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

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79730 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 1 Dodd-Frank Act sections 1098 & 1100A, codified at 12 U.S.C. 2603(a) & 15 U.S.C. 1604(b), respectively.

2 12 U.S.C. 5532(f).

3 See Press release, U.S. Bureau of Consumer Fin. Prot., Consumer Financial Protection Bureau proposes ‘‘Know Before You Owe’’ mortgage forms (July 9, 2012), available at http:// www.consumerfinance.gov/pressreleases/consumerfinancial-protection-bureau-proposes-know-beforeyou-owe-mortgage-forms/; see also Blog post, U.S. Bureau of Consumer Fin. Prot., Know Before You Owe: Introducing our proposed mortgage disclosure forms (July 9, 2012), available at http:// www.consumerfinance.gov/blog/know-before-youowe-introducing-our-proposed-mortgage-disclosureforms/.

4 See part III below for a discussion of the Bureau’s qualitative testing of prototypes of the forms with more than 100 consumers, lenders, mortgage brokers, and settlement agents before issuing the proposal and its quantitative testing of the forms with 858 consumers across the country. This part also describes the Bureau’s outreach efforts, including the panel convened by the Bureau to examine ways to minimize the burden of the proposed rule on small businesses, as well as the Bureau’s handling of the over 2,800 public comments the Bureau received during the public comment period that followed the issuance of the proposal and other information on the record. 5 This guidance is provided in the regulations and the Official Interpretations, which are in Supplement I.

6 For additional discussion of the scope of the final rule, see part V below regarding § 1026.19, Coverage of Integrated Disclosure Requirements. BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Parts 1024 and 1026 [Docket No. CFPB–2012–0028] RIN 3170–AA19 Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) AGENCY: Bureau of Consumer Financial Protection.

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. DATES: The rule is effective August 1, 2015.

FOR FURTHER INFORMATION CONTACT: 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: I. Summary of the Final Rule 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 closedend 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 VerDate Mar<15>2010 07:56 Dec 31, 2013 Jkt 232001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79731 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 7 These disclosures are available at http:// www.hud.gov/offices/hsg/rmra/res/gfestimate.pdf &http://ecfr.gpoaccess.gov/graphics/pdfs/ ec27se91.024.pdf.

8 The requirements for the Loan Estimate are in § 1026.37. Additional discussion of this and other sections of the rule is provided in the relevant portion of part V below. 9 Appendix H to the final rule provides examples of how to fill out these forms for a variety of different loans, including loans with fixed or adjustable rates or features such as balloon payments and prepayment penalties. 10 For a discussion of these disclosures, see part V.B below.

11 This provision is in § 1026.19(e)(1)(ii). 12 This provision is in § 1026.19(e)(1)(iii). 13 The definition of ‘‘application’’ is in § 1026.2(a)(3).

14 This provision is in § 1026.19(e)(2)(i). 15 This provision is in § 1026.19(e)(2)(ii). 16 These disclosures are available at http:// www.hud.gov/offices/adm/hudclips/forms/files/ 1.pdf & http://ecfr.gpoaccess.gov/graphics/pdfs/ ec27se91.024.pdf.

17 The requirements for the Closing Disclosure are in § 1026.38(a)(3).

18 This provision is in § 1026.19(f)(1)(ii). 19 This provision is in § 1026.19(f)(2). 20 This provision is in § 1026.19(f)(1). 21 The limitations and the exceptions discussed below are in § 1026.19(e)(3) and (4). 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 above 1⁄8 of a percent for most loans (and 1⁄4 of 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 threebusiness-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79732 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 22 These proposed revisions are discussed below in part V, in the section-by-section analysis of § 1026.4.

23 This proposed provision is discussed below in part V, in the section-by-section analysis of § 1026.25.

24 15 U.S.C. 1638(a)(17). 25 This proposed provision is discussed below in part V, in the section-by-section analysis of § 1026.38(o)(6).

26 However, the Bureau is finalizing the Dodd- Frank Act requirement to include the total interest percentage disclosure on both the Loan Estimate and Closing Disclosure, because consumers at the Bureau’s consumer testing were able to understand and use the total interest percentage disclosure on both the Loan Estimate and Closing Disclosure. This proposed provision is discussed below in part V, in the section-by-section analyses of §§ 1026.37(l)(3) and 1026.38(o)(5).

27 For additional discussion regarding the effective date of the final rule, see part VI below. 28 Bd. of Governors of the Fed. Reserve Sys., Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts (June 2013). 29 See Thomas F. Siems, Branding the Great Recession, Fin. Insights, May 13, 2012, Vol. 1 Issue 1 at 3, available at http://www.dallasfed.org/assets/ documents/banking/firm/fi/fi1201.pdf (stating that the [great recession] ‘‘was the longest and deepest economic contraction, as measured by the drop in real GDP, since the Great Depression.’’). 30 Bureau of Econ. Analysis, U.S. Dep’t of Commerce, Real Gross Domestic Product (Nov. 7, 2013), available at http://research.stlouisfed.org/ fred2/series/GDPC1.

31 Bureau of Labor Statistics, U.S. Dep’t of Labor, Labor Force Statistics from the Current Population Survey (Nov. 19, 2013), available at http:// data.bls.gov/timeseries/LNS14000000 (Labor Force Statistics from 2003 through 2013). 32 Press Release, Mortg. Bankers Ass’n, Short-term Delinquencies Fall to Pre-Recession Levels, Loans in Foreclosure Tie All-Time Record in Latest MBA National Delinquency Survey (Feb. 17, 2011), available at http://www.mortgagebankers.org/ NewsandMedia/PressCenter/75706.htm. 33 Bd. Of Governors of the Fed. Reserve Sys., The U.S. Housing Market: Current Conditions and Policy Considerations, at 3 (2012), available at http://www.federalreserve.gov/publications/otherreports/files/housing-white-paper-20120104.pdf. 34 See U.S. Dep’t. of Hous. and Urban Dev., An Analysis of Mortgage Refinancing, 2001–2003 (2004), available at www.huduser.org/Publications/ pdf/MortgageRefinance03.pdf; Souphala Chomsisengphet & Anthony Pennington-Cross, The Evolution of the Subprime Mortgage Market, 88, No. 1 Fed. Res. Bank of St. Louis Review, at 48 (Jan./ Feb. 2006), available at http://research.stlouisfed. org/publications/review/article/5019. 35 The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report at 156 (2011) (FCIC Report), available at http://www.gpo.gov/fdsys/pkg/ GPO-FCIC/pdf/GPO-FCIC.pdf. 36 An Analysis of Mortgage Refinancing, 2001– 2003, at 1.

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 upfront 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 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79733 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 37 FCIC Report at 88. These products included most notably 2⁄28 and 3⁄27 hybrid adjustable rate mortgages (ARMs) and option ARM products. Id. at 106. A hybrid ARM is an adjustable rate mortgage loan that has a low fixed introductory rate for a certain period of time. An option ARM is an adjustable rate mortgage loan that has a scheduled loan payment that may result in negative amortization for a certain period of time, but that expressly permits specified larger payments in the contract or servicing documents, such as an interest-only payment or a fully amortizing payment. For these loans, the scheduled negatively amortizing payment was typically described in marketing and servicing materials as the ‘‘optional payment.’’ These products were often marketed to subprime customers.

38 For example, the Federal Reserve Board on July 18, 2011, issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. The order addresses allegations that Wells Fargo Financial employees steered potential prime-eligible consumers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected consumers. See Press Release, Bd. Of Governors of the Fed. Reserve Sys. (July 20, 2011), available at http://www.federalreserve.gov/ newsevents/press/enforcement/20110720a.htm. 39 Inside Mortgage Fin., 2011 Mortgage Statistical Annual: Mortgage Originations by Product, at 20 (2011).

40 FCIC Report at 215–217. 41 CoreLogic’s TrueStandings Servicing (reflects first-lien mortgage loans) (data service accessible only through paid subscription). 42 Id.

43 Id.

44 Id. at 217.

45 Id. at 124.

46 FCIC Report at 88.

47 Id. at 106. ‘‘Hybrid Adjustable Rate Mortgage’’ is a term frequently used to describe adjustable rate mortgage loans that have a low fixed introductory rate for a certain period of time. ‘‘Option ARM’’ is a term frequently used to describe adjustable rate mortgage loans that have a scheduled loan payment that may result in negative amortization for a certain period of time, but that expressly permit specified larger payments in the contract or servicing documents, such as an interest-only payment or a fully amortizing payment. For these loans, the scheduled negatively amortizing payment was typically described in marketing and servicing materials as the ‘‘optional payment.’’ 48 Id. at 109.

49 Id. at 111.

50 Sections 1011 and 1021 of the Dodd-Frank Act, 12 U.S.C. 5491, 5511. The Consumer Financial Continued 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 governmentsponsored 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 notably 2⁄28 and 3⁄27 Hybrid 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79734 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations Protection Act is substantially codified at 12 U.S.C. 5481–5603.

51 Sections 1024 through 1026 of title X of the Dodd-Frank Act, codified at 12 U.S.C. 5514–5516. 52 Section 1411 of the Dodd-Frank Act, codified at 15 U.S.C. 1639c.

53 Section 1032(f) of the Dodd-Frank Act, codified at 12 U.S.C. 5532(f). Sections 1098 and 1100A of the Dodd-Frank Act amend RESPA and TILA, respectively.

54 Sections 1402 through 1405 of the Dodd-Frank Act, codified at 15 U.S.C. 1639b. 55 Sections 1418, 1420, 1463, and 1464 of the Dodd-Frank Act, codified at 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, & 1639g. 56 Moody’s Analytics, Credit Forecast 2013 (2013) (Credit Forecast 2013), available at http:// www.economy.com/default.asp (reflects first-lien mortgage loans) (data service accessibly only through paid subscription). 57 Mortgage Markets Daily, New Houses by Type of Financing, available at http:// www.mortgagenewsdaily.com/data/financingtype.aspx.

58 Credit Forecast 2013.

59 Inside Mortgage Fin., Mortgage Originations by Product, in Inside Mortgage Finance Issue 2013:08 (Mar. 1, 2013) (Inside Mortgage Finance Newsletter).

60 Inside Mortgage Fin., 2012 Mortgage Statistical Annual: Mortgage Originations by Product: 2000– 2013 Data, at 17 (2012). These percentages are based on the dollar amount of the loans. 61 Inside Mortgage Fin. Newsletter. 62 ICF Macro Int’l, Summary of Findings: Design and Testing of Truth in Lending Disclosures for Closed-End Mortgages, at 6 (July 2009) (Macro 2009 Closed-End Report), available at http:// www.federalreserve.gov/boarddocs/meetings/2009/ 20090723/Full%20Macro%20CE%20Report.pdf.; see also Kleimann Communication Group, Inc., Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures (July 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_ report_tila-respa-testing.pdf. 63 James Lacko & Janis Pappalardo, Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms, at 26 (2007) (finding borrowers had misunderstood key loan features, including the overall cost of the loan, future payment amount, ability to refinance, payment of up-front points and fees, whether the monthly payment included escrow for taxes and insurance, any balloon payment, whether the interest rate had been locked, whether the rate was adjustable or fixed, and any prepayment penalty), available at http:// www.ftc.gov/os/2007/06/ P025505MortgageDisclosureReport.pdf. 64 Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 Cornell L. Rev. 1073, 1079 (2009) (discussing how subprime borrowers may not fully understand the loan costs due to product complexity and deferral of loan costs into the future); id. at 1133 (explaining that borrower underestimation of mortgage loan cost distorts their decision to take out a loan, resulting in excessive borrowing), available at http:// legalworkshop.org/wp-content/uploads/ 2009/07/cornell-a20090727-bar-gill.pdf. 65 Brian K. Bucks & Karen M. Pence, Do Borrowers Know their Mortgage Terms?, J. of Urb. Econ. (2008), available at http://works.bepress.com/ karen_pence/5.

66 U.S. Gov’t Accountability Office, GAO–06– 1112T, Alternative Mortgage Products: Impact on Default Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved (2006), available at http://www.gao.gov/new.items/d061112t.pdf. 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79735 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 67 Types of loan products include a fixed rate loan, adjustable rate loan, and interest-only loan. 68 Inside Mortgage Fin., 2012 Mortgage Statistical Annual: Mortgage Originations by Product: 2000– 2013 Data, at 17 (2012). These percentages are based on the dollar amount of the loans. 69 Inside Mortgage Finance Newsletter. 70 Compare Press Release, Mortgage Bankers Assoc., Mortgage Applications Decrease in Latest Weekly MBA Survey (Mar. 6, 2013), available at http://www.mbaa.org/NewsandMedia/PressCenter/ 83653.htm with Mortgage Bankers Assoc., Mortgage Applications Decrease in Latest Weekly MBA Survey (Aug. 28, 2013), available at http:// www.mbaa.org/NewsandMedia/PressCenter/ 85466.htm.

71 Some loans may require a large final payment (or ‘‘balloon’’ payment) in addition to monthly payments.

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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79736 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 72 Public Law 101–625, 104 Stat. 4079 (1990), sections 941–42.

73 Prior to the Dodd-Frank Act, section 4 of RESPA applied to ‘‘all transactions in the United States which involve federally related mortgage loans.’’ 12 U.S.C. 2603 (2009). However, section 1098 of the Dodd-Frank Act deleted the reference to ‘‘federally related mortgage loan’’ in this section and replaced it with ‘‘mortgage loan transactions.’’ The regulation implementing this statutory requirement has historically applied and continues to apply to ‘‘federally related mortgage loans.’’ See 12 CFR 1024.8; 24 CFR 3500.8 (2010). 74 During this 10-year period, in 2002, HUD published a proposed rule revising the good faith estimate forms and accuracy standards for cost estimates, which it never finalized. 67 FR 49134 (July 29, 2002).

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 10year 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. VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79737 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 75 U.S. Dep’t. of Hous. and Urban Dev., Summary Report: Consumer Testing of the Good Faith Estimate Form (GFE), prepared by Kleimann Communication Group, Inc. (2008), available at http://www.huduser.org/publications/pdf/ Summary_Report_GFE.pdf. 76 New RESPA Rule FAQs, available at http:// portal.hud.gov/hudportal/documents/ huddoc?id=resparulefaqs422010.pdf. 77 RESPA Roundup Archive, available at http:// portal.hud.gov/hudportal/HUD?src=/program_ offices/housing/rmra/res/resroundup. 78 Section 1029 of the Dodd-Frank Act excludes from this transfer of authority, subject to certain exceptions, any rulemaking authority over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 12 U.S.C. 5519. 79 MDIA is contained in sections 2501 through 2503 of the Housing and Economic Recovery Act of 2008, Public Law 110–289, enacted on July 30, 2008. MDIA was later amended by the Emergency Economic Stabilization Act of 2008, Public Law 110–343, enacted on October 3, 2008. 80 MDIA codified some requirements previously adopted by the Board in a July 2008 final rule. 73 FR 44522 (July 30, 2008) (HOEPA Final Rule). To ease discussion, the description of MDIA’s disclosure requirements includes the requirements of the 2008 HOEPA Final Rule. 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-onone 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 openend (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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79738 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 81 Bd. of Governors of the Fed. Reserve Sys., Summary of Findings: Design and Testing of Truth in Lending Disclosures for Closed-End Mortgages, prepared by Macro International, Inc. (July 16, 2009) (Macro 2009 Closed-End Report), available at http://www.federalreserve.gov/boarddocs/meetings/ 2009/20090723/Full%20Macro%20CE% 20Report.pdf.

82 As discussed in the section-by-section analysis of the proposed amendments to § 1026.4 in part VI, in response to concerns about the effect of an ‘‘allin’’ finance charge on the higher-priced and HOEPA coverage thresholds in §§ 1026.35 and 1026.32, respectively, the Board proposed to implement a different ‘‘transaction coverage rate’’ for higherpriced coverage and to retain the existing ‘‘some fees in, some fees out’’ treatment of certain charges in the definition of points and fees for purposes of determining HOEPA coverage. See 76 FR 27390, 27411–12 (May 11, 2011); 76 FR 11598, 11608–09 (Mar. 2, 2011); 75 FR 58539, 58636–38, 58660–61 (Sept. 24, 2010).

83 The Board finalized this proposal effective April 1, 2011. 76 FR 11319 (Mar. 2, 2011). 84 Public Law 104–208, 110 Stat. 3009 (1996). 85 Id., section 2101.

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 closedend 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79739 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 86 Id., section 2102(b). 87 Bd. of Governors of the Fed. Reserve Sys. And U.S. Dep’t of Hous. and Urban Dev., Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act (1998), available at http:// www.federalreserve.gov/boarddocs/rptcongress/ tila.pdf.

88 See, e.g., Regulation Z, 12 CFR part 1026 app. H–2 Loan Model Form.

89 74 FR 43232, 43233.

90 See the Bureau’s press release Consumer Financial Protection Bureau proposes ‘‘Know Before You Owe’’ mortgage forms (July 9, 2012), available at http://www.consumerfinance.gov/pressreleases/ consumer-financial-protection-bureau-proposesknow-before-you-owe-mortgage-forms/; the Bureau’s blog post Know Before You Owe: Introducing our proposed mortgage disclosure forms (July 9, 2012), available at http://www.consumerfinance.gov/blog/ know-before-you-owe-introducing-our-proposedmortgage-disclosure-forms/. 91 In its initial Federal Register notice, the Bureau also applied the September 7, 2012 deadline to comments on the proposed amendments to the definition of finance charge in § 1026.4. On August 31, 2012, however, the Bureau issued a notice extending the deadline for such comments to November 6, 2012. See the Bureau’s blog post, More time for comments on proposed changes to the definition of the finance charge (Aug. 31, 2012), available at http://www.consumerfinance.gov/blog/ more-time-for-comments-on-proposed-changes-tothe-definition-of-the-finance-charge/. The extension was published in the Federal Register on September 6, 2012. See 77 FR 54843 (Sept. 6, 2012). It did not change the comment period for any other aspects of the TILA–RESPA Proposal, which, as noted above, closed on November 6, 2012. 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).

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79740 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 92 The Consumer Financial Protection Act is title X, ‘‘Bureau of Consumer Financial Protection,’’ of the Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376 (2010), sections 1001–1100H. In the Consumer Financial Protection Act, Congress established the Bureau and its powers and authorities, transferred to the Bureau various existing functions of other agencies, mandated certain regulatory improvements, and prescribed other requirements and conforming amendments. Subtitle H, ‘‘Conforming Amendments,’’ is the last subtitle and consists of sections 1081–1100H. Certain titles of the Dodd-Frank Act are codified at 12 U.S.C. chapter 53. Subtitles A through G (but not H) of title X are codified at 12 U.S.C. chapter 53, subchapter V, parts A through G. Thus, the Consumer Financial Protection Act is substantially codified at 12 U.S.C. 5481–5603.

93 78 FR 6855 (Jan. 31, 2013), finalizing a proposal issued on July 9, 2012 (77 FR 54844 (Aug. 15, 2012) (2012 HOEPA Proposal)).

94 Homeownership Counseling Organizations Lists Interpretive Rule (Nov. 8, 2013), available at http://files.consumerfinance.gov/f/201311_cfpb_ interpretive-rule_homeownership-counselingorganizations-lists.pdf; see also Homeownership Counseling list requirements, CFPB Bulletin 2013– 13 (Nov. 8, 2013), available at http:// files.consumerfinance.gov/f/201311_cfpb_bulletin_ homeownership-counseling-list-requirements.pdf. 95 78 FR 10901 (Feb. 14, 2013), amending Regulation Z (2013 TILA Mortgage Servicing Final Rule), and 78 FR 10695 (Feb. 14, 2013), amending Regulation X (2013 RESPA Mortgage Servicing Final Rule). These rules finalized proposals issued on August 20, 2012 (77 FR 57317 (Sept. 17, 2012), proposing amendments to Regulation Z (2012 TILA Mortgage Servicing Proposal) and 77 FR 57200 (Sept. 17, 2012), proposing amendments to Regulation X (2012 RESPA Mortgage Servicing Proposal)).

96 78 FR 11279 (Feb. 15, 2013), finalizing a proposal issued on August 17, 2012 (77 FR 55271 (Sept. 7, 2012) (2012 Loan Originator Proposal)). 97 78 FR 32547 (May 31, 2013), finalizing a proposal to delay the effective date of the prohibition issued May 7, 2013 (78 FR 27308 (May 10, 2013)).

98 78 FR 10637 (Feb. 13, 2013), finalizing a proposal issued on September 5, 2012 (77 FR 54721 (Sept. 9, 2012) (2012 Interagency Appraisals Proposal)).

99 78 FR 48548 (Aug. 8, 2013). 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79741 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 100 78 FR 6407 (Jan. 30, 2013), finalizing a proposal issued by the Board on May 11, 2011 (76 FR 27389 (May 11, 2011) (2011 Board Ability to Repay Proposal)).

101 78 FR 35429 (Jun. 12, 2013), finalizing the concurrent proposal issued on January 10, 2013 (78 FR 6622 (Jan. 30, 2013)). 102 78 FR 4726 (Jan. 22, 2013), finalizing a proposal issued by the Board on March 2, 2011 (76 FR 11597 (Mar. 2, 2011)). 103 78 FR 23171 (Apr. 18, 2013). 104 78 FR 30739 (May 23, 2013). 105 78 FR 44685 (July 24, 2013), finalizing a proposal issued on April 19, 2013 (78 FR 25638 (May 2, 2013)).

106 78 FR 60382 (Oct. 1, 2013); 78 FR 39902 (Jul. 2, 2013).

107 78 FR 62993 (Oct. 23, 2013). 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 higherpriced 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 governmentsponsored 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 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79742 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 108 72 FR 14940, 14944 (Mar. 29, 2007); 74 FR 62890, 62893 (Dec. 1, 2009). 109 73 FR 14030, 14043 (Mar. 14, 2008); 73 FR 68204, 68265 (Nov. 17, 2008). 110 See e.g., Debra Pogrund Stark and Jessica M. Choplin, A Cognitive and Social Psychological Analysis of Disclosure Laws and Call for Mortgage Counseling to Prevent Predatory Lending, 16 Psych. Pub. Pol. and L. 85, 96 (2010); Paula J. Dalley, The Use and Misuse of Disclosure as a Regulatory System, 34 Fla. St. U.L. Rev. 1089, 1115 (2007); Patricia A. McCoy, The Middle-Class Crunch: Rethinking Disclosure in a World of Risk-Based Pricing, 44 Harv. J. on Legis. 123, 133 (2007); Lauren E. Willis, Decisionmaking and The Limits of Disclosure: The Problem of Predatory Lending: Price, 65 Md. L. Rev. 707, 766 (2006); Troy A. Paredes, After the Sarbanes-Oxley Act: The Future Disclosure System: Blinded by the Light: Information Overload and its Consequences for Securities Regulation, 81 Wash. U. L. Q. 417 (2003); William N. Eskridge, Jr., One Hundred Years of Ineptitude: The Need for Mortgage Rules Consonant with the Economic and Psychological Dynamics of the Home Sale and Loan Transaction, 70 Va. L. Rev. 1083, 1133 (1984).

111 John Kozup & Jeanne M. Hogarth, Financial Literacy, Public Policy, and Consumers’ Self- Protection-More Questions, Fewer Answers, 42 Journal of Consumer Affairs 2, 127 (2008). 112 74 FR 43232, 43234.

113 See Macro 2009 Closed-End Report at 19. For additional discussion regarding information overload, see the section-by-section analysis of proposed § 1026.37(l).

114 73 FR 14030, 14031.

115 Public Law 96–221, 94 Stat 132 (1980). 116 Public Law 96–221, Depository Institutions Deregulation and Monetary Control Act of 1980, Senate Report No. 96073 (Apr. 24, 1979). 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’ decisionmaking 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79743 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 117 The consumers who participated in these interviews had varying levels of education (from consumers with less than a high school education to consumers with graduate degrees) and varying levels of experience with the home buying and mortgage loan process (from consumers who never owned a home to consumers who had been through the home buying and mortgage loan process before). 118 See http://www.consumerfinance.gov/ knowbeforeyouowe/.

119 Examples of consumer and industry responses to the prototypes of the disclosures can be seen in the CFPB blog, including at: www.consumerfinance.gov/know-before-you-owego; www.consumerfinance.gov/13000-lessonslearned; and www.consumerfinance.gov/knowbefore-you-owe-its-closing-time. 120 Kleimann Communication Group, Inc., Know Before You Owe: Evolution of the Integrated TILA– RESPA Disclosures (July 2012), available at http:// files.consumerfinance.gov/f/201207_cfpb_report_ tila-respa-testing.pdf. 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-onone 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 nondepository 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 VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79744 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 121 The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires the Bureau to convene a Small Business Review Panel before proposing a rule that may have a substantial economic impact on a significant number of small entities. See Public Law. 104–121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Public Law 110– 28, sec. 8302 (2007)).

122 Available at http://www.consumerfinance.gov/ blog/sbrefa-small-providers-and-mortgagedisclosure/.

123 Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Integration of TILA and RESPA Mortgage Disclosure Requirements (Apr. 23, 2012), available at http:// files.consumerfinance.gov/f/201207_cfpb_report_ tila-respa-sbrefa-feedback.pdf. 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.

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79745 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 124 The Bureau’s policy regarding ex parte communications can be found at http:// files.consumerfinance.gov/f/2011/ 08/Bulletin_20110819_ ExPartePresentationsRulemakingProceedings.pdf. 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79746 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 125 See 78 FR 14030 (Oct. 29, 2013) (finalizing Policy to Encourage Trial Disclosure Programs under section 1032(e) of the Dodd-Frank Act); 77 FR 74625 (Dec. 17, 2012) (seeking comment on a proposed ‘‘Policy to Encourage Trial Disclosure Programs’’ under section 1032(e) of the Dodd-Frank Act); see also 78 FR 36532 (June 18, 2013) (seeking comment under the Paperwork Reduction Act on the proposed policy).

126 According to the U.S. Census Bureau, based on data from the 2007 American Community Survey, 55.4 million people spoke a language other than English at home. U.S. Census Bureau, Language Use in the United States: 2007, ACS–12 (Apr. 2010), available at http://www.census.gov/ hhes/socdemo/language/data/acs/ACS-12.pdf. 127 Id.

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-bysection 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 sectionby-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 preproposal 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 codevelopment of a non-English version of VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79747 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 128 The modifications to the design to accommodate the additional space necessary for the Spanish language text necessitated the use of a sixth page for the Spanish language version of the Closing Disclosure.

129 Kleimann Communication Group, Inc., Post- Proposal Testing of the Spanish and Refinance Integrated TILA–RESPA Disclosures (November 2013), available at http://files.consumerfinance.gov/ f/201311_cfpb_report_tila-respa_testing-spanishrefinancing.pdf.

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 Spanishlanguage 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79748 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 130 James Lacko and Janis Pappalardo, Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms, Federal Trade Commission, p. 53 (June 2007), available at http://www.ftc.gov/os/2007/06/ P025505MortgageDisclosureReport.pdf. 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 preproposal 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79749 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 131 Prior to conducting the Quantitative Study, the Bureau made modifications to the proposed integrated disclosures in response to public comments to increase consistency within and between the Loan Estimate and Closing Disclosure. The Bureau revised: The Assumption disclosures under §§ 1026.37(m) and 1026.38(l) so that the language between the two disclosures would match; the reference language in the Loan Terms table under §§ 1026.37(b) and 1026.38(b) so that the reference to the estimated total payment monthly payment used the same term as in the Projected Payments table under §§ 1026.37(c) and 1026.38(c), and to put the language in sentence case to increase readability; the checkboxes in the Escrow Account disclosure on the Closing Disclosure under § 1026.38(l)(7) to delete the ‘‘require or’’ from the second checkbox; change the ‘‘Agent’’ label on page 1 of the Closing Disclosure under § 1026.38(a) to ‘‘Settlement Agent’’ to match the Contact Information table under § 1026.38(r); removed the word ‘‘Borrower’’ from the ‘‘Borrower’s Loan Amount’’ label under § 1026.38(j) to match the term used in the Loan Terms table under §§ 1026.37(b) and 1026.38(b); and changed the labels of the row headings in the Escrow Account disclosure on page 4 of the Closing Disclosure under § 1026.38(l)(7) to include the word ‘‘escrow.’’ See the section-bysection analyses of the respective sections for more information regarding these modifications. 132 Kleimann Communication Group, Inc., Quantitative Study of the Current and Integrated TILA–RESPA Disclosures (November 2013), available at http://files.consumerfinance.gov/f/ 201311_cfpb_study_tila-respa_disclosurecomparison.pdf. See chapters 4 and 5 of the report for the results and conclusions of the study. 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; closedend 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 sectionby-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79750 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 133 See Kleimann Quantitative Study Report at 68–69.

134 Available at http://files.consumerfinance.gov/ f/201311_cfpb_report_tila-respa_testing-spanishrefinancing.pdf.

135 Dodd-Frank Act section 1400(c)(3) is codified at 15 U.S.C. 1601 note.

136 Dodd-Frank Act section 1414(a) also added to TILA new section 129C(f)(2), which requires firsttime borrowers for certain residential mortgage loans that could result in negative amortization to provide the creditor with documentation to demonstrate that the consumer received homeownership counseling from organizations or counselors certified as competent to provide such counseling by HUD. That provision is implemented in the Bureau’s proposal to implement Dodd-Frank Act requirements expanding protections for ‘‘highcost’’ mortgage loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433 (the 2012 HOEPA Proposal). 77 FR 49090 (Aug. 15, 2012). The 2012 HOEPA Proposal also implements the requirement of RESPA section 5(c), added by section 1450 of the Dodd-Frank Act, that lenders provide borrowers with a list of certified homeownership counselors. 137 As it stated in the TILA–RESPA Proposal, the Bureau believes that to give effect to the legislative purpose of section 1414(d) of the Dodd-Frank Act, the disclosure requirements of TILA section 129C(h) should apply without regard to whether the person would be a ‘‘creditor’’ under TILA and Regulation Z. See 77 FR 51116, 51265. For these reasons, in the TILA–RESPA Proposal, the Bureau proposed to retain the term ‘‘covered person’’ under § 1026.39(a)(1) and its definition, which would subject such covered persons to the proposed disclosure requirements. Id. As in the TILA–RESPA Proposal, in this final rule the Bureau is temporarily exempting ‘‘persons’’ (as defined in Regulation Z) rather than ‘‘creditors’’ from compliance with the provisions of TILA section 129C(h), which includes covered persons.

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 14 Disclosures Title XIV Disclosures 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 antideficiency 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 fullyindexed 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79751 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 138 The information set forth under TILA section 129D(j)(2) includes information concerning any applicable fees or costs associated with either the non-establishment of the escrow account at the time of the transaction, or any subsequent closure of the account; a clear and prominent statement that the consumer is responsible for personally and directly paying the non-escrowed items, in addition to paying the mortgage loan payment, in the absence of any such account, and the fact that the costs for taxes, insurance, and related fees can be substantial; a clear explanation of the consequences of any failure to pay non-escrowed items, including the possible requirement for the forced placement of insurance by the creditor or servicers and the potentially higher cost (including any potential commission payments to the servicer) or reduced coverage for the consumer in the event of any such creditor-placed insurance; and other information the Bureau determines is necessary for consumer protection. 15 U.S.C. 1639d(j)(2). 139 Effective July 21, 2011, the Dodd-Frank Act generally transferred rulemaking authority for TILA to the Bureau (except for certain rulemaking authority over motor vehicle dealers that remains with the Board). See sections 1061 and 1100A of the Dodd-Frank Act.

140 See the Bureau’s press release Consumer Financial Protection Bureau proposes ‘‘Know Before You Owe’’ mortgage forms (July 9, 2012), available at http://www.consumerfinance.gov/pressreleases/ consumer-financial-protection-bureau-proposesknow-before-you-owe-mortgage-forms/; the Bureau’s blog post Know Before You Owe: Introducing our proposed mortgage disclosure forms (July 9, 2012), available at http://www.consumerfinance.gov/blog/ know-before-you-owe-introducing-our-proposedmortgage-disclosure-forms/. 141 In its initial Federal Register notice, the Bureau also applied the September 7, 2012 deadline to comments on the proposed amendments to the definition of finance charge in § 1026.4. On August 31, 2012, however, the Bureau issued a notice extending the deadline for such comments to November 6, 2012. See the Bureau’s blog post, More time for comments on proposed changes to the definition of the finance charge (August 31, 2012), available at http://www.consumerfinance.gov/blog/ more-time-for-comments-on-proposed-changes-tothe-definition-of-the-finance-charge/. The extension was published in the Federal Register on September 6, 2012. See 77 FR 54843 (Sept. 6, 2012). It did not change the comment period for any other aspects of the TILA–RESPA Proposal, which, as noted above, ended November 6, 2012. 142 Codified at 15 U.S.C. 1601 note. Escrow Waiver Disclosure). New TILA section 129D(j)(1)(B) requires a creditor or servicer to provide disclosures postconsummation 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 antideficiency 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 fullyindexed 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79752 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 143 As the Bureau stated in the TILA–RESPA Proposal, certain of the Affected Title XIV Disclosures indicate that Congress did not intend for those disclosure requirements and the TILA– RESPA integrated disclosures to operate independently. For example, Dodd-Frank Act section 1419 amended paragraphs (a)(16) through (19) of TILA section 128 to require additional content on the disclosure provided to consumers within three days of application and in final form at or before consummation. 15 U.S.C. 1638(a)(16) through (19). Pursuant to TILA section 128(b)(1), for residential mortgage transactions, all disclosures required by TILA section 128(a) must be ‘‘conspicuously segregated’’ from all other information provided in connection with the transaction. 15 U.S.C. 1638(b)(1). Therefore, the Bureau stated that these sections are directly implicated by the integrated TILA–RESPA requirement. 77 FR 51116, 51133. 144 Id.

145 77 FR 51116, 51134. 146 As described under part IV below, the Bureau considers an exemption from the disclosure requirement under TILA section 129D(j)(1)(B), such as that proposed in the TILA–RESPA Proposal for the Affected Title XIV Disclosures, to be the issuance of a regulation implementing that provision for purposes of Dodd-Frank Act section 1400(c)(3).

147 77 FR 70105 (Nov. 23, 2012). 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79753 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 148 See Kleimann Testing Report. 149 Public Law 111–203, 124 Stat. 1376, section 1061(b)(7); 12 U.S.C. 5581(b)(7). 150 12 U.S.C. 5581(a)(1). 151 Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining ‘‘Federal consumer financial law’’ to include the ‘‘enumerated consumer laws’’ and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) (defining ‘‘enumerated consumer laws’’ to include TILA and RESPA); Dodd-Frank section 1400(b), 15 U.S.C. 1601 note (defining ‘‘enumerated consumer laws’’ to include certain subtitles and provisions of Title XIV). 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-bysection 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 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79754 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 152 Section 1100A of the Dodd-Frank Act amended TILA section 105(b) to provide that the ‘‘Bureau shall 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 the Real Estate Settlement Procedures Act of 1974 that, taken together, may apply to a transaction that is subject to both or either provisions of law.’’ 15 U.S.C. 1604(b). Section 1098 of the Dodd-Frank amended RESPA section 4(a) 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 this section and section 5, in conjunction with the disclosure requirements of the Truth in Lending Act that, taken together, may apply to a transaction that is subject to both or either provisions of law.’’ 12 U.S.C. 2603(a). 153 This requirement applies to extensions of credit that are both secured by a dwelling and subject to RESPA. TILA section 128(b)(2)(A); 15 U.S.C. 1638(b)(2)(A).

154 15 U.S.C. 1639. TILA section 129 contains requirements for certain high-cost mortgages, established by the Home Ownership and Equity Protection Act (HOEPA), which are commonly called HOEPA loans.

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 highcost 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79755 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79756 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 155 For example, the small financial service providers who advised the Small Business Review Panel stated that ambiguity in the application or interpretation of the current RESPA disclosure requirements produces substantial costs in the form of legal fees, staff training, and, for settlement agents, preparing forms differently for different lenders. To address this concern, these providers generally requested that the Bureau provide clear guidance on how to fill out the forms, similar to that currently provided in Regulation Z. See Small Business Review Panel Report at 19–20. In addition, the rules and forms adopted in this final rule are intended to meet the requirements of sections 1032(f), 1098, and 1100A of the Dodd-Frank Act that require the Bureau to combine the disclosures under TILA and sections 4 and 5 of RESPA into a single, integrated disclosure for mortgage loan transactions. 12 U.S.C. 5532(f), 12 U.S.C. 2603, 15 U.S.C. 1604.

156 The Bureau is proposing to retain established regulatory terminology in Regulations X and Z for consistency, such as using the term ‘‘borrower’’ in Regulation X and ‘‘consumer’’ in Regulation Z. 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 openend 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 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79757 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 157 See Small Business Review Panel Report at 19–20.

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-bysection 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 1024.5 Coverage 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79758 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79759 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 158 The regulation recodified the provisions of § 1024.13 as § 1024.5(c) in order to clarify the application of State law provisions concerning the servicing of mortgage loans in the context of RESPA. See 78 FR 44686, 44689–90 (July 24, 2013). 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 1024.30 Scope 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 closedend 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 closedend 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-bysection 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; VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79760 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 159 Section 1026.1(d)(5) was also amended by the Bureau’s 2013 HOEPA Final Rule to reflect the expanded scope of HOEPA under the Dodd-Frank Act. See 78 FR 6856, 6868 (Jan. 31, 2013). Those amendments will take effect on January 10, 2014. 160 15 U.S.C. 1638(a)(16)–(19), 1638(b)(4), 1639c(f)(1), 1639c(g), 1639c(h), 1639d(h), and 1639d(j)(1)(A); 12 U.S.C. 2604(c); 12 U.S.C. 5532(f). 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 1026.1 Authority, 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 abovelisted provisions of TILA and RESPA VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79761 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 161 Under section 553(d) of the Administrative Procedure Act (APA), the required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except for (1) A substantive rule which grants or recognizes an exemption or relieves a restriction; (2) interpretative rules and statements of policy; or (3) as otherwise provided by the agency for good cause and published with the rule. 5 U.S.C. 553(d). The Bureau’s final rule provided for a temporary exemption from the Affected Title XIV Disclosures and the Post-Consummation Escrow Cancellation Disclosure such that they would not become selfeffective on January 21, 2013, and instead would be required at the time the TILA–RESPA integrated disclosures become effective. Therefore, under section 553(d)(1) of the APA, the Bureau published the final rule less than 30 days before its effective date because it was a substantive rule which grants or recognizes an exemption or relieves a restriction. 5 U.S.C. 553(d)(1).

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 openend 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 selfexecuting 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79762 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 1026.2 Definitions 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79763 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations § 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 openend 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 catchall 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79764 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79765 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 preapplication 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 catchall 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 largebank 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- VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79766 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79767 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 prequalification cost estimates or grant preapprovals. The Bureau believes that creditors could provide prequalification estimates and grant preapprovals 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 prequalification estimates and preapprovals 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 prequalification 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 preapproval 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79768 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79769 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79770 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 sevenbusiness 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-bysection 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79771 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 162 46 FR 20848, 20851 (April 7, 1981) (‘‘The Board believes these numerical tests will be most useful in cases when a person does not extend credit as part of its primary business and therefore is genuinely unsure whether it is a ‘creditor’ for Truth in Lending purposes’’). 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 preconsummation 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 Federallychartered 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79772 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79773 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 notfor-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79774 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 163 Public Law 104–29, 109 Stat. 271 (1995). 164 See Bd. Of Governors of the Fed. Reserve Sys., Report to the Congress on Finance Charges for Consumer Credit under the Truth in Lending Act 10–11 (April 1996), available at http:// www.federalreserve.gov/boarddocs/rptcongress/fc_ study.pdf.

165 Id. at 12.

166 Bd. Of Governors of the Fed. Reserve Sys. & U.S. Dep’t of Hous. & Urban Dev., Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act (July 1998), available at http:// www.federalreserve.gov/boarddocs/rptcongress/ tila.pdf.

167 Id. at 10.

168 Id.

169 Id.

170 Id. at 13–16. A subsequent joint report issued by HUD and the U.S. Department of the Treasury expressly adopted this recommendation, concluding that the ‘‘ ‘all in approach’ would improve the APR’s usefulness and at the same time lessen the compliance burden for industry.’’ U.S. Dep’t of Treas. and U.S. Dep’t of Hous. and Urban Dev., Joint Report on Recommendations to Curb Predatory Home Mortgage Lending, available at http://archives.hud.gov/reports/treasrpt.pdf. 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 1026.4 Finance 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 ‘‘allinclusive 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). VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79775 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 171 References to the Bureau’s rulemakings under title XIV of the Dodd-Frank Act are to the final rules issued by the Bureau in January 2013. See part II.F for a discussion of these rulemakings. 172 Under rules implementing provisions of the Dodd-Frank Act, a loan is defined as a high-cost mortgage, subject to HOEPA protections, if the total points and fees payable in connection with the transaction exceed specified thresholds (points and fees coverage test); the transaction’s APR exceeds the applicable average prime offer ate (APOR) by a specified threshold (APR coverage test); or the transaction has certain prepayment penalties. First, under the points and fees coverage test, the definition of points and fees includes, as its starting point, all items included in the finance charge. Therefore, a potential consequence of the more inclusive finance charge would have been that more loans might exceed HOEPA’s points and fees threshold because new categories of charges would have been included in the calculation of total points and fees for purposes of that coverage test. In addition, under the APR coverage test, the more inclusive finance charge could have resulted in some additional loans being covered as high-cost mortgages because closed-end loans would have had higher APRs. There are currently some differences between APR and APOR, the latter of which is generally calculated using data that includes only contract interest rates and points but not other origination fees. See 75 FR 58539, 58660– 62 (Sept. 24, 2010). The current APR includes not only discount points and origination fees but also other charges the creditor retains and certain thirdparty charges. The more inclusive finance charge, which would have also included most third-party charges, would have widened the disparity between the APR and APOR and caused more closed-end loans to qualify as high-cost mortgages. Similar implications would have applied to each respective rulemaking in which coverage depends on comparing a transaction’s APR to the applicable APOR. The Bureau notes, however, that the Dodd- Frank Act expands HOEPA to apply to more types of mortgage transactions, including purchase money mortgage loans and open-end credit plans secured by a consumer’s principal dwelling. However, the proposed more inclusive finance charge would have applied only to closed-end loans. Therefore, the more inclusive finance charge would not have affected the potential coverage of open-end credit plans under HOEPA.

173 Specifically, the Dodd-Frank Act and the 2013 ATR Final Rule generally prohibit prepayment penalties on closed-end, dwelling-secured mortgage loans, except on fixed rate qualified mortgages that are not higher-priced. For balloon loans, the Dodd- Frank Act and the 2013 ATR Final Rule generally require creditors to assess consumers’ ability to repay a higher-priced loan with a balloon payment using the scheduled payments required under the terms of the loan including any balloon payment, and based on income and assets other than the dwelling itself. 78 FR 6408, 6585 (Jan. 30, 2013). Only consumers with substantial income or assets would likely qualify for such a loan. 174 The TCR would have been determined in accordance with the applicable rules of Regulation Z for the calculation of the APR for a closed-end transaction, except that the prepaid finance charge for purposes of calculating the transaction coverage rate includes only charges that will be retained by the creditor, mortgage broker, or affiliates of either. The Board’s proposed definition of TCR varied slightly between the 2010 Mortgage Proposal and the 2011 Escrows Proposal as to treatment of charges retained by mortgage broker affiliates. In its 2012 HOEPA Proposal, the Bureau proposed to use the 2011 Escrows Proposal version, which would include charges retained by broker affiliates. 77 FR 49090, 49102 (Aug. 15, 2012). 175 To the extent that creditors believed that it would be burdensome to calculate two metrics, the Board’s proposal stated that they could continue to use APR for both coverage and disclosure purposes. 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 higherpriced balloon loans, and been ineligible for certain exceptions authorizing creditors to offer prepayment penalties on fixed rate, nonhigher-priced qualified mortgage loans.173 Again, status as ‘‘higherpriced’’ 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).

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79776 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 176 In addition to commenting on the threshold question of whether the Bureau should adopt a more inclusive finance charge, commenters also argued that certain specific exclusions from the finance charge should be retained or removed in the event the Bureau moves to a more inclusive finance charge (for example, voluntary credit insurance and title insurance charges). Because the Bureau is not adopting a more inclusive finance charge definition at this time, those comments are not specifically addressed here. The Bureau will evaluate those comments separately in the event the Bureau decides to propose the more inclusive finance charge at a later date. 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79777 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79778 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 177 Comments regarding the broader definition of the finance charge or potential mitigation measures submitted to the other Title XIV Rulemakings are not specifically described here because the Bureau is not adopting the proposed amendment to the definition of the finance charge. 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 thirdparty 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79779 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 178 Section 1094 of the Dodd-Frank Act amends HMDA to expand the scope of information relating to mortgage applications and loans that must be compiled, maintained, and reported under HMDA, including the ages of loan applicants and mortgagors, information relating to the points and fees payable at origination, the difference between the annual percentage rate associated with the loan and benchmark rates for all loans, the term of any prepayment penalty, the value of real property to be pledged as collateral, the term of the loan and of any introductory interest rate for the loan, the presence of contract terms allowing non-amortizing payments, the origination channel, and the credit scores of applicants and mortgagors. The Bureau is in the prerule stage of incorporating these amendments to HMDA into its Regulation C, 12 CFR part 203, which implements HMDA. 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79780 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 sectionby-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 mortgagerelated 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 closedend 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 1026.17 General 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 sectionby-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79781 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 179 See 78 FR 10902, 11017 (Feb. 14, 2013). 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-bysection 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 postconsummation 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 creditorpaid 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79782 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 lookback 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79783 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79784 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 manufacturerpaid 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79785 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79786 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 transactionspecific 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-bysection 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 abilityto-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 closedend 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 nonmortgage 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79787 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79788 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79789 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 180 In addition to, and at the same time as, provision of the RESPA GFE under RESPA section 5(c), section 5(d) also requires lenders to provide to mortgage applicants the home buying information booklet prepared by the Bureau pursuant to section 5(a). Although the Bureau did not propose to integrate the booklet with the RESPA GFE and TILA disclosures, the Bureau proposed to implement the booklet requirement in proposed § 1026.19(g), discussed below. The same considerations of coverage discussed here with respect to the integrated disclosures also apply for purposes of the requirement to provide the special information booklet under § 1026.19(g). 181 Although section 4 of RESPA, 12 U.S.C. 2603, originally recited that it applied to federally related mortgage loans as well, as amended by the Dodd- Frank Act it no longer does so explicitly. The Bureau nevertheless regards the RESPA settlement statement requirement as continuing to apply to federally related mortgage loans, consistent with the rest of RESPA’s scope generally. 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 ‘‘highcost’’ 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79790 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 182 The exemption for 25-acre loans is provided by Regulation X but does not appear in RESPA. See 12 CFR 1024.5(b)(1).

183 See, e.g., Dodd-Frank Act section 1414(a) (requires negative amortization disclosure for openor closed-end consumer credit plans secured by a dwelling or residential real property that includes a dwelling that provides or permits a payment plan that may result in negative amortization) (TILA section 129C(f)); Dodd-Frank Act section 1419 (requires certain payment disclosures for variable rate residential mortgage loans for which an escrow account will be established) (TILA section 128(a)(16)); Dodd-Frank Act sections 1461(a), 1462, and 1465 (requires certain payment and escrow disclosures for consumer credit transactions secured by a first lien on the principal dwelling of the consumer, other than an open-end credit plan or reverse mortgage) (TILA section 129D(h) and (j) and section 128(b)(4)); Dodd-Frank Act section 1475 (permits disclosure of appraisal management fees for federally related mortgage loans) (RESPA section 4(c)).

184 The rural lender indicated that approximately 55 percent of its consumer-purpose loan applications and 61 percent of closed-end consumer-purpose loans secured with real property are currently exempt from the RESPA GFE and RESPA settlement statement requirements, respectively.

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 (vacantland 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 consumerpurpose 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79791 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 vacantland 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 consumerpurpose, 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79792 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 185 The final rule also removes the 25-acre loan exemption from Regulation X. See the section-bysection analysis of § 1026.5(b)(1) above. 186 Regulation X currently exempts from coverage any loan secured by vacant or unimproved property, unless, within two years from the date of the settlement of the loan, a structure or a manufactured home will be constructed or placed on the real property using the loan proceeds. 12 CFR 1024.5(b)(4). If a loan for a structure or manufactured home to be placed on vacant or unimproved property will be secured by a lien on that property, the transaction is covered by Regulation X. Id.

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 nonconsumer-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 nonconsumer 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 closedend 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 estatesecured, 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79793 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 187 In addition, many reverse mortgages are structured as open-end plans and therefore may be subject to the same concerns noted with respect to HELOCs.

188 The Board’s 2010 Mortgage Proposal included several provisions relating to reverse mortgages. See 75 FR 58539, 58638–59 (Sept. 24, 2010). Specifically, the Board proposed requiring creditors to use new forms of disclosures designed specifically for reverse mortgages, rather than the standard TILA disclosures. The 2010 Mortgage Proposal also proposed significant protections for reverse mortgage consumers, including with respect to advertising of reverse mortgages and cross-selling of reverse mortgages with other financial and insurance products. In addition, section 1076 of the Dodd-Frank Act required the Bureau to engage in a study of reverse mortgage transactions and instructs the Bureau to consider protections with respect to obtaining reverse mortgages for the purpose of funding investments, annuities, and other investment products and the suitability of a borrower in obtaining a reverse mortgage. The Bureau published the reverse mortgage study on June 28, 2012. See Press Release, U.S. Consumer Fin. Prot. Bureau, CFPB Report Finds Confusion in Reverse Mortgage Market (June 28, 2012), available at http://www.consumerfinance.gov/pressreleases/ consumer-financial-protection-bureau-report-findsconfusion-in-reverse-mortgage-market/. The Bureau intends that its future rulemaking for reverse mortgages will address the issues identified in the Board’s 2010 Mortgage Proposal and the findings of the Bureau’s reverse mortgage study. 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. Chatteldwelling 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 closingcost 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79794 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 189 See 77 FR 51116, 51156 (Aug. 23, 2012). 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 nondepository 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 chatteldwelling 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 dwellingsecured 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79795 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 190 In 2009, the Board proposed significant revisions to the disclosure requirements for HELOCs. See 74 FR 43428 (Aug. 26, 2009). The Bureau is now responsible for this proposal. 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-dwellingsecured 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-dwellingsecured 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-dwellingsecured 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79796 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 191 See 15 U.S.C. 1602(g); 12 CFR 1026.2(a)(17). 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79797 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 fiveor-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 antideficiency 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79798 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 closedend 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 vacantland 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79799 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 192 RESPA section 5(d) provides that ‘‘[e]ach lender referred to in subsection (a) of this section shall provide the booklet described in such subsection to each person from whom it receives or for whom it prepares a written application to borrow money to finance the purchase of residential real estate. Such booklet shall be provided by delivering it or placing it in the mail not later than 3 business days after the lender receives the application, but no booklet need be provided if the lender denies the application for credit before the end of the 3-day period.’’ 12 U.S.C. 2604(d). RESPA section 5(c) provides that ‘‘[e]ach lender shall 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 as prescribed by the Bureau.’’ 12 U.S.C. 2604(c). Thus, the lender must deliver the RESPA GFE not later than three business days after receiving the consumer’s application. § 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79800 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and 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; VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79801 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79802 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 borrowerrequested 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 sevenbusiness-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) VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79803 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79804 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79805 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations § 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 inperson 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 overcompliance: 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-bysection 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), VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79806 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 sevenbusiness-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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79807 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79808 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79809 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 abovereferenced 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79810 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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.

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79811 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79812 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations § 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 preapproval 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79813 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 ‘‘preapplication 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 ‘‘preapplication fee’’ would be contrary to the Bureau’s intent of ensuring that consumers receive a reliable estimate of mortgage loan costs with as little upfront expense and burden as possible. Second, the Bureau is concerned that the description of a fee as a ‘‘preapplication 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, narrowlytailored purpose before the consumer indicates an intent to proceed. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79814 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 193 Proposed form H–26(B) would have illustrated the placement of the disclaimer on a consumerspecific worksheet for which a creditor uses a format similar to the proposed Loan Estimate in form H–24 of appendix H to Regulation Z. 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, preapplication 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79815 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations that the unregulated nature of preapplication 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 tradeoffs 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 preapplication 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 12point 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 overburdensome 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79816 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79817 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 194 For a discussion of changed circumstances and borrower-requested changes, see the section-bysection analysis of § 1026.19(e)(3)(iv). 195 As proposed, the term ‘‘affiliate’’ would have meant any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956, 12 U.S.C. 1841(k). 77 FR 51167, fn. 141. 196 The Bureau stated in the proposal that settlement service providers such as appraisal management companies and title companies may be affiliated with the creditor. Because fees paid for appraisals and title-related services constitute a large percentage of total settlement service fees paid by consumers at consummation, permitting these fees to vary by ten percent may significantly increase the actual cost of obtaining a mortgage. 197 Section 1026.18 of Regulation Z includes several disclosures related to the cost of credit, such as the amount financed, finance charge, and annual percentage rate. Section 1026.18(c)(3) also provides that the itemization of amount financed need not be delivered if the RESPA GFE is provided. 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 nonlender-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 lenderrequired 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 lenderrequired 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. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79818 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 198 RESPA section 2(b). 12 U.S.C. 2601. 199 RESPA section 5(c). 12 U.S.C. 2604. 200 See Small Business Review Panel Report at 34, 37–38, 40, 64, 67, and 71. 201 Id. at 29.

202 Two national consumer advocacy groups, however, provided comments on the aspect of the proposal that would have kept prepaid interest in the category of settlement costs not subject to tolerances at all. For a detailed discussion of this issue, see the section-by-section analysis of § 1026.19(e)(3)(iv) below. 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-bysection 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 sectionby-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79819 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 lenderrequired 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 lenderrequired providers. Many commenters cited the lack of knowledge about a nonaffiliated 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 lenderrequired 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79820 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 203 78 FR 6408 (Jan. 30, 2013). 204 76 FR 24090 (Apr. 29, 2011). On August 29, 2013, the agencies announced in a joint press release that a revised NPRM on the rule has been issued. See e.g., Board of Governors of the Federal Reserve System, et al. Agencies revise proposed risk retention rule, available at http:// www.federalreserve.gov/newsevents/press/bcreg/ 20130828a.htm (last accessed Aug. 29, 2013). 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 thirdparty 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 lenderrequired service providers. As discussed in greater detail below in the section-bysection analysis of § 1026.19(e)(3)(i), the final rule generally provides that any affiliate charge or charge of a lenderrequired 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 borrowerrequested 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, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79821 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 205 67 FR 49134 (Jul. 29, 2002). 206 73 FR 14030, 14032 (Mar. 14, 2008). 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 borrowerrequested 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 sectionby-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 borrowerrequested 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79822 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 lenderrequired 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 nonrequired 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79823 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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.

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79824 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 borrowerrequested 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79825 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 207 Current § 1026.32(b)(2), which sets the definition of ‘‘affiliate’’ in subpart E of Regulation Z, will be renumbered as § 1026.32(b)(5) when the Bureau’s 2013 ATR Final Rule becomes effective on January 10, 2014.

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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79826 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 nonaffiliates 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79827 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 lenderrequired) 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79828 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 borrowerrequested 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 sectionby-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79829 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 208 See § 1024.7(f)(1), (2), (3), and (5). revised to reflect cost increases due to a changed circumstance or borrowerrequested 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.

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79830 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79831 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 209 12 CFR 1024.2(b).

210 Id.

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 Federallychartered 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79832 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 ratedependent 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79833 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 211 The term ‘‘bona fide discount points’’ was not defined until the issuance of the Bureau’s 2013 ATR Final Rule, which post-dated the issuance of the TILA–RESPA Proposal.

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 tenbusiness-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 tenbusiness-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79834 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 212 ‘‘If a revised GFE is to be provided, the loan originator must do so within 3 business days of receiving information sufficient to establish changed circumstances.’’ 12 CFR 1024.7(f)(1) and (2). ‘‘If a revised GFE is to be provided, the loan originator must do so within 3 business days of the borrower’s request.’’ 12 CFR 1024.7(f)(3). ‘‘The loan originator must provide the revised GFE within 3 business days of the interest rate being locked or, for an expired interest rate, re-locked.’’ 12 CFR 1024.7(f)(5).

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 threebusiness-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 threebusiness-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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79835 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-businessday 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 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79836 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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 threebusiness-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. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79837 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 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-bysection 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. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79838 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 213 Although commenters provided these comments in response to the Bureau’s proposal for which party would be responsible for providing the Closing Disclosure, discussed in more detail in the section-by-section analysis of § 1026.19(f)(1)(v) below, the Bureau is addressing them here because they implicate the decision to integrate the disclosures in § 1026.19(f). 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 providers, and that creditors frequently do not select settlement service providers.

Both creditor and settlement agent commenters were concerned that they could not guarantee that the ‘‘actual terms’’ of the transaction could be provided three business days before consummation in every case. Commenters also were concerned that a requirement to disclose the ‘‘actual terms’’ of the transactions before consummation would delay closings because creditors would not provide the Closing Disclosure until all parties have finalized their information. Because settlement costs currently are not disclosed to borrowers until the day before or the day of settlement on the RESPA settlement statement, industry commenters were concerned about the feasibility of providing the ‘‘actual terms’’ of the transaction before consummation, notwithstanding the proposed exceptions for consumer-seller negotiations, tolerance cures, and $100 or less increase in the cash to close amount. Commenters were concerned that the proposed exceptions would be too narrow to account for the many reasons closing costs could change before consummation, and that the need for revisions would arise inevitably, triggering a series of three-business-day waiting periods.

Settlement agent commenters recommended that the Bureau integrate the final TILA disclosure with the RESPA settlement statement by crossreferencing in Regulation Z certain RESPA-related disclosure requirements in Regulation X.213 A trade association representing the settlement agent and title insurance industry recommended that the final rule divide the Closing Disclosure requirements among Regulation Z and Regulation X, as a modification to one of the alternatives proposed by the Bureau with respect to who would be responsible for providing the Closing Disclosure. The commenter submitted draft language for the Bureau to consider adopting in the final rule. Final Rule Actual terms. The Bureau believes consumers must receive accurate information about the actual terms of their transactions. The Bureau also appreciates that some information about the transaction may not be known with certainty three business days before consummation. The Bureau further understands that consumers and other parties may face costs if closings are delayed, as discussed in greater detail in the section-by-section analyses of § 1026.19(f)(1)(ii)(A) and (f)(2) below. From the extensive public comments it received on this aspect of the proposal, the Bureau understands that creditors and settlement agents obtain transaction cost information from a wide variety of sources and third parties. The Bureau understands that some costs may only be known before or even after consummation. In light of these concerns, the final rule clarifies the requirements in § 1026.19(f) with respect to the accuracy of the information contained in the Closing Disclosure provided three business days before consummation, as discussed in more detail below, and with respect to changes that may occur before and after consummation, as discussed in the section-by-section analyses of § 1026.19(f)(1)(ii)(A) and (f)(2) below. Final § 1026.19(f)(1)(i) is adopted as proposed with a technical revision to the heading of § 1026.19(f)(1). Final § 1026.19(f)(1)(i) provides 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 transaction.

Proposed comment 19(f)(1)(i)–1 is adopted substantially as proposed, with revisions to conform to the final rule. The Bureau recognizes that changes may occur after the Closing Disclosure is first provided three business days before consummation. Accordingly, comment 19(f)(1)(i)–1 states that if the disclosures provided pursuant to § 1026.19(f)(1)(i) do not contain the actual terms of the transaction, the creditor does not violate § 1026.19(f)(1)(i) if the creditor provides corrected disclosures that contain the actual terms of the transaction and complies with the other requirements of § 1026.19(f), including the timing requirements in § 1026.19(f)(1)(ii) and (f)(2). The comment includes a reference to the timing requirements of § 1026.19(f)(2) because that provision, as revised, includes timing and delivery requirements applicable to changes that may occur after the Closing Disclosure is first provided under § 1026.19(f)(1)(ii)(A) three business days before consummation. See the sectionby-section analysis of final § 1026.19(f)(2) for a discussion of these redisclosure requirements. The final rule also amends the example in the final sentence of proposed comment 19(f)(1)(i)–1 to reflect revisions made in the final rule to address changes that may be made before consummation without triggering additional three-business-day waiting periods under § 1026.19(f)(2). Specifically, the comment includes an example in which the consumer adds a mobile notary service after the creditor provides the Closing Disclosure, which requires that the creditor provide corrected disclosures at or before consummation, pursuant to § 1026.19(f)(2)(i). In addition, comment 19(f)(1)(i)–1 refers to ‘‘corrected disclosures’’ rather than ‘‘new disclosures’’ to reflect the terminology currently used with respect to the final TILA disclosures in Regulation Z and for greater consistency throughout § 1026.19(f).

Best information reasonably available standard. As discussed in more detail in the section-by-section analyses of § 1026.19(f)(1)(ii)(A), (f)(2)(i), and (f)(2)(ii), the Bureau recognizes that the Closing Disclosure provided to consumers three business days before consummation pursuant to § 1026.19(f)(1)(ii)(A) may require revisions, and that creditors may face compliance difficulties providing the ‘‘actual terms’’ of the transaction three business days before consummation. Accordingly, as discussed in more detail below, the final rule clarifies the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79839 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations accuracy standards applicable to the Closing Disclosure provided three business days before consummation. While the Bureau acknowledges that the Closing Disclosure provided three business days before consummation may require subsequent revisions, the Bureau does not expect revisions will be made to terms that will impose significant, long-term costs to consumers. First, the final rule expands the zero percent tolerance category that applies to the estimated charges under § 1026.19(e) from the category that is applicable to the RESPA GFE under current Regulation X to include charges paid to affiliates of the creditor or a mortgage broker and charges for which the consumer cannot shop for the service provider, as discussed in the section-by-section analysis of § 1026.19(e)(3) above. Second, the final rule imposes redisclosure requirements resulting in a new three-business-day waiting period for certain changes to the APR, loan product, and prepayment penalties, discussed in the section-bysection analysis of § 1026.19(f)(2) below. With respect to revisions resulting from the consumer’s participation in the transaction, such as third-party services that the consumer shops for independently (e.g., owner’s title insurance), the Bureau believes the consumer will be aware of cost increases associated with such services. In addition, to the extent changes occur between the time the Closing Disclosure is first provided and consummation that may affect the Cash to Close disclosure under § 1026.38, the Bureau believes creditors and settlement agents will have an incentive to keep consumers informed of such changes to ensure the efficient operation of closings. In addition, the Bureau believes the final rule will provide industry with additional incentive to ensure consumers receive disclosures that are as accurate as possible at the time they are provided to minimize subsequent revisions.

The accuracy standards with respect to the final TILA disclosures and the RESPA settlement statement currently differ under Regulation X and Regulation Z. RESPA section 4 requires that the RESPA settlement statement itemize all charges imposed upon the borrower and the seller, and current Regulation X § 1024.8(b)(1) requires the disclosure of the ‘‘actual charges’’ paid by the borrower and seller. However, Regulation Z currently accounts for the practical difficulties that creditors may face in providing information on disclosures delivered before consummation. Regulation Z § 1026.17 contains general disclosure requirements applicable to closed-end transactions, including mortgage loans. Section 1026.17(c)(2)(i) states that, ‘‘[i]f any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer, and shall state clearly that the disclosure is an estimate.’’ Comments 17(c)(2)(i)–1, –2, and –3 contain guidance explaining the application of the best information reasonably available standard.

While the Bureau did not propose to amend the text of § 1026.17(c)(2)(i), it did propose amendments to the commentary of that section to clarify the applicability of the best information reasonably available standard to the particular estimation and redisclosure requirements of § 1026.19(e) and (f). For example, as discussed in the section-bysection analysis of § 1026.17(c)(2)(i), proposed comment 17(c)(2)(i)–1 would have added a clause to the first sentence of the comment that states, ‘‘[e]xcept as otherwise provided in §§ 1026.19, 1026.37, and 1026.38, disclosures’’ may be estimated when the exact information is unknown at the time disclosures are made. Proposed comment 17(c)(2)(i)–1 also would have added a sentence to the end of the existing comment that states, ‘‘[f]or purpose of § 1026.17(c)(2)(i), creditors must provide the actual amounts of the information required to be disclosed pursuant to § 1026.19(e) and (f), subject to the estimation and redisclosure rules in those provisions.’’ Thus, creditors would have had to disclose the actual terms of the transaction for the disclosures under § 1026.19(f), including for disclosures provided three business days before consummation. Proposed comment 17(c)(2)(i)–2 (labeling estimates) would have added a sentence to the current comment to clarify that, for 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 the disclosure is an estimate, and that ‘‘for all other disclosures,’’ creditors have flexibility in labeling estimates. The Bureau believes the actual charges standard applicable to the RESPA settlement statement under Regulation X and the best information reasonably available standard generally applicable to closed-end disclosures provided before consummation under Regulation Z must be reconciled to integrate the disclosure requirements of RESPA and TILA. Accordingly, the final rule revises proposed comment 17(c)(2)(i)–1 to clarify that the best information reasonably available standard applies to the Closing Disclosure in certain circumstances. In addition, as discussed below, the final rule includes comment 19(f)(1)(i)–2, which is similar to the commentary generally applicable to § 1026.17(c)(2)(i), but differs in certain respects.

Comment 17(c)(2)(i)–1 explains that creditors may estimate when the exact information is unknown to the creditor at the time disclosures are made, and that information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. Comment 19(f)(1)(i)–2 is substantially similar, but uses the phrase ‘‘actual term’’ instead of ‘‘exact information’’ to reflect the requirements of § 1026.19(f)(1)(i) that the creditor provide the consumer with disclosures in § 1026.38 reflecting the ‘‘actual terms’’ of the transaction. Because the best information reasonably available standard applies to the Closing Disclosure when it is provided three business days before consummation, comment 19(f)(1)(i)–2 provides that creditors may estimate disclosures provided under § 1026.19(f)(1)(ii)(A) and (f)(2)(ii) when the actual term is unknown to the creditor at the time disclosures are made, consistent with § 1026.17(c)(2)(i).

