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Daily Rules, Proposed Rules, and Notices of the Federal Government

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: Proposed rule with request for public comment.
SUMMARY: Sections 1032(f), 1098, and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the Bureau to issue proposed 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 proposing to amend 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 in the Dodd-Frank Act, the proposed rule provides extensive guidance regarding compliance with those requirements.
DATES: Comments regarding the proposed amendments to 12 CFR 1026.1(c) and 1026.4 must be received on or before September 7, 2012. For all other sections including proposed amendments, comments must be received on or before November 6, 2012.
ADDRESSES: *Electronic: http://www.regulations.gov.Follow the instructions for submitting comments.

*Mail/Hand Delivery/Courier:Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552.

Instructions:All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change tohttp://www.regulations.gov.In addition, comments will be available for public inspection and copying at 1700 G Street NW., Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or social security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: David Friend, Michael G. Silver and Priscilla Walton-Fein, Counsels; Andrea Pruitt Edmonds, Richard B. Horn, Joan Kayagil, and Thomas J. Kearney, Senior Counsels; Paul Mondor, Senior Counsel & Special Advisor; and Benjamin K. Olson, Managing Counsel, Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:

I. Summary of Proposed 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 combine the forms. To accomplish this, the Bureau has engaged in extensive consumer and industry research and public outreach for more than a year.1 Based on this input, the Bureau is now proposing a rule with new, combined forms. The proposed rule also provides a detailed explanation of how the forms should be filled out and used.

1See part III below for a discussion of the Bureau's testing of the forms with more than 100 consumers, lenders, mortgage brokers, and settlement agents. 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.

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 form and Closing Disclosure form, the Bureau has reconciled the differences between the existing forms and combined several other mandated disclosures. 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.2 This should reduce the burden on lenders and others in preparing forms in the future.

2This guidance is provided in the proposed regulations and the proposed Official Interpretations, which are in Supplement I.

B. Scope of the Proposed Rule

The proposed rule applies to most closed-end consumer mortgages. The proposed rule 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 proposed rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.3

3For additional discussion of the scope of the proposed rule, see part VI below regarding section 1026.19, Coverage of Integrated Disclosure Requirements.

C. The Loan Estimate

The Loan Estimate form would replace two current Federal forms. It would replace the Good Faith Estimate designed by the Department of Housingand Urban Development (HUD) under RESPA and the “early” Truth in Lending disclosure designed by the Board of Governors of the Federal Reserve System (the Board) under TILA.4 The proposed rule and the Official Interpretations (on which lenders can rely) contain detailed instructions as to how each line on the Loan Estimate form would be completed.5 There are sample forms for different types of loan products.6 The Loan Estimate form also incorporates new disclosures required by Congress under the Dodd-Frank Act.7

4These disclosures are available athttp://www.hud.gov/offices/hsg/rmra/res/gfestimate.pdfandhttp://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf.

5The requirements for the Loan Estimate are in proposed § 1026.37. Additional discussion of this and other sections of the proposed rule is provided in the relevant portion of part VI below.

6Appendix H to the proposed 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.

7For a discussion of these disclosures, see part V.B below.

Provision by mortgage broker.The lender may rely on a mortgage broker to provide the Loan Estimate form. However, the lender also remains responsible for the accuracy of the form.8

8This provision is in proposed § 1026.19(e)(1)(ii).

Timing.The lender or broker must give the form to the consumer within three business days after the consumer applies for a mortgage loan.9 The proposed rule contains a specific definition of what constitutes an “application” for these purposes.10

9This provision is in proposed § 1026.19(e)(1)(iii).

10The definition of “application” is in proposed § 1026.2(a)(3).

Limitation on fees.Consistent with current law, the lender 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 lenders to charge fees to obtain consumers' credit reports.11

11This provision is in proposed § 1026.19(e)(2)(i).

Disclaimer on early estimates.Lenders and brokers may provide consumers with written estimates prior to application. The proposed rule requires that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer would not be required for advertisements.12

12This provision is in proposed § 1026.19(e)(2)(ii).

