Category Archives: Compliance Updates

HMDA Reporting – Getting It Right

A Guide to HMDA Reporting: Getting It Right! will assist you in complying with the Home Mortgage Disclosure Act (HMDA) as implemented by the Consumer Financial Protection Bureau’s Regulation C, 12 CFR Part 1003 (Regulation C). The purpose of this Guide is to provide an easy-to-use summary of certain key requirements. This Guide does not provide detailed information about the HMDA submission process, or file, data, and edit specifications. Information about those topics may be found on the FFIEC’s Resources for HMDA Filers website, available at www.consumerfinance.gov/data-research/hmda/for-filers and www.ffiec.gov/hmda/. The Foreword and Summary of Requirements sections of the Guide were developed by the Federal Financial Institutions Examination Council (FFIEC) — the Board of Governors of the Federal Reserve System (Board), the CFPB the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Liaison Committee (SLC) — and the U.S. Department of Housing and Urban Development (HUD). The appendices include, in addition to Regulation C and its Official Interpretations, certain HMDA compliance materials developed and issued exclusively by the CFPB and not by the FFIEC or its other member agencies. Financial institutions may wish to consult and rely upon additional compliance resources that their Federal supervisory agencies may offer. Contact information for each agency is available in Appendix H. This edition of the Guide incorporates the amendments made to HMDA in the DoddFrank Act. 1 The Dodd-Frank Act amended HMDA, transferring rulewriting authority to the Bureau and expanding the scope of information that must be collected, reported, and disclosed under HMDA, among other changes. In October 2015, the Bureau issued the 2015 HMDA Final Rule implementing the Dodd-Frank Act amendments to

Regulation C. 2 On August 24, 2017, the Bureau issued a final rule further amending Regulation C to make technical corrections and to clarify and amend certain requirements adopted by the 2015 HMDA Final Rule.3 The 2015 HMDA Final Rule modified the types of institutions and transactions subject to Regulation C, the types of data that institutions are required to collect, and the processes for reporting and disclosing the required data.4 The Summary of Requirements reviews HMDA’s purposes and data collection, reporting, and disclosure requirements. It provides a high level summary of:  The institutions covered by Regulation C.  The transactions covered by Regulation C.  The information that covered institutions are required to collect, record, and report.  The requirements for reporting and disclosing data. This Guide is not a substitute for HMDA or Regulation C. Regulation C and its official interpretations (also known as the commentary) are the definitive sources of information regarding their requirements. Regulation C is available in Appendix F and G of this Guide and at www.consumerfinance.gov/regulatory-implementation/hmda/.

Additionally, this Guide is not a substitute for the requirements for filing the reportable data. The Filing Instructions Guide is the definitive source for information regarding the filing requirements and is available at www.consumerfinance.gov/dataresearch/hmda/for-filers.

Feedback The FFIEC welcomes suggestions for changes or additions that might make this Guide more helpful.

Write to: FFIEC, 3501 Fairfax Drive Room B-7081a Arlington, VA 22226

Send an e-mail to: GettingItRightGuide@cfpb.gov

If, after reviewing the resources in this Guide, you have a question regarding a specific provision of the regulation, or have questions about how to file HMDA data, please email HMDAHELP@cfpb.gov with your specific question, identifying the filing year you are referencing, and, when applicable, the section(s) of the regulation related to your question. You can also submit the inquiry online using the form available at hmdahelp.consumerfinance.gov. The information you provide will permit the Consumer Financial Protection Bureau to process your request or inquiry. You may also contact your appropriate Federal HMDA reporting agency (see Appendix H to this Guide.)

Generally, this Guide will point you to the relevant resources that discuss:

The institutions covered by Regulation C.

The transactions covered by Regulation C.

The information that covered institutions are required to collect, record, and report.

The requirements for reporting and disclosing data. The material can be found after the introduction in the referenced appendix section.

Institutional Coverage: Who Must Report? INSTITUTIONAL COVERAGE GENERALLY An institution is required to comply with Regulation C only if it is a “financial institution” as that term is defined in Regulation C. The definition of financial institution includes both depository financial institutions and nondepository financial institutions, as those terms are separately defined in Regulation C. 12 CFR 1003.2(g). An institution uses these two definitions, which are outlined below, as coverage tests to determine whether it is a financial institution that is required to comply with Regulation C. For the purposes of this Guide, the term “financial institution” refers to an institution that is either a depository financial institution or a nondepository financial institution that is subject to Regulation C.

