Monica Jackson
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, D.C. 20552
RE: Docket No. CFPB-2012-0028; Proposed Rule on TILA and RESPA Combined Disclosures
Dear Ms. Jackson:
On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I write to you regarding the Consumer Financial Protection Bureau’s (CFPB) proposed rule to combine mortgage disclosures required under the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA) and the statutes’ implementing regulations, Regulation Z and Regulation X. See 77 Fed. Reg. 51116 (August 23, 2012). The proposed rule would represent a significant and comprehensive change to the manner, form, timing and content of the initial and final mortgage disclosures that credit unions are required to provide.
This comment letter addresses all aspects of the proposed rule, except the sections on the definition of “finance charge.” In our September 21, 2012 comment letter to the CFPB, we expressed our strong opposition to the “finance charge” provisions of the proposed rule. To reiterate, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) does not require the CFPB to address finance charge and given the multitude of regulations in which the agency is in the midst of promulgating and the extraordinary costs that would be borne by credit unions as a result, we do not believe it is neither necessary nor advisable for the agency to take action at this time. Further, the proposed definition would have significant impact on many other regulations, including the credit union interest rate ceiling as established by the National Credit Union Administration (NCUA).
General Comments
Credit unions are not-for-profit member-owned cooperative financial institutions that have provided affordable and dependable alternative financial services to their members for over one-hundred years. Approximately 94 million people rely on their credit unions for a range of financial services and products, including mortgage loans. In large part due to their well-earned reputation as dependable and consumer-friendly lenders, credit unions’ share of the mortgage market has steadily increased. In the first quarter of 2012, credit unions originated approximately 8% of mortgages in our nation, far greater than the previous record of 5%, indicating that members are not only highly satisfied with their credit unions but also that consumers overall are increasingly aware of the value that credit unions provide.
Despite the growth in their share of the mortgage market, most credit unions are finding it increasingly difficult and costly to maintain the level of quality that has been leading consumers to credit unions. While the economic crisis is a major reason for this, it has become abundantly clear that the costs and burden associated with the constantly increasing and unforgiving intensity of regulations imposed on credit unions has caused, and will likely continue to cause, credit unions to reevaluate their operations and possibly scale back some programs. The enactment of the Dodd-Frank Act and the consequent advent of the CFPB have, not surprisingly, coincided with the increased regulatory burden and it is unfortunate that the CFPB and other regulators are continuing on this unrelenting path. The agency, by this proposed rule, would significantly add to the cost of doing business, while not achieving its stated purpose of reducing consumer confusion and simplifying the mortgage lending transaction.
As the CFPB knows, NAFCU has long advocated for the simplification of the mortgage disclosures as required by TILA and RESPA, and has specifically supported combining the current separate initial and closing disclosures. NAFCU also appreciates the effort put forth by the CFPB in this rulemaking, including its work to assemble small entity representatives to fulfill its obligations under the Small Business Regulatory Enforcement Fairness Act (SBREFA). NAFCU-member credit unions participated in the panels and offered invaluable feedback in the various stages of the agency’s Know Before You Owe project.
For the reasons discussed below, NAFCU has very serious concerns about the ramification of the slew of proposed changes and underlying regulations on credit unions. Further, we strongly object to the agency’s frequent references to the SBREFA report, but apparent lack of serious consideration of the concerns that small entities and the report detailed. In only less than a handful of cases did the agency give adequate credence to the report and implement the recommendations or address the concerns. As such, we recommend that the agency carefully revisit the rulemaking, taking into full consideration the report’s detailed and substantive concerns.
Scope of the Proposed Rule
The proposed rule would apply to closed-end mortgages, with the exception of home equity lines of credit (HELOCs), reverse mortgages, and mortgages that are not secured by a home attached to real property. Importantly, the proposal would apply to construction-only loans, vacant land loans and loans on property of 25 acres or more. Each of these types of loans is currently exempt from Regulation X. Further, the proposal would exempt loans that are made by a lender that makes five mortgages or fewer in a year.
NAFCU would first like to express our support for the exemptions for HELOCs, reverse mortgages and mortgages for homes that are not attached to real property. Each of these types of loans is unique and presents specific facts and circumstances to which many aspects of the proposed rule simply could not reasonably apply. We commend the CFPB for recognizing these factors and issuing the exemptions.
The CFPB has also proposed to impose the proposed rule’s requirements to construction-only loans, vacant land loans and loans involving 25 acres or more. Many aspects of the proposed rule are simply incongruous for these types of loans and would provide little to no benefit to borrowers. For example, imposing the various proposed timing requirements on construction-only loans, where the timing of the consummation of the transaction is often affected by unforeseeable events, such as weather or material shortages, is unreasonable. Accordingly, NAFCU strongly opposes the application of the proposed rule to these loans.