Like comment 17(c)(2)(i)–1, comment 19(f)(1)(i)–2.i explains that the ‘‘reasonably available’’ standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. An actual term is unknown only if it is not ‘‘reasonably available’’ to the creditor at the time the disclosures are made, and the ‘‘reasonably available’’ standard requires that the creditor, acting in good faith, exercise due diligence in obtaining the information. The due diligence requirement is a critical element of the best information reasonably available standard. The Bureau expects creditors will conduct due diligence, and coordinate with settlement agents and other parties as necessary, to obtain information about the terms of the consumer’s transaction so that the consumer receives a reliable Closing Disclosure three business days before consummation.

To clarify the due diligence requirement, comment 19(f)(1)(i)–2.i includes guidance similar to comment 17(c)(2)(i)–1 with respect to how a creditor exercises due diligence in obtaining information. Unlike comment 17(c)(2)(i)–1, comment 19(f)(1)(i)–2.i includes settlement agents as an additional example of a third-party VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79840 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations source the creditor may rely on in obtaining information. The comment includes this example because the Bureau understands that creditors are likely to rely on settlement agents for many types of information that must be provided in the Closing Disclosure. Thus, the comment illustrates that creditors might look to a settlement agent for homeowners association dues or other information in connection with a real estate settlement. This comment is intended to be illustrative and not exhaustive of the types of parties or information that a creditor might consult in performing due diligence. If the creditor does not itself have the information regarding the actual terms, such as for the disclosures under § 1026.38(j) and (k), the creditor may rely on a third party settlement agent for the transaction in obtaining information regarding the actual terms of the transaction. The creditor would not be considered to have conducted due diligence if the creditor did not attempt to obtain such information from the settlement agent. In such case, the creditor would not be permitted to use an estimate for the disclosure provided under § 1026.19(f)(1)(ii)(A). Comment 19(f)(1)(i)–2.i includes examples illustrating how a creditor exercises due diligence for purposes of § 1026.19(f)(1)(i). Comment 19(f)(1)(i)– 2.i.A includes an example in which a creditor does not exercise due diligence in connection with the cost of the lender’s title insurance policy to be purchased by the consumer. Comment 19(f)(1)(i)–2.i.B includes an example in which a creditor has exercised due diligence in connection with amounts disclosed under § 1026.38(j) and (k) because it bases disclosures on information about the consumer’s transaction obtained from the settlement agent.

Like comment 17(c)(2)(i)–1, comment 19(f)(1)(i)–2.ii clarifies that, if an actual term is unknown, the creditor may use estimates in making disclosures even though the creditor knows that more precise information will be available at or before consummation. Similar to comment 17(c)(2)(i)–1, comment 19(f)(1)(i)–2 highlights the creditor’s obligations to make subsequent disclosures. Comment 19(f)(1)(i)–2.ii specifically discusses the creditor’s obligations to provide corrected disclosures at or before consummation containing the actual terms of the transaction under § 1026.19(f)(2), subject to the exceptions provided for in § 1026.19(f)(2).

Comment 19(f)(1)(i)–2 does not state that the creditor must label disclosures based on the best information reasonably available as estimates. Instead, comment 19(f)(1)(i)–2.ii clarifies that the labeling rules under § 1026.38 apply to the Closing Disclosures with a reference to comment 17(c)(2)(i)–2 to direct creditors to guidance on labeling estimates. The disclosure requirements in § 1026.38 generally do not permit creditors to label disclosures on the Closing Disclosure as estimates because creditors are required to use the master headings, headings, subheadings, labels, and designations required by that section.

The Bureau is aware that other disclosures provided under Regulation Z are labeled as estimates when information is unknown. However, the Bureau is concerned that labeling certain items on the Closing Disclosure as estimates may result in consumer confusion regarding the nature of the Closing Disclosure. In addition, the Closing Disclosure uses the term ‘‘estimated’’ in specific areas to inform the consumer when certain recurring costs may change in the future, such as future payments for taxes and property insurance. The Bureau believes the intended meaning of the term ‘‘estimated’’ for those disclosures may be affected by use of that term in other places on the Closing Disclosure form. Further, at the Bureau’s Quantitative Study, consumer participants using the Closing Disclosure performed statistically significantly better at understanding their final loan terms and costs than consumer participants using the current RESPA settlement statement and final TILA disclosure. See Kleimann Quantitative Study Report at 68–69.

The Bureau notes that under § 1026.19(f)(2)(i) and (ii), creditors must provide corrected disclosures if information on disclosures provided under § 1026.19(f)(1)(i) becomes inaccurate. Thus, consumers will receive by consummation corrected disclosures stating the actual terms of the transaction. In addition, under final § 1026.19(f)(2)(iii), consumers will receive corrected disclosures after consummation if a subsequent event changes an amount actually paid by the consumer during the 30-day period following consummation. This approach is consistent with what the Bureau believes is the current practice under Regulation X, which provides that the RESPA settlement statement must state the actual charges paid by the borrower and seller, and does not provide for labeling charges as estimates, even if the RESPA settlement statement is subsequently revised.

Unlike comment 17(c)(2)(i)–1, comment 19(f)(1)(i)–2.iii explains how the best information reasonably available standard applies if a settlement agent provides certain disclosures under § 1026.19(f)(1)(i) instead of a creditor, pursuant to § 1026.19(f)(1)(v). As discussed in the section-by-section analysis of § 1026.19(f)(1)(v), a settlement agent may provide a consumer with the Closing Disclosure, provided the settlement agent complies with all relevant requirements of § 1026.19(f). Comment 19(f)(1)(i)–2.iii is intended to illustrate the applicability of the best information reasonably available standard to provisions as applied to settlement agents providing the Closing Disclosure three business days before consummation.

Comment 19(f)(1)(i)–2.iii explains that the settlement agent normally may rely on the representations of other parties in obtaining information, but the settlement agent also must satisfy the ‘‘best information reasonably available’’ standard. Accordingly, the settlement agent is required to exercise due diligence to obtain information if it is providing the Closing Disclosure pursuant to § 1026.19(f)(1)(v). Comment 19(f)(1)(i)–2.iii illustrates a scenario in which the settlement agent is considered to have conducted due diligence if it obtained from the creditor information for the loan terms table required to be disclosed under § 1026.38(b).

As discussed in the section-by-section analysis of § 1026.19(f)(1)(v), even if the settlement agent provides the Closing Disclosure, the creditor remains responsible under § 1026.19(f)(1)(v) for ensuring that the Closing Disclosure is provided in accordance with § 1026.19(f). Comment 19(f)(1)(v)–3 explains that the creditor is expected to maintain communication with the settlement agent to ensure that the settlement agent is acting in place of the creditor. Comment 19(f)(1)(i)–2.iii references this obligation and includes a cross-reference to comment 19(f)(1)(v)– 3.

Denied or withdrawn applications. As discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(B) below, a trade association representing the timeshare industry requested that the final rule include commentary clarifying that, if the consumer’s application will not or cannot be approved on the terms requested or the consumer has withdrawn the application, the Closing Disclosure is not required. Although the commenter provided this recommendation in the context of timeshare transactions, the Bureau VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79841 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 214 See, e.g., § 1026.38(a)(5) (loan information disclosures requiring disclosure of the information required to be disclosed under § 1026.37(a)(8) through (11)); § 1026.38(c) (projected payment disclosures requiring disclosure of the information required to be disclosed under § 1026.37(c)); § 1026.38(f) (closing loan cost information described in § 1026.37(f)(1) and (3), and the total of loan costs based, inter alia, on such disclosures). believes such guidance would be helpful as applied to all transactions subject to § 1026.19(f). Thus, as discussed below, the final rule includes comment 19(f)(1)(i)–3 to provide guidance for such situations, which reflects similar guidance applicable to the Loan Estimate.

Under § 1026.19(f)(1)(i), the creditor must provide a Closing Disclosure reflecting ‘‘the actual terms of the transaction.’’ Additionally, under § 1026.19(f)(1)(ii)(A) and (f)(2)(ii), the Closing Disclosure must be provided three business days before consummation; under § 1026.19(f)(2)(i), the Closing Disclosure must be provided at or before consummation; and for loans secured by timeshares under § 1026.19(f)(1)(ii)(B), creditors must ensure that the consumer receives the Closing Disclosure no later than consummation. If the consumer’s application for credit is denied or withdrawn before the creditor provides the Closing Disclosure under § 1026.19(f)(1)(ii)(A), (f)(1)(ii)(B), (f)(2)(i), or (f)(2)(ii), creditors would be unable to disclose ‘‘the actual terms of the transaction,’’ and providing a Closing Disclosure in such cases would provide relatively little consumer benefit.

In other cases, an application may be denied or withdrawn after the threebusiness-day deadline by which the Closing Disclosure must be provided under § 1026.19(f)(1)(ii)(A) and, as applicable, § 1026.19(f)(2)(ii). In these cases, however, the denial or withdrawal of an application that may occur subsequent to the three-businessday deadline does not excuse a creditor’s obligation to provide the Closing Disclosure by that deadline. Where the consumer is considering whether to withdraw a credit application in the days before consummation, the consumer’s receipt of the Closing Disclosure three business days before consummation would provide critical information about whether it is in the consumer’s interest to proceed with the transaction. Accordingly, comment 19(f)(1)(i)–3 clarifies that the creditor is not required to provide the disclosures required under § 1026.19(f)(1)(i) if, before the time the creditor is required to provide the disclosures under § 1026.19(f), the creditor determines the consumer’s application will not or cannot be approved on the terms requested, or the consumer has withdrawn the application, and, as such, the transaction will not be consummated. The comment also includes a crossreference to comment 19(e)(1)(iii)–3, which provides examples in which an application will not or cannot be approved on the terms requested or has been withdrawn by the consumer. Integration of Closing Disclosure requirements in Regulation Z. Section 1032(f) of the Dodd-Frank Act generally requires that the Bureau propose 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. In addition, Dodd-Frank Act sections 1098 and 1100A 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. Although Congress imposed this integrated disclosure requirement, it did not harmonize the underlying statutes, as discussed in greater detail in the Legal Authority discussion in part IV above. Thus, to meet the Dodd-Frank Act’s express requirement to integrate the disclosures required by TILA and RESPA, the Bureau must reconcile the differences between these two statutes. The Bureau understands the concerns raised by commenters with respect to placing the requirements regarding disclosure of settlement charge information, which is traditionally considered to be only RESPA-required information, in Regulation Z. However, the Bureau believes it is appropriate to integrate the requirements of RESPA and TILA into a single Closing Disclosure set forth in Regulation Z. Section 1419 of the Dodd-Frank Act amended TILA by adding section 128(a)(17), which generally requires creditors to disclose the aggregate amount of settlement charges for all settlement services provided in connection with the loan and the aggregate amount of other fees or required payments in connection with the loan. The items included in this amendment are nearly all of the items that are included on the RESPA settlement statement. Accordingly, creditors would have to include in the TILA disclosures information that was traditionally known only to settlement agents in advance of consummation. Although TILA section 128(a)(17) requires that creditors disclose aggregate information, to meaningfully implement this requirement, the Bureau believes it is reasonable to require that creditors base such disclosure on the specific elements comprising the aggregate figure. Accordingly, and in light of the integration mandate, the Bureau believes it is appropriate to integrate the specific requirements of RESPA and Regulation X into Regulation Z. In addition, the Bureau believes there are substantial practical benefits to locating the disclosure requirements in Regulation Z, including the benefits of facilitating industry compliance and improving consumer comprehension. The Closing Disclosure was subjected to extensive consumer testing as a single, integrated document. Were the Closing Disclosure divided as separate documents based on disparate requirements located in Regulation X and Regulation Z, there is risk that consumers would receive different parts of the Closing Disclosure at different times, which the Bureau believes would undermine consumer comprehension. Even if the rule were to require that the information be provided to consumers by the same deadline, there is a risk that consumers would receive separate, disjointed disclosures at separate times if, for example, parties providing the disclosures used different delivery services. Accordingly, the Bureau believes it is necessary to ensure that consumers receive the Closing Disclosure as a single, integrated document.

The Bureau believes ensuring consumer comprehension requires that the information in the Closing Disclosure be disclosed and delivered in a consistent manner. The Closing Disclosure was designed to facilitate the consumer’s comparison of terms disclosed in the Loan Estimate. As a result, a number of the disclosure requirements applicable to the Closing Disclosure set forth in § 1026.38 crossreference the disclosure requirements applicable to the Loan Estimate set forth in § 1026.37, rather than setting forth their own requirements.214 This approach helps ensure consumers can easily compare the Closing Disclosure against the Loan Estimate. To this end, the Bureau believes the Closing Disclosure should be subject to rules relying on a single set of terminology, timing requirements, recordkeeping requirements, and a consistent set of other general disclosure requirements and commentary.

The Bureau believes the final rule will facilitate compliance because it will obviate potential conflicts between Regulation X and Regulation Z that might otherwise arise. For example, as described in more detail above, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79842 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 215 The commenter recommending this approach, in which the settlement agent would provide elements of the Closing Disclosure contained in Regulation X, explained that doing so would facilitate industry compliance and enhance consumer understanding. The Bureau has addressed settlement agent responsibility for the Closing Disclosure in the section-by-section analysis of § 1026.19(f)(1)(v). § 1026.19(f)(1)(i) clarifies the applicability of the best information reasonably available standard set forth in the general disclosure requirements applicable to closed-end consumer credit transactions under § 1026.17(c)(2)(i), and § 1026.17 contains a number of other general disclosure requirements that address compliance questions raised by commenters, such as questions about delivery requirements in the case of multiple consumers. See section-bysection analysis of § 1026.19(f)(1)(iii) below; § 1026.17(d) (providing disclosures in the case of multiple consumers). Regulation Z also contains extensive commentary that interprets many of the provisions of Regulation Z, including the general disclosure requirements in § 1026.17. The Bureau believes this extensive commentary will assist industry in complying with the final rule. By contrast, locating certain Closing Disclosure requirements in Regulation X, with other information in Regulation Z, likely would present compliance difficulties for creditors and settlement agents. Because the Loan Estimate requirements will be located in Regulation Z, and because elements of the Closing Disclosure cross-reference elements of the Loan Estimate, creditors or settlement agents would be required to regularly consult Regulation Z. The Bureau is concerned that compliance with two sets of regulations for one disclosure would increase the risk of inconsistencies.

One trade association representing settlement agents and the title insurance industry implied that the Bureau could resolve any such discrepancies by including a provision in Regulation X stating that, for loans subject to § 1026.19(e) and (f), the definitions and rules of construction of Regulation Z would control, to the extent of any inconsistency. This commenter also recommended that the Closing Disclosure provisions in Regulation X cross-reference applicable Loan Estimate requirements located in Regulation Z. However, the Bureau does not believe such an approach will facilitate compliance, which is one of the purposes of the integrated disclosures. See Dodd-Frank Act sections 1098, 1100A. Because many of the individual elements of the Closing Disclosure cross-reference the Loan Estimate, and because the timing, delivery, and other general disclosure standards applicable to the Closing Disclosure rely on definitions and other provisions located in Regulation Z, coordination with Regulation Z would be unavoidable. The Bureau is concerned that separating the disclosure requirements between Regulation Z and Regulation X would foster confusion and inefficiencies, while not facilitating compliance with the disclosure requirements. See Dodd-Frank Act sections 1098, 1100A. For example, while the approach preferred by commenters may reconcile differences in terminology, the Bureau does not believe it would reconcile other differences, such as the general disclosure requirements in § 1026.17.215 The Bureau believes integrating the Closing Disclosure requirements in Regulation Z also satisfies the Dodd- Frank Act integration mandate. To meet the integration mandate, the Bureau must reconcile several important differences between RESPA and TILA. For example, to reconcile the different timing requirements under RESPA and TILA with respect to when the Closing Disclosure must be provided, the final rule generally requires that the Closing Disclosure be provided three business days before ‘‘consummation.’’ Regulation Z currently defines ‘‘consummation’’ as ‘‘the time that a consumer becomes contractually obligated on a credit transaction.’’ See § 1026.2(a)(13). Regulation X, by contrast, provides that the RESPA settlement statement must be delivered by ‘‘settlement,’’ which is defined as ‘‘the process of executing legally binding documents regarding a lien on property that is subject to a federally related mortgage loan.’’ See 12 CFR 1024.2(b). As noted by commenters representing the views of settlement agents, discussed in the section-bysection analysis of § 1026.19(f)(1)(ii)(A), ‘‘consummation’’ and ‘‘settlement’’ may not necessarily occur at the same time. To ensure consumers consistently receive a single, integrated Closing Disclosure in a timely manner, the Bureau believes it must reconcile these differences. Accordingly, as discussed in more detail in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), the final rule requires that the Closing Disclosure be received three business days before ‘‘consummation.’’ Thus, as described above, the Bureau believes integrating the TILA and RESPA requirements applicable to the Closing Disclosure in § 1026.19(f)(1)(i) will satisfy TILA, RESPA, and the Dodd- Frank Act’s integration mandate, will facilitate industry compliance, and will enhance consumers’ understanding of their transactions.

Comments related to the integration of particular disclosure requirements are addressed where applicable below in the section-by-section analysis of § 1026.38. Comments related to liability issues raised by integrating the Closing Disclosure requirements in Regulation Z are addressed in the beginning of part V above. The final rule makes certain amendments to the proposal in response to comments regarding the timing and delivery requirements applicable to the Closing Disclosure, as discussed in greater detail throughout the section-bysection analysis of § 1026.19(f) below. Final provisions. For the reasons discussed above, and based on the authority cited in the proposal as well as sections 1098 and 1100A of the Dodd-Frank Act, the final rule integrates the disclosure requirements in TILA section 128 and RESPA section 4 in final § 1026.19(f), as proposed. The final rule adopts the language in proposed § 1026.19(f)(1)(i) as proposed, with a technical revision to the heading of § 1026.19(f)(1). The final rule adopts proposed comment 19(f)(1)(i)–1 substantially as proposed, and adopts new comments 19(f)(1)(i)–2 and –3 pursuant to the Bureau’s authority under sections 105(a) of TILA, 19(a) of RESPA, and sections 1098, 1100A and 1032(f) of the Dodd-Frank Act. 19(f)(1)(ii) Timing 19(f)(1)(ii)(A) In General The Bureau explained in the proposal that the integrated disclosure mandate requires the Bureau to reconcile two statutory timing regimes that are currently not synchronized. The Bureau explained that the determination of how to integrate these conflicting statutory provisions also must be made in light of section 1405(b) of the Dodd-Frank Act, which focuses on improving ‘‘consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures.’’ The Bureau recognized in the proposal that consumers may be more aware of and better understand their transactions if consumers receive the disclosures reflecting all of the terms and costs associated with their transactions three business days before consummation. The Bureau explained that this would afford consumers sufficient time to review, analyze, and question the information reflected in the disclosure, such that consumers are aware of and understand the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79843 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 216 Commenters included title and insurance companies, settlement agents, law firms, mortgage brokers, attorneys, a large bank, community banks, and trade associations representing creditors, attorneys, and settlement agents. 217 Commenters observed that they would have to prepare the Closing Disclosure at least six business days before consummation because proposed § 1026.19(f)(1)(iii) would add three business days to the timeframe to obtain the benefit of a presumption that the consumer receives it three business days before consummation. As discussed in the sectionby-section analysis of § 1026.19(f)(1)(iii), the Continued transactions by the time consumers become obligated.

The Bureau also explained that if consumers receive the disclosures three business days before consummation, they would have sufficient time to identify and correct errors, discuss and negotiate cost increases, and have the necessary funds available. The Bureau expected that this also could eliminate the opportunity for bad actors to surprise consumers with unexpected costs at the closing table, when consumers are committed to going through with the transaction. Further, the Bureau explained that providing consumers with more time to review the Closing Disclosure may encourage creditors to take greater care to ensure the accuracy of the Loan Estimate. The Bureau noted that while the proposal’s expanded Loan Estimate tolerances would reduce the likelihood of such tactics, requiring advance disclosure of the Closing Disclosure would make it easier for consumers to identify any changes and provide additional incentive for creditors to avoid such changes.

The Bureau acknowledged that a three-business-day period could result in closing delays, which would impose costs on some consumers. The Bureau also noted that, in extreme situations, such delays could cause a transaction to fall through if a consumer is under a contractual obligation to close by a certain date. The Bureau reasoned, however, that creditors and settlement agents currently coordinate to provide the RESPA settlement statement at closing and that these parties would have an incentive to complete closings as scheduled, and therefore the Bureau believed that they would adjust their business practices to provide the Closing Disclosure in a timely manner, making closing delays infrequent. The Bureau also noted that delayed or canceled closings could impose costs on covered persons as well, such as a loss in revenue for transactions that fall through due to a delay. The Bureau also noted that the proposed rule could create legal and reputational risks for creditors or settlement agents that are unable to close loans as planned. Section 105(a) of TILA authorizes the Bureau to modify and add requirements under certain circumstances, and the Bureau stated its belief that requiring redisclosure in cases where it is not currently required under Regulation Z or Regulation X is necessary to effectively integrate the disclosures. Accordingly, the Bureau proposed § 1026.19(f)(1)(ii)(A), which would have provided that, except for transactions secured by timeshares, or as provided under proposed § 1026.19(f)(2), the creditor shall ensure that the consumer receives the disclosures no later than three business days before consummation. Pursuant to proposed § 1026.2(a)(6), the definition of ‘‘business day’’ that would have applied to § 1026.19(f)(1)(ii) would have been the specific definition that also applies to the right of rescission under § 1026.23: a business day would include all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a).

Proposed comment 19(f)(1)(ii)–1 would have provided illustrations of this requirement. Proposed comment 19(f)(1)(ii)–2 would have explained the requirement that consumers must receive disclosures no later than three business days in advance of consummation, and would have provided practical examples illustrating appropriate delivery methods. Comments The Bureau received extensive public comment and ex parte submissions regarding the timing of the Closing Disclosure’s delivery requirements. Some industry commenters representing views from across the real estate market 216 and some individual consumers expressed support for a general three-business-day disclosure requirement. These commenters explained that a general three-businessday period would provide consumers an opportunity to review documents, ask questions, negotiate to reduce costs, gather necessary funds, transfer funds to the settlement agent, and reduce opportunity for bait-and-switch tactics. Settlement agents and attorney commenters explained that a general three-business-day requirement also would provide settlement agents more time to prepare settlement documents in an unpressured environment. A variety of settlement agent commenters and an individual consumer explained that consumers are sometimes surprised at the closing table when they discover important changes to their loan terms, such as the discovery that they are receiving an adjustable rate mortgage loan rather than a fixed rate loan, or an adjustable rate mortgage loan with different loan terms than what they anticipated. Settlement agent commenters explained that a general three-business-day period would allow consumers to review the Closing Disclosure with an attorney or another advisor. Some of these commenters, however, expressed concern about triggering an additional waiting period as a result of redisclosing the Closing Disclosure and about how the Bureau’s proposal would interact with other rules. Comments relating to the circumstances under which revisions to the Closing Disclosure would trigger an additional waiting period are discussed in more detail in the section-by-section analysis of § 1026.19(f)(2) below.

Commenters who represent consumer interests supported the three-businessday requirement. Two consumer advocacy groups submitting a joint comment supported the Bureau’s proposal. A housing counseling agency noted that a mandatory period would address a common consumer complaint that refinancing settlements are frequently rushed. A State attorney general stated that a three-business-day period was necessary for consumers to consider all of the costs in light of the significant obligation assumed by the consumer in a mortgage transaction, particularly in the context of purchasing a home. Several associations of State banking regulators submitting a joint comment also supported a general threebusiness-day requirement, explaining that the three-business-day requirement would create consistency where there was a discrepancy between RESPA and TILA. This commenter noted that the proposed changes to the disclosures were perhaps the most sweeping and significant reform to the mortgage origination process in recent history, but cautioned that careful and coordinated implementation was essential to avoiding potentially significant market disruption.

However, many commenters from across the mortgage and real estate industry and a Federal agency opposed a general three-business-day disclosure requirement, arguing that providing ‘‘final’’ settlement costs three business days before consummation would be impracticable, unnecessary, and result in frequent closing delays that would impose costs on consumers, sellers, industry, and the market. Commenters explained that certain settlement costs were unknown three to six days in advance and usually are not known until a day or two before closing.217 A VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79844 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations proposed rule would have provided that if the Closing Disclosure is not provided to the consumer in person, the consumer is presumed to have received it three business days after it is mailed or delivered to the address specified by the consumer. community bank representative stated that, while it would be feasible to prepare a borrower’s closing costs three days in advance, it may be more difficult to account for the seller’s transaction accurately by that time. Difficulties with obtaining final costs three business days before consummation. Many commenters concerned about the general threebusiness-day requirement cited the likelihood of coordination problems between creditors, settlement service providers, and other third-parties. Both creditors and settlement agents expressed concern that they could not guarantee that other parties, such as government entities or third-party settlement service providers, would be able to provide final closing figures in a timely manner. As a result, commenters explained that it is common practice for consumers to review final settlement costs the day before settlement or several hours before settlement.

Settlement agent commenters explained that the RESPA settlement statement includes certain loan information and requires coordination with lenders, but that they do not receive the lender’s settlement statement figures until the day of or day before closing. One escrow agent commenter explained that it is not uncommon for lenders and settlement agents to revise the RESPA settlement statement frequently because of differences in software used by those parties and miscommunications between them. Settlement agents also explained that the work of clearing known title defects can sometimes occur during the days leading up to consummation because certain defects may not come to light until after a title report is analyzed.

Creditors expressed similar coordination concerns and explained that many settlement service fees are outside of the control of the creditor or the creditor’s affiliate. Community banks explained that they cannot ensure they receive accurate information in a timely manner from third parties such as realtors, attorneys, title companies, insurance agents, and other third-party lenders responsible for providing payoffs or subordination agreements. Commenters explained that third-party payoff information may become stale as a result of closing delays. A settlement agent commenter operating in a rural area explained that in an active real estate market, it can be difficult for creditors to obtain an appraisal more than three days before closing, and without underwriting being complete, creditors are unable to produce the exact numbers needed for the settlement statement. One non-depository lender explained that it is not uncommon for loan amounts to be adjusted in refinancings where appraisals or payoff figures from third parties arrive soon before consummation. Commenters also explained that final settlement costs could not be known in advance if consumers shop or otherwise request changes to the transaction, if settlement agent due diligence uncovers new obligations or encumbrances, or if delays cause per diem or prorated amounts to accumulate.

Costs associated with a general threebusiness-day period. A variety of settlement agents, title insurance companies, individual attorneys and law firms, a variety of creditors, industry trade associations, and a member of Congress, identified costs that consumers would face as a result of delayed closings caused by a mandatory three-business-day waiting period, including breach or expiration of real estate agreements; the expiration of interest rate locks; inconvenience and financial costs associated with rearranging closings (such as, if a consumer is required to arrange for temporary housing needs, or if a seller’s subsequent purchase also is delayed); additional pre-closing diligence costs and attorney’s fees; and, in the case of refinancings, especially those subject to the right of rescission’s postconsummation funding delay, prolonged interest payments on outstanding debts.

Non-depository lenders, credit unions, community banks, mortgage brokers, settlement agents, trade associations representing those industries, a mortgage compliance company and an individual consumer stated that a general three-business-day period would inconvenience and impose logistical costs on consumers. Commenters explained consumers would have difficulties scheduling moving vans, time away from work, temporary housing, and could face delays up to 12 days or more before they could close. A mortgage company commenter noted that consumers in the military who are purchasing a home frequently stay in a hotel before they move in, and that, in those instances, closing delays could result in longer hotel stays. Law firms, settlement agents, and trade associations representing attorneys and credit unions anticipated that a general threebusiness-day period would lead consumers to ask more questions and engage in additional diligence before consummation, which would require more time on the part of settlement agents and attorneys per closing and, thus, increase costs to consumers. Commenters also identified financial and opportunity costs that consumers could incur as a result of closing delays. Trade associations representing banks and settlement agents, a community bank and a community bank holding company, non-depository lenders, and a member of Congress indicated that a consumer’s interest rate lock could expire as a result of a delay. As a result, commenters explained, consumers would have to pay a higher interest rate or pay additional fees to extend their rate lock or obtain a new one. Commenters expected that creditors would price rate locks higher and may limit their availability to account for closing delays across the market. A nondepository lender and a large bank estimated that the proposal’s general three-business-day period, a threebusiness-day presumption of delivery, and two business days to prepare the disclosure would mean preparing and delivering the Closing Disclosure would take eight business days, or ten calendar days. Estimating that the cost of a rate lock at approximately two basis points per day, the non-depository lender commenter estimated consumers would pay approximately 20 basis points, or $400 on a $200,000 loan. In addition to interest rate lock expiration, a large number of commenters expressed concern that a consumer’s purchase agreement with a seller could expire, potentially putting the consumer in breach of the agreement. The consumer could lose the opportunity to purchase the home or incur per diem penalties, which in turn could jeopardize other of the consumer’s arrangements. Numerous commenters also raised concerns about the ‘‘domino effect’’ of closing delays on sellers who may schedule coinciding settlements in which they are a buyer. Commenters were concerned this could affect the efficient operation of the residential real estate market. Commenters also explained that sellers in short-sales may be harmed, where a creditor may require that a sale occur within a specified period of time. Commenters also explained that, in the case of refinancings, where no seller is present, delays could force consumers to pay additional interest on an outstanding loan or delay their ability to meet an upcoming expense. One commenter suggested that the threebusiness-day timing requirement could VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79845 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 218 Commenters explained the nine-day period would be due to a three-day period by operation of proposed § 1026.19(f)(1)(iii), a three-day waiting period before consummation, and a three-day postconsummation waiting period by operation of the rescission rule.

be an unlawful interference with the right of buyers and sellers to contract. Banks, non-depository lenders, and a trade association representing banks were concerned that a three-businessday receipt requirement would increase loan processing costs, including compliance costs or costs to extend expired rate locks or underwriting verifications, and costs necessary to secure warehouse financing capacity. For example, a community bank explained that it would have to add five days to its secondary market rate locks to meet the proposal’s timelines to prevent the interest rate lock from expiring, and that such costs would be passed on to consumers. In addition, trade associations representing creditors and community banks expressed concern that delayed closings would require them to pay for additional warehouse financing capacity. Creditor and settlement agent commenters also were concerned that they would face liability and reputational risk arising from incorrect figures obtained from or delays caused by third parties, particularly where delays may result in the breach of a consumer’s real estate agreement. One creditor requested that the final rule protect creditors from such liability and ensure that settlement agents bear responsibility for their mistakes.

Commenters also raised concerns that closing delays would be problematic for sellers who are paying off existing Federal Housing Administration (FHA) loans or consumers who are refinancing existing FHA loans. Commenters explained that FHA has traditionally charged borrowers a whole month’s interest if they pay off their loans after the first day of any month; thus, many borrowers schedule closings at the end of the month to avoid this extra interest payment. Commenters explained that delayed closings could push scheduled end-of-month closings into the next month, causing consumers to pay additional interest.

In addition to general compliance costs, creditors noted they would face additional costs related to preparing revised Closing Disclosures. Settlement agents, law firms, credit unions, title insurance companies, and trade associations representing attorneys explained that delayed closings would result in fewer closings and increased burden on the part of settlement agents in terms of additional time and costs related to preparing the Closing Disclosure and answering consumers’ questions. Some commenters thought that the pressure to avoid closing delays would lead to the circumvention of the closing process.

Uncertain benefits of a general threebusiness-day period. Many commenters maintained that a general threebusiness-day waiting period was unnecessary in light of the current tolerance rules because they limit increases in certain settlement costs, TILA rescission rights that impose a mandatory post-consummation threebusiness-day waiting period, other rulemakings under title XIV of the Dodd-Frank Act, and because a consumer’s primary interest is in closing the transaction in a timely manner.

A wide variety of commenters also maintained that the APR accuracy requirements in Regulation Z and the good faith estimate tolerance requirements currently in Regulation X render additional waiting periods unnecessary. A trade association representing banks indicated that a consumer’s cash to close amount would most likely increase due to consumer choice, rather than because of a loan origination charge, and that very few closed loans have increases in closing costs that result in tolerance violations requiring reimbursement, and therefore a three-business-day period was unjustified. Other commenters, including trade associations representing real estate agents, banks, and financial companies stated that other Bureau rulemakings under title XIV of the Dodd-Frank Act, such as the ability-to-repay, loan originator compensation, and HOEPA rulemakings made an additional three-business-day waiting period unnecessary. A mortgage broker, a title insurance company and trade associations representing attorneys, banks, and financial companies maintained that a pre-consummation period would not enhance consumer understanding because consumers already have a long period of time to negotiate and review closing costs. A compliance company and a settlement agent commenter suggested that advance disclosure of real estate agent fees and other costs was unnecessary because consumers receive information about many fees during the course of the transaction. Commenters also emphasized that consumers are primarily interested in closing the transaction as quickly as possible and would not benefit from a waiting period. Law firm commenters and a professional association representing attorneys did not think a waiting period would be useful without someone to help the consumer understand the Closing Disclosure. Law firm commenters explained that they expected many consumers would wait until consummation to review the document. The association representing attorneys believed it would be necessary to schedule separate meetings with consumers to help them understand the Closing Disclosure. One law firm commenter recommended that the final rule should require that consumers have an attorney present at settlement to explain the Closing Disclosure. Transactions subject to the right of rescission. A variety of industry commenters critical of the Bureau’s proposed three-business-day waiting period questioned the necessity of the pre-consummation waiting period in light of the right of rescission available to consumers for certain transactions under § 1026.23. These commenters explained that rescission rights render a pre-consummation waiting period unnecessary and that a preconsummation waiting period would further delay the funding of a consumer’s loan. Some commenters said that consumers could experience a nineday waiting period at the earliest to fund such a loan.218 A community bank commenter explained that creditors sometimes permit a post-consummation waiting period for transactions not subject to TILA rescission rights as a courtesy to consumers, and that a preconsummation waiting period would further delay these transactions as well. Some commenters requested that the Bureau exempt refinancings from a three-business-day waiting period or permit the three-business-day waiting period to run concurrently with the rescission period because the rescission rule already protects consumers. A large bank recommended that, for transactions subject to the right of rescission, the three-business-day right to cancel should begin with the consumer’s receipt of the Closing Disclosure to shorten the waiting period by four days while still preserving the consumer’s opportunity to review the transaction and rescind. Alternatives recommended by commenters. Commenters recommended a number of alternatives to the proposed three-business-day period. Commenters including nondepository lenders, community banks, credit unions, and trade associations representing credit union suggested that a two-day or 48-hour period would better balance the need for advance disclosure with the consumer’s interest in closing in a timely manner. Similarly, a one-day or 24-hour period was VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79846 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 219 As originally enacted on December 22, 1974, RESPA contained a requirement that lenders disclose in writing, not later than 12 days before settlement, the amount of each charge for settlement services. See Public Law 93–533, section 6 (12 U.S.C. 2605, repealed 1976). Congress subsequently amended RESPA to, among other things, repeal the requirement to provide advance disclosure of actual recommended by many commenters, including a State housing development authority, mortgage brokers, individual consumers, non-depository lenders, community banks, law firms, as well as trade associations representing mortgage brokers, banks and community banks, credit unions, and the manufactured housing industry. Commenters believed a one-day period would provide consumers enough time to review the disclosure and would be less disruptive than a three-business-day requirement, although some thought that even a oneday delay could be problematic for consumers.

Other commenters, including a large bank, credit unions and trade associations representing credit unions, title insurance companies and a law firm, recommended that the final rule include no pre-consummation period, or that a pre-consummation period apply only if there is a tolerance violation. The large bank commenter explained that the Bureau could accomplish this by exempting all closed-end consumer mortgage loans secured by real property from the requirement under TILA section 128(b)(2) that an inaccurate APR triggers the obligation that a consumer receive a corrected final TILA disclosure no later than three business days before consummation. The commenter stated that this would harmonize the timing between TILA and RESPA and would facilitate compliance with the Dodd- Frank Act’s integrated disclosure mandate.

One individual consumer was concerned that a three-business-day period could negatively affect a purchase transaction, but the commenter also questioned whether a three-business-day period would provide consumers sufficient time to question charges. One settlement agent commenter recommended that the final rule adopt a post-consummation period in which adjustments to the transaction could occur. A mortgage broker commenter recommended, as alternatives to a three-business-day advance disclosure, requiring the consumer’s signature of the Closing Disclosure at closing or requiring that the Closing Disclosure be read aloud to consumers at closing to ensure the consumer understood the transaction. A settlement agent recommended that consumers should be able to determine how much time they would like before closing, or that the final rule should apply different timing requirements to different classes of consumers, depending on how experienced they are with mortgage transactions, such as by requiring that first-time home buyers receive the Closing Disclosure six days in advance, while all other consumers would receive the disclosure one-tothree days in advance, at their option. In addition to recommending alternative timing regimes, commenters recommended that the final rule provide more flexible exemptions from the general three-business-day period. A trade association representing real estate agents, a financial holding company, a compliance company, and various settlement agents recommended that the final rule distinguish between loan and settlement costs for purposes of imposing a pre-consummation period. Commenters recommended either separating TILA and RESPA disclosures and requiring a three-business-day period for TILA disclosures and no waiting period for RESPA disclosures, or imposing a general three-businessday period but permitting settlement figures to be finalized at closing. One trade association representing settlement agents requested that the Bureau consider an exemption from the three-business-day period if the final cash to close amount does not increase beyond a certain tolerance. The commenter explained that this would allow transactions that have been estimated more accurately at the Loan Estimate stage to close without advance delivery of the Closing Disclosure. Consummation v. settlement. The proposed rule would have required that the Closing Disclosure be delivered three business days before ‘‘consummation,’’ consistent with other provisions under TILA and Regulation Z. RESPA and Regulation X, by contrast, require the settlement statement to be delivered at ‘‘settlement.’’ Some settlement agents and various trade associations representing settlement agents, the title insurance industry, and banks requested clarification on how ‘‘consummation’’ would be defined and how the proposal would apply in jurisdictions in which settlement and consummation occur at different times. Trade associations representing settlement agents and the title insurance industry explained that in some States, the signing of legally binding documents may occur at one time, while consummation may not occur until one or more days later, such as when the documents are recorded. Commenters requested clarification on whether, in this case, the Closing Disclosure would be provided when the documents are recorded. Other commenters were concerned that settlement may not occur until after consummation, and that the proposed rule did not adequately account for postconsummation changes occurring during the course of settlement. Business day. As discussed in the section-by-section analysis of § 1026.2(a)(6), the Bureau received comments on the proposed definitions of ‘‘business day’’ applicable to the proposed rule. As noted in the sectionby-section analysis of § 1026.2(a)(6), a variety of commenters supported establishing a consistent definition of business day to promote consistency across the provisions of Regulations X and Z. Commenters observed that the specific definition would allow one less day to comply with the timing requirements. One commenter was concerned that an inconsistent business day definition could create confusion if different products are treated differently (e.g., refinancings). A trade association representing banks and financial companies recommended that business days should include Saturdays because doing so would allow consumers to close sooner.

Authority issues. Several industry trade associations and a large bank stated that the Bureau lacks authority under TILA and the Dodd-Frank Act to implement this aspect of the proposal, and that TILA and RESPA both would permit the Closing Disclosure to be provided at or before consummation. A compliance company commenter maintained that the Dodd-Frank Act does not specifically mandate that the Bureau improve disclosure of realtor fees or other transaction costs outside of the cost of financing. These commenters pointed out that RESPA does not require that settlement costs be disclosed in advance and that TILA requires a threebusiness-day waiting period only if a loan’s APR changes outside of the tolerance. A large bank, a trade association representing banks and financial companies, and a trade association representing banks stated that the three-business-day waiting period under TILA only applies to the disclosure of the APR and not to other loan or settlement-related costs. A trade association representing banks and financial companies and a trade association representing banks pointed out that, soon after RESPA was enacted, Congress substantially amended its original early settlement cost disclosure requirement after substantial public protest, which the commenter believed indicates Congress prohibited such waiting periods thereafter.219 VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79847 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations settlement costs and replace it with a requirement that lenders provide good faith estimates of likely settlement charges. Congress also added the requirement for settlement agents to make settlement costs available for inspection by the borrower upon request. See 12 U.S.C. 2603(b) (1976).

220 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).

221 See also the discussion in this section-bysection analysis below for reasons why the final rule uses the TILA term ‘‘consummation’’ rather than the RESPA term ‘‘settlement’’ as the event around which disclosures must be provided. Final Rule After considering public comment and the ex parte submissions, the Bureau continues to believe there is significant consumer benefit to requiring that the Closing Disclosure be provided three business days before consummation. As described below, the final rule requires creditors to ensure that consumers receive the Closing Disclosure no later than three business days before consummation. As noted above, the timing requirements of TILA and RESPA are not synchronized. TILA requires, for certain mortgage transactions, that creditors furnish a corrected disclosure to the consumer so that it is received 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 requires that the person conducting the settlement (e.g., the settlement agent) 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.

The Dodd-Frank Act amended TILA and RESPA to mandate that the Bureau establish a single disclosure scheme for use by lenders or creditors in complying comprehensively with the ‘‘disclosure requirements’’ of those statutes.220 However, Congress did not define ‘‘disclosure requirements’’ and did not instruct the Bureau on how to integrate the different timing requirements under TILA and RESPA with respect to final disclosures. The Bureau believes that harmonizing the timing requirements is a component step towards achieving the goals of integration: to facilitate compliance and to ensure that consumers receive disclosures that will aid in their understanding of their mortgage loan transactions. Accordingly, the Bureau is adopting final § 1026.19(f)(1)(iii)(A) to adjust both TILA’s and RESPA’s timing requirements, using its authorities under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd-Frank Act, and, for residential mortgage transactions, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. Integrating the disclosures without reconciling the timing requirements would result in a series of disclosures provided by both the creditor and the settlement agent. Creditors would provide integrated disclosures three business days before consummation when necessary under TILA, as amended by MDIA, and then again at consummation. See TILA section 128(b)(2)(B)(ii) and (b)(2)(D); 15 U.S.C. 1638(b)(2)(B)(ii) and (b)(2)(D). Settlement agents would be required to permit the borrower to inspect the integrated disclosures one business day before settlement based on the information known by the settlement agent, and then would be required to provide them at or before ‘‘settlement,’’ which may occur before, concurrent with, or after ‘‘consummation.’’ The Bureau believes this uncoordinated approach to the timing of the disclosures could result in consumer confusion and unnecessary burden for industry. Therefore, the Bureau is using its authorities under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd-Frank Act, and, for residential mortgage transactions, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act to adjust both TILA and RESPA to require creditors to deliver Closing Disclosures at least three business days before consummation in all cases, and not only when the APR previously disclosed exceeds tolerance. Providing all consumers with three business days to review the Closing Disclosure will greatly enhance consumer awareness and understanding of the costs associated with the entire mortgage transaction.221 Disclosure to consumers of such component settlement charges three business days prior to consummation would represent an increased benefit for consumers from the current disclosure requirements under RESPA. Currently, RESPA requires that settlement agents disclose settlement costs and certain loan terms on the RESPA settlement statement at or before settlement, and inspection of the statement is permitted during the business day before settlement at the consumer’s request. By affirmatively requiring that all consumers receive a Closing Disclosure listing loan terms and settlement charges three business days before consummation, the Bureau believes the potential for consumers to be surprised at closing will be reduced. As the Bureau explained in the proposal, one of the purposes of the integrated disclosures is to aid consumer understanding of their transaction through the use of disclosures. To that end, the Bureau has developed the Loan Estimate and the Closing Disclosure to facilitate a comparison between the two, so that consumers can easily compare their estimated and actual charges. The Bureau’s Quantitative Study, as described in part III above, determined that the integrated disclosures better enable consumers to compare their estimated and actual terms and costs than the current disclosures. See Kleimann Quantitative Study Report at 46–47. The Bureau believes this consumer benefit will be achieved best if consumers receive the Closing Disclosure three business days before consummation to compare the terms with the Loan Estimate, ask questions, and consider all of their options before proceeding with the transaction. To the extent changes occur between the time the Closing Disclosure is first provided three business days before consummation and consummation, consumers only will need to compare changes between two Closing Disclosures.

The benefits of a three-business-day period are not exclusive to consumers. The Bureau believes a general threebusiness-day requirement also will benefit industry because settlement agents, like consumers, will have time to review the Closing Disclosure in an unpressured environment and incorporate other changes to the transaction that may occur before consummation. Both creditor and settlement agent commenters explained that they have had problems coordinating to ensure the timely receipt of information necessary to prepare the RESPA settlement statement. Commenters, particularly settlement agents, explained that this VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79848 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 222 MDIA amended TILA section 128(b)(2)(D) to require that creditors provide a corrected disclosure so that it is received by the consumer no later than three business days before consummation, if the APR changes outside of the TILA tolerances. See 15 U.S.C. 1638(b)(2)(D). In its final rule implementing MDIA, the Board explained that ‘‘[t]he requirement in TILA Section 128(b)(2)(D) for a creditor to provide a corrected disclosure is essentially a requirement for the creditor to provide an additional set of the early disclosures required by TILA Section 128(b)(2)(A).’’ See 74 FR 23289, 23296 (May 19, 2009). The Bureau agrees with this interpretation. Current § 1026.19(a)(2)(ii) of Regulation Z implements the MDIA amendments, requiring creditors to provide final TILA disclosures with all changed terms, pursuant to the statutory timing requirements. As a general rule, a disclosed APR is considered accurate if it is within a percentage of the actual APR. This percentage is commonly referred to as the ‘‘APR tolerance’’ or the ‘‘TILA tolerance.’’ In general, the tolerance specified for closed-end ‘‘regular transactions’’ (those that do not involve multiple advances, irregular payment periods, or irregular payment amounts) is one eighth of one percent; the tolerance specified for ‘‘irregular’’ transactions (those that involve multiple advances, irregular payment periods, or irregular payment amounts, such as an adjustable rate mortgage with a discounted initial interest rate) is one quarter of one percent. See 12 CFR 1026.22(a).

223 As noted in the proposal, the Bureau received extensive feedback indicating that APR estimates included in the early TILA disclosures are so rarely accurate by the time of consummation that most creditors provide corrected disclosures at least three business days before consummation as a standard business practice, instead of analyzing the accuracy of the disclosed APR to ensure compliance with MDIA.

224 As noted above, the Bureau’s Quantitative Study determined that the integrated disclosures better enable consumers to compare their estimated and actual terms and costs than the current disclosures, and to understand their final transaction better than the current disclosures. See Kleimann Quantitative Study Report at 46–48. frequently results in a pressured, lastminute preparation of the RESPA settlement statement, increasing the risk of errors. As noted above, some individual settlement agent commenters supported a general three-business-day requirement because it would reduce the pressured atmosphere of last-minute closings. The Bureau believes a general three-business-day requirement will help correct for this problem by providing a strong incentive for parties to coordinate earlier. Thus, the Bureau believes a general three-business-day requirement will improve the operation of closings for all parties involved. The Bureau recognizes that providing settlement cost and other information on the Closing Disclosure three business days before consummation will require that industry adjust current practice with respect to the disclosure of settlement charges. However, the Bureau notes that industry would have to adjust current practice to comply with the Dodd-Frank Act’s impact on TILA. TILA, as amended by MDIA, and Regulation Z currently require redisclosure of all changed terms three business days before consummation when the APR is inaccurate. Under TILA section 128(b)(2)(D), the creditor must provide a corrected disclosure statement if the previously disclosed APR becomes inaccurate. See 15 U.S.C. 1638(b)(2)(A), (D).222 As discussed above, section 1419 of the Dodd-Frank Act also amended TILA section 128(a) by adding paragraph (17), which requires creditors to disclose the aggregate amount of settlement charges for all settlement services provided in connection with the loan and the aggregate amount of other fees or required payments in connection with the loan. The items included in this amendment are nearly all of the items that are included on the RESPA settlement statement; and to disclose the aggregate figure, the Bureau believes creditors must know the itemized settlement charges. Accordingly, even if the final rule implemented the requirements of TILA, as amended by MDIA and the Dodd-Frank Act, in a manner similar to the current rule, the Bureau believes industry would have to implement systems necessary to disclose settlement cost information before consummation on the final TILA disclosures. The Bureau further believes that, in the absence of this final rule, it is possible that when the loan’s previously disclosed APR becomes inaccurate, creditors would elect to provide final TILA disclosures with all changed terms, including settlement cost information required by TILA section 128(a)(17), to all consumers as a matter of practice to manage their TILA liability risk.223 Commenters opposed to the proposal were concerned that a general threebusiness-day timing requirement would lead to closing delays. As discussed below, the Bureau does not believe such a requirement alone would be the primary cause of any such delays. The Bureau believes creditors and settlement agents will be able to coordinate in advance based on when consummation is expected to occur to ensure that consumers receive a timely Closing Disclosure that includes the actual terms or is based on the best information reasonably available at the time it is provided. See the section-bysection analysis of § 1026.19(f)(1)(i). With a three-business-day requirement, the timing of particular actions by creditors and settlement agents may shift forward, further reducing the probability of closing delays. The Bureau further believes industry will have additional incentive to coordinate preparation of the Closing Disclosure in light of the interest in avoiding closing delays shared by consumers, sellers, and other parties.

Thus, the Bureau believes creditors or settlement agents can provide the Closing Disclosure so that it is received by the consumer no later than three business days before consummation without delaying consummation while they await more precise information about the actual terms of the transaction. In addition, the Bureau believes the revisions to the proposed redisclosure requirements will significantly reduce the risk of closing delays, as discussed in the section-bysection analysis of § 1026.19(f)(2)(i) and (f)(2)(ii).

Some commenters were concerned that a three-business-day rule would lead to additional closing conferences or time spent with consumers, and some commenters suggested that the Bureau require that attorneys or other settlement service providers be present to assist consumers with understanding their transaction. The final rule does not require the scheduling of closing conferences or the presence of particular personnel at a closing. The Bureau is concerned that such a requirement would be burdensome. The Bureau further believes that the design of the Loan Estimate and Closing Disclosure will help consumers understand their transaction, even if additional personnel are not available, as discussed in the Kleimann Quantitative Study Report.224 To the extent consumers ask creditors, settlement agents, or other parties questions about their transaction based on the information in the Closing Disclosure, the Bureau believes a general three-business-day requirement will improve consumer awareness and understanding of their transaction, consistent with Dodd-Frank Act section 1405(b). Enhancing consumer awareness and understanding is one of the principal goals of this rulemaking and is consistent with the purpose of the integration mandate. Thus, the Bureau believes a potential increase in burden associated with additional engagement with consumers is justified. In addition, to the extent consumers have an opportunity to ask questions and identify errors before they arrive at closing, a general three-business-day requirement may increase the efficient operation of closings.

Some commenters were concerned that a three-business-day requirement would be difficult to comply with because loan underwriting is sometimes not completed until soon before consummation, particularly in active real estate markets. While the Bureau VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79849 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 225 In addition, the Bureau believes the prepayment penalty provisions adopted in the Bureau’s 2013 ATR Final Rule and May 2013 ATR Final Rule will reduce the likelihood that consumers will incur such charges in the future. appreciates that it may be difficult in certain cases to complete underwriting in advance, the Bureau does not believe such problems will be widespread as a result of a general three-business-day requirement because creditors already must be in a position to know a mortgage loan’s APR as necessary to comply with MDIA’s three-business-day requirement.

Commenters were concerned that a three-business-day requirement would have a negative impact on consumer choice. As discussed below, the Bureau believes the final rule affords consumers flexibility to make a wide variety of changes to their transaction between the time the Closing Disclosure is first provided and consummation without triggering a new three-business-day period. In fact, the Bureau believes a requirement to provide the Closing Disclosure so that it is received by consumers no later than three business days before consummation will help consumers make more informed decisions because they will have more information about the entire transaction before consummation. Further, in light of the revisions made to the proposed redisclosure requirements, discussed in greater detail in the section-by-section analysis of § 1026.19(f)(2) below, the Bureau does not believe a threebusiness-day period will frustrate consumer choice. The Bureau believes these revisions also address commenters’ concern that closing delays would lead consumers to incur an additional month’s interest based on FHA payoff rules.225 Several commenters stated that a three-business-day requirement was unnecessary because consumers already have time during the loan application, underwriting, and closing process to inform themselves about their transaction. However, the Bureau is concerned that a consumer’s ability to understand the transaction and ask questions is limited without a single disclosure that presents all of the terms. Consumers may have difficulty making purchase decisions or other tradeoffs without accurate information about all of the costs involved in their transactions. As commenters explained, mortgage loan transactions involve many pieces of information from a variety of sources and, in some cases, underwriting and title exams may not conclude until later in the process. Because creditors and settlement agents are in a better position than consumers to coordinate this information and account for disbursements, the Bureau believes it is appropriate for consumers to receive this information in a single, integrated disclosure before consummation. The Bureau understands that consumers have an interest in completing their transaction in a timely manner, but the Bureau believes this goal can be achieved while also providing consumers timely information about the terms of their transaction. The Bureau also believes a general three-business-day requirement is warranted, notwithstanding the Bureau’s other Title XIV Rulemakings. While regulations adopted in the 2013 ATR Final Rule, 2013 Loan Originator Final Rule, and the 2013 HOEPA Final Rule provide important consumer protections, they do not specifically address the goal of enhancing consumers’ awareness and understanding of the specific terms of their transaction. Moreover this final rule will work in concert with other consumer protections. For example, the Bureau’s 2013 HOEPA Final Rule adopted counseling requirements, including requirements that creditors cannot extend a high-cost mortgage to a consumer unless the creditor receives written certification that the consumer has obtained counseling on the advisability of the mortgage from an approved counselor. See 12 CFR 1026.34(a)(5). In addition, the 2013 HOEPA Final Rule adopted requirements that lenders provide loan applicants a written list of counseling organizations that provide counseling services in the applicant’s area. See 12 CFR 1024.20(a)(1). While counselors can provide general guidance, they can provide much more effective counseling if their advice is tailored to the terms of a consumer’s transaction, based on information in the Closing Disclosure. To this end, the Bureau believes a general three-business-day review period will provide consumers time to consult a housing counselor or other professionals about the particulars of their transaction before consummation. Other timing standards recommended by commenters. With respect to the suggestion that the Bureau exempt all closed-end consumer credit transactions secured by real property from MDIA’s three-business-day redisclosure requirement (triggered by an inaccurate APR), the Bureau declines. For the reasons discussed below, the Bureau believes an exemption from the MDIA requirement that consumers receive the TILA disclosures three business days before consummation when the APR is inaccurate would be inconsistent with both TILA and the goals that this final rule seeks to achieve.

While such an exemption might eliminate concerns about delayed closings and reduce some burden on industry, it would remove what the Bureau believes is an important existing consumer protection under MDIA. As noted above, the Bureau believes consumers should be provided the opportunity to review their final loan terms and costs in an unpressured environment to identify mistakes, ask questions, and generally understand their transaction before becoming obligated to it. Providing consumers with information about their final loan terms and costs three business days prior to consummation also was recognized by the Board and HUD as providing important consumer benefits and was recommended by those agencies to Congress. See Board-HUD Joint Report at 43–44. In addition, the Bureau has developed the Loan Estimate and Closing Disclosure to match closely to enable consumers to easily compare their estimated and actual loan terms and costs. Further, as noted above, the Bureau’s Quantitative Study has determined that the Bureau’s integrated disclosures perform better than the current disclosures at enabling consumers to identify differences between the early and final disclosures. See Kleimann Quantitative Study Report at 46–47.

Because the Closing Disclosure contains a significant amount of detailed content necessary to inform consumers about their loan and their settlement charges, the Bureau believes that providing consumers with at least three business days before consummation to review the information and ask questions provides an important benefit to consumers. The Bureau believes the good faith estimate tolerance rules under § 1026.19(e)(3) will protect consumers against the most significant bait-and-switch risks. However, they do not provide protection against all changes that may occur between the time the Loan Estimate is provided and consummation. These changes include increases in certain real estate-related costs and disbursements to others, which could create legal issues for consumers after consummation. Further, the Bureau believes that providing consumers with better disclosures to identify changes or inaccuracies, as well as providing them with more time in which to do so, will further encourage creditors to provide more accurate Loan Estimates and Closing Disclosures, and discourage the use of bait-and-switch tactics.

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79850 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 226 While the final rule does not impose a requirement for creditors to ensure that consumers receive the Closing Disclosure one or two days before consummation, the final rule does include a requirement for creditors to permit consumers a right to inspect the Closing Disclosure the business day before consummation upon the consumer’s request. See the section-by-section analysis of § 1026.19(f)(2)(i).

227 For certain transactions, including refinancings with a new creditor or refinancings with the same creditor where new money is advanced, TILA grants consumers a three-day right to rescind the transaction where a security interest is or will be retained in the consumer’s principal dwelling. See 15 U.S.C. 1635(a). The right of rescission permits consumers time to reexamine their credit contracts and cost disclosures and to reconsider whether they want to put their home at risk by offering it as security for credit. See 12 CFR 1026.23.

The Bureau has considered commenters’ suggestions that the Closing Disclosure be provided earlier than three business days before consummation. However, as stated in the proposal, the Bureau also is concerned that it would be impractical to require delivery earlier than three business days before consummation. Thus, the final rule provides flexibility to industry by requiring creditors to ensure that consumers receive the disclosures no later than the third business day before consummation. Under this approach, a creditor need not complete the disclosures until the third business day before consummation, provided it can ensure that the consumer will receive the disclosures that day, such as via electronic mail consistent with applicable requirements regarding electronic delivery or hand delivery. See comments 19(f)(1)(ii)–2 and 19(f)(1)(iii)–2. In addition, as explained in more detail in the sectionby-section analysis of § 1026.19(f)(1)(iii) below, the final rule makes amendments to the proposal, which the Bureau believes will facilitate compliance with the delivery requirements. The Bureau believes a general threebusiness-day requirement will benefit consumers more than a requirement for creditors to ensure the consumer receives the Closing Disclosure two days or one day before consummation.226 While shorter periods would reduce the extent of revisions to the Closing Disclosure before consummation, they would provide consumers less time to review the transaction. As noted above, the Closing Disclosure, like the current final TILA disclosure and RESPA settlement statement, contains a significant amount of information regarding the credit and the real estate transaction. The Bureau believes a three-business-day period in which to review the information is a reasonable amount of time considering this significant amount of information on the disclosure. The Bureau also believes a three-business-day period is appropriate because the three-business-day period was the period recently instituted by Congress under its MDIA amendments to TILA with respect to creditor disclosures when the loan’s previously disclosed APR becomes inaccurate. Transactions subject to the threebusiness-day right of rescission. The Bureau declines to exempt transactions subject to the three-business-day right of rescission from § 1026.19(f)(1)(ii)(A) or otherwise amend the rescission rules.227 The Bureau believes the preconsummation waiting period and the post-consummation waiting period for transactions subject to the right of rescission serve different purposes. The pre-consummation period permits the consumer an opportunity to understand the specific elements of the transaction, question specific charges, ask questions, consider other options, or potentially improve the terms of the transaction prior to consummation. On the other hand, the right of rescission provides consumers an opportunity to unwind the entire transaction and receive any fees they may have paid for the transaction. Exempting transactions subject to the right of rescission from the general three-business-day preconsummation review period would mean many consumers would lose the opportunity to review the transaction details and resolve any concerns before consummation. The Bureau further notes that the Congresses that passed the Dodd-Frank Act and MDIA did not exempt rescindable transactions from MDIA’s three-business-day waiting period. Currently under Regulation Z, creditors must provide the final TILA disclosures so that consumers receive them no later than three business days before consummation if the loan’s previously disclosed APR becomes inaccurate, even if the loan is subject to the post-consummation three-businessday right of rescission. While the Bureau has authority to exempt transactions from TILA’s requirements in certain circumstances, an exemption is not warranted here because the amendments made to the final rule’s redisclosure requirements in § 1026.19(f)(2) will significantly reduce the potential for closing delays. In addition, refinancings that are subject to the right of rescission typically involve fewer parties and require less coordination than purchase-money transactions. Thus, the Bureau believes creditors in those transactions should be able to provide disclosures for transactions subject to the right of rescission three business days before consummation without imposing burdensome delays on consumers. Consummation v. settlement. The final rule requires that the Closing Disclosure be provided three business days before ‘‘consummation,’’ rather than before ‘‘settlement.’’ In general, TILA and Regulation Z require that creditors provide final TILA disclosures in certain circumstances three business days before ‘‘consummation’’ of the credit transaction, while RESPA and Regulation X require settlement agents to provide the RESPA settlement statement at or before ‘‘settlement.’’ Regulation Z currently defines ‘‘consummation’’ as ‘‘the time that a consumer becomes contractually obligated on a credit transaction.’’ See 12 CFR 1026.2(a)(13). Regulation X, by contrast, provides that the RESPA settlement statement must be delivered by ‘‘settlement,’’ which is defined as ‘‘the process of executing legally binding documents regarding a lien on a property that is subject to a federally related mortgage loan.’’ See 12 CFR 1024.2(b). The Bureau appreciates that ‘‘consummation’’ and ‘‘settlement’’ may not always coincide in some jurisdictions. The Bureau believes that reconciling this difference between TILA and RESPA satisfies the integration mandate. The Bureau believes ‘‘consummation’’ is appropriate because TILA section 128(b)(2)(D) requires that the creditor provide final TILA disclosures no later than three business days before consummation where the loan’s previously disclosed APR becomes inaccurate. See 15 U.S.C. 1638(b)(2)(D). This is the standard that applies to TILA disclosures currently under MDIA, which, as amended by Dodd-Frank Act section 1419, include the disclosure of settlement cost information. See 15 U.S.C. 1638(a)(17). In addition, TILA requires that the early TILA disclosures be provided no later than seven business days before ‘‘consummation.’’ 15 U.S.C. 1638(b)(2)(A). The Bureau believes that the early and final TILA disclosures should be provided in the sequence set forth under TILA to ensure consumers benefit from the time necessary to review the respective disclosures before becoming obligated on the credit transaction. In addition, because ‘‘consummation’’ is a particular point in time, while ‘‘settlement’’ is defined as a ‘‘process,’’ the Bureau believes the rule provides clarity with respect to when the disclosures must be provided. Accordingly, the final rule uses ‘‘consummation’’ as the timing standard VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79851 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations applicable to the provision of the Closing Disclosure.

As noted above, the Bureau recognizes that ‘‘consummation’’ and ‘‘settlement’’ may not coincide in some jurisdictions. Indeed, the definition of ‘‘settlement’’ in Regulation X indicates that a settlement is not necessarily a singular event involving the execution of one agreement, but is instead a ‘‘process of executing legally binding documents’’ regarding a lien on property that is subject to a federally related mortgage loan. See 12 CFR 1024.2(b). Thus, in some jurisdictions, a settlement may begin before ‘‘consummation’’ under Regulation Z, and, in some jurisdictions, may conclude later.

The Bureau believes that the final rule should account for the variety of ways settlements are handled across the country without imposing unnecessary costs on consumers, sellers, or industry. Accordingly, the final rule provides additional flexibility by narrowing the triggers for new three-business-day waiting periods when changes occur to the terms of the transaction, as discussed in the section-by-section analysis of § 1026.19(f)(2). The Bureau believes these changes will help ensure the efficient operation of closings. To account for situations in which consummation may occur before a settlement concludes, the final rule provides additional flexibility for postconsummation events, as discussed in the section-by-section analysis of § 1026.19(f)(2)(iii) below. Some commenters requested clarification of when ‘‘consummation’’ occurs, specifically inquiring whether it occurs when documents are recorded. As noted above, ‘‘consummation’’ is defined as ‘‘the time that a consumer becomes contractually obligated on a credit transaction.’’ See 12 CFR 1026.2(a)(13). Existing commentary to Regulation Z explains that when a contractual obligation on the consumer’s part is created is a matter to be determined under applicable law, and that Regulation Z does not make this determination. See comment 2(a)(13)–1. Existing commentary also explains that consummation does not occur when the consumer becomes contractually committed to a sale transaction, unless the consumer also becomes legally obligated to accept a particular credit arrangement. See comment 2(a)(13)–2.

Business day. As noted in the sectionby-section analysis of § 1026.2(a)(3), the final rule adopts the specific definition of business day applicable to § 1026.19(f)(1)(ii), as proposed. The Bureau believes the specific definition in § 1026.19(f)(1)(ii) is appropriate because the delivery requirement in § 1026.19(f)(1)(iii), as discussed in the section-by-section analysis for that section, provides that the consumer is deemed to have received the Closing Disclosure three business days after they are mailed or delivered, if not provided to the consumer in person. That provision uses the specific definition of business day to account for the current practice of United States postal service delivery on Saturday. Using the specific definition for the Closing Disclosure delivery requirements in this rule also will assist industry and consumers by facilitating the efficient delivery of the Closing Disclosure to reduce the potential for closing delays. The Bureau does not expect that such use of the specific definition of business day in this rule will impose costs on industry because it would not operate to require that a creditor’s or settlement agent’s office be open on Saturday. It only enables them to count Saturday as a day on which the consumer received the disclosures. The Bureau believes that using the general definition of business day in § 1026.19(f)(1)(ii) and (f)(1)(iii) would create unnecessary delays in many cases because it would mean that creditors and settlement agents could not count Saturdays as a day of receipt, unless the creditor’s or settlement agent’s offices were open to the public for carrying on substantially all of its business functions. The Bureau believes it would be incongruous if the regulation did not recognize a consumer’s actual receipt of the Closing Disclosure on a Saturday simply because the creditor’s offices were not open. The Bureau recognizes that using a consistent definition of business day, both within Regulation Z and between Regulation X and Regulation Z, could benefit industry and consumers alike by providing more certainty regarding regulatory requirements and reducing compliance costs. However, the Bureau believes that streamlining the definition of business day should be part of a more comprehensive assessment of Regulation Z, which the Bureau believes is outside of the scope of this rulemaking. See the section-by-section analysis of § 1026.2(a)(6) for additional discussion of the definition of business day.

