or underwriting, until the consumer has received the disclosures required by § 1026.19(e)(1)(i) and indicated an intent to proceed with the transaction. The only exception to the fee restriction would have been to allow the creditor or other person to impose a bona fide and reasonable fee for obtaining a consumer's credit report, pursuant to proposed § 1026.19(e)(2)(i)(B).

Proposed comment 19(e)(2)(i)(A)-2 would have explained that the consumer may indicate an intent to proceed in any manner the consumer chooses, unless a particular manner of communication is required by the creditor, provided that the creditor does not assume silence is indicative of intent. The proposed comment would have clarified that the creditor must document this communication to satisfy the requirements of § 1026.25. The proposed comment would have also included illustrative examples.

Proposed comment 19(e)(2)(i)(A)-3 would have discussed the collection of fees and clarified that at any time prior to delivery of the required disclosures, the creditor may impose a credit report fee as provided in § 1026.19(e)(2)(i)(B), but that the consumer must receive the disclosures required by § 1026.19(e)(1)(i) and indicate an intent to proceed before paying or incurring any other fee in connection with the consumer's application. Proposed comment 19(e)(2)(i)(A)-4 would have provided illustrative examples regarding these requirements.

Proposed comment 19(e)(2)(i)(A)-5 would have clarified that, for purposes of § 1026.19(e), a fee is “imposed by” a person if the person requires a consumer to provide a method for payment, even if the payment is not made at that time. The proposed comment would have provided examples that a creditor may not require the consumer to provide a $500 check or a credit card number to pay a “processing fee” before the consumer receives the disclosures required by § 1026.19(e)(1)(i) and the consumer subsequently indicates intent to proceed. The proposed comment would have further clarified that the creditor in this example would not comply with § 1026.19(e)(2) even if the creditor did not deposit the check or charge the card until after the disclosures required by § 1026.19(e)(1)(i) were received by the consumer and the consumer subsequently indicated intent to proceed. The proposed comment would have further explained that the creditor would have complied with § 1026.19(e)(2) if the creditor required the consumer to provide a credit card number if the consumer's authorization was only to pay for the cost of a credit report. The proposed comment would have clarified that this would comply with § 1026.19(e)(2) even if the creditor maintained the consumer's credit card number on file and charged the consumer a $500 processing fee after the disclosures required by § 1026.19(e)(1)(i) were received and the consumer subsequently indicated an intent to proceed, provided that the creditor requested and received a separate authorization for the processing fee charge from the consumer after the consumer received the disclosures required by § 1026.19(e)(1)(i).

19(e)(2)(i)(B) Exception to Fee Restriction

As noted above, § 1026.19(a)(1)(iii) of Regulation Z currently provides that a person may impose a fee for obtaining a consumer's credit history prior to providing the good faith estimates, which is the lone exception to the general rule established by § 1026.19(a)(1)(ii) that fees may not be imposed prior to the consumer's receipt of the disclosures. Section 1024.7(a)(4) of Regulation X contains a similar exception, but it differs in two important respects. First, Regulation Z provides that the fee may be imposed for a consumer's “credit history,” while Regulation X specifies that the fee must be for the consumer's “credit report.” The Regulation Z provision could be read as permitting a broader range of activity than just acquiring a consumer's credit report. The Bureau proposed to adopt the terminology used by Regulation X, concluding that the purposes of the integrated disclosures were better served by the more restrictive language. The Bureau stated that consumers should be able to receive a reliable estimate of mortgage loan costs with as little up-front expense and burden as possible, while creditors should be able to receive sufficient information from the credit report alone to develop a reasonably accurate estimate of costs.

Second, existing commentary under Regulation Z provides that the fee charged pursuant to § 1026.19(a)(1)(iii) may be described or referred to as an “application fee,” provided the fee meets the other requirements of § 1026.19(a)(1)(iii). The Bureau, however, proposed for purposes of the integrated disclosures to require a fee for a credit report to be disclosed with the more precise label under the theory that consumers may be more likely to understand that a credit report fee is imposed if a fee for the purpose of obtaining a credit report is clearly described as such, and compliance costs are generally reduced when regulatory requirements are standardized. Accordingly, the Bureau proposed § 1026.19(e)(2)(i)(B), which would have provided that a person may impose a bona fide and reasonable fee for obtaining the consumer's credit report before the consumer has received the disclosures required by § 1026.19(e)(1)(i). Proposed comment 19(e)(2)(i)(B)-1 would have clarified that a creditor or other person may impose a fee before the consumer receives the required disclosures if it is for purchasing a credit report on the consumer, provided that such fee is bona fide and reasonable in amount. The proposed comment would have also stated that the creditor must accurately describe or refer to this fee, for example, as a “credit report fee.”

Comments

A large non-depository lender expressed the concern that if the proposal was finalized as proposed, the practice of requiring a method of payment prior to providing the Loan Estimate would be a violation of the rule. The commenter, along with a number of other commenters that included a large bank commenter and industry trade associations representing banks and mortgage lenders, asserted that creditors should be permitted to obtain the consumer's credit card information before a consumer receives the Loan Estimate and indicates an intent to proceed, regardless of whether the creditor intends to charge the consumer the fee for obtaining the consumer's credit report. The trade association commenters asserted that restricting the creditor's ability to obtain the consumer's credit card information imposes an operational burden on creditors that do not charge a consumer for a credit report fee until the consumer has indicated an intent to proceed. The commenters predicted that adopting the proposed rule would make it likely that creditors will change their current practice and begin charging the credit report fee before the consumer indicates an intent to proceed.

The Bureau also received requests from industry commenters that the Bureau clarify how to determine when a consumer has indicated an intent to proceed. The trade association commenter requested that the Bureau clarify that a lender may require the consumer to indicate the intent to proceed in a specific manner, as long as it is reasonable. The commenters also described specific examples and asked the Bureau to provide guidance on whether each specific example constitutes the consumer's intent to proceed. Similarly, a community bank commenter asserted that the Loan Estimate should contain a signature line, which could be signed by the consumer to indicate the consumer's intent to proceed.

The trade association commenter and the large bank commenter additionally requested that the Bureau clarify what the Bureau meant when it stated in proposed § 1026.19(e)(2)(i)(A)-5 that a creditor must request and receive a separate authorization for a new fee before it charges the consumer the new fee on the credit card the creditor had previously used to charge the consumer for the cost of a credit report. The commenters asserted that it was unclear whether the “separate authorization” refers to an authorization from the credit card company or a separate verbal authorization from the consumer to the creditor with respect to charging the consumer's credit card. The trade association commenter further requested clarification on whether the consumer's explicit expression of intent to proceed provides the lender with separate authorization to charge additional fees. Finally, the Bureau also received comments from industry commenters that asserted that the creditor should be able to charge the consumer a “pre-application fee” to compensate the creditor for pre-approval activities, such as the issuance of pre-application worksheets.

Final Rule

The Bureau has considered the comments, and for the reasons set forth below, is finalizing § 1026.19(e)(2)(i) substantially as proposed. The Bureau believes that it is important that the consumer takes the affirmative step to indicate an intent to proceed with the mortgage loan transaction before the creditor requests a method of payment from the consumer, other than a method of payment to pay for the cost of a credit report. The Bureau recognizes that requiring a method of payment does not necessarily mean that the consumer will actually be charged. However, the Bureau is concerned that consumers' use of the integrated disclosures to make informed financial decisions and to compare loan products from different creditors may be inhibited if creditors can require that the consumer provide the consumer's credit card number without a specific, narrowly tailored purpose before the consumer indicates an intent to proceed with the transaction. This may make a consumer feel committed to the creditor even though, after reviewing the Loan Estimate, the consumer may be uncertain that the disclosed terms are in the consumer's best interest or that the disclosed terms are those for which the consumer originally asked. The consumer may also feel uncomfortable providing the consumer's credit card number to multiple creditors, if multiple creditors intend to keep the numbers on file to charge at a later date. In addition, the Bureau understands that some creditors may currently require consumers to provide their credit card numbers at the time of application to provide a “deposit” that is either charged after application if the consumer does not consummate the transaction, or is applied towards the consumer's closing costs if the transaction is consummated. Under § 1026.19(e)(2)(i) adopted in this final rule, a creditor is not permitted to require the consumer to provide the consumer's credit card number before the consumer receives the Loan Estimate and indicates an intent to proceed, even if the creditor promises not to charge the card until after such time. See comment 19(e)(2)(i)(A)-5.

The Bureau has revised the final regulation text to address commenters' request for additional clarification with respect to determining whether a consumer has indicated an intent to proceed. Proposed comment 19(e)(ii)(A)-2 would have explained, among other things, that a creditor can require a particular method of communication for the consumer to indicate an intent to proceed, as long as the creditor can document this communication to satisfy the requirements of § 1026.25. But in light of the comments requesting additional clarification with respect to determining whether a consumer has indicated an intent to proceed, the Bureau believes incorporating the statement, set forth in proposed comment 19(e)(ii)(A)-2, that the consumer may indicate an intent to proceed in any manner the consumer chooses, unless the creditor requires a particular manner of communication into final § 1026.19(e)(2)(i)(A) as part of the regulatory text would facilitate compliance. As adopted, § 1026.19(e)(2)(i)(A) provides that except as provided in § 1026.19(e)(2)(i)(B), neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer's application for a mortgage transaction subject to § 1026.19(e)(1)(i) before the consumer has received the disclosures required under § 1026.19(e)(1)(i) and indicated to the creditor an intent to proceed with the transaction described by those disclosures. Section 1026.19(e)(2)(i)(A) further provides that a consumer may indicate an intent to proceed with a transaction in any manner the consumer chooses, unless a particular manner of communication is required by the creditor.

The Bureau declines to make other changes to the rule requested by commenters. With respect to the request that the Loan Estimate contain a signature line that could be signed by the consumer to indicate the consumer's intent to proceed, the Bureau believes that allowing the Loan Estimate to be signed by the consumer to document the consumer's intent to proceed is contradictory to the intent of TILA section 128(2)(B)(i). This section of TILA, implemented in this final rule in § 1026.37(n)(1), provides that consumers are not required to proceed with the transaction merely because they have received the Loan Estimate or signed a loan application. Specifically, form H-24 of appendix H to Regulation Z, which illustrates the optional signature line permitted on the Loan Estimate under § 1026.37(n)(1), states that the consumer's signature only documents receipt of the Loan Estimate. The Bureau also does not believe that additional clarification is needed to explain what “separate authorization” means in comment 19(e)(2)(i)(A)-5, which is adopted as proposed. The Bureau believes that the term “separate authorization,” as used in the comment, clearly means a new authorization, whether verbal or written, from the consumer for the creditor to charge new fees. The Bureau believes that an expression of a consumer's intent to proceed with a transaction is not the same as an authorization to the creditor to charge additional fees.

Lastly, the Bureau does not believe that the creditor should be able to impose on a consumer a “pre-application fee” before the consumer has received the Loan Estimate and indicated an intent to proceed. As discussed above, both Regulations X and Z contain provisions that create exceptions to the general prohibition on the creditor's ability to impose fees on a consumer prior to providing the RESPA GFE and early TILA disclosure. The Bureau incorporated the terminology used by Regulation X in the proposal because the Bureau believed that incorporating the more narrow and precise terminology used by Regulation X would better ensure that consumers receive a reliable estimate of mortgage loan costs with as little up-front expense and burden as possible.

The Bureau believes permitting creditors to impose a “pre-application fee” on the consumer is problematic. First, although the Bureau recognizes that the creditor uses resources to provide pre-application worksheets or other pre-qualification services, the worksheets are not subject to the good faith requirements of TILA section 128(b)(2)(A) and RESPA section 5 and may be unreliable. Accordingly, expanding the exception to a “pre-application fee” would be contrary to the Bureau's intent of ensuring that consumers receive a reliable estimate of mortgage loan costs with as little up-front expense and burden as possible. Second, the Bureau is concerned that the description of a fee as a “pre-application fee” is imprecise and that there may not be an industry standard to help determine what the fee is paying for, which does not promote the informed use of credit. The lack of precision and uniformity could also complicate supervision and compliance. Additionally, consumers may not have any information available to them regarding what services are included in the fee.

For the reasons stated above, the Bureau is adopting § 1026.19(e)(2)(i)(A) and (B) largely as proposed, pursuant to its authority under TILA section 105(a) and 129(b)(2)(E), and RESPA section 19(a). The Bureau is also finalizing comments 19(e)(2)(i)(A)-1 through -5, and comment 19(e)(2)(i)(B)-1 substantially as proposed, except for revisions to improve the clarity of the proposed comments. The Bureau believes that it is important that the consumer takes the affirmative step to indicate an intent to proceed with the mortgage loan transaction before the creditor requests a method of payment from the consumer, other than a method of payment to pay for the cost of a credit report. The Bureau recognizes that requiring a method of payment does not necessarily mean that the consumer actually will be charged. However, the Bureau's goals that consumers use the integrated disclosures to make informed financial decisions and that consumers use the disclosure to compare loan products from different creditors may be inhibited if the Bureau permits a creditor to require that the consumer provide the consumer's credit card number without a specific, narrowly-tailored purpose before the consumer indicates an intent to proceed.

19(e)(2)(ii) Written Information Provided to Consumer

The Bureau proposed to require creditors that provide a written estimate of loan terms or costs specific to a consumer, before the consumer has received the Loan Estimate and indicated an intent to proceed, to include a statement on such estimate to distinguish the estimate from the Loan Estimate. The Bureau understands that consumers often request written estimates of loan terms before receiving the RESPA GFE or early TILA disclosure. The Bureau recognizes that these written estimates may be helpful to consumers. However, the Bureau expressed concern in the proposal that consumers could confuse such written estimates, which are not subject to the good faith requirements of TILA section 128(b)(2)(A) and RESPA section 5 and may therefore be unreliable, with the Loan Estimate disclosures proposed under § 1026.19(e)(1)(i), which must be made in good faith. The Bureau was also concerned that unscrupulous creditors may use formatting and language similar to the disclosures that would have been required under § 1026.19(e)(1)(i) to deceive consumers into believing that the creditor's unreliable written estimate is actually the disclosure that would have been required under § 1026.19(e)(1)(i). The Bureau found these concerns to be particularly important in light of section 1405(b) of the Dodd-Frank Act, which places emphasis on improving “consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures.”

The Bureau believes that creditors may choose to issue, and consumers may want, preliminary written estimates based on less information than is needed to issue the disclosures required under § 1026.19(e)(1)(i). However, mortgage loan costs are often highly sensitive to the information that triggers the disclosures. The Bureau noted that as such, the disclosures that would have been required under proposed § 1026.19(e)(1)(i) may be more accurate indicators of cost than preliminary written estimates. The Bureau stated that consumers may better understand the sensitivity of mortgage loan costs to information about the consumer's creditworthiness and collateral value if consumers are aware of the difference between preliminary written estimates and disclosures required under § 1026.19(e)(1)(i). Additionally, section 1032(a) of the Dodd-Frank Act authorizes the Bureau to prescribe rules to ensure the full, accurate, and effective disclosure of mortgage loan costs in a manner that permits consumers to understand the associated risks. The Bureau sought to foster consumer understanding of the reliability of the cost information provided, while permitting the use of preliminary written estimates, which may be beneficial to consumers.

Accordingly, pursuant to its authority under section 105(a) of TILA, section 1032(a) of the Dodd-Frank Act, and, for residential mortgage loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act, the Bureau proposed to require creditors to distinguish between preliminary written estimates of mortgage loan costs, which are not subject to the good faith requirements under TILA and RESPA, and the disclosures required under § 1026.19(e)(1)(i), which are subject to these requirements. Proposed § 1026.19(e)(2)(ii) would have required creditors to provide consumers with a disclosure indicating that the preliminary written estimate is not the Loan Estimate required by RESPA and TILA, if a creditor provides a consumer with such written estimate of specific credit terms or costs before the consumer receives the disclosures under § 1026.19(e)(1)(i) and subsequently indicates an intent to proceed with the mortgage loan transaction. The Bureau concluded that the proposed provision is consistent with section 105(a) of TILA in that it would increase consumer awareness of the costs of the transaction by informing consumers of the risk of relying on preliminary written estimates, thereby assuring a meaningful disclosure of credit terms and promoting the informed use of credit. The Bureau also believed the proposal is consistent with section 129B(e) of TILA because permitting creditors to provide borrowers with a preliminary written estimate and the Loan Estimate required by TILA and RESPA without a disclosure indicating the difference between the two is not in the interest of the borrower.

Proposed comment 19(e)(2)(ii)-1 would have explained that § 1026.19(e)(2)(ii) applies only to written information specific to the consumer. It provided examples to illustrate the difference between written information specific to the consumer, such as an estimated monthly payment for a mortgage loan based on the estimated loan amount and the consumer's estimated credit score, and non-individualized information such as a preprinted list of closing costs common in the consumer's area, or an advertisement as defined in § 1026.2(a)(2). This proposed comment would have also included a reference to comment 19(e)(1)(ii)-4 regarding mortgage broker provision of written estimates specific to the consumer.

Comments

The Bureau received largely supportive comments from industry commenters, but largely negative comments from consumer advocacy groups. A number of consumer advocacy groups expressed concerns regarding how non-binding, pre-application estimates have been used by creditors and mortgage brokers to deceive borrowers. They asserted that any creditor or broker using any document that is substantially similar to the Loan Estimate or Closing Disclosure should be subject to the requirements for such forms. The consumer advocacy groups asserted that the proposal would send a message that the Bureau condones the practice of providing consumers with non-binding estimates that have been used to deceive consumers. The commenters asserted that the disclaimer the Bureau proposed is inadequate. In joint comments, two national consumer advocacy groups observed that the Kleimann Testing Report contained a recommendation to design a more noticeable disclaimer, and asserted that the proposed disclaimer is only marginally more noticeable than the one tested. Accordingly, the national consumer advocacy group commenters expressed the belief that creditors would still be able to use pre-application worksheets to circumvent consumer shopping.

