The CFPB recently approved an application (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-to-permanent loans. The Application is for a Trial Disclosure Program Waiver Template (TDP Waiver Template). The TDP Waiver Template is not actually operative, and is not binding on the CFPB. Rather, individual institutions must submit their own application for a Trial Disclosure Program Waiver (TDP Waiver) based on the TDP Waiver Template in accordance with the CFPB’s Policy to Encourage Trial Disclosure Programs (Policy). We previously reported on the Policy. We also previously reported on the CFPB’s request for comments on the Application.
The ICBA asserts that the purpose of the Application is to increase the availability of affordable single-close construction-to-permanent loans through the modification of the Loan Estimate and Closing Disclosure under the TRID rule to better align with such transactions. The ICBA claims that such disclosures are primarily designed for standard home purchase or refinance mortgage loans, and as currently configured do not sufficiently disclose all components of consumer construction-to-permanent loans. As a result, the ICBA asserts that while community banks are main suppliers of construction loan financing in many small towns and rural markets, many community banks are reluctant to offer such loans based on concerns about complying with the TRID rule requirements for the Loan Estimate and Closing Disclosure in connection with construction-to-permanent loans.
Among the modifications provided for in the TDP Waiver Template are the following:
- The Loan Terms section of the Loan Estimate and Closing Disclosure more clearly disclose interest rate and monthly payment information for the construction phase and the permanent phase.
- The Projected Payments section of the disclosures separately set forth the construction phase payments and the permanent phase payments.
- The Closing Costs Details section of the disclosures is divided into two pages, one for the construction phase and one for the permanent phase. (The TDP Waiver Template provides that the costs are disclosed separately for the construction phase and permanent phase “to demonstrate to the consumer the added costs associated with a construction loan.” However, this is not the case for various fees as the construction phase costs include costs paid at consummation that apply to the loan in general and are not specific to a construction loan, such as credit report fees, flood zone determination fees, and title related charges.)
- The Calculating Cash to Close section of the disclosures include a specific entry for the construction costs.
- The Annual Percentage Rate section of the disclosures include separate rates for the construction phase and the permanent phase.
- A Conversion Notice disclosure is added that is a combination of an adjustable rate mortgage interest rate change notice and an initial escrow account disclosure statement, although the escrow account disclosure would be optional. The Notice would be provided to the borrower 60 to 120 days before the conversion to the permanent phase to advise the borrower of the monthly payment that will be required. An Initial Escrow Account Disclosure Statement currently is required under RESPA. (The ICBA application provided for a Pre-Conversion Loan Modification disclosure that would address changes between the originally anticipated permanent phase loan terms and the modified permanent phase terms. That disclosure is not part of the TDP Waiver Template.)
While the ICBA application provided for a construction costs table to be added to the disclosures to provide detail regarding the construction costs, lot value or purchase price, down payment and loan amount, the table is not included in the TDP Waiver Template. However, the TDP Waiver Template provides for the inclusion of some of the information in the Borrower’s portion of the Summaries of Transactions section of the Closing Disclosure.
The CFPB advises that it will accept applications from lenders for a TDP Waiver based on the TDP Waiver Template under Section E.1.b of the Policy. The CFPB states that it “is interested in receiving applications from a number of lenders, rather than a single market participant.” The CFPB advises that, consistent with the Policy, applications for a TDP Waiver should:
- Include the information specified in section A of the Policy, but with appropriate adjustments given that the application will be based on the TDP Waiver Template.
- Include a statement that the application is based on the TDP Waiver Template, and that the applicant wishes to conduct in-market testing of the trial versions of the Loan Estimate and Closing Disclosure described in the Addendum to the TDP Waiver Template.
- Identify the specific portions of Regulation Z sections 1026.37 and 1026.38, which set forth the requirements for the Loan Estimate and Closing Disclosure, respectively, that will require a waiver. (The CFPB states that the “ICBA broadly identifies [the sections], as they govern the [Loan Estimate and the Closing Disclosure], respectively. However, the disclosures proposed by ICBA do not require a waiver of every single component of these two provisions.”)
- Include information relating to the in-market testing design to be used, including:
- The size, location, and nature of the consumer population to be involved in the testing program, an explanation of how the population was chosen, and a description of any plans to scale or modify the population over the duration of the testing program.
- A description of test result data that the applicant expects to share with the CFPB.
- Metrics for evaluating whether the trial disclosures tested actually improve on existing disclosures.
The CFPB states that it “will carefully evaluate the plan to test the effectiveness of these disclosures” and that “[w]hile the CFPB is unable to provide staff support to develop an individualized plan for an applicant, the CFPB plans to provide technical feedback on any application to allow for any modifications by the applicant prior to making a decision to approve or deny an application.” The CFPB states that if it grants an application from a lender for a TDP Waiver based on the TDP Waiver Template, it intends to provide the lender with the terms and conditions of the waiver in a document entitled “TDP Waiver Terms and Conditions,” and to publish a TDP Waiver Order on the CFPB’s website and in the Federal Register.