Statements made by CFPB Director Cordray to the National Association of Realtors on May 12, 2015 suggest that the Director may not fully appreciate the implications of the TILA/RESPA Integrated Disclosure (TRID) rule that is scheduled to become effective August 1, 2015.

The TRID rule requires that the combined consummation disclosure, which is called the “Closing Disclosure,” be received by the borrower at least three business days before consummation.  Certain changes in the loan require not only a revised Closing Disclosure but also a new three business day waiting period.  The changes that require a new waiting period are if the annual percentage rate (APR) becomes inaccurate, a prepayment penalty is added or the loan product (or certain loan features) change.

Apparently addressing industry concerns that the waiting period, and potential need for another waiting period if there are loan changes, may delay closings, the Director stated:

“The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits. On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances: (1) any increases to the APR by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans; (2) the addition of a prepayment penalty; or (3) a change in the basic loan product, such as moving from a fixed-rate loan to a variable-rate loan. That is it. We recognize that various other things can and do change in the days leading up to the closing, so the rule makes allowances for those ordinary changes without delaying the closing date in ways that neither the buyer nor the seller may be able to accommodate very easily.”

The Director correctly notes that the CFPB did react to comments that the proposed TRID rule would have resulted in closing delays, because a new waiting period would have been required if the costs to close increased by more than $100.  The CFPB revised the proposal so that the final TRID rule requires a new waiting period based on only the APR becoming inaccurate, a prepayment penalty being added or the loan product (or certain loan features) being changed.  This was a common sense revision made by the CFPB.  However, the Director’s comment that problems discovered during a walk-through of a home will not trigger the need for a new waiting period is not consistent with industry views and experience.  Based on experience, industry members believe that issues discovered through a walk-through of a home before closing can result in changes to the sales transaction that result in changes to the loan terms, and that the loan term changes may cause the APR to become inaccurate.

Also, the Director did not address an important related issue.  The TRID rule limits the amount that lender fees and various other fees may increase, but allows the lender to increase fees based on changed circumstances and similar events.  The problem is that except in a very limited situation, only the upfront disclosure, called the “Loan Estimate,” may be used to increase fees subject to the TRID rule limits, and the rule does not permit a lender to issue a Loan Estimate after the lender has issued a Closing Disclosure.  So if a lender issues a Closing Disclosure for receipt by the borrower at least three business days before consummation, and the lender then learns of changes to the transaction, such as because of a walk through, that would increase loan fees, in many cases the lender will be in the unenviable position of having to bear the increased costs or deny the loan.

In both of the situations addressed above, matters involving the borrower and seller, and not the lender, will trigger the need for loan changes.  Revisions to the TRID rule that would provide greater flexibility that would enable a lender to make appropriate changes, and to do so without triggering a new waiting period, would be welcomed by the industry, and also benefit consumers.

Also, the Director’s statement that with regard to the APR, only increases by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans require a new waiting period, does not reflect the regulatory environment and industry reaction.  The TRID rule uses the same standard in effect today for the Truth in Lending Disclosure that a revised disclosure with a new three business day waiting period is required if the APR becomes inaccurate.  Whether the APR becomes inaccurate is determined based on tolerances addressed in Regulation Z section 1026.22.  That section incorporates the statutory APR tolerances of 1/8 of 1 percent for regular transactions and ¼ of 1 percent for irregular transactions.  Under the statutory tolerances the disclosed APR is deemed to be accurate if it is above or below the actual APR by no more than the applicable percentage.

Section 1026.22 also includes a regulatory APR overstatement tolerance.  Under that tolerance, if the finance charge is overstated and the APR is also overstated, but by no more than the equivalent finance charge overstatement, the APR is deemed to be accurate.  Because there often is confusion as to what is a regular versus an irregular transaction, and because the availability of the APR overstatement tolerance depends on the relationship of the disclosed APR to the disclosed finance charge, it is common in the industry to use only an APR tolerance of 1/8 of 1 percent above or below the actual APR to assess if a new Truth in Lending Disclosure with a new waiting period must be provided.  It is believed that many industry members will adopt the same approach to determining whether a new Closing Disclosure with a new waiting period must be provided under the TRID rule.

The Director’s comments in fact reflect the confusion and complexity with regard to whether a transaction is a regular or irregular transaction, which is the basis for many industry members using only the regular transaction tolerance.   The Director indicated that the 1/8 of 1 percent tolerance for regular transactions applies to fixed rate loans, and that the ¼ of 1 percent tolerance for irregular transactions applies to variable rate loans.  While often that will be the case, it many situations it will not.  One of the factors that classifies a transaction as an irregular transaction is if there are irregular payment amounts, other than an irregular first or final payment.  A fixed rate loan that has an interest only feature for a period of time or a graduated payment feature would have multiple payment levels and, thus, would be an irregular transaction.  A variable rate loan with an initial rate that equals the fully indexed rate would be disclosed as having a single payment level (ignoring the first and final payments) and, thus, would be a regular transaction.

Because of the uncertainty created by the complexity of the APR tolerances, many industry members will likely rely on the regular transaction tolerance of 1/8 of 1 percent to assess if a new Closing Disclosure with a new waiting period is required.  This likely will result in more delayed closings than would be the case if the TRID rule were revised to simplify when a new waiting period is required because of changes to the APR.