INSTITUTIONAL COVERAGE TESTS DEPOSITORY FINANCIAL INSTITUTIONS A bank, savings association, or credit union is a depository financial institution and subject to Regulation C if it meets ALL of the following: 1. Asset-Size Threshold. On the preceding December 31, the bank, savings association, or credit union had assets in excess of the asset-size threshold published annually in the Federal Register, included in the official interpretations, 12 CFR Part 1003, Comment 2(g)-2, and posted on the Bureau’s website. 12 CFR 1003.2(g)(1)(i). The phrase “preceding December 31” refers to the December 31 immediately preceding the current calendar year. For example, in 2018, the preceding December 31 is December 31, 2017. Comment 2(g)-1. 2. Location Test. On the preceding December 31, the bank, savings association, or credit union had a home or branch office located in a metropolitan statistical area (MSA). 12 CFR 1003.2(g)(1)(ii). For purposes of this location test, a branch office for a bank, savings association, or credit union is an office: (a) of the bank, savings association, or credit union (b) that is considered a branch by the institution’s Federal or State supervisory agency. For purposes of Regulation C, an automated teller machine or other free-standing electronic terminal is not a branch office regardless of whether the supervisory agency would consider it a branch. 12 CFR 1003.2(c)(1). A branch office of a credit union is any office where member accounts are established or loans are made, whether or not an agency has approved the office as a branch. Comment 2(c)(1)-1. 3. Loan Activity Test. During the preceding calendar year, the bank, savings association, or credit union originated at least one home purchase loan or refinancing of a home purchase loan secured by a first lien on a one-to four-unit dwelling. 12 CFR 1003.2(g)(1)(iii). For more information on whether a loan is secured by a dwelling, is a home purchase loan, or is a refinancing, see 12 CFR 1003.2(f), (j), and (p) and associated commentary; and Sections 4.1.1.2 and 5.7 of the HMDA Small Entity Compliance Guide available in Appendix B of this Guide. 4. Federally Related Test. The bank, savings association, or credit union: a. Is federally insured; or b. Is federally regulated; or c. Originated at least one home purchase loan or refinancing of a home purchase loan that was secured by a first lien on a one- to-four-unit dwelling and also (i) was insured, guaranteed or supplemented by a Federal agency or (ii) was intended for sale to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). 12 CFR 1003.2(g)(1)(iv). 5. Loan-Volume Threshold. The bank, savings association, or credit union meets or exceeds either the closed-end mortgage loan or the open-end line of credit loanvolume threshold in each of the two preceding calendar years. Effective January 1, 2018 and through December 31, 2019, a bank, savings association, or credit union that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years, or originated at least 500 open-end lines of credit in each of the two preceding calendar years meets or exceeds the loan-volume threshold. When the bank, savings association, or credit union determines whether it meets these loan-volume thresholds, it does not count transactions excluded by 12 CFR 1003.3(c)(1) through (10) and (13). 12 CFR 1003.2(g)(1)(v). Closed-end mortgage loans, open-end lines of credit, and these excluded transactions are discussed below in TRANSACTIONAL COVERAGE: WHAT IS REPORTED?.

When determining if it meets the loan-volume thresholds, a bank, savings association, or credit union only counts closed-end mortgage loans and open-end lines of credit that it originated. Only one institution is deemed to have originated a specific closedend mortgage loan or open-end line of credit under Regulation C, even if two or more institutions are involved in the origination process. Only the institution that is deemed to have originated the transaction under Regulation C counts it for purposes of the Loan-Volume Threshold. Comment 2(g)-5; see also Comments 4(a)-2 through -4. These requirements are discussed below in TRANSACTIONS INVOLVING MULTIPLE ENTITIES. Regulation C also includes a separate test to ensure that financial institutions that meet only the closed-end mortgage loan threshold are not required to report their open-end lines of credit, and that financial institutions that meet only the open-end line of credit threshold are not required to report their closed-end mortgage loans. 12 CFR 1003.3(c)(11) and (12).6 For more information, see HMDA Small Entity Compliance Guide, Section 4.1.2 available in Appendix B of this Guide.

NONDEPOSITORY FINANCIAL INSTITUTIONS Under Regulation C, a for-profit mortgage-lending institution other than a bank, savings association, or credit union is a nondepository financial institution and subject to Regulation C if it meets BOTH of the following: 1. Location Test. The institution had a home or branch office in a metropolitan statistical area (MSA) on the preceding December 31. 12 CFR 1003.2(g)(2)(i). The phrase “preceding December 31” refers to the December 31 immediately preceding the current calendar year. For example, in 2018, the preceding December 31 is December 31, 2017. Comment 2(g)-1 For purposes of this location test, a branch office of a nondepository financial institution is any one of the institution’s offices at which the institution takes from the public applications for covered loans. A nondepository financial institution is also deemed to have a branch office in an MSA if, in the preceding calendar year, it received applications for, originated, or purchased five or more covered loans related to property located in that MSA, even if it does not have an office in that MSA. 12 CFR 1003.2(c)(2). Covered loans and applications for covered loans are discussed below in TRANSACTIONAL COVERAGE: WHAT IS REPORTED?. 2. Loan-Volume Threshold. The institution meets or exceeds either the closed-end mortgage loan-volume threshold or the open-end line of credit loan-volume threshold in each of the two preceding calendar years. Effective January 1, 2018 through December 31, 2019, an institution that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years, or originated at least 500 open-end lines of credit in each of the two preceding calendar years meets or exceeds the loanvolume threshold.

When an institution determines whether it meets the loan-volume thresholds, it does not count transactions excluded by 12 CFR 1003.3(c)(1) through (10) and (13). 12 CFR 1003.2(g)(2)(ii). Closed-end mortgage loans, open-end lines of credit, and these excluded transactions are discussed below in TRANSACTIONAL COVERAGE: WHAT IS REPORTED?. When determining if it meets the loan-volume thresholds, an institution only counts closed-end mortgage loans and open-end lines of credit that it originated. Only one institution is deemed to have originated a specific closed-end mortgage loan or openend line of credit under Regulation C, even if two or more institutions are involved in the origination process. Only the institution that is deemed to have originated the transaction under Regulation C counts it for purposes of the loan volume threshold. Comment 2(g)-5; see also Comments 4(a)-2 through -4. These requirements are discussed below in TRANSACTIONS INVOLVING MULTIPLE ENTITIES. Regulation C also includes a separate test to ensure that financial institutions that meet only the 25 closed-end mortgage loan threshold are not required to report their open-end lines of credit, and that financial institutions that meet only the 500 open-end line of credit threshold are not required to report their closed-end mortgage loans. 12 CFR 1003.3(c)(11) and (12).7 For more information, see the HMDA Small Entity Compliance Guide, Section 4.1.2 available in Appendix B of this Guide.

Source: https://www.ffiec.gov/hmda/pdf/2018guide.pdf

Fannie Mae Updates Mortgage Loan Rating Classifications and Servicer Watchlist Submissions

Multifamily Mortgage Business Guide Update 18-03

Effective May 14, 2018, Fannie Mae is updating Part V, Chapter 6 – Watchlist Management, of the Multifamily Selling and Servicing Guide (“Guide”) to: • clarify that Mortgage Loans that would otherwise by identified as Pass Watch Mortgage Loans are not eligible for identification as Special Mention; and • remove from the definition of a Mortgage Loan identified as Special Mention the existence of unanticipated deferred maintenance at the Property requiring attention by the Borrower

Changes Fannie Mae is clarifying the definitions of Mortgage Loans identified as Pass Watch and rated as Special Mention. The Mortgage Loans identified as Special Mention must only be Mortgage Loans that would otherwise be identified as Pass. Additionally, Mortgage Loans with unanticipated deferred maintenance at the Property requiring attention by the Borrower are no longer identified as Special Mention. Please see the actual Guide chapter for full details and other minor editorial changes.