Other issues raised by commenters. With respect to a commenter’s request that the final rule include protections for the creditor from breach of contract claims arising from delayed closing, the final rule does not expressly address such limitations on creditor liability. The final rule addresses disclosure obligations under TILA and RESPA; other creditor duties are outside the scope of this rulemaking. With respect to the commenter’s request that the final rule address creditor liability for the accuracy of the Closing Disclosure, see the section-by-section analyses of § 1026.19(f)(1)(i) and (f)(1)(v). Final provisions. For the aforementioned reasons, the final rule adopts § 1026.19(f)(1)(ii)(A) and comment 19(f)(1)(ii)–1 substantially as proposed. Final § 1026.19(f)(1)(ii)(A) makes technical revisions by adding references to other provisions of § 1026.19(f) that serve as exceptions to the general three-business-day requirement under § 1026.19(f)(1)(ii)(A). Specifically, the final rule replaces the reference to § 1026.19(f)(2) with more specific references to § 1026.19(f)(2)(i) and (f)(2)(iii) through (f)(2)(v). This change has been made because final § 1026.19(f)(2) has been revised to narrow the circumstances under which a new pre-consummation threebusiness-day period is required, as discussed in the section-by-section analysis of § 1026.19(f)(2)(i) and (ii) below. The final rule makes conforming changes to comment 19(f)(1)(ii)–1. Comment 19(f)(1)(ii)–1 also includes a technical revision by omitting a reference to comment 2(a)(6)–1 so that comment 19(f)(1)(ii)–1 cross-references only comment 2(a)(6)–2, which discusses the specific definition of business day applicable to § 1026.19(f)(1)(ii).

The final rule also adopts comment 19(f)(1)(ii)–2, with modifications. The comment has been reorganized for clarity, makes technical revisions, and includes additional discussion. The comment references the receipt rule in § 1026.19(f)(1)(iii) and includes examples illustrating when the Closing Disclosure would have to be delivered or placed in the mail to ensure the consumer receives the Closing Disclosure no later than three business days before consummation. The Bureau believes this language helps clarify the example that follows. In that example, consummation is scheduled for Thursday, and the comment explains that a creditor would satisfy the requirements of § 1026.19(f)(1)(ii)(A) if the creditor places the disclosures in the mail on Thursday of the previous week, because, for the purposes of § 1026.19(f)(1)(ii), Saturday is a business day, pursuant to § 1026.2(a)(6), and, pursuant to § 1026.19(f)(1)(iii), the consumer would be considered to have received the disclosures on the Monday before consummation is scheduled. The comment also includes a cross-reference to comment 19(f)(1)(iii)–1, which further clarifies the requirements of VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79852 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 228 See MDIA, Public Law 110–289, section 2502(a)(6), 122 Stat. 2654, 2857 (2008); 15 U.S.C. 1638(b)(2)(G). ‘‘Timeshare’’ is defined in 11 U.S.C. 101(53D).

§ 1026.19(f)(1)(iii) applicable to mail delivery. The comment also explains that a creditor would not satisfy the requirements of § 1026.19(f)(1)(ii)(A) in this example if the creditor places the disclosures in the mail on the Monday before consummation.

The comment also includes more detail than proposed comment 19(f)(1)(ii)–2 in explaining how a creditor in the above example could satisfy the requirements of § 1026.19(f)(1)(ii)(A) by delivering the Closing Disclosure by way of electronic mail on a day (Monday) that is three business days before consummation (Thursday). The comment also revises the proposal’s reference to § 1026.17(a)(1) relating to disclosures in electronic form. The final comment refers to § 1026.38(t)(3)(iii) instead, which permits the Closing Disclosure to be provided in electronic form, subject to compliance with the E-Sign Act. As revised, the comment explains that the creditor in the above example could satisfy the requirements of § 1026.19(f)(1)(ii)(A) by delivering the disclosures on Monday, for instance, by way of electronic mail, provided the requirements of § 1026.38(t)(3)(iii) relating to disclosures in electronic form are satisfied and assuming that each weekday is a business day, and provided that the creditor obtains evidence that the consumer received the emailed disclosures on Monday. The comment also includes a cross-reference to comment 19(f)(1)(iii)–2, which discusses how § 1026.19(f)(1)(iii) applies to delivery methods other than mail delivery.

Final § 1026.19(f)(1)(ii)(A) and comments 19(f)(1)(ii)–1 and –2 are adopted pursuant to the Bureau’s legal authority under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd- Frank Act, and, for residential mortgage transactions, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. The Bureau has considered the purposes for which it may exercise its authority under section 105(a) of TILA and, based on that review, believes that the rule and commentary are appropriate. The final rule and commentary will help consumers avoid the uninformed use of credit by ensuring that consumers receive disclosures of the actual terms and costs associated with the mortgage loan transaction early enough that consumers have sufficient time to become fully informed as to the cost of their credit. The final rule and commentary are consistent with section 129B(e) of TILA because failing to provide borrowers with enough time to become fully informed of the actual terms and costs of the transaction is not in the interest of the borrower. The Bureau also has considered the purposes for which it may exercise its authority under section 19(a) of RESPA and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will ensure more effective advance disclosure of settlement costs by requiring creditors to disclose the actual settlement costs associated with the transaction three business days before consummation.

The final rule and commentary are consistent with Dodd-Frank Act section 1032(a) because the features of mortgage loan transactions and settlement services will be more fully, accurately, and effectively disclosed to consumer in a manner that permits consumers to understand the costs, benefits, and risks associated with the mortgage loan and settlement services if consumers receive the disclosures reflecting the terms and costs associated with their transactions three business days before consummation.

In addition, the Bureau has considered the purposes for which it may exercise its authority under section 1405(b) of the Dodd-Frank Act and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will improve consumer awareness and understanding of the mortgage loan transaction by ensuring that consumers receive the disclosures reflecting the terms and costs associated with their transactions three business days in advance of consummation. The final rule and commentary also will be in the interest of consumers and in the public interest because they may eliminate the opportunity for bad actors to surprise consumers with unexpected costs at the closing table, when consumers are less able to question such costs.

The Bureau recognizes that the timing requirement in § 1026.19(f)(1)(ii)(A) is a change from current industry practice. During the Small Business Review process, several small entity representatives were opposed to this modification. See Small Business Review Panel report at 35, 38, 40, 45, 53–54, 59–60, 67–68, 72, and 77. The Small Business Review Panel recommended that the Bureau explore ways to mitigate the potential impact of the three business day requirement on small entities. Id. at 29. While the final rule continues to require that the Closing Disclosure be provided to consumers three business days before consummation in all circumstances, the final rule has provided for more flexibility, in part, because of the concern of the rule’s impact on the market. As discussed above in the section-by-section analysis of § 1026.19(f)(1)(i), the final rule includes new comment 19(f)(1)(i)–2, which clarifies when creditors may use the best information reasonably available when providing the disclosures required under § 1026.19(f)(1)(i). In addition, the final rule narrows the circumstances under which a new waiting period will be triggered for revisions to the Closing Disclosure, as discussed in more detail in the section-by-section analysis of § 1026.19(f)(2) below. Further, the final rule clarifies the receipt requirements in § 1026.19(f)(1)(iii), which the Bureau believes will facilitate compliance. The Bureau believes these modifications will reduce burden on small entities. 19(f)(1)(ii)(B) Timeshares As explained above, in 2008 Congress amended TILA to require delivery of final disclosures three business days prior to consummation. However, Congress explicitly exempted mortgage loans secured by timeshares from MDIA’s three-business-day requirement.228 Accordingly, the Bureau proposed § 1026.19(f)(1)(ii)(B), which would have provided that, for transactions secured by a consumer’s interest in a timeshare plan described in 11 U.S.C. 101(53D), the creditor shall ensure that the consumer receives the disclosures required under § 1026.19(f)(1)(i) no later than consummation. The Bureau proposed these requirements pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, and 1405(b) of the Dodd-Frank Act.

Proposed comment 19(f)(1)(ii)–3 would have explained that, for loans secured by timeshares, § 1026.19(f)(1)(ii)(B) requires a creditor to ensure that the consumer receives the disclosures required under § 1026.19(f)(1)(i) as soon as reasonably practicable, but no later than consummation. The proposed comment also would have included illustrative examples of this requirement. Comments. A trade association representing the timeshare industry supported the Bureau’s proposed exemption from the Closing Disclosure’s timing requirements. The commenter also explained that proposed comment 19(f)(1)(ii)–3 should be modified to clarify that, if the creditor in the case of a transaction secured by a consumer’s VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79853 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations interest in a timeshare plan provides the credit application and consummates the transaction on the same day, or if consummation occurs a day after the application is received, there should be no requirement to provide the Loan Estimate required by § 1026.19(e)(1)(iii), and that the creditor would comply with § 1026.19(e)(1)(iii) and (f)(1)(i) by providing the Closing Disclosure. As discussed in the section-by-section analysis of § 1026.19(e)(1)(iii) above, the commenter noted that timeshare transactions are typically consummated on the same or very next day after the creditor receives the application. The commenter also requested that comment 19(f)(1)(ii)–3 be amended to clarify that timeshare transactions covered by the rule may be consummated at any time after the Closing Disclosure is provided, similar to language in existing comment 19(a)(5)(ii)–1. The commenter further requested that language be added to the comment explaining that the disclosures required by § 1026.19(e)(1)(iii) and (f)(1)(i) are not required to be provided if the consumer’s application will not or cannot be approved on terms requested by the consumer or if the consumer has withdrawn the application, similar to language in existing comment 19(a)(5)(ii)–4.

The commenter also requested that the Bureau also exempt timeshares from many of the Dodd-Frank Act’s amendments to TILA by, for example, allowing timeshare lenders to use a timeshare-specific Closing Disclosure form or to strike out or omit inapplicable disclosures on the proposed forms. The commenter indicated that this would fulfill the exemption for timeshares recognized in the Dodd-Frank Act.

Final rule. The Bureau adopts § 1026.19(f)(1)(ii)(B) and comment 19(f)(1)(ii)–3 substantially as proposed, but has added additional commentary in response to the comments received. As discussed in the section-by-section analysis of § 1026.19(f)(1)(i), the final rule includes comment 19(f)(1)(i)–3 explaining that, for transactions covered by § 1026.19(f)(1)(i), creditors may rely on comment 19(e)(1)(iii)–3 in determining that disclosures are not required by § 1026.19(f)(1)(i) because the consumer’s application will not or cannot be approved on the terms requested or the consumer has withdrawn the application. Thus, for timeshare transactions covered by § 1026.19(f)(1)(ii)(B), creditors need not provide the Closing Disclosure if a consumer’s application is denied or withdrawn, in accordance with comment 19(f)(1)(i)–3.

Comment 19(f)(1)(ii)–3 adds language to proposed comment 19(f)(1)(ii)–3 clarifying that timeshare transactions may be consummated at the time or any time after the disclosures required by § 1026.19(f)(1)(i) are received by the consumer. To avoid uncertainty over whether consummation may occur after only the Closing Disclosure is provided, the comment also indicates that, in some cases, the Loan Estimate must be provided under § 1026.19(e) and includes a cross-reference to comment 19(e)(1)(iii)–4. Comment 19(f)(1)(ii)–3 amends the examples in proposed comment 19(f)(1)(ii)–3 to demonstrate that the Closing Disclosure must be provided no later than consummation. The comment includes an example in which an application is received on a Monday and consummation occurs on Friday of that week. The comment also includes an example in which an application is received on a Monday and consummation occurs the next day, on Tuesday of that week. In both examples, the Closing Disclosure must be provided no later than consummation.

To conform the comment to the language in § 1026.19(f)(1)(ii)(B), the comment omits language in proposed comment 19(f)(1)(ii)–3 that would have explained that, if an application is received on a Monday and consummation is scheduled for Friday, ‘‘the creditor may provide the consumer with the disclosures required by § 1026.19(f)(1)(i) on Tuesday, June 2, if doing so is reasonably practicable.’’ The comment also revises proposed guidance that would have addressed compliance with § 1026.19(e). Comment 19(f)(1)(ii)–3 explains that, in some cases, a Loan Estimate also must be provided under § 1026.19(e) and includes a cross-reference to comment 19(e)(1)(iii)–4, which addresses the provision of the Loan Estimate in timeshare transactions, as discussed in the section-by-section analysis of § 1026.19(e)(1)(iii).

Section 1026.19(f)(1)(ii)(B) and comment 19(f)(1)(ii)–3, as finalized, carry out the purposes of TILA and RESPA by ensuring meaningful disclosure of credit terms and effective advance disclosure of settlement costs, consistent with section 105(a) of TILA and 19(a) of RESPA, respectively. Also, the final rule and commentary will improve consumer awareness and understanding of transactions involving residential mortgage loans by requiring effective disclosure within a timeframe appropriate for loans secured by a timeshare, which will be in the best interest of consumers and the public consistent with Dodd-Frank Act section 1405(b).

19(f)(1)(iii) Receipt of Disclosures TILA and RESPA differ in their treatment of delivery requirements for the final disclosures. Section 128(b)(2)(E) of TILA, as amended by 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 does not expressly address delivery requirements. Regulation Z provides that if the disclosures are provided to the consumer by means other than delivery in person, the consumer is deemed to have received the disclosures three business days after they are mailed or delivered. See 12 CFR 1026.19(a)(2)(ii). Regulation X provides that the settlement agent shall deliver the completed RESPA settlement statement at or before the settlement, except if the borrower waives the right to delivery of the completed RESPA settlement statement, in which case the completed RESPA settlement statement shall be mailed or delivered as soon as practicable after settlement. See 12 CFR 1024.10(b), (c).

To establish a consistent standard for the Closing Disclosure, the Bureau proposed to adopt § 1026.19(f)(1)(iii), which would have provided that, if any disclosures required under § 1026.19(f)(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 to the address specified by the consumer. The Bureau proposed these requirements pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, and 1405(b) of the Dodd-Frank Act. Proposed § 1026.2(a)(6) would have applied the specific definition of ‘‘business day’’ to § 1026.19(f)(1)(iii). The specific definition of business day is the definition that applies to the right of rescission in § 1026.23 and includes all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a).

Proposed comment 19(f)(1)(iii)–1 would have explained that if any disclosures required under § 1026.19(f)(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 further explained that this is a presumption which may be rebutted by providing evidence that the consumer received the disclosures earlier than three business VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79854 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations days. The proposed comment also would have included illustrative examples. Proposed comment 19(f)(1)(iii)–2 would have clarified that the presumption established in § 1026.19(f)(1)(iii) applies to methods of electronic delivery, such as email. However, the comment also would have explained that creditors using electronic delivery methods, such as email, must also comply with § 1026.17(a)(1). This proposed comment also would have included illustrative examples. The Bureau recognized in the proposal that this requirement is different than the current requirement in Regulation Z. As explained above, the current rules deem corrected disclosures mailed or delivered to the consumer by a method other than in-person delivery to be received three business days after mailing or delivery. In contrast, the proposed rule instead would have created a presumption that the disclosures are received three business days after they are mailed or delivered to the address provided by the consumer. The Bureau was concerned that the current rule may not be appropriate for the Closing Disclosure, which contains much more information than the final TILA disclosures subject to the current rule, and therefore would require more time to review and understand. The Bureau reasoned that it therefore may be appropriate to create a presumption of receipt, which would provide additional encouragement for lenders to ensure that the disclosures are received in a timely manner. The Bureau solicited feedback regarding whether the proposed rule would create uncertainty regarding compliance and whether the rule should be made analogous to § 1026.19(a)(2), which uses ‘‘deem’’ instead of ‘‘presume,’’ or whether § 1026.19(a) should be modified to reflect § 1026.19(f)(1)(iii), if the final rule adopts the presumption of receipt. Comments The Bureau received public comment and an ex parte submission regarding the proposed rule’s presumption of receipt. A variety of commenters identified the proposed three-day presumption of receipt as a potential source of additional costs and delays. Commenters observed that the three-day presumption of receipt would add three more business days to the general threebusiness-day pre-consummation period, which could require that the Closing Disclosure be provided a minimum of six business days before consummation. Many commenters had questions about what type of evidence would be sufficient to demonstrate compliance with the rule and to respond to challenges to the presumption that the Closing Disclosure was not timely received.

Some commenters, including the SBA, expressed concern that demonstrating evidence of physical delivery, such as by using an overnight courier service, could be burdensome, and asked that the Bureau provide flexibility in the delivery rules such as by recognizing methods of electronic delivery and by providing clear guidance on what forms of proof are sufficient to demonstrate compliance. The SBA observed that the three-day presumption applied even for disclosures that are emailed, unless it could be proved that they were received earlier. A trade association representing settlement agents asked whether delivery by facsimile machine would be acceptable. A number of commenters suggested that electronic delivery methods, such as facsimile or email, could raise questions about how to demonstrate evidence of delivery, such as by read receipt, return receipt, an email from the person to be obligated on the loan, or email tracking metrics, such as open and click-through rates. Several bank and credit union commenters, trade associations representing banks and financial companies, settlement agents, and title insurance commenters expressed concern that use of the word ‘‘presumed’’ meant the presumption could be defeated by an assertion that a consumer received it more than three business days after mailing or by denying that they received the disclosure by presenting oral evidence or a written affidavit. Commenters expressed concerns that managing compliance risk associated with defeating the presumption would likely delay closings and increase costs. Trade associations representing banks expressed concern that the rebuttable presumption could delay closings because creditors or settlement agents would wait until they obtained sufficient evidence of receipt, particularly if a consumer waited to notify someone that it did not receive a timely disclosure. One trade association representing banks explained that creditors would not know that a consumer did not receive a mailed disclosure, or that receipt had been delayed, unless the consumer informed the creditor, and that the preconsummation waiting period could be delayed if consumers wait to tell creditor that they did not receive the Closing Disclosure. A credit union commenter observed that a three-day presumption for electronic communications would encourage industry to send documents in-person or by overnight delivery to guarantee receipt.

A large bank commenter was concerned that creditors could face TILA liability for mail delivery delays that are outside of the creditor’s control. A title insurance company explained that the rebuttable presumption would increase post-closing litigation, and that higher litigation risk would increase costs that would be passed on to consumers.

Rural lenders, settlement agents, and trade associations representing attorneys and settlement agents expressed concern about how the timing of the Closing Disclosure could impact closings in rural areas. Commenters explained that consumers are frequently in transit over long distances to attend a closing and may not always be able to receive documents electronically, that delivery can take longer than three days in certain areas and that certain carriers will not deliver documents on Saturdays. A rural lender explained that in-person delivery is not always an option in rural areas, so creditors would likely have to mail the Closing Disclosure six business days before consummation, but that proving timely delivery would be difficult. To address these concerns, a large bank commenter recommended that the Bureau clarify in commentary that the presumption may be rebutted only by evidence that consumer received the disclosure earlier than three business days after mailing or delivery, but that it could not be challenged by assertions or evidence that the disclosures were in fact received more than three business days after mailing. A variety of commenters recommended retaining the current rule in Regulation Z that disclosures are deemed to be received three days after placed in the mail. A title insurance company commenter explained that ‘‘deemed’’ would make compliance more certain and would not delay transactions while creditors and settlement agents obtain evidence of receipt. The commenter suggested that the term ‘‘presume’’ would lead to postclosing litigation when persons in default on their loans attempt to rebut the presumption that disclosure was received within three days, which would increase costs to consumers because creditors and settlement agents would be forced to defend such litigation, and litigation costs would ultimately be passed on to consumers in the form of higher fees. Credit union commenters recommended that the final rule establish a presumption of instant VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79855 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations receipt based on electronic delivery in all cases, or in cases where consumers have agreed to receive electronic communications. The commenter explained that electronic communications are received nearly instantly after sending, and it is likely that individuals involved in important transactions will check their electronic communications more than once per day. One trade association representing credit unions explained that it is reasonable to assume that members who have agreed to receive electronic communications expect to receive disclosures by email, and that a consumer’s agreement to receive notices electronically should constitute adequate notice of expected delivery. A credit union commenter stated that electronic delivery should not require evidence to defeat the presumption in any case. One non-depository lender recommended that the presumption of delivery for emailed disclosure be shortened to 24 hours.

Commenters asked for clarification on what forms of evidence could be used to demonstrate the consumer received the disclosures for purposes of demonstrating compliance or rebutting the three-day presumption (and, by extension, defeating such rebuttals). A large bank in an ex parte comment asked that the Bureau confirm that an applicant’s representation to the creditor, such as a recorded verbal acknowledgement or a signed statement, could defeat the presumption (i.e., to prove that they received it earlier, or later, than three days). A trade association representing settlement agents and the title insurance industry asked, if the disclosure is delivered by the United States Postal Service or a courier service, whether a delivery confirmation, signature confirmation service, return receipt, or certified mail, could rebut the presumption of receipt. The commenter also asked whether a certificate of mailing or track-andconfirm receipt could establish the date on which the disclosure was sent. The commenter also asked, if a signature is required for confirmation of receipt, whether the signature must be the signature of the person named as a party to the loan.

A software company commenter requested clarification on whether the day the disclosures are mailed or delivered counts as the first day for purposes of the delivery requirements in 19(f)(1)(iii). Commenters also requested clarification regarding how to deliver the Closing Disclosure when there are multiple consumers involved. Several trade associations representing banks and financial companies requested clarification that the three-day period begins when the Closing Disclosure is delivered to the ‘‘primary’’ consumer when there are multiple consumers. One trade association representing settlement agents asked whether a particular consumer could elect a different method of delivery than a coborrower. Another commenter asked that if multiple consumers are to be obligated on the loan, whether all of them must sign a delivery receipt to confirm they have received the Closing Disclosure.

Final Rule The Bureau has considered the comments on this aspect of the proposal and is modifying the proposed provision creating a presumption of receipt three business days after delivery. The final rule adheres to the statutory provision under MDIA. The final rule provides that, if the Closing Disclosure is mailed to the consumer or delivered to the consumer by means other than delivery in person, the consumer is considered to have received the disclosure three business days after it is mailed or delivered. The final rule makes this change to reflect the standard for determining receipt set forth in TILA section 128(b)(2)(E), as amended by MDIA, in response to comments that indicated a presumption of receipt could delay closings and increase costs for consumers. This is the standard that currently applies to the final TILA disclosures under § 1026.19(a)(2).

When it issued the proposal, the Bureau reasoned that the presumption of receipt rule at proposed § 1026.19(f)(1)(iii) would provide additional encouragement for lenders to ensure that disclosures are received in a timely manner. Commenters provided feedback explaining that, to manage compliance risk associated with a presumption of receipt, creditors and settlement agents may incur additional costs and delay closings to ensure they have evidence of receipt. Accordingly, commenters requested clarification on the types of evidence that would be sufficient under the proposal, including an ex parte comment requesting clarification of whether a recorded verbal acknowledgment or a signed statement from the consumer would be sufficient to demonstrate compliance or withstand a challenge to the presumption of receipt. In light of the variety of delivery methods and options offered by service providers, it is not feasible to define with sufficient clarity what evidence will demonstrate compliance or withstand a challenge to the presumption of receipt; such a determination would involve a factual inquiry. Without a bright-line standard or extensive regulatory guidance, the Bureau believes industry would likely seek to document evidence of receipt, such as through recorded verbal or written acknowledgements or affidavits, which may unnecessarily delay many transactions. The Bureau also is concerned that demonstrating compliance under the proposal could be especially difficult and costly in rural areas. Creditors and settlement agents in rural areas explained that long distances separate parties to a transaction, and that it is often difficult for creditors to obtain evidence that a consumer has, in fact, received a disclosure. By adhering to the statutory provision under MDIA, the final rule should facilitate compliance for creditors and settlement agents in these areas. Accordingly, the final rule modifies proposed § 1026.19(f)(1)(iii) so that the provision adheres to the statutory mailbox rule under TILA section 128(b)(2)(E) and the standard currently in Regulation Z § 1026.19(a)(2).

The final rule does not prevent creditors from arranging earlier delivery of the Closing Disclosure provided they ensure the consumer receives the disclosures no later than three business days before consummation, consistent with § 1026.19(f)(1)(ii) and (iii). Moreover, to accommodate changes that may occur between the time the Closing Disclosure is provided and consummation, the final rule has narrowed the triggers for new threebusiness-day waiting periods under the rule’s redisclosure requirements, as discussed in the section-by-section analysis of § 1026.19(f)(2) below. The Bureau believes this change will further reduce the impact on industry and consumers in rural areas. The final rule does not adopt separate rules or presumptions regarding the delivery of disclosures by overnight courier, electronic transmission, or other means. Although these methods may be faster than delivery by regular mail, the Bureau does not believe it is feasible to adequately identify satisfactory compliance in all cases. Nor does the Bureau believe it has sufficient information to identify a separate presumption of receipt for particular delivery methods, such as electronic delivery methods. However, a creditor or settlement agent is not required to use the three-business-day delivery standard to determine when the waiting period required by § 1026.19(f)(1)(iii) begins. Thus, if a creditor or settlement agent delivers the Closing Disclosure electronically consistent with VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79856 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations § 1026.38(t)(3)(iii) or delivers the Closing Disclosure by overnight courier, the creditor or settlement agent may rely on evidence of actual delivery (such as documentation that the Closing Disclosure was received by certified mail or overnight delivery that uses a signature to accept delivery or email, if similar documentation is available) to determine when the three-business-day waiting period begins.

Some commenters requested clarification on when a Closing Disclosure is considered delivered for purposes of counting the three-businessday rule. For clarity and consistency with other provisions of § 1026.19(e) and (f), final § 1026.19(f)(1)(iii) provides generally that if the Closing Disclosure is not provided in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail. Comment 19(f)(1)(iii)–1 also explains that the days are counted from the date on which the disclosures are placed in the mail. See also comment 19(f)(1)(ii)– 2. Some commenters requested clarification regarding transactions involving multiple consumers. Final § 1026.17 sets forth the applicable requirements for such transactions and clarifies that the Closing Disclosure need only be given to one of the primary obligors, unless the transaction is subject to the right of rescission, in which case all consumers with the right to rescind must receive the closing disclosures. See section-by-section analysis of § 1026.17(d). Final provisions. Accordingly, final § 1026.19(f)(1)(iii) provides that, if any disclosures required under § 1026.19(f)(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 delivered or placed in the mail. The heading of final § 1026.19(f)(1)(iii) has been modified to refer to ‘‘Receipt of disclosures,’’ which the Bureau believes is clearer than the proposed heading that would have referred to ‘‘Delivery.’’ As discussed in the sectionby-section analysis of § 1026.19(f)(1)(ii)(A), the final rule adopts the specific definition of business day applicable to § 1026.19(f)(1)(iii) for purposes of the delivery requirements of the Closing Disclosure.

Comment 19(f)(1)(iii)–1 restates the requirement of § 1026.19(f)(1)(iii) and contains language similar to language in current comment 19(a)(2)(ii)–3, clarifying that, if the creditor delivers the disclosures under § 1026.19(f)(1)(iii) to the consumer in person, consummation may occur any time on the third business day following delivery. Comment 19(f)(1)(iii)–1 also clarifies that, if the creditor provides the disclosures by mail, the consumer is considered to have received them three business days after they are placed in the mail, for purposes of determining when the three-business-day waiting period required under § 1026.19(f)(1)(ii)(A) begins. For consistency with comment 19(e)(1)(iv)– 1, comment 19(f)(1)(iii)–1 also explains that the creditor may, alternatively, rely on evidence that the consumer received the Closing Disclosure earlier than three business days after mailing. The comment also includes a cross-reference to comment 19(e)(1)(iv)–1 for an example in which the creditor sends disclosures by overnight mail. Comment 19(f)(1)(iii)–2 also has been modified to conform to final § 1026.19(f)(1)(iii) and contains a sentence substantially similar to the last sentence in current comment 19(a)(2)(ii)–3, clarifying that creditors that use electronic mail or a courier other than the United States Postal Service also may follow the approach for disclosures provided by mail described in comment 19(f)(1)(iii)–1. This language replaces proposed language that would have explained that the three-business-day presumption applies to methods of electronic delivery and that would have provided an illustrative example and an explanation that the creditor could demonstrate compliance by providing evidence that the consumer received an emailed disclosure earlier. Thus, if a creditor sends a disclosure required under § 1026.19(f) via email on Monday, pursuant to § 1026.19(f)(1)(iii) the consumer is considered to have received the disclosure on Thursday, three business days later. For consistency with comment 19(e)(1)(iv)–2, the comment also explains that the creditor may, alternatively, rely on evidence that the consumer received the emailed disclosures earlier than three business days. Comment 19(f)(1)(iii)–2 includes a cross-reference to comment 19(e)(1)(iv)– 2 for an example in which the creditor emails disclosures and receives an acknowledgment from the consumer on the same day. Comment 19(f)(1)(iii)–2 adopts substantially all of the language in proposed comment 19(f)(1)(iii)–2 regarding a creditor’s use of electronic delivery methods, with a revised reference to § 1026.38(t)(3)(iii) instead of § 1026.17(a)(1) to reflect the requirements applicable to the Closing Disclosure.

The final delivery provision under § 1026.19(f)(1)(iii) and comments 19(f)(1)(iii)–1 and –2 are consistent with section 105(a) of TILA. Specifically, the rule and commentary will help consumers avoid the uninformed use of credit by ensuring that consumers receive disclosures of the actual terms and costs associated with the mortgage loan transaction early enough that consumers have sufficient time to become fully informed as to the cost of credit. The final rule and commentary are also authorized under section 19(a) of RESPA because they will ensure more effective advance disclosure of settlement costs by requiring creditors to make sure that the disclosures are delivered to the consumer three business days before consummation. In addition, § 1026.19(f)(1)(iii) and comments 19(f)(1)(iii)–1 and –2 are consistent with section 1405(b) of the Dodd-Frank Act because the rule will improve consumer awareness and understanding of the mortgage loan transaction by ensuring that disclosures reflecting all of the terms and costs associated with their transactions are delivered to the consumer three business days in advance of consummation.

19(f)(1)(iv) Consumer’s Waiver of Waiting Period Before Consummation TILA and RESPA set forth different waiver provisions applicable to the final disclosures. 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. 15 U.S.C. 1638(b)(2)(F). 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 current § 1026.19(a)(3) of Regulation Z.

Neither RESPA nor Regulation X contains a similar provision for emergencies. Instead, RESPA section 4 provides the Bureau authority to issue regulations under which consumers may waive their rights to receive the RESPA settlement statement at or before settlement. Regulation X provides that the settlement agent shall deliver the completed RESPA settlement statement VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79857 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations at or before the settlement, unless the borrower waives the right to delivery of the completed RESPA settlement statement. If the borrower exercises the waiver, the completed RESPA settlement statement must be mailed or delivered as soon as practicable after settlement. See 12 CFR 1024.10(b)(c). The Bureau explained in the proposal that, although waivers based on a bona fide personal financial emergency are rare, the waiver provision serves an important purpose. Specifically, 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, the Bureau proposed § 1026.19(f)(1)(iv), which would have allowed a consumer to waive the three-business-day waiting period in the event of a bona fide personal financial emergency. The provision would have required that the consumer 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 is determined by the facts surrounding individual situations. Further, each consumer who is primarily liable on the legal obligation would have been required to sign the written statement for the waiver to be effective.

Proposed comment 19(f)(1)(iv)–1 would have stated that, a consumer may modify or waive the right to the threebusiness-day waiting period required by § 1026.19(f)(1)(ii) only after the creditor makes the disclosures required by § 1026.19(f)(1)(i). This comment was modeled after comment 19(a)(3)–1, which was based on the text in TILA, and is consistent with commentary on waiving the rescission period and the pre-consummation waiting period required for certain high-cost mortgage transactions. The comment would have set forth one example: 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 Bureau sought comment on the nature of waivers based on bona fide personal financial emergencies and 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).

Comments Consumer advocates and industry commenters differed in their views on the waiver proposal. Two consumer advocacy groups submitting a joint comment noted that the bona fide personal financial emergency waiver would protect consumers sufficiently from serious harm caused by a delayed closing. While they noted that consumers may be inconvenienced by closing delays, they stated that a waiver should not be available for mere inconveniences, and that a narrow waiver provision would provide industry an incentive to avoid such inconveniences without risking the potential that a flexible waiver provision could be abused. By contrast, many industry comments expressed the view that the proposed waiver provision was inadequate. These commenters believed the bona fide personal financial emergency waiver was too restrictive to account for the variety of reasons a consumer may wish to waive the timing provisions of the Closing Disclosure. Creditors noted that they are already reluctant to accept bona fide personal financial emergency waivers under the current rescission rules because the lack of examples could subject them to possible TILA liability. A trade association representing banks explained that, due to TILA liability, creditors are often reluctant to honor a waiver where a borrower’s attested circumstances do not rise to the level of a clear emergency but instead appear to be inconveniences.

Some industry commenters, including a title insurance company and a professional association representing attorneys, opposed a rule that relied on a waiver because of the potential for consumer abuse inherent in a waiver and the reputational and legal risk incurred by settlement agents who may need to consider whether to accept a waiver. Commenters explained that consumers likely would feel forced into signing a waiver on most closings that would undermine the purpose of the three-business-day period. Some settlement agent commenters noted the potential for consumer abuse inherent in waiver mechanisms, but they believed the Bureau nonetheless could craft a waiver provision to deal with this risk.

Commenters critical of the proposed waiver provision generally recommended several approaches to broaden the waiver provision, including expanding the bona fide personal financial emergency provision to cover additional ‘‘emergencies,’’ permitting a waiver for ‘‘non-emergency’’ circumstances, and permitting the consumer and the seller to jointly sign a waiver in the event of a closing being necessary to facilitate a coinciding settlement. One large bank stated that a flexible waiver would be necessary even if the Bureau expanded exemptions in the final rule because situations necessitating a waiver would arise that fall outside of the exemptions. The commenter stressed the consumers should be free to make their own decisions about whether to waive the timing requirements in the rule. Commenters, including a GSE, asked that the Bureau consider a variety of examples that would either constitute a bona fide personal financial emergency or justify some other more flexible waiver, including the following: the consumer may miss a mandatory military service deadline; timely receipt of the Closing Disclosure would be impracticable because the consumer is traveling; the consumer expends financial resources to secure emergency housing or make other logistical arrangements; the consumer needs timely access to funds to satisfy a legal judgment or other legal arrangement, for an emergency medical procedure, or to repair a heating system in the winter; the consumer loses the opportunity to purchase a home because a sale contract expires; the consumer faces financial costs or economic hardship, such as the expiration of an interest rate lock, additional interest rate lock extension fees, additional prorated taxes, or higher interest payments on an existing loan in the case of refinancing; or a delay will affect the seller, such as by delaying a separate coinciding closing. Some commenters suggested that a more flexible waiver should be available in particular circumstances. A large bank, a title insurance company, and settlement agent commenters recommended that a flexible waiver be available to consumers where the rule would trigger additional redisclosure waiting periods so the consumer could avoid the costs associated with a closing delay, such as the loss of a rate lock or penalties associated with a breach of a purchase agreement. A trade association representing banks and financial companies believed that a more flexible waiver should be permitted when a consumer is receiving a mortgage loan that meets the criteria of a ‘‘qualified mortgage’’ under the Bureau’s rules. Several commenters requested that a flexible waiver be available for transactions subject to the threebusiness-day right to rescind under § 1026.23. A trade association representing credit unions and a large bank suggested non-cash-out and termreduction refinancings presented less consumer risk and that consumers should be able to waive the rule’s timing VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79858 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 229 See, e.g., section-by-section analysis of § 1026.19(f)(1)(i) (best information reasonably available standard), (f)(1)(iii) (delivery), (f)(2)(i) and (ii) (revised triggers for the redisclosure waiting period), and (f)(2)(iii) (changes for postconsummation events).

requirements for such transactions. A credit union commenter stated that the waiver provision applicable to the Closing Disclosure should be consistent with the waiver provision applicable to the Loan Estimate.

A large bank believed creditors should be permitted to establish processes and controls around the issuance of waivers, while a settlement agent and a credit union commenter recommended that the Bureau develop disclaimer language for a waiver to mitigate the risk of abuse, and a mortgage broker commenter believed consumers should be able to acknowledge at closing that they have waived the rule’s timing requirements. A trade association representing various mortgage professionals believed the risk of abuse should be addressed through enforcement rather than restrictive regulations.

Several commenters requested that the Bureau provide clarification on the mechanics for issuing a waiver. A law firm commenter requested that the final rule clarify how a waiver is obtained and what is required for approval. Various settlement agent commenters and a title insurance company commenter indicated that the seller should be able to exercise a waiver, while a trade association representing settlement agents and a community bank recommended that consumers and sellers should be required to execute a waiver to ensure that all parties can consider the effects of and necessity for a waiver.

Final Rule The final rule adopts final § 1026.19(f)(1)(iv) substantially as proposed, with technical revisions discussed further below. The Bureau believes the bona fide personal financial emergency provision is the appropriate waiver mechanism for the Closing Disclosure, rather than the broader waiver currently provided for under Regulation X § 1024.10(c) with respect to the RESPA settlement statement. There is significant consumer interest in ensuring consumers receive the Closing Disclosure at least three business days before consummation, given the complexity and significance of mortgage transactions. Final TILA disclosures provided three business days prior to consummation under the amendments made to TILA by MDIA are already subject to the bona fide personal financial emergency waiver. This waiver provision will ensure that consumers only forego their ability to review the Closing Disclosures when they are presented with a financial emergency. In addition, the Bureau believes that implementing TILA’s waiver provision is necessary to implement the delivery requirements for the integrated disclosures under MDIA and the Dodd- Frank Act.

The Bureau believes the bona fide personal financial emergency waiver should apply to all transactions subject to § 1026.19(f), and not just those loans subject to MDIA’s three-business-day timing requirement (i.e., loans for which the previously disclosed APR becomes inaccurate). While a more flexible waiver is available under Regulation X currently with respect to the RESPA settlement statement, the Closing Disclosure is different in nature because it integrates information derived from both RESPA and TILA. The final rule requires that the Closing Disclosure be provided three business days before consummation in all cases, as discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(A). As noted in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), advance receipt of the Closing Disclosure provides important consumer protections, fulfills the goals of the integration mandate, and is in line with the goal of improving consumer awareness through disclosures for residential mortgage loans under sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. The Bureau is concerned that a broader waiver for transactions not covered by MDIA’s timing requirements could be abused and undermine these benefits. This risk of abuse was noted by consumer advocates and several industry commenters, as described above.

The Bureau recognizes that the limited guidance on what constitutes a bona fide personal financial emergency may limit the use of the waiver, but the Bureau believes the waiver should be reserved for limited use: when a consumer faces a true financial emergency, as distinct from an inconvenience. One commenter questioned whether the risk of abuse should be addressed through restrictive regulatory provisions instead of through enforcement activities. The Bureau believes a limited waiver provision in the final rule is an appropriate tool for addressing the risk of abuse. Because determining the circumstances surrounding the issuance of waivers would involve a fact-intensive inquiry, it may be difficult to identify whether consumer abuse occurred on any particular occasion. The Bureau is concerned that a more flexible waiver provision would make it more difficult to detect abuse.

The final rule does not include standardized disclaimer language, as suggested by some commenters. The Bureau believes it would be impracticable to provide standardized language in light of the unique characteristics of each mortgage loan transaction. In addition, the Bureau does not believe the risk of abuse would be mitigated by a statement provided at closing acknowledging a waiver. To be meaningful, the Bureau believes that waivers should be provided with the delivery of the Closing Disclosure and should be based on a justification contained in a written statement provided by the consumer and signed by all consumers primarily liable on the legal obligation. Thus, final § 1026.19(f)(1)(iv) prohibits the use of printed forms for this purpose. A more flexible waiver standard might offer some consumer benefits. On balance, however, the Bureau does not believe it is needed to protect consumers from unnecessary delays. For example, additional delays and inconveniences for some consumers that would have been required by the proposed redisclosure requirements could be avoided by a more flexible waiver if such a redisclosure requirement were in place, as one commenter suggested. However, the Bureau believes the final rule’s modification to the proposal’s requirement for additional waiting periods and other disclosure requirements under § 1026.19(f) substantially reduce the likelihood of costly closing delays, thereby reducing the need for a broader waiver.229 With respect to the circumstances that would trigger redisclosure waiting periods under the final rule, the Bureau believes a waiver should be available only in the event of a bona fide personal financial emergency. The Bureau believes the events triggering a new waiting period in § 1026.19(f)(2) have the potential to pose serious, long-term risk to consumers, and thus waivers in these cases should be limited. In addition, the Bureau believes reliance on the bona fide personal financial emergency waiver provision will facilitate compliance better than a two-tiered waiver regime, in which transactions not subject to MDIA’s timing requirements would be subject to a broader waiver. For example, a twotiered waiver provision applicable to the Closing Disclosure would create a different standard for waivers than the standard for the Loan Estimate. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79859 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations Regarding comments requesting additional examples of a bona fide personal financial emergency, the example in comment 19(f)(1)(iv)–1 is illustrative and not exhaustive. For example, situations offered by commenters could constitute a bona fide personal financial emergency, such as a sudden, unforeseen mandatory military service deadline or an unforeseen medical emergency, depending on the facts and circumstances of an individual case.

One commenter stated that a more flexible waiver should be permitted when a consumer is receiving a qualified mortgage under the Bureau’s ability-to-repay rules. While a qualified mortgage may present less risk that a consumer lacks an ability to repay the loan, a home mortgage transaction is a complex, long-term financial commitment that most consumers enter into only infrequently. Thus, the Bureau believes consumers receiving qualified mortgages will benefit from time to review the Closing Disclosure, to ensure that the loan terms and settlement charges offered contain no significant surprises.

The final rule does not provide for a broader waiver for transactions subject to the right of rescission, as requested by several commenters. A large bank and a trade association representing credit unions stated that non-cash-out and term-reduction refinancings presented less consumer risk and that consumers should be able to waive the rule’s timing requirements for those transactions. The Bureau recognizes that a preconsummation waiting period may, in some cases, lengthen the disbursement of funds for transactions subject to the right of rescission. However, as explained in the section-by-section analysis of § 1026.19(f)(1)(i)(A), the Bureau believes the pre- and postconsummation periods serve distinct purposes, and that the risk of closing delays for such transactions is limited, particularly in light of the modifications made to proposed § 1026.19(f). Several commenters requested that the Bureau provide clarification on the mechanics for issuing a waiver. A law firm commenter requested that the final rule clarify how a waiver is obtained and what is required for approval. The requirements for obtaining a waiver are set forth in § 1026.19(f)(1)(iv) and are clarified in comment 19(f)(1)(iv)–1. Pursuant to § 1026.19(f)(1)(v), settlement agents providing consumers with the disclosures required under § 1026.19(f)(1)(i) also would need to comply with § 1026.19(f)(1)(iv), although creditors would remain responsible for compliance, pursuant to § 1026.19(f)(1)(v).

The final rule does not alter the mechanics for accepting waivers by permitting or requiring sellers to execute a waiver along with, or independent of, the consumer. Several settlement agents and a title insurance company indicated that the seller should be able to exercise a waiver; and a trade association representing settlement agents and a community bank recommended that consumers and sellers should be required to execute a waiver to ensure that all parties can consider the effects of and necessity for a waiver. The Bureau recognizes that sellers have interests that may be frustrated by the waiting period. However, the waiting period is a critical protection to ensure that consumers who are about to take on significant long term financial commitments have time to review the terms of the commitment and the settlement costs without being pressured. The Bureau is concerned that, if sellers could waive the waiting period or could jointly exercise the waiver, consumers would be rushed into accepting loan terms that they do not understand and settlement costs that they did not expect to incur. Final § 1026.19(f)(1)(iv) and comment 19(f)(1)(iv)–1 are adopted substantially as proposed for the reasons stated in the proposal and above. The final rule and commentary include technical amendments to the first sentence of § 1026.19(f)(1)(iv) to conform to revisions regarding the three-businessday redisclosure waiting period under § 1026.19(f)(2)(ii). Specifically, proposed § 1026.19(f)(1)(iv) would have referred to the three-business-day waiting period ‘‘for the disclosures required under paragraph (f)(1)(ii)’’ of § 1026.19. Because a three-business-day period is required under § 1026.19(f)(1)(ii)(A) and (f)(2)(ii), the final rule refers to the three-businessday waiting periods under § 1026.19(f)(1)(ii)(A) and (f)(2)(ii). Comment 19(f)(1)(iv)–1 includes a similar reference to § 1026.19(f)(2)(ii). In addition, final § 1026.19(f)(1)(iv) includes a technical revision for clarity and consistency with a similar provision in § 1026.19(e) (i.e., that a consumer can modify or waive ‘‘the’’ waiting period, instead of ‘‘a’’ waiting period).

Final § 1026.19(f)(1)(iv) and comment 19(f)(1)(iv)–1 are consistent with TILA section 128(b)(2)(F), which 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. Final § 1026.19(f)(1)(iv) and comment 19(f)(1)(iv)–1 are adopted pursuant to the Bureau’s legal authority under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd-Frank Act, and, for residential mortgage transactions, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. The Bureau has considered the purposes for which it may exercise its authority under section 105(a) of TILA and, based on that review, believes that final rule and commentary are appropriate. The final rule and commentary will help consumers avoid the uninformed use of credit by ensuring that consumers receive disclosures of the actual terms and costs associated with the mortgage loan transaction early enough that consumers have sufficient time to become fully informed as to the cost of their credit, subject to a limited waiver. The final rule and commentary are consistent with section 129B(e) of TILA because failing to provide borrowers with enough time to become fully informed of the actual terms and costs of the transaction is not in the interest of the borrower, except where the borrower determines otherwise if necessary to meet a bona fide personal financial emergency.

The Bureau also has considered the purposes for which it may exercise its authority under section 19(a) of RESPA and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will ensure more effective advance disclosure of settlement costs by requiring creditors to disclose the actual settlement costs associated with the transaction three business days before consummation, subject to a limited waiver provision. The final rule and commentary are consistent with Dodd-Frank Act section 1032(a) because the features of mortgage loan transactions and settlement services will be more fully, accurately, and effectively disclosed to consumer in a manner that permits consumers to understand the costs, benefits, and risks associated with the mortgage loan and settlement services if consumers receive the disclosures reflecting the terms and costs associated with their transactions three business days before consummation, unless they determine to waive or modify these timing requirements if necessary to meet a bona fide personal financial emergency. In addition, the Bureau has considered the purposes for which it may exercise its authority under section 1405(b) of the Dodd-Frank Act and, based on that review, believes that the final rule and commentary are VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79860 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations appropriate. The final rule and commentary will improve consumer awareness and understanding of the mortgage loan transaction by ensuring that consumers receive the disclosures reflecting the terms and costs associated with their transactions three business days in advance of consummation, subject to a limited waiver. The final rule and commentary also will be in the interest of consumers and in the public interest because they may eliminate the opportunity for bad actors to surprise consumers with unexpected costs at the closing table, when consumers are less able to question such costs, unless consumers determine to waive or modify these timing requirements if necessary to meet a bona fide personal financial emergency.

19(f)(1)(v) Settlement Agent TILA and RESPA impose requirements to provide disclosures on different parties. TILA and Regulation Z require that creditors provide the TILA disclosures, but neither TILA nor Regulation Z imposes disclosure requirements on settlement agents. In contrast, the RESPA settlement statement requirement generally applies to settlement agents, as implemented in Regulation X § 1024.10. Section 1032(f) of the Dodd-Frank Act requires the Bureau to propose for public comment rules that combine the disclosures required under TILA and sections 4 and 5 of RESPA. Dodd-Frank Act sections 1098 and 1100A amended TILA and RESPA to mandate that the Bureau integrate the disclosure requirements under TILA and RESPA, but Congress did not reconcile the division of responsibilities between creditor and settlement agent in TILA and RESPA. As recognized in the proposal, persons who conduct settlements, such as settlement agents and closing attorneys, play a valuable role in the real estate settlement process. Settlement agents may be able to assist consumers with issues that arise during a real estate settlement perhaps even more effectively than creditors. However, the Bureau explained in the proposal that it was concerned that settlement agents may not be able to fulfill the obligations imposed by TILA. The Bureau also expressed concern that, if the responsibility to provide the disclosures were divided, consumers would receive duplicative, inaccurate, or unreliable disclosures. The Bureau explained that this result would be contrary to the TILA–RESPA integration mandate.

Accordingly, the Bureau proposed two alternative approaches to the responsibility for providing the Closing Disclosure. Alternative 1 would have made the creditor solely responsible for the provision of the disclosures required by § 1026.19(f). Alternative 2 would have permitted a settlement agent to provide the disclosures required under § 1026.19(f)(1)(i), provided the settlement agent complies with all requirements of § 1026.19(f) as if it were the creditor. Alternative 2 would have required the creditor and settlement agent to agree on a division of responsibilities regarding the delivery of the disclosures. To implement alternative 2, the Bureau proposed § 1026.19(f)(1)(v), which would have provided that a settlement agent may provide a consumer with the disclosures required under § 1026.19(f)(1)(i), provided the settlement agent complies with all requirements of § 1026.19(f) as if it were the creditor. The Bureau proposed alternative 2 pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, and 1405(b) of the Dodd-Frank Act.

Proposed § 1026.19(f)(1)(v) would have required the creditor to ensure that the disclosures are provided in accordance with the requirements of § 1026.19(f). Accordingly, alternative 2 would not have relieved the creditor of its responsibility under § 1026.19(f). Thus, the creditor would have remained responsible for the disclosures provided under § 1026.19(f). See proposed comment 19(f)(1)(v)–3. Disclosures provided by a settlement agent in accordance with the requirements of § 1026.19(f) would have satisfied the creditor’s obligation under § 1026.19(f)(1)(i).

Proposed comment 19(f)(1)(v)–1 would have clarified that a settlement agent may provide the disclosures required under § 1026.19(f)(1)(i) instead of the creditor. By assuming this responsibility, the settlement agent would become responsible for complying with all of the relevant requirements as if it were the creditor, meaning that ‘‘settlement agent’’ should be read in the place of ‘‘creditor’’ for all the relevant provisions of § 1026.19(f), except where the context indicates otherwise. The commentary would have clarified that the creditor and settlement agent must effectively communicate to ensure timely and accurate compliance with the requirements of § 1026.19(f)(1)(v).

Proposed comment 19(f)(1)(v)–2 would have clarified that if a settlement agent issues any disclosure under § 1026.19(f), the settlement agent must comply with the requirements of § 1026.19(f). This proposed alternative comment also would have clarified that the settlement agent may assume the responsibility to provide some or all of the disclosures required by § 1026.19(f), provided that the consumer receives one single disclosure form containing all of the information required to be disclosed pursuant to § 1026.19(f)(1)(i), in accordance with the other requirements in § 1026.19(f), such as requirements related to timing and delivery. The comment also would have included illustrative examples.

Proposed comment 19(f)(1)(v)–3 would have explained that if a settlement agent provides disclosures required under § 1026.19(f) in the creditor’s place, the creditor remains responsible under § 1026.19(f) for ensuring that the requirements of § 1026.19(f) have been satisfied. The comment would have provided an example illustrating that the creditor does not comply with § 1026.19(f) if the settlement agent does not provide the disclosures required under § 1026.19(f)(1)(i), or if the consumer receives the disclosures later than three business days before consummation. The proposed comment also would have clarified that the creditor does not satisfy the requirements of § 1026.19(f) if it provides duplicative disclosures, and clarified that a creditor does not satisfy its obligation by issuing disclosures required under § 1026.19(f) that mirror ones already issued by the settlement agent for the purpose of demonstrating that the consumer received timely disclosures. The comment would have further clarified that the creditor is expected to maintain communication with the settlement agent to ensure that the settlement agent is acting in place of the creditor, and that disclosures provided by a settlement agent in accordance with § 1026.19(f)(1)(v) satisfy the creditor’s obligation under § 1026.19(f)(1)(i). Proposed comment 19(f)(1)(v)–4 would have clarified that the settlement agent may assume the responsibility to provide some or all of the disclosures required by § 1026.19(f). The comment would have further clarified that the consumer must receive one single disclosure form containing all of the information required to be disclosed pursuant to § 1026.19(f)(1)(i), in accordance with the other requirements in § 1026.19(f), such as requirements related to timing and delivery. The proposed comment also would have included illustrative examples. The proposed rule was designed to carry out TILA’s goal of promoting the informed use of credit. The Bureau explained that the involvement of a settlement agent could result in increased consumer awareness and more meaningful disclosure of credit VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79861 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 230 As discussed below in the section-by-section analysis of § 1026.19(f)(4), many settlement agent commenters also raised concerns about a creditor’s involvement in preparing the seller’s portion of the Closing Disclosure. Commenters were concerned that sellers may not want to provide sensitive information to creditors that owe them no duty. terms, consistent with section 105(a) of TILA. The proposed regulation also was structured to achieve RESPA’s purposes by resulting in more effective advance disclosure of settlement costs, consistent with section 19(a) of RESPA. The Bureau further stated that the proposed regulation also could improve consumer understanding and awareness of the transaction by permitting the Closing Disclosure to be completed and provided by settlement agents, who often assist consumers during a real estate closing, which is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b). The Bureau invited comment on other methods of dividing responsibility between creditors and settlement service providers, provided that such other methods ensure that consumers are provided with prompt, accurate, and reliable disclosures. Comments Overview. The Bureau received extensive public comment and ex parte submissions from across various sectors of the real estate and mortgage lending industries regarding responsibility for providing the Closing Disclosure. Commenters provided general feedback on the relative merits of creditor and settlement agent involvement in preparing the Closing Disclosure and more specific feedback on alternatives 1 and 2, and other alternatives for dividing responsibility. In addition, commenters provided feedback on the creditor’s responsibility for ensuring compliance with § 1026.19(f) (which would have been required under both alternatives 1 and 2) and State law issues. Commenters also requested clarification on certain issues. In general, commenters supporting creditor preparation of the Closing Disclosure observed that creditors would be better able to make loanrelated disclosures and ensure compliance. A professional association representing attorneys, a large bank, and escrow agent commenters explained that creditors are in a better position to provide and explain loan-related disclosures. A large bank commenter also explained that creditors would be better positioned to facilitate consumer contact and ensure timely delivery of the disclosures three business days before consummation. A large bank commenter explained that settlement agents likely would be unable to complete the Closing Disclosure if the forms were in ‘‘dynamic’’ rather than ‘‘static’’ form. A community bank commenter explained that allowing a party other than the creditor to generate the Closing Disclosure would increase costs and delay the closing process, and thereby inconvenience and increase costs to consumers. In addition, a commenter from a company that provides escrow and title software argued that the Closing Disclosure should be provided by the creditor because the complexity of disclosures would make coordination difficult. On the other hand, many settlement agent commenters questioned whether the creditor would act in the best interests of the consumer or other parties, such as sellers. A trade association representing settlement agents and the title insurance industry and various law firm commenters suggested that, without the role of an independent review or preparation of the Closing Disclosure by the settlement agent, creditors could misstate the charges of third parties, and that third parties are unable to correct such mistakes. The trade association commenter further explained that creditors and affiliated service providers would share the costs of creditor compliance risk, which would increase overall risk to creditor-affiliated businesses. Some settlement agent commenters pointed out that settlement agent preparation of the Closing Disclosure would not pose significant consumer risk because revisions to settlement costs are typically minor, whereas revisions to loan costs can impose significant costs to consumers. Commenters also were concerned that creditor preparation of the Closing Disclosure would lead to conflicts between settlement agents and creditors, such as those arising from potentially conflicting closing instructions, or conflicts over the underwriting of title insurance if a creditor-prepared Closing Disclosure contained errors. Other settlement agent commenters were concerned that they may be unable to understand a creditor-prepared Closing Disclosure or explain it to other parties at settlement. Additional comments on creditor preparation of the Closing Disclosure are discussed in greater detail below.

In general, many commenters emphasized that settlement agents have unique expertise in conducting settlements and preparing settlement cost figures, and that preserving their role in the transaction would be critical to ensuring the efficient operation of closings. Various law firm commenters, trade associations representing attorneys, individual settlement agents, real estate agents, and mortgage brokers explained that only licensed real estate attorneys or settlement agents should handle closings because they are subject to State regulation and have expertise in local customs and disbursement activities. Commenters representing the views of law firms, credit unions, settlement agents, trade associations representing settlement agents and the title insurance industry, real estate agents, and title insurance companies explained that because of settlement agents’ expertise in conducting closings and their coordination of multiple parties to the transaction, their preparation of the Closing Disclosure would be more efficient than creditor preparation. For example, settlement agent commenters expressed concern that closings would be delayed and costs would increase if settlement agents had to coordinate with creditors when handling last-minute changes to the Closing Disclosure at settlement. Many commenters, including settlement agents, attorneys, law firms, title insurance companies, real estate brokers, and trade associations representing settlement agents and the title insurance industry stressed that the settlement agent serves an important consumer protection function by acting as a neutral, independent third party who verifies the creditor’s figures and has the best interests of the consumer and all other parties in mind.230 Commenters were concerned that creditor preparation of the Closing Disclosure would be a conflict-ofinterest. For example, one trade association representing settlement agents and various law firm commenters raised the possibility that, without the role of an independent review or preparation of the Closing Disclosure by a settlement agent, creditors could misstate fees of third-party settlement service providers.

Other settlement agents, however, were concerned that making settlement agents responsible for the Closing Disclosure would conflict with the settlement agent’s role as a neutral third party whose duty is limited to following closing instructions from the creditor and other parties to the real estate transaction. Additional comments on settlement agent preparation of the Closing Disclosure are discussed in greater detail below.

Support for alternative 1. Several nondepository lenders, a mortgage compliance company, and an individual consumer explained that alternative 1 would relieve creditors of TILA liability for the actions of settlement agents; VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79862 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 231 See U.S. Consumer Fin. Prot. Bureau, Bulletin 2012–03 (2012), available at http:// files.consumerfinance.gov/f/201204_cfpb_bulletin_ service-providers.pdf.

232 However, a trade association representing settlement agents explained that it would support alternative 1 only if the Bureau could protect independent settlement agents from creditor consolidation that they believed could result from alternative 1. See the discussion of commenters supporting alternative 2. whereas, under alternative 2, creditors would have an obligation to supervise settlement agents but still assume all legal liability. A non-depository lender explained that, pursuant to CFPB Bulletin 2012–03, creditors already are obligated to supervise settlement agents as ‘‘service providers.’’ 231 The mortgage compliance company commenter asserted that, if settlement agents were allowed to deliver the Closing Disclosure, the final rule would have to create a safe harbor for the creditor for the settlement agent’s failure to satisfy regulatory requirements. Some settlement agent and escrow agent commenters perceived benefits to creditor responsibility for the Closing Disclosure under alternative 1. Commenters explained that alternative 1 would encourage creditors to take more responsibility for the efficient operation of closings, reduce creditor-caused delays, and ensure consumers receive more accurate information about closing costs. Another settlement agent commenter believed that ensuring creditor responsibility would improve regulators’ ability to supervise for compliance. One commenter pointed out that creditors are already familiar with evaluating settlement costs because they often ‘‘approve’’ the RESPA settlement statement before it is provided to borrowers. In addition, some settlement agents explained that creditors are in the best position to ensure the accuracy of the Closing Disclosure because they will be in control of the Loan Estimate and are responsible for complying with the accuracy requirements in § 1026.19(e)(3), and because they are familiar with settlement costs, consistent with the current practice of approving the RESPA settlement statement.

In addition to ensuring creditor accountability, commenters representing settlement agents, escrow agents, and related trade associations explained that alternative 1 would relieve them of liability for the Closing Disclosure and would allow them to play a more traditional role related to conducting closings.232 In particular, a trade association representing escrow agents supported alternative 1, because it believed alternative 2 could impose new creditor duties on settlement agents, which would be in conflict with the settlement agent’s traditional role as a neutral third party. An escrow agent commenter explained that settlement agents do not have expertise in loan products and should not share in liability that applies to creditors. The commenter further explained that settlement agent responsibility for the Closing Disclosure would impose burdens on settlement agents because it would require that they coordinate with creditors to develop an accurate disclosure.

Concerns with alternative 1. Many commenters representing settlement agents, title insurance companies, real estate agents, and trade associations representing attorneys, settlement agents, and the title insurance industry were opposed to alternative 1 because they were concerned it would eliminate or significantly reduce the settlement agent’s role, result in inefficient closings, and increase risk to consumers and the market.

Settlement agent and title insurance industry commenters were concerned that alternative 1 would reduce the availability of settlement agents, which would require consumers in some parts of the country would have to travel long distances or use mobile notaries because local settlement agents would no longer be available. Many settlement agent commenters also maintained that their ability to prepare the Closing Disclosure serves an important consumer protection function and that alternative 1 would present a conflict-of-interest if the creditor prepared the Closing Disclosure. Numerous settlement agent commenters, particularly attorneys and related trade associations, maintained that creditor preparation would conflict with various State laws regulating the conduct of settlements and the practice of law and could place attorneys who conduct settlements in the conflicted position of supervising a creditor’s unauthorized practice of law. Various commenters representing settlement agents, a real estate agent, title insurance companies, attorneys, credit unions, community banks, and various trade associations representing creditors, settlement agents, and the title insurance industry were concerned that alternative 1 would increase coordination costs for industry because it would shift settlement activities to creditors, introduce unnecessary complexity to the settlement process, delay the underwriting of title insurance, delay closings, and increase costs and risk to consumers. These commenters emphasized that settlement agents have unique expertise in local customs and procedures, are subject to State regulation, and are in the best position to prepare settlement cost disclosures because of their role in preparing the disbursement statement at closings. Community bank and credit union commenters were concerned that alternative 1 would require creditors to assume more responsibility for settlement activities and require that they hire staff attorneys licensed to practice in multiple jurisdictions, which would increase costs that would be passed on to consumers. Attorneys and trade associations representing attorneys shared these concerns. Commenters also explained that, while settlement agents likely would continue to provide collection and disbursement activities even under alternative 1, creditors would be required to document those activities on the Closing Disclosure. A settlement agent commenter stressed that settlement agents would be burdened even if a creditor were solely responsible for the Closing Disclosure because the settlement agent would likely be the party responsible for answering consumers’ questions about the Closing Disclosure, but that they would have difficulty explaining a creditor-prepared form. Finally, commenters noted that it was difficult to analyze the potential impact alternative 1 would have on the market. Commenters asserted that the Bureau did not provide sufficient analysis on the impact of alternative 1. A trade association representing the settlement agent and title insurance industry stated that the Bureau did not provide sufficient guidance about its expectations regarding creditorsettlement agent responsibility. A member of Congress stated that the Bureau did not analyze the impact of assigning sole responsibility to creditors would have on the settlement agent industry.

Support for alternative 2. Alternative 2 generally received broader support from industry commenters relative to alternative 1, although many commenters requested that the Bureau consider modifying alternative 2, as discussed below. Many commenters, including large banks, credit unions, community banks, settlement agents, related trade associations, and two consumer advocacy groups submitting a joint comment explained that alternative 2 most closely reflects current industry practice in which the creditor relies on settlement agent expertise and efficiency. Some settlement agent commenters noted that currently settlement agents must submit RESPA settlement statements to the creditor for approval, and that VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79863 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 233 The trade association commenter noted in its comment letter that it preferred making creditors responsible for the form. However, this commenter explained that it would support alternative 2 if the Bureau could not protect the settlement agent industry from creditor consolidation of the industry as a result of making creditors responsible for the form, because of the threat of creditor conflict-ofinterest during the settlement process. alternative 2 reflected this practice. Settlement agent commenters emphasized that they are in a better position than creditors to prepare the Closing Disclosure because they receive information from third parties to the transaction, typically compute charges, such as recording and transfer charges, and handle payoffs to ensure marketable title is conveyed. A number of real estate agent commenters supported alternative 2 because it would provide for more efficient closings when an outof-State creditor is involved. Settlement agents, a trade association representing settlement agents, and mortgage brokers also expressed support for alternative 2 because it would preserve their role in the transaction and mitigate the potential for creditor conflicts-ofinterest.233 Commenters also observed that alternative 2 would allow creditors and settlement agents flexibility in determining how to divide responsibility and selecting the delivery option that best serves consumers, which they expected would reduce implementation costs, discrepancies on settlement disbursements statements, and impacts on small businesses. In particular, credit union commenters explained that, in some cases, credit unions may choose to close a loan inhouse to reduce closing costs, while in other cases, they may choose to have a settlement agent complete transactional information. Credit union commenters explained that alternative 2 allows creditors to rely on settlement agents when needed, unlike alternative 1, which they believed would require creditors to hire staff attorneys to perform closings in multiple jurisdictions, increasing costs and limiting their ability to perform closings nationwide. A trade association representing banks and financial companies believed that this flexibility in dividing responsibility was sensible in light of creditor liability for exceeding tolerances under RESPA and other liability under TILA. However, the commenter also noted that the Bureau should consider making settlement service providers responsible for the accuracy of their information, for exceeding tolerances and otherwise for bearing responsibility for their role in the transaction.

Concerns with alternative 2. Creditor commenters, including large banks and community banks, expressed concern that creditors would retain ultimate liability for the Closing Disclosure under alternative 2, notwithstanding settlement agent participation. These commenters were concerned about their liability for settlement cost information outside of their control. A community bank commenter was concerned that a creditor would not be able to manage this risk if consumers shop for their own settlement agent. A nonbank lender suggested that alternative 2 would affect the timeliness of closings and increase the cost of the transaction because creditor liability would mean the creditor would still need to review the Closing Disclosure even if the settlement agent provided the information.