As noted, industry commenters generally expressed support for the proposal. For instance, a community bank commenter concluded that the proposed disclaimer would reduce consumer confusion. A national trade association representing credit unions generally expressed support for the proposed disclaimer. The trade association commenter supported the disclaimer, so long as the statement does not require significant redesign of the forms that creditors currently use as pre-application worksheets or the use of additional pages for the disclaimer. A State trade association representing banks commented regarding proposed form H-26(B) that its member banks would prefer to use their own version of a consumer-specific worksheet, rather than proposed form H-26(B). [193]

An industry trade association representing community banks agreed that the unregulated nature of pre-application estimates can cause confusion for consumers, but asserted that the proposed disclaimer would further confuse the consumer. The commenter suggested that the problem lies not with the worksheets, but with the belief by creditors that they must have the property address to issue the RESPA GFE. The commenter expressed concern that creditors are treating this as a requirement, and thus, the creditor must provide worksheets to consumers shopping for a mortgage loan, and then issue the Loan Estimate only after the consumer selects the property. As discussed in greater detail in the section-by-section analysis of § 1026.2(a)(3), the commenter recommended that the Bureau address the issue by making “property address” an optional item in the definition of “application” for the original Loan Estimate delivery requirement in purchase transactions.

A GSE commenter expressed concern that the proposed disclaimer could confuse consumers if the Bureau were to adopt, pursuant to the Bureau's 2012 Loan Originator Proposal, the requirement that the creditor must first provide the consumer with a quote for a comparable, alternative loan without any discount or origination points and/or fees (zero-zero alternative) before compensating a loan originator with a transaction-specific payment and charging the consumer discount and origination points and fees. The GSE commenter believed that the zero-zero alternative would have been specific to the consumer and would be provided before the Loan Estimate. The GSE commenter argued that providing a disclosure that the consumer is meant to rely on for understanding pricing trade-offs in a document that contains the proposed disclaimer would cast doubt on the document's reliability and cause consumer confusion. An industry trade association representing mortgage bankers suggested that instead of finalizing this aspect of the Bureau's 2012 Loan Originator Proposal, the Bureau should permit creditors to inform the consumer that different loan programs with different mixes of rates and fees are available on the pre-application worksheets.

Final Rule

The Bureau is adopting § 1026.19(e)(2)(ii) and comment 19(e)(2)(ii)-1 largely as proposed, after considering the comments, and pursuant to its authority under section 105(a) of TILA, section 1032(a) of the Dodd-Frank Act, and, for residential mortgage loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. As adopted, § 1026.19(e)(2)(ii) provides that if a creditor or other person provides a consumer with a written estimate of terms or costs specific to that consumer before the consumer receives the disclosures required under § 1026.19(e)(1)(i), the creditor or such person shall clearly and conspicuously state at the top of the front of the first page of the estimate in a font size that is no smaller than 12-point font: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.” The Bureau is deleting the proposed timing requirement that the written estimate be provided before the consumer has indicated an intent to proceed with the transaction. The Bureau believes that this requirement suggests that a written estimate could be provided even though the Loan Estimate had been provided. The Bureau believes receiving a written estimate after the Loan Estimate has been provided will confuse consumers and create compliance burdens for industry. The Bureau is modifying proposed § 1026.19(e)(2)(ii) in response to consumer advocacy groups' concern that pre-application worksheets formatted in a way that is substantially similar to the Loan Estimate or Closing Disclosure can cause consumer confusion. Section 1026.19(e)(2)(ii) provides that a written estimate of terms or costs may not be made with headings, content, and format substantially similar to form H-24 or H-25 of appendix H to Regulation Z.

With respect to the concerns raised about proposed form H-26(B), which would have provided a sample of the statement required by § 1026.19(e)(2)(ii) on a consumer-specific worksheet, the Bureau intended that the worksheet illustrated by proposed form H-26(B) provide an example of a worksheet that had a similar format as the proposed Loan Estimate. However, as discussed in greater detail in the section-by-section analysis of appendix H, the Bureau is concerned that worksheets similar in format to the Loan Estimate could confuse consumers, which was a concern raised by consumer advocacy group commenters. In addition, the Bureau is concerned that the sample caused confusion for industry commenters, which were concerned that the format of form H-26(B) would be required. As noted above, to address concerns raised by commenters about consumer confusion from worksheets similar in format to the Loan Estimate, the Bureau has modified § 1026.19(e)(2)(ii) to prohibit the use of a consumer-specific worksheet that is substantially similar in format to the Loan Estimate or the Closing Disclosure. Accordingly, the Bureau is not adopting proposed form H-26(B). The Bureau is, however, adopting the model form of the statement required by § 1026.19(e)(2)(ii), renumbered as form H-26. The Bureau believes that a creditor or other person providing consumer-specific written estimates may use forms they have already developed, provided that they add the disclaimer required by § 1026.19(e)(2)(ii) and that their forms are not substantially similar to form H-24 or H-25 of appendix H to Regulation Z.

With respect to the argument that consumers are becoming confused because current regulations prohibit provision of the RESPA GFE until the consumer has a specific property address, the Bureau notes that the final rule permits creditors to provide a consumer with a Loan Estimate without receiving information about the property address. As discussed in more detail above in the section-by-section analysis of § 1026.2(a)(3), the property address is not required to be received before a creditor may issue the Loan Estimate. Finally, with respect to concerns about the interactions between § 1026.19(e)(2)(ii) and the 2012 Loan Originator Proposal, the zero-zero alternative was not adopted in the Bureau's 2013 Loan Originator Final Rule.

19(e)(2)(iii) Verification of Information

The Bureau proposed in § 1026.19(e)(2)(iii) to prohibit creditors from requiring consumers to submit documents verifying information related to the consumer's application before providing the Loan Estimate. Section 1024.7(a)(5) of Regulation X currently provides that a creditor may collect any information from the consumer deemed necessary in connection with an application, but the creditor may not require, as a condition for providing a RESPA GFE, that the consumer provide supplemental documentation to verify the information the consumer provided on the application. HUD stated in its 2008 RESPA Final Rule that the prohibition was to prevent over-burdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers. 73 FR 68204, 68211 (Nov. 17, 2008).

The Bureau proposed to incorporate language similar to § 1024.7(a)(5) in the integrated disclosures rules in order to minimize the cost to consumers of obtaining Loan Estimates. The Bureau proposed § 1026.19(e)(2)(iii), which would have provided that a creditor shall not require a consumer to submit documents verifying information related to the consumer's application before providing the disclosures required by § 1026.19(e)(1)(i).

The Bureau made this proposal pursuant to its authority under section 105(a) of TILA, section 19(a) of RESPA, and, for residential mortgage loans, section 129B(e) of TILA. The Bureau stated its belief in the proposal that proposed § 1026.19(e)(2)(iii) would effectuate the purposes of TILA by reducing the burden to consumers associated with obtaining different offers of available credit terms, thereby facilitating consumers' ability to compare credit terms, consistent with section 105(a) of TILA. The Bureau also stated that this proposed provision would be consistent with section 129B(e) of TILA because requiring documentation to verify the information provided in connection with an application increases the burden on borrowers associated with obtaining different offers of available credit terms, which is not in the interest of the borrower.

Proposed comment 19(e)(2)(iii)-1 would have explained that the creditor may collect from the consumer any information that it requires prior to providing the early disclosures, including information not listed in § 1026.2(a)(3)(ii). However, the proposed comment would have clarified that the creditor is not permitted to require, before providing the disclosures required by § 1026.19(e)(1)(i), that the consumer submit documentation to verify the information provided by the consumer. The proposed comment would have also provided examples, stating that the creditor may ask for the names, account numbers, and balances of the consumer's checking and savings accounts, but the creditor may not require the consumer to provide bank statements, or similar documentation, to support the information the consumer provides orally before providing the disclosures required by § 1026.19(e)(1)(i). Further, proposed comment 19(e)(2)(iii)-1 would have referenced § 1026.2(a)(3) and the related commentary for guidance on the definition of application.

The proposed provision did not generate much comment. A software vendor commenter sought clarification on whether a creditor must refuse verifying documentation a consumer brings to the creditor in anticipation of such documentation being needed. The Bureau does not believe that verifying documentation should be needed prior to issuing a Loan Estimate. However, the final rule does not prohibit the creditor from accepting verifying documentation if the consumer proffers such documentation, provided that it is not required by the creditor before the creditor provides the Loan Estimate.

As noted above in the section-by-section analysis of § 1026.2(a)(3), based on comments responding to the Bureau's proposed definition of application, the Bureau understands that some creditors currently require a purchase and sale agreement prior to issuing the RESPA GFE and the early TILA disclosures in purchase transactions.

The Bureau is concerned that some creditors may use the purchase and sale contract as verification documentation to support information that it has asked the consumer to provide in connection with the consumer's application, such as the sale price or the property address, before the creditor issues the Loan Estimate, although as noted in the section-by-section analysis of § 1026.2(a)(3), the practice may be permissible under current Regulation X for purposes of the RESPA GFE in limited cases. Final comment 19(e)(2)(iii)-1 explains that a creditor is not permitted to require, before providing the disclosures required by § 1026.19(e)(1)(i), that the consumer submit documentation to verify the information provided by the consumer. The Bureau is adopting § 1026.19(e)(2)(iii) based on the same intent on which HUD based § 1024.7(a)(5), which is to prevent overly burdensome documentation demands on mortgage applicants, and to facilitate shopping by the consumer.

The Bureau believes that requiring a consumer to submit a purchase and sale contract so that the creditor can obtain information it would otherwise obtain from the consumer or other sources may constitute overly burdensome documentation and inhibit shopping because under such a demand a consumer would be required to become obligated to the purchase of real estate prior to obtaining a reliable estimate of the cost of financing such purchase. The Bureau notes that the creditor may revise the estimates provided in the original Loan Estimate based on receipt of changed information under § 1026.19(e)(3)(iv)(A). Accordingly, the Bureau believes that requiring the consumer to provide a purchase and sale contract before issuing the Loan Estimate would be in contravention of the prohibition on requiring verifying documentation being finalized under § 1026.19(e)(2)(iii). The Bureau is adjusting comment 19(e)(2)(iii)-1 to clarify that the creditor may not require the consumer to provide a purchase and sale agreement to verify information provided by the consumer before providing the disclosures required by § 1026.19(e)(1)(i).

Final Rule

Accordingly, the Bureau is finalizing § 1026.19(e)(2)(iii) and comment 19(e)(2)(iii)-1 substantially as proposed. Section 1026.19(e)(2)(iii) provides that the creditor or other person shall not require a consumer to submit documents verifying information related to the consumer's application before providing the disclosures required by § 1026.19(e)(1)(i). Final comment 19(e)(2)(iii)-1 explains that the creditor or other person may collect from the consumer any information that it requires prior to providing the early disclosures before or at the same time as collecting the information listed in § 1026.2(a)(3)(ii) and provides illustrative examples. However, the creditor or other person is not permitted to require, before providing the disclosures required by § 1026.19(e)(1)(i), that the consumer submit documentation to verify the information collected from the consumer. The comment also provides illustrative examples, including an example involving a purchase and sale contract, as described above, and refers to § 1026.2(a)(3) and its commentary for guidance regarding the definition of application. The Bureau is adopting § 1026.19(e)(2)(iii) and comment 19(e)(2)(iii)-1 pursuant to its authority under section 105(a) of TILA, section 19(a) of RESPA, and for residential mortgage loans, section 129(B) of TILA.

19(e)(3) Good Faith Determination for Estimates of Closing Costs

The Bureau's Proposal

The Bureau proposed to amend Regulation Z by: (1) Incorporating and expanding existing Regulation X requirements that establish tolerance categories limiting the variation between the estimated amount of certain settlement charges included on the RESPA GFE and the actual amounts included on the RESPA settlement statement; and (2) applying these requirements to variations between the estimated amount of certain settlement charges included on the Loan Estimate and the actual amounts paid by or imposed on the consumer. Current Regulation X prohibits variations in origination charges and transfer taxes between the estimated amounts and the actual amounts unless one of six exceptions, such as a changed circumstance or a borrower-requested change, applies. [194] The Bureau proposed to expand this zero percent tolerance category of settlement costs to include fees paid to affiliates of the creditor and fees paid to lender-required settlement service providers (i.e., settlement service providers that the creditor requires the consumer to use). [195] Currently under Regulation X, these costs are in the ten percent tolerance category, which also includes recording fees and charges paid to non-lender-required third party settlement service providers where the borrower uses a lender-identified settlement service provider, including charges for owner's title insurance. Costs in the ten percent tolerance category could increase between the estimated amount and the amount actually paid by or imposed on the consumer so long as the sum of all charges paid by or imposed on the consumer in this category does not exceed the sum of all such charges included on the RESPA GFE by more than ten percent. 12 CFR 1024.7(e)(2). As discussed in greater detail in the section-by-section analysis of § 1026.19(e)(3)(i), the Bureau proposed to incorporate these changes in that section.

Under the proposal, fees for lender-required services for which a creditor permits the consumer to choose the provider and the consumer selects a settlement service provider identified by the creditor would remain in the ten percent tolerance category. Recording fees and owner's title insurance would also stay in the ten percent tolerance category. See the section-by-section analysis of § 1026.19(e)(3)(ii) below.

Further, similar to the current regulation, a cap would not be applied to certain settlement costs such as prepaid interest and property insurance premiums. This aspect of the proposal is discussed in greater detail in the section-by-section analysis of § 1026.19(e)(3)(iii) below. Lastly, similar to the current regulation, under the Bureau's proposal, creditors would continue to be able to rely on any of six exceptions such as changed circumstances and borrower-requested changes to adjust any estimated settlement cost subject to a tolerance if the creditor establishes that one of the six exceptions is the reason for the cost to increase beyond the applicable tolerance.

The Bureau's rationale was based on the reasons described in the proposal (summarized below), and in reliance on its authority to prescribe standards for “good faith estimates” under TILA section 128 and RESPA section 5, as well as its general rulemaking, exception, and exemption authorities under TILA sections 105(a) and 121(d), RESPA section 19(a), section 1032(a) of the Dodd-Frank Act, and, for residential mortgage loans, section 1405(b) of the Dodd-Frank Act and section 129B(e) of TILA.

The Bureau believed that creditors could develop accurate estimates of fees for settlement services charged by their affiliates and by lender-required providers, because creditors are aided by the increased level of knowledge and communication suggested by these types of relationships and the frequency of repeat business with a particular affiliate or lender-required settlement service provider. The Bureau also believed that lenders that were denying the opportunity of consumers to influence the quality and cost of settlement services through shopping by requiring consumers to use lender-required service providers should take greater responsibility for estimating settlement costs accurately and assume some of the risk of underestimation for failing to accurately estimate such costs.

The Bureau also believed that consumers benefit from having more reliable estimates of settlement costs. The Bureau believed that more reliable estimates are inherently beneficial. They enable consumers to make informed and responsible financial decisions. More reliable estimates also promote honest competition among industry providers that desire a fair and level playing field, and the existence of such a market for settlement services helps to prevent unnecessarily high settlement costs. Subjecting settlement costs to an enhanced reliability standard may also help to prevent financial surprises at the real estate closing that may greatly harm consumers. [196] The Bureau stated in the proposal that it believed that these benefits advance the principles upon which TILA and RESPA were founded, and advance the goals of the 2008 RESPA Final Rule, under which the current tolerance categories were established.

TILA. TILA section 128(b)(2)(A) requires creditors to provide good faith estimates of certain required disclosures not later than three business days after receipt of a consumer's written application for a closed-end mortgage loan that is also subject to RESPA. TILA section 128(b)(2)(D) also requires creditors to provide revised disclosures to consumers if the initially-disclosed APR becomes inaccurate, subject to a tolerance for accuracy, not later than three business days before consummation. TILA section 121(d) further establishes that the Bureau may create new tolerances for numerical disclosures other than the APR if the Bureau determines that such additional tolerances are necessary to facilitate compliance with TILA. Regulation Z § 1026.19(a)(1)(i) implements the good faith and delivery requirements of TILA section 128(b)(2)(A) in the context of certain mortgage loans. It requires creditors to make good faith estimates of the disclosures required by § 1026.18 by either delivering or placing the disclosures in the mail not later than the third business day after the creditor receives the consumer's written application. [197]

Although settlement charges have historically been the subject of RESPA, section 1419 of the Dodd-Frank Act amended TILA section 128(a) to require creditors to disclose: “In the case of a residential mortgage loan, the aggregate amount of settlement charges for all settlement services provided in connection with the loan, the amount of charges that are included in the loan and the amount of such charges the borrower must pay at closing . . . and the aggregate amount of other fees or required payments in connection with the loan.” 15 U.S.C. 1638(a)(17). The term “settlement charges” is not defined under TILA. This amendment expands the disclosure requirements of TILA section 128(a) beyond the cost of credit to include all charges imposed in connection with the mortgage loan. The Bureau stated in the proposal that the amendment made no distinction between whether those charges relate to the extension of credit or the real estate transaction, or whether those charges are imposed by the creditor or another party, so long as the charges arise in the context of the mortgage loan settlement.

RESPA and HUD's 2008 RESPA Final Rule. A stated purpose of RESPA is that consumers should receive effective advance disclosures of settlement costs. [198] Further, the statute establishes the requirement that lenders must provide consumers with good faith estimates of settlement costs, which include most fees charged in connection with a real estate settlement, within three days of receiving a consumer's application for a mortgage loan. [199] HUD amended Regulation X with its 2008 RESPA Final Rule after a ten-year investigatory process that found RESPA's stated purposes were undermined by market forces. HUD found that cost estimates appearing on the RESPA GFE could be significantly lower than the amount ultimately charged at settlement, even though in most cases loan originators could estimate final settlement costs with great accuracy. See 73 FR 14030, 14039 (March 14, 2009). Further, consumers were often unable to challenge increases in settlement costs because many consumers found out about the increases immediately before settlement, which was the point in time where they were in the weakest bargaining position.

Since the enactment of the 2008 RESPA Final Rule, however, concerns were identified that could undermine its goals. The first of such concerns was the treatment of fees paid to lender affiliates. The inclusion of such fees in the ten percent tolerance category means that they could increase by as much as ten percent prior to the real estate closing, in addition to increases based on changed circumstances and borrower-requested changes. The Bureau stated in the proposal that given that the affiliate relationship is inherently beneficial to the creditor, permitting affiliate fees to vary by as much as ten percent without a need to justify the increase may incent creditors to raise fees at closing solely to obtain all money available up to the ten percent tolerance.

The second of these concerns centers on the ability of consumers to shop for settlement service providers. As discussed above in the section-by-section analysis of § 1026.19(e)(1)(vi), HUD intended to promote shopping by giving some information to the consumer as a starting point to shop. It promulgated the requirement that loan originators must provide borrowers with a written list of providers if the loan originator permits a borrower to shop for third-party settlement services. In the proposal, the Bureau stated that the concern is that creditors have used the requirement to direct consumers to use only the providers that are on the written list, thereby turning the lists into “closed lists” of “preferred providers,” and denying consumers the ability to influence the cost and quality of settlement services through shopping.