NAFCU also does not believe that the proposed exception for lenders that conduct five or fewer mortgages a year is an appropriate measure to provide regulatory relief for small entities. First and foremost, interpreting the “small entity” exemption in the Dodd-Frank Act on the basis of a limited number of transactions is inconsistent with the statute, SBREFA and the agency’s own actions preceding this rulemaking. Specifically, the Dodd-Frank Act, unlike the proposed transaction-based exemption, incorporates the concept of “small entity” as contemplated by SBREFA, and the agency’s own implementation of SBREFA throughout the Know Before You Owe Project has focused on entities’ asset size, not the number of transactions.
Many small credit unions that conduct a small number of mortgage loans to their specific membership would simply cease their mortgage operations. For example, a credit union whose membership consists of teachers in a part of one state or another whose membership consists of firefighters of another state may originate twenty mortgages in a year. Very likely, each of those credit unions’ membership has relied on its credit union for years, if not generations, for mortgage products. The result of sucha low exemption threshold is likely that the particular niche market that the consumer-members and the credit union have established and fostered will cease to exist as the credit union may not be able to justify the costs of offering mortgage products.
If the CFPB’s goal is, in fact, to provide regulatory relief for small credit unions, it should provide an exemption for credit unions that have $175 million or less in assets. This threshold, as the CFPB knows, has been used to determine whether a credit union is a “small entity” for purposes of the SBREFA analysis and other measures that the agency is required to conduct by the Dodd-Frank Act. Further, the Dodd-Frank Act requires the agency to seriously consider the impact of its regulations on small entities in no small part because Congress understood that the agency’s regulations would disproportionately affect small entities.
Definitions
Application
Currently, for purposes of providing a Good Faith Estimate under Regulation X and the early disclosures under Regulation Z, an application is made when a borrower submits his or her name, monthly income, social security number, 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.” The proposed rule would remove the catch-all element.
NAFCU strongly opposes the removal of the catch-all provision. The catch-all provision enables credit unions to obtain reasonable information to properly process applications. A credit union, for example, should have the option of obtaining information such as borrowers’ assets and liabilities before processing the application. Additionally, a credit union should be able to require a borrower to provide information about the collateral, beyond the property address and estimated value.
Most importantly, the catch-all provision is particularly important given that the proposed rule would tighten the tolerances, would greatly limit credit unions’ ability to revise estimates, and revise the definition of business day. Taken together, these proposed changes would greatly reduce a credit union’s ability to conduct the type of due diligence and analysis necessary to issue accurate estimates that will both help the borrower understand the costs and other issues associated with the loan and enable the credit union to appropriately assess the loan application.
Business Day
Regulation Z and Regulation X each contain a general definition of “business day;” however, an alternative definition applies to certain provisions of Regulation Z. The general definition of the term is a day on which the offices of the creditor or other business entity are open to the public for carrying on substantially all the entity’s business functions. In limited cases (for example for purposes of the right of rescission and imposition of fees), Regulation Z’s alternative definition of “business day,” which means all calendar days except Sundays and legal public holidays, governs.
The CFPB is proposing to apply Regulation Z’s alternative definition for purposes of providing the Loan Estimate and Closing Disclosure. If adopted, this would mean that Saturdays would count as a “business day.”
NAFCU strongly objects to the adoption of the alternative definition and urges the CFPB to adopt the general definition. Many credit unions are either closed on Saturdays altogether or do not operate their backrooms on Saturdays. Thus, under the proposed definition of “business day,” many credit unions would have one less day to comply with the relevant timing requirement associated with a particular disclosure, which could lead to more errors. Simply put, the perceived benefits of the proposed change would not justify the associated costs and burden.
The Loan Estimate
Responsibility for Providing the Disclosure
Under the proposal, the Loan Estimate can be provided by either a creditor or a mortgage broker; however, a creditor would remain responsible for ensuring that the Loan Estimate is provided on a timely basis and for errors in Loan Estimates even if the disclosures are provided by the broker. Further, and unreasonably, the proposed rule would prohibit a lender from issuing corrected disclosures or providing its own Loan Estimates if the broker is providing one.
NAFCU strongly opposes this aspect of the proposal. As the CFPB is aware, the relationship between mortgage brokers and lenders varies from case to case, and the arrangements also differ from one case to another. The proposed creditor-liability for a broker’s action amounts to vicarious liability even though a lender would not, in many cases, have the ability to control the broker’s actions. The agency, however, has simply ignored this long-standing element of vicarious liability and chose to propose, instead, to create a conundrum for lenders where one need not be created. If the agency moves forward with this aspect of the proposal, it is very possible that some lenders simply would choose to not deal with mortgage brokers, a result that could end up hurting consumers as they would lose the ability of having a broker shop for the best and appropriate loan for their situation.