Settlement agent commenters expressed concern with creditor responsibility under alternative 2. Settlement agents were concerned that, like alternative 1, alternative 2 would lead to greater creditor control of the settlement process, such as by determining the scope of settlement agent involvement in the Closing Disclosure. Settlement agents also expressed concern that creditors, to manage their liability risk, would likely apply rigorous audit procedures to settlement agents and would be likely to sue settlement agents for compliance failures. Settlement agents also explained that creditors under alternative 2 would have to hire and train additional staff in the settlement process, which would result in higher costs being passed on to consumers. In addition to concerns with creditor responsibility, some settlement agent commenters expressed concern with their own liability under alternative 2. In particular, several settlement agent commenters expressed opposition to proposed comment 19(f)(1)(v)–1, which would have clarified that a settlement agent may provide the disclosures instead of the creditor, but by assuming this responsibility, it becomes responsible for complying with all of the relevant requirements as if it were the creditor. One commenter who served as a panelist on the Small Business Review Panel indicated that assuming creditor liabilities and responsibilities would require settlement agents to increase their fees substantially.

Commenters representing creditors, settlement agents, and a software company explained that, to the extent they must coordinate to prepare a Closing Disclosure, creditors and settlement agents would have to develop software systems to exchange information between creditor and settlement agent systems that do not currently communicate with each other. Industry commenters also indicated that such systems would have to address the privacy implications of sharing potentially sensitive information. Commenters representing a large bank, a trade association representing banks, settlement agents, attorneys, and a professional association representing attorneys indicated that settlement agents currently lack systems to generate TILA disclosures and that settlement agents may not be able to meet the technology requirements necessary to generate a Closing Disclosure or exchange information with creditors under alternative 2. A rural bank explained that creditors use hundreds and sometimes thousands of different settlement agents who use their own loan origination systems with no universal data interface, which would make shared responsibility difficult. A software company explained that, as a result of this lack of universality, software vendors likely would need to integrate different systems, which could be expensive and complicated by the lack of meaningful naming conventions and a lack of standardized data formats. The commenter recommended that the final rule take steps to minimize the need to integrate different systems. Some settlement agent commenters believed that implementing the Closing Disclosure would be a significant expense, would force them to raise fees on consumers, and could decrease settlement agent productivity and put small practitioners out of business. To reduce costs, a number of settlement agent commenters recommended that the Bureau mandate a standard Closing Disclosure form, rather than model forms. Settlement agent commenters were concerned that use of model forms would require settlement agents to communicate with many disparate information technology systems, increasing burden.

One settlement agent commenter explained that the Closing Disclosure would impose coordination costs on settlement agents and creditors, regardless of how creditors and settlement agents divided responsibility. The commenter explained that, if creditors and settlement agents work in the same document, they would incur software integration costs; if the settlement agent provided information separately to the creditor, the creditor would incur costs in populating the Closing Disclosure; and, if the creditor assumes settlement agent duties, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79864 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 234 One commenter also recommended that settlement agents be responsible for exceeding the limitations on increases from the estimated charges disclosed on the Loan Estimate under § 1026.19(e)(3).

settlement agents would face costs in terms of lost business opportunities and creditors would face costs in terms of hiring and training settlement agents. Finally, a member of Congress stated that alternative 2 would require increased coordination, explaining that, while creditors and settlement agents currently coordinate in the closing process, they would need to adjust their procedures for the new forms and timing requirements. This commenter explained, however, that it was unclear how creditors would choose to coordinate with settlement agents under the new liability framework. Further, the commenter stated that, although it was clear that the role of settlement agents could change significantly under alternative 1, it was unclear which alternative would be less burdensome because the Bureau had failed to analyze the impact of either alternative 1 or 2. The member of Congress stated that the Bureau did not estimate the potential cost of changes that might be incurred as a result of alternative 2, and that it was unclear how creditors would choose to coordinate with settlement agents.

Requests for clarification regarding alternative 2. A community bank criticized alternative 2 as vague and open-ended, which would create confusion for creditors that would ultimately be subject to regulatory supervision. A settlement agent commenter requested that the Bureau clarify proposed § 1026.19(f)(1)(v), which would have stated that the settlement agent may provide a consumer with the disclosures required under § 1026.19(f)(1)(i), provided the settlement agent complies with all requirements of § 1026.19(f) as if it were the creditor. The commenter was concerned that this would impose a new duty on settlement agents to take responsibility for the financing of an individual’s loan. The commenter recommended instead that the final rule provide for the delegation of duties between creditors and settlement agents. A community bank and settlement agent commenters requested clarification on whether the settlement agent and creditor can complete their respective portions of the Closing Disclosure, combine their pages manually as one form or provide it separately from both parties to the consumer. Other commenters requested clarification on whether a creditor could prepare the Closing Disclosure provided three business days before consummation, with the settlement agent preparing any revised Closing Disclosures provided at consummation. Other recommendations by commenters. Both creditors and settlement agents recommended alternatives that would require the Bureau to more specifically assign responsibilities with respect to the Closing Disclosure. Many settlement agent commenters did not necessarily express support for alternative 1 or 2, but instead generally advocated for their continued involvement in the settlement process, including the preparation of the Closing Disclosure. Trade associations representing settlement agents explained that, without further clarifying the settlement agent’s role, settlement agents would face potentially large compliance costs because they would have to anticipate compliance with all aspects of the Closing Disclosure. One individual settlement agent suggested that the rule require title insurance underwriters to establish an effective process for managing the compliance risk of the settlement agents.

A wide variety of commenters representing creditors and various trade associations representing credit unions, banks, and community banks, settlement agents and the title insurance industry, as well as the manufactured housing industry recommended that the Bureau assign settlement agents substantive disclosure responsibilities so that creditors and settlement agents would prepare information over which they have respective control. A wide variety of settlement agent commenters requested that the Bureau impose similar requirements on creditors. For example, some commenters recommended dividing responsibility by the statutory authority requiring the disclosure, by page number (e.g., creditors would prepare pages 1, 4, and 5, and settlement agents would prepare pages 2 and 3), or by the party that assumes responsibility for the Closing Disclosure. A rural bank explained that assigning specific disclosure responsibilities would reduce coordination costs because settlement agents and creditors currently use different software systems, which would make it difficult to exchange information.

A variety of commenters representing settlement agents, community banks, credit unions, title insurance companies, and trade associations representing settlement agents recommended that settlement agents be responsible for the Closing Disclosure. Community banks and credit unions expected this would alleviate concern about creditor liability for settlement agent conduct. Further, settlement agent commenters expected that this would ensure settlement agents remain involved in the settlement process and avoid a creditor conflict-of-interest. One commenter recommended that the consumer be able to choose whether the creditor or settlement agent prepare the Closing Disclosure. One settlement agent explained that requiring the settlement agent to prepare the Closing Disclosure but requiring the creditor to deliver the Closing Disclosure would be appropriate because in many cases the loan originator is the consumer’s primary point of contact and could explain the final figures. In addition to suggesting an option for assigning substantive disclosure obligations, commenters suggested options for assigning procedural duties or other standards, including liability, on creditors and settlement agents. Commenters requested that the final rule further define the responsibility of creditors and settlement agents to provide timely and accurate information. Large banks and trade associations representing creditors and attorneys suggested that, in light of creditor liability, settlement agents should be responsible for providing accurate information to creditors in a timely manner so creditors could prepare the Closing Disclosure.234 One large bank commenter explained that settlement agents would not be able to accurately and timely prepare and provide the TILA portions of the Closing Disclosure. This bank and another large bank commenter explained that settlement agents play an important role in providing information about items such as, third-party lender payoff amounts, taxes, recording fees and other information currently within purview of settlement agents or real estate agents. One large bank commenter explained that the lender relies on the settlement agent to provide an accurate accounting of fees and charges listed on the closing sheet.

A settlement agent commenter, a compliance company, credit union trade associations, and a community bank commenter recommended that the final rule impose liability on whichever party is responsible for preparing the Closing Disclosure. One settlement agent commenter explained that settlement agents should prepare the Closing Disclosure, as they do today, but that the final rule should shift a portion of the burden for accuracy of the disclosure to settlement agents. The commenter explained that this would VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79865 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations increase the likelihood that creditors would continue to rely on settlement agents because creditors would not carry all of the burden for the accuracy of the Closing Disclosure. Similarly, settlement agent commenters recommended that the Bureau impose requirements on creditors to provide timely and accurate information to ensure settlement agents have sufficient time to prepare settlement costs on the Closing Disclosure. Settlement agent commenters and trade associations representing credit unions recommended that the settlement agent should prepare the Closing Disclosure and that the creditor should review and approve the form. Settlement agents explained that this would alleviate concerns about creditor conflicts-ofinterest, while creditors pointed out that this would alleviate creditor liability for settlement agent actions. Trade associations representing banks and financial companies requested that the final rule address who will provide the Closing Disclosure before and at closing, recommending that the creditor should provide if before closing (unless the settlement agent agrees to provide it) and the settlement agent should provide revised closing disclosure at closing because the creditor is not always present at closing.

Creditor responsibility. A variety of creditors and trade associations representing creditors stated that they did not perceive a meaningful distinction between alternatives 1 and 2 because the creditor would remain liable under either option. Creditors expressed concern with this arrangement because provision of the Closing Disclosure depends on the cooperation of third parties, namely settlement agents. Large banks and a credit union explained that creditors do not control or have direct access to certain settlement charges and therefore could not guarantee that they will always be disclosed in a timely manner. A large bank explained that this is particularly the case with respect to information about amounts paid to and due from the seller. A large bank and a trade association representing banks observed that creditor responsibility for the accuracy of settlement costs would be a significant revision to existing practice.

Several commenters, including a nondepository lender, a settlement agent, and a trade association representing settlement agents and the title insurance industry believed that creditor responsibility for the Closing Disclosure would lead to dual closings (one for the real estate transaction and one for the mortgage transaction) resulting in a more complicated closing process at higher cost to the consumer. A law firm commenter and a title insurance agent anticipated that creditor-controlled closings would result in creditors choosing the cheapest closing attorney without regard to quality, increasing risk to the title insurance underwriter, thereby increasing title insurance premiums, which would be passed on to consumers.

A wide variety of commenters expressed concern that creditor responsibility for the Closing Disclosure would mean that creditors would take greater control over the settlement process or turn to larger, national settlement firms instead of independent settlement agents, which will limit consumer choice and the ability to shop, and which could have a negative impact on the availability of local settlement agents, particularly in rural areas. Other settlement agent commenters were concerned that reliance on national settlement agent companies would mean that settlements would lose the benefit of local settlement agent expertise. Some settlement agent commenters were concerned that creditor responsibility for providing the Closing Disclosure would encourage creditors to assume control over title insurance matters, become national title insurance companies, contract with title insurance companies directly, or impact real estate brokers’ ability to freely refer clients to settlement agents. Settlement agent and attorney commenters, including a national professional association representing attorneys, were concerned that creditor responsibility for the Closing Disclosure would result in risk-shifting between creditors and settlement agents, which they argued would not be in the consumer’s interest. One settlement agent commenter anticipated that creditors would impose third-party vetting to ‘‘approve’’ settlement agents they work with, which would impose indirect costs on settlement agents. This commenter also anticipated that creditor responsibility for the Closing Disclosure would result in creditors requiring settlement agents to maintain additional liability insurance, which would come at a cost to settlement agents. Other settlement agent commenters anticipated that creditor liability would result in creditors requiring any violation under RESPA or TILA to be borne by the settlement agent and that smaller settlement agents would not be able to bear this responsibility or be able to maintain the type of liability insurance that would be required by creditors. A law firm commenter predicted that the cost of title insurance premiums would increase to compensate for the lost revenue that would result from creditors preparing the Closing Disclosure. This commenter also indicated that diminishing the role of title agents would mean consumers would lose the protection of title insurance gap coverage that is provided by statute or required by the lender when a title agent closes the transaction, or that the consumer would no longer have the protection of the title insurance underwriter’s closing protection letter. Many settlement agent commenters advocated for their continued involvement in preparing the Closing Disclosure, although a large number of settlement agents recommended that settlement agents be solely responsible for the Closing Disclosure, or that the Bureau further define a substantive division of responsibility. By contrast, other commenters explained that creditor responsibility for the Closing Disclosure resembled current practice. Several agent commenters explained that creditors currently require settlement agents to obtain creditor approval for each RESPA settlement statement before a transaction closes or funds are disbursed. Commenters explained that, by approving the RESPA settlement statement and issuing preparation instructions to the settlement agent, the creditor already assumes some degree of responsibility for the contents of the RESPA settlement statement. Thus, as one commenter explained, the proposed rule would not, in practice, shift responsibility from the settlement agent company to the creditor and that it would be unnecessary for the rule to impose this responsibility on the creditor. A community bank commenter also noted that creditors already have responsibility for the accuracy of the RESPA settlement statement, but requested that settlement agents continue to be involved in preparing the Closing Disclosure in the purchase-andsale context because of the additional requirements applicable to the seller. Two consumer advocacy group commenters explained that creditor liability under the rule would simplify enforcement of the rule and avoid confusion between creditors and other parties, and that creditors could protect themselves by negotiating indemnification agreements with and supervising settlement agents. A trade association representing the settlement services industry and a community bank commenter explained that, if the final rule makes the creditor ultimately responsible for the Closing Disclosure, it should provide the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79866 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations creditor flexibility to determine how to prepare and provide the Closing Disclosure. Commenters explained that, depending on the market, the creditor’s size and financial resources, some creditors may develop a variety of approaches to preparing and providing the Closing Disclosure, including relying, in some cases, on an in-house capability, and in other cases relying on approved unaffiliated third-parties or affiliated third-parties. One commenter observed that reliance on affiliates may be compromised by the points and fees threshold in the Bureau’s ability-torepay rulemaking.

One large bank commenter requested that the Bureau exclude from the creditor’s responsibility fees outside of the creditor’s control or imposed after the creditor issues closing instructions to the settlement agent. This commenter requested that the Bureau clarify that, in dividing responsibility with a settlement agent, the creditor may rely on the documents prepared by the settlement agent, and that if additional fees that are not imposed by the creditor or other items are not accurately disclosed on the statement, the creditor will not be liable for the accuracy of such fees or other items. Large banks and many individual settlement agent commenters questioned the Bureau’s legal authority to alter the existing division of responsibility or liability under TILA and RESPA by making the creditor responsible for the settlement agent’s actions. A trade association representing banks and a large bank noted that RESPA section 4(b) requires settlement statements to be provided by ‘‘the person conducting the settlement’’ and that Regulation X requires settlement agents to complete the RESPA settlement statement. A large bank commenter questioned how assigning TILA liability to the creditor would carry out the purposes of RESPA section 4. The commenter was concerned that the Bureau would prescribe a division of responsibility in which the settlement agent could take part in completing or providing the Closing Disclosure but without any regulatory consequence. The commenter further requested that the Bureau retain the current and respective responsibilities of creditors and settlement agents with respect to the Closing Disclosure, in light of the absence of a requirement in the Dodd- Frank Act, TILA, or RESPA, that a creditor be responsible for the settlement agent’s actions in completing or providing the Closing Disclosure. State law issues. Various commenters, including attorneys, law firms, title insurance companies, settlement agents and trade associations representing attorneys, settlement agents and the title insurance industry expressed concern that requiring creditor preparation of the Closing Disclosure would conflict with State regulation of closings and the practice of law. Commenters identified several provisions of State laws that they stated give consumers an absolute right to choose their closing attorneys in residential real estate transactions. Commenters also identified provisions of certain State laws that they explained require attorneys or other agents to conduct closings. They explained creditor preparation of the Closing Disclosure could constitute the unauthorized practice of law, and that attorney or escrow agent involvement in such a transaction could constitute abetting the unauthorized practice of law. One commenter was concerned that creditors would prevent consumers from having access to an attorney at closings, contrary to State law. One settlement agent raised concerns that State law requires settlement agents to ensure a closing is conducted in compliance with State law and the rules under RESPA, and that creditor preparation of the Closing Disclosure would eliminate the settlement agent’s ability to perform under State law. Requests for clarification. Various individual settlement agents and a trade associations representing settlement agents and the title insurance industry requested that the Bureau clarify whether the Closing Disclosure is a disbursement statement. One trade association commenter explained that the Closing Disclosure should not serve as a disbursement statement, but that industry should make this determination on its own. A settlement agent commenter requested clarification on whose responsibility it would be to provide the Closing Disclosure to the consumer.

Final Rule In general. The final rule adopts alternative 2 substantially as proposed. In light of the comments and ex parte submissions and RESPA’s long-standing requirements regarding settlement agent preparation and delivery of the RESPA settlement statement, the Bureau believes that expressly allowing creditors to work with settlement agents will provide the most certainty in the market. Indeed, creditor commenters indicated that alternative 2 would make clear that they could continue to rely on settlement agents. Thus, the Bureau believes the final rule avoids creating uncertainty and avoids increased compliance costs and other risks to industry that could ultimately result in higher costs to consumers. Alternative 2 provides clarity for creditors while also leaving sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers. Under the final rule, creditors and settlement agents are free to divide responsibility in a variety of ways, including but not limited to a division in which the creditor provides the Closing Disclosure three business days before consummation and the settlement agent provides any corrected Closing Disclosure at consummation, subject to the provisions of § 1026.19(f), as suggested as an alternative by some trade association commenters representing banks and financial companies.

The Bureau has considered suggestions from industry to impose additional substantive and procedural obligations on both creditors and settlement agents, including suggestions by some commenters for dividing responsibility for specific disclosures between settlement agents and creditors. After considering these comments, the Bureau continues to believe alternative 2 most effectively balances the interests of ensuring consumers receive a timely and accurate Closing Disclosure prepared in a consistent manner with the interests of industry in complying with the rule. The Bureau believes that a rule that expressly divided substantive disclosure responsibilities or assigned strict procedural duties governing the relationship between creditors and settlement agents would impose coordination costs on creditors and settlement agents that may result in inefficiencies during the closing process. The Bureau believes that the better approach for consumers is to permit shared responsibility and allow creditors and settlement agents to decide how to divide that responsibility most efficiently.

As part of the Small Business Review Panel process, the Bureau considered requiring the creditor to prepare certain loan cost information, and the settlement agent to prepare certain real estate settlement cost information. Under this approach, the creditor and settlement agent would be jointly responsible for combining the portions of the disclosure and providing the consumer with a Closing Disclosure three business days before closing. See Small Business Panel Review Report at 12. However, the Bureau determined after conducting the Small Business Review Panel, and continues to believe, that such a division would be VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79867 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 235 While some of the Closing Disclosure requirements in Regulation Z are modeled on existing provisions in Regulation X, the Closing Disclosure also includes new information that will likely require some degree of coordination. For example, the cash to close disclosure on pages 2 and 3 involves a calculation of loan costs, settlement service costs, and other costs. Accordingly, because this calculation requires analysis of several categories of costs, settlement agents and creditors may need to coordinate to arrive at a single cash to close figure. 236 See, e.g., U.S. Consumer Fin. Prot. Bureau, Bulletin 2012–03 (2012), available at http:// files.consumerfinance.gov/f/201204_cfpb_bulletin_ service-providers.pdf.

impracticable. The Bureau received comments in response to the proposal suggesting a wide variety of approaches to creditor-settlement agent engagement, indicating that the industry does not employ a uniform method for disclosing information to consumers. In addition, there is significant overlap between the disclosures required by the two statutes, and creditors and settlement agents have access to both RESPA and TILA information.235 Further, alternative 2 allows creditors and settlement agents to decide whether and how to coordinate, which would be complicated by a rule that assigned strict responsibilities to particular parties. For example, under the final rule, some creditors could conduct some closings in-house to avoid coordination costs in some cases. Alternative 2 provides flexibility by allowing creditors to manage preparation of the Closing Disclosure in a manner appropriate to their size, market, financial resources, and their own assessments of compliance risk and the applicability of other State law, Federal law, or other guidance, affecting their responsibility to supervise third-party service providers.236 Moreover, a number of settlement agents and related trade associations explained that they did not wish to bear responsibility or costs associated with providing the Closing Disclosure. A number of settlement agent commenters operating in escrow jurisdictions expressed concern with a requirement that would impose TILA disclosure obligations on them and expressly requested that they not have any responsibility for providing disclosures under TILA. The final rule addresses the concerns expressed by many settlement agent commenters about substantial compliance costs that they would incur in exchanging information and in coordinating with creditors. The final rule allows settlement agents to avoid such costs by not taking responsibility for the Closing Disclosure. At the same time, creditors would still be free to rely on settlement agents’ expertise in conducting closings. Thus, Alternative 2 provides settlement agents some flexibility with respect to determining the scope of their involvement in preparing and delivering the Closing Disclosure.

In addition, the Bureau believes the final rule will avoid concerns with conflicting State laws governing the conduct of settlement. Although the final rule requires only that the creditor provide certain disclosures to consumers and does not require that the creditor conduct settlements, the Bureau appreciates that creditor preparation of the Closing Disclosure may raise operational questions for creditors in certain States. To the extent a creditor is concerned with compliance with State or local laws, a creditor under alternative 2 may share responsibility with the settlement agent in whatever manner they determine is appropriate. In contrast, if the final rule were to assign more substantive or procedural responsibilities to creditors or settlement agents, the rule could raise difficult compliance questions with respect to the conduct of settlements in some jurisdictions.

Some settlement agent commenters questioned whether creditors should have any role in preparing or overseeing the preparation of the Closing Disclosure. These commenters believed creditors would have an improper conflict-of-interest in preparing the disclosure of settlement costs. The Bureau does not believe that requiring creditors to retain responsibility for the Closing Disclosure in the final rule will lead to consumer harm or abuse in other contexts because creditors will have sufficient incentive to comply with the final rule to ensure consumers receive a timely and accurate disclosure. Some commenters expressed concern that settlement agents could face operational challenges if a creditor prepares the Closing Disclosure in a manner that conflicts with the creditor’s closing instructions to the settlement agent. The Closing Disclosure is designed to integrate disclosures provided to consumers under TILA and RESPA to enhance their understanding of the home mortgage loan transaction. To the extent the Closing Disclosure’s disclosure requirements differ from other arrangements made pursuant to contract or other law or custom, the final rule does not prohibit creditors and settlement agents from developing their own disbursement instructions and managing any discrepancies as they arise, consistent with the current practice with respect to the RESPA settlement statement. To the extent settlement agents have questions about how to explain the Closing Disclosure to consumers, the Bureau believes they will be able to coordinate with the creditor ahead of time as a result of the general three-business-day requirement in § 1026.19(f)(1)(ii)(A). As noted in the section-by-section analysis of that section, the Bureau believes a general three-business-day requirement will improve coordination between settlement agents and creditors by providing all parties additional time to ask questions and correct errors. Concerns with creditor responsibility under alternative 2. Commenters expressed concern that creditor responsibility for the Closing Disclosure would make creditors more likely to assume greater control over the settlement process, which would result in closing delays because creditors would have to approve any last-minute changes that arise at the closing table. Creditor commenters also questioned the Bureau’s authority to require creditors to disclose settlement cost information, particularly in light of RESPA section 4. The Bureau appreciates industry’s concerns that creditor responsibility for the Closing Disclosure may affect the current roles of creditors and settlement agents. However, to integrate the disclosure requirements under TILA and RESPA, the Bureau believes the final rule should make creditors responsible for the accuracy and delivery of the Closing Disclosure under § 1026.19(f). As discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), Dodd- Frank Act section 1419 amended TILA to require that creditors disclose aggregate settlement cost information under the early and final TILA disclosures required by TILA section 128. See 15 U.S.C. 1638(a)(17). As a result, creditors have responsibility for disclosing settlement cost information that had previously been solely the responsibility of settlement agents under RESPA. In light of this responsibility, the Bureau believes alternative 2 is appropriate because it permits creditors flexibility in how they rely on settlement agents to disclose settlement cost information. In addition, the Bureau believes creditors are in a better position than settlement agents to provide other TILA disclosures, such as the finance charge and projected payments disclosures. Further, making a single party ultimately responsible for the Closing Disclosure will reduce the likelihood of inconsistencies and errors in disclosures that require coordination, such as the cash to close disclosure. The Bureau also believes that modifications to the proposal made in the final rule will reduce the rule’s impact on the existing roles of creditors VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79868 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations and settlement agents. The final rule clarifies that, with respect to the Closing Disclosure provided three business days before consummation, creditors may provide disclosures based on the best information reasonably available and may rely on information provided by settlement agents. See the section-bysection analysis of § 1026.19(f)(1)(i) above. In addition, under § 1026.19(f)(1)(v), settlement agents may provide consumers with the Closing Disclosure, provided they comply with all relevant requirements of § 1026.19(f), as discussed further below. Further, the final rule reduces the risk that changes to the Closing Disclosure will result in closing delays, as discussed in the section-by-section analyses of § 1026.19(f)(1)(i), (f)(1)(ii)(A), and (f)(2). For example, the narrowed redisclosure waiting period triggers in § 1026.19(f)(2) should facilitate a settlement agent’s participation in the transaction. Because additional three-business-day periods will be triggered only by changes to APR, loan product, and the addition of a prepayment penalty, other changes to settlement costs will not trigger a new waiting period. See the section-bysection analysis of § 1026.19(f)(2)(i) and (ii) above. The final rule also accounts for changes during the settlement process that may occur after consummation, as discussed in the section-by-section analysis of § 1026.19(f)(2)(iii). The Bureau believes these modifications will reduce compliance risk for creditors as they relate to the disclosure of settlement costs, which the Bureau believes will reduce the likelihood of disrupting the current roles of creditors and settlement agents.

The Bureau acknowledges that, despite these modifications to the final rule, creditors may assume greater responsibility for the disclosure of settlement cost information than they do currently. However, while creditors may seek to assume greater control over the disclosure of settlement costs or apply greater scrutiny to settlement services than under current rules, the Bureau believes creditors will continue to rely on the expertise of settlement agents in conducting closings. Creditor comments indicate that creditors and settlement agents have long-standing, deep relationships in which settlement agents act as creditors’ partners in the closing and settlement process. As noted by many commenters, creditor responsibility under alternative 2 aligns with current practices and allow the parties to continue to work together to close home mortgage transactions in a manner that is most efficient for consumers and the market. With respect to commenters who were concerned that creditor responsibility for the Closing Disclosure would lead creditors to assume an improper role with respect to the underwriting of title insurance policies, the Bureau believes title insurance underwriters and creditors share an incentive to minimize risk to the underwriting of their own title insurance. Thus, the Bureau expects that creditors will have strong incentives to continue to rely on settlement agents under alternative 2. Furthermore, the Bureau expects that the requirements adopted in the 2013 ATR Final Rule and the May 2013 ATR Final Rule may have an impact on a creditor’s decision to rely on exclusive affiliate relationships because those rules limit the points and fees that may be charged for a qualified mortgage, which are defined to include affiliate charges. See § 1026.32(b)(1)(i)(D) and (b)(1)(iii).

With respect to commenters’ concerns that creditor responsibility for the Closing Disclosure would lead to dual closings, the final rule does not require that closings be conducted in any particular manner, other than to require the delivery and inspection of the Closing Disclosure in accordance with the requirements of § 1026.19(f). The Bureau expects industry will adapt current practices in a variety of ways, consistent with other applicable law or custom, to ensure consumers receive the required disclosures. With respect to concerns about closing delays caused by creditor-settlement agent coordination, the Bureau does not expect such delays will occur frequently because creditors and settlement agents already must coordinate to prepare the RESPA settlement statement. As noted by commenters, creditors and settlement agents work closely to conduct closings under current rules and the Bureau expects that this coordination will continue under the final rule. One commenter suggested that the rule would require title insurance underwriters to establish an effective process for managing the compliance risk of settlement agents. The final rule does not impose requirements on title insurance underwriters to establish processes to manage the compliance risks of settlement agents as requested by commenters. Such requirements are outside of the scope of this rulemaking and are managed by most States through licensing regulations.

Some commenters expressed concern that proposed § 1026.19(f)(1)(v) would mean settlement agents would have to assume all the duties of the creditor. The Bureau does not intend through this final rule to impose duties outside the scope of § 1026.19(f) on settlement agents. A settlement agent’s compliance with duties under § 1026.19(f) depends on the extent of settlement agent involvement in preparing and providing the Closing Disclosure. Proposed comment 19(f)(1)(v)-1 would have explained that, by assuming responsibility to provide the disclosures required under § 1026.19(f)(1)(i), the settlement agent becomes responsible for complying with all of the relevant requirements of § 1026.19(f). As discussed below, the final rule adopts this comment substantially as proposed. To further clarify the scope of a settlement agent’s responsibility under the rule, and to conform to similar language in § 1026.19(e) with respect to mortgage brokers, final § 1026.19(f)(1)(v) states that a settlement agent may provide a consumer with the Closing Disclosure, provided the settlement agent complies with ‘‘all relevant’’ requirements of § 1026.19(f). In addition, the final rule omits the language ‘‘as if it were the creditor’’ to avoid any suggestion that settlement agents, by providing the Closing Disclosure, would assume duties outside the scope of § 1026.19(f). The Bureau believes settlement agents’ compliance with the relevant provisions of § 1026.19(f) is critical to ensuring consumers consistently receive a Closing Disclosure that complies with the final rule, regardless of how settlement agents and creditors divide responsibility. In addition, because creditors are responsible under § 1026.19(f)(1)(v) for ensuring compliance with § 1026.19(f), the Bureau believes creditors would be reluctant to share responsibility with settlement agents if it were unclear whether settlement agents had to comply with § 1026.19(f). Section 1026.19(f)(1)(v) makes clear that a settlement agent must comply with § 1026.19(f) to the extent it assumes the responsibility to provide the disclosures required by that provision. Some commenters stated that the rule’s lack of specificity about the roles of settlement agents and creditors would result in confusion over the responsibilities of the respective parties. As discussed above, however, the final rule does not further specify which parts of the Closing Disclosure a settlement agent is required to complete or, if more than one Closing Disclosure is provided under § 1026.19(f), which Closing Disclosure the settlement agent is required to deliver. Final § 1026.19(f)(1)(v) is intended to provide maximum flexibility between creditors and settlement agents so that they may VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79869 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations determine how to provide the Closing Disclosure most efficiently and effectively in the contexts of their businesses. As discussed below, the proposed comment 19(f)(1)(v)–2 has been revised to clarify the meaning of § 1026.19(f)(1)(v) with respect to a settlement agent’s ability to divide responsibility with the creditor for providing different versions of the Closing Disclosure under § 1026.19(f). Commenters also expressed concern about creditor responsibility for the Closing Disclosure, notwithstanding the settlement agent’s involvement. As they would have been under proposed § 1026.19(f)(1)(v), creditors under final § 1026.19(f)(1)(v) are responsible for ensuring compliance with § 1026.19(f), even where a settlement agent provides the disclosures. The Bureau believes making a single party ultimately responsible for the Closing Disclosure will provide industry an incentive to ensure the Closing Disclosure is provided in a consistent manner. Creditor responsibility also may provide an incentive to improve creditor and settlement agent communication, as noted by some settlement agent commenters. The Bureau does not believe it is necessary to mandate in the final rule how a settlement agent and creditor must coordinate to ensure settlement agent compliance because settlement agents are already required to comply with § 1026.19(f)(1)(i), pursuant to § 1026.19(f)(1)(v).

Some commenters recommended that the final rule set forth objectives-based criteria for creditors and settlement agents to provide timely and accurate information. The Bureau does not believe it is necessary to do so. In general, the Bureau believes final § 1026.19(f)(1)(v) sets forth a clear standard for settlement agents to comply with § 1026.19(f) to the extent they provide disclosures under that section. In addition, the Bureau also believes that creditors will be able to manage compliance risk through agreements and arrangements with settlement agents and title insurance underwriters. In addition, the Bureau believes the clarification made in comment 19(f)(1)(i)–2, as discussed in the sectionby-section analysis of § 1026.19(f)(1)(i), addresses concerns about relying on third-party information for the Closing Disclosure provided three business days before consummation.

The final rule does not include a requirement that the settlement agent provide information to the creditor in a timely manner. To provide industry maximum flexibility in preparing and providing the Closing Disclosure, the final rule does not mandate that settlement agents and creditors coordinate in any particular manner. In light of the variety of ways creditors and settlement agents may divide responsibilities and the diversity of settlement practices across the country, the Bureau does not believe it is feasible to define with specificity a timeliness standard for all creditors and settlement agents. Mandating specific timeframes for sharing information could be unnecessarily cumbersome for industry. Accordingly, the final rule does not require that settlement agents share information with creditors by any particular deadline. Nor does the final rule impose a general requirement for settlement agents to provide ‘‘timely’’ information. Without further defining such a requirement, the Bureau is concerned that such a standard would be vague. The Bureau expects settlement agents will have a business interest in coordinating with creditors to ensure they provide information in a timely manner.

Some commenters requested clarification on whether creditors and settlement agents may complete portions of the Closing Disclosure and combine their portions into one form manually provided to the consumer, or if they may separately provide their respectively completed portions to the consumer. Creditors and settlement agents may agree on a division of responsibility to complete portions of the Closing Disclosure, but they must coordinate to ensure the consumer receives a single disclosure. See the discussion of comment 19(f)(1)(v)–4 below. With respect to comments regarding the use of standard and model forms, see the section-by-section analysis of § 1026.38(t)(3) below. Final provisions. For the reasons discussed above, the Bureau adopts the language in proposed § 1026.19(f)(1)(v) substantially as proposed. As discussed above, final § 1026.19(f)(1)(v) states that the settlement agent may provide a consumer with the disclosures required under § 1026.19(f)(1)(i), provided the settlement agent complies with ‘‘all relevant’’ requirements of § 1026.19(f). In addition, as discussed above, the final rule omits the language ‘‘as if it were the creditor.’’ Final § 1026.19(f)(1)(v) includes a modification with respect to the requirement that the creditor ensure that the disclosures required under § 1026.19(f)(1)(i) are provided in accordance with all requirements of § 1026.19(f). For clarity, and to conform to similar language in § 1026.19(e)(1)(ii) with respect to mortgage brokers who provide the Loan Estimate, the final provision states that the creditor must ensure that ‘‘such’’ disclosures are provided in accordance with ‘‘all’’ requirements of § 1026.19(f). For the same reasons, final § 1026.19(f)(1)(v) provides that disclosures provided by a settlement agent in accordance with the requirements of § 1026.19(f) satisfy the creditor’s obligation under the general paragraph 19(f), instead of the more specific paragraph 19(f)(1)(i). The Bureau adopts proposed comment 19(f)(1)(v)–1 substantially as proposed. To facilitate compliance with § 1026.19(f), the comment explains that, for purposes of § 1026.19(f), a settlement agent is the person conducting the settlement. This language is substantially similar to language in RESPA section 4(b), which requires ‘‘the person conducting the settlement’’ to provide the RESPA settlement statement. The comment does not include the language ‘‘as if it were the creditor,’’ to conform to the final rule. Comment 19(f)(1)(v)–1 also revises proposed language that would have addressed how § 1026.19(f)(1)(v) applies where requirements of § 1026.19(e) are referenced in § 1026.19(f). The proposed language would have referred to text in proposed comment 19(f)(1)(ii)–3 for an example involving timeshare transactions and provision of the Loan Estimate under § 1026.19(e), in which ‘‘settlement agent’’ could not be read in place of ‘‘creditor.’’ As discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(B) above, comment 19(f)(1)(ii)-3 has been revised with respect to the provision of the Loan Estimate for timeshare transactions. Accordingly, conforming changes have been made to comment 19(f)(1)(v)–1. Finally, comment 19(f)(1)(v)–1 also includes minor technical revisions for clarity.

The Bureau adopts proposed comment 19(f)(1)(v)–2 with modifications and additional discussion to clarify the variety of ways in which creditors and settlement agents may agree to divide responsibility with respect to providing the disclosures pursuant to § 1026.19(f)(1)(v). The comment uses the term ‘‘provides’’ to better reflect the language in the rule text, instead of the term ‘‘issues’’ that was used in proposed comment 19(f)(1)(v)–2. Comment 19(f)(1)(v)–2 also clarifies that if the settlement agent provides any disclosures under § 1026.19(f), the settlement agent must comply with the ‘‘relevant’’ requirements of § 1026.19(f). The comment also provides an illustrative example of how creditors and settlement agents could divide responsibility and includes a crossreference to comment 19(f)(1)(v)–3 to VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00141 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79870 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations indicate that a creditor remains responsible under § 1026.19(f) for ensuring that the requirements of § 1026.19(f) have been satisfied. Like the proposed comment, comment 19(f)(1)(v)–2 explains that the settlement agent may assume the responsibility to provide some or all of the disclosures required by § 1026.19(f). However, comment 19(f)(1)(v)–2 does not include the example in proposed comment 19(f)(1)(v)–2 that would have illustrated how a settlement agent and a creditor could divide responsibility with respect to completing the Closing Disclosure. Instead, comment 19(f)(1)(v)–2 includes a cross-reference to comment 19(f)(1)(v)–4 to refer to additional guidance on how creditors and settlement agents may divide responsibilities for completing the disclosures.

The Bureau adopts proposed comment 19(f)(1)(v)-3 substantially as proposed. The comment includes additional language to clarify the example in which the creditor does not comply with § 1026.19(f). The example in comment 19(f)(1)(v)–3 explains that if the settlement agent assumes the responsibility for providing all of the disclosures required under § 1026.19(f)(1)(i), the creditor does not comply with § 1026.19(f) if the settlement agent does not provide these disclosures at all, or if the consumer receives the disclosures later than three business days before consummation, as required by § 1026.19(f)(1)(ii) and, as applicable, (f)(2)(ii). The final rule adopts proposed comment 19(f)(1)(v)–4 with modifications to include additional language clarifying that creditors and settlement agents may divide responsibility to complete the Closing Disclosure under § 1026.38. Final § 1026.19(f)(1)(v) and its associated commentary are adopted pursuant to the Bureau’s authority under TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section 1405(b). Final § 1026.19(f)(1)(v) and its associated commentary will achieve the purposes of RESPA by resulting in more effective advance disclosure of settlement costs, consistent with section 19(a) of RESPA, and by promoting the informed use of credit, consistent with section 105(a) of TILA. The final rule and commentary also will improve consumer understanding and awareness of the transaction by permitting the form to be completed and provided by settlement agents, who often assist consumers during a real estate closing, which is in the interest of consumers and in the public interest, consistent with Dodd- Frank Act section 1405(b). The final rule and commentary are consistent with Dodd-Frank Act section 1032(a) because the features of mortgage loan transactions and settlement services will be more fully, accurately, and effectively disclosed to consumer in a manner that permits consumers to understand the costs, benefits, and risks associated consumers will understand the costs and risks associated with the mortgage loan and settlement services if settlement agents are permitted to provide the disclosures required under § 1026.19(f)(1)(i).

The Bureau understands that some commenters were concerned that settlement agents would face civil liability under section 130 of TILA if the Bureau adopted proposed alternative 2. However, the Bureau does not believe that a settlement agent’s providing the Closing Disclosure, or some aspect thereof, under § 1026.19(f)(1)(v) exposes the settlement agent to civil liability under section 130 of TILA, to the extent that the settlement agent is not also functioning as a creditor or an assignee under TILA sections 130 and 131. 19(f)(2) Subsequent Changes As discussed above, the proposal would have included a strict requirement that the disclosures provided three business days before consummation contain the ‘‘actual terms’’ of the transaction. Thus, because the ‘‘actual terms’’ would have had to be disclosed three business days before consummation pursuant to § 1026.19(f)(1)(ii), revisions to the Closing Disclosure generally would have triggered a new three-business-day pre-consummation waiting period. However, the Bureau recognized that, in certain circumstances, a strict application of the three-business-day waiting period required by proposed § 1026.19(f)(1)(ii) would operate to the consumer’s detriment. Accordingly, proposed § 1026.19(f)(2) would have provided that if the Closing Disclosure provided pursuant to proposed § 1026.19(f)(1)(i) is subsequently revised for any of the reasons described in § 1026.19(f)(2), a creditor need not comply with the timing requirements in § 1026.19(f)(1)(ii) when providing a revised disclosure.

In general, under § 1026.19(f)(2)(i) and (f)(2)(ii) respectively, if changes occurred due to consumer and seller negotiations, or if the amount actually paid by the consumer did not exceed the amount disclosed pursuant to § 1026.38(d)(1) by more than $100, the creditor would have been required to provide a revised Closing Disclosure reflecting such changes at or before consummation, instead of triggering a new three-business-day preconsummation waiting period. Proposed § 1026.19(f)(2)(iii) through (v) would have permitted revised disclosures to be provided within 30 days after consummation and, in some cases, as soon as reasonably practicable, where a revised Closing Disclosure was provided due to inaccuracies resulting solely from payments to a government entity, to correct non-numeric clerical errors, and to document cures for violations of the good faith estimate requirements, respectively.

As discussed in greater detail in the section-by-section analyses of § 1026.19(f)(2)(i) and (ii) below, the final rule narrows the circumstances in which revisions to the ‘‘actual terms’’ of the Closing Disclosure provided three business days before consummation under § 1026.19(f)(1)(ii)(A) trigger a new three-business-day pre-consummation waiting period. In general, pursuant to final § 1026.19(f)(2)(i) and (ii), a revised Closing Disclosure must be provided three business days before consummation when the loan’s previously disclosed APR becomes inaccurate, the loan product changes, or a prepayment penalty is added; other revisions may be disclosed at or before consummation. Final § 1026.19(f)(2)(iii) through (v) set forth circumstances under which revised disclosures must be provided after consummation. However, because the triggers for providing a revised Closing Disclosure three business days before consummation have been narrowed pursuant to § 1026.19(f)(2)(ii), final § 1026.19(f)(2)(iii) through (v) no longer function as exceptions to the strict three-business-day requirement under proposed § 1026.19(f)(1)(ii). Nevertheless, the Bureau believes retaining them, with modifications discussed below, will enhance consumer awareness and understanding of their mortgage transaction and facilitate industry compliance. 19(f)(2)(i) and (ii) Changes Before Consummation Proposed 19(f)(2)(i). Proposed § 1026.19(f)(2)(i), would have provided that if the consumer and the seller agree to make changes to the transaction that affect items previously disclosed, the creditor shall deliver revised disclosures reflecting such changes at or before consummation. Under proposed § 1026.19(f)(2)(i), these changes could be reflected on a revised Closing Disclosure without triggering a new three-businessday waiting period. Proposed comment 19(f)(2)(i)-1 would have provided illustrative examples of this requirement. The proposal reflected the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79871 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 237 The Bureau received one letter submitted by a member of Congress during the comment period and two ex parte letters dated May 24, 2013, signed by 62 Republican members and 20 Democratic members of Congress, respectively. The letters expressed serious concern with the proposal’s redisclosure requirements. common practice in which sellers and buyers alter the terms of the real estate transaction based on the condition of the house at the time of the walk-though inspection, which is often the day before the scheduled real estate closing, and in some cases even continue to negotiate the deal at the closing table. Proposed 19(f)(2)(ii). Proposed § 1026.19(f)(2)(ii) would have provided that if the amount actually paid by the consumer does not exceed the amount disclosed under § 1026.38(d)(1) by more than $100, the creditor shall deliver revised disclosures at or before consummation. The Bureau sought comment on whether $100 was the appropriate threshold to accommodate small miscalculations or minor changes prior to consummation. The Bureau proposed this exemption because it did not believe that small miscalculations or minor changes to the transaction should result in closing delays. The Bureau stated its belief that $100 may have been the correct tolerance based on feedback regarding the items most likely to change prior to consummation. Proposed comment 19(f)(2)(ii)-1 would have discussed the requirements of § 1026.19(f)(2)(ii), which would have stated that the creditor may provide revised disclosures without regard to the timing requirements in § 1026.19(f)(1)(ii) if the amount actually paid by the consumer does not exceed the amount disclosed pursuant to § 1026.38(d)(1) by more than $100, provided that the creditor delivers revised disclosures at or before consummation. This proposed comment also would have included illustrative examples of these requirements. Proposed comment 19(f)(2)(ii)-2 would have clarified that revised disclosures provided at consummation may reflect adjustments pursuant to both § 1026.19(f)(2)(i) and § 1026.19(f)(2)(ii). Thus, although proposed § 1026.19(f)(2)(ii) would have limited the difference between the amount disclosed pursuant to § 1026.19(f)(1)(i) and the amount actually paid at the real estate closing by the consumer to $100, the amount actually paid by the consumer at the real estate closing could vary by more than $100, to the extent permitted by proposed § 1026.19(f)(2)(i). This proposed comment also included illustrative examples of this provision. Comments The Bureau received extensive comment and ex parte submissions on the proposed redisclosure requirements and exemptions from a broad group of stakeholders, including consumer advocacy groups, commenters representing a variety of industry sectors, government agencies, and members of Congress. While most consumer advocacy groups did not comment specifically on this aspect of the proposal, two such groups submitting a joint comment supported the proposal’s requirement to redisclose the Closing Disclosure at least three business days before consummation for any changes to the actual terms of the transaction, subject to the bona fide personal financial emergency waiver and the Bureau’s proposed narrow exemptions. These commenters emphasized that any exemptions to the timing requirements should be narrow. An individual settlement agent commenter also expressed support for the redisclosure waiting period and the proposed exemptions.

A State attorney general commenter supported the redisclosure waiting period and the proposed exemptions and noted that the magnitude and cost of a consumer’s decision to purchase a home make it particularly important that consumers be made aware of all associated costs far enough in advance of closing to be able to reasonably evaluate the transaction with all costs in mind. Several associations of State financial regulators submitted a joint letter in which they offered measured support for the proposed redisclosure waiting period. While these commenters noted that they generally supported an advance disclosure requirement, they stated that the Bureau should take a balanced and careful approach to the implementation of the proposed timing and redisclosure requirements. The letter stated that thresholds should not cause significant market disruptions and should be amended if they do. Thus, these commenters requested that the Bureau seek ways to avoid restricting access to credit or unnecessarily delaying closings. These commenters also emphasized that the expanded tolerances proposed by the Bureau would ensure that consumers are not subject to the types of abusive practices that they were in the past and would provide an incentive for lenders to provide consumers with accurate Loan Estimates and Closing Disclosures, reduce the risk of error and uncertainty associated with the disclosure process, and lead to a healthier residential mortgage market.

By contrast, an overwhelming majority of industry commenters, including a GSE, and a State housing development authority, along with members of Congress, expressed significant concern with the proposed redisclosure waiting period for changes to the actual terms of the transaction and the narrowness of the proposed exemptions. The SBA and members of Congress also expressed significant concern with the proposed redisclosure waiting period and the narrowness of the proposed exemptions.237 Similar to concerns about the general threebusiness-day receipt requirement, commenters explained that providing ‘‘final’’ settlement costs three business days before consummation was impracticable, unnecessary, and would result in frequent closing delays that would impose substantial costs on consumers, sellers, industry, and the market. The majority of these commenters were concerned that the narrow exemption and waiver provisions would not reduce the likelihood of closing delays due to redisclosure.

Difficulties associated with a redisclosure waiting period. Commenters cited in connection with a three-business-day redisclosure period the same concerns they cited about the impracticality of providing final settlement costs three business days before consummation, described in the section-by-section analysis of § 1026.19(f)(1)(ii) above. Commenters identified a variety of reasons why transaction costs can change during the three-business-day period before consummation, which commenters believed would frequently trigger a new three-business-day period. Many commenters highlighted consumer requests as a major source of changes to the loan or settlement costs. Commenters explained that consumers frequently request changes to the loan amount, either because the amount needed to pay off a refinanced loan changes or, in the purchase context, because the consumer’s financing needs change independent of a negotiation with a seller. For example, commenters explained that consumers may discover they need a larger or smaller downpayment before consummation. Commenters also explained that consumers may make changes affecting their escrow charges or purchase products or services in connection with the transactions, such as insurance endorsements, mobile notary services, document-preparation services, inspections, and legal services. Commenters maintained that it would be important for consumers to retain VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79872 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations flexibility to make changes to their transactions.

Commenters identified third party changes not requested by the consumer that could affect the transaction, despite reasonable due diligence of creditors and settlement agents. Commenters explained that it is not uncommon for third parties to correct errors or account for changed circumstances outside of the control of creditors or settlement agents. For example, a variety of commenters noted that homeowners’ associations may be late in reporting assessments or fees associated with a certificate of approval. Another common example was that of third-party lenders who may be late in providing payoff statements or subordination agreements. Commenters also cited weather- or travel-related delays as reasons why certain costs may not be known until consummation. Commenters also identified changes that only affected the seller’s side of the transaction as a common source of changes that might occur before consummation, such as increases in the seller’s payoff amounts or additional interest due on taxes. Commenters did not believe changes to the seller’s side of the transaction should require a new three-business-day waiting period. Commenters also explained that agents conducting a title exam may discover new encumbrances or other obligations, such as final utility charges, judgments, unpaid taxes, or, in rural areas, grazing leases, wells, or easements, during a ‘‘final rundown’’ the day before consummation that is often done as a matter of prudent due diligence.

In addition, commenters explained that a series of redisclosure waiting periods could be triggered if per diem or prorated amounts accumulate, such as prepaid interest or escrowed charges. A number of commenters, including a GSE, expressed concern that the accumulation of such charges could trigger a series of redisclosure periods if the de minimis exemption under proposed § 1026.19(f)(2)(ii) were too low. Commenters also explained that a number of settlement costs are interrelated, such as service provider commissions, and that a change in one item could easily change another. Many industry commenters believed that the proposed exemptions were too narrow to prevent frequent closing delays. Members of Congress settlement agent commenters submitted ex parte letters expressing concern that the rule would put consumers in the position of having to choose between having their closing delayed for three days (and paying the associated increased costs) or not buying a product for their protection (such as a home warranty or an owner’s title insurance policy). Commenters supported the consumer-seller negotiation exemption, but believed the proposed $100 de minimis exemption was too low to effectively prevent unnecessary delays. A trade association representing creditors and a member of Congress stated that the Bureau provided little rationale for selecting a $100 de minimis exemption, suggesting that it appeared arbitrary. Commenters explained that $100 was inadequate because it was not proportional to the transaction, did not account for inflation, or the variety of factors that can cause settlement costs to change within three to six business days before consummation and that are out of the creditor’s or the settlement agent’s control. Commenters explained that the following costs could easily exceed $100: fees charged for optional thirdparty services purchased by the consumer, such as a consumer’s decision to hire an outside notary, a courier, or an attorney; consumerrequested changes to the loan amount, escrowed amounts, insurance policies or endorsements, premium-deductible tradeoffs, and home warranties; accumulating prepaid interest due to closing delays; or additional interest due on a consumer’s payoff of an existing loan.

Costs associated with a redisclosure waiting period. A significant proportion of commenters stated that a mandatory three-business-day redisclosure waiting period would impose high costs on consumers, sellers, industry, and the real estate market generally. Commenters identified the same costs described in the section-by-section analysis of § 1026.19(f)(1)(ii) above, arguing that delayed closings would jeopardize a consumer’s real estate agreements, result in financial costs and inconvenience to consumers and sellers, restrict a consumer’s ability to shop, and prolong interest payments on outstanding debts. Commenters were concerned that delays caused by the redisclosure waiting period could cause certain loan and settlement costs to increase, which could trigger additional redisclosure waiting periods. Commenters also explained that uncertainty over when closings occur would make it difficult for consumers, sellers, settlement agents, and creditors to coordinate to reschedule closings. Some commenters were concerned that it would be difficult for parties to reschedule a closing date and that sellers may be unlikely to extend a purchase contract to accommodate a closing delay. In addition, a trade association representing banks explained that consumers would face liquidity problems if settlement agents placed consumer funds in non-interestbearing accounts. A large bank and a trade association representing settlement agents explained that consumers in refinancings would have difficulty meeting upcoming expenses or would forego savings for each threebusiness-day period during which they would have to make payments on an existing loan. A settlement agent commenter and professional association representing attorneys were concerned that multiple consumer-seller walkthrough inspections would be required during each redisclosure waiting period. Commenters including settlement agents, creditors, and various trade associations also explained that the proposed rule could put consumers in a difficult position of deciding whether to make changes to their transaction (e.g., to purchase an insurance policy or make changes to escrowed items) or delay closings. The ex parte letters from members of Congress also expressed concern with such a scenario. Creditors were concerned that their underwriting costs would increase as a result of expired credit or employment verifications or expired interest rate locks, particularly if the Bureau finalizes tolerance rules that limit their ability to increase fees. Some creditors explained that they would likely price rate locks higher to cover this risk or that they may qualify the availability of guaranteed rates. Creditors also were concerned that uncertainty over the date of closing would require them to pay more for warehouse financing capacity. A settlement agent observed that settlement service providers may be inhibited from recouping the actual costs of their services if creditors or settlement agents did not revise the Closing Disclosure out of concern for triggering a redisclosure waiting period. A law firm commenter explained that without flexibility in the rule to account for changes in these charges, settlement service providers may delay consummation to ensure they are compensated for their services. Many industry commenters, including a GSE, expressed concern about the aggregate impact of the proposed threebusiness-day redisclosure rule on the efficiency of the market. Commenters expressed serious concern about the unintended consequences of delayed closings on sellers who have scheduled their own purchase transaction to occur immediately after a consumer’s purchase transaction (coinciding settlements) or who are under pressure to conduct a short sale of their property VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79873 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 238 The study stated that, ‘‘[b]ased on incidents in past years, industry professionals expect that between 50 percent and 60 percent of total closing transactions would experience at least one threeday delay of closing due to changes in the Closing Disclosure forms.’’ Nam D. Pham, Ph.D., NDP Consulting, The Economic Contributions of the Land Title Industry to the U.S. Economy (November 2012), p. 2. The study concluded that delaying the collection of transfer taxes and fees would result in a ‘‘lost time value’’ for State and local governments, with a cumulative impact of more than $1 million for every three-day period. Further, the study concluded that just one three-day delay would have an impact of nearly $193 million on sellers (in terms of time value and mortgage interest payments), an impact of nearly $64 million on homeowners who refinance (in terms of mortgage interest payments for each one percentage point mortgage rate reduction), and, for home buyers, an impact of more than $1 billion per year in additional mortgage interest payments throughout the life of their mortgage loans. See id. (for less than the outstanding principal balance of their loan). Commenters frequently cited an anticipated ‘‘domino effect’’ of delayed closings across the market, which could result in unexpected additional costs and delay other transactions. In general, commenters were concerned that delayed closings would result in fewer closings and increased cost and burden that would be passed on to consumers. A trade association representing settlement agents and the title insurance industry submitted a commissioned study analyzing the aggregate impact of the proposed redisclosure waiting period, highlighting financial costs to sellers and consumers, as well as to State and local governments.238 The study assumed that a little over half of total closings would experience at least one three-business-day delay of closing due to changes in the Closing Disclosure.

Alternatives recommended by commenters. Industry commenters recommended a variety of approaches to modify the Bureau’s proposed timing requirements, including requiring no waiting periods, shortening the threebusiness-day period to a one- or two-day period, requiring a three-business-day period for TILA-mandated costs, or requiring no waiting periods for settlement-related costs. Other commenters recommended adding flexibility to the consumer waiver or increasing the $100 de minimis exemption. Other commenters recommended additional exemptions for types of loans (e.g., refinancings), types of closing costs, or other exemptions based on changes requested by or benefiting the consumer. A community bank, a trade association representing various mortgage professionals, and an individual consumer recommended that the final rule require a separate form to be provided to consumers documenting what changed from the initial Closing Disclosure. Trade associations representing various mortgage professionals and settlement agents, a community bank, and a non-depository lender recommended that the final rule impose waiting periods shorter than three business days, such as a onebusiness-day waiting period. Many commenters, including trade associations representing settlement agents, banks, and real estate agents, title insurance companies, settlement agents, non-depository lenders, and attorneys, were concerned that the proposed exemptions would not cover all potential last-minute changes that presented relatively little consumer risk. Commenters requested that the Bureau clarify existing exemptions to prevent creditors and settlement agents from interpreting them narrowly to the detriment of consumers. Other commenters requested that the Bureau expand the scope of the proposed exemptions.

Many commenters offered recommendations for changes they did not believe warranted a new waiting period. One trade association representing banks and financial companies explained that while a change to the fundamental terms of the loan may warrant a new waiting period, minor changes should not. Commenters also stated that changes requested by, agreeable to, or that otherwise benefit consumers should not require a new waiting period so that consumers could maximize their flexibility before consummation. Other categories suggested by creditor commenters included adjustments to the loan amount (e.g., due to investor or loan program limits or to account for payoffs of other loans), or changes that are due to circumstances outside of the creditor’s control.

Commenters also recommended that changes to particular closing costs should not require a new threebusiness-day period. Trade associations representing banks, a large bank, and a non-depository lender stated that amounts collected at closing that change depending on when closing is scheduled to occur should be exempted from a redisclosure waiting period. Settlement agents, including one submitting an ex parte submission, and trade associations representing settlement agents and the title insurance industry offered a number of other examples: closing costs unrelated to loan costs paid by or on behalf of the consumer; payments to discharge any defects, liens, encumbrances or other matters requiring curative action discovered during a title search or examination; any prorated or per diem amount where the underlying rate does not change; insurance fees; home warranties; lender reserves for taxes and insurance and amounts paid to a State or local government; recording costs and other fees incurred for the consumer’s convenience, such as wire fees, notary fees, and endorsement fees; and changes due to consumer-seller negotiations or as a result of local custom or practice. A large bank stated that small increases in numerical disclosures other than the cash to close amount should not trigger a new waiting period, and various settlement agents stated that revisions to the seller’s side of the transaction also should be exempt. One trade association representing the workforce mobility industry recommended that the final rule include an exemption for consumers who are obtaining a mortgage loan in connection with a corporate-sponsored relocation. A large bank, a community bank, and trade associations representing banks and financial companies suggested that changes to APR that are within the current TILA tolerances should not require a new waiting period. One trade association representing various mortgage professionals recommended a ten percent tolerance for changes in closing costs. Other commenters recommended that the Bureau make adjustments to the exemptions included in the proposal.

Many commenters supported exemptions but believed the proposed exemptions were too narrow. A trade association representing real estate agents anticipated that creditors and settlement agents would be likely to interpret the proposed exemptions cautiously, which would lead to the three-business-day redisclosure period being invoked frequently, imposing costs on consumers.

Trade associations representing banks and financial companies were concerned that sellers could game the proposed exemption for changes due to consumer-seller negotiations at proposed § 1026.19(f)(2)(i) and deliberately postpone closings. Other commenters requested that the exemption should account for other seller-related changes. A trade association representing banks, a nondepository lender, and a large bank requested that the proposed exemption be expanded to cover additional changes to the transaction that might arise from a consumer-seller negotiation affecting the terms of the purchase-andsale agreement, such as a property price reduction that might result in a change VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79874 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 239 Currently, corrected TILA disclosures must be provided to the consumer at least three business days before consummation if the previously disclosed APR becomes inaccurate. See § 1026.19(a)(2)(ii). The final rule generally maintains this trigger, although the final rule applies the redisclosure requirement to the Closing Disclosure under final § 1026.19(f)(2)(ii)(A). in the loan amount and the reduction or elimination of mortgage insurance. The Bureau received substantially more comment on the proposed $100 de minimis exemption under proposed § 1026.19(f)(2)(ii). Many commenters representing views from across the real estate industry and a member of Congress believed $100 was inadequate, as discussed above. A trade association representing the settlement service provider industry believed the threshold should be based on costs that are significant enough that the consumer would need three business days to decide whether to continue with the transaction. Many commenters, including a member of Congress, recommended that the de minimis threshold should be based on a percentage or a ratio relative to the loan amount or property value to account for consumers who may have different price sensitivities, market diversity, and the effects of inflation. Commenters proposed a range of alternatives to the $100 exemption: a percentage of the loan amount or the sale price of the property (commenters suggested thresholds ranging between 0.001 to 1 percent); a fixed dollar amount (commenters suggested thresholds ranging between $200 and $1,000); or the greater of a fixed dollar amount or a percentage. Other commenters recommended that the final rule allow creditors to guarantee third-party charges so they cannot change, provided the rule offers creditors relief from liability under RESPA section 8. A large bank and trade associations representing banks and financial companies recommended that the rule make the de minimis exemption available for any changes in fees, without regard to whether they are finance charges or which tolerance level applies to them. Commenters recommended that the proposed three-business-day redisclosure requirement either be shortened or eliminated. A trade association commenter representing the views of mortgage professionals and affiliated service providers explained that shortening the timing of the Closing Disclosure would allow flexibility rather than unnecessary delays due to redisclosure and enforced waiting periods. Commenters also recommended that the redisclosure waiting period be limited to one day or 24 hours. One settlement agent commenter recommended that the final rule eliminate redisclosure waiting periods. The commenter believed that any bait-and-switch abuses would be better addressed through enforcement actions.

Requests for clarification. Commenters requested that the Bureau clarify several aspects of the proposed redisclosure requirements. A community bank commenter requested clarification on whether the Closing Disclosure must be provided again at consummation. This commenter was concerned that two closings could arise under the rule: one to provide the Closing Disclosure and one to sign the final loan documents. One individual consumer asked whether the threebusiness-day waiting period would eliminate the three-business-day right of rescission. A large bank and two trade associations representing banks and financial companies asked whether changes in interest rate or APR, either within or outside of the TILA tolerances, would trigger a new threebusiness-day period. Commenters also asked whether a new three-business-day period would be triggered if a fee was listed in the wrong category on the form, if changes were made to the escrowed items, if the consumer requests a change to how funds will be disbursed to others, if loan principal and periodic payments are reduced slightly, or if a creditor’s approximate cost of funds calculation changes. One settlement agent commenter requested clarification on what would constitute a redisclosure. This commenter also requested clarification on which party would pay or absorb costs associated with any redisclosures. Trade associations representing banks and financial companies requested that the Bureau clarify that the de minimis threshold exemption at proposed § 1026.19(f)(2)(ii) was an aggregate threshold and did not apply to any particular costs.

Final Rule The Bureau has considered the comments and ex parte submissions on this issue submitted by members of Congress. Based on the extensive and detailed comments the Bureau received on the types of changes that can occur after the Closing Disclosure is first provided, the final rule revises the proposed rule’s exemptions to the redisclosure waiting period requirement to reduce the risk of unintended and potentially harmful consequences for consumers and the real estate market. As explained in the section-by-section analyses of § 1026.19(f)(1)(i) and (f)(1)(ii)(A) above, the final rule requires that consumers receive the Closing Disclosure three business days before consummation. However, in response to concerns expressed by commenters about closing delays caused by the proposed redisclosure requirement, the final rule narrows the triggers for a new three-business-day waiting period for changes that may occur after the Closing Disclosure is initially provided. Under the final rule, if the Closing Disclosure is provided and the APR subsequently becomes inaccurate by exceeding the applicable tolerance, a corrected Closing Disclosure must be provided to the consumer at least three business days before consummation (§ 1026.19(f)(2)(ii)(A)).239 In addition, the final rule requires redisclosure with a new three-business-day waiting period in two circumstances not currently provided for in Regulation Z: where the loan product changes (§ 1026.19(f)(2)(ii)(B)) and where a prepayment penalty is added (§ 1026.19(f)(2)(ii)(C)). The Bureau believes that a requirement that limits a redisclosure waiting period to these three situations in this final rule appropriately balances the consumer benefits of advance disclosure against the potential costs associated with a redisclosure waiting period. While the proposed redisclosure requirement and narrow exemptions would provide a major incentive for industry to finalize settlement costs earlier in the process, the Bureau is concerned that creditors or settlement agents may not be in a position to ensure that all such costs will be known with certainty by the time the Closing Disclosure is first delivered. The breadth and specificity of comments on this issue demonstrated that settlement costs derive from a multitude of sources, including third-party lenders, local government entities, sellers, homeowners’ associations, and a host of third-party settlement service providers; and such costs may change based on events outside the control of any one party. Further, the Bureau is concerned that the proposed redisclosure requirement and narrow exemptions could prevent consumers from making adjustments or informed purchases when it may be in their interest, or even necessary, to do so. For example, as some commenters noted, the cash to close amount could increase above the de minimis exemption if a consumer requests a smaller principal loan amount before consummation in exchange for making a larger down payment.

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79875 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 240 Although some changes to APR may result from one-time costs affecting the finance charge that are paid at consummation, APR also is a metric for other long-term costs of credit. It also is the metric MDIA relies on to determine when final TILA disclosures must be provided three business days before consummation.

241 Research indicates that cognitive processes take more time when evaluating changes in terms. See, e.g., Christopher Chabris et al., The Allocation of Time in Decision-Making, Journal of the European Economic Association (2009) (decisionmakers spend more time on decisions when their estimates of the value of the best option is closer to the estimate of the value of the next best option); Mieneke W.H. Weenig and Marleen Maarleveld, The Impact of Time Constraint on Information Search Strategies in Complex Choice Tasks, Journal of Economic Psychology (2002) (in complex choice tasks, screening is based on fewer attributes when time pressure is imposed). 242 See, e.g., Dodd-Frank Act sections 1412, adding TILA section 129C(b) (generally defining a ‘‘qualified mortgage’’ as one that, among other things, does not contain negative amortization, interest-only payments, or balloon payments) (15 U.S.C. 1639c(b)); Dodd-Frank Act section 1450 (amending the contents of the special information booklet under RESPA section 5(b) to include discussion of balloon payments, prepayment penalties, and the advantages of prepayment) (12 U.S.C. 2604(b)).

