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“Know before you owe”: goodbye testing; hello SBREFA

Posted in Mortgages

The CFPB is conducting this week its final round of testing in its “Know Before You Owe” project. Instead of asking for comments on side-by-side comparisons of prototypes for the same disclosure, the CFPB is asking for comments on one prototype of a RESPA/TILA integrated application disclosure and one prototype of a RESPA/TILA integrated settlement disclosure. Among the questions the CFPB asks consumers to think about when reviewing the prototypes are whether they can easily find key loan terms, are able to identify changes to the loan terms or costs, and have the information they would need to feel comfortable closing the loan.

We have a few comments on the latest prototypes. The prototype settlement disclosure: (1) doesn’t include the partial escrow concept that appeared in the Butternut prototype issued in January, (2) includes line numbers, although like the Butternut prototype, the line numbers are not based on the current HUD-1 Settlement Statement numbering format, (3) includes a reformatted and simplified section detailing the cash to close and changes between estimated and final costs but the section doesn’t address whether there were changes between the estimated and final interest rate, as did the Hemlock and Butternut prototypes issued in January, (4) uses the tabular format from the Butternut prototype to provide information regarding the escrow account, and (5) includes the expanded contact information section contained in the Hemlock and Butternut prototypes.

Since the CFPB’s focus is on testing the settlement disclosure, the Tupelo application disclosure prototype has only minor format variations from the Honeylocust prototype issued in January. The Tupelo prototype addresses an ARM loan while Honeylocust addressed a fixed rate loan and does not include the disclosure from Honeylocust that addressed fees subject to 0% and 10% tolerances. (That Honeylocust disclosure was not accurate based on current rules in that it suggested the charges for services that the borrower may shop for are subject to 10% tolerance, regardless of whether the borrower selected a provider identified by the originator.)

After the final round of testing is completed, the CFPB “over the next few months” will work on writing the rules that will govern the application and settlement disclosures. Before issuing its proposal, the CFPB will have to comply with the requirements of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) . (We discussed the SBREFA “speed bump” in an earlier blog post.)

Among other requirements, SBREFA requires the CFPB to convene a small business panel when rolling out regulations that the CFPB director expects to have a significant impact on a substantial number of small business entities. The CFPB has outlined its plans for using the SBREFA panel process for the mortgage disclosures before it “formally propose[s] a rule for comment in July.” (The CFPB is required to issue its proposal by July 21, 2012.)