Dodd-Frank Act. As discussed above, sections 1032(f), 1098, and 1100A of the Dodd-Frank Act require integration of the disclosure provisions under TILA and RESPA, and sections 1098 and 1100A of the Act further provide that the purpose of the integrated disclosures is “to facilitate compliance with the disclosure requirements of [RESPA] and [TILA], and to aid the borrower or lessee in understanding the transaction by utilizing readily understandable language to simplify the technical nature of the disclosures.” The Bureau stated its belief in the proposal that these amendments require integration of the regulations related to the accuracy and delivery of the disclosures, as well as their content.

During the Small Business Review Panel process, several small entity representatives expressed concern about the unintended consequences that may result from applying the zero-percent tolerance rule currently under Regulation X to affiliates of the creditor or mortgage broker and to providers selected by the creditor, [200] and the Small Business Review Panel recommended that the Bureau consider alternatives that would increase the reliability of cost estimates while minimizing the impacts on small entities and solicit comment on the effectiveness of the current tolerance rules. [201]

Consistent with the Small Business Review Panel's recommendation, the Bureau solicited comment on all aspects of the proposal, including the cost, burden, and benefits to consumers and to industry regarding the proposed revisions to the good faith requirements, and whether the current tolerance rules have sufficiently improved the reliability of the estimates that creditors give consumers, while preserving creditors' flexibility to respond to unanticipated changes that occur during the loan process. The Bureau solicited comment on the frequency, magnitude, and causes of settlement cost increases. The Bureau also requested comment on any alternatives to the proposal that would further the purposes of TILA, RESPA, and the Dodd-Frank Act and provide consumers with more useful disclosures.

Comments

Consumer advocacy groups did not provide comments on the proposed application of the zero percent tolerance category of settlement costs to fees paid to affiliates of the creditor and fees paid to settlement service providers that creditors require consumers to use. [202] But the Bureau received numerous comments from industry commenters representing a wide range of segments of the mortgage origination industry on both the Bureau's rationale to expand the zero percent tolerance category of settlement costs to fees paid to lender affiliates and lender-required providers and the specific provisions of § 1026.19(e)(3). Provision-specific comments are addressed in the section-by-section analysis of each subsection of § 1026.19(e)(3), as applicable. This general section-by-section analysis of § 1026.19(e)(3) addresses comments received on the Bureau's rationale to expand the zero percent tolerance category of settlement costs to fees paid to lender affiliates and lender-required providers.

Industry commenters expressed mixed views on industry's ability to adapt to the change in the zero percent tolerance category of settlement charges, the impact of the change on competition and consumers, and alternatives. As discussed in more detail below, industry commenters questioned the Bureau's belief about the ability of creditors to accurately estimate the charges imposed by its affiliates and lender-required providers. Some commenters asserted that the Bureau was basing its proposal on anecdotal evidence, rather than systemic data. Commenters, including a large bank commenter, also questioned the Bureau's legal authority to establish a zero percent tolerance category for any settlement charge. They asserted that RESPA permits a creditor to provide consumers an estimate of settlement costs, rather than requiring a creditor to disclose the exact amount of a settlement charge early in the loan origination process.

Compliance impact. Commenters expressed mixed views about the ability of industry to comply with the expansion of the zero percent tolerance category of settlement charges to include fees paid to lender affiliates and lender-required settlement service providers. A regional bank holding company stated that it supported the accuracy thresholds on the Loan Estimate, but that industry should be given at least 18 months to comply with the new rules.

Many industry commenters asserted that the proposed tolerance rules will be disruptive and costly because it would be difficult to estimate fees paid to lender-affiliates and lender-required service providers accurately early in the loan origination process. The SBA argued that the Bureau should maintain the current ten percent cushion for third-party charges because the small entities that participated in the Small Business Review Panel process stated that they were currently able to comply with HUD's 2008 RESPA Final Rule. A number of the commenters asserted that the current tolerance rules have largely solved the problem of large settlement cost increases at closing and that if the Bureau did not have evidence of widespread or systemic abuse of consumers, the Bureau should not change the current rules.

Industry commenters expressed concern about the impact of unforeseen circumstances that could change the cost estimates quoted on the original Loan Estimate, and about a creditor's ability to estimate affiliate fees and lender-required service provider fees. Some commenters suggested that unforeseen circumstances are especially likely to be an issue in rural areas where properties are often unique, title work frequently includes more variables, and appraisal costs vary because it is difficult to gather comparable sales data. Other commenters suggested that costs may be difficult to estimate initially if the creditor is working outside of the creditor's market and lacks familiarity with the prices charged by local settlement service providers.

Commenters also expressed concern that the original estimates could change because of overall market forces, such as market-based price fluctuations or a change in the availability of a lender-required service provider. A national provider of title insurance and settlement services asserted that even under well-defined vendor agreements for services such as providing an appraisal, obtaining a flood risk determination, or obtaining the consumer's credit report, fees may vary slightly from time to time. Some commenters, including industry trade associations representing banks and mortgage lenders, suggested that section 8 of RESPA, the statutory provision in RESPA that prohibits kickbacks, referral fees and similar considerations being exchanged in the context of referrals for settlement service business, is one of the reasons that explains why the creditor is unable to control settlement service fees.

Ability to estimate affiliates' fees. Several industry commenters, including mortgage lenders, a credit union, an industry trade association representing affiliated real estate businesses, and an industry association representing realtors, expressed support for the Bureau's rationale for including fees paid to affiliates in the zero percent tolerance category. They agreed that affiliated business relationships facilitate greater communication and coordination than a relationship between independent entities operating at arm's length. But other commenters expressed concern that unless the creditor-affiliate relationship is one based on actual control of the creditor over the affiliate, creditors do not control the affiliates' cost.

Ability to estimate fees of lender-required providers. Many commenters cited the lack of knowledge about a non-affiliated service provider's fees and control over the provider, as the primary reason they are concerned about expanding the zero percent tolerance category of settlement charges to include fees paid to lender-required providers. As noted above, some mortgage lenders, a credit union, and an industry trade association representing realtors supported the Bureau's rationale for including affiliate fees in the zero percent tolerance category. But they expressed concern that the same level of knowledge of and control over costs does not exist between creditors and unaffiliated service providers, even in situations where the creditor selects the unaffiliated service providers.

Competitive impact. Commenters also expressed mixed views about the competitive impact of the expansion of the zero percent tolerance category of settlement fees. An industry trade association representing independent land title agents and a title company commenter expressed support for the proposal's potential to encourage consumer shopping, and thereby increase competition. Some commenters, including the SBA and several industry trade associations representing banks and mortgage lenders expressed concerns that the proposed rule would increase affiliation and decrease competition, thereby harming small, independent settlement service providers.

But other commenters believed that there would be a decrease in affiliation. An industry trade association representing Federally-charted credit unions expressed concern that although the expansion may decrease affiliation, well-established settlement service providers, rather than small entities, will reap the benefits from de-affiliation, because creditors would be incented to seek services from established providers that can offer fee guarantees or provide reimbursements if tolerance thresholds are crossed. A Federal credit union commenter expressed concern that small creditors may be negatively impacted by the proposed rules because large creditors can use affiliation to control costs and provide accurate estimates, while small creditors would have to rely on unaffiliated settlement service providers that charge fees small creditors do not manage or control.

As noted above, several industry commenters supported the Bureau's rationale for the inclusion of fees paid to lender affiliates. But the commenters expressed concern about whether the change would lead to an unfair marketplace if only fees paid to lender-required affiliates were subject to the zero percent tolerance rule. The commenters asserted that the same tolerance rules should apply to affiliated and unaffiliated service providers equally.

Impact on consumers. The proposal's potential impact on consumers also generated mixed reactions from industry. One large bank commenter stated that imposing a zero percent tolerance rule when the consumer is not given a choice in selecting the service provider and the creditor has a degree of control over the provider is the right thing to do for the consumer. An industry trade association representing independent land title agents and a title company commenter supported expanding the zero percent tolerance category of fees to include fees paid to affiliates because they believed that it would encourage consumer shopping and promote consumer choice. The trade association commenter stated that it conducted a survey of its members and found that over half of the respondents thought that it was appropriate to subject affiliate fees to a zero percent tolerance on cost increases.

In joint comments, associations representing State consumer financial services regulators expressed support for the expansion. The commenters stated that applying the zero percent tolerance rule to fees of lender affiliates and lender-required service providers will ensure consumers are not subject to abusive practices that were prevalent in the past, and it will additionally incent creditors to provide consumers with accurate Loan Estimates and Closing Disclosures. The commenters stated that the proposal should lead to a healthier residential mortgage market because better informed consumers provided with accurate disclosures make better choices and are less likely to default, and creditors will have a less cumbersome and more certain process, reducing the risk of error and uncertainty associated with the disclosure process. The commenters, however, stated that the tolerance thresholds should be adjusted if they cause closings to be delayed unnecessarily because industry has raised concerns about possible disruptions and inconveniences to consumers flowing from the combination of the Bureau's proposed changes to the tolerance rules and the timing requirement for delivery of the Loan Estimate.

Many industry commenters asserted that expanding the zero percent tolerance category of settlement costs to include fees paid to lender affiliates and lender-required service providers would harm consumers. They asserted that if creditors are held to a zero percent tolerance for fees paid to lender affiliates and lender-required nonaffiliated service providers, creditors may either increase their loan origination costs or quote higher third-party fees as a hedge against losses if the actual cost for a settlement service in the zero percent tolerance category charged at settlement is greater than the cost estimate disclosed on the Loan Estimate. A State housing finance agency expressed concern that overestimating third-party fees would harm consumers, because it would make the cost of the loan look higher than it actually is to consumers. An industry trade association representing community banks expressed concern that creditors may collude on prices with settlement service providers because the proposal creates pressure to disclose accurate cost estimates, and such collision would ultimately harm consumers.

As noted above, industry trade associations representing banks and mortgage lenders suggested creditors may increase affiliation to manage settlement costs. The commenters asserted this, in turn, may mean less credit availability for consumers because increased affiliation would raise the risk of creditors exceeding the points and fees thresholds for qualified mortgages under the Bureau's 2013 ATR Final Rule, [203] and for qualified residential mortgages under a credit risk retention proposal issued by other Federal regulators. [204] The SBA expressed concern that the negative impact of affiliation on small, independent service providers may harm consumers by decreasing competition.

Still other commenters, including the SBA and industry trade associations representing banks, argued that the proposed application of the zero percent category of settlement costs would cause an increase in the number of revised Loan Estimates being issued. They asserted that this, in turn, could increase consumer confusion, cause information overload, create closing delays, and increase the cost of obtaining a loan because creditors would pass the cost of producing the revised Loan Estimates to consumers.

Alternatives. Commenters presented a number of alternatives, including retaining the current tolerance rules. Several commenters suggested that the Bureau narrowly define the term “affiliate” so that the zero percent tolerance category of fees would only be expanded to include fees paid to affiliates in which the creditor has a majority ownership interest. As noted above, several commenters asserted that the Bureau should treat affiliated and unaffiliated settlement service providers equally. One such commenter suggested that the Bureau subject both affiliate provider fees and non-affiliated provider fees to a five percent tolerance on cost increases.

Still other industry commenters advocated for more fundamental changes. A number of mortgage lenders and mortgage broker commenters submitted similar comments asserting that the current tolerance rules generally caused consumer harm, and it would be better for mortgage transactions to be subject to the rules that applied before HUD's 2008 RESPA Final Rule became effective. A national industry association representing mostly mortgage brokers stated that a materiality standard, which measures the amount of a cost increase against the loan amount, would be a better way to address limitations on settlement cost increases.

A State association representing escrow agents asserted that tolerance rules should only apply to loan costs. If a consumer must pay the same fee in a cash transaction, then the fee should not be subject to limitations on increases. Some commenters, including industry trade associations representing banks and mortgage lenders, requested that the Bureau permit fees in the zero percent tolerance category to increase so long as the aggregate amount of these fees do not increase. The commenters stated that the result would streamline the disclosures and consumers would not be harmed because the total amount the consumer pays would be the same.

Finally, industry trade associations representing banks and mortgage lenders asserted that the Bureau should consider whether to offer lenders an exemption from compliance with section 8 of RESPA so lenders could negotiate with third-party settlement service providers and offer consumers settlement service packages with guaranteed prices. The trade associations representing banks and mortgage lenders expressed the view that relief from section 8 liability is needed so creditors do not accidentally exceed the points and fees thresholds for qualified mortgages and qualified residential mortgages.

Final Rule

The Bureau has considered these comments, but is finalizing the proposed expansion of the current zero percent tolerance category of settlement costs to affiliate fees and fees of lender-required service providers. As discussed in greater detail below in the section-by-section analysis of § 1026.19(e)(3)(i), the final rule generally provides that any affiliate charge or charge of a lender-required provider paid by or imposed on the consumer that exceeds the amount for such charge estimated on the disclosures required by § 1026.19(e)(1)(i) is not in good faith, subject to legitimate cost revisions such as changed circumstances or borrower-requested changes.

As noted, several industry commenters expressed support for the Bureau's rationale to expand the zero percent tolerance category of settlement costs to fees of lender affiliates. The Bureau also does not believe that expanding the zero percent tolerance category will negatively impact credit availability. As previously noted, some industry trade associations suggested creditors may increase affiliation to manage settlement costs. The commenters asserted this, in turn, may mean less credit availability for consumers, because increased affiliation increase the risk that mortgages would not be able to be qualified mortgages or qualified residential mortgages because creditors would exceed the points and fees thresholds. Also as noted above, some commenters suggested that providing industry with relief from RESPA section 8 liability would be an effective way to solve the problem, because creditors and settlement service providers could agree on prices in advance and avoid exceeding the points and fees threshold.

The Bureau believes that the substantial communication that already exists between creditors and their affiliates would enable creditors to determine, early in the mortgage origination process, whether a loan would exceed the points and fees threshold tests. Accordingly, the Bureau is not persuaded that the proposal would negatively impact credit availability. The Bureau also believes that the presence of this points and fees threshold may incent creditors to strengthen the already-substantial communication with their affiliates to obtain affiliate cost information with greater accuracy early in the process, which would, in turn, facilitate compliance with the final rule. In addition, the Bureau does not have information that the lack of such an exemption has had any detrimental effect on creditors' ability to comply with the current tolerance rules under Regulation X.

Further, there is a longstanding debate about whether RESPA section 8 liability casts a shadow over creditors and settlement service providers such that it hinders the ability of creditors to comply with tighter tolerances for settlement charges. As noted above, some industry trade associations suggested that creditors and settlement service providers should be provided with relief from section 8 liability if they could guarantee the prices of certain settlement services. HUD proposed a similar solution in 2002, [205] and a strong backlash from independent settlement service providers and consumer advocacy groups ensued. [206]

Additionally, the Bureau believes that if a creditor denies consumers the opportunity to influence the quality or cost of settlement services through shopping by requiring consumers to use lender-selected settlement service providers, then the creditor should take responsibility for making accurate estimations and assuming the risk of under-estimation. As noted above, one large national provider of title insurance and settlement services stated that creditors enter into “well-defined” vendor agreements with lender-required service providers. The Bureau believes that the existence of such agreements supports the Bureau's rationale that creditors are in a superior position of knowledge with respect to the expected costs of the services of lender-required providers. The Bureau acknowledges that unforeseen circumstances and market forces could render estimates of settlement services inaccurate. To the extent that the variation is due to a changed circumstance or borrower-requested change, the final rule permits a creditor to revise the cost estimate it originally provided to the consumer. The Bureau recognizes that the ten percent cushion could help creditors and settlement service providers manage the risk of price fluctuations associated with market forces. But the Bureau believes creditors' ability to obtain information about their affiliate's or preferred provider's pricing means that creditors do not need the ten percent cushion under the current tolerance rules to manage such risk, because the final rule permits revisions based on legitimate changed circumstances and borrower-requested changes.

With respect to the concerns expressed by some commenters about the competitive consequences of applying the zero percent tolerance category to affiliate fees and fees paid to lender-required service providers, the Bureau does not believe that this final rule will threaten competition by pushing small, independent settlement service providers out of business. The Bureau believes that this final rule may actually enhance competition in the market for settlement service providers. If a creditor does not want the zero percent tolerance rule to apply to the cost of a lender-required service, a creditor must permit the consumer to select the settlement service provider for that service, and the service provider cannot be an affiliate of the creditor. Further, if the creditor permits a consumer to select the settlement service provider, the creditor must provide the consumer with a written list identifying available providers, which as illustrated in the model written list the Bureau is finalizing in this final rule as form H-27 of appendix H to Regulation Z, would expressly disclose to the consumer that the consumer may choose a different settlement service provider. The Bureau believes that these provisions would promote consumer shopping and competition among settlement service providers.

The Bureau also believes that the structural flaws in HUD's 2008 RESPA Final Rule the Bureau identified in the proposal and described in this section-by-section analysis justify the Bureau taking this action in this final rule, even though the Bureau's empirical support rests on anecdotal evidence, rather than systemic data, because of the significant harm that can result from increased closing costs to consumers. Further, with respect to the argument that RESPA permits a creditor to provide consumers with an estimate of settlement costs, rather than requiring a creditor to disclose the exact amount of a settlement charge early in the loan origination process, the Bureau observes that the final rule incorporates the current tolerance rules' exceptions (i.e., the amount of settlement charges subject to the zero percent tolerance category, as well as the ten percent tolerance category, may change due to events such as changed circumstances and borrower-requested changes).

With respect to the argument that an unintended consequence of the Bureau's proposal would be that creditors would increase their origination charges to compensate for increased costs due to settlement charges exceeding the expanded zero percent tolerance category of settlement costs, the Bureau doubts that creditors will, in fact, incur such increased costs for the reasons already discussed and also believes that competition among creditors should be an effective countervailing force to prevent creditors using affiliates from charging higher interest rates on their loans. The Bureau also doubts that the final rule will pressure creditors and settlement service providers to collude on prices or to limit business relationships to ones with established settlement service providers that can offer price guarantees or provide reimbursements if tolerance thresholds are crossed. The Bureau believes that current restrictions under section 8 of RESPA on kickbacks, referral fees, and similar considerations should deter such behavior.

