What is my responsibility with respect to the new Closing Disclosure (“CD”) (which replaces the HUD-1/HUD-1A and final TIL disclosure)?

Under the TRID rule, responsibility for the information currently disclosed on the HUD-1 or HUD-1A shifts from the settlement agent to you.[1] You must disclose the costs associated with the transaction that are actually charged to the borrower on the CD, and you must provide this disclosure sooner than previously required—it must be received by the borrower at least three business days prior to closing.[2] You may delegate completion of the form to a settlement agent, but you ultimately retain the liability if the settlement agent gets it wrong.[3]

Notably, liability for these disclosures has also expanded. The Dodd-Frank Act expanded TILA to require that, for residential mortgage loans, you disclose “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.”[4] Because there is no accuracy tolerance for the aggregate settlement charge, you must accurately disclose each individual settlement charge to avoid liability under TILA for stating an inaccurate total. If you inaccurately disclose the charges, then borrowers may bring a private right of action against you for violating TILA.

Most lenders will continue to rely heavily on settlement agents in preparing the CD, and the TRID rule expressly condones this practice.[5] However, careful coordination and communication are required to ensure the disclosure is accurately and timely made.

[1] Cmt. 19(f)(1)(v)-3.

[2] 12 C.F.R. § 1026.19(f)(1).

[3] 12 C.F.R. § 1026.19(f)(1)(v); cmt. 19(f)(1)(v)-3.

[4] 15 U.S.C. § 1638(a)(17).

[5] See comment 19(f)(1)(i)-2.i.B (“Assume that . . . the creditor obtained information about the terms of the consumer’s transaction from the settlement agent regarding the amounts disclosed under § 1026.38(j) and (k). The creditor has exercised due diligence in obtaining the information about the costs under § 1026.38(j) and (k) for purposes of the “reasonably available” standard in connection with such disclosures under § 1026.38(j) and (k).”); 78 Fed. Reg. at 79868 (“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.”).

Answered By: Ben Olson

Is over estimation of LEC’s acceptable?

There are new tolerances that come into effect with the new rules. The way the rules are designed is very similar to what you have for the RESPA GFE. There is a good faith standard, meaning you (or the broker on your behalf) have to provide the consumer with good faith estimates, based on the best information reasonably available for any settlement charges. Then there are tolerance rules that are going to be in place for those charges. There is an expanded category of zero tolerance charges, meaning that, under the rules, if what the consumer ultimately pays is higher than what was on the estimate, then the estimate was deemed to not be in “good faith” and you must cure a tolerance violation unless there was a changed circumstance or other event that allows you to redisclose it. There’s another category called the 10% category where you’ve permitted shopping for a service and it’s not being paid to an affiliate of the creditor or broker. This also is very similar to what you have under RESPA. Then there are other types of charges, like prepaid interest that are not subject to tolerance at all. But generally the baseline for “good faith” is that you did not charge more than you stated on the estimate.

However, I wouldn’t bank on the fact that “good faith” relies on charging the consumer more than the estimate as a license to intentionally overestimate. There are business reasons and legal reasons why you still wouldn’t want to do that. The business reasons are obvious: you’re probably putting yourself at a competitive disadvantage if you are overestimating fees and making the loan look more expensive than it is. That’s a practical concern. The legal concern is that, even though the good faith standard turns on charging the consumer more than the estimate, there also is still a best information reasonably available standard. This means each disclosure that is made has to be made according to the best information reasonably available. So if what you or your third party LO is doing is intentionally inflating estimates to get around potential tolerance violations, then those disclosures wouldn’t be made according to the best information reasonably available. Even though they may end up protecting you from a tolerance violation, you still could still violate TILA.

Answered By: Andy Arculin

The way I look at it, we (the lender) already are responsible for everything. How does TRID increase our liability with both regulators and investors in addition to what we have today?