Accordingly, the final rule narrows the circumstances under which changes between the initial provision of the Closing Disclosure and consummation will trigger an additional three-businessday waiting period. The final rule omits proposed § 1026.19(f)(2)(i) and (f)(2)(ii) and instead revises the three-businessday waiting period redisclosure triggers to three specific circumstances: the transaction’s previously disclosed APR becomes inaccurate, the loan product changes, or a prepayment penalty provision is added to the transaction. Thus, if one of those events occurs between the time the initial Closing Disclosure is provided and consummation, the creditor must provide a corrected Closing Disclosure with all changed terms, and must ensure that the consumer receives the disclosure three business days before consummation. These events are described in final § 1026.19(f)(2)(ii). If changes for any other reason occur after the initial Closing Disclosure is provided, the creditor must provide a corrected Closing Disclosure reflecting any changed terms to the consumer so that the consumer receives the corrected disclosures at or before consummation, pursuant to § 1026.19(f)(2)(i). Difficulties associated with a de minimis exemption. The final rule does not include the proposed de minimis exemption for changes in closing costs in light of comments received and the difficulty in identifying an appropriate dollar threshold. Commenters provided extensive feedback demonstrating why designing a reliable de minimis exemption would be difficult, and they identified a large number of factors that might influence changes in closing costs. However, as the Bureau noted in the proposal’s analysis under section 1022 of the Dodd-Frank Act, the Bureau lacks reliable market-wide data of the types, size, or frequency of costs that typically change between the early TILA disclosure and RESPA GFE and the disclosures provided at consummation. The Bureau appreciates that increases in costs before consummation vary based on a variety of factors, including those dependent on local custom. The extent of these variables complicates the development of a reliable threshold. Changes requiring a new threebusiness-day waiting period before consummation. In light of the potentially serious consequences of delayed closings for all parties to a transaction and the market generally, the Bureau believes a mandatory redisclosure waiting period should be limited to situations that have the potential to impose significant, longterm financial impacts on consumers. Unlike one-time costs paid at settlement, these changes can impose costs that can carry significant, longterm consequences for consumers, such as higher interest rates, an adjustable rate feature for which consumers may be unprepared, or a prepayment penalty that could preclude refinancing.240 In addition, because changes to the loan product and the addition of a prepayment penalty involve complex decisions that affect consumers over the life of the loan, the Bureau believes consumers will benefit from having sufficient time to consider whether to accept such changes.241 As noted in the section-by-section analysis of § 1026.19(f)(1)(i), settlement agent commenters in support of a general three-business-day requirement explained that such a requirement would benefit consumers who are surprised at the closing table when they discover major changes to their loan product. The Bureau believes this rule is likely to encourage creditors to ensure consumers have time to consider the tradeoffs involving higher APRs, different loan products, or prepayment penalties sufficiently in advance of consummation to avoid the risk of closing delays. The final rule therefore limits the redisclosure and new waiting period requirements to cases in which a loan’s previously disclosed APR changes outside of the TILA tolerance, the loan product changes, or where a prepayment penalty is added. Narrowing the redisclosure triggers to these circumstances will reduce the frequency of closing delays and, in light of the other consumer protections regarding settlement charges in this final rule, will, on balance, benefit consumers.

Further, the Bureau believes the final rule is in line with the goals of other consumer protections advanced by Congress in response to the recent financial crisis. Congress recognized the unique risks associated with changes to APR in 2008 under MDIA as well as the risks posed by certain loan products and prepayment penalties in 2010 under the Dodd-Frank Act.242 While the regulations adopted in the Bureau’s 2013 ATR Final Rule and May 2013 ATR Final Rule may reduce the likelihood that consumers obtaining qualified mortgages will be surprised by changes to loan products or the addition of a prepayment penalty, they generally will not prevent creditors from extending credit with such features. Although these rules will make it less likely that such changes will trigger a redisclosure waiting period, the Bureau believes the final rule should maintain this protection where such changes are not precluded. Moreover, the Bureau is concerned that a creditor could extend a qualified mortgage but still make certain last-minute changes to the loan product in manner that presents a risk to consumers, such as changes to the length of the introductory rate period or the frequency of interest rate adjustments, or change the loan to a non-qualified mortgage with certain product features that present unique risks to consumers.

The Bureau believes the final rule strikes the appropriate balance between protecting consumers from undue delays in closings and from bait-andswitch tactics. The Bureau believes the expanded Loan Estimate tolerance rules will address bait-and-switch risk by restricting certain increases in settlement charges. Under the final rule, loan origination charges, required services for which a consumer cannot shop, as well as services provided by a creditor’s affiliate would be subject to a zero percent tolerance. In addition, recording fees and required services for which a consumer shops and chooses a non-affiliate identified by the creditor would be subject to an aggregate ten percent tolerance. See section-bysection analyses of § 1026.19(e)(3)(i) and (ii). The Bureau believes there is limited consumer risk with respect to items not covered by the Loan Estimate tolerances, such as prepaid interest, insurance premiums, escrowed amounts, and settlement costs disclosed pursuant to § 1026.38(g)(4), which typically involve adjustments and payments related to obligations and VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79876 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 243 For example, because prepaid interest is based on an underlying interest rate, increases in prepaid interest are relatively predictable based on the number of days that still remain in the month after closing and the number of days prepaid interest accumulates. Additionally, because prepaid interest is a finance charge under Regulation Z, revisions to prepaid interest would be reflected in the loan’s APR, changes to which are governed by TILA’s three-business-day redisclosure requirement and rescission rules. Further, interest rates are locked in many instances, in which cases the only variable is the day of closing.

244 With respect to insurance premiums that a consumer shops for independently, the Bureau believes other means are available for limiting consumer harm, such as a competitive marketplace for property insurance premiums, or, in the case of other insurance products, advance disclosures that such products are optional. See, e.g., § 1026.4(d)(1) and (2) (conditioning the treatment of certain credit and property insurance premiums as a ‘‘finance charge’’ on the provision of advance disclosures); § 1026.37(g)(4) (Loan Estimate disclosures for owner’s title insurance). 245 The Bureau noted that certain Dodd-Frank Act amendments could be read as overriding the RESPA inspection requirement, but did not ground proposed § 1026.19(f)(1)(ii)(A) on such an interpretation. See 77 FR 51116, 51175, n.145. other encumbrances that commonly must be paid as a condition to close.243 Although the final rule leaves some room for certain charges to change before closing without triggering an additional three-business-day waiting period, the Bureau believes such changes pose less harm to consumers than delaying closings because of these changes. For example, the final rule does not require a new waiting period for optional services for which a consumer shops independently, which costs are not subject to a good faith tolerance limit under § 1026.19(e)(3). Commenters explained that consumers frequently shop for some of these services in the days prior to closing for a number of reasons. For example, commenters explained that some consumers wait to purchase an owner’s title insurance policy, and others purchase unexpected notary and courier services that may be necessary in rural areas where consumers cannot attend a closing in person, or to accommodate last-minute child-care or employment obligations. The final rule does not require a new waiting period because many of these costs are incurred to address unforeseen circumstances, they are generally one-time costs that are small relative to the entire transaction, and because consumers have an opportunity to shop for these services independently.244 Exemptions recommended by commenters. Commenters suggested additional exemptions that are not included in the final rule. The Bureau believes that significant operational challenges could arise if the final rule were to include a de minimis threshold and provided for a panoply of additional exemptions from the redisclosure waiting period (e.g., exemptions for prepaid interest, escrowed amounts, changes to the seller’s side of the transaction, or consumer-requested changes). As noted by several commenters, a final rule that included a long list of exemptions could increase regulatory complexity and impose substantial compliance costs on industry, especially smaller entities that may not have a large compliance staff, but may not provide any additional consumer benefit compared to the narrowed triggers the Bureau is finalizing. In addition, the Bureau does not believe it is practicable to list with specificity every situation that might warrant an exemption, and doing so may create confusion and unnecessary closing delays.

Cost of redisclosure. One commenter requested clarification on which party would be responsible for paying and absorbing costs associated with redisclosures of the Closing Disclosure. Final § 1026.19(f)(5) provides that no fee may be imposed on any person, as a part of settlement costs or otherwise, by a creditor or by a servicer (as that term is defined under 12 U.S.C. 2605(i)(2)) for the preparation or delivery of the disclosures required under § 1026.19(f)(1)(i). Other than this provision, § 1026.19(f) does not address which party is responsible for paying or absorbing costs associated with providing corrected Closing Disclosures. Consumer’s right to inspect. Current Regulation X § 1024.10(a) 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). The current Regulation X provision implements RESPA section 4(b)(2).

In the proposal, the Bureau did not propose retaining this requirement because, under the proposed rule, the creditor would have been required to deliver the Closing Disclosure three business days before consummation, and redisclose with an additional threebusiness-day waiting period if any of the actual terms changed, except in very limited circumstances described in the section-by-section analysis of § 1026.19(f)(2). Thus, under the proposal, the disclosures consumers would have received three business days before consummation would have been nearly accurate, other than for a narrow set of changes permitted under the exemptions in proposed § 1026.19(f)(2). Even if changes occurred after the initial Closing Disclosure was provided under the proposal, consumers would still have received a nearly accurate revised Closing Disclosure three business days before consummation. As a result, the Bureau determined that it was unnecessary to include the RESPA inspection requirement in the integrated disclosures.245 Several industry commenters requested that the Bureau return to the one-business-day requirement to inspect the Closing Disclosure. A community bank commenter and a trade association representing bank compliance officers recommended that the rule include a one-day right to inspect as an alternative to a three-business-day redisclosure period. The commenters stated that, while providing the Closing Disclosure three business days before closing may be beneficial once, any changes should be addressed within the three-businessday period and could be previewed at least one day before closing without necessitating three days repeatedly. The Bureau has considered these comments and believes that, in light of the changes made in the final rule to the proposed redisclosure provisions, it is appropriate to include in the final rule a right to inspect the Closing Disclosure one business day before consummation. As discussed above, the final rule permits a greater range of changes to occur between the time the Closing Disclosure is initially provided (three business days before consummation) and consummation. Thus, because the Closing Disclosure may change before consummation without triggering a new three-business-day waiting period, except in the three circumstances discussed above, the Bureau believes it is appropriate to implement RESPA section 4, which gives borrowers the right to inspect the settlement statement one business day before settlement, by giving consumers the right to inspect the Closing Disclosure one day before consummation. The Bureau believes that implementing this statutory right will reduce the likelihood that consumers will be surprised by changes to the Closing Disclosure at the point of consummation. Moreover, the Bureau believes a one-day right to inspect will be less disruptive to the efficient operation of closings than a threebusiness-day redisclosure requirement. For the reasons discussed above, the final rule adopts an inspection provision in § 1026.19(f)(2)(i). Under this final rule, notwithstanding the requirement to provide corrected disclosures at or before consummation, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79877 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations the creditor must permit the consumer to inspect the Closing Disclosure, completed to set forth those items that are known to the creditor at the time of inspection, during the business day immediately preceding consummation. The final provision also includes language similar to that in current Regulation X § 1024.10(a), stating that the creditor may omit from inspection items related only to the seller’s transaction.

This provision is similar to current Regulation X § 1024.10(a) but differs in certain respects. Unlike the current provision, which applies to the ‘‘settlement agent,’’ the final rule applies to the ‘‘creditor.’’ The Bureau recognizes that RESPA section 4(b) applies to ‘‘the person conducting the settlement.’’ 12 U.S.C. 2603(b). However, the final rule applies this requirement to creditors instead of settlement agents because § 1026.19(f)(1)(i) requires that creditors provide the Closing Disclosure. Nonetheless, pursuant to § 1026.19(f)(1)(v), the settlement agent may fulfill the creditor’s responsibilities under § 1026.19(f)(2)(i). Comment 19(f)(2)(i)–2 addresses the settlement agent’s role in permitting the consumer the right to inspect the Closing Disclosure. Settlement agents are subject to the requirements of § 1026.19(f)(1)(v), as discussed in the section-by-section analysis of that section above. The final rule also uses the term ‘‘consumer’’ instead of ‘‘borrower,’’ consistent with the terminology of Regulation Z. In addition, unlike the current provision in RESPA and Regulation X, which permits borrowers the right to inspect the RESPA settlement statement the business day immediately preceding ‘‘settlement,’’ the final rule permits inspection during the business day immediately preceding ‘‘consummation.’’ The final rule applies this requirement to the business day before consummation instead of settlement because the final rule requires delivery of the Closing Disclosure at or before ‘‘consummation.’’ See the section-bysection analysis of § 1026.19(f)(1)(ii)(A). ‘‘Business day’’ in this provision is defined under § 1026.2(a)(6), as the day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.’’ This definition is substantially similar to the definition in Regulation X § 1024.2(b) that is used in the current inspection requirement in Regulation X § 1024.10(a). The Bureau believes it would be burdensome to require the inspection to occur on days creditors may not currently be open for business. See the section-by-section analysis of § 1026.2(a)(6). The final rule does not contain an exemption for certain transactions currently implemented in Regulation X § 1024.10(d). The current provision in Regulation X provides generally that, when the borrower or the borrower’s agent does not attend the settlement, or when the settlement agent does not conduct a meeting of the parties for that purpose, the transaction is exempt from the right to inspect, except that the RESPA settlement statement must be mailed or delivered as soon as practicable after settlement. The final rule does not include this exemption because the final rule requires that the Closing Disclosure be provided at or before consummation in all cases, regardless of whether an in-person settlement is conducted. As discussed in more detail below, 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), the final rule adjusts and modifies the requirement of RESPA section 4(b)(2) allowing a onebusiness-day right to inspect the settlement statement from the person conducting the settlement. Specifically, the final rule adopts § 1026.19(f)(2)(i) to require creditors to permit consumers to inspect the Closing Disclosure, completed to set forth those items that are known to the creditor at the time of inspection, during the business day immediately before consummation, and that the creditor may omit from inspection items related only to the seller’s transaction.

The Bureau believes adjusting the application of RESPA section 4(b)(2) 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 for the disclosure requirements under TILA and sections 4 and 5 of RESPA. As discussed above in the section-bysection analyses of § 1026.19(f)(1)(i) and (f)(1)(v), to satisfy the integration mandate, the Bureau must reconcile existing differences between TILA and RESPA. Accordingly, the final rule requires generally that the creditor provide the Closing Disclosure. RESPA section 4(b) imposes an obligation on ‘‘the person who will conduct the settlement’’ to permit the borrower a right to inspect the forms ‘‘during the business day immediately preceding the day of settlement.’’ The Bureau believes it is necessary to reconcile this requirement with the requirement under TILA section 128(b)(2)(D), as amended by MDIA and the Dodd-Frank Act, and implemented in this final rule under § 1026.19(f)(1)(i) requiring advance delivery of the Closing Disclosure by the creditor.

Final provisions. Final § 1026.19(f)(2)(i) provides that, except as provided in § 1026.19(f)(2)(ii), if the disclosures provided under § 1026.19(f)(1)(i) become inaccurate before consummation, the creditor shall provide corrected disclosures reflecting any changed terms to the consumer so that the consumer receives the corrected disclosures at or before consummation. Final § 1026.19(f)(2)(i) also provides that, notwithstanding the requirement to provide corrected disclosures at or before consummation, the creditor shall permit the consumer to inspect the disclosures provided under § 1026.19(f)(1)(i), completed to set forth those items that are known to the creditor at the time of inspection, during the business day immediately preceding consummation, but the creditor may omit from inspection items related only to the seller’s transaction. Final § 1026.19(f)(2)(ii) provides that, if one of the following disclosures provided under § 1026.19(f)(1)(i) becomes inaccurate in the following manner before consummation, the creditor shall ensure that the consumer receives corrected disclosures containing all changed terms in accordance with the requirements of § 1026.19(f)(1)(ii)(A): (A) the annual percentage rate disclosed under § 1026.38(o)(4) becomes inaccurate, as defined in § 1026.22; (B) the loan product is changed, causing the information disclosed under § 1026.38(a)(5)(iii) to become inaccurate; or (C) a prepayment penalty is added, causing the statement regarding a prepayment penalty required under § 1026.38(b) to become inaccurate. The final rule adopts proposed comment 19(f)(2)(i)–1, modified to conform to the final rule, and adopts proposed comments 19(f)(2)(i)–1.i and –1.ii substantially as proposed. Proposed comments 19(f)(2)(i)–1.i and –1.ii would have provided examples of changes due to consumer-seller negotiations to illustrate the proposed exemption that was designed for that type of scenario. The Bureau believes the proposed commentary serves as useful guidance for the final rule because consumer-seller negotiations are a common reason that closing costs change. This commentary is intended to be illustrative and not representative of all changes that may occur prior to consummation. The final rule also includes comment 19(f)(2)(i)–1.iii, VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79878 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations which is similar to proposed comment 19(f)(2)(ii)–1. The comment illustrates a scenario in which a consumer-seller negotiation and an understated insurance premium cause closing costs to increase but do not trigger a new waiting period.

Comment 19(f)(2)(i)–1 has been revised to conform to final § 1026.19(f)(2)(i). Comments 19(f)(2)(i)– 1.i, –1.ii, and –1.iii also include technical revisions to clarify that the creditor must provide corrected disclosures so that the consumer receives them at or before consummation. Comment 19(f)(2)(i)–2 addresses the consumer’s right to inspect the Closing Disclosure during the business day before consummation. The comment explains that a settlement agent may satisfy the requirement to permit the consumer to inspect the disclosures under § 1026.19(f)(2)(i), subject to § 1026.19(f)(1)(v). Comment 19(f)(2)(ii)–1 contains guidance illustrating when the changes specified by § 1026.19(f)(2)(ii)(A) through (C) trigger a new waiting period and corrected disclosures. Comment 19(f)(2)(ii)–1.i includes examples in which the APR changes. These example are similar to existing commentary found in § 1026.19(a)(2)(ii) that implements MDIA’s timing requirements. Comment 19(f)(2)(ii)–1.i has been modified to reflect the requirements of § 1026.19(f)(2), to provide additional explanation for why different APRs in the examples would necessitate a new waiting period, and technical revisions for clarity. Comment 19(f)(2)(ii)–1.ii includes examples where the loan product changes, and comment 19(f)(2)(ii)–1.iii includes examples where a prepayment penalty is added. Final § 1026.19(f)(2)(i) and (ii) and their associated commentary are adopted pursuant to the Bureau’s legal authority under sections 105(a) of TILA, 19(a) of RESPA, 1032(a) of the Dodd- Frank Act, and, for residential mortgage transactions, sections 129B(e) of TILA and 1405(b) of the Dodd-Frank Act. The Bureau has considered the purposes for which it may exercise its authority under section 105(a) of TILA and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will help consumers avoid the uninformed use of credit by ensuring that consumers receive disclosures of the actual terms and costs associated with the mortgage loan transaction early enough that consumers have sufficient time to become fully informed as to changes to APR, changes to the loan product, and the addition of a prepayment penalty, which can impose long-term costs on consumers. The final rule and commentary also will help consumers avoid the uninformed use of credit by requiring that they receive corrected disclosures reflecting any changes to the actual terms of the transaction at or before consummation, and by requiring that consumers be permitted a right to inspect the Closing Disclosure for any changes that may occur before consummation. The final rule and commentary are consistent with section 129B(e) of TILA because failing to provide borrowers with enough time to become fully informed of major terms and costs of the transaction is not in the interest of the borrower. Similarly, failing to inform borrowers of any changed terms at or before consummation is not in the interest of the borrower.

The final rule and commentary are adopted pursuant to the Bureau’s authority under sections 105(a) of TILA and 19(a) of RESPA. The Bureau believes that the final rule and commentary will carry out the purposes of TILA and RESPA by ensuring meaningful disclosure of credit terms, more effective advance disclosure of settlement costs, and will result in the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services, consistent with sections 105(a) of TILA and 19(a) of RESPA, respectively. The Bureau also has considered the purposes for which it may exercise its authority under section 19(a) of RESPA and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will ensure more effective advance disclosure of settlement costs by requiring that creditors permit consumers a right to inspect the Closing Disclosure during the business day preceding consummation; by requiring that, if settlement costs change before consummation, creditors provide a corrected Closing Disclosure containing all changed terms at or before consummation; and by permitting consumers to make necessary changes affecting the settlement of their transactions.

The final rule and commentary are consistent with Dodd-Frank Act section 1032(a) because the features of mortgage loan transactions and settlement services will be more fully, accurately, and effectively disclosed to consumer in a manner that permits consumers to understand the costs, benefits, and risks associated with the mortgage loan and settlement services if consumers receive corrected disclosures three business days before consummation when changes occur to the transaction that can impose significant, long-term risks on consumers. The Bureau believes these risks arise where the loan’s previously disclosed APR becomes inaccurate, the loan product changes, or a prepayment penalty is added. In addition, the final rule and commentary are consistent with Dodd-Frank Act section 1032(a) because the features of mortgage loan transactions and settlement services will be more fully, accurately, and effectively disclosed to consumer in a manner that permits consumers to understand the costs, benefits, and risks associated with the mortgage loan and settlement services, if consumers receive the disclosures reflecting all of the terms and costs associated with their transactions at or before consummation, and if consumers are permitted a right to inspect the disclosures for changed terms during the business day before consummation. In addition, the Bureau has considered the purposes for which it may exercise its authority under section 1405(b) of the Dodd-Frank Act and, based on that review, believes that the final rule and commentary are appropriate. The final rule and commentary will improve consumer awareness and understanding of the mortgage loan transaction by ensuring that consumers receive the disclosures reflecting major changes to the terms and costs associated with their transactions three business days in advance of consummation, by ensuring that consumers receive corrected disclosures reflecting any changes to the terms of the transaction at or before consummation, and by ensuring that consumers have a right to inspect the disclosures reflecting all of the terms and costs associated with their transactions during the business day before consummation. The final rule and commentary also will be in the interest of consumers and in the public interest because the final rule and commentary may eliminate the opportunity for bad actors to surprise consumers with significant unexpected costs at the closing table, when consumers are less able to question such costs. Finally, the Bureau also is adopting the final rule and commentary pursuant to its authority under sections 1098, 1100A and 1032(f) of the Dodd- Frank Act.

19(f)(2)(iii) Changes Due to Events Occurring After Consummation The Bureau proposed § 1026.19(f)(2)(iii), which would have provided that, if an event occurs after consummation that causes the disclosures to become inaccurate, and VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79879 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 246 See, e.g., RESPA section 4(a) (‘‘The Bureau may, by regulation, permit the deletion from the forms prescribed under this section of items which are not, under local laws or customs, applicable in any locality’’) (12 U.S.C. 2603(a)) and 12 CFR 1024.10(d) (exemption, in certain circumstances, from inspection and delivery requirements of the RESPA settlement statement where the borrower or borrower’s agent does not attend the settlement, or when the settlement agent does not conduct a meeting of the parties for that purpose). such inaccuracy results solely from payments to a government entity in connection with the transaction, the creditor shall deliver corrected disclosures to the consumer no later than the third business day after the event occurs, provided the consumer receives the corrected disclosures no later than 30 days after consummation. The proposal was intended to address situations in which some costs are not known with absolute certainty until the loan documents are recorded. For example, a locality could change its schedule of recording fees, without advance notice, the day after the consumer signs the mortgage loan documents, but before the documents are recorded. The Bureau stated its belief that the final rule should provide flexibility to address this occurrence, so that these changes do not trigger an additional three-day waiting period. The Bureau proposed this provision pursuant to its authority under section 105(a) of TILA and section 19(a) of RESPA. Proposed comment 19(f)(2)(iii)– 1 would have clarified that this provision applies to payments imposed by government entities, such as taxes, recording fees, and other taxes related to the real estate transaction, and provided several illustrative examples. The Bureau solicited feedback on whether changes, other than payments to government entities, may occur after the real estate closing, and whether the regulation should provide additional flexibility for such changes. Comments The Bureau received public comments and an ex parte submission regarding post-consummation redisclosure requirements. Bank commenters and a GSE were concerned about creditor liability resulting from post-consummation redisclosure requirements, given that third-party fee changes, including recording fees and other charges, are often outside of the creditor’s control. Commenters recommended expanding the exemption for post-consummation changes beyond government entity payments, to cover any post-closing fee that is not under the creditor’s control, such as settlement agent fees, homeowner’s association fees, or third-party lender charges on a loan that is being refinanced. A trade association representing banks in a midwestern State, settlement agent commenters, and trade associations representing escrow agents and settlement agents explained that consummation of the loan and settlement of the entire transaction may occur at different times. Commenters explained that settlement may not end until several days after consummation of the loan. Commenters offered a variety of examples of events that could occur after consummation but before settlement that may cause amounts listed on the Closing Disclosure to change in addition to payments to a government entity, such as changes made by a consumer and seller during a final walk-through, the resolution of title issues, and other third-party charges.

A large bank and a trade association representing settlement agents explained that creditors occasionally understate final charges, but frequently will absorb the cost of the understatement. The commenter observed that post-closing redisclosure for these types of changes that do not affect the consumer will lead to consumer confusion and recommended instead requiring post-closing redisclosure only for changes that will impact the consumer, i.e., when changes to the Closing Disclosure entitle the consumer to a refund.

A GSE and a large bank explained that creditors frequently do not know if a government entity has made a change that would make the Closing Disclosure inaccurate during the 30 days after consummation because changes are frequently not disclosed until documents are stamped and returned. Commenters also explained that documents are often not returned until 60–180 days, and sometimes a year, after documents are recorded because of delays in government processing. Commenters were concerned that complying with the proposal’s 30-day period after consummation would be infeasible and recommended that the final rule extend the deadline and harmonize it with the deadline for providing revised disclosures for clerical errors in proposed § 1026.19(f)(2)(iv). A large bank recommended that a creditor should be required to provide a revised disclosure within 30 days of learning of an event, rather than within 30 days of consummation. A GSE recommended that creditors be required to provide the revised disclosure within seven business days of being notified of the issue, regardless of how long ago the loan was consummated.

Final Rule In general. After considering the comments and ex parte submission on this issue, the final rule adopts a requirement to provide corrected disclosures for post-consummation events. However, as discussed in more detail below, the final rule does not limit such events to changes arising from payments to a government entity to account for additional changes that may occur after consummation. In addition, the final rule modifies the time period in which corrected disclosures must be provided.

There is a clear consumer benefit to disclosing actual costs at or before consummation. However, based on comments received, the Bureau recognizes that this may simply not be feasible in certain instances. The Bureau understands from trade associations representing creditors and settlement agents that, in certain jurisdictions, consummation can occur several days before settlement concludes. RESPA section 4 provides that the settlement statement shall contain the amount imposed upon the consumer in connection with the settlement, and Regulation X § 1024.8(b)(1) sets forth the general rule that the settlement agent shall state the actual charges paid by the borrower and seller on the RESPA settlement statement. However, RESPA, Regulation X, and the HUD RESPA FAQs do not directly address subsequent revisions to the RESPA settlement statement, other than for correcting inadvertent or technical errors or curing tolerance violations. Thus, RESPA and Regulation X provide flexibility to account for the variety of settlement practices across the country.246 Furthermore, Regulation Z also provide flexibility for changes that may occur after a disclosure is provided. Regulation Z § 1026.17(e) currently provides that events that occur subsequent to the provision of a disclosure do not render the disclosure inaccurate, but that redisclosure under certain circumstances may be required. In integrating TILA’s and RESPA’s disclosure requirements, the Bureau believes it is appropriate for the final rule to provide flexibility to account for post-consummation events that may make earlier disclosures inaccurate to reflect the variety of settlement practices across the country. Without a more flexible exception to account for postconsummation changes, the Bureau is concerned that creditors and settlement agents may face compliance difficulties with disclosing the ‘‘actual terms’’ of the transaction at or before consummation, but before settlement is concluded. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79880 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations Concern about liability risk may create unnecessary inefficiencies and disrupt the consumer’s and seller’s transactions. Post-consummation events requiring redisclosure. As discussed above, the Bureau intends for § 1026.19(f)(2)(iii) to account for changes that may occur during the normal settlement process after the point of ‘‘consummation’’ of the credit transaction. Accordingly, the rule refers to ‘‘events in connection with the settlement of the transaction’’ to reflect similar language in RESPA section 4(a), which requires that the RESPA settlement statement itemize all charges ‘‘in connection with the settlement.’’ 12 U.S.C. 2603(a). Section 1026.19(f)(2)(iii) provides only for revisions for inaccuracies due to events occurring after consummation. Inaccuracies due to events occurring at or before consummation are covered by the other provisions of § 1026.19(f)(1)(i), (f)(2)(i), and (f)(2)(ii). The Bureau expects creditors and, as applicable, settlement agents, will conduct due diligence to ensure the Closing Disclosure contains accurate information at or before consummation, consistent with the requirements of § 1026.19(f). As discussed in the section-by-section analysis of § 1026.19(f)(1)(v) above, creditors may divide responsibility for providing the Closing Disclosure with settlement agents.

The final rule requires redisclosure only for post-consummation events that change an amount actually paid by the consumer. The Bureau does not believe consumers would benefit from revisions to the Closing Disclosure due to postconsummation events that do not affect charges imposed on them. Further, the Bureau believes this approach is consistent with RESPA and Regulation X. RESPA section 4 provides that the settlement statement shall contain the amount imposed upon the consumer in connection with the settlement. Regulation X § 1024.8(b)(1) provides the general rule that the settlement agent shall state the actual charges paid by the borrower and seller on the RESPA settlement statement. Thus, the Bureau believes a redisclosure to the consumer after consummation should be required only if a subsequent event changes a charge actually paid by the consumer and not for any change to the transaction.

The final rule imposes a redisclosure requirement based on changes attributable to post-consummation events occurring during the 30-day period following consummation. The Bureau believes a 30-day period will account for most events that would change the amount actually paid by the consumer and will provide flexibility to account for the variety of settlement practices across the country. The Bureau believes a 30-day period to identify post-consummation events is sufficient in light of comments and its understanding of current industry practice.

Several commenters, including a GSE and a large bank provided feedback that backlogs in county recorder’s offices have resulted in delays of several months or, in some cases, a year. To address this issue, commenters recommended that the final rule require that creditors provide corrected disclosures within some period of time (e.g., seven or 30 days) of being notified of a change to the actual terms of the transaction, without regard to how long after consummation such event occurs. The Bureau recognizes that the charges for some items, such as recording fees, may not be known with certainty until several months, and sometimes a year, after consummation. However, final § 1026.19(f)(2)(iii) does not provide for a long-term or open-ended period to account for changes to the Closing Disclosure because the Bureau does not believe such a requirement would provide significant consumer benefit in relation to the potential burden. The Bureau is concerned that such a requirement would impose costly ongoing compliance costs on creditors to monitor and analyze all activity that may increase an amount actually paid by the consumer in connection with the settlement of the transaction. 30-day period for providing corrected disclosures. The Bureau understands that creditors will not necessarily know an event has occurred that may make the Closing Disclosure incorrect at the time the event occurs. Accordingly, the final rule requires redisclosure not later than 30 days after the creditor’s receipt of information sufficient to establish that such an event in connection with the settlement of the transaction has occurred. Under final § 1026.19(f)(2)(iii), if during the 30-day period following consummation, an event in connection with the settlement of the transaction occurs that causes the disclosures provided under § 1026.19(f)(1)(i) to become inaccurate, the creditor must deliver or place in the mail corrected disclosures to the consumer not later than 30 days after receiving information sufficient to establish that such event has occurred. The language regarding information sufficient to establish that an event in connection with the settlement of the transaction operates in the same manner as the standard that applies to creditors in the context of providing revised Loan Estimates under § 1026.19(e)(4)(i).

Unlike the standard in § 1026.19(e)(4)(i), which requires creditors to provide revised disclosures within three business days of receiving sufficient information to establish that an event has occurred, final § 1026.19(f)(2)(iii) provides that the creditor may provide corrected disclosures not later than 30 days after receiving information sufficient to establish an event has occurred. The Bureau believes a 30-day period balances creditors’ interests in having sufficient time to process revisions to the Closing Disclosure with the interests of consumers in receiving corrected disclosures within a reasonable time after an event occurs. The Bureau also believes a 30-day period is reasonable in light of existing requirements under Regulation X that impose a 30-day deadline after settlement to cure tolerance violations and correct technical errors. Thus, the Bureau believes industry already has systems in place for conducting quality-control reviews during this period. The 30-day period also is intended to harmonize the time period creditors have to cure tolerance violations that may arise due to events after consummation during the course of settlement under final § 1026.19(f)(2)(v). The Bureau believes this will reduce the number of corrected disclosures consumers may receive after consummation. Some postconsummation events covered by § 1026.19(f)(2)(iii) that cause the Closing Disclosure to become inaccurate also may be a tolerance violation for which a creditor provides a cure under § 1026.19(f)(2)(v). As discussed in more detail in the section-by-section analysis of § 1026.19(f)(2)(v), creditors must provide corrected disclosures to cure a tolerance violation no later than 60 days after consummation. Thus, where a creditor learns of a tolerance violation attributable to a post-consummation event during the 30-day period after consummation, it would comply with § 1026.19(f)(2)(iii) and (f)(2)(v) by providing the consumer with a corrected Closing Disclosure that reflects the tolerance cure not later than 30 days after receiving information sufficient to establish that the event has occurred. In addition to accommodating the 60-day period under § 1026.19(f)(2)(v), the 30-day period under § 1026.19(f)(2)(iii) accommodates the 60-day period under § 1026.19(f)(2)(iv) for providing corrected disclosures correcting nonnumeric clerical errors. Thus, the Bureau believes the 30-day period for VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79881 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 247 ‘‘A creditor or assignee has no liability under this section or section 108 or section 112 for any failure to comply with any requirement imposed under this chapter or chapter 5, if within sixty days after discovering an error, whether pursuant to a final written examination or notice issued under section 108(e)(1) or through the creditor’s or assignee’s own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.’’ 15 U.S.C. 1640(b). providing corrected disclosures under § 1026.19(f)(2)(iii) will facilitate compliance and reduce the number of corrected disclosures received by consumers after consummation. Final provisions. For the aforementioned reasons, the Bureau is adopting § 1026.19(f)(2)(iii) to provide that if during the 30-day period following consummation, an event in connection with the settlement of the transaction occurs that causes disclosures required under § 1026.19(f)(1)(i) to become inaccurate, and such inaccuracy results in a change to an amount actually paid by the consumer from that amount disclosed under § 1026.19(f)(1)(i), the creditor shall deliver or place in the mail corrected disclosures within 30 days of receiving information sufficient to establish that such event has occurred. The final rule and commentary use the term ‘‘corrected disclosures’’ rather than ‘‘revised disclosures’’ to reflect the terminology currently used with respect to the final TILA disclosures in Regulation Z and for greater consistency throughout § 1026.19(f). In addition, for consistency with other requirements under § 1026.19(e) and(f), the final rule also requires that the creditor deliver or place in the mail the Closing Disclosure. The final rule adopts comment 19(f)(2)(iii)–1 with revisions to conform to the final rule as adopted. The comment restates § 1026.19(f)(2)(iii) and contains a cross-reference to comment 19(e)(4)(i)–1 for additional guidance on when sufficient information has been received to establish that an event has occurred for the purposes of § 1026.19(f)(2)(iii). The comment generally adopts the proposed examples illustrating the original provision, but has made conforming changes to reflect the revised timing requirements applicable to § 1026.19(f)(2)(iii) and to illustrate how § 1026.19(f)(2)(iii) interacts with other provisions of the final rule.

Comment 19(f)(2)(iii)–1.i makes a technical revision and omits language from the example in proposed comment 19(f)(2)(iii)–1.i that would have illustrated the discovery of a fee change on the 28th day after consummation. This example is inapplicable in light of the revision to the timing requirement in § 1026.19(f)(2)(iii). Comment 19(f)(2)(iii)–1.ii makes a technical revision and revises the example of proposed comment 19(f)(2)(iii)–1.ii in which transfer taxes owed to the State differ from those previously disclosed to illustrate the timing requirements of final § 1026.19(f)(2)(iii) and the interaction of this provision with final § 1026.19(f)(2)(v) in which a cure for a tolerance violation is provided. Comment 19(f)(2)(iii)–1.iii modifies the example in proposed comment 19(f)(2)(iii)–1.iii, in which a $500 nuisance abatement assessment is discovered after consummation. The comment revises the example to illustrate a scenario in which the postconsummation event does not result in a change to an amount actually paid by the consumer, but does result in such a change for the seller, pursuant to § 1026.19(f)(4)(ii). Comment 19(f)(2)(iii)–1.iv includes revised language to clarify further the example in which the municipality in which the property is located raises property tax rates ten days after consummation. The comment clarifies that the scenario illustrated is one in which property taxes are raised ‘‘effective after the date on which the settlement concludes.’’ The comment explains that § 1026.19(f)(2)(iii) does not require the creditor to provide the consumer with corrected disclosures because the increase in property tax rates is not in connection with the settlement of the transaction.

Final § 1026.19(f)(2)(iii) and its associated commentary will prevent circumvention and evasion of, and will facilitate compliance with, TILA, by ensuring that consumers receive corrected disclosures of the final terms and costs of the transaction, consistent with section 105(a) of TILA. The final rule and commentary are also adopted pursuant to the Bureau’s authority to implement section 4 of RESPA, consistent with section 19(a) of RESPA. 19(f)(2)(iv) Changes Due to Clerical Errors Regulation X § 1024.8(c) generally provides that an inadvertent or technical error in completing the RESPA settlement statement shall not be deemed a violation of section 4 of RESPA if a revised settlement statement is provided within 30 calendar days after settlement. Section 130(c) of TILA provides that creditors and assignees cannot be liable for bona fide errors, including clerical errors. TILA section 130(b) contains a general cure provision, which relieves creditors of civil liability under certain circumstances, including if, within 60 days of identifying an error, the creditor notifies the person concerned and makes whatever adjustments are necessary.247 RESPA does not contain a general cure provision. Proposed § 1026.19(f)(2)(iv) would have provided that a creditor does not violate § 1026.19(f)(1)(i) if the disclosures contain non-numeric clerical errors, provided the creditor delivers corrected disclosures as soon as reasonably practicable and no later than 30 days after consummation. The Bureau proposed this provision pursuant to its authority under sections 105(a) of TILA and 19(a) of RESPA. Proposed comment 19(f)(2)(iv)–1 would have clarified that clerical errors are errors such as typographical errors, or other minor errors that do not affect the amount owed by the consumer. The Bureau solicited feedback on whether the regulations should provide flexibility for numeric clerical errors, and how such flexibility could be provided without undermining the reliability of the disclosures provided to consumers at or before consummation. Comments Commenters requested that the Bureau provide more definitions and clarification of § 1026.19(f)(2)(iv). Two consumer advocacy groups submitting a joint comment requested that the Bureau clarify that a clerical error under § 1026.19(f)(2)(iv) should not include any error regarding the ‘‘actual terms of the transaction.’’ They also stated that if an error is discovered before consummation, a revised disclosure should be provided no later than consummation. The commenters recommended that the final rule include in commentary an example of a nonnumeric error that would not be considered ‘‘clerical’’ that would require redisclosure before consummation. A GSE explained that it is not uncommon that clerical errors are noticed months after consummation when a loan file undergoes qualitycontrol review by a secondary market investor. The commenter recommended that the timing of § 1026.19(f)(2)(iv) should be harmonized with § 1026.19(f)(2)(iii), and that creditors should be required to provide a revised disclosure within seven business days of being notified of the error, regardless of how long after consummation the error was discovered. A trade VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79882 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations association representing banks requested that the cure period be extended from 30 days to 90 days to account for quality control cycles. In addition to non-numeric errors, commenters requested that the rule address numeric errors. A large bank requested that new exception should be added for redisclosures required due to numerical typographical errors, without any dollar amount or other threshold. A title insurance company stated that the rule should provide flexibility for ‘‘numeric clerical errors,’’ subject to the Bureau’s promulgation of a specific definition of the term and providing specific examples. The commenter recommended that the final rule include a definition of ‘‘numeric clerical errors’’ limited to inadvertent misstatements of charges known by or previously disclosed to the consumer, where the creditor can document such knowledge. Another title insurance company commenter recommended that numeric errors include errors that do not affect the consumer. A title insurance company stated that, for overstatement and understatement errors, creditors should be required to provide a revised Closing Disclosure within the timeframe under § 1026.19(f)(2)(iv). A title insurance company stated that, for understatement errors, creditors should provide a revised Closing Disclosure at or before consummation and be able to collect additional amounts owed by the consumer, subject to the proposed $100 de minimis threshold.

A large bank requested that the final rule exempt numerical typographical errors, without regard to any dollar amount or threshold, such as when a fee correctly stated on the Loan Estimate as a $2,000 fee is mistakenly stated on the initial Closing Disclosure as a $200 fee. A trade association representing banks suggested that, if a fee is listed in the wrong category of the Closing Disclosure, but the correct amount is disclosed, a corrected Closing Disclosure should be provided at consummation.

Final Rule Final § 1026.19(f)(2)(iv) is adopted substantially as proposed. The final rule provides a 60-day period for providing corrected disclosures and omits the requirement that creditors provide revised disclosures ‘‘as soon as reasonably practicable.’’ The final rule adopts comment 19(f)(2)(iv)–1 substantially as proposed, modified as discussed above and to conform to the final rule.

By finalizing 1026.19(f)(2)(iv), the Bureau does not intend to modify the scope or applicability of TILA section 130(b) or (c), which sets forth treatment for errors related to certain disclosures. The proposal would have incorporated existing requirements in Regulation X that clarify whether certain technical errors constitute a violation of RESPA section 4. By finalizing this requirement in § 1026.19(f)(2)(iv), the Bureau intends only to clarify that a creditor does not violate § 1026.19(f)(1)(i) if the creditor corrects a non-numeric clerical error within the first 60 days of consummation. The Bureau does not intend to affect statutory liability provisions for other types of errors. Thus, the Bureau does not believe it is necessary to define numeric errors and address how they must be cured in § 1026.19(f)(2)(iv).

Moreover, the Bureau does not believe it would be appropriate to create a category of ‘‘numeric clerical errors,’’ such as those limited to inadvertent misstatements of charges known by or previously disclosed to the consumer where the creditor can document such knowledge. The Bureau does not believe the fact that a charge was disclosed in a different manner to a consumer before an incorrect disclosure was provided is material for purposes of classifying a clerical error. The Bureau is concerned such a classification could undermine the value of the disclosures, which consumers should be able to rely on for accuracy. The Bureau also declines to classify errors based on whether they include errors that affect the consumer. The disclosures required under § 1026.19(f)(1)(i) are required because they contain information relevant to costs associated with the transaction, which inherently affects the consumer. The Bureau does not believe correcting non-numeric clerical errors will impose a significant compliance burden because curing such errors can be done by providing corrected disclosures rather than making substantial revisions to the consumer’s account. The Bureau also notes that it has harmonized the timing requirements for providing corrected disclosures under 1026.19(f)(2)(v) in the final rule, to require that creditors deliver corrected disclosures documenting a cure for tolerance violations no later than 60 days after consummation. The Bureau believes this approach will limit the number of corrected disclosures received by consumers and will facilitate compliance with the disclosure requirements. In response to comments, the final rule includes an example of a nonnumeric error in comment 19(f)(2)(iv)– 1 that would not be considered ‘‘clerical.’’ However, the Bureau declines to clarify that a clerical error does not include any error regarding the actual terms of the transaction because such language could cause confusion. The requirement to disclose the actual terms of the transaction covers a wide array of disclosures and § 1026.19(f)(2)(iv) applies to a narrow set of errors.

The final rule revises the proposed 30-day period to a 60-day period and removes the condition that revised disclosures be provided ‘‘as soon as reasonably practicable.’’ The Bureau believes harmonizing the timing requirements with the timing requirements applicable to § 1026.19(f)(2)(v) will facilitate compliance by helping creditors coordinate providing corrected disclosures that also set forth cures for tolerance violations. As discussed in the section-by-section analysis of § 1026.19(f)(2)(v), the Bureau believes a 60-day period is warranted to facilitate compliance in jurisdictions in which settlement may conclude after consummation. The final rule omits the ‘‘as soon as reasonably practicable’’ language to set forth a clear deadline for compliance. The Bureau does not believe removing this language or extending the period for providing corrected disclosures will harm consumers because the risk posed by disclosures that contain a non-numeric, clerical error is minimal. The final rule and commentary use the term ‘‘corrected disclosures’’ rather than ‘‘revised disclosures’’ to reflect the terminology currently used with respect to the final TILA disclosures in Regulation Z and for greater consistency throughout § 1026.19(f). In addition, for consistency with other provisions of § 1026.19(f), the final rule also requires the creditor deliver or place in the mail a corrected Closing Disclosure. Final § 1026.19(f)(2)(iv) and comment 19(f)(2)(iv)–1 will prevent circumvention and evasion of, and will facilitate compliance with, TILA, by ensuring that consumers receive corrected disclosures consistent with section 105(a) of TILA. The final rule and commentary also will result in the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services by ensuring that the consumer’s records correctly reflect the terms, payments, and entities involved in the transaction, consistent with section 19(a) of RESPA.

19(f)(2)(v) Refunds Related to the Good Faith Analysis Neither RESPA nor Regulation Z expressly requires creditors to refund money to the consumer based on VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79883 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations variations between the disclosed estimated costs of settlement services and the amounts for such settlement services actually paid by the consumer at consummation. Regulation X § 1024.7(i), however, provides that a lender or mortgage broker violates section 5 of RESPA if any charges at settlement exceed the charges listed on the RESPA GFE by more than the permitted tolerances, provided, however, that the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded at settlement or within 30 calendar days after settlement. As noted above, section 130 of TILA has a similar provision, with respect to civil liability, which relieves creditors and assignees of civil liability under certain circumstances, including if, within 60 days of identifying an error, the creditor notifies the person concerned and makes whatever adjustments are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed. Accordingly, proposed § 1026.19(f)(2)(v) would have provided that, if amounts paid by the consumer exceed the amounts specified under § 1026.19(e)(3)(i) or (ii), the creditor complies with § 1026.19(e)(1)(i) if the creditor refunds the excess to the consumer as soon as reasonably practicable and no later than 30 days after consummation, and the creditor complies with § 1026.19(f)(1)(i) if the creditor provides revised disclosures that reflect such refund as soon as reasonably practicable and no later than 30 days after consummation. The Bureau proposed this provision pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, and, with respect to residential mortgage loans, section 1405(b) of the Dodd-Frank Act.

Proposed comment 19(f)(2)(v)–1 would have discussed refunds related to the good faith analysis. The proposed comment would have explained the requirement under § 1026.19(f)(2)(v) providing that, if amounts paid by the consumer exceed the amounts specified under § 1026.19(e)(3)(i) or (ii), the creditor does not violate § 1026.19(e)(1)(i) if the creditor delivers disclosures revised to reflect the refund of such excess as soon as reasonably practicable and no later than 30 days after consummation. This proposed comment also would have included illustrative examples of these requirements.

Comments Several commenters believed that the cure period was too narrow, would not give creditors sufficient time to conduct audit reviews or provide an incentive to cure violations after the 30-day period, and appeared arbitrary. Commenters explained that mortgage lending is a cyclical business and a 30-day period would be too short when lending is active. A large bank commenter stated that a 30-day period could prove impracticable when a creditor is reviewing loans purchased from a correspondent lender. The commenter stated that the Bureau proposed to adopt the Regulation X 30-day cure period but did not explain why it did not adopt TILA’s cure period or offer any data that would suggest the period under TILA section 130 did not provide adequate consumer protection.

Bank and trade associations representing banks and financial companies also requested that the cure period be measured from the discovery of an error rather than from consummation, consistent with TILA section 130. Commenters explained that certain violations are known at or before consummation, so the cure period would be measured from that point in time. Commenters also explained that cure periods measured more than 30 days from consummation would provide an incentive for creditors to correct errors discovered as part of quality control testing that occurs more than 30 days after consummation. One large bank commenter recommended that cures be provided within 30 days of discovery of an error. A community bank holding company commenter stated that a 90-day period would give creditors additional time to conduct audit reviews. A large bank and a trade association representing banks and financial companies recommended a cure period from the date an error is discovered, consistent with TILA section 130. Several commenters recommended a 60-day cure period measured from the discovery of an error. A trade association representing banks and financial companies, a community bank, and a law firm commenter believed that a 90-day cure period was appropriate, for example, to account for periods of more active mortgage lending and in light of changes in industry practice that have extended quality control periods to comply with additional regulations. A trade association representing banks and financial companies requested that the final rule distinguish between intentional and unintentional violations and that an extended cure period be permitted for unintentional violations. A consumer advocacy group commenter stated that creditors should be limited to correcting errors before litigation or rescission, and that the final rule should clarify that creditors may only correct errors before the consumer notifies the creditor of an error. The commenter explained that, absent clarification, there would likely be litigation over what constitutes a good faith error and what notice to a creditor triggers the time period for the creditor to correct the error without facing liability. The commenter believed that such a rule would help consumers exercise the right of rescission because it would prevent creditors from making a correction to avoid triggering rescission rights. The commenter also requested that the final rule contain a presumption that systemic errors are not good faith errors because such errors are unlikely to arise in the presence of adequate policies and procedures. Two consumer advocacy groups submitting a joint comment requested clarification on how refunds would be provided to prevent unjust enrichment by creditors that exceed the good faith estimate tolerances when a consumer finances closing costs. The commenters were concerned that, if the creditor simply issues a cash refund, the consumer would continue paying interest on the financed closing costs. The commenters set forth an example in which a borrower finances $100 of closing costs in a 30-year mortgage loan having an eight percent fixed annual rate, and the creditor sends the consumer a $100 refund check, illustrating that the creditor will still earn $240 on that refund over the life of the loan unless the borrower sends an extra $100 payment to her mortgage servicer.

The commenters explained that typical consumers are unlikely to realize they must use the refund check to pay down the loan to avoid being charged additional interest. The commenters recommended that the final rule add a requirement specifying that, whenever a consumer finances any closing costs, the creditor must apply any refund as a credit against the principal balance of the loan, up to the amount of closing costs financed.

Commenters also requested clarification on the mechanics for tolerance cures. A community bank commenter asked whether a revised Closing Disclosure must be provided with the refund. A trade association representing banks and financial companies requested that the final rule clarify whether settlement agents may VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00155 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79884 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations cure a tolerance violation. A law firm commenter asked that the final rule clarify that a person’s non-compliance with the rule during the cure period would not constitute a violation. Final Rule The Bureau has considered the comments on this issue and has determined to finalize § 1026.19(f)(2)(v) with a 60-day period as the deadline for providing refunds for tolerance cures and corrected disclosures reflecting the refund. While Regulation X § 1024.7(i) permits loan originators to cure tolerance violations by reimbursing to the borrower the amount by which the tolerance was exceeded at settlement or within 30 calendar days after settlement, the Bureau believes a 60-day period, measured from consummation, is warranted in light of the revisions to § 1026.19(e)(3) with respect to the good faith estimate requirements and to § 1026.19(f)(2)(iii) with respect to postconsummation events.

Under § 1026.19(e)(3)(i), 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), except as otherwise provided in § 1026.19(e)(3)(ii) through (iv). Comment 19(e)(3)(i)–2 clarifies 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 by the consumer at consummation or settlement, whichever is later. Thus, in jurisdictions where settlement occurs after consummation, some tolerance violations may not be known until some time after consummation. The Bureau believes creditors in those jurisdictions should be permitted to have sufficient time to provide refunds for tolerance violations that may not be known until after consummation, and that a 60-day period after consummation will account for jurisdictions in which settlement occurs after consummation.

Because Regulation X currently provides creditors a 30-day period after ‘‘settlement’’ to cure tolerance violations, the Bureau believes a 60-day period after consummation under the final rule will give all creditors sufficient time to cure tolerance violations. As discussed in the sectionby-section analysis of § 1026.19(f)(2)(iii), creditors may need to make revisions for subsequent events occurring within 30 days after consummation. Because a revision under § 1026.19(f)(2)(iii) may result in a tolerance violation, the Bureau believes it is necessary to ensure creditors have a 30-day period to cure such violations and provide corrected disclosures.

The Bureau believes that providing creditors with sufficient time to obtain revised cost information, revise the integrated disclosures, prepare payments for such revised costs or the cures to be paid to consumers, and deliver such payments to consumers will facilitate compliance and ensure accurate disclosures and payments for consumers. The final rule also removes the condition that refunds and revised disclosures be provided ‘‘as soon as reasonably practicable,’’ which the Bureau believes will facilitate compliance by establishing a bright-line standard by which revised disclosures must be mailed or delivered. The Bureau does not believe lengthening the cure period to 60 days after consummation will significantly undermine an existing consumer protection because it is synchronous with the cure period under TILA section 130(b) for errors corrected within 60 days of discovery of the error and because the cure will be provided in the form of a refund. The final rule does not extend the cure period further than 60 days after consummation or measure it from a date other than consummation. The Bureau believes that doing so would undermine the incentive for creditors to conduct quality control reviews as soon as reasonably practicable after consummation. In addition, the Bureau notes that creditors currently must provide tolerance cures within 30 days of settlement under Regulation X § 1024.7(i). Accordingly, a 60-day period after consummation may ease burden on creditors. The final rule does not adopt different rules for curing intentional and unintentional violations. While TILA section 130(c) contains special liability provisions for unintentional violations, the Bureau does not believe it would be appropriate to condition tolerance cures based on whether a violation was intentional. The Bureau believes an objective, bright-line standard serves the interests of consumers, the supervisory activities of regulatory agencies, and industry compliance better than a timing standard that depends on a factintensive inquiry.

The final rule does not expressly limit a creditor’s ability to correct errors to situations before a consumer has notified the creditor of the error. The Bureau has determined to follow the current Regulation X cure provision for increases beyond the limitations set forth in § 1026.19(e)(3), which does not contain the type of limitation requested by the commenter. As noted above, the Bureau is not seeking to alter the liability provisions under TILA. For the aforementioned reasons, the final rule adopts a 60-day period for curing tolerance violations and providing revised disclosures. The final rule removes the proposed requirement that the disclosures be provided ‘‘as soon as reasonably practicable.’’ Final § 1026.19(f)(2)(v) provides that, if amounts paid by the consumer exceed the amounts specified under § 1026.19((e)(3)(i) or (ii), the creditor complies with § 1026.19(e)(1)(i) if the creditor refunds the excess to the consumer no later than 60 days after consummation, and the creditor complies with § 1026.19(f)(1)(i) if the creditor delivers or places in the mail corrected disclosures that reflect such refund no later than 60 days after consummation. The Bureau adopts comment 19(f)(2)(v)–1, revised to conform to the final rule. In addition, for clarity, the example in the comment has been modified to use the term ‘‘consummation’’ instead of ‘‘closing,’’ and explains how the creditor in this example complies with § 1026.19(e)(1)(i) and (f)(1)(i) where a tolerance cure and corrected disclosures must be provided. The final rule and commentary use the term ‘‘corrected disclosures’’ rather than ‘‘revised disclosures’’ to reflect the terminology currently used with respect to the final TILA disclosures in Regulation Z and for greater consistency throughout § 1026.19(f). In addition, for consistency with other requirements under § 1026.19(f), the final rule requires the creditor to deliver or place in the mail the corrected Closing Disclosure. Commenters asked whether settlement agents may cure tolerance violations. Under the final rule, although creditors are responsible for complying with the good faith tolerance requirements and are responsible for providing cures, see § 1026.19(e)(3), settlement agents may provide revised disclosures in accordance with § 1026.19(f)(1)(v).

Commenters asked how tolerance cures would be documented on revised disclosures, and some commenters requested that the final rule provide clarification on how refunds must be provided in the event that a creditor exceeds tolerances when a consumer finances closing costs. If the amounts paid by the consumer exceed the amounts specified under § 1026.19(e)(3)(i) or (e)(3)(ii), § 1026.19(f)(2)(v) requires the creditor to refund the excess to the consumer. Comment 19(f)(2)(v)–1 includes a crossreference to comment 38(h)(3)–2, which provides guidance on disclosing VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79885 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations refunds. With respect to providing refunds where closing costs are financed, as described by commenters, the Bureau does not believe it is practicable to provide guidance on the variety of situations in which refunds may be provided, particularly because consumers may have different preferences for how they wish to apply refunds.

A commenter asked that the final rule clarify that a person’s non-compliance with the rule during the cure period would not constitute a violation. Final § 1026.19(f)(2)(v) provides that if amounts paid by the consumer exceed the amounts specified under § 1026.19(e)(3)(i) or (ii), the creditor complies with § 1026.19(e)(1)(i) if the creditor refunds the excess to the consumer no later than 60 days after consummation, and the creditor complies with paragraph § 1026.19(f)(1)(i) if the creditor delivers or places in the mail corrected disclosures that reflect such refund no later than 60 days after consummation. Thus, creditors do not violate § 1026.19(e) or (f) in connection with the refund changing the disclosures if they provide corrected disclosures in accordance with the timeframe in the final rule.

This final rule and commentary will enable meaningful disclosure of credit terms, prevent circumvention and evasion of TILA, and will facilitate compliance with TILA by enabling creditors to refund amounts collected in excess of the good faith requirements, consistent with TILA section 105(a). This also will result in the meaningful advance disclosure of settlement costs and the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services by enabling creditors to refund amounts collected in excess of the good faith requirements, thereby furthering the meaningfulness and reliability of the estimated disclosures, consistent with section 19(a) of RESPA. 19(f)(3) Charges Disclosed 19(f)(3)(i) Actual Charge Section 4 of RESPA provides that the settlement statement shall contain ‘‘all charges imposed upon the borrower’’ in connection with the settlement. 12 U.S.C. 2603(a). Regulation X § 1024.8(b)(1) currently provides the general rule that the settlement agent shall state the actual charges paid by the borrower and seller on the RESPA settlement statement. The Bureau proposed § 1026.19(f)(3)(i), which would have provided that the amount imposed upon the consumer for any settlement service shall not exceed the amount actually received by the service provider for that service, except if the charge is an average charge, as provided under § 1026.19(f)(3)(ii). The Bureau proposed this provision pursuant to its authority under section 105(a) of TILA, section 19(a) of RESPA, Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd-Frank Act section 1405(b).

Proposed comment 19(f)(3)(i)–1 would have explained that § 1026.19(f)(3)(i) provides the general rule that the amount imposed upon the consumer for any settlement service shall not exceed the amount actually received by the service provider for that service. The comment would have explained further that, except as otherwise provided in § 1026.19(f)(3)(ii), a creditor violates § 1026.19(f)(3)(i) if the amount imposed upon the consumer exceeds the amount actually received by the service provider for that service. The Bureau explained that the proposed rule would prevent circumvention and evasion of, and will facilitate compliance with, TILA by requiring disclosure of the actual terms and costs of the transaction, consistent with section 105(a) of TILA. The Bureau also explained that the proposed rule would implement the requirements of RESPA section 4, pursuant to the Bureau’s implementation authority under RESPA section 19(a), which also would result in the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services, consistent with RESPA sections 2(b) and 8. The Bureau explained that the proposed rule also would ensure that the features of the consumer’s mortgage loan are fully and accurately disclosed to the consumer, consistent with Dodd-Frank Act section 1032(a). The Bureau further explained that the proposed rule would improve consumer awareness and understanding of transactions involving residential mortgage loans and is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b).

The Bureau received few comments on this aspect of the proposal. A trade association representing banks explained that the proposed rule appears to impose a zero tolerance on charges imposed on consumer, unless average charges are used. The commenter explained that, under Regulation Z § 1026.4(c)(7), certain third-party fees are excluded from the finance charge if they are ‘‘bona fide.’’ The commenter explained that creditors have some protection against inadvertent mistakes because of the $100 finance charge tolerance under § 1026.18(d)(1). The commenter recommended that the final rule include a $100 tolerance, adjusted annually, for charges disclosed on the Closing Disclosure. One individual escrow agent requested that the Bureau clarify how settlement agents must balance their accounts if the amount of the title policy is not the actual premium. The Bureau has addressed questions with respect to specific disclosures in the applicable section-by-section analyses of § 1026.38. The Bureau has considered the comment from the trade association and has determined to adopt the § 1026.19(f)(3)(i) and its associated commentary substantially as proposed, under the authority described in the proposal, with technical revisions to amend the reference to ‘‘service provided,’’ and refers instead to ‘‘settlement service provider’’ for clarity. The final rule does not include a $100 tolerance for settlement charges that may be inaccurately disclosed. The charges disclosed on the Closing Disclosure are subject to the accuracy standards in § 1026.19(f)(1)(i). In addition, the final rule affords creditors more flexibility with respect to events occurring after consummation that make the previous disclosures inaccurate. In addition, as noted above, the Bureau does not intend to alter the existing provisions under TILA section 130 regarding the curing of errors by creditors.

19(f)(3)(ii) Average Charge As part of HUD’s 2008 RESPA Final Rule, HUD adopted a limited exception to the requirement that the settlement statement shall contain the amount imposed on the borrower, which shall not be more than the amount received by the settlement service provider. See 12 U.S.C. 2603(a), 2607(b). Under current Regulation X, a lender or settlement service provider may charge more for a settlement service than the amount paid for that service if the charge is an average charge. Specifically, Regulation X § 1024.8(b) provides that the average charge for a settlement service shall be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider on behalf of borrowers and sellers for a particular class of transactions involving federally related mortgage loans, and that the total amounts paid by borrowers and sellers for a settlement service based on the use of an average charge may not exceed the total amounts paid to the providers of VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79886 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 248 See 73 FR 14030, 14051–14052 (March 14, 2008). Section 8(c)(5) of RESPA provided that, ‘‘Nothing in this section shall be construed as that service for the particular class of transactions.

Section 1024.8(b)(2) also provides that, the settlement service provider shall define the particular class of transactions for purposes of calculating the average charge as all transactions involving federally related mortgage loans for a period of time as determined by the settlement service provider, but not less than 30 calendar days and not more than six months, a geographic area as determined by the settlement service provider, and a type of loan as determined by the settlement service provider. Regulation X also requires a settlement service provider to use an average charge in the same class of transactions for which the charge was calculated, and if the settlement service provider uses the average charge for any transaction in the class, then the settlement service provider must use the same average charge in every transaction within that class for which a RESPA GFE was provided. Id. Regulation X prohibits the use of an average charge for any settlement service if the charge for the service is based on the loan amount or property value, such as transfer taxes, interest charges, reserves or escrow, or any type of insurance, including mortgage insurance, title insurance, or hazard insurance, and also requires the settlement service provider to retain all documentation used to calculate the average charge for a particular class of transactions for at least three years after any settlement for which that average charge was used. Id.

Proposed § 1026.19(f)(3)(ii) would have provided that a creditor or settlement service provider may charge a consumer or seller the average charge for a settlement service if the average charge is no more than the average amount paid for that service by or on behalf of all consumers and sellers for a class of transactions, the creditor or settlement service provider defines the class of transactions based on an appropriate period of time, geographic area, and type of loan, the creditor or settlement service provider uses the same average charge for every transaction within the defined class, and the creditor or settlement service provider does not use an average charge for any type of insurance, for any charge based on the loan amount or property value, or if doing so is otherwise prohibited by law. The Bureau proposed this provision pursuant to its authority under section 105(a) of TILA and 19(a) of RESPA.

Proposed comment 19(f)(3)(ii)–1 would have explained that averagecharge pricing is the exception to the rule in § 1026.19(f)(3)(i) that consumers shall not pay more than the exact amount charged by a settlement service provider for the performance of that service. The comment would have clarified that, if the creditor develops representative samples of specific settlement costs for a particular class of transactions, the creditor may charge the average cost for that settlement service instead of the actual cost for such transactions, and that an average-charge program may not be used in a way that inflates the cost for settlement services overall.

Proposed comment 19(f)(3)(ii)–2 would have explained how an appropriate period of time, geographic area, and type of loan may be defined, and provided illustrative examples of issues a person may encounter when defining an appropriate geographic area and an appropriate type of loan. Proposed comment 19(f)(3)(ii)–3 would have provided further explanation related to the requirement that if a creditor chooses to use an average charge for a settlement service for a particular loan within a class, then the creditor must use that average charge for that service on all loans within the class. Proposed comment 19(f)(3)(ii)–3 also would have provided examples illustrating the uniform use requirement. Proposed comment 19(f)(3)(ii)–4 would have illustrated the requirement that the average charge must be calculated according to the average amount paid for a settlement service in a prior period, and clarifies that updates to the average charge may be delayed for an amount of time sufficient to re-calculate the average charge, provided that such delays are applied uniformly from one time period to the next.

Proposed comment 19(f)(3)(ii)–5 would have discussed the requirement that the total amount of average charges paid by consumers for settlement services may not exceed the total amount paid for those settlement services overall. The Bureau explained in the proposal that it has received extensive feedback from industry that this requirement, which currently exists under RESPA and Regulation X, has impeded industry adoption of average charge pricing. The Bureau stated its belief that prohibiting industry from collecting more money than is actually paid to settlement service providers means that industry cannot actually average costs over time, and must instead operate at a loss in the long term if industry chooses to use average charge pricing. The Bureau explained that it believed that the use of averagecharge pricing promotes greater reliability for consumers. Therefore, the Bureau sought to address this concern to facilitate the adoption of average charge pricing. Proposed comment 19(f)(3)(ii)– 5 would have addressed this issue and discussed the ways in which a person may comply with this requirement. The comment would have clarified that a person may refund the excess amounts collected or may factor in the excesses when determining the average charge for the next period. In addition, the comment would have clarified that a person also may comply by establishing a rolling monthly period of reevaluation, and that a person complies by re-calculating the average amount every month, and will be deemed to be in compliance with sections 4 and 8 of RESPA if the person uses this method, even if the person collects more for settlement services than the total amount paid for those settlement services over time.

Proposed comment 19(f)(3)(ii)–6 would have explained that adjustments to the average charge based on prospective analysis are permitted if the creditor or settlement service provider develops a statistically accurate and reliable method for doing so. However, the Bureau explained in the proposal that it was concerned that prospective adjustments may not be practicable in the context of determining average charges. Accordingly, the Bureau sought comment on whether such a provision is appropriate.

Proposed comment 19(f)(3)(ii)–7 would have discussed the requirement that average charges may not be used for insurance premiums or for items that vary according to the loan amount or property value, such as transfer taxes. Proposed comment 19(f)(3)(ii)–8 would have clarified that an average charge may not be used where prohibited by any applicable State or local law. Proposed comment 19(f)(3)(ii)–9 would have explained how the recordkeeping requirements in § 1026.25 apply to the documents related to the calculation of average charge.