Some commenters expressed concern that creditors would have to issue more revised Loan Estimates, and the Bureau acknowledges that this is a possibility. However, the Bureau believes that this result is adequately counter-balanced by the benefits that will flow to consumers from receiving more accurate cost estimates and better enabling consumer shopping. The Bureau believes that adopting the proposal would mean that consumers would have more certainty about their settlement costs early in the loan process, which can enhance the ability of consumers to shop among creditors. The Bureau does not believe that expanding the zero percent tolerance category as proposed would delay closings, which concerned some commenters, because as noted above, creditors would be able to revise cost estimates subject to a tolerance in the event of a changed circumstance or borrower-requested change. In addition, as discussed in greater detail below in the section-by-section analysis of § 1026.19(e)(4), this final rule does not prohibit disclosing revised costs that have changed due to a changed circumstance or borrower-requested change on the Closing Disclosure provided under § 1026.19(f)(1)(i).

The Bureau does not believe that the final rule must be adjusted to subject all affiliated and unaffiliated businesses to a zero percent tolerance because it does not believe that this final rule will treat affiliated businesses unfairly. As discussed above, the application of the zero percent tolerance category of settlement charges to affiliated settlement service providers and lender-required unaffiliated settlement service providers is based on the premise that in both cases, creditors that use affiliates or unaffiliated providers they require are in a superior position of knowledge with respect to the expected costs of the services of those providers and can provide more accurate disclosures than they are with respect to the expected costs of services of unaffiliated and non-required providers. It is not based merely on the premise that creditors should be able to estimate more accurately all settlement charges. Additionally, because the Bureau's justification is not primarily based on the existence of actual control, the Bureau does not believe that “affiliates” should be defined to include only entities in which the creditor holds a majority ownership interest.

The Bureau also does not believe that fundamental changes must be made to the current tolerances framework on charges for settlement services. As noted above, the current tolerance rules resulted from HUD's ten-year-long investigation of problems in the settlement services industry. For reasons discussed above, the Bureau believes that it is reasonable to expect creditors to estimate affiliate fees and fees paid to service providers required by the creditors as if they were estimating their own fees. In addition, such accurate estimates will benefit consumers because accurate estimates will enable consumers to make more informed comparisons among different loans, thus facilitating shopping. Therefore, the Bureau does not believe it is appropriate to permit fees in the zero percent tolerance category to increase so long as the aggregate amount of these fees does not increase. Further, for the same reasons, the Bureau does not believe other alternative fundamental changes raised in the comments, such as setting limitations on cost increases based on the materiality of the change, changing the zero percent tolerance rule to a five percent tolerance rule, or limiting the application of the tolerance rules to loan costs, are appropriate.

Legal authority. The Bureau is adopting in this final rule the expansion of the zero percent tolerance category generally as proposed, with the modifications described below, pursuant to its authority to prescribe standards for “good faith estimates” under TILA section 128 and RESPA section 5, as well as its general rulemaking, exception, and exemption authorities under TILA sections 105(a) and 121(d), RESPA section 19(a), section 1032(a) of the Dodd-Frank Act, and, for residential mortgage loans, section 1405(b) of the Dodd-Frank Act and section 129B(e) of TILA.

For the reasons discussed above, the Bureau believes that expanding the zero percent tolerance category of settlement charges to include affiliate charges and charges of lender-required service providers is consistent with TILA's purpose in that it will ensure that the cost estimates are more meaningful and better inform consumers of the actual costs associated with obtaining credit. The Bureau also believes that this final rule will effectuate the statute's goals by ensuring more reliable estimates, which will increase the level of shopping for mortgage loans and foster honest competition for prospective consumers among financial institutions. The Bureau further believes that this final rule will prevent potential circumvention or evasion of TILA by penalizing underestimation to gain a competitive advantage in situations where TILA requires good faith.

As noted above, section 121(d) of TILA generally authorizes the Bureau to adopt tolerances necessary to facilitate compliance with the statute, provided such tolerances are narrow enough to prevent misleading disclosures or disclosures that circumvent the purposes of the statute. The Bureau has considered the purposes for which it may exercise its authority under TILA section 121(d) and, based on that review and for reasons discussed above, the Bureau believes that the tolerance categories adopted in this final rule are appropriate, will facilitate compliance with the statute by providing bright-line rules for the determination of “good faith” based on the knowledge of costs that creditors have, or reasonably should have, and prevent misleading disclosures. Additionally, the Bureau believes that the final rule is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b), because providing consumers with more accurate estimates of the costs of the mortgage loan transaction will improve consumer understanding and awareness of the mortgage loan transaction through the use of disclosure. Section 129B(e) of TILA generally authorizes the Bureau to adopt regulations prohibiting or conditioning terms, acts, or practices relating to residential mortgage loans that are not in the interest of the borrower. The Bureau has considered the purposes for which it may exercise its authority under TILA section 129B(e). Based on that review and for reasons discussed above, the Bureau believes that the regulations are appropriate because unreliable estimates are not in the interest of the borrower.

Section 19(a) of RESPA authorizes the Bureau to prescribe regulations and make interpretations to carry out the purposes of RESPA, which include more effective advance disclosure of settlement costs. The Bureau has considered the purposes for which it may exercise its authority under RESPA section 19(a). Based on that review and for reasons discussed above, the Bureau believes that the final rule is appropriate. It will ensure more effective advance disclosure of settlement costs by requiring creditors to disclose accurate estimates when such creditors are in a position to do so. Contrary to assertions made by certain commenters about the Bureau's authority to impose zero percent tolerance on any settlement charge, the Bureau's authority is broad and, as noted above, resides in a number of statutes.

19(e)(3)(i) General Rule

As discussed above, Regulation X currently provides that the amounts imposed for certain settlement services and transfer taxes may not exceed the amounts included on the RESPA GFE, unless certain exceptions are met. The items included under this category are generally limited to charges paid to creditors and brokers, in addition to transfer taxes. The Bureau proposed to incorporate the zero percent tolerance rule in Regulation X in proposed § 1026.19(e)(3)(i). Further, as discussed above in the general section-by-section analysis of § 1026.19(e)(3), the Bureau proposed to expand the scope of the zero percent tolerance category to include fees paid to affiliates and lender-required service providers. Legitimate cost revisions when an unexpected event occurs, such as a changed circumstance or a change requested by the consumer, would permit fees subject to the zero percent tolerance to increase from their initial estimates.

Proposed § 1026.19(e)(3)(i) would have provided that the charges paid by or imposed on the consumer may not exceed the estimated amounts of those charges required to be disclosed under § 1026.19(e)(1)(i), subject to permissible reasons for revision provided in § 1026.19(e)(3)(iv), and except as otherwise provided under § 1026.19(e)(3)(ii) and (iii). Proposed comment 19(e)(3)(i)-1 would have explained that § 1026.19(e)(3)(i) imposes the general rule that an estimated charge disclosed pursuant to § 1026.19(e) is not in good faith if the charge paid by or imposed on the consumer exceeds the amount originally disclosed. Although proposed § 1026.19(e)(3)(ii) and (e)(3)(iii) would have provided exceptions to the general rule for certain types of charges, the comment would have explained that those exceptions generally would not apply to: (1) Fees paid to the creditor; (2) fees paid to a broker; (3) fees paid to an affiliate of the creditor or a broker; (4) fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider; and (5) transfer taxes.

Proposed comment 19(e)(3)(i)-2 would have provided guidance on the issue of whether an item is “paid to” a particular person. In the mortgage loan origination process, individuals often receive payments for services and subsequently pass those payments on to others. Similarly, individuals often pay for services in advance of the real estate closing and subsequently seek reimbursement from the consumer. This proposed comment would have clarified that fees are not considered “paid to” a person if the person does not retain the funds and would have provided examples. Proposed comment 19(e)(3)(i)-3 referred to other provisions addressing the distinction between transfer taxes and recording fees.

Proposed comment 19(e)(3)(i)-4 would have provided examples illustrating the good faith requirement in the context of specific credits, rebates, or reimbursements. The proposed comment would have clarified that an item identified, on the disclosures provided pursuant to § 1026.19(e), as a payment from a creditor to the consumer to pay for a particular fee, such as a credit, rebate, or reimbursement would not be subject to the good faith determination requirements in § 1026.19(e)(3)(i) or (ii) if the increased specific credit, rebate, or reimbursement actually reduced the cost to the consumer. The proposed comment would have further clarified that specific credits, rebates, or reimbursements could not be disclosed or revised in a way that would otherwise violate the requirements of § 1026.19(e)(3)(i) and (ii). The proposed comment would have illustrated these requirements with examples.

Proposed comment 19(e)(3)(i)-5 would have clarified how to determine “good faith” in the context of lender credits. The proposed comment would have explained that the disclosure of “lender credits,” as identified in § 1026.37(g)(6)(ii), is required by § 1026.19(e)(1)(i). The proposed comment would have also explained that lender credits are payments from the creditor to the consumer that do not pay for a particular fee on the disclosures provided pursuant to § 1026.19(e)(1)(i). The proposed comment would have further clarified that these non-specific credits are negative charges to the consumer—as the lender credit decreases the overall cost to the consumer increases. Thus, under the proposal an actual lender credit provided at the real estate closing that is less than the estimated lender credit provided pursuant to § 1026.19(e)(1)(i) would have been an increased charge to the consumer for purposes of determining good faith under § 1026.19(e)(3)(i). The proposed comments would have illustrated these requirements with examples. The proposed comment would have also included a reference to § 1026.19(e)(3)(iv)(D) and comment 19(e)(3)(iv)(D)-1 for a discussion of lender credits in the context of interest rate dependent charges.

Comments

The Bureau received a number of comments on its proposal to incorporate aspects of the current zero percent tolerance under Regulation X in this final rule. The comments addressed the Bureau's proposal to keep transfer taxes in the settlement costs subject to the zero percent tolerance category, the treatment of “no cost” loans, the treatment of lender credits and specific credits, and the definition of “affiliate.”

A number of industry commenters asserted that transfer taxes should not be subject to a zero percent tolerance. The commenters included industry trade associations representing banks and mortgage lenders, individual large banks, community banks, mortgage lenders, mortgage brokers, a rural creditor, and settlement and title agents. The commenters asserted that transfer taxes are neither paid to, nor set by, the creditor. The commenters asserted that the amounts charged for transfer taxes vary among different State and local jurisdictions, provisions of the real estate purchase and sale contract, and transaction-specific factors, like changes in the loan amount, and locality-specific factors, such as local law or custom that determines if the seller or consumer is ultimately responsible for paying the transfer tax.

Some industry commenters, including industry trade associations representing banks and mortgage lenders, asserted that “no cost” loans should not be subject to tolerance rules because the creditor finances the consumer's closing costs. Industry commenters also expressed confusion about the treatment of lender and specific credits. They sought various clarifications about specific credits, including how to determine when a creditor has committed a tolerance violation regarding specific credits, how to disclose these credits on the Loan Estimate, and whether changed circumstances would apply to lender credits and specific credits.

A State manufactured housing trade association sought an exemption that would permit creditors to decrease the amount of lender credits actually provided to the consumer at closing without causing a tolerance violation in transactions subject to the Federal Housing Administration's streamlined refinancing program and other similar programs. The trade association commenter explained that the program guidelines limit the amount of cash a creditor can pay to the consumer at closing. Accordingly, the creditor may need to reduce the amount of the actual lender credit at the real estate closing to remain in compliance with program guidelines. The trade association commenter stated that if the reduction was considered a tolerance violation, creditors may respond by reducing the number of rate lock offers on these transactions.

Some commenters, including an individual title company commenter, suggested that the Bureau define the term “affiliate.” Lastly, the Bureau received requests from some title company commenters that sought an exemption from the proposed general rule with respect to the treatment of payments that affiliated title companies receive at closing that are disbursed to service providers not affiliated with the lender as payment for services performed by the unaffiliated service providers on behalf of the affiliated title companies.

Final Rule

The Bureau has considered the comments, and is adopting § 1026.19(e)(3)(i) substantially as proposed. Section 1026.19(e)(3)(i) provides that an estimated closing cost disclosed pursuant to § 1026.19(e) is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under § 1026.19(e)(1)(i), subject to permissible reasons for revision permitted under § 1026.19(e)(3)(iv), such as a changed circumstance or a borrower-requested change, and except as otherwise provided under § 1026.19(e)(3)(ii) and (iii).

The adoption of the final rule means that for purposes of conducting the good faith analysis, the creditor compares the actual charge paid by or imposed on the consumer to the estimated amount disclosed in the original Loan Estimate. If the originally estimated amount changed due to one of the valid reasons for revision set forth in this final rule, e.g., a changed circumstance or borrower-requested change, the creditor may compare the actual charge paid by or imposed on the consumer with the revised estimated amount, provided that the creditor provides the revised amount pursuant to the redisclosure requirements in this final rule, discussed in greater detail below in the section-by-section analysis of § 1026.19(e)(4). The Bureau has adjusted the text of § 1026.19(e)(3)(i) to harmonize the regulatory text with the related commentary.

Comment 19(e)(3)(i)-1 is adopted substantially as proposed, with minor changes to enhance clarity. The Bureau has added a new comment 19(e)(3)(i)-2 to explain that for purposes of § 1026.19(e), a charge “paid by or imposed on the consumer” refers to the final amount for the charge paid by or imposed on the consumer at consummation or settlement, whichever is later. As discussed in greater detail in the section-by-section discussion of § 1026.19(f)(1)(ii), some industry commenters expressed concern about the ability of creditors to determine the final cost for certain settlement services three business days before consummation, because in some jurisdictions, settlement does not occur until after consummation, and costs could change between consummation and settlement. The Bureau understands that recording fees, which are subject to the ten percent tolerance category, are an example of such costs that could change between consummation and settlement.

The Bureau is concerned that by not clarifying what a charge “paid by or imposed upon the consumer” means, the proposed rule would not have adequately accounted for changes in actual closing costs in jurisdictions where consummation and settlement occur at different times, which in turn, could complicate the creditor's good faith analysis under § 1026.19(e)(3)(i) and (ii). Accordingly, the Bureau believes that compliance will be facilitated if the Bureau clarifies that for purposes of § 1026.19(e)(3), a charge “paid by or imposed on the consumer” refers to the final amount for the charge paid by or imposed on the consumer at consummation or settlement, whichever is later. The comment further explains that “consummation” is defined in § 1026.2(a)(13), and that “settlement” is defined in Regulation X, 12 CFR 1024.2(b). The Bureau notes that current Regulation Z refers to “settlement” with respect to the determination of whether a finance charge is a prepaid finance charge under § 1026.2(a)(23) (see comment 2(a)(23)-2.ii) and the timing of corrected disclosures for transactions secured by a consumer's interest in a timeshare plan under § 1026.19(a)(5)(iii) (see comment 19(a)(5)(iii)-1). Comment 19(e)(3)(i)-2 also provides illustrative examples. The Bureau further notes that final § 1026.19(f)(2)(iii) generally requires the creditor to provide a revised Closing Disclosure after consummation if the Closing Disclosures provided pursuant to § 1026.19(f)(1)(i) becomes inaccurate after consummation.

The Bureau is making a modification to proposed comment 19(e)(3)(i)-2, renumbered as comment 19(e)(3)(i)-3, to facilitate compliance. Proposed comment 19(e)(3)(i)-2 did not include an illustration of whether transfer taxes and recording fees are considered “paid to” the creditor for purposes of § 1026.19(e). As adopted, comment 19(e)(3)(i)-2 provides such an illustration. The Bureau is finalizing proposed comment 19(e)(3)(i)-3, renumbered as comment 19(e)(3)(i)-4, substantially as proposed to streamline the references to commentary to § 1026.37(g)(1) that discuss the differences between transfer taxes and recording fees.

The Bureau is not finalizing proposed comments 19(e)(3)(i)-4 and -5 on the treatment of lender credits and specific credits in consideration of the comments received. Instead, the Bureau is adopting new comment 19(e)(3)(i)-5 to clarify that the final rule is incorporating the guidance on lender credits under current Regulation X. The Bureau acknowledges industry's concern that the Loan Estimate does not permit lender credits and specific credits to be separately disclosed. But under current Regulation X, lender credits and specific credits are not separately disclosed on the RESPA GFE. Accordingly, the Bureau believes that maintaining the status quo on the treatment of lender credits and specific credits will reduce industry confusion and facilitate implementation of this final rule.

New comment 19(e)(3)(i)-5 explains that the disclosure of “lender credits,” as identified in § 1026.37(g)(6)(ii), is required by § 1026.19(e)(1)(i), and that “lender credits,” as identified in § 1026.37(g)(6)(ii), represents the sum of non-specific lender credits and specific lender credits. Non-specific lender credits are generalized payments from the creditor to the consumer that do not pay for a particular fee. Specific lender credits are specific payments, such as a credit, rebate, or reimbursement, from a creditor to the consumer to pay for a specific fee. Non-specific lender credits and specific lender credits are negative charges to the consumer. The actual total amount of lender credits, whether specific or non-specific, provided by the creditor that is less than the estimated “lender credits” identified in § 1026.37(g)(6)(ii) and disclosed pursuant to § 1026.19(e) is an increased charge to the consumer for purposes of determining good faith under § 1026.19(e)(3)(i). Comment 19(e)(3)(i)-5 also provides illustrations of these requirements. The comment also references § 1026.19(e)(3)(iv)(D) and comment 19(e)(3)(iv)(D)-1 for a discussion of lender credits in the context of interest rate dependent charges. With respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of § 1026.19(e)(3)(iv), discussed below, are satisfied.

The Bureau is also adding new comment 19(e)(3)(i)-6 to provide guidance on how to perform the good faith analysis required by § 1026.19(e)(3)(i) with respect to lender credits. New comment 19(e)(3)(i)-6 explains that for purposes of conducting the good faith analysis required under § 1026.19(e)(3)(i) for lender credits, the total amount of lender credits, whether specific or non-specific, actually provided to the consumer is compared to the amount of “lender credits” identified in § 1026.37(g)(6)(ii). The comment also explains that the total amount of lender credits actually provided to the consumer for purposes of the good faith analysis is determined by aggregating the amount of the “lender credits” identified in § 1026.38(h)(3) with the amounts paid by the creditor that are attributable to a specific loan cost or other cost, disclosed pursuant to § 1026.38(f) and (g). As clarified in final comment 19(e)(3)(i)-6, a creditor uses the actual total amount of lender credits, whether specific or non-specific, for purposes of the good faith analysis under § 1026.19(e)(3)(i).