Right, the lender is technically responsible for everything today. There are a couple of ways this complicates things. One, the liability risk is a lot more substantial. There are a lot of confusing aspects to the RESPA GFE rules that I think everyone got comfortable enough with, but the threat of a private lawsuit really just wasn’t there. An example is the 10% tolerance in Reg X—I don’t know if anyone ever really fully understood how it’s supposed to work, and HUD never explained it. But everyone started doing it a certain way and it wasn’t something that was subject to private liability where a court could really come in and undermine what they’d done. Now everything’s under Regulation Z and potentially carries with it TILA liability. That is a pretty big change. The TILA disclosures have always had liability, but today’s TILA disclosures really aren’t that complicated. These are a lot more complicated. The lender also is legally considered the party doing the disclosures, even in a broker transaction. The lender can’t take a package from a broker and consider that receipt of the application. If a lender is doing work with a broker, the broker is presumed to be acting on behalf of the lender, making a disclosure in the lender’s shoes. These changes haven’t necessarily increased responsibility that much, but they’ve increased exposure. In general, these are just harder forms. They’re a lot more detailed, a lot more technical. And now everything is potentially subject to scrutiny, whereas before RESPA and the GFE rules weren’t tightly enforced and there was no private right.

Answered By: Andy Arculin

Can a secondary market purchaser be sued for anything I as a lender—or one of my vendors—get wrong?

I think this is really something that has to be explored by courts. The easy answer is no. The violation has to be apparent on the face of the disclosure, which I tried to talk about earlier. What does that mean for the TILA disclosures? It typically means you can look at the documents that were received with the assignment and the disclosure and discover that there’s a violation. The finance charge was done wrong, it was understated, and therefore you’re liable as the assignee, because you should have caught it in your QC. That’s fairly straightforward. But with RESPA there was no liability, either for lenders or for assignees, other than just enforcement against lenders. So what happens now? These new disclosures all have a private right of action, or presumably do. There are some questions that will need to be litigated about where private rights exist and where they don’t, but I think you can probably assume for now that a violation of basically anything on the disclosure form will at least give someone an opportunity to file a lawsuit that could potentially carry liability. The question is really what violations will become apparent on the face of the disclosure? In the past, if you look at case law about TILA assignee liability, issues like timing have been dismissed. Courts have said you can’t determine whether or not the disclosure was given within the timing requirement based on the face of the disclosure; therefore, there won’t be any assignee liability for timing violation. But I think it’s less clear here, not because assignees are supposed to have a crystal ball, but there are disclosures that say the date issued is X, and it’s supposed to be the date the disclosure was delivered or placed in the mail. For the closing disclosure, it’s supposed to be when it was provided to the consumer. It’s questionable whether the court may change its tune on issues like that. Other things like the RESPA tolerances have never really fully been explored by courts because the issues never come up. There’s been TILA disclosure and TILA tolerances but not RESPA tolerances, meaning you’ve made a disclosure of an estimated settlement service and violated the good faith standard because you charged the consumer more than the estimate and you didn’t refund the money back. With those types of issues, it’s really unclear what courts are going to do. The CFPB didn’t even tell us whether there were prior rights of action within the rule, let alone address those types of questions. To be fair, I don’t think they really could have. Those are statutory questions courts will have to hash out. It will probably be years before courts of appeals have gotten those types of issues and decided them. Even then, they may not agree.

Answered By: Andy Arculin

Do you believe that there will be a flood of lawsuits after October 3rd? Assuming not, why do you think secondary market purchasers are going to be so risk averse?