Timing and Delivery
The proposed rule requires the creditor to deliver the Loan Estimate within three business days after receiving the application, and consummation may not take place until at least seven business days after delivery has occurred unless the consumer waives the waiting period in writing. The waiver is available only when a bona fide personal emergency exists. The proposed rule, in proposed Comment 19(e)(1)(v), states that whether a bona fide personal emergency exists is determined by the facts surrounding individual situations and provides a single example involving the sale of the consumer’s home at foreclosure.
While NAFCU understands that the bona fide emergency exception is statutory, nothing in TILA or RESPA prevents the agency from allowing consumers to make their own independent determination as to whether a specific situation constitutes a bona fide emergency. At the very least, we believe the CFPB can, and should, use its discretionary authority to further interpret the exception. In fact, the agency should more provide specific examples that would serve as safe harbors. For example, a loan involving a sale at auction and a loan involving an estate sale should also qualify.
Shopping for Settlement Services
The proposed rule maintains the current requirement that credit unions provide a list of settlement services separately from the Loan Estimate, that the list correspond each particular service with the servicer that is providing it, and that the list include the servicers’ contact information. The list must be provided within three business days after application.
NAFCU requests that the agency clarify that the list can be provided along with the Loan Estimate as long as it is on a separate sheet of paper, or when provided electronically, on a different page. That is, the agency should clarify that the list can be mailed or e-mailed in the same transmission with the Loan Estimate.
Good Faith Determination for Estimates of Closing Costs
The proposed rule would impose a “good faith” standard that applies when estimates for closing costs are provided. The standard is met if the credit union does not exceed the estimated amounts for services, with certain tolerances allowed as exceptions for estimated costs for certain services provided by unaffiliated service providers.
Specifically, a credit union may only exceed the estimated costs of third party services if the third party is not an affiliate and if the borrower is permitted to shop for those services. Currently, the ten percent tolerance exists regardless of whether the third party is an affiliate. The proposed rule, however, would limit the ten percent tolerance to non-affiliated third-party service providers.
NAFCU strongly opposes this aspect of the proposal and urges the CFPB to maintain the status quo that allows estimated costs of affiliated third-party services to be included in the sum of the amount that is increased. Many credit unions have an affiliated relationship with a third-party that allows them to offer their members reduced pricing for particular services, including title and settlement services. In some cases, just as with services provided by non-affiliated third-parties, the estimate may be lower than the actual cost for providing those services. It is thus critical, in order to maintain the consumer advantage associated with lower costs by affiliated third-parties, that the CFPB allows for flexibility in this case.
Revised Estimates
Currently, credit unions are greatly limited in their ability to provide revised estimates. The proposed rule would further restrict this ability. For instance, credit unions can currently provide revised estimates if there are changed circumstances that warrant the revision. Changed circumstances include: “(1) Acts of God, war, disaster, or other emergency; (2) Information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided, which information may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE; (3) New information particular to the borrower or transaction that was not relied on in providing the GFE; or (4) Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems.” The CFPB proposes to remove the last prong on the basis that it is covered elsewhere in the definition and may be confusing to industry participants.
NAFCU does not agree that the fourth prong is covered elsewhere in the definition. The fourth prong covers, among other things, changed circumstances related to the property, which the remaining three prongs clearly do not. In addition, the fourth prong takes into account the possibility that there may be circumstances, not foreseeable at the time of the initial estimates, which may justify revisions of the estimates. While we encourage the CFPB to provide clarification and guidance on what would be covered under this prong, we strongly object to its proposed removal.
Next, NAFCU recommends that the list of changed circumstances justifying revised estimates be expanded. For example, when a borrower increases a down payment, it is very likely that the settlement charges estimated in the Loan Estimate would change. The list should also include circumstances where the seller changes a condition that would result in changes to the estimate. These include payments in addition to the sale price, such as payments related to liens or other attachments. Unfortunately, the proposed rule would not specifically allow for revised estimates in such cases.
Prepayment Penalties
The proposed rule requires the disclosure of a prepayment penalty on the first page of the Loan Estimate. As credit unions do not and cannot, by law, issue a prepayment penalty, the line item would generally not apply to them. However, proposed Comment 1026.37(b)(4) provides examples of what constitutes a prepayment penalty to include a fee waived by the creditor on the condition that the consumer does not prepay the loan.
