Consumer Compliance Outlook > 2019 > First Issue 2019

Consumer Compliance Outlook: First Issue 2019

Early Observations on the TILA-RESPA Integrated Disclosure Rule

By Katie E. Ringwald, Senior Examiner, Federal Reserve Bank of St. Louis

Before the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act) was enacted and implemented, consumers applying for closed-end residential mortgages received two sets of disclosures. In general, Regulation Z, implementing the Truth in Lending Act (TILA), required creditors to provide early and final disclosures soon after application and at closing (and, if the annual percentage rate (APR) changed, several days before closing), concerning the cost of credit. Separately, Regulation X, implementing the Real Estate Settlement Procedures Act (RESPA), required creditors to provide the Good Faith Estimate (GFE) soon after application and required settlement agents to provide the HUD-1 Settlement Statement at closing, concerning settlement costs. These disclosures overlapped to some degree, were not always understood by consumers, and could be difficult for lenders and settlement agents to explain.¹ Against this backdrop, Congress in the Dodd– Frank Act directed the Consumer Financial Protection Bureau (CFPB) to integrate the TILA and RESPA disclosures and make them easier to understand.²

In response, the CFPB issued a final TILA-RESPA Integrated Disclosure rule (TRID) in late 2013 that consolidated the GFE and early TILA disclosure into the Loan Estimate (LE), and the HUD-1 and final TILA disclosure statement into the Closing Disclosure (CD).³ The language in these once-separate forms was aligned and subjected to consumer testing to improve consumer comprehension.

Because TRID required institutions to significantly change their mortgage origination systems that manage the process from application to closing, the industry expressed concerns about challenges implementing the rule as the mandatory October 3, 2015, compliance date approached. Some institutions experienced unique challenges early on because of the extent of change and the technical nature of the rule. However, Federal Reserve System examiners reviewed recent consumer compliance examinations and found that the majority of banks examined have successfully implemented TRID and demonstrated effective change management practices when preparing for the rule. This article discusses some common TRID violations we recently observed during 2017 Federal Reserve consumer compliance examinations,⁴ the root causes, primary challenges, and sound practices to help institutions identify and correct potential issues.

Recent TRID Observations

Most of the TRID violations Federal Reserve System examiners cited were technical, often reflecting isolated LE or CD fields being left blank. However, a few disclosure errors were systemic and reflected weaknesses in compliance management systems, such as a deficiency in oversight, training, or internal controls.

Most of the common TRID errors recently identified involved disclosures of the loan identification number,⁵ settlement agent,⁶ and file number,⁷ which are part of the general loan information disclosed on page 1 of the LE and/or CD. The regulation requires creditors to disclose the loan identification number, a unique number used to identify the specific transaction, on the LE, the CD, and any revised disclosures to ensure the consumer can identify the transaction from application through origination. Examiners found that institutions frequently left this field blank. Similarly, examiners found the settlement agent and file number were also left blank on the CD. This information is important for borrowers who need to follow up with the settlement agent in the future about their loan.

Examiners also found violations in the Closing Cost Details table on page 2 of both the LE and CD. This section divides closing costs into two types: Loan Costs and Other Costs. Loan Costs on the LE include origination charges and services the borrower can and cannot shop for, and Other Costs include taxes and government fees, prepaid costs (such as homeowner’s insurance and prepaid interest), and initial escrow payments. The Closing Cost Details section of the CD is similar to that of the LE but a bit more detailed. The CD indicates whether fees are borrower-paid, seller-paid (for purchase transactions), or paid by others. In addition, it details the name of the person receiving payment for closing cost services, and it reflects whether the borrower shopped for certain services.

Common violations in this section included failing to indicate the number of months for which homeowner’s insurance is to be paid (on both the LE and CD)⁸ and failing to identify the person receiving payment for closing cost services, as well as government entities to which taxes and other government fees were disbursed⁹ This information is important to ensure closing costs and fees are clearly disclosed to consumers. As in the general information section previously, violations in this section frequently occurred when information was required to be provided, but fields were left blank.

Examiners also observed violations in the Calculating Cash to Close table¹⁰ found on page 2 of the LE and page 3 of the CD. This table outlines the amount of cash the borrower needs to close the loan by referencing the total closing costs and adding or subtracting other amounts needed to close, such as a down payment or seller credits. While the LE table contains only the estimated values, the CD carries these values forward into a Loan Estimate column so the borrower can easily compare the estimated with the final amounts. Moreover, this table includes a Did This Change? column reflecting whether amounts changed from the most recent LE provided to the consumer, and if so, where the consumer can look to find additional details. Examiners noted several instances in which lenders did not accurately complete the Did This Change? column.

Finally, another common violation involved omitting portions of the required contact information on page 5 of the CD¹¹ Full contact information for the lender, mortgage broker, consumer’s real estate broker, seller’s real estate broker, and settlement agent is required, if applicable, for the consumer’s benefit. This generally includes:

• the legal or business name of the business entity;
• the business address;
• the name of a personal contact at the business entity;
• the Nationwide Mortgage Licensing System and Registry (NMLSR) ID number (if none, a license number for both the business entity and the personal contact); and
• the telephone number and email address of the personal contact.

If the borrower did not have a personal contact (for example, no mortgage broker), the corresponding column can be left blank; however, for each person identified, all pieces of contact information are generally required.

Sound Practices

TRID is similar to other compliance regulations, in which different compliance risk management program elements contribute to an effective overall compliance system. We observed that institutions that successfully implemented TRID have strong compliance risk management programs that include effective training, open communication with third parties, knowledgeable compliance staff, formal procedures, and a secondary review process. The following are more detailed examples of some elements commonly identified in the compliance management systems of institutions that were deemed successful in implementing TRID rules and maintaining continued compliance.