However, with respect to the request that the Bureau provide a specific exemption that would allow the amount of lender credits to decrease so that the creditor would be able to stay within guidelines under streamlined refinancing programs that limit the amount of cash that the creditor could pay the consumer at closing, the Bureau declines. Lenders are not permitted to reduce the lender credits they provide to the borrower under current Regulation X. See HUD RESPA FAQs p. 27, # 4 (“GFE—Block 2”). Under current Regulation X, the loan originator may only apply the amount of the excess lender credits to additional closing costs previously not anticipated to be included in the loan, apply the excess to a principal reduction to the outstanding balance of the loan, pay the consumer the excess in cash, or reduce the interest rate and the credit accordingly. Creditors will be able to take the same actions with respect to lender creditors in streamlined refinancing programs under this final rule.

The Bureau is also adding commentary to § 1026.19(e)(3)(i) to address a comment the Bureau received from a document preparation company about the proposed requirements set forth in proposed § 1026.37(o)(4) and § 1026.38(t)(4) to disclose rounded numbers for certain charges on the Loan Estimate and Closing Disclosure. The commenter requested guidance on how numbers required to be rounded on the Loan Estimate pursuant to §§ 1026.37(o)(4) and 1026.38(t)(4) would be compared to the Closing Disclosure for the purposes of the tolerances provided in § 1026.19(f)(1). New comment 19(e)(3)(i)-7 explains that although §§ 1026.37(o)(4) and 1026.38(t)(4) require that the dollar amounts of certain charges disclosed on the Loan Estimate and Closing Disclosure, respectively, be rounded to the nearest whole dollar, to conduct the good faith analysis under § 1026.19(e)(3)(i) and (ii), the creditor should use unrounded numbers to compare the actual charge paid by or imposed on the consumer for a settlement service with the estimated cost of the service.

The Bureau does not believe that it would be appropriate to exempt “no cost” loans from § 1026.19(e)(3)(i). “No cost” loans must comply with the current limitations on settlement charge increases set forth in Regulation X. Additionally, the text of § 1026.19(e)(3)(i) indicates that the general rule applies to both charges that are paid by the consumer, and charges that are imposed on the consumer. In a “no cost” loan transaction, closing costs may not be paid by the consumer because they are financed by the creditor, but are nonetheless imposed on the consumer. The Bureau also believes that consumers should receive reliable cost estimates for “no cost” loans so the consumer could use the Loan Estimate to compare such loans, where the closing costs are financed, with loans that do not finance closing costs.

The Bureau also declines to modify the rule to provide an exemption for payments that affiliated title companies receive at closing that are then disbursed to unaffiliated service providers as payment for services performed by the unaffiliated service providers on behalf of the affiliated title companies. If a lender requires a consumer to use an affiliated company for title services, then the fees the consumer pays to the affiliate company should be subject to zero percent tolerance, even if the affiliate uses vendors to perform the title services.

The Bureau has also considered the comments about the application of the zero percent tolerance rule to transfer taxes. The Bureau believes that a creditor should be able to obtain information about transfer taxes with considerable precision based on its knowledge of the real estate settlement process and resources it has available, such as software that permits a creditor to estimate transfer taxes with considerable precision, even though it is originating a loan in a geographical area with which it is unfamiliar. In addition, the amount of transfer taxes could be obtained through other sources, such as directly from the government authority of the jurisdiction where the transaction is taking place. Further, because the final rule reflects the current rule, the Bureau believes that creditors have already adapted to this requirement. Further, the adoption of § 1026.19(e)(3)(iv) in this final rule, as discussed below, offers a level of flexibility for the creditor to make adjustments to its estimate for transfer taxes similar to the current rule under Regulation X if the amount of transfer taxes increases because of a changed circumstance or borrower-requested change. Lastly, as noted above, the Bureau has added a comment to § 1026.19(e) to define “affiliate” for purposes of § 1026.19(e) by explaining that it has the same meaning as in § 1026.32(b)(2) in current subpart E of Regulation Z. [207]

19(e)(3)(ii) Limited Increases Permitted for Certain Charges

Proposed § 1026.19(e)(3)(ii) would have permitted the sum of recording fees and all charges for non-affiliated third-party services for which the creditor permits the consumer to shop for a provider other than those identified by the creditor, to increase by ten percent for the purposes of determining good faith. Proposed comment 19(e)(3)(ii)-1 would have explained that § 1026.19(e)(3)(ii) provides that certain estimated charges are in good faith if the sum of all such charges paid by or imposed on the consumer does not exceed the sum of all such charges disclosed pursuant to § 1026.19(e) by more than ten percent. The proposed comment would also have explained that § 1026.19(e)(3)(ii) permits this limited increase for only: (1) fees paid to an unaffiliated third party if the creditor permitted the consumer to shop for the service, consistent with § 1026.19(e)(1)(vi)(A); and (2) recording fees.

Proposed comment 19(e)(3)(ii)-2 would have clarified that pursuant to § 1026.19(e)(3)(ii), whether an individual estimated charge subject to § 1026.19(e)(3)(ii) is in good faith depends on whether the sum of all charges subject to § 1026.19(e)(3)(ii) increase by more than ten percent, even if a particular charge does not increase by more than ten percent. The proposed comment would have also clarified that § 1026.19(e)(3)(ii) provides flexibility in disclosing individual fees by focusing on aggregate amounts, and would have provided illustrative examples. Proposed comment 19(e)(3)(ii)-3 would have discussed the determination of good faith when a consumer is permitted to shop for a settlement service, but either does not select a settlement service provider, or chooses a settlement service provider identified by the creditor on the list required by § 1026.19(e)(1)(vi)(C). The proposed comment would have explained that § 1026.19(e)(3)(ii) provides that if the creditor requires a service in connection with the mortgage loan transaction, and permits the consumer to shop, then good faith is determined pursuant to § 1026.19(e)(3)(ii)(A), instead of § 1026.19(e)(3)(i) and subject to the other requirements in § 1026.19(e)(3)(ii)(B) and (C). The proposed comment also would have illustrated the requirement with examples.

Proposed comment 19(e)(3)(ii)-4 would have discussed how the good faith determination requirements apply to recording fees. The proposed comment would have explained that the condition specified in § 1026.19(e)(3)(ii)(B), that the charge not be paid to an affiliate of the creditor, is inapplicable in the context of recording fees. The proposed comment would have also explained that the condition specified in § 1026.19(e)(3)(ii)(C), that the creditor permits the consumer to shop for the service, is similarly inapplicable. Therefore, the proposed comment would have stated that estimates of recording fees would only have needed to satisfy the condition specified in § 1026.19(e)(3)(ii)(A) (i.e., that the aggregate amount increased by no more than ten percent) to be subject to the requirements of § 1026.19(e)(3)(ii).

Comments

Commenters expressed concern that fees subject to the ten percent tolerance would be restricted to fees paid to non-affiliates for services for which creditors permit consumers to shop. A number of commenters opposed the Bureau's proposal to keep recording fees in the ten percent tolerance category. A number of commenters sought various clarifications of proposed § 1026.19(e)(3)(ii).

An industry trade association representing mortgage lenders asserted that whether a consumer is able to shop beyond the written list of providers for a settlement service should not be a condition that determines whether the ten percent tolerance applies to a fee charged by a settlement service provider. An industry trade association representing banks asserted that the ten percent tolerance rule should apply to lender-required service providers and that no tolerance rules should apply to fees paid to settlement service providers selected by the consumer without, or regardless of, a creditor's recommendation because the creditor has no knowledge of or control over the pricing set by such providers.

The commenters opposing the application of the ten percent tolerance to recording fees included commenters that opposed the application of the zero percent tolerance to transfer taxes, and many based their opposition on similar arguments they made for transfer taxes. A large bank commenter observed that recording fees can increase shortly before, or even at, closing. A settlement agent commenter suggested that applying the ten percent tolerance rule to recording charges will delay closings and harm consumers. But a law firm employee commenter from a State that requires attorneys to conduct real estate closings suggested that the ten percent tolerance rule would not negatively impact the timeliness of closings.

Industry trade association commenters representing banks and mortgage lenders observed that, in some cases, the creditor may disclose an amount for a settlement service on the original Loan Estimate but later on, the service is no longer required, due to unexpected events. The commenters asserted that the final rule should clarify that the estimated amount for that settlement service disclosed on the Loan Estimate be included in the sum of all estimated amounts for charges subject to § 1026.19(e)(3)(ii) for purposes of the good faith analysis under § 1026.19(e)(3)(ii), because the creditor could not have predicted the occurrence of the event that resulted in the nonperformance of a lender-required service.

A large bank commenter requested the Bureau confirm that the ten percent tolerance applies where the creditor permits the consumer to shop for a settlement service, but the consumer still asks the creditor to select the settlement service provider. The large bank commenter also requested clarification on what tolerance rule applies when the consumer asks the creditor to select the settlement service provider, even though the creditor permits the consumer to shop pursuant to § 1026.19(e)(1)(iv)(A), and the creditor selects a non-affiliate that the creditor did not disclose to the consumer on the list required by § 1026.19(e)(1)(iv)(C).

Final Rule

The Bureau has considered the comments and is adopting § 1026.19(e)(3)(ii) with minor revisions to enhance clarity. Section 1026.19(e)(3)(ii) provides that an estimate of a charge for a third-party service performed by an unaffiliated settlement service provider or a recording fee is in good faith if the aggregate amount of such charges paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under § 1026.19(e)(1)(i) by more than 10 percent, provided that the creditor permits the consumer to shop for the third-party service, consistent with § 1026.19(e)(1)(vi). Comments 19(e)(3)(ii)-1 through -4 are adopted substantially as proposed.

With respect to applying the ten percent tolerance rule to fees paid to service providers recommended by the creditor, the Bureau believes there needs to be a determination, pursuant to § 1026.19(e)(3)(ii), whether the fee is paid to an unaffiliated third party and whether the creditor permitted the consumer to shop for the service. The Bureau recognizes that some consumers may ask their creditor or mortgage broker for recommendations when selecting settlement service providers; however, the Bureau is concerned that some creditors and mortgage brokers may try to require the consumer to select certain providers while appearing to permit the consumer to shop for a provider. If the creditor or mortgage broker engages in this practice, the Bureau believes that it may raise similar consumer protection issues associated with creditors developing “closed lists” of “preferred providers,” discussed above in the general section-by-section analysis of § 1026.19(e)(3).

The Bureau declines to incorporate in final § 1026.19(e)(3)(ii) some commenters' suggestion that the estimated amount of a settlement service be included in the amount of charges used to conduct the good faith analysis required by § 1026.19(e)(3)(ii), even when the service was not performed. Current Regulation X provides that if a service that was listed on the RESPA GFE was not obtained in connection with the transaction, then no amount for that service should be reflected on the RESPA settlement statement, and the estimated amount for that charge on the RESPA GFE should not be included in any amount used to determine whether a tolerance violation has occurred. 12 CFR part 1024, app. C. HUD explained that the reason for adopting this rule is that allowing loan originators to include in the good faith analysis charges from the RESPA GFE for settlement services that were not purchased could both induce loan originators to discourage consumers from purchasing settlement services in order to increase the cushion they have under the ten percent tolerance rule and to disclose on the RESPA GFE services that the consumer will not need in the transaction. 76 FR 40612, 40614 (July 11, 2011). The final rule largely mirrors these requirements in that if the creditor discloses a cost estimate for a settlement service on the Loan Estimate, but the settlement service was not obtained, the creditor cannot include the fee estimate in the estimated aggregate amount for purposes of conducting the good faith analysis under § 1026.19(e)(3)(ii). To facilitate compliance, the Bureau is adopting new comment 19(e)(3)(ii)-5. Comment 19(e)(3)(ii)-5 explains that in calculating the aggregate amount of estimated charges for purposes of conducting the good faith analysis pursuant to § 1026.19(e)(3)(ii), the aggregate amount of estimated charges must reflect charges for services that are actually performed, and provides an illustrative example. The Bureau believes that the ten percent tolerance rule should continue to apply to recording fees. Because this is the current rule under Regulation X, the Bureau believes that creditors have already adapted. The comments also suggested that there was a concern that because recording fees can increase shortly before closing, closing can be delayed if a revised Loan Estimate must be provided. But pursuant to § 1026.19(e)(4)(ii), discussed below, a creditor complies with § 1026.19(e)(4) by listing the revised recording fee in the Closing Disclosure.

19(e)(3)(iii) Variations Permitted for Certain Charges

Section 1024.7(e)(3) of Regulation X currently provides that the amounts charged for services other than those identified in § 1024.7(e)(1) and § 1024.7(e)(2) may change at settlement. The Bureau proposed § 1026.19(e)(3)(iii), which would have provided that estimates of the following charges are in good faith regardless of whether the amount actually paid by the consumer exceeds the estimated amount disclosed, provided such estimates are consistent with the best information reasonably available to the creditor at the time the disclosures were made: prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve, or similar account; and charges paid to third-party service providers selected by the consumer consistent with § 1026.19(e)(1)(vi)(A) that are not on the list provided pursuant to § 1026.19(e)(1)(vi)(C). The Bureau reasoned that: (1) certain types of estimates, such as those for property insurance premiums, may change significantly after the original disclosures required under § 1026.19(e)(1)(i) are provided; and (2) the existing Regulation X rule would be improved and compliance facilitated by specifically identifying which items are included in this category.

Proposed comments 19(e)(3)(iii)-1, -2, and -3 would have clarified that the disclosures for items subject to § 1026.19(e)(3)(iii) must be made in good faith, even though good faith is not determined pursuant to a comparison of estimated amounts and actual costs. The proposed comments would have clarified that the disclosures must be made according to the best information reasonably available to the creditor at the time the disclosures are made. The Bureau stated in the proposal that it was concerned that unscrupulous creditors could underestimate, or fail to include estimates for, the items subject to § 1026.19(e)(3)(iii) and mislead consumers into believing the cost of the mortgage loan is less than it actually is. The Bureau also stated in the proposal its belief that this concern must be balanced against the fact that some items may change significantly and legitimately prior to consummation. Further, the Bureau stated that while the creditor should include estimates for all fees “the borrower is likely to incur,” it may not be reasonable to expect the creditor to know every fee, no matter how uncommon, agreed to by the consumer, for example in the purchase and sale agreement, prior to providing the estimated disclosures. The proposal would have struck a balance between these considerations by imposing a general good faith requirement.

Accordingly, proposed comment 19(e)(3)(iii)-1 would have explained that estimates of prepaid interest, property insurance premiums, and impound amounts must be consistent with the best information reasonably available to the creditor at the time the disclosures are provided. Proposed comment 19(e)(3)(iii)-1 would have explained that differences may exist between the amounts of charges subject to § 1026.19(e)(3)(iii) disclosed pursuant to § 1026.19(e)(1)(i) and the amounts of such charges paid by or imposed upon the consumer, so long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. The proposed comment would have illustrated the requirement with an example.

Proposed comment 19(e)(3)(iii)-2 would have discussed the good faith requirement for required services chosen by the consumer that the consumer has been permitted to shop for, consistent with § 1026.19(e)(1)(vi)(A). It would have explained that, if a service is required by the creditor, and the creditor permits the consumer to: shop for that service, provides the written list of providers, and the consumer chooses a service provider that is not on the list to perform that service, then the actual amounts of such fees need not be compared to their original estimates.

Proposed comment 19(e)(3)(iii)-2 would have further clarified that the original estimated charge, or lack of an estimated charge for a particular service, must be made based on the best information reasonably available to the creditor at that time and would have illustrated the requirement with an example. The proposed comment would have also clarified that if the creditor permits the consumer to shop consistent with § 1026.19(e)(1)(vi)(A) but fails to provide the list required by § 1026.19(e)(1)(vi)(C), then good faith is determined pursuant to § 1026.19(e)(3)(ii) instead of § 1026.19(e)(3)(iii) regardless of the provider selected by the consumer, unless the provider is an affiliate of the creditor, in which case good faith is determined pursuant to § 1026.19(e)(3)(i).

Proposed comment 19(e)(3)(iii)-3 would have clarified the good faith requirement for optional settlement services (i.e., service that are not lender-required) chosen by the consumer. It would have explained that differences between the amounts of estimated charges for services not required by the creditor disclosed pursuant to § 1026.19(e)(1)(i) and the amounts of such charges paid by or imposed on the consumer do not necessarily constitute a lack of good faith and would have illustrated the requirement with an example. Proposed comment 19(e)(3)(iii)-3 would have also explained that the original estimated charge, or lack of an estimated charge for a particular service, must still be made based on the best information reasonably available to the creditor at the time that the estimate was provided, and would have illustrated the requirement with an example.

Comments

The Bureau received a number of comments seeking various adjustments and clarifications. Although an industry trade association representing affiliated real estate businesses expressed support for the inclusion of property insurance premiums in the category of charges not subject to a tolerance, even if the insurance provider is a lender affiliate, at least one industry commenter sought clarification on whether property insurance premiums would have been subject to tolerances. The commenter asserted that property insurance premiums should not be subject to limitations on increases because there are too many variables that ultimately determine the premium amount due at closing on a consumer's property insurance policy.

Some industry commenters asked the Bureau to clarify that property taxes, insurance premiums and homeowner's association, condominium, and cooperative fees are included in the costs subject to proposed § 1026.19(e)(3)(iii), regardless of whether these costs would have been placed into an escrow or similar account. An industry trade association representing community associations stated their belief that the good faith requirement would impose a burden on its members. The commenter expressed concern that the final rule would succeed in encouraging consumer shopping, which in turn would increase the number of information requests to community associations to which they must respond. The commenter was also concerned that the definitions of application and business day with respect to the original Loan Estimate delivery requirement would impose additional burden on community associations by shortening the amount of time community associations would have to respond to creditor inquiries. The commenter further expressed concern that under State consumer protection laws, community associations may be held liable if there is a difference between the estimated cost of community association assessments and the actual cost of the assessments. The commenter asserted that the Bureau should encourage creditors to use information about association assessments provided by either the seller or the buyer when preparing the Loan Estimate.

State bar associations and individual law firm commenters from States that require attorneys to conduct real estate closings requested that the Bureau include attorney and title-related fees in final § 1026.19(e)(3)(iii). They asserted that it is inappropriate to subject these fees to limitations on increases because the provision of legal services is not a commodity and thus, cannot be priced as such. Further, the commenters asserted that price limitations are not necessary because of existing competitive pressures in the market. They also expressed concern that applying tolerance rules to their fees would incent creditors to require consumers to use certain lender-selected providers to control closing costs.