NAFCU does not believe that exercising a condition for a waived fee constitutes a prepayment penalty. In fact, both the courts and the NCUA have determined that the recoupment of fees waived does not constitute prepayment. In many cases, the condition expires in two or three years and the credit union would not be able to recoup the waived fee after the expiration of the term. This practice is used as a risk management tool so that a credit union’s expected interest income is more predictable. The waived fees, essentially, function as a compensation for the ability of the credit union to manage risk in this manner; thus, both the borrower and the credit union benefit. Further, requiring credit unions to disclose the recoupment of the waived fee as a prepayment in the Loan Estimate will cause unnecessary confusion as credit union members know that their credit unions do not impose prepayment penalties. Compounding the confusion is the fact that credit unions would be required to indicate “YES” in the box without distinguishing the recoupment of waived fees from other charges that are truly prepayment penalties. Thus, we strongly urge the agency to remove this aspect of the proposed comment. At the very least, the CFPB should specify that the recoupment of waived fees does not constitute a prepayment penalty if the term of the condition does not exceed five years.
We also urge the agency to remove the proposed comment describing “interest accrual amortization” as a prepayment penalty. As is the case with recouped waived fees, the courts have held that this practice does not constitute a prepayment penalty, and lenders should be able to depend on the loan’s amortization schedule.
Record Retention Requirements
The proposed rule would require that credit unions retain the Loan Estimate and Closing Disclosure in an “electronic, machine-readable format,” and in such a manner that the computer software can read the fees as stated in the Loan Estimate and Closing Disclosure. A credit union would be required to retain a copy of the Loan Estimate in this format for three years and the Closing Disclosure for five years.
NAFCU acknowledges the importance of retaining the documents on record. However, we urge the CFPB to provide credit unions more flexibility on the manner and format. The proposed manner and format would be costly, adding to the already substantial costs associated with compliance with this proposed rule that credit unions will have to bear, while it does not provide any consumer benefits. Given that this aspect of the proposed rule is not mandated by the Dodd-Frank Act, we urge the agency to remove it as it finalizes the proposed rule.
Further, the agency requests comments about whether it should exempt small entities from the proposed record retention requirements. NAFCU appreciates that the CFPB is contemplating such action and would support a measure that would exempt all credit unions over which the agency does not have oversight authority. Such action would be consistent with the stated purpose of this aspect of the proposed rule, which is to facilitate CFPB examination. The NCUA, the agency responsible for oversight of such credit unions, already has extensive record retention requirements. See, e.g., 12 CFR part 749. Thus, it would be wise and fair for the CFPB to exempt credit unions that are already highly regulated from the proposed record retention requirements.
Closing Disclosure
Creditors’ Cost of Funds and Total Interest Percentage
The proposed rule would require a credit union’s cost of funds to be disclosed in the Closing Disclosure. The proposal would require credit unions to use either the most recent ten-year Treasury notes or the credit union’s actual cost of borrowing the funds. NAFCU strongly opposes this aspect of the proposal.
As the CFPB indicates, the intent and purpose of combining the TILA and RESPA disclosures is to simplify and clarify the disclosures. As stated above, NAFCU supports the combining of the TILA and RESPA disclosures. However, the disclosure of the creditors’ cost of funds would add little to no value to consumers; rather, it will only create consumer confusion. On the other hand, the proposed requirement would impose significant regulatory burden on credit unions. This is especially the case for smaller entities and in situations where the cost of funds may not be known to the credit union at the time of disclosure.
The CFPB is also proposing to require the disclosure of the total interest to be paid over the life of the loan, disclosed as the percentage of the loan’s principal. This amount would be disclosed as the “Total Interest Percentage” (TIP). As in the case with the creditor’s cost of funds disclosure, NAFCU does not see any benefit to the consumer; rather, we believe the TIP would simply create or add to consumer confusion and overload consumers with unnecessary information. Accordingly, we urge the agency to remove this disclosure requirement.
Responsibility for Providing the Disclosure
Under the proposal, the Closing Disclosure can be provided by either a creditor or a settlement agent; however, a credit union would remain responsible for ensuring that the disclosure is provided on a timely basis and for errors contained therein even if the disclosures are provided by the settlement agency.
NAFCU strongly opposes this aspect of the proposal. As the CFPB is aware, the relationship between settlement agents and lenders varies from case to case, and the arrangements are also different from one situation to the next. Just as it is the case with imposing creditor-liability for an erroneously issued Loan Estimate that is provided by a mortgage broker, the proposed creditor-liability for a settlement agent’s action amounts to vicarious liability even though a lender would not, in a vast majority of cases, have the ability to control the settlement agent’s actions. Moreover, if the agency moves forward with this aspect of the proposal, credit unions would incur significant costs because they would either have to contract the work to a qualified third-party or hire and train employees to serve as, essentially, settlement agents. We believe that these increased costs would drive many credit unions out of the market place.