The Bureau proposed § 1026.19(f)(3)(ii) pursuant to its authority under section 105(a) of TILA and 19(a) of RESPA. HUD adopted average-charge pricing pursuant to its authority under section 19(a) of RESPA after finding that average-charge pricing would benefit consumers by lowering settlement costs and enabling more effective advance disclosure of such costs, consistent with RESPA sections 2(b), 4, 5, 8(c)(5), and 19(a).248 In VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79887 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations prohibiting . . . such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Secretary.’’ 12 U.S.C. 2607(c)(5) (2008).

addition to this authority, the Bureau explained that proposed § 1026.19(f)(3)(ii) would prevent circumvention and evasion of, and will facilitate compliance with, TILA, consistent with section 105(a) of TILA. The Bureau further stated that the proposed regulation would improve consumer awareness and understanding of the transaction, which would be in the interest of consumers and in the public interest, consistent with Dodd- Frank Act section 1405(b). Comments Trade associations representing banks were concerned that, if average cost pricing methodology cannot be used for small differences for different populations, they doubted whether it would be useful. Commenters were concerned that proposed comment 19(f)(3)(ii)–2 language appeared to require the creditor or settlement service provider to perform statistical analysis to determine what the median prices would be for a service, depending upon how the class was defined and whether there was a ‘‘normal distribution’’ of costs within a class. Commenters were concerned that the burden of conducting such analysis did not appear to have a reasonable relationship to any potential consumer benefit. Commenters also stated that, once a statistical analysis is complete, the proposed rule did not offer guidance on what level of difference in prices within a class would be acceptable.

Trade associations representing banks and financial companies explained that it was not clear under either the current or proposed rule when services are considered separate services, such as whether different types of credit reports or different types of appraisals and valuations can be considered the same service. Commenters recommended that the creditor either be able to treat these as the same type of service or as different types of services. Commenters also requested guidance on how to the rule would apply when there are intermediate settlement service providers, such as when a creditor uses multiple appraisal management companies that, in turn, use many different appraisers, or when a creditor uses more than one title company, each of which uses many subproviders to provide title-related services. Trade associations representing banks and financial companies asked, if an average charge is paid by the consumer but the settlement service provider received a different amount, whether the amount disclosed should be the actual amount paid to the service provider or the average amount charged to the consumer. Commenters observed that disclosing the actual amount paid to the provider would be a compliance burden and confusing to the consumer. They recommended that, where the consumer pays an average charge, the amount disclosed should be the average charge.

A trade association representing settlement agents supported the proposed rule’s average charge pricing rules and explained that it found the detailed direction on the computation and use of an average charge helpful. The commenter requested that current Regulation X provisions on average charge pricing be supplanted by the TILA provisions of the proposed rule. A title insurance company commenter supported the inclusion of proposed comment 19(f)(3)(ii)–6, which would have explained that a creditor may prospectively adjust average charges if it develops a statistically reliable and accurate method for doing so. The commenter explained that a prospective analysis adjustment procedure, based on a statistically accurate and reliable method, provides a way to charge an average charge that is more reflective of the actual cost incurred and is more equitable to consumers. The commenter provided an example in which, for winter-weather States, the charge for a survey obtained during the months of October through March may be 25 percent higher than the charge for a survey obtained during the months of April through September. The commenter was concerned that, if a prospective analysis was not permitted, consumers obtaining a survey during winter months would pay an average charge calculated retrospectively, and based on lower prices before winter. Similarly, if a prospective analysis was not permitted, consumers obtaining a survey during summer months would pay an average charge calculated retrospectively, and based on higher prices before the summer. The commenter was concerned that this would lead to inequitable outcomes for some consumers and would provide a disincentive to the creditor or settlement service provide to use the average charge methodology. The title insurance company commenter also explained that a prospective adjustment methodology would be able to account for unusual situations where there is a known unilateral increase or decrease in the actual cost of a particular third-party settlement service. The commenter gave an example in which a new law was to take effect January 1 that would result in an across-the-board increase of $50 per transaction in recording fees. Without a prospective adjustment for this expected change, the $50 per transaction recording fee actual cost would have to be absorbed by the creditor or settlement agent for the initial time period of up to six months and would never be recovered. The commenter also explained that, conversely, if the law would result in an across-the-board decrease of $50 per transaction in recording fees, an inability to use a prospective adjustment methodology would result in a windfall to the creditor or settlement agent for the initial time period at the expense of the consumer.

The commenter did not believe prospective adjustments would be impracticable in the context of determining average charges if, as proposed, documentation would have to be provided to support all average charge determinations. Recordkeeping requirements would provide data for seasonal variations and would ensure average charges are not prospectively adjusted at will.

The commenter requested that the Bureau provide guidance on who will determine the average recording charges, noting that ‘‘alternative 1’’ to proposed § 1026.19(f) (in which the creditor would have been solely responsible for providing the Closing Disclosure) would raise questions about whether the creditor would be required to pay the actual recording charge to the settlement agent or if the settlement agent would establish the average charge for recording fees. The commenter was concerned that, if the Bureau selected ‘‘alternative 2’’ (in which responsibility for proposed § 1026.19(f) could be divided between settlement agents and creditors), it may be difficult for settlement agents to establish the average recording charges because they also would be the party paying the actual recording charge as necessary to record the documents. The commenter requested that the Bureau provide guidance on these situations. Final Rule The Bureau has considered the comments received regarding the proposed average charge pricing provisions. Some commenters were concerned that burdensome statistical analysis would be required to use average charge pricing under the final rule. The final rule does not require that creditors or settlement service providers engage in statistical analysis to VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00159 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79888 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations determine whether the class of transactions that serves as the basis for the average charge is based on an appropriate geographic area and loan type.

The Bureau does not believe it will be unreasonably burdensome for creditors or settlement service providers to assess whether a geographic area or loan type are defined using subgroups that clearly have distinct cost characteristics. The average cost pricing rules are not requirements, but are intended to provide creditors flexibility from the general requirement that the actual amount imposed on the consumer may not exceed the amount received by the settlement service provider. To the extent an average charge is imposed that exceeds the cost actually received by a settlement service provider, the Bureau believes it is reasonable to expect creditors to ensure the average charge is not derived from distinct markets. Deriving an average charge from a class composed of subgroups that have distinct cost characteristics would mean that a charge could be unfairly inflated and applied in a way that disadvantages certain populations.

Creditors relying on such charges must ensure that classes of transactions are defined in a way that complies with § 1026.19(f)(3)(ii). While the Bureau does not expect that the average cost pricing rules will require the use of expensive statistical analysis, creditors relying on such charges likely will need to review the distribution of charges in a class of transactions to ensure averages are not derived from populations that have dissimilar cost characteristics. Commenters requested that the rule clarify when settlement services are considered separate services or how the rule would apply to settlement services that involve intermediate settlement service providers. Final § 1026.19(f)(3)(i) and (ii) sets forth cost disclosure rules with respect to a ‘‘settlement service.’’ RESPA section 3(3) defines ‘‘settlement services’’ as including ‘‘any service provided in connection with a real estate settlement’’; the definition sets forth a number of examples. 12 U.S.C. 2603(3). Similarly, Regulation X defines ‘‘settlement service’’ broadly to mean ‘‘any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of’’ 15 classes of services, such as ‘‘[r]endering of credit reports and appraisals.’’ Neither TILA nor Regulation Z includes its own definition of ‘‘settlement service.’’ Because of the variety of settlement services and arrangements, the Bureau does not believe it is feasible to add additional specificity to that already provided by RESPA and Regulation X for purposes of the average cost pricing rules. Creditors should exercise judgment in determining whether particular settlement services are distinct for purposes of calculating average charges, bearing in mind the requirement that an average charge should be no more than the average amount paid for a particular service by or on behalf of all consumers and sellers for a class of transactions. See § 1026.19(f)(3)(ii)(A). Creditors should also bear in mind that an average-charge program may not be used in a way that inflates the cost for settlement services overall. Thus, it would be inappropriate to derive an average charge for a settlement service comprised of sub-classes that have dissimilar cost characteristics because the nature of the service provided for each sub-class is clearly distinct. Similarly, where an average charge is applied to settlement services involving intermediary service providers, the appropriateness of an average charge would depend, among other things, on the nature of settlement service provided and how the provider charges for that service.

With respect to the comment recommending that the rule include a prospective adjustment methodology, the Bureau believes that a prospective adjustment methodology will facilitate compliance with the final rule. A prospective adjustment analysis can, in some cases, be a more efficient means of developing an average charge where certain cost increases are predictable using a statistically reliable and accurate method of adjustment. With respect to the comment requesting that the proposed average charge pricing regulations and commentary be included in Regulation X, such an amendment to Regulation X is outside the scope of this rulemaking. For the aforementioned reasons and those discussed in the proposal, the Bureau has determined to finalize § 1026.19(f)(3)(ii) as proposed and comments 19(f)(3)(ii)–1 through –9 substantially as proposed. Minor modifications have been made to comments 19(f)(3)(ii)–2.i and –2.ii, which contain illustrative examples of how a creditor could define a geographic area and loan type. Comment 19(f)(3)(ii)–2.i clarifies that, where a geographic area is made up of sub-divisions, the geographic area would be ‘‘appropriately defined’’ if the sub-divisions had a relatively normal distribution of appraisal costs, even if the distribution ‘‘for each subdivision’’ ranges from below $200 to above $1,000. The final rule makes this modification to clarify further the meaning of the comment. A similar modification has been made to comment 19(f)(3)(ii)–2.ii. In addition, comment 19(f)(3)(ii)–2 has been modified to explain that, for purposes of § 1026.19(f)(3)(ii)(B), a geographic area and loan type are appropriate if the sample size is sufficient ‘‘to calculate average costs with reasonable precision,’’ provided that the area and loan type are not defined in a way that aggregates costs between dissimilar populations. This language has been added to clarify the meaning of ‘‘sufficient’’ in this context. The comment then gives examples of whether a geographic area and loan type have been defined appropriately. With respect to loan type, comment 19(f)(3)(ii)(B)–2.ii explains that it would not be appropriate to define a loan type that includes two distinct rate products that have different median recording fees, which would reflect dissimilar cost characteristics between the two products. The commentary explains that a loan type could be appropriately defined if both rate products had a ‘‘relatively normal distribution of recording fees,’’ even if that distribution ranges between low and high amounts for both loan products. Comment 19(f)(3)(ii)–3.i and –3.ii include minor technical revisions.

Comment 19(f)(3)(ii)–9 has been revised to correct a reference to the document retention period required under § 1026.25. Proposed comment 19(f)(3)(ii)–9 had explained that, to comply with § 1026.25, a creditor must retain all documentation used to calculate the average charge for a particular class of transactions for at least two years after any settlement for which that average charge was used. In accordance with § 1026.25(c)(1), the comment clarifies that documentation must be retained for at least three years after any settlement for which the average charge was used. Commenters requested clarification on whether, in a situation in which an average charge is paid by the consumer but where the settlement provider received a different amount, the amount disclosed should be the actual amount paid to the service provider or the average amount charged to the consumer. In this case, the charge disclosed would be the average charge, not the actual charge, pursuant to § 1026.19(f)(3)(i) and (ii). The Bureau believes this is consistent with RESPA and Regulation X, which require that the settlement statement disclose charges actually paid by the consumer. A commenter requested clarification on how § 1026.19(f)(3)(ii) would apply to average charges for recording fees under either ‘‘alternative 1’’ or VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00160 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79889 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations ‘‘alternative 2’’ with respect to the party responsible for providing the Closing Disclosure. As discussed in the sectionby-section analysis of § 1026.19(f)(1)(v), the Bureau is finalizing ‘‘alternative 2,’’ which would permit creditors and settlement agents to share responsibility for complying with § 1026.19(f). If a settlement agent assumes the responsibility for charging a consumer an average charge instead of an actual charge, it must comply with § 1026.19(f)(3)(ii). See comment 19(f)(1)(v)–2. Thus, the settlement agent would charge the consumer an average charge for recording fees in compliance with § 1026.19(f)(3)(ii), even if it pays different actual charges to record documents.

Final § 1026.19(f)(3)(ii) and comments 19(f)(3)(ii)–1 through –9 are adopted pursuant to the Bureau’s authority under section 105(a) of TILA and 19(a) of RESPA. HUD adopted average-charge pricing pursuant to its authority under section 19(a) of RESPA after finding that average-charge pricing would benefit consumers by lowering settlement costs and enabling more effective advance disclosure of such costs, consistent with RESPA sections 2(b), 4, 5, 8(c)(5), and 19(a). The Bureau agrees with HUD’s reliance on these authorities. In addition to these authorities, the Bureau believes the final rule and commentary will prevent circumvention and evasion of, and will facilitate compliance with, TILA, consistent with section 105(a) of TILA. The Bureau believes that the final rule and commentary will improve consumer awareness and understanding of the transaction, which will be in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b).

19(f)(4) Transactions Involving a Seller Neither TILA nor Regulation Z contain requirements related to the seller in a purchase transaction. Section 4 of RESPA provides that the integrated disclosure shall conspicuously and clearly itemize ‘‘all charges imposed upon the seller’’ in connection with the settlement. 12 U.S.C. 2603(a). Regulation X states that the settlement agent shall provide a completed RESPA settlement statement to any seller at or before the settlement, unless the borrower waives the right to delivery of the RESPA settlement statement at or before settlement, in which case the RESPA settlement statement shall be mailed to the seller as soon as practicable after settlement. See 12 CFR 1024.10(b) and (c). Accordingly, the Bureau proposed § 1026.19(f)(4)(i), (ii), and (iii) pursuant to its authority under sections 105(a) of TILA, 19(a) of RESPA, Dodd-Frank Act section 1032(a), and, for residential mortgage loans, Dodd- Frank Act section 1405(b). Proposed § 1026.19(f)(4)(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 person conducting the settlement shall provide the seller with the disclosures in § 1026.38 that relate to the seller. Proposed § 1026.19(f)(4)(ii) would have provided that the person conducting the settlement shall provide these disclosures no later than the day of consummation. Under the proposed provision, if an event occurs after consummation that causes such disclosures to become inaccurate, and such inaccuracy results solely from payments to a government entity, the person conducting the real estate closing shall deliver revised disclosures to the seller no later than 30 days after consummation. Proposed § 1026.19(f)(4)(iii) would have provided that the amount imposed upon the seller for any settlement service shall not exceed the amount actually received by the service provider for that service, except for average charges calculated pursuant to § 1026.19(f)(3)(ii). Proposed comment 19(f)(4)(ii)–1 would have explained that, if an event occurs after consummation that causes such disclosures to become inaccurate and such inaccuracy results solely from payments to a government entity, the person conducting the real estate closing shall deliver revised disclosures to the seller no later than 30 days after consummation. Proposed § 1026.19(f)(4)(i) would have required disclosure of the items that relate to the seller’s transaction. Thus, the comment would have explained that the person conducting the real estate closing need only provide revised disclosures if an item related to the seller’s transaction becomes inaccurate and such inaccuracy results solely from payments to a government entity. The proposed comment also would have provided illustrative examples of this requirement.

Comments Commenters expressed mixed views with respect to the requirement to provide a separate seller’s form. Some industry commenters noted that a separate seller’s form would benefit the consumer and the seller because it would protect the privacy interests of both parties, as well as others. For example, one settlement agent noted that the parties’ real estate agents frequently do not want their commissions to be disclosed publicly as part of the transaction. Some commenters also noted that separate forms would facilitate closings because last-minute changes that affect only one party could be accounted for separately. Other industry commenters were concerned that separate disclosures could create confusion and increase burden for creditors and settlement service providers, and potentially raise costs for sellers. A number of these commenters were concerned that a separate disclosure form for the seller would have been required under the proposal, which they believed would be unnecessarily burdensome and complicate closings. Settlement agent and law firm commenters also explained that a separate seller’s form would not be in the buyer’s or seller’s interest because many transactions require a reference to the other party’s side of the RESPA settlement statement (for example, to see where seller-paid closing costs are applied). In addition, many commenters were concerned that a creditor may be responsible for the seller’s transaction. They stated that it would not be in the seller’s interest for the consumer’s creditor to control all aspects of the funding, that creditors owe no duty to the seller, and that creditors lack expertise to complete information about the seller’s transaction. A community bank stated that creditors should not have to complete the seller’s disclosure, even if the closing is taking place at the creditor’s offices; instead, the real estate agent or title company should prepare the form. Real estate agents stated that it would not be appropriate for the buyer’s lender to contact the seller’s lender for payoff information, and that this information should be obtained by the title company because such information would pose a conflict-ofinterest for the creditor. One real estate agent commenter suggested that this would mean a seller would lack representation at the closing table and would need to hire a separate attorney, increasing closing costs. One settlement agent commenter asked whether the seller should be afforded the same opportunity as the consumer to review the settlement figures three business days prior to closing. However, a community bank explained that, although it should not be a problem to provide the borrower the final closing costs three days in advance, most title companies are not able to provide the seller’s figures until the day before closing at the earliest. The commenter noted that third-party lenders do not calculate the seller’s payoff statement until right before closing and sometimes attorney fees are VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00161 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79890 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations not provided timely. A trade association representing various mortgage industry professionals requested that the Bureau design separate disclosure forms to avoid consumers receiving a Closing Disclosure that combines seller and consumer information. Commenters also asked how settlement performed by the creditor would be documented by the settlement agent for the seller if the creditor delivers the Closing Disclosure. Trade associations representing banks and financial companies stated that proposed § 1026.19(f)(4)(i) appeared inconsistent with proposed § 1026.19(f)(2)(i). The commenters observed that, while § 1026.19(f)(4)(i) would have provided that ‘‘the person conducting the real estate closing shall provide the seller with the disclosures in § 1026.38 that relate to the seller’s transaction,’’ proposed § 1026.19(f)(2)(i) would have provided that, if there were changes to the transaction, ‘‘the creditor shall deliver revised disclosures reflecting such changes at or before consummation.’’ A variety of settlement agents and trade associations representing settlement agents and banks requested clarification on how a seller’s settlement agent would document settlements when the creditor provides the Closing Disclosure, and which document would serve as the ultimate disbursement document.

Final Rule The Bureau has considered the comments on the proposed provisions regarding disclosure to the seller. The Bureau has determined to finalize the regulation and commentary substantially as proposed, with modifications described below. The Bureau understands commenters’ concerns about the inconsistent usage of the terms ‘‘settlement agent’’ and ‘‘the person conducting the real estate closing’’ between § 1026.19(f)(4) and the other provisions of § 1026.19(f). The final rule revises proposed § 1026.19(f)(4)(i) and (ii) to change the term ‘‘person conducting the real estate closing’’ to the term ‘‘settlement agent’’ to conform to the usage of that term throughout § 1026.19(f). The Bureau believes this modification will facilitate compliance.

As set forth in § 1026.38, the final rule requires certain information about the seller’s transaction because such information is necessary to comply with TILA section 128(a)(17), which requires that the creditor disclose the aggregate amount of settlement charges for all settlement services provided in connection with the loan and the aggregate amount of other fees or required payments in connection with the loan. The Bureau believes this requires disclosure of information about the seller’s transaction. In addition RESPA section 4(a) requires that the RESPA settlement statement itemize all charges imposed upon the seller in connection with the settlement. As discussed in more detail in the section-by-section analysis of 1026.19(f)(1)(v), creditors are permitted to divide responsibility for providing the Closing Disclosure with settlement agents, and the Bureau expects creditors will do so if they believe they cannot accurately or effectively make certain disclosures. The Bureau proposed a separate requirement under § 1026.19(f)(4)(i) for the person conducting the settlement to provide the disclosures in § 1026.38 that relate to the seller’s transaction to the seller because the Bureau recognizes that a creditor does not owe a duty to the seller and to account for variations in local law that may require that the seller receive a separate disclosure (e.g., for privacy reasons) or variations in local practice in which a seller and a consumer may not attend settlements in-person or at the same time. This requirement is intended to implement in Regulation Z the RESPA requirement that currently appears in Regulation X. See 12 CFR 1024.10(b). To the extent the seller’s disclosure contains the same information as the Closing Disclosure, the Bureau does not believe substantial new burden will be created because information from the Closing Disclosure, or the Closing Disclosure itself, could be used. To avoid confusion over whether a separate seller’s disclosure must be provided, the Bureau has clarified proposed comment 19(f)(4)(i)–1 to indicate that the settlement agent complies with § 1026.19(f)(4)(i) by providing a copy of the Closing Disclosure provided to the consumer, if it also contains the information under § 1026.38 relating to the seller’s transaction, or alternatively providing the disclosures under § 1026.38(t)(5)(v) or (vi), as applicable. See the section-by-section analyses of § 1026.38(t)(5)(v) and (vi) for more discussion of the separate forms that are permitted for transactions involving a seller.

Some commenters were concerned that sellers would be reluctant to provide information to a creditor that may appear on the Closing Disclosure and one commenter explained that creditors should not have to complete the seller’s disclosure, even if the closing is taking place at the creditor’s offices. Final § 1026.19(f)(4)(i) provides that the settlement agent provides the seller’s disclosure, which in most cases will not be the creditor. With respect to concerns about sellers being reluctant to share their information, the Bureau believes final § 1026.19(f)(1)(v) will allow creditors and settlement agents to manage any conflicts as they arise. The Bureau also observes that Regulation X § 1024.10(b) currently requires, when the borrower’s and seller’s copies of the RESPA settlement statement differ, that the settlement agent deliver copies of both the borrower’s and seller’s copies of the RESPA settlement statement to the lender (if the lender is not the settlement agent). Some comments requested that the Bureau develop a separate forms, such as for refinancings, to avoid consumers receiving a Closing Disclosure that combines seller and consumer information. This is permitted pursuant to § 1026.38(t)(5). As discussed in the section-by-section analysis of that provision below, this provision provides for a separate form for the seller and consumer, a different version for transactions without a seller, and a different version only for the seller. One commenter asked whether the seller should be afforded the same opportunity as the consumer to review the settlement figures three business days prior to closing. The final rule does not require that the seller receive the Closing Disclosure three business days before consummation, but the final rule does not prevent settlement agents from providing the Closing Disclosure to the seller earlier. As noted above, neither TILA nor Regulation Z contain requirements related to the seller in a purchase transaction. Regulation X generally requires that the settlement agent provide a completed RESPA settlement statement to any seller at or before the settlement. In the context of a credit transaction covered by TILA, consumers are considering the terms of a loan obligation in addition to settlement costs in connection with a purchase-money mortgage transaction. As discussed in the section-by-section analyses of § 1026.19(f)(1)(ii)(A), (f)(2)(i), and (f)(2)(ii), the Bureau believes a three-business-day period for consumers would be necessary to comply with the requirements of MDIA and to provide consumers sufficient time to consider major changes to the terms of a loan that could impose significant, long-term costs on consumers.

With respect to commenters’ questions about use of the Closing Disclosure as a disbursement document, as explained also in the section-bysection analysis of § 1026.19(f)(1)(v), the Closing Disclosure is designed to VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00162 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79891 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations integrate disclosures provided under TILA and RESPA. To the extent the Closing Disclosure’s disclosure requirements differ from other arrangements made pursuant to contract or other law or custom, the final rule does not prohibit creditors and settlement agents from developing their own disbursement instructions and managing any discrepancies as they arise, consistent with the current practice with respect to the RESPA settlement statement.

Final provisions. For the aforementioned reasons, including those cited in the proposal, § 1026.19(f)(4)(i) and (ii) and comments 19(f)(4)(i)–1 and 19(f)(4)(ii)–1 are adopted substantially as proposed, with modifications discussed below. Final § 1026.19(f)(4)(iii) is adopted without change.

Final § 1026.19(f)(4)(i) and (ii) and the associated commentary use the term ‘‘settlement agent’’ instead of ‘‘person conducting the settlement’’ to conform to the usage of the term throughout § 1026.19(f). Final § 1026.19(f)(4)(i) also requires that the settlement agent provide the seller with the disclosures in § 1026.38 that relate to the seller’s transaction ‘‘reflecting the actual terms of the seller’s transaction.’’ The final rule includes this language to conform § 1026.19(f)(4)(i) to the requirement in § 1026.19(f)(1)(i) and to reflect the standard currently in Regulation X for the settlement agent to state the actual charges paid by the borrower and seller on the RESPA settlement statement. See 12 CFR 1024.8(b)(1).

The final rule includes comment 19(f)(4)(i)–1, which clarifies how the settlement agent complies with § 1026.19(f)(4)(i) to provide the seller with the disclosures in § 1026.38 that relate to the seller’s transaction. Specifically, comment 19(f)(4)(i)–1 explains that the settlement agent complies with § 1026.19(f)(4)(i) by providing a copy of the Closing Disclosure provided to the consumer, if it also contains the information under § 1026.38 relating to the seller’s transaction, or alternatively providing the disclosures under § 1026.38(t)(5)(v) or (vi), as applicable. See the section-bysection analyses of § 1026.38(t)(5)(v) and (vi) for further discussion regarding the final rule with respect to the disclosures required under § 1026.38 in transactions involving a seller.

In addition, final § 1026.19(f)(4)(ii) amends the proposal to require that the settlement agent provide the seller’s disclosures reflecting the actual terms of the transaction on the day of consummation. Regulation X generally requires that the settlement agent deliver the RESPA settlement statement to the seller at or before settlement. See 12 CFR 1024.10(b). As discussed in the section-by-section analysis of § 1026.19(f)(1)(ii)(A), the Bureau recognizes that ‘‘consummation’’ may not necessarily be the final ‘‘settlement’’ of the transaction. Final § 1026.19(f)(4)(ii) addresses changes that may occur after consummation. Final § 1026.19(f)(4)(ii) and comment 19(f)(4)(ii)–1 also have been modified with respect to post-consummation changes to harmonize this provision with the requirements in final § 1026.19(f)(2)(iii) with respect to the circumstances requiring redisclosure and the timing for such redisclosures. Comment 19(f)(4)(ii)–1 includes a crossreference to comment 19(e)(4)(1)–1 for additional guidance on complying with the timing requirement for postconsummation disclosures. Comment 19(f)(4)(ii)–1 includes an illustrative example, modified to conform to the final rule and includes a cross-reference to comment 19(f)(2)(iii)–1.iii for an additional example in which corrected disclosures must be provided to the seller.

The final rule includes § 1026.19(f)(4)(iv) to implement the requirement currently in Regulation X § 1024.10(b). The Regulation X provision generally provides that, when the borrower’s and the seller’s copies of the RESPA settlement statement differ, both copies shall be provided to the lender (if the lender is not the settlement agent). The Bureau believes it is important to integrate this requirement in § 1026.19(f) because § 1026.25(c)(1)(ii) generally requires creditors to retain copies of the disclosures under § 1026.19(f)(1)(i) and (f)(4)(i). Accordingly, final § 1026.19(f)(4)(iv) provides that, when the consumer’s and seller’s disclosures under § 1026.19(f) are provided on separate documents, as permitted under § 1026.38(t)(5), the settlement agent shall provide to the creditor (if the creditor is not the settlement agent) a copy of the disclosures provided to the seller under § 1026.19(f)(4)(i). The Bureau believes the final rule and commentary will prevent circumvention and evasion of, and will facilitate compliance with, TILA, consistent with section 105(a) of TILA. The final rule and commentary implement the requirements of RESPA section 4, pursuant to the Bureau’s implementation authority under RESPA section 19(a). The Bureau believes the final rule and commentary also will result in the meaningful advance disclosure of settlement costs and the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services by ensuring that the terms of the transaction that relate to the seller, which include amounts owed to the seller, are fully and accurately disclosed to the seller, consistent with RESPA sections 8 and 19(a). The Bureau believes that receipt of the integrated disclosures in accordance with the final rule and commentary also will ensure that the features of the transaction and settlement services will be more fully and accurately disclosed to the consumer in a manner that permits sellers to understand the costs of the transaction, consistent with Dodd-Frank Act section 1032(a). The Bureau also believes that, by requiring sellers to receive the integrated disclosure, the final rule and commentary also will improve the seller’s awareness and understanding of the seller’s transaction, which involves a residential mortgage loan, which is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b).

19(f)(5) No Fee Although TILA does not address fees related to the preparation of disclosures, RESPA provides that no fee may be imposed on any person, as a part of settlement costs or otherwise, by a lender in connection with a federally related mortgage loan made by such lender for the preparation or delivery of the settlement statement required by section 4 of RESPA or for statements required by TILA. See 12 U.S.C. 2610. Regulation X § 1024.12 implements RESPA’s requirement. Neither TILA nor Regulation Z contains a similar requirement. The Bureau proposed § 1026.19(f)(5), which would have provided that no fee may be imposed on any person, as a part of settlement costs or otherwise, by a creditor or by a servicer for the preparation or delivery of the disclosures required under § 1026.19(f)(1)(i), escrow account statements required pursuant to section 10 of RESPA, or other statements required by TILA. The Bureau proposed this provision under TILA section 105(a) and RESPA sections 10 and 19(a). The Bureau explained that the proposed provision would strengthen the informed use of credit by ensuring that consumers are not informed that consumers must pay fees prohibited by law, and enhance competition by ensuring that creditors do not attempt to gain a competitive advantage by charging prohibited fees, both of which are consistent with section 105(a) of TILA. The Bureau also stated its belief that the proposal would result in the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79892 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 249 In the 2013 Loan Originator Final Rule, the Bureau adopted a complete exemption to the statutory ban on upfront points and fees set forth in TILA section 129B(c)(2)(B)(ii). See 78 FR 11279, 11370 (Feb. 15, 2013).

meaningful advance disclosure of settlement costs and the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services by ensuring that illegal fees are not included on the disclosures, consistent with section 19(a) of RESPA.

The Bureau received no comments on this proposed provision. For the reasons stated in the proposal and based on the authority stated in the proposal, the final § 1026.19(f)(5) is adopted with modifications from the proposal. For organizational purposes, the final rule limits the scope of the prohibition on charging fees for the preparation or delivery of the Closing Disclosure only. The full prohibition under Regulation X § 1024.12 remains in effect. 19(g) Special Information Booklet at Time of Application Regulation X § 1024.6 contains the provisions related to the special information booklet, which is required by section 5 of RESPA. See 12 U.S.C. 2604. The Bureau proposed § 1026.19(g), which is substantially similar to the existing requirements in Regulation X, but modified to conform to the usage associated with TILA. The Bureau proposed this provision pursuant to its authority under TILA section 105(a) and RESPA section 19(a). The Bureau also solicited feedback on whether the Consumer Handbook on Adjustable-Rate Mortgages (CHARM) booklet, required under § 1026.19(b)(1), should be incorporated into the special information booklet.

Proposed comment 19(g)(1)–1 would have provided that the Bureau may, after publishing a notice in the Federal Register, issue a revised or separate special information booklet that addresses transactions subject to § 1026.19(g). The comment would have further clarified that the Bureau also may choose to permit the forms or booklets of other Federal agencies to be used by creditors, in which case the availability of the booklet or alternate materials for these transactions will be set forth in a notice in the Federal Register.

Proposed comment 19(g)(1)–2 would have clarified that, when two or more persons apply together for a loan, the creditor complies with § 1026.19(g) if the creditor provides a copy of the booklet to one of the persons applying. Proposed comment 19(g)(2)–1 would have explained that the special information booklet may be reproduced in any form, provided that no changes are made, except as otherwise provided under § 1026.19(g), and that provision of the special information booklet as a part of a larger document does not satisfy the requirements of § 1026.19(g). Comment 19(g)(2)–1 would have further clarified that any color, size and quality of paper, type of print, and method of reproduction may be used so long as the booklet is clearly legible. The Bureau explained that proposed § 1026.19(g) was consistent with TILA’s purposes in that it would increase consumer awareness of the costs of the transaction by informing consumers that settlement costs can be influenced by shopping, thereby promoting the informed use of credit. The Bureau further explained that the provision would enhance consumers’ ability to shop for a mortgage loan, which will effect changes in the settlement process that will result in the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services, consistent with the Bureau’s authority under section 19(a) of RESPA. Proposed comment 19(g)(2)– 2 would have clarified that the special information booklet may be translated into languages other than English. The Dodd-Frank Act amended RESPA section 5 to require that the booklet include, among other things, information about the trade-off between closing costs and interest rates over the life of the loan. See Dodd-Frank Act section 1450(2), amending section 5(b) of RESPA; 12 U.S.C. 2604(b)(1)(D). At the time the Bureau was receiving public comments on this proposal, the Bureau also was considering the 2012 Loan Originator Proposal. In the 2012 Loan Originator Proposal, the Bureau proposed to use its exemption authority under the Dodd-Frank Act to allow creditors and loan originator organizations to continue making available loans with consumer-paid upfront points or fees. As noted in the discussion of comments in the sectionby-section analysis of § 1026.19(e)(2)(ii) above, the 2012 Loan Originator Proposal generally would have required creditors to make a zero-zero alternative loan available to consumers before imposing upfront points or fees in a closed-end mortgage transaction.249 The Bureau in that proposal solicited comments on variations and alternatives to this approach.

Comments Commenters had several suggestions for some of the RESPA-required content for the special information booklet. In response to the 2012 Loan Originator Proposal, commenters explained that educating consumers generally about the relationship between interest rates and other costs would be preferable to a requirement that loan originators offer consumers particular terms. In addition, commenters stated that a mandated presentation of a zero-zero alternative may cause borrowers to believe that such an alternative is best in all cases, where in fact, the benefit to a borrower depends on many factors (including how long the consumer plans to remain in the mortgage, particularly as interest rates rise). Trade associations representing banks recommended that the special information booklet demonstrate hypothetical trade-offs to assist consumers in selecting loan options, similar to the current RESPA GFE. One trade association representing banks also emphasized that the Bureau should include generic information about the trade-off between a loan’s interest rate and its points and fees. The commenter explained that many consumers shop based on rate and points and the commenter stated that it believed more would if they were advised accordingly. The commenter further explained that increased consumer interest in such shopping will drive the market to provide even more than the many rate and point choices available today, alleviating the need for mandated options. A commenter also explained that the booklet offers the opportunity and right platform to test various approaches to informing borrowers of available options. With respect to combining the CHARM booklet with the special information booklet, a trade association representing settlement agents did not object to including the CHARM booklet with other materials. A trade association representing banks noted there were advantages and drawbacks to including the CHARM materials with the special information booklet. Among the advantages were that it would serve a growing market as ARM loans may become more popular as interest rates rise. Among the drawbacks were that the CHARM booklet is 36 pages long and would be very large compared to the booklet. The commenter believed it was important, in any event, that the CHARM materials be made accessible and easily understandable for consumers by the Bureau. A nondepository lender stated that the CHARM and special information booklets should remain separate. The commenter explained that CHARM booklet is directed to consumers who VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00164 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79893 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations have applied for an ARM, and that it would be ill-suited to consumers who apply for a fixed rate loan. Credit union commenters supported consolidating the CHARM booklet with the special information booklet. One credit union commenter explained doing so would streamline the number of documents received by borrowers at the time of application without any detrimental effect to the borrower. The credit union commenter also explained that the combined document contains all of the information that a borrower would find useful in the application process while reducing information overload. Another credit union commenter explained that combining the CHARM booklet with the special information booklet would reduce information overload and would help consumers better understand the application process. A software company commenter requested clarification on whether two versions of the special information booklet will need to be made—one for ARMs and one for all others.

A professional association representing attorneys recommended that the special information booklet could be used to reduce the length and complexity of the integrated disclosures by containing information about the transaction that does not relate to the exchange of funds.

A non-depository lender supported proposed comment 19(g)(1)–2, clarifying that when two or more persons apply together for a mortgage loan, lenders are in compliance with the rule by providing a copy of the booklet to one of the persons applying. Trade associations representing banks and a non-depository lender commenter requested that the Bureau put high priority on developing web-based information that is linked to the forms as well as the booklet. Commenters explained that internet links would efficiently explain the forms to borrowers, and internet-based information and accompanying hard copy key or glossary materials could alleviate the need for explanatory information in the forms, making the forms shorter and more inviting to consumers. A trade association representing banks recommended that the Bureau include an interactive, online version made available to consumers and housing counselors. A software company commenter requested clarification on whether the booklet would be required to be provided on 8.5 x 11 paper as a separate disclosure. The commenter also requested clarification on whether the graphic on the cover can be removed. A trade association representing banks explained that the special information booklet and any accompanying web-based information accompanying the disclosures were as important as the forms themselves. The commenter explained that these materials should be proposed along with the tested and revised loan forms for comment by stakeholders. One nondepository lender requested that the Bureau seek public input when developing the booklet because it would provide almost as much information as the disclosures themselves. A trade association representing settlement agents reiterated its support for a public process in developing the special information booklet.

Final Rule The final rule adopts § 1026.19(g) substantially as proposed and adopts commentary to that section substantially as proposed, along with other modifications discussed below. The Bureau views the special information booklet as part of the Bureau’s broader mission to educate consumers about consumer financial products, and the Bureau intends to develop the special information booklet together with other educational materials that will be accessible on its public Web site. The Bureau also plans to update the booklet in the future to reflect the integrated disclosures adopted in this final rule, the amendments to section 5 of RESPA in section 1450 of the Dodd-Frank Act, and other Bureau rulemakings. Creditor to provide the special information booklet under § 1026.19(g)(1). To define the term ‘‘special information booklet,’’ final § 1026.19(g)(1) includes clarifying language referring to the special information booklet required pursuant to section 5 of RESPA (12 U.S.C. 2604) to help consumers applying for federally related mortgage loans understand the nature and cost of real estate settlement services.

The final rule clarifies proposed § 1026.19(g)(1)(i) by omitting language that would have referred to the consumer’s application ‘‘for credit.’’ The application under § 1026.19(g)(1) has the same meaning as the application under § 1026.2(a)(3)(ii). See the sectionby-section analysis of § 1026.2. The final rule refers only to the consumer’s ‘‘application.’’ To facilitate compliance, the final rule includes comment 19(g)(1)–3 to explain that ‘‘application’’ is defined in § 1026.2(a)(3)(ii). The comment also clarifies that the creditor need not provide the booklet under § 1026.19(g)(1)(i) when it denies an application or if the consumer withdraws the application before the end of the three-business-day period. The comment also includes a crossreference to comment 19(e)(1)(iii)–3 for additional guidance on denied or withdrawn applications. The final rule makes other amendments to the provisions in proposed § 1026.19(g)(1)(i) to clarify the timing requirements applicable to § 1026.19(g). Proposed § 1026.19(g)(1)(i) would have stated that the creditor must deliver the special information booklet ‘‘not later than three business days after the application is received,’’ and that the creditor need not provide the booklet if the creditor denies the consumer’s application before the end of the ‘‘three-day period.’’ To set forth the timing requirements of § 1026.19(g) more clearly, the final rule provides that the creditor shall deliver or place in the mail the booklet not later than three business days after the ‘‘consumer’s application’’ is received, and that the creditor need not provide the booklet if the creditor denies the consumer’s application before the end of the ‘‘threebusiness-day period.’’ The final rule also revises § 1026.19(g)(1)(i) to state that the creditor shall deliver or place in the mail the special information booklet, to conform to the language of § 1026.19(e) and (f), as well as RESPA section 5(d), which states that the booklet ‘‘shall be provided by delivering it or placing it in the mail.’’ In addition, comment 19(g)(1)–1 revises proposed comment 19(g)(1)–1 to describe more clearly how the Bureau will issue revised or separate special information booklets. Specifically, comment 19(g)(1)–1 states that the Bureau may, ‘‘from time to time,’’ issue revised or ‘‘alternative versions’’ of the special information booklet that addresses transactions subject to § 1026.19(g). Proposed comment 19(g)(1)–1 would have stated that the Bureau may issue a revised or ‘‘separate’’ special information booklet that addresses transactions subject to § 1026.19(g).

Comment 19(g)(1)–1 includes these revisions because the Bureau believes the reference in proposed comment 19(g)(1)–1 to a ‘‘separate’’ booklet does not reflect the Bureau’s interpretation of its authority under RESPA section 5 to issue alternate booklets that reflect different product types. As discussed above, commenters made a number of suggestions for revising the special information booklet or combining it with the CHARM booklet applicable to adjustable rate mortgage loans. Also as noted above, Dodd-Frank Act section 1450 amended RESPA section 5 to VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79894 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations require that the special information booklet include additional content. Some of this content may be more relevant to some products than others. And while § 1026.19(g)(1)(iii) currently limits the scope of coverage of the special information booklet to first-lien, purchase-money consumer credit transactions secured by real property, the Bureau plans to review the scope of § 1026.19(g) as it develops integrated disclosure requirements for other loans in future rulemakings.

The Bureau expects to publish revisions to the special information booklet in the future, for example, to conform the booklet’s content to changes resulting from the Bureau’s Title XIV Rulemakings. The Bureau also expects to publish revisions to implement the Dodd-Frank Act’s amendments to RESPA section 5 and will take into account comments received in response to the proposal and other feedback received from interested parties in its design. See Dodd-Frank Act section 1450(2), amending section 5(b) of RESPA; 12 U.S.C. 2604(b)(1)(D). For example, the Bureau may determine that alternative versions of the booklet for particular product types may aid consumer understanding by providing consumers with information most relevant to their situation. Finally, the Bureau believes comment 19(g)(1)–1 is consistent with the current definition of ‘‘special information booklet’’ in Regulation X § 1024.2, which currently provides that ‘‘[t]he Bureau may issue or approve additional booklets or alternative booklets by publication of a Notice in the Federal Register.’’ Comment 19(g)(1)–1 also differs from proposed comment 19(g)(1)–1 in terms of when a revised or alternative version of the booklet may be issued. Under the comment, such a booklet may be issued ‘‘by’’ publishing a notice in the Federal Register. The proposed comment would have stated that the Bureau may issue a revised or separate booklet ‘‘after’’ publishing a notice in the Federal Register. The Bureau believes that the comment is clearer than the proposed commentary, which could have implied that an additional step was necessary to issue the booklet after publication of the Federal Register notice. In addition to these modifications, comment 19(g)(1)– 1 includes a clarifying revision that the Bureau also may choose to permit the forms or booklets of other Federal agencies ‘‘to be used by creditors.’’ The final rule reorganizes § 1026.19(g)(1)(iii) to clarify the types of transactions for which the booklet is not required to be provided. Proposed § 1026.19(g)(1)(iii) would have provided that the creditor or mortgage broker need not provide the booklet to the consumer for transactions identified in § 1026.19(g)(1)(iii)(A) through (C), as well as those identified in § 1026.19(g)(1)(iii)(D), which would have listed ‘‘[a]ny other consumer credit transaction secured by real property whose purpose is not the purchase of a one-to-four family residential property.’’ The transactions under proposed § 1026.19(g)(1)(iii)(D) would have been inclusive of the transactions under § 1026.19(g)(1)(iii)(A) through (C). Accordingly, the final rule moves the reference to the class of transactions that would have been identified in proposed § 1026.19(g)(1)(iii)(D) to the more general provision in § 1026.19(g)(1)(iii), and retains the classes of transactions identified in § 1026.19(g)(1)(iii)(A) through (C) as examples. As revised, under final § 1026.19(g)(1)(iii), the creditor or mortgage broker need not provide the booklet to the consumer for a consumer credit transaction secured by real property, the purpose of which is not the purchase of a one-to-four family residential property, including, but not limited to, the transactions identified in the proposal (i.e., refinancing transactions, closed-end loans secured by a subordinate lien, and reverse mortgages).

In addition, the final rule revises proposed § 1026.19(g)(1)(iii)(B), which would have referred to ‘‘[c]losed-end loans when the lender takes a subordinate lien,’’ to refer instead to ‘‘[c]losed-end loans secured by a subordinate lien.’’ The final rule includes this change to clarify that the booklet is not required to be provided when the creditor is extending only a closed-end loan secured by a subordinate lien. However, the booklet would be required to be provided when the creditor is extending a closed-end first-lien consumer credit transaction secured by real property for the purpose of purchasing a one-to-four family residential property, even if the creditor also is extending a closed-end subordinate-lien loan contemporaneously. The creditor would not be required under § 1026.19(g)(i)(iii)(B) to provide a second booklet for the subordinate-lien loan.

Permissible changes under § 1026.19(g)(2). The final rule revises proposed § 1026.19(g)(2) to provide clearer language with respect to permissible changes to the booklet. In addition, comment 19(g)(2)–1 includes a technical revision to the first sentence of the comment to refer more specifically to § 1026.19(g)(2) and includes a crossreference to comment 19(g)(2)–3, which is discussed in more detail below. A minor revision has been made to improve the language in final § 1026.19(g)(2)(ii), and final § 1026.19(g)(2)(iv) includes a technical revision to replace a reference to ‘‘the lender’’ with a reference to ‘‘the creditor,’’ to conform to the terminology of Regulation Z. Comment 19(g)(2)–2 corrects a typographical error in the last sentence of the proposed comment and includes a reference to comment 19(g)(2)–3, discussed below. In addition, the final rule amends proposed § 1026.19(g)(2)(iv) to provide that the cover of the booklet may be in any form and may contain any drawings, pictures or artwork, ‘‘provided that the title appearing on the cover shall not be changed.’’ As discussed below, this change has been made because the Bureau believes that future revised or alternative versions of the booklet will be more effective for consumers if creditors are not permitted to change the title. Proposed § 1026.19(g)(2)(iv) would have provided that ‘‘[t]he cover of the booklet may be in any form and may contain any drawings, pictures or artwork, provided that the words ‘settlement costs’ are used in the title.’’ This language would have reflected the current requirement under Regulation X § 1024.6(d)(2) applicable to the version of the booklet presently used by lenders. As noted above, the Bureau plans to update the special information booklet consistent with the amendments to section 5 of RESPA in section 1450 of the Dodd- Frank Act and to reflect the integrated disclosures. And as discussed above with respect to comment 19(g)(1)–1, the Bureau intends to issue a revised version, and possibly alternative versions of the special information booklet that implement the expanded content requirements of RESPA section 5 and the integrated disclosure requirements of § 1026.19(e) and (f). Because the amendments to RESPA section 5 include new content beyond settlement cost information, the Bureau expects future revised or alternative versions of the booklet will address topics in addition to settlement costs. Similarly, the Bureau expects the title of the revised or alternative versions of the booklet will refer to topics other than settlement costs.

The Bureau is concerned that, without this modification, the restriction on the permissible changes to the title (i.e., the title must include the words ‘‘settlement costs’’) will become obsolete and may prove too narrow once the Bureau issues an updated version of the special information booklet covering a broader range of topics. Although updates to the booklet are still under consideration by VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00166 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79895 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations the Bureau, the Bureau believes the final rule must address future versions of the booklet so that the booklet’s title accurately conveys to consumers the full range of content. Accordingly, the final rule amends § 1026.19(g)(2)(iv) to state expressly that creditors may not change the title of the booklet. At the same time, the Bureau recognizes creditors should be permitted to continue to provide booklets already in use until the Bureau issues an update to address topics in addition to settlement costs. Accordingly, the final rule includes comment 19(g)(2)–3, which refers to the general restriction on changing the booklet’s title under § 1026.19(g)(2)(iv) and comment 19(g)(1)–1, and explains that, until the Bureau issues a version of the special information booklet relating to the Loan Estimate and Closing Disclosure under §§ 1026.37 and 1026.38, for applications that are received on or after August 1, 2015, a creditor may change the title appearing on the cover of the version of the special information booklet in use before August 1, 2015, provided the words ‘‘settlement costs’’ are used in the title. The final rule includes this comment to facilitate compliance for creditors using the current version of the special information booklet that does not address the integrated disclosure requirements of § 1026.19(e) or (f) until the Bureau issues an updated version for applications subject to the integrated disclosure requirements. In the event that the Bureau does not issue a revised or alternative version of the booklet that addresses the integrated disclosure requirements by the effective date of this final rule (August 1, 2015), the Bureau believes creditors should be permitted to rely on booklets they may have already modified in accordance with current Regulation X § 1024.6(d), including any permissible modifications creditors have made to the title. The Bureau believes this commentary is appropriate because a rule that restricts a creditor’s ability to change the title of the current version of the booklet may impose unnecessary compliance burden on creditors without material consumer benefit. To provide creditors with guidance on compliance with the effective date of the final rule, comment 19(g)(2)–3 also contains a crossreference to comment 1(d)(5)–1. Clarifications. A commenter requested clarification on whether the graphic on the cover can be removed and whether the booklet would be required to be provided on 8.5 x 11 paper as a separate disclosure. Final § 1026.19(g)(2) permits certain changes to the booklet, including changes to the graphics on the cover. Final § 1026.19(g)(2)(iv) provides that the cover of the booklet may be in any form and may contain any drawings, pictures, or artwork, provided the words ‘‘settlement costs’’ are used in the title. The booklet is not required to be provided on 8.5 x 11 paper. Comment 19(g)(2)–1 clarifies that any color, size and quality of paper, type of print, and method of reproduction may be used so long as the booklet is clearly legible. Final provisions. Final § 1026.19(g)(1) and (2), comments 19(g)(1)–1, –2, and –3, 19(g)(2)–1, and comments 19(g)(2)– 1, –2, and –3 are adopted pursuant to the Bureau’s authority under TILA section 105(a) and RESPA section 19(a). The final rule and commentary are consistent with TILA’s purposes in that it will increase consumer awareness of the costs of the transaction by informing consumers that settlement costs can be influenced by shopping, thereby promoting the informed use of credit. The final rule and commentary will enhance consumers’ ability to shop for a mortgage loan, which will effect changes in the settlement process that will result in the elimination of kickbacks, referral fees, and other practices that tend to increase unnecessarily the costs of certain settlement services, consistent with the Bureau’s authority under section 19(a) of RESPA. The final rule and commentary implement Dodd-Frank Act section 1450, which amends RESPA section 5(a) and (b) to set forth new content for the special information booklet.

Section 1026.20 Disclosure Requirements Regarding Post- Consummation Events 20(e) Escrow Account Cancellation Notice for Certain Mortgage Transactions Sections 1461 and 1462 of the Dodd- Frank Act amended TILA to create a new section 129D, which establishes certain requirements for escrow accounts 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). 15 U.S.C. 1639d(a) through (j). New TILA section 129D(h) and (j) require certain disclosures when an escrow account is established and certain other disclosures when an escrow account is refused or cancelled by the consumer, respectively. Specifically, new TILA section 129D(h) establishes that a creditor must provide a disclosure with the information set forth under TILA section 129D(h) 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 established in connection with the transaction (the Pre- Consummation Escrow Establishment Disclosure). Section 129D(j)(1)(A) establishes that a creditor or servicer must 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). Section 129D(j)(1)(B) establishes that a creditor or servicer must provide disclosures after 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 the consumer’s escrow account established in connection with a consumer credit transaction secured by real property and in accordance with any statute, regulation, or contractual agreement (the Post-Consummation Escrow Cancellation Disclosure). The Board’s 2011 Escrows Proposal would have implemented the new TILA escrow requirements, and most aspects of that proposal have been implemented in the Bureau’s 2013 Escrows Final Rule. See 78 FR 4726 (Jan. 22, 2013). But, for reasons discussed in greater detail in the section-by-section analysis of § 1026.38(l)(7) (Escrow account), the Bureau proposed to implement the Pre- Consummation Escrow Establishment Disclosure and Pre-Consummation Escrow Waiver Disclosure, along with certain other new disclosure requirements for mortgage transactions established by Title XIV (collectively, Affected Title XIV Disclosures), as part of the TILA–RESPA Proposal. Additionally, on November 23, 2012, the Bureau issued a final rule effectively exempting persons from providing the Post-Consummation Escrow Cancellation Disclosure. See 77 FR 70105 (Nov. 23, 2012). In that final rule, the Bureau stated that it had concluded that delaying the Post-Consummation Escrow Cancellation Disclosure and coordinating its implementation with that of the integrated disclosure requirements is in the interest of industry and consumers alike. 77 FR 70105, 70111 (Nov. 23, 2012). The Bureau believed that implementing the Post-Consummation Escrow Cancellation Disclosure along with the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00167 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79896 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 250 For reasons set forth in greater detail in the section-by-section analysis of § 1026.38(l)(7) below, the Bureau proposed to apply the TILA section 129D escrow requirements to all transactions subject to proposed § 1026.19(f), which would have included all closed-end credit transactions secured by real property, other than a reverse mortgage subject to § 1026.33, whether or not secured by a first-lien on real property. integrated disclosure requirements would allow the Bureau to use feedback it has received from consumer testing conducted prior to the TILA–RESPA Proposal, the comments on that proposal, and any additional 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 integrated disclosure. The Bureau stated its belief that consumers 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. The Bureau also noted that commenters to the Board’s 2011 Escrows Proposal urged the Board to delay implementation of the Dodd-Frank Act’s escrow disclosure requirements until the Bureau could finalize the integrated disclosure requirements. The commenters stated that harmonizing the rulemakings would allow for a comprehensive approach, and avoid duplicative forms and repetitive rulemakings. The Bureau believes that it is important to coordinate the implementation and requirements of the Pre-Consummation Escrow Establishment Disclosure, the Pre-Consummation Escrow Waiver Disclosure, and the Post-Consummation Escrow Cancellation Disclosure, because it will result in a more comprehensive and harmonized set of escrow disclosures, which will aid consumer understanding and facilitate compliance for industry.

Accordingly, in this final rule, the Bureau is adopting § 1026.20(e) to implement the Post-Consummation Escrow Cancellation Disclosure, 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). Disclosure of this information would ensure that consumers have the facts to understand a key aspect of their mortgage loan and avoid the uninformed use of credit, consistent with the purpose of TILA. The Bureau also believes that § 1026.20(e) ensures that the features of the mortgage transaction, both initially and over the term of the transaction, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the mortgage transaction, in light of the facts and circumstances, consistent with Dodd-Frank Act section 1032(a), and improves consumer awareness and understanding of residential mortgage loans, which is in the interest of consumers and the public, consistent with section 1405(b). Except as otherwise discussed below, § 1026.20(e) generally adopts the proposed Post- Consummation Escrow Disclosure Cancellation requirements in the Board’s 2011 Escrows Proposal. 20(e)(1) Scope In the Board’s 2011 Escrows Proposal, the Board proposed to add a new § 226.20(d) to Regulation Z to implement the disclosure requirements of TILA sections 129D(j)(1)(B) and 129D(j)(2), as enacted by section 1462 of the Dodd-Frank Act. The Board stated in the proposal that TILA section 129D(j)(1)(B) requires a creditor or servicer to provide the disclosures set forth in TILA section 129D(j)(2) when a consumer requests closure of an escrow account that was established in connection with a transaction secured by real property.

The disclosure requirements under proposed § 226.20(d), however, would have covered closed-end credit transactions secured by a first lien on real property or a dwelling. The Board stated in the proposal its belief that the information disclosed when an escrow account will be cancelled likely would be just as useful to a consumer who has a loan secured by manufactured housing as it would to a consumer who has a mortgage loan secured by a site-built home. The Board also believed that the coverage of all dwellings would ease compliance burden for creditors because the coverage of all dwellings would eliminate the analysis that creditors would have to undertake to determine whether and which disclosures would be triggered when a transaction will be secured by any one of various types of dwellings. The Board also proposed to apply § 226.20(d) to instances in which the creditor or servicer decides independently to cancel an escrow account. The Board believed that a consumer whose escrow account will be closed should be informed of the risks attendant with not having an escrow account, even if the consumer is not requesting the cancellation of the account.

Comments Some industry commenters responding to the Board’s 2011 Escrows Proposal asserted that the Board should not apply any of the proposed escrow disclosure requirements to transactions secured only by real property (e.g., vacant or unimproved land), because escrow accounts are rarely established for such transactions. Commenters also asserted that none of the disclosure requirements should apply to dwellings because dwellings may include personal property, such as manufactured homes, recreational vehicles, and boats, and escrow accounts are seldom established for such transactions. Some commenters, including a large bank commenter and an industry trade association representing banks, asserted that the Board exceeded its authority when it proposed to apply the escrow disclosure requirements to transactions secured by dwellings and transactions secured only by real property. Final Rule The Bureau is adopting proposed § 226.20(d) in this final rule renumbered as § 1026.20(e)(1), 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). Other than a modification to exempt reverse mortgage transactions under § 1026.33, § 1026.20(e)(1) finalizes the scope as proposed by the Board. The modification aligns the scope of the Post-Consummation Escrow Cancellation Disclosure more closely with the scope of § 1026.19(f) 250 and the post-consummation partial payment disclosure required by § 1026.39. The Bureau believes this modification will facilitate compliance with the integrated disclosure requirements and Post- Consummation Escrow Cancellation Disclosure requirements. Further, the Bureau noted in the TILA–RESPA Proposal that reverse mortgages have unusual terms and features, and that it intended to address these unique transactions in a separate, future rulemaking. See 77 FR 51115, 51137, 51157 (Aug. 23, 2012).

The Bureau has considered the comments regarding the scope of proposed § 226.20(d). Final § 1026.20(e)(1) only applies to consumer credit transactions for which an escrow account was established. Therefore, if escrow accounts are not typically established in connection with consumer credit transactions secured by personal property used as dwellings, or by vacant land, the disclosure requirement will not be triggered, and VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00168 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79897 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations thus, the rule may not be a compliance burden. In addition, consumer credit transactions are subject to substantial variability. The Bureau believes that requiring the provision of the Post- Consummation Escrow Cancellation Disclosure to consumers in transactions secured by personal property (e.g., manufactured homes, boats, or recreational vehicles) used as dwellings, or transactions secured only by real property (e.g., vacant or unimproved land), however rarely escrow accounts may be established in such transactions, may provide an important consumer protection if, in fact, an escrow account was set up. Further, the coverage of all dwellings would facilitate compliance because the coverage of all dwellings would eliminate the analysis that creditors would have to undertake to determine whether the cancellation of the escrow account established for a loan secured by a particular type of dwelling would trigger the disclosures. Section 1026.20(e)(1) also provides that the term ‘‘escrow account’’ has the same meaning as under 12 CFR 1024.17(b), and the term ‘‘servicer’’ has the same meaning as under 12 CFR 1024.2(b). The Bureau is also finalizing comment 20(d)–1 proposed by the Board, renumbered as comment 20(e)(1)–1. Comment 20(e)(1)–1 explains that the term ‘‘real property’’ includes vacant and unimproved land. It clarifies that the term ‘‘dwelling’’ includes vacation and second homes and manufactured homes, boats, and trailers used as residences, and refers to additional guidance regarding the term provided by § 1026.2(a)(19) and related commentary. The Bureau is also finalizing comments 20(d)(2)–2 and –3 as proposed by the Board, renumbered as comments 20(e)(1)–2 and –3, respectively. Comment 20(e)(1)–2 explains that neither creditors nor servicers are required to provide the disclosures required by § 1026.20(e)(2) when an escrow account that was established solely in connection with the consumer’s delinquency or default on the underlying debt obligation will be cancelled. Comment 20(e)(1)–3 explains that neither creditors nor servicers are required to provide disclosures required by § 1026.20(e)(2) when the underlying debt obligation for which an escrow account was established is terminated, including by repayment, refinancing, rescission, and foreclosure. Finally, as discussed above, the Board also proposed to require the provision of the disclosure when the creditor or servicer decides independently to cancel an escrow account. The Bureau is also finalizing this aspect of the Board’s proposal without modification.

20(e)(2) Content of Required Disclosures As discussed above, new TILA section 129D(j)(1)(B) establishes that a creditor or servicer must provide disclosures with the information set forth under TILA section 129D(j)(2) when a consumer chooses, and provides written notice of the choice, to close the consumer’s escrow account established in connection with a consumer credit transaction secured by real property, and in accordance with any statute, regulation, or contractual agreement. As noted above, the statutory content requirements for this Post- Consummation Escrow Cancellation Disclosure are the same as the content requirements for the Pre-Consummation Escrow Waiver Disclosure. The Board proposed § 226.20(d)(2), which would have set forth the content requirements of the Post-Consummation Escrow Cancellation Disclosure. Proposed § 226.20(d)(2) would have required a creditor or servicer to provide a statement on the escrow cancellation notice that the notice is to inform the consumer that the escrow account on the consumer’s mortgage is being closed, the reason for its closure, and the risk of not having an escrow account. It would have also required the creditor or servicer to disclose the dollar amount of any fee that the consumer will be charged in connection with the closure. Proposed § 226.20(d)(2) would have further required the creditor or servicer to explain what an escrow account is and how it works, and to describe the consequences of the failure to pay for property costs, such as taxes and property insurance. Proposed § 226.20(d)(2) would have additionally required the creditor or servicer to inform the consumer whether the consumer can request that the escrow account be kept open. If the consumer can make such request, proposed § 226.20(d)(2) would have required the creditor or servicer to disclose the telephone number that the consumer can use to make the request and the latest date by which the consumer can make the request. The proposal would have also provided that if the creditor or servicer independently decides to cancel the escrow account, rather than agreeing to close it at the request of the consumer, and does not charge a fee in connection with the cancellation, the creditor or servicer shall omit this disclosure from the table. Comments A national consumer advocacy group asserted that the Board should require the creditor or servicer to state a reason if it decides independently to cancel the escrow account, or else the consumer would lack the information needed to determine whether the escrow cancellation is legitimate. Comments from industry commenters also indicated that some industry commenters disagreed with the model language the Board proposed to implement the content requirements that the Dodd-Frank Act established for the Post-Consummation Escrow Cancellation Disclosure. A national trade association representing property insurance carriers expressed concern that the model language the Board proposed to describe lender-placed insurance might have violated the McCarran-Ferguson Act because some States have established regulations with respect to notifying consumers of the placement of lender-placed insurance by their creditors.

A regional bank holding company commenter asserted that the proposed requirement that servicers must disclose the latest date by which the consumer can make the request to keep the consumer’s escrow account was unclear because the proposed rule and corresponding commentary do not provide direction as to whether there is a minimum or maximum time limit for this date, or whether the disclosure is optional based on whether or not the creditor has an operational cut-off date. A large bank commenter sought clarification from the Board with respect to how creditors that do not charge a fee for the cancellation of an escrow account are to comply with the proposed requirement that such fee be disclosed.

Final Rule 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 is adopting the proposed content requirements of § 226.20(d)(2), with certain modifications and adjustments in response to consumer testing and comments received, in § 1026.20(e)(2). Under the heading ‘‘Escrow Closing Notice,’’ § 1026.20(e)(2) provides that if an escrow account was established in connection with a transaction subject to § 1026.20(e), and the escrow account will be cancelled, the creditor or servicer shall disclose clearly and conspicuously the information set forth in § 1026.20(e)(2)(i) and (ii). Section 1026.20(e)(2)(i) requires a statement informing the consumer of the date on which the consumer will no longer have an escrow account. It also VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00169 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79898 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations requires a statement that an escrow account may also be called an impound or trust account, the reason why the escrow account will be closed, and a statement that without an escrow account, the consumer must pay all property costs, such as taxes and homeowner’s insurance, directly, possibly in one or two large payments a year. The final rule provision also requires a table, titled ‘‘Cost to you,’’ that contains an itemization of the amount of any fee the creditor or servicer imposes on the consumer for closing the consumer’s escrow account in connection with the transaction, labeled ‘‘Escrow Closing Fee,’’ and a statement that the fee is for closing the escrow account.

In addition to the legal authorities referenced above, TILA section 129D(j)(2)(D) establishes that the Bureau may include in the Post-Consummation Escrow Cancellation Disclosure such other information as it determines necessary for the protection of the consumer. A consumer advocacy group asserted that the Board’s proposed notice requirements would not have given consumer sufficient information to enable them to make informed decisions in the event that an existing escrow account is canceled. In consideration of the consumer advocacy group’s comments, the Bureau has added the requirement to § 1026.20(e)(2)(i) that the creditor or servicer include on the Post- Consummation Escrow Cancellation Disclosure a statement informing the consumer of the date on which the consumer will no longer have an escrow account. The Bureau believes that by identifying the point in time at which the responsibility of ensuring that previously-escrowed obligations are paid in a timely manner will transfer to the consumer, the disclosure will assist consumers in making decisions that will help ensure that the obligations are paid in such manner. For instance, knowing that the escrow account will be canceled as of a date certain may motivate the consumer to save a percentage of the consumer’s income to ensure that the consumer’s property tax obligation is paid when it becomes due. Under the reference ‘‘In the future,’’ final § 1026.20(e)(2)(ii)(A) requires a statement of the consequences if the consumer fails to pay property costs, including the actions that a State or local government may take if property taxes are not paid and the actions the creditor or servicer may take if the consumer does not pay some or all property costs, such as adding amounts to the loan balance, adding an escrow account to the loan, or purchasing a property insurance policy on the consumer’s behalf that may be more expensive and provide fewer benefits than a policy that the consumer could obtain directly. The Bureau has considered the comments and does not believe that the content requirements conflict with the McCarran-Ferguson Act, because it does not prohibit a creditor from complying with applicable State regulations on providing notifications to consumers with respect to the creditor’s placement of such insurance.

Section 1026.20(e)(2)(ii)(B) requires a statement of a telephone number the consumer may use to request information about the escrow cancellation. The Bureau understands the view of the consumer advocate commenter that in situations where the creditor or servicer independently cancels the consumer’s escrow account, the consumer should be able to receive information about the reason for the cancellation. However, the Bureau believes that this consideration must be counterbalanced by the fact that there could be a variety of reasons for the cancellation such that it would be difficult to provide model disclosures that can be used to facilitate compliance. The Bureau believes the best way to balance these competing concerns is to require the creditor or servicer to provide the consumer with a telephone number that the consumer can use to request more information about the cancellation of the consumer’s escrow account. Accordingly the Bureau is adopting final § 1026.20(e)(2)(ii)(B), which requires a statement with a telephone number that the consumer can use to request additional information about the escrow account cancellation.

The Bureau modified the proposed content requirements to address situations where the creditor or servicer does not have a cut-off date. Accordingly, § 1026.20(e)(2)(C) requires a statement of whether the creditor or servicer offers the option of keeping the escrow account open and, as applicable, a telephone number the consumer can use to request that the account be kept open. Section 1026.20(e)(2)(ii)(D) requires a statement of whether there is a cut-off date by which the consumer can request that the account be kept open.

