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From Banking and Finance Law Daily, May 15, 2015

Hearing examines upcoming changes to real estate settlement process

By Colleen M. Svelnis, J.D.

The Financial Services Subcommittee on Housing and Insurance has started to examine how proposed changes to the mortgage settlement process are expected to impact consumers and lenders. The changes proposed by the Consumer Financial Protection Bureau are scheduled to take effect on Aug. 1, 2015. The hearing, entitled “TILA-RESPA Integrated Disclosure: Examining the Costs and Benefits of Changes to the Real Estate Settlement Process,” examined the enforcement of the Truth in Lending and Real Estate Settlement Procedures Act Integrated Disclosures (TRID) through witness testimony focused on the impact of TRID on the real estate market; implementation and compliance costs associated with TRID; and a comparison of those costs to the benefits consumers and industry participants are expected to derive from the rule.

“Purchasing a home is one of the biggest and most important decisions most Americans will make. That is why we owe it to all homebuyers to hold this hearing, to continue to press the CFPB, and make sure the home buying process is as straightforward as possible. The dramatic changes to this process have the potential to unnecessarily delay closings and cause a ripple effect throughout real estate markets,” said Subcommittee Chairman Blaine Luetkemeyer (R-Mo).

Background on TILA. The TRID Rule is intended to fulfill disclosure requirements established by the Real Estate Settlement Procedures Act of 1974 (RESPA) (P.L. 93-533) and the Truth in Lending Act of 1968 (TILA) (P.L. 90-321). Both laws provide consumers with information regarding real estate transaction costs. The Dodd-Frank Act transferred rulemaking authority for both RESPA and TILA to the CFPB. The model Loan Estimate form intended to satisfy TILA and RESPA requirements is a three-page document that would replace the Good Faith Estimate form developed by HUD and the early TILA form developed by the Federal Reserve System. The model Closing Disclosure form is a five-page document that would replace the HUD-1 Settlement Statement and the revised TILA disclosure. These new integrated disclosure forms may not be used prior to Aug. 1, 2015, which does not give consumers, industry, or the CFPB an opportunity to test the new closing process in real time, according to a release from the committee (See previous coverage in the Banking and Finance Law Daily, March 20, 2015 and April 2, 2015).

Fluid process. Joyce Beatty (D-Ohio) spoke at the hearing, saying it is important to have a “seamless transition” to an updated closing process. Beatty stated, “at the end of the day we are here to bridge the gap between effective compliance and ensuring that the rule’s implementation is in the best interests of both the realtors and the homebuyers. In the aftermath of the 2008 housing crisis I hope to learn today that all consumers, both buyers and sellers, will have the proper education and understanding of TILA-RESPA disclosures to make the mortgage loan closing process as fluid and seamless as possible.”

Not ready. Cindy Lowman, president of United Bank Mortgage Corporation, part of United Bank of Michigan, located in Grand Rapids, Mich., testified on behalf of the ABA, stating that she believes that opportunities were missed in the integration process. “The new forms remain lengthy and intimidating to average consumers. The rules that lenders must follow are still confusing and difficult to apply.” She also said that “these new rules fail to achieve a simplified disclosure regime, and contain numerous ambiguities that raise compliance concerns for lenders and will lead to confusion and delays for borrowers if the rules are implemented as scheduled.” Lowman highlighted three points in her testimony:

  • A lot of work needs to be done to implement TRID.

  • Consumers will be harmed if TRID is not implemented properly.

  • A delay of enforcement would minimize negative impacts on consumers.

“These new rules affect the entire mortgage-lending industry, including lenders, service providers, appraisers, escrow agents and virtually anyone with a relationship to the mortgage lending process,” Lowman said. “They will significantly reshape the housing-finance market, which comprises a substantial portion of our country’s gross domestic product and touches the lives of nearly every American household. If we do not get this right it will have a negative impact on consumers, banks and the recovery of the housing market.”

