CFPB Convenes Small Business Panel for Know Before You Owe Mortgage Disclosures

Panel is Bureau’s First Under Small Business Regulatory Enforcement Fairness Act

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) is announcing today the formation of a Small Business Review Panel as part of its initiative to integrate the mortgage disclosure forms that borrowers receive when applying for and closing on a loan. The review panel will solicit feedback from small businesses that make mortgage loans and conduct mortgage closings.

“This is another step in the CFPB’s wide-ranging efforts to gather the input of the people who will be affected by our rules. The CFPB is dedicated to issuing thoughtful, research-based rules that take into account not only the benefits to consumers but also how businesses of all sizes will be affected,” said CFPB Director Richard Cordray. “We take all feedback seriously.”

The CFPB began its Know Before You Owe initiative to combine mortgage loan disclosure forms in May 2011. The project integrates two federally required mortgage disclosures into a single, simpler form that makes the costs and risks of the loan clearer for borrowers. Combining and simplifying these forms will also reduce burdens on lenders.

For more than thirty-five years, two federal laws (the Truth in Lending Act or “TILA,” and the Real Estate Settlement Procedures Act or “RESPA”) have required lenders and settlement agents to give consumers who take out a mortgage loan different but overlapping disclosure forms regarding the loan’s terms and costs. This duplication has long been recognized as inefficient and confusing for consumers and industry. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is responsible for solving this problem by combining the disclosures.

However, TILA and RESPA are separate laws with different and sometimes inconsistent requirements. The CFPB will propose rules that integrate the statutory requirements and resolve any inconsistencies. The CFPB’s thorough and innovative approach to the disclosure forms not only clearly conveys the information that the laws mandate but also highlights the information consumers really need to know.

The CFPB is convening the Small Business Review Panel to help with proposals the CFPB is considering. Examples of these include:

• Consumers need to know what information they can rely on. Three days after application, consumers will receive an integrated loan estimate that clearly discloses the terms and costs of the mortgage loan. However, many lenders and mortgage brokers provide consumers with preliminary estimates of loan terms and costs earlier in the process. These estimates are not required by TILA or RESPA. The CFPB is considering whether to require that these preliminary estimates carry a disclaimer informing the consumer that the preliminary estimate is not the Loan Estimate required by law. This is intended to help consumers avoid relying on estimates that may not be reliable.
• Consumers need to be able to rely on their loan estimate. Under current rules, when a lender provides the consumer with an estimate of the cost of its own services under RESPA, the actual cost cannot be higher than the estimate unless there is a valid change of circumstances. The CFPB is considering a proposal to apply the same limitation when the lender estimates the cost of services provided by its affiliates or by companies the lender requires the consumer to use. This is intended to make the Loan Estimate more reliable for consumers.
• Consumers need to know the final terms and costs before they sit down at the closing table. Under current rules, consumers typically receive a disclosure with some of their final loan terms and costs three business days before closing on the loan, but other costs are not finalized until the day of closing. As a result, consumers sometimes do not know how much they will owe until it is too late. The CFPB is considering a proposal that would generally require delivery of the integrated settlement disclosure stating the consumer’s final loan terms and costs at least three business days before closing to reduce the risk that consumers will face unexpectedly higher closing costs at the last minute.

In developing new forms, the CFPB has engaged and continues to engage extensively with consumers and industry – well before proposing its regulation. The CFPB has conducted one-on-one testing of the forms in 9 cities across the country. The CFPB has also posted the forms on its website and received more than 27,000 comments from the public, including industry. Engaging with consumers helps the CFPB understand what they need from the form. Engaging with industry helps the CFPB understand the benefits and costs from the businesses – large and small – that are likely to be directly affected by the new mortgage disclosure.

The CFPB will be sharing the following documents with the Small Business Review Panel:

An overview of the proposals under consideration: https://www.consumerfinance.gov/wp-content/uploads/2012/02/20120221_cfpb_tila-respa-integration-rulemaking-outline-of-proposals-and-alternatives.pdf

A fact sheet summarizing the Small Business Review Panel process: https://www.consumerfinance.gov/wp-content/uploads/2012/02/20120221_cfpb_factsheet-small-business-review-panel-process.pdf

A list of questions and issues on which the CFPB will seek input: https://www.consumerfinance.gov/wp-content/uploads/2012/02/20120221_cfpb_tila-respa-integration-rulemaking-discussion-issues-for-small-entity-representatives.pdf

In this process, the CFPB is following the requirements of the Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996. Generally, unless a proposed rule will not have a significant economic impact on a substantial number of small entities, the CFPB will seek input directly from small entities about potential costs of a proposed rule and potentially less-burdensome alternatives before issuing the proposal for public comment.

Under this law, representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Office of Management and Budget’s Office of Information and Regulatory Affairs will form a review panel. The panel meets with a group of representatives of small financial service providers selected by the CFPB, in consultation with the SBA. The representatives will provide the panel with feedback on the benefits and burdens of complying with the proposals the CFPB is considering. The representatives may also suggest alternatives that would minimize those burdens.

Within 60 days of convening, the review panel completes a report on the input received from small providers during the panel process. The report also contains the panel’s findings on the potential effects of the proposed regulation on small providers and any significant alternatives that accomplish the objectives of the proposed rule while minimizing such impacts. The CFPB then considers the panel’s report and the comments and advice provided by small providers as it prepares the proposed rule. The CFPB plans to formally release a proposed rule for comment in July.