Effective Date This Guide Update is effective May 14, 2018. Questions Please contact David Miller at david_w_miller@fanniemae.com or (202) 752-6297, or John Collins at john_p_collins@fanniemae.com or (617) 345-8041, with any questions. Associated Documents On the Effective Date, the updated Guide chapter will be published on AllRegs. • Part V, Chapter 6 – Watchlist Management (clean and blackline)

Source: https://www.fanniemae.com/content/announcement/gu1803.pdf

FFIEC Issues Examination Procedures Regarding Customer Due Diligence and Beneficial Ownership

Beneficial Ownership Requirements for Legal Entity Customers – Overview Objective. Assess the bank’s written procedures and overall compliance with regulatory requirements for identifying and verifying beneficial owner(s) of legal entity customers. Under the Beneficial Ownership Rule, 1 a bank must establish and maintain written procedures that are reasonably designed to identify and verify beneficial owner(s) of legal entity customers and to include such procedures in its anti-money laundering compliance program. Legal entities, whether domestic or foreign, can be used to facilitate money laundering and other crimes because their true ownership can be concealed. The collection of beneficial ownership information by banks about legal entity customers can provide law enforcement with key details about suspected criminals who use legal entity structures to conceal their illicit activity and assets. Requiring legal entity customers seeking access to banks to disclose identifying information, such as the name, date of birth, and Social Security number of natural persons who own or control them will make such entities more transparent, and thus less attractive to criminals and those who assist them. Similar to other customer information that a bank may gather, beneficial ownership information collected under the rule may be relevant to other regulatory requirements. These other regulatory requirements include, but are not limited to, identifying suspicious activity, and determining Office of Foreign Assets Control (OFAC) sanctioned parties. Banks should define in their policies, procedures, and processes how beneficial ownership information will be used to meet other regulatory requirements. Legal Entity Customers For the purposes of the Beneficial Ownership Rule, 2 a legal entity customer is defined as a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or other similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. A number of types of business entities are excluded from the definition of legal entity customer under the Beneficial Ownership rule. In addition, and subject to certain limitations, banks are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens certain types of accounts. For further information on exclusions and exemptions to the Beneficial Ownership Rule, see Appendix 1. These exclusions and exemptions do not alter or supersede other existing requirements related to BSA/AML and OFAC sanctions. Beneficial Owner(s) Beneficial ownership is determined under both a control prong and an ownership prong. Under the control prong, the beneficial owner is a single individual with significant

responsibility to control, manage or direct a legal entity customer.3 This includes, an executive officer or senior manager (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, President), or any other individual who regularly performs similar functions. One beneficial owner must be identified under the control prong for each legal entity customer. Under the ownership prong, a beneficial owner is each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer.4 If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial owner is the trustee.5 Identification of a beneficial owner under the ownership prong is not required if no individual owns 25 percent or more of a legal entity customer. Therefore, all legal entity customers will have a total of between one and five beneficial owner(s) – one individual under the control prong and zero to four individuals under the ownership prong. Banks may rely on the information supplied by the legal entity customer regarding the identity of its beneficial owner or owners, provided that it has no knowledge of facts that would reasonably call into question the reliability of such information.6 However, bank staff who know, suspect, or have reason to suspect that equity holders are attempting to avoid the reporting threshold may, depending on the circumstances, be required to file a SAR.7 More information on filing of SARs may be found in the “Suspicious Activity Reporting Overview” section on page 60 of the FFIEC BSA/AML Examination Manual. Identification of Beneficial Ownership Information A bank must establish and maintain written procedures detailing the identifying information that must be obtained for each beneficial owner of a legal entity customer opening a new account after May 11, 2018. At a minimum, the bank must obtain the following identifying information for each beneficial owner of a legal entity customer: • Name. • Date of birth. • Address.8

• Identification number.9 A bank may obtain identifying information for beneficial owner(s) of legal entity customers through a completed certification form10 from the individual opening the account on behalf of the legal entity customer, or by obtaining from the individual the information required by the form by another means, provided the individual certifies, to the best of the individual’s knowledge, the accuracy of the information. A bank may rely on the information supplied by the individual opening the account on behalf of the legal entity customer regarding the identity of its beneficial owner(s), provided that it has no knowledge of facts that would reasonably call into question the reliability of such information. If a legal entity customer opens multiple accounts a bank may rely on the pre-existing beneficial ownership records it maintains, provided that the bank confirms (verbally or in writing) that such information is up-to-date and accurate at the time each account is opened.11 Banks must have procedures to maintain and update customer information, including beneficial ownership information for legal entity customers, on the basis of risk. Additionally, banks are not required to conduct retroactive reviews to obtain beneficial ownership information on legal entity customers that were existing customers as of May 11, 2018. However, the bank may need to obtain (and thereafter update) beneficial ownership information for existing legal entity customers based on its ongoing monitoring. For further guidance on maintaining and updating of customer information including beneficial ownership information, please see the “Ongoing Monitoring of Customer Relationship” section of the “Customer Due Diligence Overview” section of the FFIEC BSA/AML Examination Manual. 12 Verification of Beneficial Owner Information A bank must establish and maintain written risk-based procedures for verifying the identity of each beneficial owner of a legal entity customer within a reasonable period of time after the account is opened. These procedures must contain the elements required for verifying the identity of customers that are individuals under 31 CFR 1020.220(a)(2), provided, that in the case of documentary verification, the bank may use photocopies or other reproductions of the documents listed in paragraph (a)(2)(ii)(A)(1) of 31 CFR 1020.220. Guidance on documentary and non-documentary verification methods may be found in the core overview section “Customer Identification Program,” of the FFIEC BSA/AML Examination Manual. 9 An identification number for a U.S. person is a taxpayer identification number (TIN) (or evidence of an application for one), and an identification number for a non-U.S. person is one or more of the following: a TIN; a passport number and country of issuance; an alien identification card number; or a number and country of issuance of any other unexpired government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. TIN is defined by section 6109 of the Internal Revenue Code of 1986 (26 USC 6109) and the IRS regulations implementing that section (e.g., Social Security number (SSN) or individual taxpayer identification number (ITIN), or employer identification number (EIN)). See 31 CFR 1010.220(a)(2)(i)(4) 10 See 31 CFR 1010.230, Appendix A, Certification Regarding Beneficial Owners of Legal Entity Customers (2016) 11 FinCEN, FIN-2018-G001, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, Question #10, April 2018. 12 FFIEC, Core Examination Overview and Procedures, Customer Due Diligence Overview, May 201

