CFPB Fills in the Dreaded ‘Black Hole'
By John I. Vong, CMB, CMT
June 5, 2018
John Vong, CMB, CMT, is president and co-founder of ComplianceEase, Burlingame, Calif., and a frequent contributor to MBA Insights. He can be reached at email@example.com.
Black Hole, noun, ASTRONOMY. A region of space/time possessing a gravitational field so intense that no matter or energy can escape.
--informal, a place where people or things, especially money, disappear without trace.
After several years of uncertainty, the Consumer Finance Protection Bureau closed the infamous TRID "black hole" once and for all.
Now lenders know what they can and can't do when, through no fault of their own, they are faced with last minute cost increases for items disclosed on an initial Closing Disclosure. The Bureau outlines six situations in which these costs could now be re-disclosed with a revised CD, even if timely issuance of the CD falls more than four days before consummation of the loan.
These six situations are:
1. A defined set of changed circumstances that cause estimated charges to increase or, in the case of certain estimated charges, cause the aggregate amount of such charges to increase by more than 10%.
2. The borrower is ineligible for an estimated charge previously disclosed because of a changed circumstance that affects the borrower's creditworthiness or the value of the property securing the transaction.
3. The borrower requests revisions to the credit terms or the settlement that cause an estimated charge to increase.
4. Points or lender credits change because the interest rate was not locked when the Loan Estimate was provided.
5. The borrower indicates an intent to proceed with the transaction more than 10 business days, or more than any additional number of days specified by the lender before the offer expires, after the Loan Estimate was provided to the borrower.
6. The loan is a construction loan that is not expected to close until more than 60 days after the Loan Estimate has been provided to the borrower and the lender clearly and conspicuously states that a revised disclosure may be issued.
Notably, the new CFPB ruling does not affect two important timing restrictions relating to the provision of CDs. First, a revised CD must still arrive three or more business days before the closing. Second, no alteration has been made to the specification of circumstances in which changes on a revised CD would require a new three-business day waiting period (including a change in the accuracy of the previously disclosed APR).
The "fix", which has been in the works for some time, acknowledges real-world circumstances encountered by lenders: fees and costs can change during the origination process and it is difficult to time when these changes will become apparent.
The question now becomes, will this change the workflow or policies used by some institutions? For example, will lenders be more likely to issue CDs much earlier in the process with less reliable estimates, because they know they can come back later and change them?
Clearly that isn't the intent of the amendment, and may run afoul of the overarching good faith requirement for disclosures. In fact, the CFPB is on record as saying "[It] will continue to monitor the market for practices that do not comply with the rule's Closing Disclosure accuracy standard."
One way to protect against potential violation of the accuracy standard is to track all LE and CD pairings, not just the final two as many lenders do today. More advanced automated compliance solutions have the ability to do this, and can position lenders to better defend themselves if CD accuracy is questioned in an audit.
It is always best practice to have a third-party system to review the changes and calculations, especially for indirect originations, as many loan origination systems' TRID implementations are different. Many aggregators make this a pre-purchase requirement.
The other good news: the black hole closure is effective June 1, and so the fix to this problem has come even sooner than the mandatory compliance date for the TRID 2.0 updates coming next fall.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)