by Sterling Compliance

As you may recall, when the CFPB finalized the TRID amendment last July to formalize many of the clarifications and informal guidance that they had put forth in various webinars during the early implementation phase of the rule, they issued a concurrent proposed regulation for one key issue that did not make the cut in the final amendment:  The “black hole”.  

The TILA-RESPA Integrated Disclosure Rule requires creditors to provide consumers with good faith estimates of the loan terms and closing costs required to be disclosed on a Loan Estimate. Under the rule, an estimated closing cost is disclosed in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed, subject to certain exceptions.  In some circumstances, creditors may use revised estimates, instead of the estimate originally disclosed to the consumer, to compare to the charges actually paid by or imposed on the consumer for purposes of determining whether an estimated closing cost was disclosed in good faith. If the conditions for using such revised estimates are met (valid changed circumstances), the creditor generally may provide revised estimates on a revised Loan Estimate or, in certain circumstances, on a Closing Disclosure. However, under the current rule, circumstances may arise in which a cost increases, but the creditor is unable to use an otherwise permissible revised estimate on either a Loan Estimate or a Closing Disclosure for the good faith determination. This situation, which may arise when the creditor has already provided a Closing Disclosure to the consumer when it learns about the cost increase, occurs because of the intersection of timing rules regarding the provision of revised estimates. This has been referred to in industry as a “gap” or “black hole” in the TILA-RESPA Rule.

Specifically, § 1026.19(e)(4)(ii) states that the creditor shall not provide a revised Loan Estimate on or after the date on which the creditor provides the Closing Disclosure. Section 1026.19(e)(4)(ii) also provides that the consumer must receive any revised Loan Estimate not later than four business days prior to consummation.  Regulation Z therefore limits creditors’ ability to provide revised Loan Estimates relative to the provision of the Closing Disclosure and to consummation. In issuing the 2013 TILA-RESPA Final Rule, the Bureau explained that it was aware of cases where creditors provided revised RESPA Good Faith Estimates at the real estate closing, along with the HUD-1 settlement statement. The Bureau was concerned that the practice of providing both good faith estimates of closing costs and an actual statement of closing costs at the same time could be confusing for consumers and could diminish their awareness and understanding of the transaction. The Bureau was also concerned about consumers receiving seemingly duplicative disclosures that could contribute to information overload.

Here's how this played out.  If there are fewer than four business days between the time the revised version of the disclosures is required to be provided (i.e., within three business days of receiving information sufficient to establish a reason for revision) and consummation, creditors can reflect revised disclosures to reset tolerances on the Closing Disclosure. This is referred to herein as the “four-business day limit.”  the Bureau now understands that there is significant confusion in the market and that the four-business day limit has caused situations where creditors cannot provide either a revised Loan Estimate or Closing Disclosure to reset tolerances even if a reason for revision would otherwise permit the creditor to reset tolerances. In particular, the Bureau understands that this situation may occur if the creditor has already provided the Closing Disclosure and an event occurs or a consumer requests a change that causes an increase in closing costs that would be a valid changed circumstance, but there are four or more days between the time the revised disclosures would be required to be provided and consummation. This situation may occur if there was also a delay in the scheduled consummation date after the initial Closing Disclosure is provided to the consumer.

The four-business day limit can also have negative effects on consumers. Costs that cannot be passed to the specific consumers who incur them are generally passed on to all consumers over time through an overall increase in the cost of credit. Further, some creditors may choose to deny applications to avoid absorbing the increased costs, which can have negative effects for the consumer even if the consumer immediately reapplies for credit (i.e., could result in additional fees to extend a rate lock, further delay closing, or result in the loss of a home sales contract). The Bureau also agrees with some commenters who stated that confusion over the current rules has the potential to create legal and compliance risks for creditors, which could have a negative impact on the cost and availability of credit.

Fast forward to the 2018 Final Amendment:  The final rule now removes the four-business day limit and permits creditors to reset tolerances with either an initial or corrected Closing Disclosure regardless of when the Closing Disclosure is provided relative to consummation. If a creditor uses a revised estimate for the purpose of determining good faith, the creditor shall provide a revised version of the disclosures reflecting the revised estimate within three business days of receiving information sufficient to establish that one of the reasons for revision applies.  The final rule does not change the current Regulation Z requirement that, if the Closing Disclosure becomes inaccurate before consummation, the creditor must provide a corrected Closing Disclosure reflecting any changed terms to the consumer so that the consumer receives the corrected Closing Disclosure at or before consummation, or, in some circumstances, must ensure that the consumer receives the corrected Closing Disclosure no later than three business days before consummation.  

The Bureau cautioned that the practice of providing very early Closing Disclosures with terms that are nearly certain to be revised would be contrary to the underlying purpose of the Closing Disclosure. The Bureau does not expect that removal of the four-business day limit will result in a significant increase in the number of disclosures provided to consumers because the final rule does not expand the circumstances in which creditors are allowed to reset tolerances. And, as further discussed below, the Bureau believes that current rules should prevent creditors from sending Closing Disclosures very early in the process before engaging in due diligence to ensure that any costs that are not finalized are estimated in good faith.  Regarding a commenter’s request for clarification as to whether creditors can reset tolerances using a Closing Disclosure after issuing an initial Loan Estimate but without ever issuing any revised Loan Estimate, the rule does not prohibit creditors from doing so but creditors must otherwise comply with the rule, including its Closing Disclosure accuracy standard. The Bureau will continue to monitor the market for practices that do not comply with the rule’s Closing Disclosure accuracy standard.