A bank need not establish the accuracy of every element of identifying information obtained, but must verify enough information to form a reasonable belief that it knows the true identity of the beneficial owner(s) of the legal entity customer. The bank’s procedures for verifying the identity of the beneficial owners must describe when it uses documents, non-documentary methods, or a combination of methods. Lack of Identification and Verification of Beneficial Ownership Information Also consistent with 31 CFR 1020.220, the bank should establish policies, procedures, and processes for circumstances in which the bank cannot form a reasonable belief that it knows the true identity of the beneficial owner(s) of a legal entity customer. These policies, procedures, and processes should describe:

• Circumstances in which the bank should not open an account.

• The terms under which a customer may use an account while the bank attempts to verify the identity of the beneficial owner(s) of a legal entity customer.

• When the bank should close an account, after attempts to verify the identity of the beneficial owner(s) of a legal entity customer have failed.

• When the bank should file a SAR in accordance with applicable law and regulation.

Recordkeeping and Retention Requirements A bank must establish recordkeeping procedures for beneficial ownership identification and verification information. At a minimum, the bank must maintain any identifying information obtained, including without limitation the certification (if obtained), for a period of five years after the date the account is closed. The bank must also keep a description of any document relied on (noting the type, any identification number, place of issuance and, if any, date of issuance and expiration), of any non-documentary methods and the results of any measures undertaken, and of the resolution of each substantive discrepancy for five years after the record is made. Reliance on Another Financial Institution A bank is permitted to rely on the performance by another financial institution (including an affiliate) of the requirements of the Beneficial Ownership Rule with respect to any legal entity customer of the covered financial institution that is opening, or has opened, an account or has established a similar business relationship with the other financial institution to engage in services, dealings, or other financial transactions, provided that:

• Reliance is reasonable, under the circumstances.

• The relied-upon financial institution is subject to a rule implementing 31 USC 5318(h) and is regulated by a federal functional regulator.

The other financial institution enters into a contract requiring it to certify annually to the bank that it has implemented its AML program, and that it will perform (or its agent will perform) the specified requirements of the bank’s procedures to comply with the requirements of the Beneficial Ownership Rule

ExaminationProcedures Beneficial Ownership Objective: Assess the bank’s written procedures and overall compliance with regulatory requirements for identifying and verifying beneficial owner(s) of legal entity customers. 1. Determine whether the bank has adequate written procedures for gathering and verifying information required to be obtained, and retained (including name, address, taxpayer identification number (TIN), and date of birth) for beneficial owner(s) of legal entity customers who open an account after May 11, 2018. 2. Determine whether the bank has adequate risk-based procedures for updating customer information, including beneficial owner information, and maintaining current customer information. Transaction Testing 3. On the basis of a risk assessment, prior examination reports, and a review of the bank’s audit findings, select a sample of new accounts opened for legal entity customers since May 11, 2018 to review for compliance with the Beneficial Ownership Rule. The sample should include a cross-section of account types. From this sample, determine whether the bank has performed the following procedures:

• Opened the account in accordance with the requirements of the Beneficial Ownership Rule (31 CFR 1010.230).

• Obtained the identifying information for each beneficial owner of a legal entity customer as required (e.g. name, date of birth, address, and identification number).

• Within a reasonable time after account opening, verified enough of the beneficial owner’s identity information to form a reasonable belief as to the beneficial owner’s true identity.

• Appropriately resolved situations in which beneficial owner’s identity could not be reasonably established.

• Maintained a record of the identity information required by the Beneficial Ownership Rule, the method used to verify identity, and verification results (31 CFR 1010.230(i)).

• Filed SARs as appropriate. 4. On the basis of the examination procedures completed, including transaction testing, form a conclusion about the adequacy of procedures for complying with the Beneficial Ownership Rule Beneficial Ownership — Appendix 1 FFIEC BSA/AML Examination Manual 7 05/05/2018

Appendix 1 – Beneficial Ownership Exclusions from the definition of Legal Entity Customer Under 31 CFR 1010.230(e)(2) a legal entity customer does not include: • A financial institution regulated by a federal functional regulator14 or a bank regulated by a state bank regulator; • A person described in 31 CFR 1020.315(b)(2) through (5): o A department or agency of the United States, of any state, or of any political subdivision of any State; o Any entity established under the laws of the United States, of any state, or of any political subdivision of any state, or under an interstate compact between two or more states, that exercises governmental authority on behalf of the United States or any such state or political subdivision; o Any entity (other than a bank) whose common stock or analogous equity interests are listed on the New York Stock Exchange or the American Stock Exchange (currently known as the NYSE American) or have been designated as a NASDAQ National Market Security listed on the NASDAQ stock exchange (with some exceptions); o Any subsidiary (other than a bank) of any “listed entity” that is organized under the laws of the United States or of any state and at least 51 percent of whose common stock or analogous equity interest is owned by the listed entity, provided that a person that is a financial institution, other than a bank, is an exempt person only to the extent of its domestic operations;

• An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of that Act;