“Simply put, there is no realistic way that those banks can adequately prepare for the current August 1 implementation,” Lowman said. “Banks that have not fully implemented by the deadline will have to curtail mortgage lending until systems are in place, delivering a heavy blow to the mortgage market at a crucial time of the year” (see Banking and Finance Law Daily, May 14, 2015).

According to Lowman, the ABA “strongly supports” efforts to treat the time period between Aug. 1, 2015, and Dec. 31, 2015, as a “hold harmless period for enforcement and liability under the new rules, and to formally announce such a period to ensure that the prudential regulators and secondary market stakeholders do the same.” “We urge quick action to avoid the potential harm to our mortgage customers,” she continued.

Additionally, Lowman said that “since many lenders will not have a chance to test their systems prior to August 1, lenders will be more susceptible to problems which ultimately will fall on the consumer. For example, the rule is explicit about the three day settlement procedure. Should anything go awry, then the settlement will have to be delayed. A delay in settlement could be a huge imposition to a buyer.”

More work to be done. Chris Polychron, Executive Broker with 1st Choice Realty in Hot Springs, Arkansas, and 2015 President of the National Association of Realtors (NAR), said that the NAR also supports treating the rest of 2015 as a “restrained enforcement and liability” period. “During this period, industry would operate under the rule and use the new disclosure forms but be held harmless in terms of liability if acting in good faith. The industry and the CFPB can then collect data on problems and develop solutions to minimize costly and harmful impact on consumers,” he said.

Polychron concluded that the RESPA/TILA integration was a “monumental effort,” but he said “there is more work that needs to be done to ensure these changes are effective and meet the needs and expectations of consumers.”

Largest and most costly integration. Diane Evans, Vice President of Denver-based Land Title Guaranty Company and President of the American Land Title Association, called the TRID Rule implementation integration the largest and most costly regulatory changes in its history, saying it “requires a paradigm shift in the way real estate settlements occur in this country.” Evans said the only way to successfully implement the rule is through “collaboration between all the parties involved in the transaction.”

Evans’ testimony focused on two ways that she said Congress and the CFPB can help the industry implement the TRID regulation:

  1. The CFPB should allow the title and settlement industry to disclose the price of title insurance accurately to consumers on the new Closing Disclosure. Under this new rule, the CFPB actually mandates that the correct and actual price title insurance products be withheld from consumers.

  2. The CFPB should develop and announce a plan to provide implementation support during a hold-harmless period to begin on the August 1 effective date of the regulation and continue through the end of this year.

Evans said a hold-harmless period will “help industry work its way through the challenges of implementation of their new processes without the fear of potential enforcement actions. Consumers need assurance that their transactions will not be disrupted due to the fear of unfounded enforcement of this paradigm shift for industry.”

Fragile system. Laurie Goodman, Center Director, Housing Finance Policy Center, Urban Institute, also testified about the need for a “hold harmless” period through the end of 2015. Goodman testified that, if implemented properly, this new regime should significantly improve the consumer experience. She said that the CFPB conducted extensive consumer tests after the release of the rules, and revised them according to feedback. Overall, she said it was a “minor operational issue” in a housing finance system that is in limbo and that “Congress must proceed carefully and thoughtfully, with a realization that the system remains fragile, and is failing to serve many credit-worthy borrowers.”

Goodman concluded that the hold-harmless period is needed even though lenders have had a long time to implement this rule because the operational issues are “overwhelming” and “many institutions are not yet completely set up, or have not adequately tested their capacity to handle these issues.” She further said that this time would “allow both the CFPB and lenders to work through all these issues, from vendor management to the clarification of the rules applicable to a delayed closing.”

Companies: American Bankers Association; American Land Title Association; Land Title Guaranty Company; National Association of Realtors; United Bank of Michigan; United Bank Mortgage Corporation; Urban Institute

MainStory: TopStory CFPB DoddFrankAct Mortgages RESPA

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