Fed punts on real estate loan disclosures

Consumer protection bureau tasked to devise single, standardized form
By Inman News
Inman News™

February 02, 2011

The Federal Reserve is backing down from a slew of proposed changes to mortgage loan disclosures, saying authority in that arena will soon be transferred to the new Consumer Financial Protection Bureau.

The Fed's proposed changes to mortgage loan disclosures were over a year in the making, prompted by criticism that homebuyers often didn't understand the true cost and terms of mortgages taken out during the boom.

The situation was complicated by the fact that borrowers get two sets of federal mortgage disclosures: one addressing Truth in Lending Act (TILA) requirements, and the other satisfying requirements of the Real Estate Settlement Procedures Act, or RESPA.

The Federal Reserve has had rulemaking authority for TILA loan disclosures under Regulation Z, while the Department of Housing and Urban Development (HUD) oversees RESPA disclosures.

Lenders, the real estate industry, and consumer groups have complained that having two sets of mortgage loan disclosures is confusing.

In an attempt to address that problem, the Dodd-Frank Wall Street Reform and Consumer Protection Act transfers oversight of both TILA and RESPA to the Consumer Financial Protection Bureau in July.

The bill mandates that the CFPB issue a proposal for a single federal mortgage disclosure form that satisfies both TILA and RESPA requirements within 18 months of assuming oversight responsibility.

By the time Dodd-Frank was passed, HUD had rolled out new RESPA loan disclosure forms in the face of industry opposition, but the Fed was still in the process of overhauling TILA disclosures.

A combined TILA-RESPA disclosure rule "could well be proposed by the (bureau) before any new disclosure requirements issued by the Board could be fully implemented," the Fed said in announcing that it will not finalize three rulemaking proceedings it's initiated since August 2009.

Although there are specific provisions of the Fed's proposals that would not be affected by the bureau's development of joint TILA-RESPA disclosures, adopting them "in a piecemeal fashion would be of limited benefit, and the issuance of multiple rules with different implementation periods would create compliance difficulties," the Fed said in an announcement.

In announcing plans to update TILA loan disclosures in the summer of 2009, Fed Chairman Ben Bernanke said the one-page TILA disclosure currently in use "is not adequate to convey the features and risks of today's complex products."

The Fed promised improved disclosures would:

Capture most fees and settlement costs paid by consumers in the disclosed annual percentage rate.
Require lenders to show how the consumer's APR compares to the average rate offered to borrowers with excellent credit.
Require lenders to provide final TILA disclosures at least three business days before loan closing.
Require lenders to show consumers how much their monthly payments might increase for adjustable-rate mortgage (ARM) loans.
Another issue the Fed was attempting to tackle was the use of "yield spread premiums" -- rebates paid by lenders when mortgage brokers place borrowers in loans with higher interest rates than they might otherwise have qualified for.

Critics said the rebates were often pocketed by mortgage brokers without a borrower's knowledge, creating a financial incentive for loan originators to place borrowers in more costly loans.

The Fed proposed a ban on yield-spread premiums that was to take effect April 1 -- a move adamantly opposed by the National Association of Mortgage Brokers.

HUD, for its part, has maintained that yield-spread premiums can benefit borrowers who would otherwise have trouble paying their closing costs, as long as the rebates are not pocketed by mortgage brokers.

Instead of banning yield-spread premiums, the standardized loan disclosure forms HUD began requiring lenders to use last year require that the rebates be credited against a borrower's closing costs.

Inman News columnist Jack Guttentag has characterized the dual-disclosure system as "a disgrace" because critical information is often buried or absent.

But Guttentag -- also known as "The Mortgage Professor" -- has also questioned whether the solution put forward in Dodd-Frank will solve the problem.

Dodd-Frank appears to have more mandated disclosures than TILA, some of which are "nonsensical and will prejudice the ability of (the CFPB) to do its job," Guttentag wrote in a column on the topic.

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