• An investment company, investment adviser, an exchange or clearing agency, or any other entity that is registered with the SEC;

• A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer, or major swap participant that is registered with the CFTC;

• A public accounting firm registered under section 102 of the Sarbanes-Oxley Act;

• A bank holding company or savings and loan holding company;

• A pooled investment vehicle that is operated or advised by a financial institution that is excluded under paragraph (e)(2);

• An insurance company that is regulated by a state;

A financial market utility designated by the Financial Stability Oversight Council;

• A foreign financial institution established in a jurisdiction where the regulator of such institution maintains beneficial ownership information regarding such institution;

• A non-U.S. governmental department, agency, or political subdivision that engages only in governmental rather than commercial activities;

• Any legal entity only to the extent that it opens a private banking account subject to 31 CFR 1010.620. Trusts Trusts are not included in the definition of legal entity customer, other than statutory trusts created by a filing with a Secretary of State or similar office.15 Exemptions from the Ownership Prong Certain legal entity customers are subject only to the control prong of the beneficial ownership requirement, including:

• A pooled investment vehicle operated or advised by a financial institution not excluded under paragraph 31 CFR 1010.230(e)(2); and

• Any legal entity that is established as a nonprofit corporation or similar entity and has filed its organizational documents with the appropriate state authority as necessary. Exemptions and Limitations on Exemptions Subject to certain limitations, banks are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens any of the following categories of accounts:

• Accounts established at the point-of-sale to provide credit products, including commercial private label credit cards, solely for the purchase of retail goods and/or services at these retailers, up to a limit of $50,000;

• Accounts established to finance the purchase of postage and for which payments are remitted directly by the financial institution to the provider of the postage products;

• Accounts established to finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker;

• Accounts established to finance the purchase or leasing of equipment and for which payments are remitted directly by the financial institution to the vendor or lessor of this equipment. These exemptions will not apply:

• If the accounts are transaction accounts through which a legal entity customer can make payments to, or receive payments from, third parties.

• If there is the possibility of a cash refund on the account activity opened to finance the purchase of postage, to finance insurance premiums, or to finance the purchase or leasing of equipment, then beneficial ownership of the legal entity customer must be identified and verified by the bank as required either at the initial remittance, or at the time such refund occurs

Source: https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for%20Legal%20Entity%20CustomersOverview-FINAL.pdf

CFPB Issues Final Rule Regarding KBYO Federal Mortgage Disclosure Requirements

Summary of the Final Rule The TILA-RESPA Rule1 requires creditors to provide consumers with good faith estimates of the loan terms and closing costs required to be disclosed on a Loan Estimate. Under the rule, an estimated closing cost is disclosed in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed, subject to certain exceptions. 2 In some circumstances, creditors may use revised estimates, instead of the estimate originally disclosed to the consumer, to compare to the charges actually paid by or imposed on the consumer for purposes of determining whether an estimated closing cost was disclosed in good faith. If the conditions for using such revised estimates are met, the creditor generally may provide revised estimates on a revised Loan Estimate or, in certain circumstances, on a Closing Disclosure. However, under the current rule, circumstances may arise in which a cost increases but the creditor is unable to use an otherwise permissible revised estimate on either a Loan Estimate or a Closing Disclosure for purposes of determining whether an estimated closing cost was disclosed in good faith. This situation, which may arise when the creditor has already provided a Closing Disclosure to the consumer when it learns about the cost increase, occurs because of the intersection of timing rules regarding the provision of revised estimates. This has been referred to in industry as a “gap” or “black hole” in the TILA-RESPA Rule.

The Bureau understands that these circumstances have led to uncertainty in the market and created implementation challenges that may have consequences for both consumers and creditors. If creditors cannot pass increased costs to consumers in the specific transactions where the costs arise, creditors may spread the costs across all consumers by pricing their loan products with added margins. The Bureau also understands that some creditors may be denying applications, even after providing the Closing Disclosure, in some circumstances where the creditor cannot pass otherwise permissible cost increases directly to affected consumers, which can have negative effects for those consumers. For these reasons, in July 2017, the Bureau proposed to address the issue by specifically providing that creditors may use 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 (2017 Proposal or “the proposal”). 3 The Bureau is finalizing those amendments as proposed, with minor clarifying changes.

II. Background In Dodd-Frank Act sections 1032(f), 1098, and 1100A, Congress directed the Bureau to integrate certain mortgage loan disclosures under TILA and RESPA.4 The Bureau issued proposed integrated disclosure forms and rules for comment on July 9, 2012 (2012 TILARESPA Proposal)5 and issued the 2013 TILA-RESPA Final Rule on November 20, 2013. The rule included model forms, samples illustrating the use of those forms for different types of loans, and Official Interpretations, which provided authoritative guidance explaining the new disclosures. The 2013 TILA-RESPA Final Rule took effect on October 3, 2015.6 The Bureau has provided resources to support implementation of the TILA-RESPA Rule.7 The Bureau has also stated its commitment to be sensitive to the good faith efforts made by institutions to come into compliance. In addition, since the promulgation of the 2013 TILARESPA Final Rule, the Bureau has made various amendments to facilitate compliance. Most recently, the Bureau finalized the July 2017 Amendments, which memorialized the Bureau’s informal guidance on various issues, made clarifying and technical amendments, and also made a limited number of substantive changes where the Bureau identified discrete solutions to specific implementation challenges. Concurrently with the July 2017 Amendments, the Bureau issued the 2017 Proposal to address an additional implementation issue regarding when a creditor may compare charges paid by or imposed on the consumer to amounts disclosed on a Closing Disclosure to determine if an estimated closing cost was disclosed in good faith. III. Comments The Bureau issued the 2017 Proposal on July 6, 2017, and it was published in the Federal Register on August 11, 2017. In response to the 2017 Proposal, the Bureau received 43 unique comments from industry commenters (including trade associations, creditors, and industry representatives), a consumer advocate group, and others. As discussed below, the Bureau has considered the comments in adopting this final rule.