D. The Closing Disclosure

The Closing Disclosure form would replace the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It would also replace the revised Truth in Lending disclosure designed by the Board under TILA.13 The proposed rule and the Official Interpretations (on which lenders can rely) contain detailed instructions as to how each line on the Closing Disclosure form would be completed.14 The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.

13These disclosures are available athttp://www.hud.gov/offices/adm/hudclips/forms/files/1.pdfandhttp://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf.

14The requirements for the Closing Disclosure are in proposed § 1026.38.

Timing.The lender must give consumers this Closing Disclosure form at least three business days before the consumer closes on the loan. Generally, if changes occur between the time the Closing Disclosure form is given and the closing, the consumer must be provided a new form. When that happens, the consumer must be given three additional business days to review that form before closing.15 However, the proposed rule contains an exception from the three-day requirement for some common changes. These include changes resulting from negotiations between buyer and seller after the final walk-through. There also is an exception for minor changes which result in less than $100 in increased costs.16 The Bureau seeks comment on whether to permit additional changes without requiring a new three-day period before closing.

15This provision is in proposed § 1026.19(f)(1)(ii).

16These exceptions are in proposed § 1026.19(f)(2).

Provision.Currently, settlement agents are required to provide the HUD-1, while lenders are required to provide the revised Truth in Lending disclosure. The Bureau is proposing two alternatives for who is required to provide consumers with the new Closing Disclosure form. Under the first option, the lender would be responsible for delivering the Closing Disclosure form to the consumer. Under the second option, the lender may rely on the settlement agent to provide the form. However, under the second option, the lender would also remain responsible for the accuracy of the form.17 The Bureau seeks comment as to which alternative is preferable.

17These alternatives are set forth in proposed § 1026.19(f)(1).

E. Limits on Closing Cost Increases

Similar to existing law, the proposed rule would restrict 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 could not increase: (1) The lender's or mortgage broker's charges for its own services; (2) charges for services provided by an affiliate of the lender or mortgage broker; and (3) charges for services for which the lender or mortgage broker does not permit the consumer to shop. Also unless an exception applies, charges for other services generally could not increase by more than 10 percent.18

18The limitations and the exceptions discussed below are in proposed § 1026.19(e)(3).

The rule would provide exceptions, for example, when: (1) The consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the lender; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days.

F. Changes to APR

The proposed rule redefines the way the Annual Percentage Rate or “APR” is calculated. Under the rule, the APR will encompass almost all of the up-front costs of the loan.19 This will make it easier for consumers to use the APR to compare loans and easier for industry to calculate the APR.

19These revisions are in proposed § 1026.4.

G. Recordkeeping

The proposed rule requires lenders to keep records of the Loan Estimate and Closing Disclosure forms provided to consumers in a standard electronic format.20 This will make it easier for regulators to monitor compliance. The Bureau seeks comment on whether smaller lenders should be exempt from this requirement.

20This provision is in proposed § 1026.25.

H. Effective Date

The Bureau is seeking comment on when this final rule should be effective. Because the final rule will provide important benefits to consumers, the Bureau seeks to make it effective as soon as possible. However, the Bureau understands that the final rule willrequire lenders, mortgage brokers, and settlement agents to make extensive revisions to their software and to retrain their staff. In addition, some entities will be required to implement other Dodd-Frank Act provisions, which are subject to separate rulemaking deadlines under the statute and will have separate effective dates. Therefore, the Bureau is seeking comment on how much time industry needs to make these changes. The Bureau is proposing to delay compliance with certain new disclosure requirements contained in the Dodd-Frank Act until the Bureau's final rule takes effect.21

21For additional discussion, see part V below.

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 $10.3 trillion in loans outstanding.22 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. 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.

22Inside Mortgage Finance, Outstanding 1-4 Family Mortgage Securities, Mortgage Market Statistical Annual (2012).