I don’t think there’s going to be a flood of lawsuits right after October 3rd. I think the market will probably look a lot like it does today, which is generally a performing market. People don’t tend to file lawsuits for TILA disclosure violations when they’re happy with their loan. That’s a given. There haven’t been a whole lot of them recently. But if there’s a point in time where loans are not performing as well, I think you would see more. Before I went to the CFPB, I worked with another firm in Washington D.C. and I did a lot of litigation in this space, most of it class-action litigation on issues like TILA and RESPA. Class-action lawyers are not necessarily out there defending someone who is going through a foreclosure. In a lot of cases—and this may just be my jaded viewpoint shining through—they are looking for a payday and looking to basically file a lawsuit, find a class rep, find a violation that can be tried on a class-wide basis and file a lawsuit. There are limitations on TILA that make TILA less common than something like RESPA Section 8, where you get three times the amount of the settlement service for each kickback. Here you have a million dollar cap plus fees and costs. But in my opinion, something like the co-op issue is a good example, where you have an entire class of transactions that is either covered or it’s not, and the market has gone in a certain direction because they think that’s what the bureau wants them to do, even though if you really looked at state law, it may say a cooperative share is personal property, not real property; therefore, it’s not covered. I could see someone filing a class-action on that theory, saying that there’s a violation of the TILA disclosure rules because they used the wrong form and trying it on a class-wide basis, and maybe even winning. I think there’s a risk of lawsuits like that. There’s also just the general risk of liability. In other context, if there’s a market downturn, lawsuits like that may gain traction. I think we all hope the market doesn’t take a turn for the worse, but it could. If you’re an investor who’s planning on holding this loan for X number of years, you don’t have a crystal ball and you’re not willing to take on the risk. You simply don’t want someone else’s problem to become yours.

Answered By: Andy Arculin

Can a numerical value on a CD (Fee value omission) be deemed to be a non-numerical clerical error if the LE reflects the accurate value and the omission on the value on the CD is a result of a bona-fide technical error (data mapping)? See section-by-section analysis stating “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.”

So, the way that I usually read the preamble is if there’s a sentence in the preamble, I check whether it’s responding to a public comment that was received. For many of the sections in the preamble, there’s a long list of each comment that was received, or a long description of each comment that was received to that particular revision.

When I led the rule the reason why that was important to me to include was because I wanted the responses, and the description of the reasons why the CFPB did what it did, to be responsive to the public comments that were received. I wanted that all to be in one document. And so sometimes, it’s important not to just read a sentence in isolation in the preamble, especially a sentence like that and to go see what type of comment it was responding to, and so I would want to look at that first before providing an official answer.

But I would think that, considering that what we are talking about a numerical disclosure, that that would not qualify as a violation that’s curable under that section, although it could be curable under TILA section 130(c) as I mentioned, which is a defense to liability, a defense to civil liability, for violations that were really unintentional bona fide clerical errors.

Answered By: Richard Horn

Are there any protections against civil liability for lenders who are making a good faith effort to comply with TRID regulations?

The good faith period that the CFPB and other regulatory agencies have provided does not affect whether lenders or investors have civil or assignee liability. It only affects administrative liability, so potential for violations that are cited by the regulatory agency. Civil liability is completely unaffected by these administrative good faith periods because civil liability basically accrues from the statute and regulation themselves, and those are in effect in the CFR, and so regardless of what the CFPB says about taking into account good faith, a borrower can still sue under the statute or regulations that’s on the books.

Actually, I think I should add, that’s why it would be helpful, and why there was a push in Congress to have a hold harmless period added to TILA for the implementation of TRID. It didn’t get anywhere in Congress, but perhaps, you know, there could be some movement on that later on, or perhaps there could be some limit to the rule to provide such a period in the regulation itself.

These are all things that I think a lot of folks in the industry are thinking about. But for now, there is no protection from civil liability for good faith efforts.

Answered By: Richard Horn

Settlement agents are using the new ALTA settlement statement with the final CD. It would seem that this disclosure would fall under TILA (any other disclosure). Should investors be checking settlement (disbursement of funds) with the final CD?

Section 131(e) of the Truth in Lending Act (TILA) states that an assignee (purchaser) of a consumer credit transaction secured by real property is liable if a violation that carries a private right of action is “apparent on the face of the disclosure statement,” which can be determined by comparing the disclosure statement to a “disclosure of disbursement,” among other documents.  Therefore, if the ALTA settlement statement is used to disclose the disbursement of funds, an investor may wish to compare that statement to the items on the Closing Disclosure that carry a private right of action, such as the aggregate settlement charges disclosed under section 128(a)(17) of TILA.

Answered By: Amanda Raines Lawrence

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