IV. Legal Authority The Bureau is issuing this final rule pursuant to its authority under TILA, RESPA, and the Dodd-Frank Act, including the authorities discussed below. In general, the provisions of Regulation Z that this final rule amends were previously adopted by the Bureau in the TILARESPA Rule. In doing so, the Bureau relied on one or more of the authorities discussed below, as well as other authority. The Bureau is issuing this final rule in reliance on the same authority and for the same reasons relied on in adopting the relevant provisions of the TILA-RESPA Rule, which are described in detail in the Legal Authority and Section-by-Section Analysis parts of the 2013 TILA-RESPA Final Rule and January 2015 Amendments, respectively.8 A. The Integrated Disclosure Mandate Section 1032(f) of the Dodd-Frank Act required the Bureau to propose, for public comment, rules and model disclosures combining the disclosures required under TILA and sections 4 and 5 of RESPA into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determined that any proposal issued by the Board of Governors of the Federal Reserve System (Board) and the Department of Housing and Urban Development (HUD) carried out the same purpose.9 In addition, the Dodd-Frank Act amended section 105(b) of TILA and section 4(a) of RESPA to require the integration of the TILA disclosures and the disclosures required by sections 4 and 5 of RESPA.10 The purpose of the integrated disclosure is to facilitate compliance with the disclosure requirements of TILA and RESPA and to improve borrower understanding of the transaction. The Bureau provided

B. Truth in Lending Act TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a)12 directs the Bureau to prescribe regulations to carry out the purposes of TILA and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions and may further provide for such adjustments and exceptions for all or any class of transactions that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. A purpose of TILA is to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various available credit terms and avoid the uninformed use of credit.13 In enacting TILA, Congress found that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.14 Strengthened competition among financial institutions is a goal of TILA, achieved through the meaningful disclosure of credit terms.15 For the reasons discussed below and in the TILA-RESPA Rule, the Bureau finalizes these amendments pursuant to its authority under TILA section 105(a). The Bureau believes the finalized amendments effectuate the purpose of TILA under TILA section

102(a) of meaningful disclosure of credit terms to consumers and facilitate compliance with the statute by clarifying when particular disclosures may be provided. The Bureau also believes that the final rule furthers TILA’s goals by ensuring more reliable estimates, which foster competition among financial institutions. In addition, the Bureau believes the final rule will prevent circumvention or evasion of TILA. TILA section 129B(e). Dodd-Frank Act section 1405(a) amended TILA to add new section 129B(e).16 That section authorizes the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the Bureau finds to be abusive, unfair, deceptive, predatory, necessary, or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of sections 129B and 129C of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections, or are not in the interest of the borrower. In developing rules under TILA section 129B(e), the Bureau has considered whether the rules are in the interest of the borrower, as required by the statute. For the reasons discussed below and in the TILA-RESPA Rule, the Bureau finalizes these amendments pursuant to its authority under TILA section 129B(e). The Bureau believes this final rule is consistent with TILA section 129B(e). C. Real Estate Settlement Procedures Act Section 19(a) Section 19(a) of RESPA authorizes the Bureau to prescribe such rules and regulations and to make such interpretations and grant such reasonable exemptions for classes of transactions as may be necessary to achieve the purposes of RESPA.17 One purpose of RESPA

is to effect certain changes in the settlement process for residential real estate that will result in more effective advance disclosure to home buyers and sellers of settlement costs.18 In addition, in enacting RESPA, Congress found that consumers are entitled to greater and more timely information on the nature and costs of the settlement process and to be protected from unnecessarily high settlement charges caused by certain abusive practices in some areas of the country.19 In developing rules under RESPA section 19(a), the Bureau has considered the purposes of RESPA, including to effect certain changes in the settlement process that will result in more effective advance disclosure of settlement costs. The Bureau finalizes these amendments pursuant to its authority under RESPA section 19(a). For the reasons discussed below and in the TILA-RESPA Rule, the Bureau believes the final rule is consistent with the purposes of RESPA by fostering more effective advance disclosure to home buyers and sellers of settlement costs. D. Dodd-Frank Act Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act provides that the Bureau may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.20 The authority granted to the Bureau in section 1032(a) is broad and empowers the Bureau to prescribe rules regarding the disclosure of the features of consumer financial

products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features. Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to section 1032, the Bureau shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.21 Accordingly, in developing the TILA-RESPA Rule under Dodd-Frank Act section 1032(a), the Bureau considered available studies, reports, and other evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services. Moreover, the Bureau considered the evidence developed through its consumer testing of the integrated disclosures as well as prior testing done by the Board and HUD regarding TILA and RESPA disclosures. See part III of the 2013 TILA-RESPA Final Rule for a discussion of the Bureau’s consumer testing.22 The Bureau finalizes these amendments pursuant to its authority under Dodd-Frank Act section 1032(a). For the reasons discussed below and in the TILA-RESPA Rule, the Bureau believes that the final rule is consistent with Dodd-Frank Act section 1032(a) because it promotes full, accurate, and effective disclosure of the features of consumer credit transactions secured by real property in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.

Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, notwithstanding any other provision of title XIV of the Dodd-Frank Act, in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the Bureau may exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest.23 Section 1401 of the Dodd-Frank Act, which amends TILA section 103(cc)(5), generally defines a residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling, other than an open-end credit plan or an extension of credit secured by a consumer’s interest in a timeshare plan.24 Notably, the authority granted by section 1405(b) applies to disclosure requirements generally and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority to exempt from or modify the disclosure requirements of TILA and RESPA. In developing rules for residential mortgage loans under Dodd-Frank Act section 1405(b), the Bureau has considered the purposes of improving consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures and the interests of consumers and the public. The Bureau finalizes these amendments pursuant to its authority under Dodd-Frank Act section 1405(b). For the reasons discussed below and in the TILARESPA Rule, the Bureau believes the final rule is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b).