The Bureau is also making modifications and adjustments to the Board’s proposed content requirements to incorporate elements of the model language the Bureau is adopting for the Pre-Consummation Escrow Establishment Disclosure and the Pre- Consummation Escrow Waiver Disclosure. The model language the Bureau is adopting for the Pre- Consummation Escrow Establishment Disclosure and the Pre-Consummation Escrow Waiver Disclosure is based on prototype language the Bureau created for both disclosures, which was refined over several rounds of testing, in response to feedback from consumer and industry participants to incorporate the use of plain language, simplify the disclosures, and improve accuracy and consumer comprehension. See Kleimann Testing Report at 228, 260, and 272.

The Bureau believes that it is appropriate to incorporate elements of the model language that the Bureau is adopting for the Pre-Consummation Escrow Establishment Disclosure and the Pre-Consummation Escrow Waiver Disclosure in the model language used for the Post-Consummation Escrow Cancellation Disclosure. Such incorporation will harmonize the content of the Post-Consummation Escrow Cancellation Disclosure, the Pre- Consummation Escrow Establishment Disclosure, and the Pre-Consummation Escrow Waiver Disclosure and create a synchronized and comprehensive set of disclosures regarding escrow accounts. Consumers will also benefit from a more fully integrated and synchronized disclosure scheme. Additionally, as noted above, the Dodd-Frank Act’s statutory content requirements for the Pre-Consummation Escrow Waiver Disclosure and the Post-Consummation Escrow Cancellation Disclosure are the same. Accordingly, the Bureau believes that a more synchronized disclosure scheme for the Pre-Consummation Escrow Waiver Disclosure and the Post- Consummation Escrow Cancellation Disclosure will facilitate compliance for industry.

The Bureau is finalizing comment 20(d)(2)–1 as proposed by the Board, renumbered as comment 20(e)(2)–1. Comment 20(e)(2)–1 explains that the clear and conspicuous standard generally requires that disclosures be in a reasonably understandable form and readily noticeable to the consumer. The Bureau is finalizing comment 20(e)(2)(i)–1, which clarifies the requirement to disclose the Escrow Closing Fee. Comment 20(e)(2)(i)–1 explains that § 1026.20(e)(2)(i) requires the creditor to itemize the amount of any fee the creditor or servicer imposes on the consumer in connection with the closure of the consumer’s escrow account, labeled ‘‘Escrow Closing Fee.’’ If the creditor or servicer independently decides to cancel the escrow account, rather than agreeing to close it at the request of the consumer, and does not VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00170 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79899 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations charge a fee in connection with the cancellation, the creditor or servicer complies with § 1026.20(e)(2)(i) by leaving the disclosure blank on the front-side of the one-page document described in § 1026.20(e)(4). The Bureau is making this clarification to harmonize the disclosure of the Escrow Closing Fee with the disclosure of the Escrow Waiver Fee required by § 1026.38(l)(7)(i)(B)(2), discussed in greater detail below in the section-bysection analysis of § 1026.38(l)(7). The Bureau also believes that the comment addresses the clarification sought by a large bank commenter with respect to how creditors that do not charge a fee for the cancellation of an escrow account are to comply with the proposed requirement that such a fee be disclosed.

20(e)(3) Optional Information The Board proposed § 226.20(d)(3), which would have provided that the creditor or servicer providing the Post- Consummation Escrow Cancellation Disclosure, may, at its option, include its name or logo, or the consumer’s name, property address, or loan number on the disclosure so long as it complies with the form requirements that the Board proposed. Some commenters, including several industry trade associations representing banks and financial services companies asserted that creditors should be allowed to add whatever information they deem important to the Post-Consummation Escrow Cancellation Disclosure. Final rule. The Bureau has considered the comments, and notes that this final rule does not prohibit a creditor or servicer from providing additional information the creditor or servicer deems important at the same time as the creditor or servicer provides the Post- Consummation Escrow Cancellation Disclosure. Under the final rule, the creditor or servicer may provide additional information, provided that they follow the requirements set forth in this § 1026.20(e) with respect to the Post-Consummation Escrow Cancellation Disclosure. For example, the creditor or servicer may provide additional information on separate pages and include those pages in the same transmittal that contains the Post- Consummation Escrow Cancellation Disclosure. Accordingly, the Bureau is generally adopting the provision that the Board proposed, with modifications as described below. The Bureau believes that the modifications to the optional information requirements enhance consumer understanding, and the modifications to the form requirements complement the form of the Post- Consummation Escrow Cancellation Disclosure finalized by the Bureau in § 1026.19(e)(4).

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 adopts § 1026.20(e)(3). Final § 1026.20(e)(3) provides that creditor or servicer may, at its option, include its name or logo, the consumer’s name, phone number, mailing address and property address, or the issue date of the notice, loan number or the consumer’s account number on the notice required by this § 1026.20(e). Section 1026.20(e)(3) also provides that, except for the name and logo of the creditor or servicer, the information may be placed between the heading required by § 1026.20(e)(2) and the disclosures required by § 1026.20(e)(2)(i) and (ii). The name and logo may be placed above the heading required by § 1026.20(e)(2). The Bureau is finalizing comment 20(d)(3)-1 proposed by the Board substantially as proposed, renumbered as comment 20(e)(3)–1. Comment 20(e)(3)–1 explains that § 1026.20(e)(3) lists information that the creditor or servicer may, at its option, include on the notice required by this § 1026.20(e), and provides guidance on the placement of the optional information. 20(e)(4) Form of Disclosure The Board proposed form requirements for the Post- Consummation Escrow Cancellation Disclosure in proposed § 226.20(d)(1). The Board generally proposed to require the creditor or servicer to provide the disclosures in the form of a table and in the format of a set of questions and answers. The Board also proposed commentary to explain the proposed form requirements and proposed a model form of appendix H to Regulation Z that creditors and servicers could use to comply with the proposed requirements. Commenters did not provide comments to the Board on this aspect of the Board’s proposal. Accordingly, the Bureau is adopting form requirements for the Post- Consummation Escrow Cancellation Disclosure in § 1026.20(e)(4), as well as a model form that creditors and servicers could use to comply with the form requirements. The model form is adopted as form H–29 of appendix H to Regulation Z, as described below in the section-by-section analysis of appendix H to Regulation Z below. The Bureau is generally adopting the form requirements of the Board’s proposal, but the Bureau is modifying them to harmonize and synchronize the appearance of the Post-Consummation Escrow Cancellation Disclosure with the Pre-Consummation Escrow Establishment Disclosure and Pre- Consummation Escrow Waiver Disclosure that the Bureau is adopting in this final rule. The Bureau believes that a harmonized and synchronized set of disclosures benefit consumers by enhancing consumer understanding and facilitate compliance by industry. The Bureau is adopting § 1026.20(e)(4) 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). Section 1026.20(e)(4) provides that the disclosures required by § 1026.20(e)(2) shall be provided in a minimum 10-point font, grouped together on the front side of a one-page document, separate from all other materials, with the headings, content, order, and format substantially similar to model form H–29 of appendix H. It also provides that the disclosure of the heading required by § 1026.20(e)(2) shall be more conspicuous than, and shall precede, the other disclosures required by § 1026.20(e)(2). The Bureau is finalizing comment 20(d)(1)(i)–1 as proposed by the Board, renumbered as comment 20(e)(4)–1. The Bureau is also finalizing comment 20(d)(1)(i)–2 as proposed by the Board, renumbered as 20(e)(4)–2. Comment 20(e)(4)–1 explains that the disclosures required by § 1026.20(e)(2) must be grouped together on the front side of a separate one-page document that contains no other material. Comment 20(e)(4)–2 explains that the notice containing the disclosures required by § 1026.20(e)(2) must be in writing in a form that the consumer may keep. The comment also refers to § 1026.17(a) and related commentary for additional guidance on the form requirements applicable to the disclosures required by § 1026.20(e)(2).

20(e)(5) Timing Section 129D(j)(1)(B) of TILA, as added by Dodd-Frank Act section 1462, requires a creditor or servicer to provide the Post-Consummation Escrow Cancellation Disclosure in a timely manner. In the Board’s 2011 Escrows Proposal, under proposed § 226.20(d)(4), a creditor or a servicer would have had to ensure that the Post-Consummation Escrow Cancellation Disclosure would be received by the consumer no later than three business days before closure of the consumer’s escrow account. The Board believed that a consumer should be provided sufficient time to consider the attendant responsibilities and risks of not having an escrow account. The Board additionally believed that three VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00171 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79900 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations business days, which would mean all calendar days except for Sundays and specified public holidays, rather than the general definition of business day in § 1026.2(a)(6), would provide a consumer with such time to reflect on the consequences and risks associated with the closure of an escrow account. The Board also proposed § 226.20(d)(5), which would have applied the ‘‘mailbox rule’’ to the timing requirement of proposed § 226.20(d)(4). Proposed § 226.20(d)(5) would have provided that if the disclosures required by § 226.20(d)(2) are mailed to the consumer or delivered by means other than in person, the consumer is considered to have received the disclosures three business days after they are mailed or delivered. The Board also proposed commentary to § 226.20(d)(4) and (5) to further clarify the proposed requirements and illustrate the requirements with examples.

Comments Some industry commenters opposed the timing requirement set forth in proposed § 226.20(d)(4) because they believed that the creditor or servicer should not have to wait to close the consumer’s escrow account after providing the consumer with the cancellation notice. Several industry trade associations representing banks and financial companies asserted that the Dodd-Frank Act does not establish a waiting period requirement for termination of escrow accounts. They also asserted that imposing a waiting period for an escrow account termination would be inconsistent with the Homeowners Protection Act of 1998 (12 U.S.C. 4901 et seq.) (HPA), because the HPA established timing requirements that a servicer must follow when the servicer cancels private mortgage insurance. It appears that the commenters believed that the timing requirements the Board set forth in proposed § 226.20(d)(4) would have been inconsistent with the requirements of the HPA if the consumer’s escrow account was being cancelled in connection with the cancellation of private mortgage insurance pursuant to the HPA.

The commenters also asserted that a waiting period for an escrow termination also contradicts proposed § 226.45(b)(3)(i)(A) in the Board’s 2011 Escrows Proposal, because the provision would have permitted cancellation of an escrow account when a loan is paid in full. A large bank commenter asserted rather than requiring creditors to send the Post-Consummation Escrow Cancellation Disclosure prior to the closure of the consumer’s escrow account, the Bureau should permit creditors to send the notice after the consumer’s escrow account has been closed because the consumer retains the ability to reinstate the escrow account after its closure.

A national consumer advocacy group commenter asserted that the threebusiness-day waiting period would not give consumers sufficient notice to dispute escrow account cancellations or to make arrangements to begin saving for expenses that have been escrowed. This commenter also stated that the proposal would be at odds with RESPA’s qualified written request requirements, which provides that servicers have 30 days to respond to a consumer’s qualified written request to correct a servicing error, because the timing requirement set forth in proposed § 226.20(d)(4) would have permitted a servicer to cancel a consumer’s escrow account before the servicer is required to correct any servicer mistakes. The commenter asserted that the Board should impose a 45-day minimum notice requirement and an automatic extension requirement while the servicer investigates a consumer’s qualified written requests. Final Rule The Bureau has considered the comments and is finalizing the proposal’s timing requirements set forth in proposed § 226.20(d)(4) and (5), renumbered as § 1026.20(e)(5), with modifications. The Bureau is adopting § 1026.20(e)(5) 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). Section 1026.20(e)(5)(i) provides that if the creditor or servicer cancels the escrow account at the consumer’s request, the creditor or servicer shall ensure that the consumer receives the disclosures required by § 1026.20(e)(2) no later than three business days before closure of the consumer’s escrow account. The Bureau believes that a consumer should be provided sufficient time to consider the attendant responsibilities and risks of not having an escrow account prior to the closure of the account. Three business days, which would include all calendar days except for Sundays and specified public holidays, would provide a consumer with such time if the creditor or servicer cancels the escrow account at the consumer’s request. Further, finalizing the proposed timing requirements in the Board’s proposed § 226.20(d)(4) and (5) is well within the Bureau’s authority to implement TILA section 129D(j)(1)(B) which requires the creditor or servicer to provide the Post-Consummation Escrow Cancellation Disclosure in a ‘‘timely’’ manner.

Section 1026.20(e)(5)(i) does not cause an irreconcilable conflict with the timing requirements of the HPA. If the creditor must cancel the consumer’s escrow account by a date certain pursuant to the requirements established by the HPA, the Bureau believes that the comments illustrate the actions the creditor must take with respect to ensuring that the account is cancelled by that date. With respect to the concern about the imposition of a waiting period for the cancellation of an escrow account when a loan is paid in full, comment 20(e)(1)–3, discussed above, clarifies that creditors and servicers are not required to provide the consumer with the Post-Consummation Escrow Cancellation Disclosure when the mortgage loan for which an escrow account was established is terminated by, for example, repayment of the loan. Section 1026.20(e)(5)(ii) provides that if the creditor or servicer cancels the escrow account and the cancellation is not at the consumer’s request, the creditor or servicer shall ensure that the consumer receives the disclosures required by § 1026.20(e)(2) no later than 30 business days before the closure of the consumer’s escrow account. Section 1026.20(e)(5)(iii) provides that if the disclosures required by § 1026.20(e)(2) are not provided to the consumer in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail.

As noted, a consumer advocacy group stated that three business days’ notice of cancellation is not sufficient time for consumers to contest the cancellation, where the consumer did not initiate the cancellation. The Bureau believes that providing insufficient notice of cancellation could result in consumer harm, especially when the cancellation was based on the creditor or the servicer’s error. Accordingly, the Bureau is modifying the Board’s proposed timing requirements where the escrow account is being cancelled by the creditor or servicer, but not at the consumer’s request.

To address these concerns, § 1026.20(e)(5)(ii) provides that if the creditor or servicer cancels the escrow account and the cancellation is not at the consumer’s request, the creditor or servicer shall ensure that the consumer receives the disclosures required by § 1026.20(e)(2) no later than 30 business days before the closure of the consumer’s escrow account. The Bureau acknowledges that the 2013 RESPA VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00172 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79901 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 251 See 78 FR 10696, 10878 (Feb. 14, 2013). Servicing Final Rule generally provides a servicer with 30 days (excluding legal public holidays, Saturdays, and, Sundays) to respond after it receives the borrower’s notice of error.251 But the Bureau believes that this must be counterbalanced by the concern about compliance burden with incorporating the timing requirements set forth in that rule in § 1026.20(e)(4) because those requirements would not be analogous to Regulation Z’s definitions of business day.

The Bureau is also finalizing proposed comments 20(d)(4)–1 and –2 substantially as proposed, renumbered as comment 20(e)(5)(i)–1. Comment 20(e)(5)(i)–1 explains that § 1026.20(e)(5)(i) provides that if the creditor or servicer cancels the escrow account at the consumer’s request, the creditor or servicer shall ensure that the consumer receives the disclosures required by § 1026.20(e)(2) no later than three business days before closure of the consumer’s escrow account. The comment also explains that for purposes of § 1026.20(e)(5), the term ‘‘business day’’ means all calendar days except Sundays and legal public holidays referred to in § 1026.2(a)(6). The comment additionally references comment 2(a)(6)–2, and illustrates the requirement with an example. The Bureau is adopting the Board’s proposed comment 20(d)(5)–1 substantially as proposed, renumbered as comment 20(e)(5)(iii)–1. Comment 20(e)(5)(iii)–1 explains that § 1026.20(e)(5)(iii) provides that if the disclosures required under § 1026.20(e)(2) are not provided to the consumer in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail. Accordingly, if the creditor or servicer provides the disclosures required by § 1026.20(e)(2) by mail, the consumer is considered to have received them three business days after they are placed in the mail for purposes of determining when the waiting periods required by § 1026.20(e)(5)(i) and (ii) begins. The comment also explained that creditors and servicers that use electronic mail or a courier to provide disclosures may also follow this approach. The comment further explains that if, however, the creditor or servicer delivers the disclosures required by § 1026.20(e)(2) to the consumer in person, the escrow account may be closed any time on the third or 30th business day following the date of delivery, as applicable. Finally, the comment explains that whatever method is used to provide disclosures, creditors and servicers may rely on documentation of receipt in determining when the three-business-day period required by § 1026.20(e)(5)(i) or the 30business-day period required by § 1026.20(e)(5)(ii) before the closure of the escrow account begins. Section 1026.22 Determination of Annual Percentage Rate 22(a) Accuracy of Annual Percentage Rate The Bureau proposed conforming amendments to § 1026.22 to reflect the fact that proposed § 1026.38(o)(2) would have set forth finance charge tolerances for mortgage transactions subject to § 1026.19(f), as discussed below. These tolerances are not different from the tolerances that currently apply to closed-end mortgage transactions. The tolerances set forth in current § 1026.18(d)(1) would have continued to apply to closed-end transactions that would not have been subject to proposed § 1026.19(f). Accordingly, the Bureau proposed to revise § 1026.22(a)(4) and (5) and comment 22(a)(4)–1 to add references to § 1026.38(o)(2).

The Bureau did not receive comments on this aspect of the proposal. Accordingly, for the reasons stated in the proposal, the Bureau is finalizing the amendments to § 1026.22 as proposed.

Section 1026.24 Advertising 24(d) Advertisement of Terms That Require Additional Disclosures 24(d)(2) Additional Terms Comment 24(d)(2)–2 currently provides guidance on how to state the terms of repayment in an advertisement, as required in § 1026.24(d)(2)(ii). The Bureau proposed to exercise its authority under TILA section 105(a) to revise the comment to conform with the additional forms of repayment term disclosures that would have applied to various types of mortgage transactions under the proposal. Proposed comment 24(d)(2)–2 would have clarified that, in advertisements for closed-end credit secured by real property or a dwelling, the repayment terms disclosed in the interest rate and payment summary table or the projected payments table under §§ 1026.18(s) or 1026.37(c) and 1026.38(c), as applicable, can be provided in an advertisement pursuant to § 1026.24(d)(2)(ii). The Bureau stated in the proposal that it believed that the format of disclosures applicable to a particular transaction is also the most appropriate format for advertising purposes. Proposed comment 24(d)(2)–2 also would have made clear that the payment schedule described in § 1026.18(g) is not the only permissible disclosure under § 1026.24(d)(2)(ii). The Bureau did not receive comments specifically related to the proposed revision to comment 24(d)(2)–2. However, several commenters stated that advertising rules for mortgages are generally too complex and discourage providing any useful information on the term of the loan or pricing. Commenters also stated that the annual percentage rate should not be required on mortgage advertisements because consumers do not understand the annual percentage rate. The Bureau did not propose such a broad change to the advertising requirements of § 1026.24 in the proposal, but rather only proposed the clarifications to comment 24(d)(2) described above to reflect the interest rate and payment summary table under § 1026.18(s) and the new provisions applicable to the integrated disclosures, the projected payments table under §§ 1026.37(c) and 1026.38(c). While the Bureau recognizes some of the issues related to consumer understanding of the annual percentage rate disclosure are described in the proposal and the section-by-section analysis of § 1026.37(l), the Bureau did not propose to eliminate the requirement that it be included in mortgage advertisements and, thus, it will continue to be required by § 1026.24 under this final rule. Accordingly, the Bureau adopts the revisions to comment 24(d)(2)–2 as proposed.

Section 1026.25 Record Retention In the TILA–RESPA Proposal, the Bureau proposed to amend § 1026.25 to apply the recordkeeping requirements under Regulation X to the proposed integrated disclosures and to require creditors to keep such records in an electronic, machine readable format. 25(a) General Rule The Bureau proposed to amend § 1026.25(a) to exclude transactions subject to the disclosure requirements of § 1026.19(e) and (f) from the general recordkeeping requirement. Instead, the Bureau proposed to establish the recordkeeping requirements for such transactions under a new § 1026.25(c)(1).

The Bureau did not receive comments regarding the amendment to § 1026.25(a). Accordingly, the Bureau is finalizing § 1026.25(a) as proposed. VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00173 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79902 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 252 ‘‘[A]ctions [under sections 6, 8, or 9] brought by the Bureau, the Secretary, the Attorney General of any State, or the insurance commissioner of any State may be brought within 3 years from the date of the occurrence of the violation.’’ RESPA section 16; 12 U.S.C. 2614.

253 57 FR 49600, 49607 (Nov. 2, 1992). 25(c) Records Related to Certain Requirements for Mortgage Loans 25(c)(1) Records Related to Requirements for Loans Secured by Real Property 25(c)(1)(i) General Rule Neither TILA nor RESPA contain record retention requirements. Section 1026.25 of Regulation Z requires creditors to retain evidence of compliance with TILA for two years after the date disclosures are required to be made or action is required to be taken. Section 1024.7(f) of Regulation X requires lenders to retain documentation of any reason for providing a revised RESPA GFE for no less than three years after settlement. Furthermore, § 1024.10(e) of Regulation X requires lenders to retain each completed RESPA settlement statement and related documents for five years after settlement, unless the lender disposes of its interest in the mortgage and does not service the mortgage. The Bureau proposed to reconcile these provisions by generally requiring a creditor to retain evidence of compliance with the requirements of § 1026.19(e) and (f) for three years. The Bureau stated in the proposal that it recognized that extending the record retention requirement from two years, as currently provided in Regulation Z, to three years may result in increased costs. However, the Bureau was not aware of any issues related to complying with the three-year period already required by Regulation X. The Bureau stated that creditors may be able to use existing recordkeeping systems to retain the integrated disclosures at no additional cost. Additionally, the Bureau noted that several sections of RESPA are subject to a three year statute of limitations.252 The Bureau recognized that adopting a document retention period of less than three years could affect legal actions brought under RESPA. Thus, the Bureau stated its belief that it would be appropriate to require creditors to maintain records related to compliance for three years, as opposed to the two-year requirement of Regulation Z.

Pursuant to its authority under section 105(a) of TILA and section 19(a) of RESPA, the Bureau proposed § 1026.25(c)(1)(i), which stated that, except as provided under § 1026.25(c)(1)(ii), a creditor shall retain evidence of compliance with the requirements of § 1026.19(e) and (f) for three years after the later of the date of consummation, the date disclosures are required to be made, or the date the action is required to be taken. The Bureau stated its belief that this proposed modification would ensure that records associated with the integrated disclosures were kept long enough to facilitate compliance with both TILA and RESPA, which is necessary to both prevent circumvention of and facilitate compliance with TILA and RESPA. The Bureau solicited comment on whether the three-year period was appropriate, whether the retention requirement should be extended to five years to match the recordkeeping requirement in proposed § 1026.25(c)(1)(ii), and whether a shorter time period would conflict with the statute of limitations under section 16 of RESPA. Several industry commenters, including a credit union and an industry trade association, noted that creditors were likely to maintain all records for the longer, five-year retention period for closing disclosures mandated by proposed § 1025(c)(1)(ii). As such, the commenters reasoned that creditors would not benefit from the shorter retention period in proposed § 1025(c)(1)(i), and suggested that the Bureau extend that requirement to match the requirement in proposed § 1026.25(c)(1)(ii). The Bureau appreciates the commenters’ reasoning. However, the Bureau is finalizing § 1025(c)(1)(i) as proposed in keeping with its intent to mirror the existing retention periods for amendments to GFEs, as set forth in § 1024.7(f). In addition, although some creditors may maintain all records for the longer period, some may comply strictly with the three-year period, and thus, there may be less costs imposed on industry from the three-year period. In addition, the Bureau is not aware of any issues raised with regard to the existing threeyear retention period under Regulation X.

Proposed comment 25(c)(1)–1 would have applied guidance currently applicable under § 1026.25(a) to proposed § 1026.25(c). The proposed comment would have clarified that the creditor must retain evidence that it performed the required actions as well as made the required disclosures. This included, for example, evidence that the creditor properly differentiated between affiliated and independent third party settlement service providers for determining good faith under § 1026.19(e)(3); evidence that the creditor properly documented the reason for revisions under § 1026.19(e)(3)(iv); or evidence that the creditor properly calculated average costs under § 1026.19(f)(3)(ii). Proposed comment 25(c)(1)–2 would have provided a cross-reference to § 1026.19(e)(1)(ii), which imposed responsibilities on mortgage brokers in some situations and may have implicated § 1026.25(c). The Bureau did not receive comments regarding the proposed changes to proposed comments 25(c)(1)–1 and 25(c)(1)–2. For the reasons discussed above and in the proposed rule, the Bureau is finalizing § 1026.25(c)(1)(i) and comments 25(c)(1)–1 and 25(c)(1)– 2 as proposed, pursuant to its authority under section 105(a) of TILA and section 19(a) of RESPA. 25(c)(1)(ii) Closing Disclosures As noted above, while § 1026.25 of Regulation Z generally requires creditors to retain evidence of compliance with TILA for two years after the date disclosures are required to be made or action is required to be taken, § 1024.10(e) of Regulation X requires lenders to retain each completed RESPA settlement statement and related documents for five years after settlement, unless the lender disposes of its interest in the mortgage and does not service the mortgage. If the lender disposes of its interest and does not service the mortgage, § 1024.10(e) requires the lender to provide the lender’s copy of the RESPA settlement statement to the owner or servicer of the mortgage as part of the transfer of the loan file. The owner or servicer to whom the files are transferred must retain the RESPA settlement statement for the remainder of the five-year period.

Because the Closing Disclosure contains the settlement information that is currently provided on the RESPA settlement statement, the Bureau proposed to adopt the five-year requirement with respect to the Closing Disclosure. The Bureau stated in the proposal that this information serves an important purpose as both the record of all fees associated with the transaction and as part of the official disbursement record. As such, this information may be needed for more than two years after the transaction. For example, State and local laws related to transactions involving real property may depend on the information being available for five years. Additionally, the Bureau recognized that the five-year recordkeeping requirement under Regulation X has been in effect since 1992.253 The Bureau stated in the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00174 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79903 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations proposal that it was unaware of any problems caused by the five-year requirement and did not believe the time period should be shortened without evidence that the rule is not operating as intended, is unnecessary, or otherwise harms consumers. Thus, the Bureau stated its belief that requiring creditors to retain copies of the Closing Disclosure for five years was appropriate.

Pursuant to its authority under section 105(a) of TILA and section 19(a) of RESPA, the Bureau proposed § 1026.25(c)(1)(ii). Proposed § 1026.25(c)(1)(ii)(A) would have stated that the creditor shall retain each completed disclosure required under § 1026.19(f)(1)(i) and (f)(4)(i), and all documents related to such disclosures, for five years after settlement. The Bureau stated that it believed that this proposed modification would ensure that records associated with the integrated disclosures were kept long enough to facilitate compliance with both TILA and RESPA, which was necessary both to prevent circumvention of and facilitate compliance with TILA. The Bureau also stated the proposed recordkeeping requirement would enable accurate supervision, which would result in the more effective advance disclosure of settlement costs, consistent with section 19(a) of RESPA.

Proposed § 1026.25(c)(1)(ii)(B) would have provided that, if a creditor sells, transfers, or otherwise disposes of its interest in a mortgage and does not service the mortgage, the creditor must provide a copy of the disclosures required under § 1026.19(f)(1)(i) or (f)(4)(i) to the owner or servicer of the mortgage as a part of the transfer of the loan file, and such owner or servicer must retain such disclosures for the remainder of the five-year period. Proposed § 1026.25(c)(1)(ii)(C) would have provided that the Bureau has the right to require provision of copies of records related to the disclosures required under § 1026.19(f)(1)(i) or (f)(4)(i).

The Bureau recognized that the proposal was different from current requirements under Regulation X, which do not require a creditor to maintain these documents if the creditor disposes of its interest in the mortgage loan and does not service the mortgage loan. However, the Bureau believed that the current requirement provided little practical benefit to creditors, because other provisions of Regulations Z and X require creditors to maintain records of compliance for several years, even if the creditor transfers, sells, or otherwise disposes of its interest in the mortgage loan. The Bureau solicited feedback regarding whether it was appropriate for creditors that transfer, sell, or otherwise dispose of their interest in the mortgage loan, and do not service the mortgage loan, to keep these records for the fiveyear period. The Bureau also requested feedback on the additional costs that would result from such a requirement. The Bureau did not receive any comments with respect to the appropriateness of the five-year retention period proposed by § 1026.25(c)(1)(ii)(A). It did, however, receive requests for clarification with respect to whether a creditor that sells, transfers, or otherwise disposes of its interest in a mortgage, as contemplated by § 1026.25(c)(1)(ii)(B), must continue to maintain a copy of the Closing Disclosure in its own records after disposing of the loan. To address this concern, the Bureau is revising § 1026.25(c)(1)(ii)(A) to clarify that, notwithstanding the provisions of § 1026.25(c)(1)(ii)(B), a creditor is required to retain a copy of the disclosures provided under § 1026.19(f)(1)(i) or (f)(4)(i) for a fiveyear period, even after it sells, transfers, or otherwise disposes of its interest in the loan. For the reasons set forth above and in the proposal, the Bureau is otherwise finalizing § 1026.25(c)(1)(ii) as proposed.

25(c)(1)(iii) Electronic Records In the TILA–RESPA Proposal, the Bureau proposed to require retention of records of compliance in an electronic, machine readable format. The proposal stated that ‘‘machine readable’’ meant, for purposes of the proposal, a format where the individual data elements comprising the record can be transmitted, analyzed, and processed by a computer program, such as a spreadsheet or database program. Data formats for image reproductions (e.g., PDF) or document text, such as those used by word processing programs, were not considered machine readable for purposes of the proposal. Currently, neither TILA nor RESPA address electronic recordkeeping. Regulation Z permits, but does not require, electronic recordkeeping. Current comment 25(a)–2 provides that records can be maintained by any method that reproduces disclosures accurately, including computer programs. Regulation X also permits, but does not require, electronic records. See § 1024.23 and HUD RESPA FAQs p.3, #4 (‘‘GFE—General’’). Issues Related to Adopting a Standard, Machine Readable, Electronic Data Format The Bureau stated in the proposal that prior to proposing the electronic, machine readable requirement, it sought information regarding the costs of keeping records in an electronic, machine readable format. Based on these discussions, the Bureau recognized that requiring records in an electronic, machine readable format would impose new costs on industry, which would be limited to the up-front costs of upgrading existing computer systems and additional, ongoing data storage costs. As stated in the proposal, however, the Bureau also believed that keeping records in machine readable format could provide industry and consumers with numerous, significant benefits. The Bureau stated its belief that a prescribed electronic format could potentially reduce loan origination costs due to efficiency gains associated with a standardized data format. Further, a single data format could lower longterm costs by enabling creditors to migrate from older data formats to a single, standard data format. The Bureau stated it believed that a standard format could also foster innovation by allowing technology companies to create new programs that promote efficiency instead of tailoring programs to each firm’s proprietary data format. In addition, the Bureau stated that the requirement may reduce industry’s reliance on paper files, while allowing regulators to monitor some aspects of compliance remotely.

The Bureau believed that these benefits outweighed the costs associated with adopting and maintaining such a format. Thus, pursuant to its authority under section 105(a) of TILA, the Bureau proposed § 1026.25(c)(1)(iii), which would have provided that a creditor must retain evidence of compliance in an electronic, machine readable format. The Bureau believed that this proposed requirement would ensure that records associated with the integrated disclosures were readily available for examination, which could prevent circumvention of and facilitate compliance with TILA. The Bureau stated that the proposed regulation could also facilitate compliance with TILA by easing the burden of examinations and ensuring that all entities subject to TILA kept records in a standard format.

Based on the Bureau’s discussions with industry regarding machine readable data formats, the Bureau stated in the proposal that it believed that XML may be the most appropriate VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00175 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79904 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 254 Fannie Mae, Uniform Closing Dataset Overview (June 30, 2013), available at https:// www.fanniemae.com/content/fact_sheet/ucdoverview.pdf; Freddie Mac, GSEs Developing Standardized Dataset to Support CFPB’s Closing Disclosure Form (July 30, 2013), available at http://www.freddiemac.com/singlefamily/news/ 2013/0730_umpd_efforts.html. format for electronic recordkeeping. However, the Bureau did not specifically propose to mandate use of the XML format and instead solicited feedback on the costs and benefits of specific data formats. In addition, the Bureau proposed comment 25(c)(1)(iii)– 1, which would have clarified that the requirements of § 1026.25(c)(1)(iii) were in addition to any other formats that may be required by administrative agencies responsible for enforcing the regulation. The Bureau solicited comment on this approach, including the costs associated with such a requirement. The Bureau also solicited comments on whether a small business exemption to the requirement was appropriate, and sought feedback on the proper contours of such an exemption. Finally, the Bureau solicited feedback on small business’ current technology costs, and how such costs might be affected by an electronic recordkeeping requirement.

The Bureau received voluminous comments in response to proposed § 1026.25(c)(1)(iii) from various stakeholders, including creditors, industry trade associations, government entities, real estate attorneys, and title agents. The overwhelming majority of these comments expressed strong opposition to the proposed requirement. Most comments focused on the significant costs of implementation, especially for creditors who were not currently storing information in machine-readable format or who had recently adopted a specific electronic format and would now have to invest time and money in implementing a new technology. Many of these commenters also stated that any costs would eventually be passed on to consumers, or cause creditors to tighten or discontinue their lending programs. Other comments casted doubt on the benefits of a mandated electronic format, especially given that the proposal did not require that creditors adopt a specific electronic format or field-naming protocol. Still others raised practical concerns, such as how the electronic format would capture the narrative fields included in the integrated disclosures, or how creditors would be expected to coordinate with third parties, such as settlement agents, who would not be subject to the new requirement but who may nonetheless create or maintain certain transaction documents.

Other comments objected to the proposal on the grounds that it was ambiguous, stating that the proposal lacked clarity, including a sufficientlyspecific definition of ‘‘machine readable format’’ and with respect to its application to entities other than creditors. Other commenters asserted that the rule went beyond the Bureau’s statutory authority, or that the Bureau should not be mandating specific technological requirements for industry because it was a regulatory agency and lacked technical expertise in this area. The majority of commenters requested that the Bureau either withdraw § 1026.25(c)(1)(iii) altogether or delay it for a later rulemaking. Many small entity industry commenters requested that the Bureau adopt a small entity exemption, if the Bureau were to finalize the machine readable format requirement, and suggested different thresholds for such an exemption, stating that the costs of compliance would be especially burdensome for those entities.

The Bureau considered these comments and has decided not to finalize proposed § 1026.25(c)(1)(iii) and related comment 25(c)(1)(iii)–1. The Bureau believes that adopting a single standardized data format would be critical to achieving many of the potential benefits discussed in the proposal, and that significantly more consultation with stakeholders would be beneficial before taking that step. In light of the potential implementation costs for creditors, settlement agents, and other affected parties, the Bureau believes that it is important to assure that that any data format requirements be undertaken with care. In addition, the Bureau recognizes that industry will need to make a number of data format decisions in the coming months as companies implement the final rule, and continues to believe that the adoption of a uniform electronic format throughout the mortgage industry could provide significant downstream benefits to industry and consumers alike. These benefits could include more efficient and cost-effective processing of mortgage loan data, improved consistency and data quality throughout the loan lifecycle, greater transparency for investors, and the potential for new technologies to reduce costs and streamline the mortgage process. For example, the GSEs, at the direction of the Federal Housing Finance Agency, are currently engaged in an effort to develop a standardized dataset for the Closing Disclosure, which they call the ‘‘Uniform Closing Dataset (UCD),’’ and which will utilize the data standards of the Mortgage Industry Standards Maintenance Organization (MISMO).254 The GSEs have already created a draft dataset based on the proposed Closing Disclosure and plan to issue a final dataset after they revise the draft dataset based on this final rule. When fully implemented, such an initiative as the UCD could produce a uniform dataset for the vast majority of the market. The Bureau will monitor the GSEs’ development of the UCD and any other similar initiatives and will consider whether it can take additional steps to encourage the voluntary adoption of uniform standards or whether additional rulemaking activity may be appropriate in this area. In addition, in connection with its planned efforts to provide the public with implementation assistance with respect to this final rule, the Bureau expects to provide assistance to the GSEs in connection with their finalization of the draft UCD. Section 1026.28 Effect on State Laws TILA preempts State laws to the extent of their inconsistency with the statute and permits States, creditors, and other interested parties to request a determination by the Bureau regarding such inconsistency. Specifically, section 111(a)(1) states that the provisions of chapters 1 (General Provisions), 2 (Credit Transactions), and 3 (Credit Advertising and Limits on Credit Card Fees) of TILA do not annul, alter, or affect the laws of any State relating to the disclosure of information in connection with credit transactions, except to the extent that those laws are inconsistent with the provisions of TILA and then only to the extent of the inconsistency. 15 U.S.C. 1610(a)(1). Upon its own motion or upon the request of any creditor, State, or other interested party that is submitted in accordance with procedures prescribed in regulations of the Bureau, the Bureau shall determine whether any such inconsistency exists. Id. If the Bureau determines that a State-required disclosure is inconsistent, creditors located in that State may not make disclosures using the inconsistent term or form, and shall incur no liability under the State law for failure to use such term or form, notwithstanding that such determination is subsequently amended, rescinded, or determined by judicial or other authority to be invalid for any reason. Id. Section 111(b) generally provides that TILA does not otherwise annul, alter, or effect in any manner the meaning, scope, or applicability of the laws of any State, VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00176 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79905 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 255 There are different rules regarding preemption of State laws relating to the disclosure of credit information in any credit or charge card application or solicitation that is subject to the requirements of section 127 of TILA and the correction of billing errors, but those rules are outside the scope of this rulemaking. See § 1026.28(a)(2), (d). 256 TILA section 111(a)(2) and § 1026.28(b) generally permit a creditor, State, or other interested party to request that the Bureau determine whether a State-required disclosure is substantially the same in meaning as a TILA disclosure, and if the Bureau makes such a determination, creditors in the State can provide the State-required disclosure in lieu of the TILA disclosure. Comment 28(b)–1 clarifies that under § 1026.28, a State disclosure can be substituted for a Federal disclosure only after a determination of substantial similarity. State exemptions are addressed in more detail under § 1026.29 and associated commentary.

257 The Bureau issued a final rule on July 10, 2013 that redesignated current § 1024.13 as § 1024.5(c), effective January 10, 2014, but the redesignation does not change the substance of the provision. 78 FR 44686, 44689 (July 24, 2013). including, but not limited to, laws relating to the types, amounts, or rates of charges, or any elements of charges, permissible under such laws in connection with the extension or use of credit, and neither does TILA extend the applicability of those laws to any class of persons or transactions to which they would not otherwise apply. 15 U.S.C. 1610(b).

Regulation Z § 1026.28 implements TILA section 111. Section 1026.28(a) currently provides that State law requirements that are inconsistent with the requirements contained in chapters 1 through 3 of TILA and the implementing provisions of Regulation Z are preempted to the extent of the inconsistency.255 Under § 1026.28(a), a State law is inconsistent with a TILA provision if it requires a creditor to make disclosures or take actions that contradict the requirements of TILA. A State law contradicts a requirement of TILA if it requires the use of the same term to represent a different amount or a different meaning than TILA, or if it requires the use of a term different from that required in TILA to describe the same item. A creditor, State, or other interested party may request the Bureau to determine whether a State law requirement is inconsistent, and if the Bureau makes such a determination a creditor may not make disclosures using the inconsistent term or form.256 The specific procedures for requesting a State law preemption determination are set forth in § 1026.28(c) and appendix A to Regulation Z. Appendix A states, among other things, that the Bureau reserves the right to reverse a determination for any reason bearing on the coverage or effect of State or Federal law.

Current Regulation Z commentary provides further guidance on the TILA preemption rules. Comment 28(a)–2 includes examples of State laws that would be preempted (e.g., a State law requiring use of the term ‘‘finance charge’’ but defining the term to include fees that TILA excludes, or to exclude fees that TILA includes). Comment 28(a)–3 explains that State law requirements calling for disclosure of items not covered by TILA or that require more detailed disclosures generally do not contradict the TILA requirements, provides examples of State laws that would not be preempted, and gives guidance as to whether a State law requiring itemization of the amount financed would be preempted. Comment 28(a)–4 explains that a creditor, prior to a preemption determination, may either (1) give the State disclosures or (2) apply the preemption standards to a State law, conclude that it is inconsistent, and choose not to give the State-required disclosures (but that no immunity is given under § 1026.28(a) for violations of State law if the creditor chooses not to make State disclosures and the Bureau later determines that the State law is not preempted). The comment also states that the Bureau will give sufficient time to creditors to revise their forms and procedures as necessary to conform with its preemption determinations. Comments 28(a)–8 through –15 discuss prior determinations made by the Federal Reserve Board prior to July 21, 2011, and recognized by the Bureau unless and until the Bureau makes and publishes any contrary determinations, to preempt certain State laws. For example, comment 28(a)–15 states that in Wisconsin, disclosure of the annual percentage rate under the particular State law referenced in the comment is preempted, because while the statute refers to ‘‘annual percentage rate,’’ it requires disclosure of a different amount than under TILA.

Section 18 of RESPA and current Regulation X § 1024.13 provide that State laws that are inconsistent with RESPA or Regulation X are preempted to the extent of the inconsistency. 12 U.S.C. 2616; 12 CFR 1024.13.257 RESPA and Regulation X do not annul, alter, affect, or exempt any person subject to their provisions from complying with the laws of any State with respect to settlement practices, except to the extent of the inconsistency. Id. Upon request by any person, the Bureau is authorized to determine whether such inconsistencies exist, and the Bureau may not determine that any State law is inconsistent with any provision of RESPA if the Bureau determines that such law or regulation gives greater protection to the consumer. 12 CFR 1024.13(b). In making this determination, the Bureau must consult with ‘‘appropriate Federal agencies.’’ Id.; see also 12 U.S.C. 2616. Section 1024.13(c) sets forth the process by which the Bureau makes a preemption determination. Unlike Regulation Z, Regulation X does not list any State laws preempted by RESPA, and the Bureau is not aware of any. The preemption provisions in TILA and RESPA and their implementing regulations thus contain similar language as far as scope of the preemption (i.e., in both cases State laws generally are preempted only ‘‘to the extent of the inconsistency’’), but include different authority and procedures for determining whether State laws are preempted. For example, unlike Regulation X, § 1026.28 provides a regulatory standard for determining ‘‘inconsistency’’ (i.e., disclosures or actions that contradict Federal law requirements) along with detailed commentary. RESPA, but not TILA, requires the preemption determination to be made by the Bureau in consultation with other appropriate Federal agencies. Moreover, while the Regulation Z provision addresses the relationship between Federal and State laws governing credit transactions, § 1024.13 refers to laws regarding settlement practices.

As stated previously, section 1032(f) of the Dodd-Frank Act requires the Bureau to propose rules and forms 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. In addition, the Dodd-Frank Act amended sections 105(b) of TILA and 4(a) of RESPA, respectively, to require the integration of those disclosure requirements. However, the Dodd-Frank Act did not specify whether the TILA or the RESPA State law preemption provision applies to the provision of the integrated mortgage disclosures. In order to meet the Dodd- Frank Act’s mandate, the proposed rule must reconcile the differences regarding these State law preemption regimes. The Bureau proposed to require that the State law preemption provisions of Regulation Z, § 1026.28, apply to any State law preemption question arising with respect to the requirements of sections 4 and 5 of RESPA (other than the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors), and §§ 1026.19(e) and (f), 1026.37, and 1026.38. To effectuate this change, the VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00177 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79906 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 258 See sections 1032(f), 1098, and 1100A of the Dodd Frank Act. 12 U.S.C. 5532, 2603(a), and 1604(b), respectively.

259 The provisions related to state law preemption questions under Regulation X § 1024.13 were moved to § 1024.5(c) effective on January 10, 2014. See 78 FR 44686, 44689 (July 24, 2013). 260 Section 171(b) of TILA also addresses State exemptions and contains nearly identical language to section 123, but section 171(b) applies with respect to TILA chapter 4 (credit billing), which is not affected by this rulemaking. 15 U.S.C. 1661j(b). 261 As noted earlier, § 1026.28(b) generally permits a creditor, State, or other interested party to request that the Bureau determine whether a State-required disclosure is substantially the same in meaning as a TILA disclosure, and if the Bureau makes such a determination, creditors in the State can provide the State-required disclosure in lieu of the TILA disclosure. Comment 28(b)–1 clarifies that under § 1026.28, a State disclosure can be substituted for a Federal disclosure only after a determination of substantial similarity. Bureau proposed two modifications to § 1026.28 and its associated commentary to reconcile differences regarding the State law preemption regimes of Regulation X and Regulation Z to meet the Dodd-Frank Act’s mandate to integrate the mortgage loan disclosure requirements under TILA and RESPA.258 First, the proposed rule would have modified § 1026.28(a) to provide that a determination of whether a State law is inconsistent with the requirements of sections 4 and 5 of RESPA (other than the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors) and proposed §§ 1026.19(e) and (f), 1026.37, and 1026.38 would be made in accordance with § 1026.28 and not Regulation X § 1024.13. Second, the proposed rule would have added text to comment 28(a)–1 providing that, to the extent applicable to a transaction subject to § 1026.19(e) and (f), any reference to ‘‘creditor’’ in § 1026.28 included a creditor, a mortgage broker, or a closing agent, as applicable. This change coincided with the proposed alternative of § 1026.19(f)(1) that would have permitted the settlement agent to deliver the closing disclosure in place of the creditor. The Bureau stated that if this alternative were not adopted, it would not adopt the proposed addition of the reference to the closing agent to comment 28(a)–1. As described above in the section-by-section analysis of § 1026.19(f)(1), the Bureau is finalizing this alternative substantially as proposed, and as explained below, is adopting comment 28(a)–1 with a minor modification for clarity. Several industry trade association commenters stated that preemption determinations under § 1026.28 should be made after consulting with other Federal agencies, as is provided under Regulation X in § 1024.13. As stated above, the Bureau must reconcile the differences between the two State law preemption regimes of RESPA and TILA. The two regimes are inconsistent with respect to the requirement under RESPA that the Bureau ‘‘consult with appropriate Federal agencies.’’ 12 U.S.C. 2616. As the Bureau stated in the proposal, there are certain transactions subject to TILA, but not RESPA, for which the integrated mortgage disclosures must be delivered under the proposed rule. Pursuant to § 1026.19(e) and (f), the proposed rule covers all closed-end consumer credit transactions secured by real property, other than reverse mortgages. Some of these transactions are not subject to RESPA (i.e., if they are not a federally related mortgage loan as defined in Regulation X § 1024.2), but consumers in such transactions will receive integrated mortgage disclosures containing certain content mandated by RESPA. As such, in practice the statutory integrated disclosure requirements of TILA will apply to more transactions covered by § 1026.19(e) and (f) than those subject to RESPA. This may create confusion as to which preemption provision controls were a State law preemption question to arise with respect to the RESPAmandated content on the integrated mortgage disclosures.

For these reasons, the Bureau has determined that the preemption regime under TILA section 111, as implemented by Regulation Z in § 1026.28, without a requirement that the Bureau consult with other Federal agencies, is the most appropriate for the disclosure requirements Congress mandated the Bureau to integrate under sections 1032, 1098, and 1100A of the Dodd-Frank Act. Accordingly, the Bureau is adopting the modifications to § 1026.28 and comment 28(a)–1 as proposed, with a change to the reference of ‘‘closing agent’’ to ‘‘settlement agent’’ to conform to the usage in the integrated disclosure requirements for clarity. The Bureau adopts these modifications pursuant to the authority under TILA section 105(a) and RESPA section 19(a), as described in the proposal. Section 1024.5(c) will continue to apply to State law preemption questions arising with respect to all other aspects of RESPA and Regulation X, including the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors.259 Section 1026.29 State Exemptions The Bureau proposed two substantive modifications to the commentary to § 1026.29, in addition to relabeling some of the section numbering and lettering, to reconcile differences between TILA and RESPA provisions with respect to the Bureau’s authority to grant State exemptions from disclosure provisions. TILA has several provisions that permit the Bureau to grant State exemptions from certain TILA disclosure provisions. Section 111(a)(2) of TILA allows the Bureau, upon its own motion or upon the request of any creditor, State, or other interested party that is submitted in accordance with procedures prescribed in regulations of the Bureau, to determine whether any disclosure required under any State law is substantially the same in meaning as a disclosure required under TILA. 15 U.S.C. 1610(a)(2). If the Bureau makes such a determination, TILA section 111(a)(2) provides that creditors located in that State may make such disclosure in compliance with such State law in lieu of the TILA disclosure, except that (1) the annual percentage rate and finance charge must be disclosed as required by section 122 of TILA, and (2) State-required disclosures may not be made in lieu of the high-cost mortgage disclosures under section 129 of TILA. Section 123 of TILA allows the Bureau by regulation to exempt any class of credit transactions within any State from the requirements of chapter 2 of TILA (Credit transactions) if the Bureau determines that the law of the State subjects the class of transactions to requirements substantially similar to those imposed under chapter 2 of TILA, and that there is adequate provision for enforcement.260 15 U.S.C. 1633. Regulation Z § 1026.29 and appendix B to Regulation Z implement the TILA State exemption provisions.261 Pursuant to § 1026.29(a), a State may apply to the Bureau to exempt a class of transactions within the State from the requirements of chapter 2 (Credit transactions) or chapter 4 (Credit billing) of TILA and the corresponding provisions of Regulation Z. The Bureau shall grant an exemption if it determines that (1) the State law is substantially similar to the Federal law or, in the case of chapter 4 of TILA, affords the consumer greater protection than the Federal law, and (2) there is adequate provision for enforcement. Comment 29(a)–2 clarifies that State law is ‘‘substantially similar’’ for purposes of § 1026.29(a) if the State statutory or regulatory provisions and State interpretations of those provisions are generally the same as TILA and Regulation Z. Comment 29(a)–3 clarifies that, generally, there is adequate provision for enforcement if appropriate State officials are authorized to enforce the State law through procedures and sanctions comparable to those available VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00178 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79907 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 262 12 U.S.C. 2616.

263 See sections 1032(f), 1098, and 1100A of the Dodd Frank Act. 12 U.S.C. 5532, 2603(a), and 1604(b), respectively.

to Federal enforcement agencies. Comment 29(a)–4 states that the Bureau recognizes certain TILA exemptions granted by the Board to Maine, Connecticut, Massachusetts, Wyoming, and Oklahoma prior to July 21, 2011, until and unless the Bureau makes and publishes any contrary determination. Comment 29(a)–4.i through –4.v currently provides, in relevant part, that credit transactions in these five States that are subject to the State consumer credit codes or truth in lending acts enumerated in such comment are exempt from the requirements of chapter 2 of TILA, which sets forth, among other provisions, the disclosure requirements for closed-end mortgages. The specific procedures for requesting a State exemption are set forth in § 1026.29(c) and appendix B to Regulation Z. Appendix B states, among other things, that the Bureau reserves the right to revoke an exemption if at any time it determines that the standards required for an exemption are not met.

Unlike TILA, RESPA does not contain a State exemption provision for credit transactions subject to RESPA. Rather, as discussed above with respect to § 1026.28, section 18 of RESPA 262 and Regulation X § 1024.13 provide that State laws that are inconsistent with RESPA or Regulation X are preempted to the extent of the inconsistency. As stated above, sections 1032(f), 1098, and 1100A of the Dodd-Frank Act require the Bureau to propose for public comment, and publish final rules and forms 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. However, the Dodd-Frank Act did not address a number of inconsistencies between TILA and RESPA that affect the provision of the integrated mortgage disclosures, including inconsistent provisions regarding the application of State law. In order to meet the Dodd- Frank Act’s mandate, the final rule must reconcile the State exemption provisions. The Bureau proposed to reconcile these differences between Regulation X and Regulation Z to meet the Dodd-Frank Act’s mandate to integrate the mortgage loan disclosure requirements under the two statutes.263 First, proposed revised comment 29(a)–2 would have modified the guidance regarding the ‘‘substantially similar’’ standard set forth in § 1026.29(a)(1) (i.e., one of the two preconditions to the granting of an exemption). Proposed revised comment 29(a)–2 would have clarified that, in order for transactions that would otherwise be subject to the integrated disclosures required by § 1026.19(e) and (f) to be exempt from those disclosure requirements, the State statutory or regulatory provisions and State interpretations of those provisions must require disclosures that are generally the same as those prescribed by § 1026.19(e) and (f), in the forms prescribed by §§ 1026.37 and 1026.38. In effect, in order for an existing State exemption to be maintained, the State’s law must require disclosures that are generally the same as the integrated disclosures, including the RESPA content. Second, proposed revised comment 29(a)–4 would have stated that, although RESPA and Regulation X do not provide procedures for State exemptions, for transactions subject to § 1026.19(e) and (f), compliance with the requirements of §§ 1026.19(e) and (f), 1026.37, and 1026.38 satisfies the requirements of sections 4 and 5 of RESPA (other than the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors). Furthermore, the proposed revised comment would have stated that if the transaction is subject to a previously-granted State exemption, then compliance with the requirements of any State laws and regulations incorporating the requirements of §§ 1026.19(e) and (f), 1026.37, and 1026.38 likewise satisfies the requirements of sections 4 and 5 of RESPA (other than the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors). Thus, in Maine, Connecticut, Massachusetts, Oklahoma, and Wyoming, creditors, mortgage brokers, and settlement agents, as applicable, would have, under the proposal, been able to satisfy sections 4 and 5 of RESPA (other than the RESPA section 5(c) requirements regarding provision of a list of certified homeownership counselors) through compliance with State law so long as the ‘‘substantially similar’’ State statutory and regulatory provisions (i.e., the State consumer codes or truth in lending acts enumerated in comment 29(a)–4.1 through –4.v, as applicable) expressly mandated delivery of the integrated mortgage disclosures required by the Dodd-Frank Act and implemented by this final rule. The Bureau did not receive any comments on the proposed modifications to the commentary related to State exemptions. The Bureau understands these changes require some of the five States that were previously granted State exemptions under 12 CFR 226.29, the predecessor to § 1026.29, to change their laws and/or regulations, which may be a lengthy process because, to the extent the ‘‘substantially similar’’ State laws and regulations underlying the TILA State exemptions do not currently require the integrated disclosures mandated by the Dodd- Frank Act (specifically, the portions mandated by RESPA), there is a gap in these States’ current statutory and regulatory regimes that must be filled in order to maintain the State exemptions. As such, the Bureau solicited comment on the amount of time that will be needed for these States to change their laws and/or regulations. The Bureau did not receive any comment on the amount of time that will be needed for those States to change their laws and/or regulations. However, two GSE commenters stated that the Bureau should impose a reasonable implementation period for the final rule that will permit the amendment of State laws and/or regulations. The Bureau believes that the States identified in proposed comments 29(a)–2 and –4 will be able to change their laws and/or regulations prior to the effective date of this final rule, which is discussed below in part VI. Accordingly, the Bureau is adopting the modifications to comments 29(a)–2 and –4 as proposed, pursuant to its authority under TILA section 105(a) and RESPA section 19(a) to make rules consistent with the purposes of those statutes, as described in the proposal. Section 1026.37 Content of Disclosures for Certain Mortgage Transactions (Loan Estimate) Proposed § 1026.37 would have set forth the required content of the integrated Loan Estimate disclosure, required by § 1026.19(e) to be provided to a consumer within three business days of the creditor’s receipt of the consumer’s application. As described in the proposal, the proposed Loan Estimate would have integrated the disclosures currently provided in the RESPA GFE and the early TILA disclosure. In addition, the Loan Estimate integrates several disclosures that would otherwise be provided separately under various Federal laws. The Bureau stated in the proposal that it believed the three-page Loan Estimate, as proposed, integrates at least seven pages of disclosures. Specifically, the proposed Loan Estimate incorporated: (i) Three pages of the RESPA GFE; (ii) two pages typically used for the early TILA disclosure; (iii) one page typically used for the appraisal VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00179 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79908 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 264 The Bureau did not adopt the zero-zero alternative in the 2013 Loan Originator Final Rule. 78 FR 11280 (Feb. 15, 2013). notification provided under ECOA section 701(e); and (iv) one page typically used for the servicing disclosure provided under RESPA section 6. In addition, the proposed Loan Estimate incorporated the disclosure of: (i) The total interest percentage under TILA section 128(a)(19), which was added by section 1419 of the Dodd-Frank Act; (ii) the aggregate amount of loan charges and closing costs the consumer must pay at consummation under TILA section 128(a)(17), which was added by section 1419 of the Dodd-Frank Act; (iii) for refinance transactions, the antideficiency protection notice under TILA section 129C(g)(3), which was added by section 1414(c) of the Dodd-Frank Act; and (iv) the homeowner’s insurance disclosure in TILA section 106(c) and § 1026.4(d)(2)(i), which is required to exclude homeowner’s insurance premiums from the finance charge. In the absence of the Bureau’s proposed integration of the early TILA disclosure and the RESPA GFE, some of these new disclosures would have been added to the early TILA disclosure, which potentially could have increased that disclosure’s typical two pages to three pages.

The Bureau received numerous comments from industry and consumer advocacy groups generally supporting the design of the proposed integrated disclosures. For example, a large national bank commented that the proposed disclosures are a distinct improvement over those in existing regulations and that the Bureau has consolidated multiple disclosures, minimized the conflicts between existing RESPA and TILA disclosure requirements, and created forms that are more visually appealing and more understandable to the consumer than the current forms. A national consumer advocacy group commented that the proposed integrated disclosures are in many ways an improvement over existing disclosures. A community bank praised the integrated disclosures as clearer and more concise than existing disclosures and noted several areas of ‘‘commendation’’ in both the proposed Loan Estimate and Closing Disclosure. The FTC Staff praised the integrated disclosures, particularly their formatting and language, as more effective than the current forms in conveying key loan terms to consumers.

In contrast, the Bureau received numerous comments that were critical of the design of the proposed integrated disclosures. For example, an individual settlement agent strongly criticized the proposed integrated disclosures, opining that they were significantly more complicated than the disclosures required under existing regulations. A national trade association representing mortgage lenders commented that the proposal went beyond what was necessary to reconcile TILA, RESPA, and the changes to both statutes mandated by the Dodd-Frank Act. A national trade association representing title attorneys commented that the proposed forms were too complex to be useful for consumers and would likely require title attorneys or settlement agents to create explanatory documents, thereby increasing the number of pages provided to the consumer. Some commenters suggested that features not included in the integrated disclosures be added. For example, a national trade association representing mortgage bankers suggested that the Loan Estimate include a trade-off chart similar to one that was on the RESPA GFE, which would compare the loan that is subject of the Loan Estimate and another loan available to the borrower from that creditor that has a different rate, points, and fees mix. The comment stated that such a chart would be preferable to the Bureau’s 2012 Loan Originator Proposal, which would have required that, before a creditor or mortgage broker may impose upfront points and/or fees on a consumer, the creditor must make available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or origination fees (zero-zero alternative).264 A GSE suggested that there should be a place on the Closing Disclosure to reflect whether the consumer was closing another loan at the same time as the transaction that is the subject of the Closing Disclosure.

As discussed above in part III, the Bureau has conducted extensive consumer testing of the proposed Loan Estimate and Closing Disclosure, both on their own and in comparison to the existing RESPA GFE and RESPA settlement statement and early and final TILA disclosures. The testing reflects that consumers are able to use the integrated disclosures to understand the loan presented, compare loans when shopping, compare their estimated and actual charges, and that the integrated disclosures perform significantly better than the existing disclosures under TILA and RESPA. See Kleimann Testing Report at 277, 280; Kleimann Quantitative Study Report at 68–69. Moreover, the Bureau was required by the Dodd-Frank Act both to integrate the existing disclosures and to add certain new information on the integrated disclosures that the Dodd-Frank Act added to TILA. Accordingly, while the Bureau appreciates certain commenters’ concern that the integrated disclosures are overly complex, the Bureau has extensively tested the integrated disclosures to ensure the design and layout of the new disclosures is effective for consumers and minimizes the risk of information overload, while still including the information required by TILA and RESPA, including the new requirements added to TILA by the Dodd-Frank Act. Similarly, while the Bureau understands commenters’ desire to add components to the integrated disclosures, the Bureau declines to do so given its statutory requirements to include large amounts of new information and the risk to consumers of information overload if the Loan Estimate and Closing Disclosure added still more information. Comments addressing specific parts of the integrated disclosures will be addressed in more detail in the section-by-section analysis of individual provisions. Proposed § 1026.37 would have required that the information set forth in § 1026.37(a) through (n) be disclosed ‘‘as applicable.’’ The Bureau also proposed comments 37–1 and –2 to provide guidance regarding proposed § 1026.37. Proposed comment 37–1 would have clarified that a disclosure that is not applicable to a particular transaction generally may be eliminated entirely. The proposed comment would have provided as an example that the disclosure required by § 1026.37(m)(3) need not be included in a transaction for which the creditor does not require homeowner’s insurance. Proposed comment 37–1 would have stated that a disclosure that is not applicable to a transaction alternatively may be included but marked ‘‘not applicable’’ or ‘‘N/A.’’ The proposed comment would have clarified that the adjustable payment table and adjustable interest rate information table required under proposed § 1026.37(i) and (j), respectively, are only permitted to be included in particular transactions. Proposed comment 37–2 would have directed creditors to § 1026.37(o) and its commentary for guidance on the proper format for the disclosures and permissible modifications to the format. Several trade associations representing mortgage lenders and a national title insurance company commented that the ‘‘as applicable’’ standard in proposed § 1026.37 and comment 37–1 conflicted with proposed § 1026.37(o)(1)(i), which would have required the use of the proposed VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00180 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79909 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations standard form H–24 of appendix H to Regulation Z for all federally related mortgage loans. These commenters questioned how a disclosure that was not applicable could be eliminated entirely while still using form H–24. These same commenters as well as a large bank, a document preparation company, and a law firm commented that forms that change depending on the type of the transaction, known as ‘‘dynamic forms,’’ are difficult to program and therefore very costly to implement. These commenters requested that the Bureau instead mandate a static form. The Bureau received no public comments on proposed comment 37–2.

The Bureau believes that permitting inapplicable disclosures to be deleted is inconsistent with the proposal’s intent for form H–24 to be used for all federally related mortgage loans, subject to certain limited exceptions noted in § 1026.37(o). The Bureau further believes that permitting the standard form to change for each of the myriad transaction types for which it is used could result in a Loan Estimate that is difficult for consumers to use for shopping purposes and unnecessarily costly and confusing for industry to implement.

Accordingly, the Bureau is revising § 1026.37 to delete the phrase ‘‘as applicable.’’ Additionally, the Bureau is revising comment 37–1 to clarify that disclosures under § 1026.37 must reflect the terms of the legal obligation between the parties, and that if any information necessary for an accurate disclosure is unknown to the creditor, the disclosure must be made in good faith, based on the best information reasonably available at the time the disclosure is provided to the consumer pursuant to §§ 1026.17(c) and 1026.19(e). The revised comment also clarifies that where a disclosure is not applicable, the disclosure may not be deleted from form H–24, unless otherwise provided under § 1026.37, and the use of ‘‘not applicable’’ or ‘‘N/A’’ for inapplicable disclosures is not permitted. The comment states that the inapplicable disclosure may be left blank, unless otherwise provided under § 1026.37. Final comment 37–1 is further revised to provide a different example of a disclosure that may be left blank pursuant to § 1026.37, specifically, the amounts required to be disclosed by § 1026.37(f)(1)(i) in a transaction for which the consumer does not pay points to the creditor to reduce the interest rate. As in the proposal, final comment 37–1 also references the adjustable payment and adjustable interest rate tables, which clarifies that the disclosures required by § 1026.37(i) and (j) may be included only where applicable to the transaction and otherwise must be excluded. Comments related specifically to the dynamic nature of these tables will be discussed as part of this section-by-section analysis of § 1026.37(i) and (j). Because it did not receive any comments on proposed comment 37–2, the Bureau is adopting comment 37–2 as proposed. The Bureau adopts revised § 1026.37 and comment 37–1, and comment 37–2 as proposed, pursuant to its authority under TILA section 105(a), RESPA section 19(a), because the Bureau believes these provisions will promote the informed use of credit and more effective advance disclosure of settlement costs. In addition, the Bureau believes they will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions, consistent with Dodd- Frank Act section 1032(a). Furthermore, the Bureau believes they will improve consumer awareness and understanding of transactions involving residential mortgage loans and are therefore in the interest of consumers and the public, consistent with Dodd-Frank Act section 1405(b).

37(a) General Information The Bureau proposed § 1026.37(a), which would have combined and modified disclosures currently provided under Regulations X and Z in the Loan Estimate and would have added additional disclosures for transactions subject to proposed § 1026.19(e). For the reasons discussed below and consistent with TILA section 105(a), RESPA section 19(a), and the purposes of those statutes, the Bureau stated in the proposal that it believes that § 1026.37(a) will promote the informed use of credit and more effective advance disclosure of settlement costs. In addition, the Bureau stated that it believed proposed § 1026.37(a) will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions, consistent with Dodd-Frank Act section 1032(a). Furthermore, the Bureau stated it believes that § 1026.37(a) 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). The Bureau received many comments related to the various provisions of § 1026.37(a) which will be discussed in detail below in their respective sections.