Two national consumer advocacy groups questioned the inclusion of prepaid interest in proposed § 1026.19(e)(3)(iii). The commenters asserted that the creditor should not have any difficulty calculating prepaid interest if the creditor knows the closing date and the loan's interest rate. The commenters asserted creditors should be encouraged to provide new, timely disclosures, rather being permitted to provide misleading disclosures of costs that are known to the creditor. Industry trade associations representing banks and mortgage lenders asserted that the Bureau should require creditors to list the maximum possible amount of prepaid interest that could be paid by or imposed on the consumer on the original Loan Estimate because it will enhance the ability of the consumer to shop and compare loans. It appears that the commenters are concerned that without imposing this requirement, some creditors may underestimate prepaid interest.

These trade association commenters also requested that the Bureau confirm that owner's title insurance and other charges for services that the creditor does not require are not subject to the tolerance rules, even if they are provided by an affiliate of the creditor. A settlement agent commenter also asserted that the good faith requirement should not apply to costs that the consumer incur for settlement services not required by the creditor. A community bank commenter stated that it strongly recommended that settlement provider fees should not be subject to tolerances if the provider of that service was not listed on the written list of providers the creditor provides to the consumer. Finally, a law firm commenter and a State association representing land title agents asserted that the Bureau appears to have eliminated the category of settlement service fees not subject to any tolerance that exists in current Regulation X.

Final Rule

The Bureau has considered the comments and is adopting § 1026.19(e)(3)(iii) and comments 19(e)(3)(iii)-1 through -3 substantially as proposed, with revisions to enhance clarity with respect to determining good faith under § 1026.19(e)(3)(iii). The final rule also clarifies the treatment of optional settlement services (i.e., services not required by the lender). See§ 1026.19(e)(3)(iii)(E). The Bureau believes that § 1026.19(e)(3)(iii) strikes the appropriate balance between the risk that some creditors may intentionally engage in bait and switch tactics, against the fact that some items may change significantly and legitimately prior to consummation. For example, the Bureau believes that prepaid interest is one such item and should be included in § 1026.19(e)(3)(iii). The Bureau believes that the risk that creditors may intentionally manipulate the disclosure of prepaid interest is low, compared to fees in the zero or ten percent tolerance categories, and the good faith requirement in § 1026.19(e)(3)(iii) will deter intentional underestimation of prepaid interest. On a related issue, the argument made by some commenters that creditors should be required to disclose the maximum possible amount of prepaid interest that the consumer may pay at closing on the original Loan Estimate is inconsistent with the good faith requirement in the final rule.

The Bureau does not believe that charges related to owner's title insurance should be included in the charges not subject to tolerances. Under current Regulation X, such fees are subject to the ten percent tolerance rule. The Bureau believes that changing the current rule weakens consumer protection. The Bureau also believes that attorney fees for conducting closings and title-related services in States that require attorneys to conduct real estate closings should be subject to a tolerance. In these States, the attorney is performing services that a settlement agent would provide, and thus, the attorney fees should be subject to the same tolerance rules as settlement agent charges. Additionally, the Bureau believes that the fees for conducting closings can be estimated with considerable accuracy at the time the Loan Estimate is provided. Further, these fees can be adjusted in cases of changed circumstances or borrower-requested changes.

With respect to the concern that creditors may require consumers to use certain providers to control costs if attorney fees are subject to the tolerance rules, the Bureau has addressed the potential impact of the tolerance rules on competition in the general section-by-section analysis of § 1026.19(e)(3), and has concluded that this final rule may actually enhance competition in the market for settlement service providers. In response to the argument that price limitations on attorney fees are not necessary because of market forces, the Bureau notes that the final rule does not limit what an attorney may charge for conducting settlement services. The only limitation these rules set on attorney fees for conducting closings and title-related services is the limitation on the amount by which the actual fee paid by or imposed on the consumer for such services may exceed the estimated fee for such services disclosed on the Loan Estimate. Further, as discussed above, under the final rule estimated closing costs will be able to be revised to reflect cost increases due to a changed circumstance or borrower-requested changes. In this regard rule mirrors current Regulation X.

The Bureau does not believe that optional services chosen by the consumer should be exempt from the good faith requirement. As discussed above, both RESPA and TILA establish good faith requirements related to closing costs, which includes optional services chosen by the consumer. In response to concerns raised by the industry trade association representing community associations, the Bureau has adjusted comment 19(e)(3)(iii)-1 to clarify that the “reasonably available” standard in § 1026.19(e)(3)(iii) means that the estimate for a charge subject to § 1026.19(e)(3)(iii) was obtained by the creditor through due diligence. As applied to community association assessments, this means that the creditor normally may rely on the representations of the consumer or seller. The Bureau notes that this “reasonably available” standard is the same “reasonably available” standard for estimated disclosures set forth in comment 17(c)(2)(i)-1 of Regulation Z, and thus, final comment 19(e)(3)(iii)-1 contains a reference to comment 17(c)(2)(i)-1.

Finally, as noted above, a number of the commenters sought clarification on various other aspects of the proposal. As is currently the case under Regulation X, final § 1026.19(e)(3)(iii) provides that property insurance premiums are included in the category of settlement charges not subject to a tolerance, whether or not the insurance provider is a lender affiliate. The final rule also mirrors current Regulation X in that property insurance premiums, property taxes, homeowner's association dues, condominium fees, and cooperative fees are subject to tolerances whether or not they are placed into an escrow, impound, reserve, or similar account.

On the question of whether proposed § 1026.19(e)(3)(iii) would have included fees paid to service providers that were not listed on the written list of service providers set forth in § 1026.19(e)(1)(vi)(C), comment 19(e)(3)(iii)-2 provides guidance on this question. With respect to the question whether proposed § 1026.19(e)(3)(iii) would have included fees paid to lender affiliates for an optional settlement service, charges for third-party services not required by the creditor (other than owner's title insurance) are not subject to a tolerance category, even if a lender affiliate provides them. The Bureau recognizes that this position may appear to be at odds with the general treatment of affiliate fees. However, the Bureau believes that the optional nature of such services means that consumers may decide not to purchase these services later in the origination process, or choose a provider that offers a better price for the service. The Bureau believes that these factors distinguish fees paid to affiliates for optional services from fees paid to affiliates for lender-required services. Accordingly, the Bureau believes that it is not necessary to subject fees paid to affiliates for optional services to zero tolerance. However, the Bureau expects to closely monitor the implementation of this final rule, including § 1026.19(e).

19(e)(3)(iv) Revised Estimates

Regulation X § 1024.7(f) currently provides that the estimates included on the RESPA GFE are binding, subject to six exceptions. The Bureau proposed to incorporate § 1024.7(f) in § 1026.19(e)(3)(iv), which would have provided that, for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii), a charge paid by or imposed on the consumer may exceed the originally estimated charge if the revision is caused by one of the six reasons identified in § 1026.19(e)(3)(iv)(A) through (F). Proposed comment 19(e)(3)(iv)-1 would have clarified the general requirement of § 1026.19(e)(3)(iv). The Bureau stated in the proposal that it agreed that there would be certain situations that could legitimately cause increases over the amounts originally estimated, and that the regulations should provide a clear mechanism for providing revised estimates in good faith. Consistent with current Regulation X, [208] proposed comment 19(e)(3)(iv)-2 would have clarified that, to satisfy the good faith requirement, revised estimates may increase only to the extent that the reason for revision actually caused the increase and would have provided an illustrative example of this requirement. Proposed comment 19(e)(3)(iv)-3 would have clarified the documentation requirements related to the provision of revised estimates. Regulation X § 1024.7(f) contains a separate regulatory provision related to documentation requirements. The Bureau stated in the proposal that it believed that this requirement would have been encompassed within the requirements the Bureau proposed in § 1026.25 with respect to recordkeeping. The proposed comment would have clarified that the creditors must retain records demonstrating compliance with the requirements of § 1026.19(e) in order to comply with § 1026.25. The proposed comment would have also provided illustrative examples.

A mortgage broker commenter asserted that the Bureau should expand the categories of valid reasons for revisions to include mistakes made by mortgage brokers. The Bureau has considered the comment but believes that mistakes made by the mortgage broker should not be included among the valid reasons for a settlement charge to exceed the amount originally estimated for the charge. As a general matter, errors are not a basis for revising Loan Estimates, and the Bureau does not believe that mortgage broker errors should be treated differently than other errors.

A community bank commenter stated that the Bureau should clarify that creditors are permitted to provide updated disclosures to borrowers anytime, even though the change is an increase beyond the applicable tolerance threshold. In consideration of this comment, the Bureau has revised proposed § 1026.19(e)(3)(iv) and comment 19(e)(3)(iv)-1. The Bureau believes that the revisions will clarify that § 1026.19(e)(3)(iv) does not prohibit a creditor from providing updated disclosures. Rather, § 1026.19(e)(3)(iv) provides an exception to the general rule in § 1026.19(e)(3)(i) and (ii) that a charge paid by or imposed on the consumer must be compared to the amount in the original Loan Estimate.

As adopted, § 1026.19(e)(3)(iv) provides that for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii), a creditor may use a revised estimate of a charge instead of the amount originally disclosed under § 1026.19(e)(1)(i) if the revisions is due to one of the reasons set forth in § 1026.19(e)(3)(iv)(A) through (F). Comment 19(e)(3)(iv)-1 explains that § 1026.19(e)(3)(iv) provides the exception to the rule that pursuant to § 1026.19(e)(3)(i) and (ii), good faith is determined by calculating the difference between the estimated charges originally provided under § 1026.19(e)(1)(i) and the charges paid by or imposed on the consumer. It clarifies that pursuant to § 1026.19(e)(3)(iv), for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii), the creditor may use a revised estimate of a charge instead of the amount originally disclosed under § 1026.19(e)(1)(i) if the revision is due to one of the reasons set forth in § 1026.19(e)(3)(iv)(A) through (F). Comments 19(e)(3)(iv)-2 and -3 are adopted as proposed.

19(e)(3)(iv)(A) Changed Circumstance Affecting Settlement Charges

In general. Section 1024.7(f)(1) of Regulation X currently provides that a revised RESPA GFE may be provided if changed circumstances result in increased costs for any settlement service such that charges at settlement would exceed the tolerances for those charges. The Bureau proposed § 1026.19(e)(3)(iv)(A), which would have also provided that a valid reason for re-issuance exists when changed circumstances cause estimated charges to increase or, for those charges subject to § 1026.19(e)(3)(ii), cause the sum of all such estimated charges to increase by more than ten percent. Proposed comment 19(e)(3)(iv)(A)-1 would have provided further explanation of this requirement and would have included several examples. The Bureau stated in the proposal its belief that creditors should be able to provide revised estimates if certain situations occur that increase charges.

Changed circumstance. Section 1024.2 in current Regulation X generally defines changed circumstances as information and events that warrant revision of the estimated amounts included on the RESPA GFE. The Bureau proposed a similar definition, but with certain changes to address feedback that it had received suggesting that there was confusion about the Regulation X definition. Thus, the Bureau proposed in § 1026.19(e)(3)(iv)(A) to define a changed circumstance as: (1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; (2) information specific to the consumer or transaction that the creditor relied upon when providing the disclosures and that was inaccurate or subsequently changed; or (3) new information specific to the consumer or transaction that was not relied on when providing the disclosures.

This proposed definition, most significantly, would have omitted the fourth prong of the existing definition of changed circumstances: “[o]ther circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems.” The Bureau suggested in the proposal that the items listed in the fourth prong were already covered by other elements of the definition and questioned whether the overlap had contributed to the industry uncertainty surrounding what scenarios constitute a changed circumstance under the current definition of changed circumstances in Regulation X. The Bureau sought comment on whether its proposed definition of changed circumstances was appropriate, and specifically on whether there are scenarios that should be considered a changed circumstance that would not be captured under any of the three prongs set forth in the proposed definition.

Proposed comment 19(e)(3)(iv)(A)-2 would have provided additional elaboration on the proposed definition and would have provided several examples of changed circumstances. Proposed comment 19(e)(3)(iv)(A)-3 would have explained how the definition of application under § 1026.2(a)(3) relates to the definition of changed circumstances under § 1026.19(e)(3)(iv)(A). The proposed comment would have explained that although a creditor is not required to collect the consumer's name, monthly income, or social security number to obtain a credit report, the property address, an estimate of the value of the property, or the mortgage loan amount sought, for purposes of determining whether an estimate is provided in good faith under § 1026.19(e)(1)(i), a creditor is presumed to have collected these six pieces of information. The proposed comment would have further explained that if a creditor provides the disclosures required by § 1026.19(e)(1)(i) prior to receiving the property address from the consumer, the creditor could not subsequently claim that the receipt of the property address was a changed circumstance, under § 1026.19(e)(3)(iv)(A) or (B).

Industry commenters had mixed reactions to the Bureau's proposed definition of changed circumstances. A regional bank holding company commenter and a community bank commenter stated that they supported the proposed definition. In contrast, a company that performs compliance training and consulting services to credit unions stated that the Bureau should not change the current definition of changed circumstances because the change is not required by the Dodd-Frank Act. The commenter also asserted that changing the definition of changed circumstances would result in an extended implementation period. A national provider of title insurance and settlement services stated that the Bureau should conduct more research as to the most common changed circumstances that occur in transactions that would be subject to § 1026.19(e) and (f).

Some commenters, including an industry trade association representing Federally-chartered credit unions, objected to the Bureau's proposal to omit the fourth prong in the current definition of changed circumstances. The commenters expressed concern that the elimination of the fourth prong meant that situations such as boundary disputes, which are included as instances of changed circumstances under the current definition, would not be included under the Bureau's final rule. However, this commenter also asserted that the Bureau should provide additional guidance on what scenarios would be included in the fourth prong of the definition of changed circumstances if it retains the fourth prong in the final rule.

Several industry trade association commenters asserted that the Bureau should expand the definition of “changed circumstances.” Industry trade association commenters representing banks and mortgage lenders asserted that the Bureau should treat the scenario of a loan exceeding the points and fees thresholds for a qualified mortgage, HOEPA loan, or a qualified residential mortgage as a changed circumstance. In the alternative, they asserted that the Bureau should allow the creditor to deny the loan when the applicable threshold has been exceeded. An industry trade association representing Federally-charted credit unions asserted that the proposed definition of changed circumstances should be expanded to include situations where the consumer increases the down payment amount because it is very likely that settlement charges will change as a result of the increase in the down payment amount. The commenter also stated that changed circumstances should include situations where the seller changes a condition that would result in a change to estimated costs disclosed on the Loan Estimate.

Several industry commenters urged the Bureau to change the proposed definition of changed circumstances so that the term “unexpected event” is understood to mean an “unexpected event” from the creditor's point of view. Most of the commenters asserted that the change would reduce the incentive for the consumer to withhold information. Additional commenters requested clarification with respect to the term “interested party,” asserting that such clarification was necessary so that the creditor is not responsible for matters under the control of other parties.

A State bankers association also requested guidance on whether a change to the loan amount or monthly payment would be considered a changed circumstance, if it does not result in a cost increase or in the APR becoming inaccurate. The commenter reported that its members have been advised by their regulators to reissue the RESPA GFE in such circumstances and asserted that this guidance has resulted in compliance burden.

A large bank commenter expressed concern that proposed § 1026.19(e)(3)(iv)(A) would not permit a creditor to reset estimates for purposes of the good faith analysis under § 1026.19(e)(3)(ii) unless the aggregate amount of all such charges increased by more than ten percent due to a changed circumstance. The commenter also observed that the current definition of changed circumstances sets forth what situations are not considered changed circumstances. The commenter sought clarification on whether creditors may assume that situations that are not changed circumstances under the current definition of changed circumstances would be considered changed circumstances under the proposed definition.

Lastly, a large bank commenter stated that the Bureau must provide additional clarity on whether it plans to issue guidance on changed circumstances that is similar to the HUD RESPA FAQs, or if the Bureau plans to adopt the HUD RESPA FAQs that address changed circumstances. The commenter stated that the HUD RESPA FAQs were critical to creditors' ability to establish compliance programs. Similarly, a software vendor commenter requested that the Bureau clarify whether the HUD RESPA FAQs on changed circumstances would still be valid after this rule is finalized.

Final Rule

The Bureau has considered the comments, and is adopting § 1026.19(e)(3)(iv)(A) and comments 19(e)(3)(iv)(A)-1 through 3 substantially as proposed, with revisions to enhance clarity. For the reasons stated below, the Bureau does not believe that the comments warrant material changes to proposed § 1026.19(e)(3)(iv)(A). The Bureau believes that the final rule clearly indicates that unless a scenario falls under one of the three prongs listed under the definition of changed circumstances, the scenario is not a changed circumstance. The Bureau recognizes that the current definition of changed circumstance sets forth both scenarios that are changed circumstances and those that are not. [209] The Bureau believes that this is a confusing formulation, and the Bureau's approach makes the meaning of changed circumstances clearer. But the Bureau agrees that there is value in explaining what changed circumstances do not include, and notes that for purposes of Regulation Z, explanations and clarifications are generally set forth in the official staff commentary to Regulation Z. The Bureau is taking this approach. For example, comment 19(e)(3)(iv)(A)-3 explains that a creditor may not claim that a changed circumstance has occurred if it provides the Loan Estimate pursuant to § 1026.19(e)(1)(i) without collecting any of the six items of information that make up the definition of application. This reflects the current understanding of which scenarios are not changed circumstances. [210]

The Bureau also believes that it is appropriate to adjust the current definition of changed circumstances, notwithstanding the assertion that the Bureau should not change the current definition of changed circumstances because it is not required by the Dodd-Frank Act. The fact that an industry trade association representing Federally-chartered credit unions requested additional guidance on the current definition supports the Bureau's belief that there is industry uncertainty surrounding what constitute a changed circumstance. The Bureau does not believe that the changes this final rule makes to the current definition of changed circumstances would result in an extended implementation period because the Bureau believes that the most significant change—the elimination of the fourth prong—is a change to streamline the current definition without narrowing the scope of changed circumstances. The Bureau also does not believe that additional research is needed on changed circumstances because the Bureau believes that the most common scenarios that should be considered a changed circumstance are encompassed in the final definition.

The Bureau also declines to retain the fourth prong in the current definition of changed circumstances in the final rule. The Bureau believes that the final rule encompasses the scenarios that are currently addressed by the fourth prong. Comment 19(e)(3)(iv)(A)-2 provides an example of how a boundary dispute is considered a changed circumstance.