V. Section-by-Section Analysis Section 1026.19 Certain Mortgage and Variable-Rate Transactions 19(e) Mortgage Loans – Early Disclosures 19(e)(4) Provision and Receipt of Revised Disclosures The 2013 TILA-RESPA Final Rule combined certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan into two new, integrated forms. The first new form, the Loan Estimate, replaced the RESPA Good Faith Estimate and the early Truth in Lending disclosure. The rule requires creditors to deliver or place in the mail the Loan Estimate no later than three business days after the consumer submits a loan application.25 The second form, the Closing Disclosure, replaced the HUD-1 Settlement Statement and the final Truth in Lending disclosure. The rule requires creditors to ensure that consumers receive the Closing Disclosure at least three business days before consummation.26 Section 1026.19(e)(1)(i) of the 2013 TILA-RESPA Final Rule requires creditors to provide consumers with good faith estimates of the disclosures required in § 1026.37, which describes the loan terms and closing costs required to be disclosed on the Loan Estimate. Under § 1026.19(e)(3)(i), an estimated closing cost is disclosed in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed, except as otherwise provided in § 1026.19(e)(3)(ii) through (iv). Section 1026.19(e)(3)(ii) provides that estimates for certain third-party services and recording fees are in good faith if the sum of all such charges paid by or imposed on the consumer does not exceed the sum of all such charges disclosed on the

Loan Estimate by more than 10 percent.27 Section 1026.19(e)(3)(iii) further provides that certain other estimates are disclosed in good faith so long as they are consistent with the best information reasonably available to the creditor at the time they are disclosed, regardless of whether and by how much the amount paid by the consumer exceeds the disclosed estimate. 28 The allowed variances between estimated closing costs and the actual amounts paid by or imposed on the consumer are referred to as tolerances. Section 1026.19(e)(3)(iv) permits creditors, in certain limited circumstances, to use revised estimates of charges, instead of the estimate of charges originally disclosed to the consumer, to compare to the charges actually paid by or imposed on the consumer for purposes of determining whether an estimated closing cost was disclosed in good faith pursuant to § 1026.19(e)(3)(i) and (ii) (i.e., determining whether the actual charge exceeds the allowed tolerance). 29 The provision of such revised estimates is referred to herein as resetting tolerances. The circumstances under which creditors may reset tolerances are: (1) a defined set of changed circumstances that cause estimated charges to increase or, in the case of certain estimated charges, cause the aggregate amount of such charges to increase by more than 10 percent; 30 (2)

the consumer is ineligible for an estimated charge previously disclosed because of a changed circumstance that affects the consumer’s creditworthiness or the value of the property securing the transaction; (3) the consumer requests revisions to the credit terms or the settlement that cause an estimated charge to increase; (4) points or lender credits change because the interest rate was not locked when the Loan Estimate was provided; (5) the consumer indicates an intent to proceed with the transaction more than 10 business days, or more than any additional number of days specified by the creditor before the offer expires, after the Loan Estimate was provided to the consumer; and (6) the loan is a construction loan that is not expected to close until more than 60 days after the Loan Estimate has been provided to the consumer and the creditor clearly and conspicuously states that a revised disclosure may be issued. Section 1026.19(e)(4) contains rules for the provision and receipt of revised estimates used to reset tolerances. Section 1026.19(e)(4)(i) provides the general rule that, subject to the requirements of § 1026.19(e)(4)(ii), if a creditor uses a revised estimate to determine good faith (i.e., to reset tolerances), the creditor shall provide a Loan Estimate reflecting the revised estimate within three business days of receiving information sufficient to establish that a permissible reason for revision applies. Section 1026.19(e)(4)(ii) imposes timing restrictions on the provision of revised Loan Estimates. Specifically, § 1026.19(e)(4)(ii) states that the creditor shall not provide a revised Loan Estimate on or after the date on which the creditor provides the Closing Disclosure. Section 1026.19(e)(4)(ii) also provides that the consumer must receive any revised Loan Estimate not later than four business days prior to consummation.

Regulation Z therefore limits creditors’ ability to provide revised Loan Estimates relative to the provision of the Closing Disclosure and to consummation. In issuing the 2013 TILARESPA Final Rule, the Bureau explained that it was aware of cases where creditors provided revised RESPA Good Faith Estimates at the real estate closing, along with the HUD-1 settlement statement.31 The Bureau was concerned that the practice of providing both good faith estimates of closing costs and an actual statement of closing costs at the same time could be confusing for consumers and could diminish their awareness and understanding of the transaction. The Bureau was also concerned about consumers receiving seemingly duplicative disclosures that could contribute to information overload. For this reason, the Bureau adopted the provision of § 1026.19(e)(4)(ii) that prohibits creditors from providing revised Loan Estimates on or after the date the creditor provides the Closing Disclosure. The Bureau adopted the provision of § 1026.19(e)(4)(ii) that requires that consumers receive the revised Loan Estimate not later than four business days prior to consummation to ensure that consumers do not receive a revised Loan Estimate on the same date as the Closing Disclosure in cases where the revised Loan Estimate is not provided to the consumer in person. Comment 19(e)(4)(ii)-1 clarifies when creditors may reset tolerances with a Closing Disclosure instead of with a revised Loan Estimate. Specifically, the comment explains that if there are fewer than four business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) (i.e., within three business days of receiving information sufficient to establish a reason for revision) and consummation, creditors

can reflect revised disclosures to reset tolerances on the Closing Disclosure. This is referred to herein as the “four-business day limit.” Although the Bureau originally proposed commentary in 2012 that would have stated that creditors may reflect the revised disclosures on the Closing Disclosure, without regard to the timing of consummation, the 2013 TILA-RESPA Final Rule contained the four-business day limit. 32 As stated in the 2017 Proposal, the Bureau now understands that there is significant confusion in the market and that the four-business day limit has caused situations where creditors cannot provide either a revised Loan Estimate or Closing Disclosure to reset tolerances even if a reason for revision under § 1026.19(e)(3)(iv) would otherwise permit the creditor to reset tolerances. In particular, the Bureau understands that this situation may occur if the creditor has already provided the Closing Disclosure and an event occurs or a consumer requests a change that causes an increase in closing costs that would be a reason for revision under § 1026.19(e)(3)(iv), but there are four or more days between the time the revised disclosures would be required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. This situation may occur if there was also a delay in the scheduled consummation date after the initial Closing Disclosure is provided to the consumer. This situation can arise because of the intersection of various timing rules regarding the provision of revised estimates to reset tolerances. As noted, § 1026.19(e)(4)(ii) prohibits creditors from providing Loan Estimates on or after the date on which the creditor provides the Closing Disclosure. In many cases, this limitation would not create issues for creditors because

