A not-so-gentle reminder for mortgage lenders: you have a year to get into compliance with the Consumer Financial Protection Bureau's truth-in-lending and real estate settlement changes. If you haven't started yet, you're behind the eight ball.
And it could cost you dearly.
It would be easy to be nonchalant about getting a couple of document changes done by Aug. 1, 2015, but that would be unwise, industry sources say. The penalties for non-compliance may range from stiff to astronomical.
Kris Stewart, senior manager of compliance professional services at Wolters Kluwer Financial Services in Minneapolis, has seen evidence of such nonchalance. Some clients think these are mere document changes and scoff, "we handle them all the time," she said.
But "those docs are dramatically different than the ones being used today," she said. They are "very, very technical," very complicated for doc vendors and lenders.
Lenders need to be starting the process now, Stewart said. "Big lenders have been doing this for months and months," she said. And "if they mess up, there's a lot of consequences." She doubts the CFPB will grant any extension of next year's deadline
What's all the fuss about? The changes integrate existing Truth in Lending Act and Real Estate Settlement Procedures Act provisions. According to a SourceMedia webinar that included several officers of CFPB as presenters, the initial Truth-in-Lending disclosure and the good faith estimate from RESPA will be combined into a new doc called the Loan Estimate form.
And the final truth-in-lending disclosure and the RESPA HUD-1 form will be combined into a new Closing Disclosure.
"Mortgage lenders that are not in compliance with the new disclosure requirements will be subject to the same CFPB penalties as they are today for other violations. It is still unclear, however, exactly which provisions of the rule are subject to private lawsuits under the Truth in Lending Act and which are not," said Benjamin K. Olson, a partner at BuckleySandler LLP in Washington.
Those general penalties for violations are daunting, according to Stewart. They include:
*First Tier Penalties - $5,000 per day.
*Second Tier Penalties - for reckless engagement in violations, $25,000 per day.
*Third Tier Penalties - for knowing violation, maximum penalty of $1,000,000 per day.
Officers, directors and employees of non-compliant lenders also face cease and desist orders as well as a prohibition from recovering fines and penalties from insurance; a prohibition from offsetting borrower claims with amounts paid for penalties; and other monetary damages as well as restitution, rescission, reformation of contracts, refunds, and return of compensation.
Borrowers can also seek compensation from lenders, though the specifics of that aren't exactly clear yet. "While some aspects of the new disclosures originate in RESPA and may not carry a private right of action, Congress expanded the TILA disclosures to include several additional items, such as the aggregate amount of settlement charges," said Olson.
"Like the Fed before it, the Bureau has generally declined to provide guidance on the application of TILA's penalty provisions so this appears to be a question for the courts."
Lenders face workflow changes, like the closing disclosure going to consumers three days before the closing. Mishandle it, and the closing could have to be rescheduled, Stewart said.
"Plan for testing," she advised. "Don't wait. Lock it down by May 1 or June 1." Lenders cannot use the new docs prior to Aug. 1 of next year. Until then, there is no reason they can't prepare for the workflow changes by getting into the habit of sending the current disclosure docs three days in advance of loan closings.
Are the changes necessary? "I do think they're a good thing," Stewart said. "They are very clear, very understandable." She pointed out there have been conflicts between the GFE and the closing disclosures because they were run by different agencies.
The new disclosure rule makes clear the best case and worst case scenarios for consumers. "It's never bad to have a consumer that's actively engaged," Stewart said.
Mark Fogarty, Editor at Large at National Mortgage News, writes analysis and commentary based on his 30 years covering the mortgage industry.