The CFPB recently announced that it is seeking input on a trial disclosure sandbox application from the Independent Community Bankers Association (ICBA) for alternative disclosures under the Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule for construction and construction-to-permanent loans.  The application is a template application, which means that if even approved by the CFPB it will not actually be operative.  Individual institutions would need to submit their own application for approval to use the trial disclosures.  The CFPB will accept submissions on the template application through March 29, 2023. 

The CFPB announcement includes the following interesting comments from the CFPB on its revised approach to assessing requests for rulemaking:

“In the past, under the guise of promoting innovation, individual firms privately lobbied the Consumer Financial Protection Bureau to obtain special regulatory treatment.  If they were successful, a firm receiving special treatment could then attract investors and customers by wrongly implying that their business model and practices were endorsed by the government.  In other situations, companies that were able to successfully lobby for special treatment did not follow through on their end of the bargain.

Consumer protection and financial regulators should not be in the business of picking winners and losers.  After concluding that its policies failed to meaningfully promote innovation and after assessing the risks for abuse, the CFPB has shifted toward more open and transparent methods of adjusting its regulations for new business models.  Instead, the agency is now inviting petitions for rulemaking and requests for Advisory Opinions, and focusing on other programs, like its Policy to Encourage Trial Disclosure Programs  (TDP Policy) and other efforts to promote competition.”

In the application the ICBA explains that “[i]t is not uncommon in rural or small-town communities for first-time homebuyers to build their first home, which may end up being their only option as there are limited existing affordable and good quality “starter” homes,” and that “[c]ommunity banks generally provide the majority of construction financing in many small towns and rural markets.”   The ICBA notes that while the CFPB has provided guidance to the industry regarding the use of the Loan Estimate and Closing Disclosure under the TRID rule for construction and construction-to-permanent loans, the disclosures were “designed primarily for standard home purchase or refinance mortgage transaction and in their current form do not adequately disclose all the various components of a construction or construction-to-permanent loan.”  The ICBA states that the use of such disclosures for “construction and construction-to-permanent loans remain[s] confusing, causing some creditors to avoid these loans due to compliance concerns.”  The ICBA advises that Federal Reserve Governor Michelle Bowman heard the concerns of community banks regarding the use of the disclosures with construction and construction-to-permanent loans, and reached out to ICBA to help address the issue, which resulted in the ICBA’s template application.

The ICBA is “proposing to modify/expand the current Loan Estimate and Closing Disclosure to include improved construction phase detail, construction cost breakdown, and improved disclosure regarding the consumer’s permanent loan financing.”  Among other modifications, the ICBA proposes that:

  • The Loan Terms section of the disclosures have separate columns for the construction phase and the permanent phase to provide more detail on the interest rates and monthly payments for both phases.
  • The Projected Payments section of the disclosure clearly label the construction phase payments and the permanent phase payments.
  • The Closing Costs Details section of the disclosures be divided into two sections, one for the construction phase and one for the permanent phase, to more clearly reflect the costs applicable to each phase.
  • A construction costs table be added to the disclosures to provide detail regarding the construction costs, lot value or purchase price, down payment and loan amount.
  • The Annual Percentage Rate section of the disclosures disclose separate rates for the construction phase and the permanent phase.
  • A Pre-Conversion Loan Modification disclosure be added to address changes between the originally anticipated permanent phase loan terms and the modified permanent phase terms.  The disclosure would provide for an optional Initial Escrow Account Disclosure Statement.  An Initial Escrow Account Disclosure Statement currently is required under RESPA.

In addition to addressing the proposed changes in detail, the template application also includes sample versions of the modified Loan Estimate and Closing Disclosure, and a sample of the proposed Pre-Conversion Loan Modification disclosure.