The expansion in this market is commonly attributed to both particular economic conditions and by changes within the industry. Interest rates dropped significantly—by more than 20 percent—from 2000 through 2003.23 Housing prices increased dramatically—about 152 percent—between 1997 and 2006.24 Driven by the decrease in interest rates and the increase in housing prices, the volume of refinances increased from about 2.5 million loans in 2000 to more than 15 million in 2003.25

23 SeeU.S. Dep't. of Hous. and Urban Dev.,An Analysis of Mortgage Refinancing, 2001-2003(Nov. 2004), available atwww.huduser.org/Publications/pdf/MortgageRefinance03.pdf;Souphala Chomsisengphet and Anthony Pennington-Cross,The Evolution of the Subprime Mortgage Market,Federal Reserve Bank of St. Louis Review, 88(1), 31, 48 (Jan./Feb. 2006), available athttp://research.stlouisfed.org/publications/review/article/5019.

24The Financial Crisis Inquiry Commission,The Financial Crisis Inquiry Report(Feb. 25, 2011) (FCIC Report) at 156, available athttp://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.

25 An Analysis of Mortgage Refinancing, 2001-2003,at 1.

At the same time, advances in 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 lenders 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 government sponsored enterprises (GSEs), such as 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 sophisticated investment mortgage-related vehicles through securities and derivative products.

Growth in the mortgage loan market was particularly pronounced in what are known as “subprime” and “Alt-A” products. Subprime products were sold both to borrowers with poor or no credit history, as well as to borrowers with good credit. The Alt-A category of loans permitted borrowers to provide little or no documentation of income or other repayment ability. Because these loans involved additional risk, they were typically more expensive to borrowers than so-called “prime” mortgages, though many offered low introductory rates. In 2003, subprime and Alt-A origination volume was about $400 billion. In 2006, it had reached $830 billion.26

26Inside Mortgage Finance: Mortgage Market Statistical Annual 2011.

So long as housing prices were continuing to increase, it was relatively easy for borrowers to refinance their loans to avoid interest rate resets and other adjustments. However, housing prices began to decline as early as 2005, slowing the growth in refinances.27 At the same time, as the economy worsened the rates of serious delinquency (90 or more days past due or in foreclosure) for these subprime and Alt-A products began a steep increase from approximately 10 percent in 2006, to 20 percent in 2007, to over 40 percent in 2010.28

27FCIC Report at 215.

28 Id.at 217.

The impact of this level of delinquencies on the private investors who purchased these loans from the mortgage originators was severe. Private securitizations of subprime loans peaked at $465 billion in 2005, but were virtually eliminated in 2008. Private securitizations of Alt-A loans followed a similar trajectory.29 This effect was even felt by Fannie Mae and Freddie Mac, which were large purchasers of these securitizations, and it resulted in the Federal government in late 2008 placing the GSEs into conservatorship in order to support the collapsing mortgage market.

29 Id.at 124.

Four years later, the United States continues to grapple with the fallout. Home prices are down 35 percent from peak to trough on a national basis, and it is not clear whether the national market has reached bottom.30 The fall in housing prices is estimated to have resulted in about $7 trillion in household wealth losses.31 Moreover, mortgage markets continue to rely on extraordinary U.S government support. In addition, distressed homeownership and foreclosure rates remain at unprecedented levels. Approximately 5.8 million homeowners were somewhere between 30 days late on their mortgage and in the foreclosure process as of April 2012.32 Finally, the U.S. continues to face a stubbornly high unemployment rate, which was at 8.2 percent at the end of May 2012.33

30S&P/Case-Shiller 20-City Composite accessed from Bloomberg, LP on June 6, 2012.

31Board of Governors of the Federal Reserve System,The U.S. Housing Market: Current Conditions and Policy Considerations(Jan. 4, 2012), available athttp://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf.

32Lender Processing Services April 2012 Mortgage Monitor.

33Bureau of Labor Statistics, accessed from Bloomberg, LP on June 6, 2012.

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.34

34FCIC Report at 88.

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.35 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.36

35 Id.at 106. “Hybrid Adjustable Rate Mortgage” is a term frequently used to describe adjustable ratemortgage 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.”

36 Id.at 109.

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.37

37 Id.at 111.

In the wake of this financial crisis, Congress passed the Dodd-Frank Act to address many of these concerns. In this Act, 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, TILA and RESPA, in the Bureau.38 Congress also provided the Bureau with supervision authority for certain consumer financial protection statutes over certain entities, including insured depository institutions with total assets over $10 billion and their affiliates, and certain other non-depository entities.39

38Sections 1011 and 1021 of title X of the Dodd-Frank Act, the “Consumer Financial Protection Act,” Public Law 111-203, sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer Financial Protection Act is substantially codified at 12 U.S.C. 5481-5603.

