Disclosure Change Gets Mixed Reviews

The latest draft of the Consumer Financial Protection Bureau's origination disclosure reform rule is initially drawing mixed reviews, with some agreement that the further simplification it suggests could be helpful, but also some concern it adds to what are already heavy regulatory burdens and costs.

David K. Stein, Residential Finance Corp.'s co-founder, senior vice president and general counsel, said he believes the proposed rule is "well intentioned" and that a previous round of reform in 2010 did not quite simplify the disclosures the way it should have.

"Looking at the rule as proposed would accomplish that, however there are things in the rule that, while probably well-intentioned, might not lead to further borrower clarity," said Stein.

He cited among other things the example of a waiting period in the rulemaking designed to give borrowers a chance to review the disclosures before closing. Stein said he questioned whether this would be helpful to consumers as it would likely delay closing. "Typically, it's the consumer that wants to get the loan closed" sooner rather than later, he said.

Both Stein and Scott Stucky, chief operating officer for industry document services vendor DocuTech, in separate interviews noted that the industry is relatively more receptive to the way these proposed forms are shaping up than some other CFPB proposals, such as the definitions being used to determine what a "qualified mortgage" and a "qualified residential mortgage" are in the context of extending protection from some rulemaking liability to some "safer" loans.

"What they're trying to do with the documents is good. We've been talking about simplifying RESPA for 20 years and in 2010 I'm not sure we accomplished what we wanted to accomplish," said Stucky, stressing that his opinions are based on his first, cursory review of the proposed forms.

On the other hand, like Stein he said he is concerned that some of the elements of the new rule could lead to "the classic situation of law of unintended consequences."

"We just spent a lot on 2010," he said, referring to the previous disclosure reform that year. Document services providers as well as lenders expect increased costs as a result of the move, said Stucky, noting that this could force the industry to pass those costs on to consumers.

He said there also is concern that the rule does not address the way real estate can vary more than some other saleable assets or products. "This is not like buying a Toyota Celica from a dealer's lot," he said.

Because of this variation from property to property, Stucky said the lending community is wary of how proposed rules make stricter tolerances for how much final costs for loans can vary from earlier estimates. This will do more to encourage lenders to keep their estimates on the high side and raises costs for consumers, he said.

"A highball quote doesn't do the consumer a service," he said.

Cathy Blaszyk, vice president of lender services at industry vendor Closing Corp., said in an interview that it does appear tolerances have tightened. Specifically, the wording of the draft rule suggests they have removed a 10% tolerance currently allowed for affiliate companies' charges and charges in block 3, making both a 0% tolerance. This could be a challenge for appraisers and appraisal management companies in particular.

"In the past you would order the service before the fee was known [for title and appraisal services]. That all has to be changed," she said. "You have to know the cost up front. That's a real shift compared to how this used to be done in the past."

Some provisions, such as giving the consumer the option of choosing their own settlement services providers, which would release the lender from the tolerance requirement if they do, remain.

"They're just trying to restrict the requirement for a consumer to pay more for a setttlement service," Blaszyk said.

Also, she said, "it looks like recording charges could be held to zero tolerances," which could be tricky because these vary by recording office location, page counts, type of loan rate (fixed or adjustable), and whether the property is a condominium, for example.

She said technology with geocoding such as her company provides in conjunction with its data, combined with its guarantee that cost estimates will be within tolerances, could help originators navigate these nuances and others that vary from property to property in determining what costs would be upfront. It also would help address what appears in the latest draft of the rule to be an increased stress on the need to keep electronic records of disclosures in standard electronic format, in order to make it easier for regulators to monitor a lender's compliance.

While technology and data would help lenders reduce the need the pitch their estimates high, initially implementation costs will likely mean increased compliance costs will be unavoidable. But over time, automation could help reduce those costs, Blaszyk said.

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