On July 7, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued amendments to the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (“TRID” or “Know Before You Owe”) rule. These changes come nearly a year after the CFPB published its proposed version of the amendments. In large part, the amendments finalize the CFPB’s proposals and adopt changes to the TRID rule to reflect informal guidance previously provided by the CFPB. The final amendments will become effective 60 days after publication in the Federal Register, but compliance will remain optional until October 1, 018. [1]

Most notably, however, the amendments did not finalize perhaps the CFPB’s most important proposal addressing the “black hole” issue on resetting fee tolerances. Instead, the CFPB kicked the proverbial can down the road and published a new proposal on the issue (the “New Proposal”). [2] This legal update summarizes the “black hole” issue and highlights the New Proposal.

The “Black Hole” Issue

By way of background, TRID requires creditors to provide consumers with good faith estimates of loan terms and closing costs on a Loan Estimate. An estimated closing cost is disclosed in good faith if the charge paid by the consumer does not exceed the amount disclosed beyond the permitted tolerances.

If a borrower requests a revision or if a valid “changed circumstance” [3] exists, creditors may use revised estimates to reset tolerances. In effect, the revised estimates are compared to the charges actually paid by the consumer to determine whether a cost was disclosed in good faith. Typically, a revised Loan Estimate is the disclosure used to reset tolerances, but a Closing Disclosure may also be used in certain circumstances.

With respect to timing, the rule requires creditors to provide the consumer with these revised estimates within three business days of the creditor receiving information sufficient to establish a changed circumstance. In addition, creditors may not provide a revised Loan Estimate on or after the date a Closing Disclosure is provided the consumer, and the consumer must receive any revised Loan Estimate no later than four business days prior to consummation. If there are less than four business days between the time the revised estimates must be provided and consummation, a creditor may provide the revised estimate on a Closing Disclosure. However, there is currently no similar provision in the rule that explicitly states creditors may use a Closing Disclosure to reset tolerances if there are four or more days between the time the revised estimates must be provided and consummation.

As a result, issues arise where creditors are unable to provide either a revised Loan Estimate (because the initial Closing Disclosure has been provided) or a corrected Closing Disclosure (because there are more than four days prior to consummation) to reset tolerances. This situation is referred to as the “black hole” issue in the rule. If a changed circumstance occurs in the “black hole” and that change increases charges subject to tolerances, creditors could confront a claim for a refund of the excess charges.

The New Proposal

The CFPB originally included a proposal regarding the “black hole” in its proposed TRID amendments issued in July 2016. As originally proposed, the existing TRID Commentary provision that permits the use of a Closing Disclosure to reset tolerances (section 1026.19(e)(4)(ii)-1) would remain unchanged, and a new Commentary provision would be added (section 1026.19(e)(4)(ii)-2). The proposed new Commentary provision appeared to retain the timing element of the existing provision that creates the “black hole” issue for an initial Closing Disclosure, but permitted the use of a corrected Closing Disclosure to reset tolerances without regard to whether the revised disclosure is received within four business days of consummation (as long as the corrected Closing Disclosure is provided within three business days of the established changed circumstance). Many industry members interpreted the proposal to effectively eliminate the “black hole” issue with regard to a corrected Closing Disclosure.

In the New Proposal, however, the CFPB explains that it never intended to remove the four-business-day timing requirement for resetting tolerances with a corrected Closing Disclosure. Rather, the CFPB merely intended to clarify that, if the conditions for using a Closing Disclosure to reset tolerances are met, including the timing element, then either an initial Closing Disclosure or a corrected Closing Disclosure could be used to reset tolerances.

Given the disconnect, the CFPB did not finalize the originally proposed amendment and issued the New Proposal instead. The New Proposal seeks to eliminate the “black hole” altogether by removing the four-business-day limit for resetting tolerances with either an initial or corrected Closing Disclosure. Specifically, it proposes that creditors may use either initial or corrected Closing Disclosures to reflect changes in costs for purposes of determining if an estimated closing cost was disclosed in good faith, regardless of when the Closing Disclosure is provided relative to consummation. Creditors will remain limited to resetting tolerances to the circumstances currently set forth in the TRID rule, and still would need to issue a corrected Closing Disclosure within three business days of learning of the changed circumstance.

In sum, even though lenders must continue to face the “black hole” for the time being, the New Proposal will hopefully close the door on the issue when finalized. It will be important for lenders to submit public comments and share their practices with the CFPB to assure them that the proposed change balances the interests of lenders and consumers, while also advancing compliance with the rule. Comments on the New Proposal are due 60 days after its publication in the Federal Register. [4]

[1] The full text of the final amendments can be found here: http://files.consumerfinance.gov/f/documents/201707_cfpb_Final-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf 

[2] The full text of the New Proposal can be found here: http://files.consumerfinance.gov/f/documents/201707_cfpb_Proposed-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf

[3] 12 C.F.R. § 1026.19(e)(3)(iv). Valid changed circumstances include: an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. Id. § 1026.19(e)(3)(iv)(A).

[4] The CFPB seeks comment on several issues, including:

(1) the extent to which the current four-business-day timing element has prevented creditors from resetting tolerances;

(2) the average costs and nature of the costs involved when the timing element has prevented creditors from resetting tolerances; and

(3) the extent to which creditors are providing the initial Closing Disclosure so that it is received “substantially before the required three business days prior to consummation with terms and costs that are nearly certain to be revised.”

The CFPB also notes that it designed the Closing Disclosure to be the final disclosure of costs, and it is concerned about whether the New Proposal, if adopted, could lead to Closing Disclosures being issued early, particularly at a time when future cost revisions are nearly certain. Further, the CFPB seeks comment on whether it should limit the circumstances in which a creditor may use a corrected Closing Disclosure to reset tolerances, or limit the third-party fees and creditor fees that can be reset with a corrected Closing Disclosure.

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