On April 26, 2018, the CFPB issued a final rule amending the provisions applicable to providing revised disclosures for the purpose of resetting tolerances applicable for determination of good faith estimation of closing costs under TILA-RESPA Integrated Disclosure rule that came into effect on October 3, 2015, aka Know Before You Owe rule (the “TRID Rule”). This final rule fixes the so called ‘black hole’ or ‘gap’ (“Black Hole”) under the TRID Rule. The final rule will become effective on June 1, 2018.
The Issue Addressed – The Black Hole
Under the TRID Rule, if a reason occurs that allows the creditor to issue a revised estimate to reset tolerances for determination of good faith estimate of closing costs, the creditor could do so within 3 business days of learning of such reason. Generally, the revision could be accomplished using a revised Loan Estimate. However, under the TRID Rule there are two limitations that could prevent a creditor from using a revised Loan Estimate: (i) a revised Loan Estimate cannot be provided if there are less than four business days before consummation; and (ii) a revised Loan Estimate cannot be provided after the creditor provided a Closing Disclosure. With respect to these limitations, the TRID Rule, prior to the revision, provided that the revised disclosure to reset the tolerances can be an initial Closing Disclosure or a revised Closing Disclosure (per informal guidance by the CFPB) if there are less than four business days before consummation. The Black Hole issue resulted in situations where the reason occurs after the creditor had already provided a Closing Disclosure and there are four or more business days between the time the revised version of the disclosures is required (i.e. within 3 business days of learning about the reason) and consummation. In such situation, the TRID Rule, prior to the amendment, did not allow the creditor to reset tolerance by providing a revised Closing Disclosure because it will not be provided to the borrower less than four business days before consummation. This inability to provide a revise Closing Disclosure to reset tolerances, due to the intersection of timing requirements under the TRID Rule (prior to this amendment), was known in the industry as the “black hole” or “gap”. As a result of the Black Hole, creditors were faced with hard choices, such as: absorb the additional cost, pass such costs to all future applicants, or reject the loan application due to the increase in cost.
The final rule amends the TRID Rule by removing the four business day limit and permits creditors to reset tolerances with either an initial or corrected Closing Disclosure regardless of when the Closing Disclosure is provided relative to consummation.
As revised, §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) or the disclosures required under §1026.19(f)(1)(i) (including any corrected disclosures provided under §1026.19(f)(2)(i) or (ii)) reflecting the revised estimate within three business days of receiving information sufficient to establish that one of the reasons for revision provided under paragraphs §1026.19(e)(3)(iv)(A) through (F) applies.
However, it should be clarified that, this amendment does not change the timing requirement for initial Closing Disclosure or the need for additional waiting period if a revised Closing Disclosure triggers such requirement.
The CFPB had also made conforming amendments to the official staff commentary.
Providing Very Early Closing Disclosure Concern
In the preamble to the final rule, the CFPB also flagged a potential concern that could arise from removing the four business day limit on providing revised Closing Disclosures, namely, the possibility that creditor would start providing Closing Disclosures very early in the transaction.
Importantly, the CFPB signaled that providing Closing Disclosures very early in the transaction with terms that are nearly certain to be revised would run afoul of the TRID Rule requirements. Specifically, the CFPB explained that such practice could be contrary to the underlying purpose of the Closing Disclosure, which is to disclose the “the actual terms of the credit transaction” (see, §1026.19(f)(1)(i) and comment 19(f)(1)(i)-1). Although the Closing Disclosure could be used to estimate costs, such estimated disclosures must be done using the best information “reasonably available” when the actual term is not reasonably available to the creditor at the time the disclosures are made (see, comment 19(f)(1)(i)-2). The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining the information (see, comment 19(f)(1)(i)-2).
Therefore, the CFPB noted that the current TRID Rule should prevent creditors from sending Closing Disclosures very early in the process before engaging in due diligence to ensure that any costs that are not finalized are estimated in good faith. Accordingly, the CFPB stated that it did not expect that removal of the four business day limit will result in a significant increase in the number of very early Closing Disclosures provided to consumers. Nevertheless, the CFPB stated that it will continue to monitor the market for practices that do not comply with the TRID Rule’s Closing Disclosure accuracy standards.
Other Preamble Clarifications
The preamble to the final rule contain a few other clarifying statements from the CFPB and is worth reviewing. One such clarification, concerns whether creditors can reset tolerances using a Closing Disclosure after issuing an initial Loan Estimate but without ever issuing any revised Loan Estimate. The CFPB stated that the TRID Rule does not prohibit creditors from doing so but creditors must otherwise comply with the rule, including its Closing Disclosure accuracy standard.
Effective Date and Retroactivity
According to the CFPB, once the rule becomes effective, creditors would be able to use revised Closing Disclosures to reset tolerances of disclosures with respect to loan applications that were taken prior effective date of the rule. However, the CFPB expressly stated that it declined to make the final rule otherwise apply retroactively. This means that the final rule requirements would not apply to previously closed transactions.
Creditors should revise their TRID Rule policies and procedures and incorporate the use of revised Closing Disclosure to reset tolerances, as authorized by the final rule.
Given the CFPB’s remarks in the preamble, on the very early Closing Disclosures concern, it its intention of monitoring this issue, it likely that this issue would be examined in both CFPB and state regulator’s TILA/RESPA exams. As applicable, creditor must consider their standard timing of providing Closing Disclosure in the transaction and determine whether their practice could result in potential violation of the Closing Disclosure accuracy standard. Specifically, creditors should consider whether their standard timing for providing the Closing Disclosure results in terms that are nearly certain to be revised.
If you have any question regarding this final rule, please reach out to our contact attorney.Download Related Document