The Bureau recognizes that creditors are incented not to make loans that exceed the points and fees thresholds for qualified mortgages, HOEPA loans, or qualified residential mortgages. If a changed circumstance causes the loan to exceed the application threshold, then the creditor has a legitimate basis for revision. However, the Bureau does not believe that the fact that the event occurred is, by itself, a changed circumstance. A loan may exceed the threshold because of mistakes that the creditor made in the points and fees calculation. As stated elsewhere in the section-by-section analysis of § 1026.19(e), creditor errors are not legitimate reasons for revising Loan Estimates. The Bureau also believes that it is not necessary to specifically provide that a creditor may deny a loan once the applicable points and fees threshold has been exceeded because the Loan Estimate is not a loan commitment. However, the Bureau reminds creditors that Regulation B contains requirements that apply when the creditor denies a consumer's loan application.

In response to the assertion that the definition of changed circumstances should include a scenario where the consumer increases the down payment amount, the Bureau believes that to the extent that the act of increasing the down payment amount actually increased settlement charges subject to the tolerance rules beyond the applicable tolerance, then the scenario would be considered a valid reason for re-issuance under § 1026.19(e)(3)(iv)(C), which the Bureau is adopting as proposed for reasons discussed below. Additionally, the Bureau believes that scenarios where the seller changes a condition that would result in a change to estimated costs disclosed on the Loan Estimate, are encompassed within the definition of changed circumstances.

With respect to the argument that the Bureau should change the proposed definition of changed circumstances so that the term “unexpected event” is understood to mean an “unexpected event” from the creditor's point of view because the modification would reduce the incentive for the consumer to withhold information, the Bureau declines. As illustrated in comment 19(e)(3)(iv)(A)-2, the term “unexpected event” is meant to encompass scenarios that involve changes that take place after the original Loan Estimate has been provided to the consumer. The consumer would not be able to withhold information about events that have not occurred.

The Bureau declines to clarify the term “interested party.” The Bureau believes that the term “interested party” should be interpreted broadly because mortgage loan transactions are complex and affect the interests of many parties. For example, the local government entity in which the property is located can be considered an interested party because the government entity has an interest in the transfer taxes that would be collected upon the consummation of the transaction. Further, with respect to the assertion that clarifying the term “interested party” is necessary to ensure that the creditor is not responsible for matters under the control of other parties, the Bureau believes adopting this position would undermine § 1026.19(e)(1)(ii), which provides that the creditor is responsible for ensuring that a mortgage broker complies with § 1026.19(e) when the mortgage broker provides the disclosures required by § 1026.19(e). The Bureau also believes that this position contradicts the tolerance rules, which makes creditors responsible for providing reliable estimates of costs under the control of other parties, such as third-party settlement service providers and government jurisdictions.

The Bureau believes that whether a change to the loan amount or monthly payment would be considered a changed circumstance depends on whether the reason for the change is a scenario that is described in one of the three prongs of the definition of changed circumstances.

The Bureau declines to change the proposed rule such that each occurrence of a changed circumstance becomes an opportunity for a creditor to reset the estimates used for the good faith analysis under § 1026.19(e)(3)(ii). Limiting legitimate reasons for revisions for charges subject to the ten percent tolerance rule to situations where the changed circumstance causes the aggregate amount of all such charges to increase by more than ten percent is the current rule under Regulation X and the Bureau's intention. Otherwise, if a creditor is allowed to reset the estimate used for the good faith analysis under § 1026.19(e)(3)(ii) every time there is a changed circumstance, it weakens the ten percent tolerance rule. Finally, with respect to the status of the HUD RESPA FAQs that address changed circumstances, the final rule will replace the HUD RESPA FAQs with respect to transactions subject to § 1026.19(e), (f), and (g). But with respect to transactions currently subject to Regulation X, but will not be subject to § 1026.19(e), (f), and (g), the HUD RESPA FAQs will continue to apply. Accordingly, HUD RESPA FAQs, instead of the final rule, will continue to apply to reverse mortgage transactions and federally related mortgage loans made by persons that are not “creditors” under Regulation Z.

19(e)(3)(iv)(B) Changed Circumstance Affecting Eligibility

Section 1024.7(f)(2) of Regulation X currently provides that a revised RESPA GFE may be provided if a changed circumstance affecting borrower eligibility results in increased costs for any settlement service such that charges at settlement would exceed the tolerances for those charges. The Bureau proposed § 1026.19(e)(3)(iv)(B), which would have provided that a valid reason for reissuance exists when a changed circumstance affecting the consumer's creditworthiness or the value of the collateral causes the estimated charges to increase. Proposed comment 19(e)(3)(iv)(B)-1 would have explained the requirement and provided illustrative examples. The Bureau did not receive any comments on proposed § 1026.19(e)(3)(iv)(B). Accordingly, the Bureau is finalizing § 1026.19(e)(3)(iv)(B) and comment 19(e)(3)(iv)(B)-1 with minor revisions to enhance clarity.

19(e)(3)(iv)(C) Revisions Requested by the Consumer

Section 1024.7(f)(3) of Regulation X currently provides that a revised RESPA GFE may be provided if a borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or the terms of the loan. The Bureau incorporated this same concept in proposed § 1026.19(e)(3)(iv)(C), which would have provided that a valid reason for reissuance exists when a consumer requests revisions to the credit terms or the settlement that cause estimated charges to increase. Proposed comment 19(e)(3)(iv)(C)-1 would have illustrated this requirement with an example.

A law firm commenter asserted that it was unreasonable to require a creditor to provide revised disclosures even though the reason for the revision was due to a borrower-requested change. The Bureau has considered the comment but is finalizing § 1026.19(e)(3)(iv)(C) and comment 19(e)(3)(iv)(C)-1 as proposed because § 1026.19(e)(3)(iv)(C) reflects the current rule in Regulation X, § 1024.7(f)(3). Creditors should be able to comply with this requirement, because currently they are required to comply with an identical requirement (§ 1024.7(f)(3)) under Regulation X.

19(e)(3)(iv)(D) Interest Rate Dependent Charges

Section 1024.7(f)(5) of Regulation X provides that, if the interest rate has not been locked, or a locked interest rate has expired, the charge or credit for the interest rate chosen, the adjusted origination charges, per diem interest, and loan terms related to the interest rate may change. It also provides that when the interest rate is later locked, a revised RESPA GFE must be provided showing the revised interest rate-dependent charges and terms. The Bureau proposed to retain the same basic approach in proposed § 1026.19(e)(3)(iv)(D) and to illustrate the requirement with examples. The Bureau sought comment on the frequency and magnitude of revisions to the interest rate dependent charges, the frequency of cancellations of contractual agreements related to interest rate dependent charges, such as rate lock agreements, and the reasons for such revisions and cancellations. Although the Bureau ultimately proposed taking the same approach as the current regulation, it acknowledged in the proposal a number of concerns that it believed warranted careful monitoring of the market. While the Bureau acknowledged that several costs are affected by the consumer's rate and thus may fluctuate until that rate is locked, the Bureau expressed concern that the current provision in Regulation X could be used to harm consumers by engaging in rent-seeking behavior or attempting to circumvent the requirements of TILA or RESPA. However, the Bureau was unaware of any evidence that creditors were in fact using current Regulation X § 1024.7(f)(5) to harm consumers or to circumvent RESPA.

Comments

A State trade association commenter representing bankers stated that it believed that the regulatory text in proposed § 1026.19(e)(3)(iv)(D) with respect to when a creditor must provide the revised disclosures to the consumer when the interest rate is set was in conflict with the general redisclosure rule proposed in § 1026.19(e)(4)(i) because proposed § 1026.19(e)(3)(iv)(D) stated that the creditor must provide revised disclosures “on the date that the interest rate is reset,” whereas the general redisclosure rule gave the creditor three business days to deliver the revised disclosures. The commenter also requested that the Bureau clarify whether redisclosure is necessary when the locking of the interest rate does not change the interest rate or cost estimates disclosed on the original Loan Estimate. Similarly, a community bank commenter asserted that if the interest rate is locked after the creditor has provided the original Loan Estimate, the creditor should be permitted to determine whether to provide redisclosures if there is no change to the disclosures that were originally provided.

A large bank commenter stated that the final rule should require that the revised Loan Estimate that is provided after the interest rate has been set should reflect all the items impacted by the revisions to the interest rate, bona fide discount points, and lender credits. The commenter asserted that the requirement would help ensure that information about monthly payments, projected payments, the cash to close amount, loan costs, and disclosures in the “Comparison” section of the Loan Estimate are also revised.

Final Rule

The Bureau has considered the comments, and for reasons set forth below, is finalizing § 1026.19(e)(3)(iv)(D) and comment 19(e)(3)(iv)(D)-1 with revisions to enhance clarity. The delivery requirement set forth in proposed 1026.19(e)(4)(i) was intended to establish the maximum amount of time that a creditor may let pass before providing the consumer with the revised Loan Estimate. The Bureau does not believe that creditors need that much time in situations where the interest rate is locked because the creditor controls when it executes the rate lock agreement. But in consideration of the comments, the Bureau is adding comment 19(e)(4)(i)-2 to explain the relationship between § 1026.19(e)(4)(i) and § 1026.19(e)(3)(iv)(D). The comment clarifies that if the reason for the revision is provided under § 1026.19(e)(3)(iv)(D), notwithstanding the three-business-day rule set forth in § 1026.19(e)(4)(i), § 1026.19(e)(3)(iv)(D) requires the creditor to provide a revised version of the disclosures required under § 1026.19(e)(1)(i) on the date the interest rate is locked. Comment 19(e)(4)(i)-2 also references comment 19(e)(3)(iv)(D)-1.

Final § 1026.19(e)(3)(iv)(D) and commentary also clarify that if the interest rate is simply set, but there is no rate lock agreement, § 1026.19(e)(3)(iv)(D) does not apply. Upon a review of the proposed rule text and commentary, the Bureau acknowledges that the proposed language could have caused confusion about whether the setting of the interest rate requires redisclosure where a rate lock agreement does not exist. But the Bureau intended that § 1026.19(e)(3)(iv)(D) only applies in situation where a rate lock agreement has been entered into between the creditor and borrower, or where such agreement has expired. The Bureau has made clarifying revisions to the rule text and commentary to address the potential confusion.

With respect to the request that the final rule require that the revised Loan Estimate reflect all of the items that are impacted by the revisions to the interest rate, bona fide discount points, and lender credits, the Bureau has made adjustments to the final rule text to clarify that the revised version of the Loan Estimate shall contain revisions to any other interest rate dependent charges and terms. The Bureau notes that this is the current rule under Regulation X, § 1024.7(f)(5). Lastly, as discussed above, the Bureau intends that the creditor redisclose interest rate dependent charges and terms when the interest rate is locked. Accordingly, if the creditor has to redisclose points because the consumer is paying points to the creditor to reduce the interest rate, the consumer could be paying both bona fide discount points, as defined in § 1026.32(b)(3), when the 2013 ATR Final Rule takes effect, and points that are not bona fide discount points. Final § 1026.19(e)(3)(iv)(D) provides that on the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under § 1026.19(e)(1)(i) to the consumer with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), [211] lender credits, and any other interest rate dependent charges and terms. The Bureau believes that this adjustment will facilitate compliance with this final rule because § 1026.19(e)(3)(iv)(D) now clearly indicates that to comply, the creditor must redisclose all the points disclosed pursuant § 1026.37(f)(1), even if they include points in addition to the bona fide discount points under § 1026.32(b)(3).

19(e)(3)(iv)(E) Expiration

Section 1024.7(f)(4) of Regulation X currently provides that if a borrower does not express an intent to continue with the transaction within ten business days after the RESPA GFE is provided, or such longer time specified by the loan originator, then the loan originator is no longer bound by the RESPA GFE. Similarly, the Bureau proposed § 1026.19(e)(3)(iv)(E), which would have provided that a valid reason for reissuance exists when a consumer expresses an intent to proceed more than ten business days after the disclosures are provided. Proposed comment 19(e)(3)(iv)(E)-1 would have illustrated this requirement with an example. The Bureau explained in the proposal that it believed that it was important for consumers to be able to rely on the estimated charges for a sufficient period of time to permit shopping, and that ten business days was a reasonable period. Once it expired, however, the Bureau believed that creditors should be permitted to provide revised disclosures that may reflect new charges.

The Bureau received few comments on the proposal. Some industry commenters sought clarification on how to count the ten-business-day period if the creditor provided the consumer with a revised Loan Estimate within the ten-business-day period before the consumer has indicated an intent to proceed. A mortgage broker commenter stated that mortgage brokers do not have control over third-party fees, and therefore, making the Loan Estimate binding on a mortgage broker for ten business days would be impractical.

The Bureau is finalizing § 1026.19(e)(3)(iv)(E) and comment 19(e)(3)(iv)(E)-1 substantially proposed, with revisions to enhance clarity. As adopted, § 1026.19(e)(3)(iv)(E) clarifies how to count the ten-business-day period, because it provides that the ten-business-day period begins after the disclosures required under § 1026.19(e)(1)(i) are provided pursuant to § 1026.19(e)(1)(iii). Lastly, with respect to the assertion that the mortgage broker should not be bound by the terms of the original Loan Estimate for ten business days after the mortgage broker provides it to the consumer, as noted above, the Bureau believes that a mortgage broker must comply with all of the requirements of § 1026.19(e) if the mortgage broker provides a consumer with the Loan Estimate.

19(e)(3)(iv)(F) Delayed Settlement Date on a Construction Loan

Section 1024.7(f)(6) of Regulation X currently provides that in transactions involving new construction home purchases, where settlement is expected to occur more than 60 calendar days from the time a RESPA GFE is provided, the loan originator cannot issue a revised RESPA GFE unless the loan originator provided the borrower with a clear and conspicuous disclosure stating that at any time up until 60 calendar days prior to the real estate closing, the loan originator may issue a revised RESPA GFE. The Bureau concluded that this approach made sense where consummation will not occur for an extended period of time. Accordingly, proposed § 1026.19(e)(3)(iv)(F) would have provided that a valid reason for revision exists on construction loans when consummation is scheduled to occur more than 60 days after delivery of the estimated disclosures, provided that the consumer was alerted to this fact when the estimated disclosures were provided. Proposed comment 19(e)(3)(iv)(F)-1 would have clarified that a loan for the purchase of a home either to be constructed or under construction is considered a construction loan to purchase and build a home for the purposes of § 1026.19(e)(3)(iv)(F) and would have illustrated the requirement with examples. The Bureau stated in the proposal that the proposed comment would be consistent with guidance provided by HUD in the HUD RESPA FAQs p. 21, # 2 (“GFE—New construction”). The Bureau did not receive any comments on proposed § 1026.19(e)(3)(iv)(F), and is adopting § 1026.19(e)(3)(iv)(F) and comment 19(e)(3)(iv)(F)-1 as proposed, except for minor revisions to enhance clarity.

19(e)(4) Provision and Receipt of Revised Disclosures

19(e)(4)(i) General Rule

TILA's requirement that creditors provide corrected disclosures is not linked to the time when a creditor discovers that a correction is necessary. Instead, section 128(b)(2)(D) of TILA provides that the creditor shall furnish additional, corrected disclosures to the borrower not later than three business days before the date of consummation of the transaction, if the previously disclosed annual percentage rate is no longer accurate, as determined under TILA section 107(c), and this requirement is set forth in current § 1026.19(a)(2)(ii). RESPA does not expressly address timing requirements for the delivery of revised RESPA GFEs, but Regulation X generally requires that a revised RESPA GFE must be provided within three business days of the creditor receiving information sufficient to establish a reason for revision. [212]

While both regulations contain redisclosure requirements, their approaches are different. Regulation Z ensures that the consumer is made aware of changes at a specific point in time before consummation, but does not require the creditor to keep the consumer informed of incremental changes during the loan origination process. In contrast, Regulation X does, but those changes may occur up to the day of settlement.

The Bureau proposed adopting the Regulation X approach because it believed that intermittent redisclosure of the integrated Loan Estimate is necessary under RESPA because settlement service provider costs typically fluctuate during the mortgage loan origination process. Furthermore, the Bureau stated its belief that intermittent redisclosure is consistent with the purposes of TILA because it promotes the informed use of credit by keeping the consumer apprised of changes in costs.

Accordingly, the Bureau proposed § 1026.19(e)(4)(i), which would have provided that, if a creditor delivers a revised Loan Estimate, the creditor must do so within three business days of establishing that a valid reason for revision exists. Proposed comment 19(e)(4)-1 would have illustrated this requirement with examples.

Comments

The Bureau received a number of comments on the proposal, including, as discussed below, comments urging various alternative approaches to the incremental approach to redisclosure the Bureau proposed. A large bank commenter asserted that the proposed three-business-day redisclosure requirement ignores the realities of how creditors process information and underwrite loans and is arbitrary. It stated that 50 percent of lender credits and refunds it issues as required by current Regulation X are caused by its inability to meet Regulation X's three-business-day redisclosure requirement. The commenter stated that documenting the day that the event that caused the changed circumstance is difficult and uncertain because information about the event may take time to reach the division inside the creditor's organization that is responsible for providing the revised disclosures, and that in most cases, information must be verified by the creditor. The commenter also stated that in many cases, it is simply not possible for the creditor to verify that a changed circumstance has occurred and ensure that a revised disclosure is issued within three business days. The large bank commenter also asserted that the three-business-day requirement for redisclosure is especially unworkable with respect to charges in the ten percent tolerance category because when the estimated sum of charges exceeds the ten percent threshold, it could be the cumulative result of multiple changed circumstances.

Large bank commenters and industry trade associations urged the Bureau to adopt an alternative approach to the redisclosure requirement set forth in proposed § 1026.19(e)(4)(i). The commenters described the approach as the “milestone approach.” Under the “milestone approach,” revised disclosures would only have to be provided to the consumer at specific points in the mortgage origination process, such as the time that the interest rate is set and at the time of loan commitment because the occurrence of these events usually trigger closing cost changes. The commenters asserted that adopting a “milestone approach” would benefit consumers because it would address the issue of information overload. One of the supporters of the “milestone approach” stated that a series of RESPA GFEs is often provided to the consumer under the current Regulation X and often desensitizes the consumer to the information provided. The commenter asserted that information overload would worsen under the proposal because the Bureau's proposed definition of “application” would lead to more redisclosures. Another large bank commenter supporting the “milestone approach” stated that because the “milestone approach” would tie to key events in the origination process, the approach still ensures that the consumer gets a complete picture of the loan terms. One of the large bank commenters that supported the “milestone approach” also asserted that the approach would ease compliance burden because it would allow creditors to develop streamlined and efficient compliance programs, thus facilitating supervision.

