Open Your Mind to New Regulations
Wholesale lenders should learn new disclosure requirements to avoid liability issues
Editor’s Note: In the time since this article was written and published, the Consumer Financial Protection Bureau (CFPB) has changed the effective date for TRID. The new effective date is Oct. 3.
The new Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rules will have a significant impact on wholesale lending arrangements and the liability assigned to wholesale lenders. Wholesale lenders should pay careful attention to the new requirements, because TRID regulations impose assignee liability on wholesale lenders, including civil liability.
TRID combines certain good faith estimate disclosure requirements previously imposed by the Real Estate Settlement Procedures Act (RESPA) with the Truth-in Lending Act (TILA) disclosure requirements, giving consumers the right to bring individual claims against wholesale lenders for violating disclosure requirements. Thus, wholesale lenders will not only need to contend with government claims for potential disclosure requirement violations, but they also may be subject to individual borrower claims. This combination of fines and claims could bury wholesale lenders in paperwork and cause huge headaches if they are not prepared for the Aug. 1 deadline. The problem for wholesale lenders is that they can be held liable for improper disclosures whether they are produced in-house or through affiliated broker relationships. To protect against wholesale-lending liability, lenders should review the following key elements of TRID in connection with their wholesale programs before Aug. 1, 2015:
- Pre-Loan Estimate restricted activities
- New definition of application
- Broker affiliate tolerances
- Broker training on TRID implementation
First, wholesale lenders should consider TRID’s pre-Loan Estimate restricted activities. The new rules prohibit creditors from imposing a fee on consumers, other than reasonable credit-report fees, prior to a consumer receiving the Loan Estimate and indicating an intent to proceed.
Moreover, the Consumer Financial Protection Bureau (CFPB) indicated that it considers requiring payment information synonymous with imposing a fee or charging the borrower. In a wholesale-lending context, this means that brokers will be restricted from taking credit card information or holding post-dated checks for any fees — not even appraisal fees — prior to the consumer’s receipt of the Loan Estimate and the consumer’s documented intent to proceed with the loan.
In addition, the new rules prohibit mortgage brokers from requiring verification information prior to providing a Loan Estimate. Wholesale agreements commonly require brokers to collect verification of income and employment documents from borrowers prior to submitting loan application packages. The new rule suggests that brokers cannot require consumers to submit this documentation before providing the consumer with the new TRID Loan Estimate form.
The CFPB’s rules also clarify that brokers or lenders may disclose the Loan Estimate prior to receiving an application. While the Loan Estimate must be sent to a consumer within three business days of receiving an application, the Loan Estimate may be provided before receiving a complete application. Lenders that require brokers to collect verification documentation from borrowers should review their wholesale arrangements to determine whether they also require brokers to provide initial disclosures.
“ The rules impose a new zero-tolerance limit on fees paid to an affiliate of the broker. ”
Lenders should review all of their wholesale agreements to either remove provisions requiring brokers to collect verification information or ensure that the brokers they have a relationship with have the capacity to provide the Loan Estimate prior to requiring a borrower’s verification documentation. In light of increased regulatory scrutiny, many wholesale lenders have already opted to provide initial disclosures, rather than relying on brokers to provide the disclosures.
Whether a lender chooses to rely on a broker to provide disclosures or decides to provide disclosures itself, the Loan Estimate must adhere to timing requirements triggered by the receipt of an application, as newly defined under TRID. RESPA regulations state that the following borrower information constitutes an application:
- Monthly income;
- Social Security Number to obtain a credit report;
- Property address;
- Estimated value of the property;
- Mortgage loan amount sought; and
- Any other information deemed necessary by the loan originator.
The new TRID rules, however, will restrict loan originators further by removing the seventh element of the RESPA definition. Under the new rules, a lender or broker has officially received an application upon receipt of the borrower’s name, income, social security number, property address, estimated value of the property, and mortgage loan amount sought.
Loan originators will no longer have any discretion to delay moving forward with an application based on needing any other information they deem necessary to process the loan. The receipt of the first six elements in the RESPA definition will trigger the TRID requirement to send out the Loan Estimate.
This new definition places more importance on a broker’s timely delivery of loan application packages. Lenders that do not require brokers to provide initial disclosures, should make sure their wholesale agreements require brokers to submit application packages within 24 hours to ensure the timely delivery of the Loan Estimate and other applicable disclosures.
Tolerances and training
Not only should lenders re-evaluate their wholesale arrangements to determine whether brokers will provide initial disclosures, they also should review their broker application and annual recertification procedures in light of TRID. The rules impose a new zero-tolerance limit on fees paid to an affiliate of the broker. This means that lenders will likely pay for any broker- affiliate fees that increase after the initial Loan Estimate disclosure is prepared and provided to the consumer.
Lenders should revise their broker approval and recertification requirements to inquire about any broker affiliate relationships. It is important to note that under TRID rules, an entity may be deemed an affiliate based on whether the broker directly or indirectly exercises a controlling influence over the management or policies of the company.
The integrated disclosure rules not only raise practical implementation issues for broker-lender relationships, they also provide for new broker-record retention and disclosure requirements. Wholesale lenders should inquire about the training being required of all affiliated brokers on implementation of the new requirements.
Wholesale lenders are responsible for adequately vetting third-party service providers, including mortgage brokers, so they must ensure that brokers with whom they have a relationship are ready to comply with the new rules. Furthermore, wholesale agreements, policies, and procedures should clearly define the scope of permitted broker activities and timing requirements in light of TRID to avoid civil liability for noncompliance.
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Aug. 1 is about a month away and, unless the CFPB reversed itself in the last two months, there will be no extensions on the TRID deadline. In addition, the bureau’s recent focus on vendor management means that lenders will be held responsible for the compliance of their affiliated service providers, including brokers. If you have not yet completed a review of your broker relationships, now is the time.
ABOUT DANIELLA CASSERES
Daniella Casseres focuses her practice on laws and regulations governing mortgage lenders, mortgage brokers, financial institutions and consumer finance companies.
She also works closely with the firm’s affiliate company, Strategic Compliance Partners. She advises these clients on state and federal compliance laws and regulations including, TILA, RESPA, FHA, SAFE Act, FCRA, GLBA, Privacy Act, and BSA requirements.
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