The Consumer Finance Protection Bureau’s (the “CFPB”) amendments to the 2013 TILA-RESPA Integrated Disclosure Rule (“TRID”) will become effective on October 3, 2015. The amendment extends the timing requirement for revised disclosures when consumers of mortgage loans lock a rate or extend a rate lock after the Loan Estimate is provided. Lenders can now provide a revised Loan Estimate within three business days after an interest rate is locked, instead of providing the revised Loan Estimate on the date that the rate is locked. This amendment was granted by the CFPB based on feedback from the industry that lenders would have to tighten their interest rate lock practices and restrict a consumer’s ability to lock their interest rates on their mortgage loans without more time.
While this amendment does give creditors much-needed breathing room to deliver the appropriate disclosures, the CFPB will expect strict compliance with TRID, given this relaxation of timing requirements. A review of examination procedures reveals that rate locks have definitely been a focus of bank regulatory examinations in the past. Policies and procedures regarding rate locks, customer disclosures relating to rate locks, and rate lock agreements will need to carefully address when a consumer may lose their rate locks prior to expiration, how many calendar days within which the borrower must go to settlement once the interest rate is locked, and the content of their rate lock agreements. Examiners may also review loan files to determine whether there are instances in which consumers lose a rate lock prior to its expiration, resulting in the consumer being placed in a more expensive mortgage product, despite obtaining a rate lock and submitting all required documentation within the required time frames.
Lenders in the State of Washington should also pay attention to the enforcement actions that the Washington Department of Financial Institutions has recently pursued relating to rate lock agreements. While banks are generally exempt from the Washington Consumer Loan Act, and are not required to provide a formal rate lock agreement to borrowers, once TRID is implemented, banks may want to consider instituting formal rate lock agreements as part of their policies and procedures.
In a rising interest rate environment, the process that a creditor must follow to grant a rate lock can be complicated and risky. Mortgages are considered in the “pipeline” from the point of application until the loan is either (i) sold into the secondary market, (ii) put into the originator’s loan portfolio, or (iii) falls out of the pipeline because the customer does not close on the mortgage loan after being granted a rate lock. While the mortgage loan is in the “pipeline,” the creditor bears the risk of potential rate movements between application and closing. If the loan is being sold into the secondary market, there is also the risk that the secondary market yield will move against the rate lock before closing.
TRID adds to this risk because it may require creditors to increase the rate lock period given TRID’s complexity and strict requirements on accuracy and timing, which will make it difficult to close a loan transaction within 30 days. Many in the mortgage industry believe that lenders may need to extend their rate locks by at least 15 days in order to accommodate the new TRID regime. In the current low interest rate environment, many lenders have been able to provide 30-day rate locks without (i) formal rate lock agreements, (ii) charging fees to borrowers, or (iii) too much concern about interest rate risk. Once interest rates start to rise and fluctuate, however, providing longer rate locks will be much more risky and lenders may find themselves economically pressured when required to provide rate locks for 45 days or more.
To the extent that a lender does not honor a rate lock to a borrower, lenders must be careful not to run afoul of the UDAAP provisions of the Dodd-Frank Act. UDAAP, which is the acronym for “unfair, deceptive, and abusive acts and practices,” has been used by the CFPB and banking regulatory agencies to pursue false, deceptive, or misleading acts by a provider of consumer financial services. A lender that fails to clearly and conspicuously disclose that interest rates on a mortgage loan are subject to change or that an advertised interest rate will be available only for a specific length of time could be considered to have violated UDAAP. If interest rates are rising, lenders must avoid any representation, either express or implied, that an advertised rate will be available for a specified duration unless the lender is absolutely certain that the rate will be honored. Failure to honor the rate will likely be considered a UDAAP and may result in enforcement action by a state or federal regulator.
By now, many in the compliance world are familiar with the CFPB’s expectations for compliance. Policies, procedures, and training should be updated to ensure that employees fully understand the changes that need to be made prior to their effective dates. While transaction testing generally does not take place until after the effective date of the rule and enough time has passed for there to be an adequate sample of transactions, lenders should keep in mind that when many of the mortgage origination and servicing rules became effective in January 2014, the CFPB commenced examinations for compliance four months after the effective date. Lenders should expect that examinations relating to TRID compliance will be no less stringent.