Industry trade associations representing banks and mortgage lenders also advocated for redisclosure requirements different than what the Bureau proposed. The same industry trade association representing mortgage lenders asserted that it would be far less confusing to consumers and less burdensome to creditors if a redisclosure made within 30 days after receipt of a consumer's intent to proceed is deemed timely for all changed circumstances that occurred more than three days before the redisclosure is provided. As discussed above in the section-by-section analysis of § 1026.19(e)(1)(iii), industry trade associations representing banks and mortgage lenders expressed the view that the best solution to excessive redisclosure would be to require the creditor to provide a Loan Estimate some number of days after the consumer communicates an intent to proceed, and the commenters indicated a preference that it be 30 days. With respect to the provision of revised Loan Estimates, commenters expressed the view that the creditor should not have to provide the revised Loan Estimate to the consumer if the only items that have changed after the original Loan Estimate was provided are the closing date and charges related to the closing date. They also expressed the view that sending revised Loan Estimates in these situations would be redundant.

Industry trade associations representing banks and mortgage lenders asked if a revised Loan Estimate is required within three business days if fees increased due to a changed circumstance or borrower-requested change. They also asked if a revised Loan Estimate is ever required when there is not a changed circumstance or borrower-requested change. The commenters additionally asked if a creditor may redisclose based on underwriting information without receiving consumer approval to make the changes. The commenters also stated that it appeared that the proposal would have given the creditor the option of either delivering a revised Loan Estimate within three business days of a valid reason for revision, or waiting until four days before consummation to deliver the revised Loan Estimate.

The commenters also asserted that when new information is received, such as partial income verification, more than three business days is needed for the creditor to evaluate the information to comply with ability-to-repay and investor requirements. The commenters requested confirmation from the Bureau that the three-business-day period does not begin until after the evaluation is complete. A community bank commenter requested specific guidance from the Bureau as to the determination of when the three-business-day period begins for changed circumstances in instances when there may be new information received by the borrower or inconclusive information received. The commenter stated that in order to prevent an endless stream of redisclosures, the three-business day period should begin when the lender has fully evaluated the information.

Final Rule

After consideration of the comments, the Bureau is adopting the Regulation X approach to redisclosures that the Bureau proposed. The Bureau believes the approach best ensures that consumers are kept informed of incremental changes during the loan origination process by creditors, and thus, would best serve the policy goals of both TILA and RESPA, which the Bureau discussed in the proposal and above. Additionally, given that a number of industry commenters have raised concerns about the cost of redisclosures, the Bureau believes that creditors are incented to avoid excessive redisclosures. The Bureau also believes that the final rule facilitates the goal of limiting excessive redisclosures by limiting legitimate reasons for redisclosures to the six exceptions set forth in § 1026.19(e)(3)(iv). The Bureau also is not persuaded that there would be significant compliance burden because the final rule applies the current timing requirement in Regulation X for delivery of the revised RESPA GFE to the Loan Estimate.

In response to the concern that the Bureau's proposed definition of “application” would lead to more redisclosures, the Bureau has addressed the concern in great detail in the section-by-section analysis of § 1026.2(a)(3), above, and has concluded that it does not believe that the final rule will lead to more redisclosures. In consideration of the various requests for clarification on the timing requirement for the delivery of the revised Loan Estimate, the Bureau has revised proposed § 1026.19(e)(4)(i) and proposed comment 19(e)(4)-1, renumbered as comment 19(e)(4)(i)-1, to facilitate compliance. Final § 1026.19(e)(4)(i) provides that subject to the requirements of § 1026.19(e)(4)(ii), if a creditor uses a revised estimate pursuant to § 1026.19(e)(3)(iv) for the purpose of determining good faith under § 1026.19(e)(3)(i) and (ii), the creditor shall provide a revised version of the disclosures required under § 1026.19(e)(1)(i) reflecting the revised estimate within three business days of receiving information sufficient to establish that one of the reasons for revision provided under § 1026.19(e)(3)(iv)(A) through (C), (E) and (F) applies. Comment 19(e)(4)(i)-1 explains the three-business-day requirement set forth in § 1026.19(e)(4)(i) and provides illustrative examples. Additionally, as noted above in the section-by-section analysis of § 1026.19(e)(3)(iv)(D), the Bureau is adding comment 19(e)(4)(i)-2 to clarify the relationship between § 1026.19(e)(3)(iv)(D) and (e)(4)(i).

Together with the revisions to the text of § 1026.19(e)(3)(iv) and related commentary, the Bureau believes that the revisions to the text of § 1026.19(e)(4)(i) and related commentary make it unnecessary to further clarify whether a revised Loan Estimate must be provided when there is not a changed circumstance or borrower-requested change, other than the fact that it is four days before closing.

On the question of whether a creditor may issue a revised Loan Estimate without receiving consumer approval to make the changes, the Bureau believes that the final rule and commentary are clear that creditors are not required to obtain consumer approval before the creditor provides a revised Loan Estimate. The Bureau also believes that the final rule and commentary are clear that a creditor may not wait until four days before consummation to deliver the revised Loan Estimate when doing so violates the three-business-day requirement set forth § 1026.19(e)(4) or the day-of requirement set forth in § 1026.19(e)(3)(iv)(D).

With respect to requests that the Bureau clarify when the three-business-day delivery period begins, the Bureau believes that the examples set forth in comment 19(e)(1)(4)(i)-1 clearly illustrate that the three-business-day begins on the date that the creditor receives information that sufficiently establishes the reason for revision. The Bureau believes that the comment is clear in explaining that the burden is on the creditor to show that it has a reasonable basis to believe that the information it receives does not sufficiently establish the reason for the revision.

Lastly, in response to the comment from a large bank creditor that the proposed redisclosure delivery requirement would be especially unworkable for charges in the ten percent tolerance category, the Bureau believes that comment 19(e)(4)(i)-1.ii clearly illustrates that with respect to fees included in the ten percent tolerance category, the three-business day period is counted from the date on which the creditor has received sufficient information to establish that the sum of all fees included in the category of fees subject to the ten percent tolerance rule has exceeded the original estimated sum of such fees by more than ten percent due to changed circumstances. In other words, if, for example, the creditor receives information on May 1, that a fee included in the ten percent tolerance category will increase by an amount totaling six percent of the originated estimated sum of charges in the ten percent tolerance category, and then on May 8th, the creditor receives information that a changed circumstance will cause a different fee included in the ten percent tolerance category to increase by an amount totaling two percent of the originated estimated sum of charges in the ten percent tolerance category, and then on June 15th the creditor receives information that a changed circumstance will cause a different fee included in the ten percent tolerance category to increase by an amount totaling four percent of the originated estimated sum of charges in the ten percent tolerance category, to comply with § 1026.19(e)(4)(i), the creditor would have to provide revised disclosures reflecting the 12 percent increase by June 18th, assuming that June 16th, 17th, and 18th are business days for purposes of § 1026.2(a)(6). The Bureau adopts § 1026.19(e)(4)(i) pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act.

19(e)(4)(ii) Relationship to Disclosures Required Under § 1026.19(f)(1)(i)

Proposed § 1026.19(e)(4)(ii) would have provided that the creditor shall deliver revised versions of the disclosures required by § 1026.19(e) in a manner that ensures such revised disclosures are not received on the same business day as the consumer receives the disclosures required by § 1026.19(f)(1)(i). The Bureau proposed this provision pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b). Proposed comment 19(e)(4)-2 would have clarified that revised disclosures may not be delivered at the same time as the final disclosures. The proposed comment would have also explained that creditors would comply with the requirements of § 1026.19(e)(4) if the revised disclosures are reflected in the disclosures required by § 1026.19(f)(1)(i) (i.e., the Closing Disclosure). This proposed comment would have also included illustrative examples of the requirement.

As explained above, the purposes of RESPA and TILA include effective advance disclosure of settlement costs, and the informed use of credit by consumers. See TILA section 102; RESPA section 2. Section 105(a) of TILA also permits the Bureau to prescribe regulations that would improve consumers' ability to understand the mortgage loan transaction. The Dodd-Frank Act enhances TILA's focus by placing special emphasis on the requirement that disclosures must be made in a way that is clear and understandable to the consumer. Section 1405 of the Dodd-Frank Act focuses on improving “consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures.” The Bureau stated in the proposal that it was aware that, in some cases, creditors have provided a revised RESPA GFE at the real estate closing along with the RESPA settlement statement. The Bureau stated in the proposal its concern that this practice may be confusing for consumers and may diminish their awareness and understanding of the transaction.

The Bureau also stated in the proposal that it recognized there were cases in which a consumer might not have been confused by receiving good faith estimates on the same day, or even at the same time, as the consumer receives the actual settlement costs. However, because the estimated costs would match the actual costs, the Bureau expressed concern that consumers could be confused by seemingly duplicative disclosures. The Bureau was also concerned that this duplication could contribute to information overload stemming from too many disclosures, which could, in turn, inhibit the consumer's ability to understand the transaction. Accordingly, the Bureau proposed § 1026.19(e)(4)(ii) to prohibit creditors from providing a consumer with disclosures of estimated and actual costs at the same time. To draw a clear line to facilitate compliance, the creditor would not have complied with the requirements of proposed § 1026.19(e) if the consumer received revised versions of the disclosures required under § 1026.19(e)(1)(i) on the same business day as the consumer received the disclosures required by § 1026.19(f)(1)(i).

Comments

Reaction to the proposed prohibition on the simultaneous delivery of the Loan Estimate and the Closing Disclosure was mixed. In joint comments, trade associations representing State financial services regulators supported the prohibition. They stated that the proposed prohibition would incent creditors to avoid surprising consumers and intentionally under-estimating closing costs to get borrowers to select loans that may not be in the borrower's best interest. A non-depository lender that makes manufactured home loans stated that it supported the aspect of the proposal that would have permitted the creditor to reflect a revised disclosure on the Closing Disclosure.

In contrast, an industry trade association commenter representing non-depository financial services providers stated that the proposed prohibition on the simultaneous delivery of the Loan Estimate and Closing Disclosure could delay closings because settlement costs could increase shortly before the closing, and the creditor must be able to provide the revised Loan Estimate to reflect the increase. Industry trade associations representing banks and mortgage lenders stated that the requirement that a revised Loan Estimate must be received by the consumer four days before the consummation does not take into account the significance of the change or the burden associated with the waiting period. The commenters asserted that a four-day waiting period between the receipt of the revised Loan Estimate and consummation was unnecessary because the Bureau was also proposing to impose a three-business-day waiting period between the receipt of the Closing Disclosure and consummation in proposed § 1026.19(f)(1)(ii). A regional bank holding company expressed concern that under the proposal, a consumer could receive the Loan Estimate and the Closing Disclosure simultaneously if the creditor sends the disclosures by mail.

Final Rule

The Bureau has considered the comments and believes that § 1026.19(e)(4)(ii), as proposed, would not have delayed closings or limited a creditor's ability to manage cost increases and disclose them to the consumer, because although it would have prohibited simultaneous delivery of the Loan Estimate and the Closing Disclosure, proposed comment 19(e)(4)-2 would have clarified that under certain circumstances, a creditor could comply with § 1026.19(e)(4) by reflecting revised disclosures on the Closing Disclosure. The Bureau acknowledges that some commenters did not understand proposed § 1026.19(e)(4)(ii). Accordingly, the Bureau is revising the text of proposed § 1026.19(e)(4)(ii) and comment 19(e)(4)-2, renumbered as 19(e)(4)(ii)-1. As adopted, § 1026.19(e)(4)(ii) provides that the creditor shall not provide a revised version of the disclosures required under § 1026.19(e)(1)(i) on or after the date on which the creditor provides the disclosures required under § 1026.19(f)(1)(i). Section 1026.19(e)(4)(ii) also provides that the consumer must receive a revised version of the disclosures required § 1026.19(e)(1)(i) not later than four business days prior to consummation. The Bureau believes that this addresses the regional bank holding company commenter's concern with the proposal that a consumer could receive the Loan Estimate and the Closing Disclosure simultaneously. Lastly, § 1026.19(e)(4)(ii) provides that if the revised version of the disclosures required under § 1026.19(e)(1)(i) is not provided to the consumer in person, the consumer is considered to have received such version three business days after the creditor delivers such version or places such version in the mail. This aspect of § 1026.19(e)(4)(ii) mirrors § 1026.19(e)(1)(iv). Accordingly, comment 19(e)(4)(ii)-1 references comments 19(e)(1)(iv)-1 and -2. The Bureau adopts § 1026.19(e)(4)(ii) and comment 19(e)(4)(ii)-2 pursuant to its authority under TILA section 105(a), RESPA section 19(a), Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b).

19(f) Mortgage Loans Secured by Real Property—Final Disclosures

As discussed in the section-by-section analysis of § 1026.19 above, the disclosure requirements prior to consummation of a closed-end credit transaction under TILA apply only to creditors. For certain mortgage transactions, TILA requires creditors to furnish a corrected disclosure to the consumer not later than three business days before the date of consummation of the transaction if the prior disclosed APR has become inaccurate. See 15 U.S.C. 1638(b)(2)(A), (D). In contrast, RESPA generally applies to lenders and settlement agents. RESPA requires the person conducting the settlement (e.g., the settlement agent) to complete a settlement statement and make it available for inspection by the borrower at or before settlement. See 12 U.S.C. 2603(b). RESPA also provides that, upon the request of the borrower, the person who conducts the settlement must permit the borrower to inspect those items which are known to such person on the settlement statement during the business day immediately preceding the day of settlement. Id.

Regulation Z implements TILA's requirement that the creditor deliver corrected disclosures and currently provides that, if the annual percentage rate disclosed in the early TILA disclosure becomes inaccurate, the creditor shall provide corrected disclosures with all changed terms. See 12 CFR 1026.19(a)(2)(ii). Regulation Z further provides that the consumer must receive the corrected disclosures no later than three business days before consummation. Id. Regulation X provides that the settlement agent shall permit the borrower to inspect the RESPA settlement statement, completed to set forth those items that are known to the settlement agent at the time of inspection, during the business day immediately preceding settlement. See 12 CFR 1024.10(a).

As noted above, section 1032(f) of the Dodd-Frank Act provides that the Bureau shall propose for public comment rules that combine the disclosures required under TILA and sections 4 and 5 of RESPA. In addition, sections 1098 and 1100A of the Dodd-Frank Act amended RESPA section 4(a) and TILA section 105(b), respectively, to require that the Bureau establish the integrated disclosure requirements for “mortgage loan transactions” that are “subject to both or either provisions of” RESPA sections 4 and 5 (the RESPA GFE and RESPA settlement statement requirements) and TILA. See 12 U.S.C. 2604(a); 15 U.S.C. 1604(b). As noted above, although Congress mandated that the Bureau integrate the rules under TILA and RESPA, it did not reconcile the timing requirements or the division of responsibilities between the creditor and settlement agent in TILA and RESPA.

In general, the proposed rule would have required that consumers receive the Closing Disclosure three business days before consummation in all circumstances and that, if any revisions were made to the Closing Disclosure before consummation, consumers would receive a revised Closing Disclosure that would have triggered an additional three-business-day waiting period, subject to several limited exceptions. Those exceptions would have included changes made due to consumer-seller negotiations, changes to reflect refunds curing violations of the good faith analysis at proposed § 1026.19(e)(3), and changes in which the amount actually paid by the consumer at closing does not exceed $100. The Bureau also would have included a limited waiver provision that would have allowed consumers to waive or modify the timing requirements in cases involving a bona fide personal financial emergency.

In response to public comment, the final rule narrows the circumstances in which changes that occur between initial provision of the Closing Disclosure and consummation would trigger a new three-business-day waiting period. These changes are discussed in more detail below in the section-by-section analyses of § 1026.19(f)(1)(ii) and (f)(2).

The proposed rule also set forth two alternative requirements for who would be responsible for providing the Closing Disclosure. Under alternative 1, the creditor would have been solely responsible for providing the Closing Disclosure. Under alternative 2, the creditor would have been responsible for providing the Closing Disclosure, but would have been expressly permitted to share responsibility with a settlement agent. Settlement agents would have been required to comply with the provisions of § 1026.19(f) and the creditor would have been responsible for ensuring the requirements of § 1026.19(f) have been satisfied. In response to comments, the Bureau is finalizing alternative 2, as discussed in more detail in the section-by-section analysis of § 1026.19(f)(1)(v) below.

The Bureau received extensive public comment on the proposed rules for the delivery of the Closing Disclosure. In general, commenters focused on the proposed timing and responsibility for providing the Closing Disclosure. The vast majority of commenters were concerned the Bureau's proposed timing requirements would delay most or a large percentage of transactions. Commenters also provided extensive feedback on whether the creditor or settlement agent should bear responsibility for preparing and delivering the Closing Disclosure. The Bureau also received comment on other aspects of proposed § 1026.19(f), as described more fully below in their respective sections. The final rule revises the proposal in response to these comments, as described throughout this section.

19(f)(1) Provision of Disclosures

19(f)(1)(i) Scope

As discussed above, the integrated disclosure mandate requires the Bureau to reconcile several aspects of the disclosure requirements under TILA and RESPA. Thus, pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, and 1032(f) of the Dodd-Frank Act, the Bureau proposed to integrate the disclosure requirements in TILA section 128 and RESPA section 4 in § 1026.19(f)(1)(i). This section would have provided that, in a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to § 1026.33, the creditor shall provide the consumer with the disclosures in § 1026.38 reflecting the actual terms of the credit transaction. Proposed comment 19(f)(1)(i)-1 would have provided illustrative examples of this provision.

Comments

As noted above and discussed in greater detail in § 1026.19(f)(1)(ii)(A) below, the Bureau received extensive public comment regarding the timing requirements for delivery of the Closing Disclosure. Among other things, many commenters from across the real estate and mortgage lending industries were concerned that a general requirement to disclose the “actual terms” of the transaction to the consumer three business days before consummation would prove impracticable because many costs are not known by that time. Commenters also observed that the proposed delivery rules, which would have created a presumption that the consumer received the Closing Disclosure three business days after it was placed in the mail, would have required that creditors and settlement agents disclose a large amount of information on the Closing Disclosure at least six business days, and possibly more, before consummation. Commenters further explained that information required to be disclosed on the Closing Disclosure derives from many sources, including settlement agents and other settlement service provide