Timing and Delivery
Under the proposed rule, a credit union would be required to provide required disclosures at least three business days prior to the closing date, unless the consumer waives the period for a bona fide personal emergency. Further, departing from the current Regulation Z rule on what constitutes receipt of the disclosure, the proposal would create a presumption of receipt three business days after delivery (as opposed to the current rule, which deems the disclosure received three business days after they are delivered).
NAFCU strongly urges the CFPB to withdraw this aspect of the proposal, especially given that the proposed requirement to provide the Closing Disclosure three days prior to consummation is not required under RESPA. Closing on a mortgage transaction involves many moving parts, frequently requiring changes to closing disclosures right up to the closing date. If this aspect of the proposal is finalized, any time that a change is made to the closing disclosures requiring new disclosures, the closing date would be pushed an additional three days. In a purchase transaction, consumers will be unable to occupy the home for that additional time and sellers will incur costs from the delay. The result, ultimately, will frustrate and punish all parties involved and inevitably increase the cost of the transaction.
Should the agency move forward with the proposed three-day waiting period, we strongly believe there must be more flexibility for consumers to waive the three-day waiting period. Consumers should be able to make their own independent determination as to whether a specific situation constitutes a bona fide emergency. Further, the CFPB can and should use its discretionary authority to interpret the exception in a manner that provides consumers flexibility rather than imposing unwanted constraints. The agency should provide specific examples that would serve as safe harbors. For example, a loan involving a sale at auction and a loan involving an estate sale should qualify as a bona fide personal emergency.
Further, the proposed change to create a presumption of receipt is simply unjustified, would create confusion and potentially create conflict, if not litigation, between a borrower and lender. The only justification offered by the agency, that the Closing Disclosure contains more information than the current TILA disclosure, is not adequate and does not justify the confusion and potential costs.
The proposed rule also contains exceptions from the timing requirements as long as the disclosure is revised subsequently. NAFCU generally supports the exceptions. However, we urge the agency to further expound upon the exceptions. First, the consumer should be able to waive the timing requirement at his or her choosing. Second, the agency should increase the $100 threshold for the exception regarding the amount actually paid by the consumer.
Effective Date
The proposed rule would require credit unions to make significant changes to their mortgage lending operations. Undoubtedly, the rule will require credit unions to make significant financial, time and other resource investments in order to be compliant. As the CFPB may be aware, credit unions are still in the midst of recovering from the Great Recession and are operating under tight budgets as the current low-rate environments are expected to continue for several years. After the agency finalizes the rule, credit unions will need to adequately digest the rule, make necessary system and operational changes, train staff, change forms and other documentation, draft appropriate associated policies and obtain approval from their Board of Directors, and implement new procedures as necessary to comply with the rule.
Accordingly, if the CFPB moves forward with the proposed rule, it should not make the rule effective for a minimum of 18 months after the rule is finalized. NAFCU reminds the CFPB that while the Dodd-Frank Act required the agency to propose rules by July 21, 2012, it does not contain a statutory deadline for a final rule.
Closing Comments
NAFCU would like to reiterate our appreciation for the CFPB’s efforts during the entire process of combining the TILA and RESPA mortgage disclosures. Given that the issues that are addressed are rooted in a nearly four-decade long history of legislation and regulation, and the fact that the issues are indeed complex and difficult to resolve, we understand that the agency’s endeavor to meet its obligations under the Dodd-Frank Act is difficult. Despite these challenges, we believe it is critically important that the agency not only fully understands that its actions will have tremendous amount of consequences on mortgage lending, but also does everything in its power to ensure that its actions do not cause the tightening of credit by driving small institutions out of the marketplace and ultimately create unprecedented challenges for consumers who seek to achieve an ultimate American dream – homeownership. Unfortunately, the extensive proposed changes to the underlying regulations governing the mortgage disclosures will likely increase the cost of mortgage lending for our members and ultimately harm our members.
NAFCU appreciates the opportunity to comment on this proposed rule. If you have any questions or concerns, please feel free to contact me at (703) 842-2234 or chunt@nafcu.org, or Tessema Tefferi, NAFCU’s Regulatory Affairs Counsel, at (703) 842-2268 or ttefferi@nafcu.org.
Sincerely,
Carrie Hunt
General Counsel and Vice President of Regulatory Affairs