Many institutions rely on third-party loan origination software (LOS) to generate TRID disclosures. Using vendors to create regulatory disclosures can benefit institutions that do not have the internal expertise and resources to create such disclosures, especially complex disclosures such as TRID. However, some LOS vendors acknowledged difficulties with their TRID disclosures both before and after the compliance deadline of October 3, 2015. Accordingly, many LOS vendors continued to issue software updates as glitches were identified. These errors for critical disclosures underscore the importance of vendor management, including due diligence in vetting, selecting, and monitoring vendors, and in good communications during the engagement.¹²

We observed greater success in TRID disclosures at institutions in which staff members had a solid understanding of how to properly use the software and manage the software settings. Additionally, while most systems require a certain level of manual input, banks are often able to code certain data fields to auto populate disclosures or generate a hard stop when a field needs to be manually completed, which we observed could reduce the risk of an inadvertent data entry error or a blank field.

While examiners found APR and finance charge violations to be less common than violations of other LE and CD requirements, they carry the potential for consumer harm and restitution. Therefore, ensuring that prepaid finance charges are properly set up in the software is important. It is also important to conduct periodic testing and to have a system in place to ensure any new charges are treated appropriately. Exploring these options with IT staff will help ensure automated processes are effective in managing compliance risk. Moreover, if a bank identifies a TRID error, contacting the software vendor to work through a disclosure system issue can often result in a relatively quick fix.

Institutions successful in implementing and maintaining TRID compliance also had open communication with all parties involved in the transaction, including settlement agents and title companies to ensure both accurate and timely disclosures. Sound practices include establishing formal procedures that include specific deadlines for the exchange of title fee information and closing documents, frequent contact between bank personnel and title company staff, thorough reviews of any documents prepared by the title company, and written closing instructions.

At institutions most effective in maintaining TRID compliance, we observed residential mortgage staff whose understanding of TRID requirements is commensurate with their job responsibilities. If errors occur within the scope of an employee’s responsibilities, management may consider whether follow-up training would be appropriate. Additionally, some institutions have told examiners that they have found that a higher degree of centralization helps to prevent TRID violations. For example, a central processing department can ensure that appropriately trained and specialized staff focus on TRID disclosures.

While timing violations were relatively less common, creditors may still consider incorporating controls into their disclosure processes to ensure disclosures are timely delivered to consumers and to evidence compliance with record retention requirements. For example, institutions that deliver the disclosures in person often find it easiest to ask the customer to sign and date the document to verify receipt of the disclosures rather than only signing the CD at closing. These types of procedural changes can help facilitate TRID compliance.

Finally, while the appropriate approach for an institution depends to some degree on its size, complexity, and product offerings, we have observed many institutions with strong TRID compliance conduct secondary reviews. Depending on a bank’s size, complexity, resources, and structure, reviews may be in-depth and cover all aspects of the LE and CD, or they may be risk-focused and limited to higher-risk TRID disclosures, such as charges subject to tolerances, APRs, and finance charge calculations. Regardless, having an effective secondary review of TRID-covered loans prior to loan consummation can help prevent violations.

Depending on the depth of routine secondary reviews, periodic transaction testing or an internal review of disclosures and management information systems postconsummation may be considered necessary to identify issues not captured during routine secondary reviews. For example, an institution might review a sample of disclosures generated for various types of loans, check finance charge settings in software systems, test the accuracy of APR calculations, and conduct a transaction test to ensure any charges outside of the tolerance were cured with a lender credit.

As with other areas of compliance, prompt corrective action to address any identified issues indicates strong and effective internal controls.

Conclusion

Despite the challenge of complying with TRID’s complex disclosure requirements, Federal Reserve-supervised financial institutions have largely been successful in implementing the significant changes in this rule. We hope that sharing early observations will assist institutions with their compliance efforts. Specific issues and questions related to TRID should be raised with your primary regulator.

ENDNOTES

¹ Small Entity Compliance Guide (May 2018), p. 16.

² Dodd–Frank Act Sections 1098 and 1100A (codified at 12 U.S.C. §2603(a) and 15 U.S.C. §1604(b)), respectively.

³ 78 Fed. Reg. 79730 (December 13, 2013). The GFE, HUD-1, and TIL are still required for certain closed-end real estate transactions that are not subject to TRID, such as reverse mortgages and chattel-dwelling loans.

⁴ Prior to the implementation of TRID, technical violations of the GFE and HUD-1 were relatively common because of the detailed nature of the regulations governing those forms.

⁵ See 12 C.F.R. §1026.37(a)(12)(LE), 12 C.F.R. §1026.38(a)(5)(v) (CD).

⁶ See §1026.37(a)(12) (LE) and §1026.38(a)(3)(iv) (CD).

⁷ See §1026.38(a)(3)(v) (CD).

⁸ See §1026.37(g)(2)(i) (LE) and §1026.38(g)(2) (CD).

⁹ See §1026.38(g)(1)(ii) (CD).

¹⁰ See §1026.37(h)(LE); §1026.38(i) (CD).

¹¹ See §1026.38(r) (CD).

¹² The Federal Reserve Board published Guidance on Managing Outsourcing Risk, which discusses ways to mitigate vendor risk. Consumer Compliance Outlook also published two articles on this subject: Cathryn Judd and Mark Jennings, “Vendor Risk Management — Compliance Considerations,” Fourth Quarter 2012, and Anthony W. Ricks and Timothy P. Stacy, “Vendor Risk Management,” First Quarter 2011.