39Sections 1024 through 1026 of title X of the Dodd-Frank Act, codified at 12 U.S.C. 5514-5516.

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.40 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 that will improve consumer understanding of mortgage transactions (which is the subject of this proposal).41 In addition, the Dodd-Frank Act established other new standards concerning a wide range of mortgage lending practices, including compensation for mortgage originators42 and mortgage servicing.43 For additional information, see the discussion below in part II.F.

40Section 1411 of the Dodd-Frank Act, codified at 15 U.S.C. 1639c.

411032(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.

42Sections 1402 through 1405 of the Dodd-Frank Act, codified at 15 U.S.C. 1639b.

43Sections 1418, 1420, 1463, and 1464 of the Dodd-Frank Act, codified at 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g.

Size of the Current Mortgage Origination Market

Even with the economic downturn, approximately $1.28 trillion in mortgage loans were originated in 2011.44 In exchange for a mortgage loan, borrowers promise to make regular mortgage payments and provide their home or real property as collateral. The overwhelming majority of homebuyers use mortgage loans to pay for at least some of their property. In 2011, 93 percent of all new home purchases were financed with a mortgage loan.45

44Moody's Analytics, Credit Forecast (2012). Reflects first-lien mortgage loans.

45Inside Mortgage Finance, New Homes Sold by Financing, Mortgage Market Statistical Annual (2012).

Borrowers may take out mortgage loans in order to purchase a new home, to refinance an existing mortgage, or to access home equity. Purchase loans and refinances produced 6.3 million new mortgage loan originations in 2011 alone.46 The proportion of loans that are for purchases as opposed to refinances varies with the interest rate environment. In 2011, 65 percent of the market was refinance transactions and 35 percent was purchase loans, by volume.47 Historically the distribution has been more even. In 2000, refinances accounted for 44 percent of the market while purchase loans comprised 56 percent, and in 2005 the two products were split evenly.48

46Moody's Analytics, Credit Forecast (2012). Reflects first-lien mortgage loans.

47Inside Mortgage Finance, Mortgage Originations by Product, Mortgage Market Statistical Annual (2012). These percentages are based on the dollar amount of the loans.

48Inside Mortgage Finance, Mortgage Originations by Product, Mortgage Market Statistical Annual (2012). These percentages are based on the dollar amount of the loans.

Using a home equity loan, a homeowner can use their equity as collateral in exchange for a loan. The loan proceeds can be used, for example, to pay for home improvements or to pay off other debts. These home equity loans resulted in an additional 1.3 million mortgage loan originations in 2011.49

49Moody's Analytics, Credit Forecast (2012). Reflects open-end and closed-end home equity loans.

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.50 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.51 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.52

50Bd. 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), p. 6, available athttp://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.; see alsoKleimann Communication Group, Inc.,Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures(July 2012), available athttp://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.

51James Lacko and Janis Pappalardo,Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms,Federal Trade Commission, p. 26 (June 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 athttp://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf.

52Oren 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 athttp://legalworkshop.org/wp-content/uploads/2009/07/cornell-A23090727-bar-gill.pdf.

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.53 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.54 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.

53Brian K. Bucks and Karen M. Pence,Do Borrowers Know their Mortgage Terms?,J. of Urban Econ. (2008), available athttp://works.bepress.com/karen_pence/5.

54U.S. Government Accountability Office,Alternative Mortgage Products: Impact on Default Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved(Sept. 20, 2006), available athttp://www.gao.gov/new.items/d061112t.pdf.

The Mortgage Origination Process

Borrowers must go through a mortgage origination process to take out 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. Both factors can vary tremendously, making the home purchase especially complex. Furthermore, 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,55 the interest rate, the payment amount, and the length of the loan term.

55Types of loan products include a fixed rate loan, adjustable rate loan, and interest-only loan.