37(a)(1) Form Title Although the Dodd-Frank Act requires the Bureau to combine the TILA and RESPA mortgage disclosures that are currently provided to consumers within three business days after application, the Dodd-Frank Act does not prescribe a title for the integrated form. Under § 1024.2(b) of Regulation X, the form providing consumers with the RESPA GFE of settlement charges they are likely to incur is called the ‘‘Good Faith Estimate’’ or ‘‘GFE.’’ Regulation Z does not prescribe a name for the early TILA disclosure required by § 1026.19(a)(1), although comment 17(a)(1)–5.ix permits the creditor to provide ‘‘[a] brief caption identifying the disclosures’’ and provides as examples of acceptable titles, ‘‘Federal Truth in Lending Disclosures’’ and ‘‘Real Estate Loan Disclosures.’’ Proposed § 1026.37(a)(1) would have required the creditor to use the term ‘‘Loan Estimate’’ as the title of the integrated disclosures provided pursuant to § 1026.19(e). The Bureau stated its belief in the proposal that the adoption of a standardized form name may eliminate confusion for consumers seeking to compare estimates for different loans and thereby promote the informed use of credit and more effective advance notice of settlement costs, consistent with TILA section 105(a) and RESPA section 19(a), and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions, consistent with Dodd-Frank Act section 1032(a). In addition, the Bureau stated that it believed the use of standard terminology for the integrated disclosures will facilitate compliance for industry, which is a purpose of this rulemaking under Dodd-Frank Act sections 1098 and 1100A. The Bureau did not receive any comments regarding proposed § 1026.37(a)(1). Because the Bureau continues to believe that a standardized form name will effectuate the purposes of TILA and RESPA and facilitate compliance, it is adopting § 1026.37(a)(1) as proposed, based on the authority described in the proposal and above.

37(a)(2) Form Purpose Proposed § 1026.37(a)(2) would have required the creditor to include a statement regarding one of the primary uses of the Loan Estimate for consumers, which is to compare it with the Closing Disclosure to verify the loan terms and costs. Specifically, proposed § 1026.37(a)(2) would have required the creditor to provide the following VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00181 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79910 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 265 Appendix C to Regulation X requires the following statement on the RESPA GFE under the heading ‘‘Purpose’’: ‘‘This GFE gives you an estimate of your settlement charges and loan terms if you are approved for this loan. For more information, see HUD’s Special Information Booklet on settlement charges, your Truth-in-Lending Disclosures, and other consumer information at www.hud.gov/respa. If you decide you would like to proceed with this loan, contact us.’’ statement at the top of all Loan Estimates, ‘‘Save this Loan Estimate to compare with your Closing Disclosure.’’ In the proposal, the Bureau stated its belief that the proposed language may benefit consumers and promote the informed use of credit by encouraging consumers to use the Loan Estimate as a tool to help them readily identify any changes to the loan transaction or costs that may have occurred between issuance of the initial Loan Estimate and the Closing Disclosure. The proposal noted that requiring creditors to disclose the purpose for the Loan Estimate and related disclosures is not a new requirement, and that appendix C to Regulation X currently requires specific language regarding the purpose of the RESPA GFE.265 The Bureau stated that it believed that while the Bureau’s proposed language differs from that prescribed by HUD, the disclosure in proposed § 1026.37(a)(2) accomplishes the same goal in a clearer and more succinct manner. The Bureau stated its belief that this disclosure will promote the informed use of credit and more effective advance notice of settlement costs, consistent with TILA section 105(a) and RESPA section 19(a), and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions, consistent with Dodd-Frank Act section 1032(a).

The Bureau did not receive any comments on proposed § 1026.38(a)(2) and continues to believe disclosing the form purpose will benefit consumers in the ways discussed above. Accordingly, the Bureau is adopting § 1026.37(a)(2) as proposed, based on the authority stated in the proposal and above. 37(a)(3) Creditor TILA section 128(a)(1) requires disclosure of the ‘‘identity of the creditor required to make [the] disclosure.’’ 15 U.S.C. 1638(a)(1). Regulation Z § 1026.18(a) implements TILA section 128(a)(1) and requires for each transaction the identity of the creditor making the disclosure. HUD imposed a similar requirement in appendix C to Regulation X, requiring the name and contact information for the ‘‘loan originator.’’ The Bureau proposed § 1026.37(a)(3) pursuant to TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section 1032(a), which mirrors § 1026.18(a) and would have required the name of the creditor making the disclosure. The Bureau stated in the proposal that it believed that by allowing the consumer to identify the name of the creditor providing the Loan Estimate, this disclosure will promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions.

Proposed comment 1026.37(a)(3)–1 would have cross-referenced § 1026.17(d) and comment 17(d)–1 and clarified that, in transactions with multiple creditors, only the creditor making the disclosure must be identified. Proposed comment 37(a)(3)– 2 would have stated that, in transactions where the loan is originated by a mortgage broker, the name of the creditor, if known, must still be provided even if the mortgage broker provides the disclosure to the consumer. The Bureau did not receive any public comments on proposed § 1026.37(a)(3). Because the Bureau continues to believe that disclosure of the identity of the creditor making the disclosure will, for the reasons discussed, effectuate the purposes of TILA and RESPA, it is adopting § 1026.37(a)(3) and its associated commentary substantially as proposed, based on the authority described in the proposal and above. The Bureau is revising comment 37(a)(3)–2 for clarity and to provide additional guidance for the mortgage broker if the name of the creditor is not known at the time the Loan Estimate is completed.

37(a)(4) Date Issued Appendix C to Regulation X requires creditors to provide the date of the RESPA GFE. Proposed § 1026.37(a)(4) would have mirrored this requirement by mandating disclosure of the date the Loan Estimate is mailed or delivered to the consumer. Proposed comment 1026.37(a)(4)–1 would have clarified that the ‘‘date issued’’ is the date the creditor delivers the Loan Estimate to the consumer and is not affected by the creditor’s method of delivery. The Bureau proposed this requirement pursuant to its authority under TILA section 105(a) and RESPA section 19(a) because, as stated in the proposal, the Bureau believed disclosure of the date the Loan Estimate is issued will promote the informed use of credit and more effective advance disclosure of settlement costs, which are purposes of TILA and RESPA respectively, by enabling consumers to compare the Loan Estimate with any revised Loan Estimates that may be issued. In addition, the Bureau stated in the proposal that it believed this comparison will enable consumers to identify changes in loan terms and costs and thereby understand the costs, benefits, and risks associated with the mortgage transaction, consistent with Dodd-Frank Act section 1032(a). The Bureau did not receive any comments on proposed § 1026.37(a)(4). The Bureau continues to believe mandating disclosure of the date the Loan Estimate is delivered will, for the reasons discussed, effectuate the purposes of both TILA and RESPA. Accordingly, the Bureau is adopting § 1026.37(a)(4) as proposed, based on the authority described in the proposal and above. The Bureau is revising comment 37(a)(4)–1 to increase clarity by providing examples of the date disclosed. The Bureau is adding new comment 37(a)(4)–2 to provide guidance on the date disclosed when a transaction involves a mortgage broker. 37(a)(5) Applicants Appendix C to Regulation X requires disclosure of the name of the applicants for the mortgage loan transaction. Similarly, pursuant to TILA section 105(a), RESPA section 19(a), and Dodd- Frank Act section 1032(a), proposed § 1026.37(a)(5) would have required creditors to disclose the name and mailing address of the applicants for the loan transaction. The Bureau stated in the proposal that it believed that by enabling consumers to confirm that the Loan Estimate is intended for them, this disclosure will promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions. Proposed comment 37(a)(5)–1 would have clarified that where there are multiple consumers, the names and addresses of all consumers for the mortgage loan must be disclosed on the form and that if the form cannot accommodate the names of all the consumers, the creditor may attach to the back of the form a separate page listing the remaining consumers.

Several national trade associations representing mortgage lenders requested clarification regarding the scope of the term ‘‘consumer’’ under proposed § 1026.37(a)(5). The commenters noted that the definition of consumer in a rescindable transaction includes nonapplicant co-owners who have the right to cancel and recommended that individuals who are not applicants but VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00182 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79911 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations who have the right to cancel need not be disclosed, because doing so would be onerous and not fit in the space provided in form H–24. Several national trade associations representing mortgage lenders also noted that where there are multiple consumers, proposed comment 37(a)(5)–1 would have explained that § 1026.37(a)(5) required disclosure of each consumer’s address, even though proposed comment 17(d)–2 would have stated that delivery of the disclosures may be made only to consumers with primary liability on the obligation. Those commenters suggested that only the addresses of consumers to whom the Loan Estimate will be delivered should be disclosed.

With respect to consumers in rescindable transactions, the Bureau understands that disclosing the names of non-applicant co-owners could be unnecessarily difficult, particularly because at the time the Loan Estimate is delivered, a title search likely will not have been completed and thus, the creditor would not know with certainty the names of non-applicant co-owners. Further, listing non-applicant co-owners with rights of rescission on the Loan Estimate has little benefit for those coowners given that they will typically not receive a copy of the Loan Estimate. Accordingly, the Bureau is revising § 1026.37(a)(5) to require disclosure of the name and mailing address only of the consumer applying for the credit. As discussed in the section-by-section analysis of § 1026.17(d), the Bureau is finalizing amendments to comment 17(d)–2 that clarify that § 1026.2(a)(11) provides a specific definition of ‘‘consumer’’ for purposes of rescission under §§ 1026.15 and 1026.23 that would include a non-applicant coowner of a principal dwelling, and provides guidance regarding the provision of disclosures to such consumers. Regarding the proposal’s requirement to list each consumer’s address, the Bureau believes that listing the addresses of consumers to whom the Loan Estimate is not delivered because they are not primarily liable is unnecessary, and is therefore revising comment 37(a)(5)–1 accordingly. For the aforementioned reasons, the Bureau continues to believe that disclosure of the name and mailing address of the applicant will effectuate the purposes of TILA and RESPA and thus, is adopting § 1026.36(a)(5) as revised to require disclosure of the name and mailing address of the consumer applying for the credit, pursuant to the authority described in the proposal and above. The Bureau is adopting comment 37(a)(5)–1 with a revision to state that disclosure of a mailing address is required only for consumers to whom the Loan Estimate will be delivered.

37(a)(6) Property Appendix C to Regulation X requires at the top of the RESPA GFE the ‘‘address or location of the property’’ for which the financing is sought. Appendix A to Regulation X requires the RESPA settlement statement to include the street address of the property being sold or if there is no street address, a brief legal description or other location of the property. Appendix A to Regulation X further requires disclosure of a zip code on the RESPA settlement statement in all cases. The Bureau proposed to use its authority in TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act to impose a similar requirement for the Loan Estimate required by § 1026.19(e). The Bureau stated in the proposal that it believed that, by providing the consumer with basic information about the property that is the subject of the loan transaction, this disclosure will promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions.

Accordingly, proposed § 1026.37(a)(6) would have required the creditor to disclose the street address or location of the property that secures the transaction that is the subject of the Loan Estimate. Proposed comment 37(a)(6)–1 would have instructed creditors to provide a legal description or other locator for the property in cases where there is no street address. The proposed comment also would have clarified that a zip code would be required in all instances. Several national trade associations representing mortgage lenders commented that requiring disclosure of the property address is problematic for consumers seeking preapproval for a transaction for which the property address is not yet known. Several national trade associations representing mortgage lenders and a document preparation company commented that when disclosing an alternative property address as described by proposed comment 37(a)(6)–1, sample form H–24 does not contain enough space to include a legal description of the property given that legal descriptions are often paragraphs long. A GSE requested in an ex parte meeting that the Bureau clarify how to disclose personal property that secures a transaction.

With respect to preapprovals, the Bureau does not believe that requiring disclosure of a property address in such a situation is problematic. While the property address is one of the six elements of an application under § 1026.2(a)(3)(ii) as finalized, without which the requirement to deliver a Loan Estimate is not triggered, a creditor is permitted to deliver a Loan Estimate without collecting a property address from the consumer. In that case, the Loan Estimate would be subject to § 1026.19(e) and the creditor would be presumed to have collected the address, as described in comment 19(e)(3)(iv)(A)–3. As further described by that comment, the subsequent receipt of a property address would not be considered a changed circumstance pursuant to § 1026.19(e)(3)(iv)(A) or (B). Under proposed § 1026.37(a)(6), the creditor would not have been required to disclose the street address, as would have been clarified by proposed comment 37(a)(6)–1. Comment 37(a)(6)– 1 would have stated, however, that a zip code is required in all instances. In addition, to the extent that a creditor does not want to provide a Loan Estimate for a preapproval before a property address is known, the creditor could instead deliver a written estimate of terms or costs specific to that consumer, provided that the written estimate contained the disclaimer required by § 1026.19(e)(2)(ii). Accordingly, the Bureau believes § 1026.37(a)(6) does not need to be revised to address preapprovals. However, to provide additional flexibility for creditors to use the Loan Estimate for preapprovals where the property address is unknown, the Bureau is revising comment 37(a)(6)–1 to state that while the disclosure of a zip code is required in all instances, the creditor may disclose multiple zip codes if the consumer is investigating home purchase opportunities in multiple zip codes.

In response to the commenters’ concerns about disclosing a legal description of real property, the Bureau understands that a legal description would be unlikely to fit in the space provided for the disclosure required by § 1026.37(a)(6) and has revised comment 37(a)(6)–1 to delete the reference to a legal description. With respect to disclosing personal property, the Bureau recognizes that personal property may, in some cases, also secure a transaction. Accordingly, the Bureau is adding comment 37(a)(6)–2 to address the disclosure of personal property. The Bureau also believes additional clarity VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00183 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79912 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations regarding the disclosure requirements will facilitate compliance for industry. For the reasons stated above, and pursuant to the authority stated in the proposal and above, the Bureau is adopting § 1026.36(a)(6) substantially as proposed, but with modifications to increase clarity regarding the information to be disclosed. The Bureau is revising § 1026.36(a)(6) to require disclosure of the address, including the zip code, of the property that secures or will secure the transaction, or if the address is unavailable, the location of such property including a zip code. The Bureau is further revising comment 37(a)(6)–1 to delete the reference to a legal description, to provide for the disclosure of multiple zip codes, and to clarify that a creditor complies with § 1026.37(a)(6) by disclosing a complete address for purposes of the U.S. Postal Service. The Bureau is adding comment 37(a)(6)–2 which clarifies that where personal property secures a transaction, a description of the personal property may be disclosed pursuant to § 1026.37(a)(6) to the extent that it fits in the space provided for this disclosure on form H–24. Comment 37(a)(6)–2 explains, however, that the creditor is not permitted to add additional pages to the Loan Estimate to disclose personal property. The Bureau is concerned that adding an additional page to list personal property may risk information overload to the consumer and believes that such risk outweighs the benefit of such disclosure, given its comparatively lesser importance to a description of the real property that secures the transaction. Personal property that secures a credit transaction would also be disclosed on the Closing Disclosure pursuant to § 1026.38(l)(6). The Bureau is further adding comment 37(a)(6)–3 to provide guidance on a transaction secured by more than one property. The Bureau adopts the revision to comment 37(a)(6)–1 and new comments 37(a)(6)– 2 and –3 pursuant to its authority in TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd- Frank Act.

37(a)(7) Sale Price Proposed § 1026.37(a)(7)(i) would have required disclosure of the contract sale price for the property identified in § 1026.37(a)(6). For transactions that do not involve a seller, proposed § 1026.37(a)(7)(ii) would have required disclosure of the estimated value for the property identified in § 1026.37(a)(6). The disclosure of the contract sale price and estimated property value, as applicable, is a new requirement, which the Bureau proposed pursuant to its authority under TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act for transactions subject to proposed § 1026.19(e). The Bureau stated in the proposal that it believed that including the contract sales price or estimated property value in the Loan Estimate will help promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions by ensuring that consumers have in a single location all the information needed to decide whether to enter into a legal obligation. Proposed comment 37(a)(7)–1 would have provided guidance regarding the requirement to provide the estimated value of the property in transactions where there is no seller. A regional bank commented that even in transactions where there is a seller, the sale price of the property may not be known at the time the Loan Estimate is delivered, especially because a sales contract is not one of the elements of an application, as defined in § 1026.2(a)(3), that triggers delivery of the Loan Estimate. A national trade association representing mortgage lenders requested guidance on which appraisal or valuation to use for an estimated property value where the creditor has obtained multiple appraisals or valuations but has not yet decided which one to use during underwriting. A GSE requested guidance in an ex parte meeting on whether to disclose the value of personal property in transactions where such property is valued separately from real property. With respect to the comment that the sale price of the property may not be known, the Bureau recognizes that there may be transactions that involve a seller where the sale price of the property is not yet known at the time the Loan Estimate is delivered. Accordingly, the Bureau is revising proposed comment 37(a)(7)–1 to clarify that disclosure of an estimated sales price in transactions that involve a seller where the contract sale price is not yet known is permissible if it is the estimated property value used by the creditor in making the disclosures in the Loan Estimate. For example, if the creditor has issued disclosures with origination charges based on a particular loan-to-value ratio, the creditor should disclose a sale price that it used to determine that loan-tovalue ratio. With respect to the comment that a creditor may not know which of multiple appraisals it obtained it will use for underwriting the transaction, the Bureau recognizes that proposed § 1026.37(a)(7) did not address which valuation to disclose in this circumstance and is further revising comment 37(a)(7)–1 to state that where a creditor has obtained multiple appraisals or valuations but has not yet decided which one to use, a creditor may disclose any appraisal or valuation it reasonably believes it may use in underwriting the transaction. With respect to personal property, the Bureau recognizes that proposed § 1026.37(a)(7) did not address how to disclose personal property that may be part of the sale price of a transaction. The Bureau is adopting comment 37(a)(7)–2 to provide that where personal property is separately valued from real property, only the value of the real property should be disclosed pursuant to § 1026.37(a)(7). Comment 37(a)(7)–2 further clarifies that where personal property is included in the sale price of the real property, § 1026.37(a)(7) permits disclosure of the aggregate price without any reduction for the appraised or estimated value of the personal property.

Because the Bureau continues to believe that disclosure of the contract sale price or estimated property value will effectuate the purposes of TILA and RESPA, it is adopting § 1026.37(a)(7)(i) and (ii) substantially as proposed with minor revisions for clarity, based on the legal authority described in the proposal and above. For the reasons discussed, the Bureau is adopting comment 37(a)(7)–1 as revised and is adopting comment 37(a)(7)–2, pursuant to its authority under TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act. 37(a)(8) Loan Term Existing appendix C to Regulation X requires the loan originator to disclose the loan term as part of the ‘‘Summary of Your Loan’’ disclosure. Regulation Z does not have a similar requirement, although TILA provides for such a disclosure. TILA section 128(a)(6) requires disclosure of the ‘‘number, amount, and due dates or period’’ of periodic payments which, in effect, makes disclosure of the loan term a statutory requirement. Section 1026.18(g) implements TILA section 128(a)(6) for non-mortgage transactions, but there is no corresponding disclosure requirement for mortgage loan transactions in existing § 1026.18(s). In the proposal, the Bureau stated its intent to implement TILA section 128(a)(6) by requiring disclosure of the loan term for mortgages in proposed § 1026.37(a)(8). Proposed § 1026.37(a)(8) essentially would have mirrored appendix C to Regulation X and would have required the creditor to disclose the term to maturity of the credit.

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79913 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations The Bureau proposed § 1026.37(a)(8) pursuant to its authority under TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act to implement TILA section 128(a)(6). The Bureau stated in the proposal that it believed disclosing the loan term will help promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions. The Bureau noted that the prototype mortgage disclosures used at the Bureau’s consumer testing displayed the loan term expressed in years, and consumers were able to understand and evaluate easily the term to maturity. The Bureau stated in the proposal that it believed that this unit of time provides a frame of reference to consumers that they use more regularly and that is easier to understand than months, which may result in large numbers that are unfamiliar to consumers, such as 180 or 360 months. The Bureau stated that, accordingly, it proposed § 1026.37(a)(8), which would have required the loan term to be expressed in years. The Bureau stated in the proposal that it understood from industry feedback provided in connection with the Bureau’s stakeholder outreach that some adjustable rate loans may be structured so that the periodic principal and interest payment is fixed such that increases in the interest rate cause increases of the loan term instead of the periodic payment. The Bureau stated that, accordingly, it proposed comment 37(a)(8)–1, which would have provided guidance regarding compliance with the requirement of proposed § 1026.37(a)(8) if the term to maturity is adjustable under the terms of the legal obligation. Several national trade associations representing mortgage lenders and several document preparation companies commented that neither proposed § 1026.37(a)(8) nor its accompanying commentary provided guidance on how to disclose loan terms that were not whole years, such as a term of 185 months. Further, two GSEs commented that identifying the term to maturity of the transaction was confusing in the case of a ‘‘constructionto-permanent’’ transaction which has two distinct transaction phases. The commenters requested guidance on whether proposed § 1026.37(a)(8) requires disclosure of the term of the two phases combined or of the permanent phase only and suggested that only the permanent loan term be disclosed.

To address the commenters’ requests for guidance regarding how to disclose loan terms that are not whole years, the Bureau is revising § 1026.37(a)(8) and adopting new comment 37(a)(8)–1. Revised § 1026.37(a)(8) requires disclosure of the term stated in years or months, or both, as applicable and comment 37(a)(8)–1.i clarifies that where the term to maturity of the credit transaction is 24 months or more but does not equate to a number of whole years, § 1026.37(a)(8) requires disclosure of the number of whole years in the term to maturity followed by the designation ‘‘yr.,’’ and then the remaining number of months, followed by the designation ‘‘mo.’’ For example, if the term to maturity of the transaction is 185 months, the correct disclosure would be ‘‘15 yr. 5 mo.’’ Comment 37(a)(8)–1.ii further clarifies that, if the term to maturity does not equal a whole number of years and is less than 24 months, the disclosure required is the number of months, and provides additional examples.

With regard to the comment suggesting that only the permanent phase of a construction-to-permanent loan should be required to be disclosed, the Bureau notes that existing § 1026.17(c)(6)(ii) and its accompanying commentary address how to disclose construction-to-permanent transactions. That provision provides that ‘‘[w]hen a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction.’’ Accordingly, the disclosure required by § 1026.37(a)(8) would be the term of the combined phases if the construction-to-permanent transaction were disclosed as one transaction or the term of the individual phase, if disclosed as two transactions. The Bureau notes that the amendments to appendix D to Regulation Z in this final rule, as described below, provide additional guidance regarding the disclosure of construction-to-permanent transactions.

The Bureau continues to believe that disclosing the loan term will, for the reasons discussed, effectuate the purposes of TILA and RESPA. Accordingly, based on the authority described in the proposal and above, the Bureau is adopting § 1026.37(a)(8) as revised. The Bureau did not receive any comments regarding proposed comment 37(a)(8)–1 and is adopting that comment substantially as proposed, with minor modifications for clarity, and renumbered as comment 37(a)(8)–2. For the reasons described above, the Bureau adopts new comment 37(a)(8)–1 pursuant to its authority under TILA sections 105(a) and 128(a)(6), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act.

37(a)(9) Purpose Neither Regulation Z nor Regulation X currently requires disclosure of the purpose of the loan. With the number of loan products available on the market, some of which are targeted for a particular purpose, the Bureau stated its belief in the proposal that inclusion of this information on the Loan Estimate will promote the informed use of credit and more effective advance notice of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions. Accordingly, the Bureau proposed to use its authority under TILA section 105(a), RESPA section 19(a), and section 1032(a) of the Dodd-Frank Act to require creditors to disclose the intended purpose of the extension of credit.

Under proposed § 1026.37(a)(9), the creditor would have been required to disclose as the purpose of the loan one of the following: (1) purchase; (2) refinance; (3) construction; or (4) home equity loan. Proposed comment 37(a)(9)–1 would have provided general guidance on identifying the most accurate loan purpose and would have clarified that, in disclosing the loan purpose, the creditor must consider all relevant information available to the creditor at the time of the disclosure and that, if there is uncertainty, the creditor may rely on the consumer’s stated purpose. In the proposal, the Bureau sought comment on whether additional loan purposes should be added to proposed § 1026.37(a)(9). Several national trade associations representing mortgage lenders and two large banks commented that the loan purposes required by proposed § 1026.37(a)(9) differ from those required to be disclosed under Regulation C, 12 CFR 1003, et seq., which implements the Home Mortgage Disclosure Act, 12 U.S.C. 2801 et seq. Those commenters suggested that defining loan purpose differently for Regulation C and for the integrated TILA–RESPA disclosures would create unnecessary regulatory complexity and increase the compliance burden for industry. One regional bank commenter, however, stated that the loan purpose categories proposed in § 1026.37(a)(9) were sufficient. A document preparation company requested that the Bureau add temporary financing or ‘‘bridge’’ loans as a loan purpose.

Regarding the definition of loan purpose, the Bureau recognizes that using the same definition in two of its VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00185 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79914 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations regulations may ease some compliance burden for industry. However, Regulation C and the integrated disclosures implement different statutes and have entirely different purposes. The purpose of the integrated disclosures set forth by the Dodd-Frank Act is to aid consumers’ understanding of their loan transactions. Regulation C, by contrast, is intended to provide the public with loan data, which data is typically used by regulatory agencies to study the mortgage market and for compliance purposes. 12 CFR 1003.1. Given the different purposes of the integrated disclosures and Regulation C, the Bureau declines to revise § 1026.37(a)(9) to conform with Regulation C.

With respect to adding other loan purposes, in choosing the purposes proposed in § 1026.37(a)(9), the Bureau intended to describe only the most common and basic loan purposes, recognizing that it would be impossible to list every conceivable specific purpose that a consumer has in obtaining a loan. The Bureau is satisfied that the purposes proposed will adequately describe the transactions covered by the final rule and declines to add temporary financing or ‘‘bridge’’ loans to § 1026.37(a)(9). Accordingly, pursuant to the authority discussed above and in the proposal and for the reasons described, the Bureau is adopting § 1026.37(a)(9) as proposed. 37(a)(9)(i) Purchase Proposed § 1026.37(a)(9)(i) would have required the creditor to disclose that the loan is a ‘‘Purchase,’’ if the credit is obtained to finance the acquisition of the property that is the subject of the loan transaction. Proposed comment 37(a)(9)–1.i would have clarified the meaning of the term ‘‘purchase.’’ A GSE requested that the Bureau clarify that in order for a loan to be considered a purchase loan, none of the borrowers can currently hold an ownership interest in the property. The commenter noted that such a clarification would align the meaning of purchase for the disclosure required by § 1026.37(a)(9) with current industry standards. The Bureau believes that the general understanding of a ‘‘purchase’’ loan is one where the consumer does not already hold an interest in the property. Further, the Bureau believes that the proposed regulatory text is sufficient to convey such meaning, because it states that the disclosure applies to the ‘‘acquisition’’ of the property, and one cannot acquire what one already owns. Accordingly, the Bureau is adopting § 1026.37(a)(9)(i) as proposed and comment 38(a)(9)–1.i substantially as proposed with minor modifications for clarity. 37(a)(9)(ii) Refinance Proposed § 1026.37(a)(9)(ii) would have required the creditor to disclose that the loan is for a ‘‘Refinance’’ if, consistent with § 1026.20(a) other than with regard to the identity of the creditor, the credit is to refinance an existing obligation already secured by the property that is the subject of the transaction. As under § 1026.20(a), whether a transaction is a refinancing under proposed § 1026.37(a)(9)(ii) would have depended on whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. The proposal stated that this may include an obligation under which amounts other than principal remain due under the existing obligation and are to be paid with the new obligation to satisfy the existing obligation. Proposed comment 37(a)(9)– 1.ii would have clarified the meaning of the term ‘‘refinance’’ and explained that the consumer may or may not receive cash from the transaction. Proposed comment 37(a)(9)–1.ii also would have provided a description of a refinancing with and without cash provided and provided an example of how a consumer may use cash received in a refinancing transaction with cash provided. Proposed comment 37(a)(9)–2 would have clarified that proposed § 1026.37(a)(9)(ii), unlike § 1026.20(a), applies to all such transactions even if the refinancing is undertaken by a new creditor.

Two GSEs commented that the proposed definition of refinance does not align with common industry usage in that it fails to include credit secured by a dwelling not previously subject to a security interest. The proposed definition of refinance in § 1026.37(a)(9)(ii) is not a new definition, however; it is the existing definition under § 1026.29(a) that is used throughout Regulation Z. Though the Bureau understands the GSEs’ desire to define a refinance transaction in a way that aligns with current industry usage, the purposes of the integrated disclosures are to aid consumer understanding of the transaction and facilitate compliance with the disclosure requirements, and the Bureau believes that using the existing Regulation Z definition of refinance sufficiently informs consumers while facilitating compliance for creditors. Using the existing definition in Regulation Z avoids adding regulatory complexity through the creation of a new definition of that term. Accordingly, the Bureau declines to revise the proposed definition. However, as described below, the Bureau understands that additional clarity is necessary for situations in which more than one loan purpose could be used to describe a particular transaction. Accordingly, the Bureau is revising § 1026(a)(9)(ii) to provide that the ‘‘Refinance’’ disclosure is applicable only if the credit is not for the purpose described in § 1026.37(a)(9)(i). The Bureau is further revising § 1026.37(a)(9)(ii) and comment 37(a)(9)–2 to state that a transaction is for a refinance without regard to whether the creditor is the original creditor or a holder or servicer. For the reasons discussed above, the Bureau is adopting § 1026.37(a)(9)(ii) and comment 37(a)(9)–2 as revised, and comment 37(a)(9)–1.ii as proposed. 37(a)(9)(iii) Construction If the extension of credit is to finance the construction of a dwelling on the property, proposed § 1026.37(a)(9)(iii) would have required the creditor to disclose that the loan is for ‘‘Construction.’’ Proposed comment 37(a)(9)–1.iii would have clarified that the creditor is required to disclose that the loan is for ‘‘Construction’’ both in transactions where the extension of credit is to cover the costs of a construction project only (constructiononly loan), whether it is a new construction or a renovation project, and in transactions where a multiple advance loan may be permanently financed by the same creditor (construction-to-permanent loan). The proposed comment also would have clarified that, in construction-only transactions, the consumer may be required to make interest only payments during the construction phase of the project with the loan balance due at the completion of the construction project. Finally, proposed comment 37(a)(9)– 1.iii would have cross-referenced § 1026.17(c)(6)(ii) and comments 17(c)(6)–2 and –3 for further guidance regarding construction-to-permanent transactions.

A GSE and two document preparation companies commented that disclosing a transaction for the purpose of a renovation, no matter how small, as a construction loan, does not align with common industry usage and would be confusing to consumers. The Bureau understands that disclosing the extension of credit for a renovation project as a construction loan could be confusing to the consumer because it is not aligned with common usage of the term, as well as industry usage. VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00186 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79915 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations Accordingly, the Bureau is revising comment 37(a)(9)–1.iii to refer to initial construction and to clarify that this disclosure does not apply to renovations. The Bureau is further revising § 1026.37(a)(9)(iii) to state that a loan is for ‘‘Construction’’ only if it will be used to finance the initial construction of a dwelling and is not for one of the purposes described in § 1026.37(a)(9)(i) or (ii), for the reasons discussed in the section-by-section analysis of § 1026.37(a)(9)(ii). Accordingly, credit obtained for the purpose of renovation shall be disclosed as a refinance or home equity loan, as applicable.

37(a)(9)(iv) Home Equity Loan If the extension of credit does not involve the purchase of real property as described in § 1026.37(a)(9)(i) or the construction of a dwelling as described in § 1026.37(a)(9)(iii) and will not be used to refinance an existing obligation as described in § 1026.37(a)(9)(ii), proposed § 1026.37(a)(9)(iv) would have required the creditor to state that the extension of credit is for a ‘‘Home Equity Loan.’’ Proposed comment 37(a)(9)(iv)–1.iv would have clarified that the home equity loan disclosure applies whether the transaction will be secured by a first or subordinate lien on the property. The Bureau did not receive any comments on § 1026.37(a)(9)(iv). The Bureau is adopting § 1026.37(a)(9)(iv) and comment 37(a)(9)–1.iv substantially as proposed but with minor modifications for clarity.

37(a)(10) Product Pursuant to TILA section 128(b)(2)(C)(ii), under existing § 1026.18(s), the creditor is required to provide certain information about the interest rate and payments, which is based on the loan product. In proposed § 1026.37(a)(10), the Bureau would have required a description of the loan product. The Bureau proposed this new requirement pursuant to its authority under TILA section 105(a), RESPA section 19(a), section 1032(a) of the Dodd-Frank Act, and section 1405(b) of the Dodd-Frank Act with respect to residential mortgage loans. The Bureau stated in the proposal that it believed that requiring the disclosure of the loan product on the Loan Estimate promotes the informed use of credit and more effective advance disclosure of settlement charges by providing consumers with key loan terms early in the transaction and in a clear and conspicuous manner. The Bureau further stated in the proposal that this disclosure would enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions. In addition, the Bureau stated its belief that disclosure of the loan product may improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, and is in the interest of consumers and in the public interest. Specifically, proposed § 1026.37(a)(10)(i) would have required the creditor to identify the type of loan product for which the consumer has applied and proposed § 1026.37(a)(10)(ii) would have required a description of certain loan features added to the loan product that may change the consumer’s periodic payment. Proposed § 1026.37(a)(10)(iii) would have provided instructions on how to disclose loan products that contain one or more loan features, would have stated that the creditor may disclose only one loan feature, and cross-referenced proposed § 1026.37(a)(10)(ii) as establishing the following hierarchy to be adhered to when disclosing a loan product with more than one loan feature: (1) Negative amortization; (2) interest only; (3) step payment; (4) balloon payment; and (5) seasonal payment. Proposed § 1026.37(a)(10)(iv) would have required that the disclosure of any loan product or loan feature be preceded by any introductory rate periods, adjustable features, and applicable time periods. This aspect of the proposal would not have applied to fixed rate loans with no additional features. Finally, comments to proposed § 1026.37(a)(10) would have provided further descriptions and examples of the loan products and features to be disclosed. A national trade association representing mortgage lenders commented that requiring the disclosure of loan features was confusing as part of the loan product name and recommended instead that the loan features be disclosed in the ‘‘loan terms’’ section of the Loan Estimate. A large bank commented that disclosing only one loan feature was misleading to the consumer and prevented useful shopping for loan products; instead the commenter suggested disclosing all applicable features.

As discussed above, the Bureau has extensively tested the integrated disclosures and concluded that consumers are able to use them to compare and make sophisticated tradeoffs between various loan products. See Kleimann Testing Report at 278. The Bureau believes that the general design of the loan product disclosure is beneficial for consumers and has determined not to change the structure of proposed § 1026.37(a)(10). Accordingly, the Bureau is finalizing § 1026.37(a)(10) substantially as proposed, with minor modifications for clarity, based on the authority described in the proposal and above. 37(a)(10)(i) Proposed § 1026.37(a)(10)(i) would have required disclosure of one of three product types: Adjustable rate, step rate, or fixed rate, as defined in that paragraph as the product for which the consumer has applied. Proposed comment 37(a)(10)–1 would have clarified the proper format for disclosure of the product types listed. The Bureau did not receive any comments regarding proposed § 1026.37(a)(10)(i) and is adopting it as proposed. The Bureau is adopting comment 37(a)(10)–1 as revised to clarify that only the first adjustment period shall be disclosed for any loan without the features described in § 1026.37(a)(10)(ii), for the reasons discussed in the section-by-section analysis of § 1026.37(a)(10)(iv), below. 37(a)(10)(i)(A) Adjustable Rate If the interest rate may increase after consummation, but the rates that will apply or the periods for which they will apply are not known at consummation, proposed § 1026.37(a)(10)(i)(A) would have required that the loan be disclosed as an ‘‘Adjustable Rate.’’ Proposed comment 37(a)(10)–1.i would have clarified that the proper format for disclosure of an adjustable rate product is the length of any introductory period, followed by the frequency of the adjustment periods thereafter preceding the loan product. For example, where the loan product is an adjustable rate with an introductory rate that remains the same for the first five years of the loan term and then adjusts every three years starting in year six, proposed comment 37(a)(10)–1.i would have explained that the disclosure required by § 1026.37(10) is ‘‘5/3 Adjustable Rate.’’ Several industry commenters requested guidance regarding how to disclose adjustable loan rate products that have multiple adjustment intervals. One national trade association representing mortgage lenders requested guidance for how to disclose an adjustable rate loan where the introductory period may be within a certain range of months but is not yet known.

The Bureau recognizes that the proposal did not address how to disclose such products. Accordingly, the Bureau is adopting VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00187 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79916 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations § 1026.37(a)(10)(i)(A) as proposed, but is expanding comment 37(a)(10)–1.i to address comments requesting guidance on how to disclose adjustable rate loan products which have multiple adjustment intervals. Comment 37(a)(10)–1.i is revised to clarify that disclosure of only the first adjustment period is required for the reasons discussed in the section-by-section analysis of § 1026.37(a)(10)(iv), below. To further address the numerous potential adjustable rate products, the Bureau is adding comment 37(a)(10)– 1.i.A to explain that where an adjustable rate loan product has no introductory period, the creditor is required to disclose a ‘‘0’’ followed by the first adjustment period. The Bureau also is adding comment 37(a)(10)–1.i.B to clarify, in response to the comment received regarding unknown introductory periods, that where the introductory period is not yet known, § 1026.37(a)(10) requires disclosure of the shortest potential introductory period.

37(a)(10)(i)(B) Step Rate Under proposed § 1026.37(a)(10)(i)(B), the loan product would have been required to be disclosed as a ‘‘Step Rate’’ if the interest rate will change after consummation and the applicable rates and the periods for the applicable rates are known. Proposed comment 37(a)(10)–1.ii would have clarified the proper format for disclosure of a steprate product.

A regional bank and a document preparation company both requested guidance on how to disclose preferred rate transactions under proposed § 1026.37(a)(10). One document preparation company commenter requested clarification of whether a transaction subject to a third-party buydown would be disclosed as a step rate transaction pursuant to proposed § 1026.37(a)(10)(i)(B). The Bureau also received comments from varied sources questioning the logic of requiring the disclosure of multiple adjustment intervals for the step rate product example in proposed comment 37(a)(10)–1.ii.

With respect to the request for guidance regarding preferred rate transactions, the Bureau notes that existing comment 17(c)(1)–11.iii provides guidance regarding preferred rate loans, which applies to the disclosures required by § 1026.37(a)(10). In a preferred rate transaction, the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, and the note reflects the preferred rate. As the terms of the legal obligation reflect the preferred rate, the disclosures are to be based on the preferred rate. The Bureau additionally notes that if the preferred rate under the terms of the legal obligation were set to expire at a defined future date, the disclosures required by § 1026.37 should reflect such expiration of the preferred rate as a scheduled interest rate adjustment. With respect to third-party buydowns, existing comment 1026.17(c)(1)–3 addresses how to treat such transactions, which guidance would apply to the disclosure required by § 1026.37(a)(10)(i)(B). The Bureau is adopting § 1026.37(a)(10)(i)(B) as proposed but is revising comment 37(a)(10)–1.ii to clarify that disclosure of only the first adjustment interval is required, for the reasons discussed in the section-bysection analysis of § 1026.37(a)(10)(iv). In response to the comments received regarding the proposed step rate example, the Bureau is also revising comment 37(a)(10)–1.ii to clarify how to disclose a step rate product without an introductory rate.

37(a)(10)(i)(C) Fixed Rate Proposed § 1026.37(a)(10)(i)(C) would have required the creditor to disclose the loan product as a ‘‘Fixed Rate’’ if the product is neither an Adjustable Rate nor a Step Rate, as described in § 1026.37(a)(10)(i)(A) and (B), respectively. Proposed comment 37(a)(10)–1.iii would have provided guidance regarding the disclosure required by § 1026.37(a)(10)(i)(C). The Bureau did not receive any comments on proposed § 1026.37(a)(10)(i)(C) describing fixed rate loan products or its accompanying comment, proposed comment 37(a)(10)–1.iii. Accordingly, the Bureau is adopting proposed § 1026.37(a)(10)(i)(C) and its accompanying comment as proposed. 37(a)(10)(ii) Proposed § 1026.37(a)(10)(ii) would have required the disclosure of loan features that may change the consumer’s periodic payment. As noted above, although structured differently, § 1026.18(s) requires a similar disclosure. Proposed § 1026.37(a)(10)(ii) would have required the consumer to disclose one of the following features, as applicable: Negative amortization, interest only, step payment, balloon payment, or seasonal payment. Where a transaction has more than one of the loan features described in that paragraph, proposed § 1026.37(a)(10) would have required disclosure only of the first applicable feature in the order the features are listed in § 1026.37(a)(10)(ii).

Proposed comment 37(a)(10)–2 would have clarified the requirements of proposed § 1026.37(a)(10)(iii) and (iv) with respect to the feature that is disclosed and the time period or the length of the introductory period and the frequency of the adjustment periods, as applicable, that preceded the feature. The proposed comment would have provided as examples: An adjustable rate product with an introductory rate that is interest only for the first five years and then adjusts every three years starting in year six would be disclosed as ‘‘5 Year Interest Only, 5/3 Adjustable Rate’’; a step-rate product with an introductory interest rate that lasts for seven years, and adjusts every year thereafter for the next five years at a predetermined rate would be disclosed as ‘‘7/1 Step Rate’’; and a fixed rate product that is interest only for ten years with a balloon payment due at the end of the ten-year period would be disclosed as ‘‘10 Year Interest Only, Fixed Rate.’’ The proposal noted that the balloon payment feature, however, also would be disclosed elsewhere on the form.

One trade association representing banks requested guidance on how to disclose a loan that had multiple features. As stated in the proposal, where a transaction has more than one of the features listed, § 1026.37(a)(10)(iii) requires disclosure of only one feature, the first applicable feature in the order they are listed in the regulation. The Bureau is adopting § 1026.37(a)(10)(ii) substantially as proposed but with a minor modification for clarity. The Bureau is revising comment 37(a)(10)–2 to clarify that where a transaction feature has multiple adjustment periods, only the first adjustment period must be disclosed for the reasons discussed in the section-bysection analysis of § 1026.37(a)(10)(iv), below.

37(a)(10)(ii)(A) Negative Amortization Proposed § 1026.37(a)(10)(ii)(A) would have required that the creditor disclose a ‘‘Negative Amortization’’ loan feature if, under the terms of the legal obligation, the loan balance may increase. Proposed comment 37(a)(10)– 2.i would have provided an example of the disclosure of a loan product with a negative amortization feature. The Bureau did not receive any comments on proposed § 1026.37(a)(10)(ii)(A) or its accompanying commentary and is adopting § 1026.37(a)(10)(ii)(A) as proposed. The Bureau is adopting comment 37(a)(10)–2.i substantially as proposed but with a minor modification for clarity.

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79917 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations 37(a)(10)(ii)(B) Interest Only Proposed § 1026.37(a)(10)(ii)(B) would have required that the creditor disclose an ‘‘Interest Only’’ loan feature if, under the legal obligation, one or more regular periodic payments may be applied only to interest accrued and not to the loan principal. Proposed comment 37(a)(10)–2.ii would have provided an example of the disclosure of a loan product with an interest only feature. The Bureau did not receive any comments on proposed § 1026.37(a)(10)(ii)(B) or its accompanying commentary and is adopting § 1026.37(a)(10)(ii)(B) as proposed. The Bureau is adopting comment 37(a)(10)–2.ii substantially as proposed but with a minor modification for clarity.

37(a)(10)(ii)(C) Step Payment Proposed § 1026.37(a)(10)(ii)(C) would have required that the creditor disclose a ‘‘Step Payment’’ loan feature if the terms of the legal obligation include a feature that involves scheduled variations in the periodic payment during the term of the loan that are not caused by changes in the interest rate. Proposed comment 37(a)(10)–2.iii would have clarified that the term ‘‘step payment’’ is sometimes also called a ‘‘graduated payment’’ and provided an example and guidance on the format to be used when disclosing a loan product with a Step Payment feature. The Bureau did not receive any comments on proposed § 1026.37(a)(10)(ii)(C) and is adopting it as proposed. The Bureau is adopting comment 37(a)(10)–2.iii substantially as proposed but with a minor modification for clarity. 37(a)(10)(ii)(D) Balloon Payment Proposed § 1026.37(a)(10)(ii)(D) would have required that the creditor disclose a ‘‘Balloon Payment’’ loan feature if the transaction includes a balloon payment as defined in proposed § 1026.37(b)(5). Proposed comment 37(a)(10)–2.iv would have clarified that the term ‘‘balloon payment’’ has the same meaning as in proposed § 1026.37(b)(5) and provided further guidance on the format to be used when disclosing a loan product with a balloon payment feature. The Bureau did not receive any comments on proposed § 1026.37(a)(10)(ii)(D) and is adopting it substantially as proposed with a revision to state that the feature should be disclosed if the terms of the obligation include it, to conform to the language used in § 1026.37(a)(10)(ii)(E). The Bureau is adopting comment 37(a)(10)–2.iv as revised to clarify that if a transaction includes more than one balloon payment, only the earliest year that a balloon payment is due must be disclosed.

37(a)(10)(ii)(E) Seasonal Payment Proposed § 1026.37(a)(10)(ii)(E) would have required that the creditor disclose whether the terms of the legal obligation expressly provide that regular periodic payments are not scheduled for specified unit-periods on a regular basis, disclosed as a ‘‘Seasonal Payment’’ feature. The Bureau stated in the proposal that it understands from industry feedback provided in connection with the Bureau’s stakeholder outreach that some loans, which may be more prevalent in the community bank market, may be structured so that periodic principal and interest payments are not scheduled to be made by the consumer in between specified unit-periods on a regular basis. The proposal provided as an example that such a loan may be structured so that payments are not required to be made by the consumer during the months of June through August each year of the loan term. The proposal noted that these loans are sometimes called ‘‘teacher loans.’’ Proposed § 1026.37(a)(10)(ii)(E) would have provided for the disclosure of such a product feature. Proposed comment 37(a)(10)–2.v would have provided guidance regarding this requirement. The Bureau did not receive any comments on proposed § 1026.37(a)(10)(ii)(E) and is adopting it and comment 37(a)(10)–2.v as proposed. 37(a)(10)(iii) Proposed § 1026.37(a)(10)(iii) would have required that if more than one loan feature is applicable to the transaction, the creditor disclose only the first applicable loan feature from the order in which they are presented in proposed § 1026.37(a)(10)(ii). The proposal stated that this proposed order of loan features prioritizes the loan features to ensure that consumers receive information about potential costs and risks in a readily visible format, understanding that consumers will receive information about some applicable features elsewhere in the Loan Estimate. The proposal provided as an example that the existence of a balloon payment also would have been disclosed under both proposed § 1026.37(b) and (c), and thus, is later in the order of loan features under proposed § 1026.37(a)(10)(iii). In addition, the Bureau stated its belief in the proposal that seasonal payments do not pose as great a risk to consumers as do negatively amortizing or nonamortizing payments, and thus, disclosure of these features is earlier than seasonal payments in the order under proposed § 1026.37(a)(10)(iii). Several document preparation companies and a large bank commented that the proposal was not clear with regard to how to disclose constructionto-permanent loans, which often have an adjustable rate phase followed by a fixed rate phase. As discussed above in the section-by-section analysis of § 1026.37(a)(8), existing § 1026.17(c)(6)(ii) and its accompanying commentary address how to disclose construction-to-permanent transactions. Section 1026.17(c)(6)(ii) provides that ‘‘[w]hen a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction.’’ Accordingly, a creditor may disclose a construction-topermanent loan as separate transactions with distinct loan product types. Should a creditor choose to treat the construction-to-permanent transaction as one, however, the Bureau notes that the disclosure of a Fixed Rate product type is only permitted under § 1026.37(a)(10) if the product does not otherwise fall within the definition of Adjustable Rate or Step Rate product under § 1026.37(a)(10)(i)(A) or (B). Accordingly, where a construction-topermanent transaction has an adjustable rate construction phase followed by a fixed rate permanent phase, § 1026.37(a)(10) would require it to be disclosed as an adjustable rate product because the adjustable rate phase would fall within the Adjustable Rate product determination. The Bureau is adopting § 1026.37(a)(10)(iii) as proposed. 37(a)(10)(iv) Finally, proposed § 1026.37(a)(10)(iv) would have required the creditor to include in the disclosures required by § 1026.37(a)(10)(i) and (ii) information regarding any introductory rate period, adjustment period, or time period, as applicable, and that this information should precede both the loan product and any features disclosed, as applicable.

The Bureau received comments from a document preparation company and a national trade association representing mortgage lenders requesting clarification regarding the disclosure of transactions where there are multiple adjustment periods. Specifically, the commenters asked for explanation of proposed comment 37(a)(10)–1.ii, which would have addressed step rate loan products. That proposed comment stated that, for example, if a step rate loan had an introductory interest rate VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00189 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79918 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations that lasts for 10 years and adjusts every year thereafter for the next five years, and then adjusts every three years for the next 15 years, the disclosure required by § 1026.37(a)(10) is ‘‘10/1/3 Step Rate.’’ Further, a document preparation company and a national trade association representing mortgage lenders commented that proposed § 1026.37(a)(10) was silent on how to disclose product types and features that change after a period of months or days that do not correspond to whole years. The Bureau has considered these comments and has determined that, given the possibility of multiple adjustment periods over the course of a single transaction, § 1026.37(a)(10)(iv) should be revised to limit the number of periods to be disclosed. The Bureau has determined that disclosing every adjustment period as part of the loan product could be confusing to consumers and difficult to implement. As mentioned in the proposal and above in part III, the Bureau is concerned about the risk to consumers of information overload. The Bureau believes that the first period of adjustment of a loan feature would aid consumer understanding of that feature without potentially causing information overload. Accordingly, the Bureau is revising § 1026.37(a)(10)(iv) to require that the loan product be preceded by a description of any introductory rate period, and only the first adjustment period, as applicable, and to provide additional clarity.

With respect to the comment regarding product types and features that have introductory periods or adjustment periods that do not equate to a number of whole years, the Bureau believes, after considering this comment, that it would facilitate compliance with the disclosure requirements to address this possibility in the commentary. Accordingly, the Bureau is adding comment 37(a)(10)–3 to clarify how to disclose product types and features that have periods that do not equate to a number of whole years. Comment 37(a)(10)–3 also clarifies how to disclose product types and features that have adjustment periods that change more frequently than monthly. 37(a)(11) Loan Type Existing appendix A to Regulation X requires disclosure of the loan type in section B of the RESPA settlement statement. The Bureau proposed to use its authority under TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act 1032(a) to require a similar disclosure. The types of transactions disclosed under proposed § 1026.37(a)(11) would have permitted disclosure of different cost structures or underwriting requirements. The Bureau stated its belief in the proposal that the disclosure of the type of transaction enables consumers to evaluate whether it is the type of transaction that is best suited for their personal situation. The Bureau stated that it believed that including information regarding the type of transaction for which the consumer has applied will promote the informed use of credit and more effective advance disclosure of closing costs, and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions by providing consumers with information regarding important characteristics of the loan early in the transaction. Accordingly, under proposed § 1026.37(a)(11), creditors would have been required to disclose one of the following loan types: Conventional, FHA, VA, or Other. The Bureau did not receive any comments on proposed § 1026.37(a)(11) and is adopting it as proposed, based on the legal authority described above and in the proposal.

37(a)(11)(i) Conventional If the loan is not guaranteed or insured by a Federal or State government agency, proposed § 1026.37(a)(11)(i) would have required the creditor to disclose that the loan is a ‘‘Conventional.’’ The Bureau did not receive any comments on proposed § 1026.37(a)(11)(i) and is adopting it as proposed.

37(a)(11)(ii) FHA If the loan is insured by the Federal Housing Administration, proposed § 1026.37(a)(11)(ii) would have required the creditor to disclose that the loan is an ‘‘FHA.’’ The Bureau did not receive any comments on proposed § 1026.37(a)(11)(ii) and is adopting it as proposed.

37(a)(11)(iii) VA If the loan is guaranteed by the U.S. Department of Veterans Affairs, proposed § 1026.37(a)(11)(iii) would have required the creditor to disclose that the loan is a ‘‘VA.’’ The Bureau did not receive any comments on proposed § 1026.37(a)(11)(iii) and is adopting it as proposed.

37(a)(11)(iv) Other For federally-insured or guaranteed loans that do not fall within the categories described in proposed § 1026.37(a)(11)(i) through (iii) and loans insured or guaranteed by a State agency or other entity, proposed § 1026.37(a)(11)(iv) would have required the creditor to disclose the loan type as ‘‘Other’’ and provide a brief description of the loan. Proposed comment 37(a)(11)–1 would have provided details on the type of loans that would be categorized as ‘‘Other’’ and an example of an acceptable description of a loan that falls within that category. A document preparation company commenter requested that § 1026.37(a)(11) add USDA loans as an additional loan type. A large bank and a national title company asked for guidance on how to describe ‘‘other loans’’ and whether additional pages could be attached to the Loan Estimate to do so where the space provided was not adequate. Another document preparation company asked for a list of all possible loan types. Regarding USDA loans, the Bureau notes that it specifically explained in proposed comment 37(a)(11)–1, that a loan guaranteed or funded by the Rural Housing Service of the USDA would have to be disclosed as ‘‘Other.’’ Given the space constraints of the Loan Estimate and the Closing Disclosure and the risk of information overload to the consumer, the Bureau believes it appropriate to create check boxes for the most common loan types and a general space for other types labeled as ‘‘Other.’’ With respect to the description of ‘‘Other’’ loans, the Bureau does not believe that adding a page for a description of loan type that does not fit into the space provided on form H–24 would benefit consumers, given the risk of information overload. The Bureau believes that creditors should be able to concisely describe the loan type in the space provided and that appending additional pages to the Loan Estimate for this disclosure could cause consumer confusion. Accordingly, the Bureau declines to revise § 1026.37(a)(11)(iv) or comment 37(a)(11)–1 to permit the use of an additional page for the disclosure of ‘‘other’’ loan types. With respect to the request for a list of permissible loan types, as stated in the proposal, the permissible loan types under § 1026.37(a)(11) are conventional, FHA, VA, and other. Because the Bureau continues to believe that a disclosure of loan type will, for the reasons discussed, effectuate the purposes of both TILA and RESPA, it is adopting § 1026.37(a)(11)(iv) as proposed. Comment 37(a)(11)–1 is adopted substantially as proposed with minor modifications for clarity. 37(a)(12) Loan Identification Number (Loan ID #) Appendix A to Regulation X requires the settlement agent to provide the VerDate Mar<15>2010 23:02 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00190 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79919 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations ‘‘loan number’’ in the RESPA settlement statement. The Bureau proposed to use its authority in TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section 1032(a) to require disclosure of the loan number on the Loan Estimate. The Bureau stated its belief in the proposal that including this information in a prominent position on the Loan Estimate will promote the informed use of credit and more effective advance disclosure of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions by providing consumers with access to information they may use repeatedly throughout the transaction.

Accordingly, proposed § 1026.37(a)(12) would have required the creditor to provide a unique number that may be used by the lender, consumer, and other parties to identify the loan transaction, labeled as ‘‘Loan ID #.’’ Proposed comment 37(a)(12)–1 would have clarified that the lender has the discretion to create the unique loan identification number and that different and unrelated loan transactions with the same creditor may not share the same loan identification number. The Bureau did not receive any comments on proposed § 1026.37(a)(12) or comment 37(a)(12)–1. Because the Bureau continues to believe that disclosure of a loan identification number will, for the reasons discussed, effectuate the purposes of TILA and RESPA, it is adopting § 1026.37(a)(12) substantially as proposed, based on the authority described above and in the proposal, with modifications for clarity. In order to ensure that a particular transaction retains the same loan identification number throughout the loan application process, the Bureau is revising proposed comment 37(a)(12)–1 to clarify that where a creditor issues a revised Loan Estimate for a transaction, the loan identification number must remain the same as on the initial Loan Estimate. The Bureau further notes and is revising comment 37(a)(12)–1 to clarify that the identification number disclosed under § 1026.37(a)(12) must be a unique ‘‘number’’ to enable parties to identify the particular transaction using such number, and that the ‘‘number’’ may be composed of any alpha-numeric characters and need not be limited to numbers. The Bureau adopts comment 37(a)(12)–1 as revised pursuant to its authority in TILA section 105(a), RESPA section 19(a), and Dodd- Frank Act section 1032(a). 37(a)(13) Rate Lock Existing appendix C to Regulation X requires the loan originator to disclose information regarding the expiration date for the interest rate, charges, and related terms offered by the originator in the RESPA GFE. As stated in the proposal, the Bureau believed that this information is critical to the consumer’s ability to understand the transaction and avoid the uninformed use of credit. Furthermore, the Bureau stated its belief in the proposal that disclosure of this information would promote more effective advance disclosure of settlement costs and will enable consumers to better understand the costs, benefits, and risks associated with mortgage transactions. Thus, the Bureau proposed to use its authority under TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section 1032(a) to require creditors to provide the rate lock information currently provided in the RESPA GFE. Consistent with this requirement, proposed § 1026.37(a)(13) would have required the creditor to disclose whether the interest rate identified under proposed § 1026.37(b)(2) has been locked by the consumer and, if set, proposed § 1026.37(a)(13)(i) would have required disclosure of the date and time (including the applicable time zone) the locked rate would expire. Proposed § 1026.37(a)(13)(ii) would have stated that the ‘‘rate lock’’ statement required by proposed § 1026.37(a)(13) is to be accompanied by a statement notifying the consumer that the interest rate, points, and lender credits provided in the Loan Estimate are subject to change unless the rate has been set by the consumer and the date and time (including the applicable time zone) all estimated closing costs provided in the Loan Estimate will expire. Proposed comment 37(a)(13)–1 would have clarified that for purposes of proposed § 1026.37(a)(13), a disclosed interest rate is set for a specific period of time even if subject to conditions set forth in the rate-lock agreement between the creditor and consumer. Proposed comment 37(a)(13)–2 would have clarified that the information provided under proposed § 1026.37(a)(13)(ii) related to estimated closing costs is required whether or not the transaction is consummated or the terms are otherwise not accepted or extended. Proposed comment 37(a)(13)–3 would have stated that all times provided in the disclosure must reference the applicable time zone and provided an example of an appropriate disclosure of the applicable time zone. A State trade association representing banks requested clarification regarding how to disclose an interest rate in the situation where a creditor has a policy to honor the rate quoted on the Loan Estimate but does not require the consumer to sign a rate lock agreement. Several national trade associations representing mortgage lenders commented that proposed comment 37(a)(13)–2 referred to an ‘‘expiration date’’ but did not identify whether that expiration date related to the interest rate or the closing costs. Several varied types of commenters questioned the specific wording of the rate lock disclosure on form H–24 and suggested alternative language that the commenters believed to be more clear. Regarding the situation where the creditor has a policy to honor the rate quoted without a rate lock agreement, both proposed § 1026.37(a)(13) and comment 37(a)(13)–1 expressly contemplate a rate that is locked for a specific period of time pursuant to a rate lock agreement. Accordingly, where a creditor has a policy to honor the quoted rate, but does not lock the rate pursuant to a written agreement with the consumer, the creditor would disclose ‘‘no’’ pursuant to § 1026.37(a)(13)(i). The Bureau believes this disclosure is appropriate to aid the consumer’s understanding of the transaction, because the creditor would not be bound by an agreement to provide the interest rate to the consumer at consummation.

With respect to the suggested confusion over proposed comment 37(a)(13)–2’s reference to an expiration date, the Bureau notes that § 1026.37(a)(13) states that the disclosure must state the date and time at which the ‘‘estimated closing costs’’ expire. The Bureau also notes that § 1026.19(e)(3)(iv)(E) provides the closing costs disclosed on the Loan Estimate are not subject to the limitations on increases under § 1026.19(e)(3), if the consumer does not express an intent to proceed within 10 business days after the disclosures are provided. The Bureau believes the statement as proposed provides consumers with enough information regarding the possibility that the estimated closing costs may not be available. Accordingly, the Bureau believes that the comment does not require revision to clarify that it refers to the expiration of the closing costs under § 1026.19(e)(3)(iv)(E). Regarding the rate lock disclosure on proposed form H–24, the proposed language would have stated: ‘‘Before closing, your interest rate, points, and lender credits can change unless you VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00191 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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79920 Federal Register / Vol. 78, No. 251 / Tuesday, December 31, 2013 / Rules and Regulations lock the interest rate. All other estimated closing costs expire on ___’’ As discussed above, the Bureau has tested the integrated disclosures extensively and that testing confirmed that consumers were able to understand and adequately use the information on page 1 of the Loan Estimate, including the disclosure required by § 1026.37(a)(13) as proposed. See Kleimann Testing Report at 195. Accordingly, because the Bureau continues to believe that disclosure of the rate lock period is critical to the consumer’s ability to understand the transaction and avoid the uninformed use of credit, it is adopting § 1026.37(a)(13) and comments 37(a)(13)–1 and –2 substantially as proposed but with minor modifications to refer to an interest rate as locked instead of set, for consistency with form H–24 of appendix H to Regulation Z. The Bureau is further modifying comments 37(a)(13)–1 and –2 for clarity and is adopting comment 37(a)(13)–3 as proposed.

37(b) Loan Terms To shop for and understand the cost of credit, consumers must be able to identify and understand the key loan terms offered to them. As discussed below, the Bureau’s research before the proposal informed the Bureau that the following are key loan terms that consumers recognize and expect to see on closed-end mortgage disclosures, together with their settlement charges: Loan amount; interest rate; periodic principal and interest payment; whether the loan amount, interest rate, or periodic payment can increase; and whether the loan has a prepayment penalty or balloon payment. See Macro 2009 Closed-End Report at 6. As discussed in the proposal, TILA requires the disclosure of some of these key loan terms, but not all. Notably, the loan amount and interest rate are currently not specifically required to be disclosed by TILA section 128. 15 U.S.C. 1638. Although Regulation Z currently requires the interest rate to be disclosed in the payment schedule required by § 1026.18(s), it does not require the loan amount to be disclosed for non-HOEPA loans, and does not require a summary table identifying these key loan terms for closed-end credit secured by real property. 12 CFR 1026.18. For federally related mortgage loans, § 1024.7(d) of Regulation X currently requires the RESPA GFE to contain a table on page 1, labeled ‘‘Summary of your loan terms,’’ which contains the following information: (i) Initial loan amount; (ii) loan term; (iii) initial interest rate; (iv) initial monthly amount owed for principal, interest, and mortgage insurance; (v) whether the interest rate can rise, and if so, the maximum interest rate and the date of the first interest rate change; (vi) whether the loan balance can rise, and if so, the maximum loan balance; (vii) whether the monthly amount owed for principal, interest, and mortgage insurance can rise, and if so, the payment amount at the first change and the maximum payment; (viii) whether the loan has a prepayment penalty and the maximum prepayment penalty; and (xi) whether the loan has a balloon payment, the amount, and when it is due. 12 CFR 1024.7(d).

Pursuant to its authority under TILA section 105(a), RESPA section 19(a), and Dodd-Frank Act section 1032(a), the Bureau proposed to require creditors to provide the key loan terms described above in a summary table as part of the integrated Loan Estimate required by proposed § 1026.19(e) for closed-end transactions secured by real property (other than reverse mortgages). As described in the proposal, at the Bureau’s pre-proposal consumer testing, participants were able to use the summary table to identify and compare easily the key loan terms for different loans. The Bureau stated in the proposal its belief, based on its consumer testing, that a concise loan summary table will improve consumer understanding of the loan terms presented, such as an understanding of whether the consumer can afford the loan, will enable comparisons of different credit terms offered by the same or multiple creditors, and will enable consumers to verify information about the loan provided by the creditor orally or in some other form, such as a worksheet. The Bureau stated in the proposal that it believed this disclosure will effectuate the purposes of TILA by promoting the informed use of credit and assuring a meaningful disclosure to consumers, including more effective advance disclosure of settlement costs. Furthermore, the Bureau stated that, consistent with section 1032(a) of the Dodd-Frank Act, this disclosure would 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. The Bureau proposed § 1026.37(b), which would have required a separate table that includes the information and follows the requirements specified in § 1026.37(b)(1) through (8). As proposed, the table would have appeared under the heading ‘‘Loan Terms’’ to enhance visibility. The individual items of information in the table also would have been labeled to enhance visibility. The format would have provided consumers with a bold ‘‘yes’’ or ‘‘no’’ answer to the questions of whether the loan amount, interest rate, or periodic payment can increase, and whether the loan has a prepayment penalty or balloon payment. The Bureau stated in the proposal that it believed that the format of the Loan Terms table will help consumers quickly and easily identify their key loan terms. The Bureau proposed comment 37(b)– 1 to provide additional guidance to creditors regarding the Loan Terms table. Comment 37(b)–1 would have clarified that the Loan Terms table should reflect the terms of the legal obligation that the consumer will enter into, based on information the creditor knows or reasonably should know. The Bureau did not receive any comments on proposed § 1026.37(b) or comment 37(b)–1. Because the Bureau continues to believe disclosing the key loan terms that the Bureau’s research and consumer testing demonstrate are important to and used by consumers to evaluate and understand loan terms, it is adopting § 1026.37(b) substantially as proposed but with minor modifications for clarity, based on the legal authority described in the proposal and above. Under §§ 1026.37(o)(1)(ii) and 1026.38(t)(1)(ii), all disclosures under §§ 1026.37 and 1026.38 are required to be made in the same order, and positioned relative to the master headings, headings, subheadings, labels, and similar designations in the same manner, as shown in forms H–24 and H–25, respectively. Further, under §§ 1026.37(o)(3) and 1026.38(t)(3), form H–24 and form H–25, respectively, are required to be used for federally related mortgage loans. For example, because form H–24 contains the heading of the Loan Terms table required under § 1026.37(b) in a black rounded tab (as form H–24 does for certain other headings required under § 1026.37), the black rounded tab on form H–24 is required to be used for the ‘‘Loan Terms’’ heading under § 1026.37(o) for federally related mortgage loans. A tab that uses a white background with black font, or that does not use rounded corners as illustrated on form H–24 would not comply with § 1026.37(b). As noted above, the heading is intended to enhance visibility of the Loan Terms table required under § 1026.37(b). The Bureau believes the enhanced visibility will aid consumer understanding of these key loan terms. Indeed, the Bureau’s Quantitative Study concluded VerDate Mar<15>2010 20:09 Dec 30, 2013 Jkt 232001 PO 00000 Frm 00192 Fmt 4701 Sfmt 4700 E:\FR\FM\31DER2.SGM 31DER2 bjneal on DSK4SPTVN1PROD with RULES

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