The Consumer Financial Protection Bureau (CFPB) is announcing updates to its Closing Disclosure timeline when significant revisions are made to the Loan Estimate and Closing Disclosure.

This rule takes effect for all lenders handling mortgage documents beginning June 1, 2018.

Some background:

A Loan Estimate is required to be delivered to the homebuyer within three business days of the lender’s receipt of the mortgage application. [12 Code of Federal Regulations §1026.19(a); see RPI Form 204-5]

The final Closing Disclosure needs to be delivered to the homebuyer at least three business days before closing is scheduled. [12 CFR §1026.19(f)(ii)(A); See RPI Form 402]

Upon receiving the Closing Disclosure, homebuyers are instructed to compare their Loan Estimate with the Closing Disclosure to ensure no significant changes have occurred.

Some small variances may occur from the original Loan Estimate to the Closing Disclosure, such as a change in fee charged by a party to the transaction who is not the lender or homebuyer (e.g. a title insurance provider). [12 CFR §1026.19(e)(3)]

When these variances occur on a large scale, sometimes the lender is able to provide a revised Loan Estimate. [12 CFR §1026.19(e)(3)(iv)]

A Loan Estimate revision may only be given to an applicant when:

  • a changed circumstance impacts the homebuyer’s eligibility or the real estate’s value;
  • the homebuyer requests a change to the mortgage terms;
  • a changed circumstance causes the closing costs to increase by more than 10%;
  • the interest rate was not locked when the Loan Estimate was provided, and locking the interest rate causes the points or lender credits to change;
  • the consumer indicates they will proceed with the transaction more than ten business days after the Loan Estimate was provided; or
  • the settlement for a mortgage on a new construction mortgage is delayed more than 60 calendar days and the original Loan Estimate states the lender may issue a revised disclosure 60 days before closing. [12 CFR §1026.19(e)(3)(iv)]

Lenders may not revise Loan Estimates simply due to technical errors or miscalculations of charges. [12 CFR §1026.19(e)(3)(iv)]

Since a Loan Estimate is used to ensure the estimated costs were made in good faith when compared with the final costs in the Closing Disclosure, the revised Loan Estimate may not be delivered on the same day as, or after the Closing Disclosure. [12 CFR §1026.19(e)(4)(ii)]

Thus, once the Closing Disclosure has been issued, the Loan Estimate may no longer be revised to reflect the changes. Instead, any significant changes that occur require a revised Closing Disclosure.

Under the old system, lenders that issued a revised Closing Disclosure needed to provide it to the homebuyer at least four days prior to closing, and within three days of the lender becoming aware of the changed circumstance. [12 CFR §1026.19(e)(3)-(4)]

This created what is known as the TILA-RESPA “black hole”. Changes triggering a revision to the Closing Disclosure that occurred in the last four days of closing leave a gap which can cause some lenders to avoid charging homebuyers higher rates (when they are valid), simply to avoid delaying closing.

The CFPB’s ruling says this has been damaging to lenders. It claims lenders, rather than move closings, may have charged higher fees or raise their mortgage rates as a result, passing on the unclaimed higher costs they are unable to charge in these special circumstances on to the next homebuyers.

Therefore, the new rule allows the Closing Disclosure to show revised costs, without a restriction on when it is provided in relation to closing.

Example

For example, consider a homebuyer taking out a mortgage and preparing to close on a home. Their lender provides the required Closing Disclosure three days before closing is scheduled.

After the homebuyer receives the Closing Disclosure and before they close, they request closing be pushed back more than seven days.

They also request a change which results in a higher annual percentage rate (APR), increasing closing costs by more than 10%. A change of this magnitude would normally require a revised Loan Estimate be issued, but the lender is prohibited from providing a revised Loan Estimate at the same time or after the Closing Disclosure has been issued. [§1026.19(e)(4)(ii)]

Therefore, the lender’s correct option is to issue a revised Closing Disclosure. But the lender needs to do this both within three days of the requested changes, and within four days before closing is scheduled. [12 CFR §1026.19(e)(4)(i)]

But since the homebuyer requested closing be pushed back more than seven days, under the old system, the lender is unable to comply with the law and provide the homebuyer with a revised Closing Disclosure within four days of closing and within three days of the requested change.

This is the “black hole” issue lenders which previously forced lenders to either:

  • refuse to push back closing so the homebuyer can receive the revised Closing Disclosure within the appropriate timeframe; or
  • absorb the additional costs beyond the 10% increase over the original Closing Disclosure caused by the higher APR.

This new rule removes the lender’s calculus, and simply says that when a valid reason causes the Closing Disclosure to change, they may provide the revised Closing Disclosure regardless of the timing, and regardless of when the homebuyer receives the revision in relation to closing.