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. Today, fixed rate mortgages are the most common mortgage product, accounting for 87 percent of the mortgage loan market in 2011.56 Adjustable rate mortgages accounted for only 13 percent of the mortgage loan market in 2011, although they have been more popular in the past.57 Adjustable-rate mortgages accounted for 30 percent of mortgage loan volume in 2000, and reached a recent high of 50 percent in 2004.58

56Inside Mortgage Finance, Mortgage Originations by Product, Mortgage Market Statistical Annual (2012). These percentages are based on the dollar amount of the loans.

57Inside Mortgage Finance, Mortgage Originations by Product, Mortgage Market Statistical Annual (2012). These percentages are based on the dollar amount of the loans.

58Inside Mortgage Finance, Mortgage Originations by Product, Mortgage Market Statistical Annual (2012). These percentages are based on the dollar amount of the loans.

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.59 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.

59Some loans may require a large final payment (or “balloon” payment) in addition to monthly payments.

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, 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. There are two different kinds of 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. 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.

Borrowers can apply to multiple loan originators in order to compare the loans that they are being offered. Once they have decided to move forward with the loan, the borrower must notify the loan originator. The loan originator willtypically wait to receive this notification before taking more information from the borrower and giving the borrower's application to a loan underwriter.

Mortgage Processing.A loan underwriter uses the application and additional information to confirm initial information provided by the borrower. The 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, as discussed above, lenders may require borrowers to retain title insurance, homeowner's insurance, private mortgage insurance, and other services. The lender may allow the borrower to shop for certain closing services on their 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 participate at closing, including the borrower and the settlement agent.

The settlement agent ensures that all the closing requirements are met, and that all fees are collected. The settlement agent also completes all of the closing documents. 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, 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.”Id.2601(b)(1). In addition to providing consumers with appropriate disclosures, the purposes of RESPA include 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.Id.2601. 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.60

60Public Law 101-625, 104 Stat. 4079 (1990), sections 941-42.

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.Id.2602(3). 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 * * *.”Id.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.61 Id.2603. The law further requires that form “conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement * * *.”Id.2603(a). Section 5 of RESPA provides for a booklet to help consumers applying for loans to finance the purchase of residential real estate from lenders that make federally related mortgage loans to understand the nature and costs of real estate settlement services.Id.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 * * *.”Id.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-day period.Id.2604(d).

61Prior 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.”See12 CFR 1024.8; 24 CFR 3500.8 (2010).

Historically, Regulation X of the Department of Housing and Urban Development (HUD), 24 CFR part 3500, has implemented RESPA. On March 14, 2008, after a 10-year 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).62 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 therules regarding the accuracy of the estimates provided to consumers. The final rule required re-disclosure 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.Id.at 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-on-one cognitive interviews.63 HUD issued informal guidance regarding the final rule on its Web site, in the form of frequently asked questions64 (HUD RESPA FAQs) and bulletins65 (HUD RESPA Roundups).

62During 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).

63U.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 athttp://www.huduser.org/publications/pdf/Summary_Report_GFE.pdf.

64 New RESPA Rule FAQs,available athttp://portal.hud.gov/hudportal/documents/huddoc?id=resparulefaqs422010.pdf.

65 RESPA Roundup Archive,available athttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/resroundup.

The Dodd-Frank Act (discussed further in part I.D, below) transferred rulemaking authority for RESPA to the Bureau, effective July 21, 2011.Seesections 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 open-end (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.”Id.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.”Id.1602(g).

TILA section 128 requires that, for closed-end credit, the disclosures generally be made “before the credit is extended.”Id.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.”Id.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.”Id.1638(b)(2)(D).

Historically, Regulation Z of the Board of Governors of the Federal Reserve System, 12 CFR part 226, has implemented TILA. TILA section 128's requirement that the disclosure statement be provided before the credit is extended (final TILA disclosure) is implemented in 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).66 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).67 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).

66MDIA 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.

67MDIA 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.

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 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 severalyear 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 closed-end 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.68 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.69

68Bd. 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 athttp://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.

69As discussed in the analysis of the proposed amendments to § 1026.4 in part VI, in response to concerns about the effect of an “all-in” 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 higher-priced 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.See76 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).

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.70 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 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 (including the revised rate threshold for “jumbo loans