32 See proposed comment 19(e)(4)-2 at 77 FR 51116, 51426 (Aug. 23, 2012) (“Creditors comply with the requirements of § 1026.19(e)(4) if the revised disclosures are reflected in the disclosures required by § 1026.19(f)(1)(i).”).

current comment 19(e)(4)(ii)-1 explains that creditors may reflect revised estimates on a Closing Disclosure to reset tolerances if there are less than four business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. But there is no similar provision that explicitly provides that creditors may use a Closing Disclosure to reflect the revised estimates if there are four or more business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. The 2016 Proposal On July 28, 2016, the Bureau proposed clarifications and technical amendments to the TILA-RESPA Rule, along with several proposed substantive changes (2016 Proposal).33 In the 2016 Proposal, the Bureau proposed comment 19(e)(4)(ii)-2 to clarify that creditors may use corrected Closing Disclosures provided under § 1026.19(f)(2)(i) or (ii) (in addition to the initial Closing Disclosure) to reflect changes in costs that will be used to reset tolerances.34 As discussed above, existing comment 19(e)(4)(ii)-1 clarifies that creditors may reflect revised estimates on the Closing Disclosure to reset tolerances if there are less than four business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. Although comment 19(e)(4)(ii)-1 expressly references only the Closing Disclosure required by § 1026.19(f)(1)(i), the Bureau had stated in informal guidance that the provision also applies to corrected Closing Disclosures provided pursuant to

1026.19(f)(2)(i) or (ii). The Bureau proposed comment 19(e)(4)(ii)-2 in the 2016 Proposal to clarify this point. However, some commenters to the 2016 Proposal interpreted proposed comment 19(e)(4)(ii)-2 as allowing creditors to use corrected Closing Disclosures to reset tolerances regardless of when consummation is expected to occur, as long as the creditor provides the corrected Closing Disclosure within three business days of receiving information sufficient to establish a reason for revision applies pursuant to § 1029.19(e)(4)(i). Under this interpretation, the four-business day limit would still apply to resetting tolerances with the initial Closing Disclosure, but would not apply to resetting tolerances with a corrected Closing Disclosure. Commenters were not uniform in their interpretation of proposed comment 19(e)(4)(ii)-2. Commenters who interpreted proposed comment 19(e)(4)(ii)-2 as removing the four-business day limit as it applies to corrected Closing Disclosures were generally supportive, citing uncertainty about the proper interpretation of current rules and stating that the timing rules regarding resetting tolerances with a Closing Disclosure are unworkable. Many commenters perceived that proposed comment 19(e)(4)(ii)-2 would resolve these issues because they interpreted it as allowing creditors to use corrected Closing Disclosures to reset tolerances even if there are four or more business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. Some commenters who interpreted the proposed comment in this way supported it, but also cautioned about unintended consequences. For example, some commenters stated that eliminating the fourbusiness day limit for corrected Closing Disclosures might remove a disincentive that currently exists under the rule from providing the initial Closing Disclosure extremely early in the  mortgage origination process, which these commenters stated would not be consistent with the Bureau’s intent that the Closing Disclosure be a statement of actual costs. The 2017 Proposal The Bureau did not finalize proposed comment 19(e)(4)(ii)-2 as part of the July 2017 Amendments. Instead, the Bureau issued the 2017 Proposal to amend § 1026.19(e)(4) and associated commentary to expressly remove the four-business day limit for providing Closing Disclosures for purposes of resetting tolerances and determining if an estimated closing cost was disclosed in good faith. The Bureau issued the 2017 Proposal in light of comments received in response to the 2016 Proposal and prior outreach indicating that timing rules regarding resetting tolerances with Closing Disclosures have led to uncertainty in the market and created implementation challenges that could have unintended consequences for both consumers and creditors, as explained above. Consistent with current comment 19(e)(4)(ii)-1, the proposal would have allowed creditors to reset tolerances by providing a Closing Disclosure (including any corrected disclosures provided under § 1026.19(f)(2)(i) or (ii)) within three business days of receiving information sufficient to establish that a reason for revision applies. Unlike current comment 19(e)(4)(ii)-1, however, the proposal would not have restricted the creditor’s ability to reset tolerances with a Closing Disclosure to the period of less than four business days between the time the revised version of the disclosures is required to be provided pursuant to § 1026.19(e)(4)(i) and consummation. In the proposal, the Bureau explained that it believes that, in most cases in which a creditor learns about cost increases that are a permissible reason to reset tolerances, the creditor will not yet have provided a Closing Disclosure to the consumer. The proposal explained that, to 19 the extent there is a cost increase of a type that would allow tolerances to be reset, the Bureau expects that creditors will typically provide a revised Loan Estimate (and not a Closing Disclosure) for the purpose of resetting tolerances and that these revised Loan Estimates will be used in determining good faith under § 1026.19(e)(3)(i) and (ii). However, there are circumstances in which creditors will instead reset tolerances with a Closing Disclosure. For example, the proposal noted that events that can affect closing costs may occur close to the time of consummation, even after the initial Closing Disclosure has been provided to the consumer. The proposal also noted that events may result in consummation being delayed past the time that was expected when the creditor provided the Closing Disclosure to the consumer. Some events can both affect closing costs and lead to a delay in consummation. These events may be outside the control of the creditor and, in some cases, requested by the consumer. The proposal cited as examples weather-related events that delay closing and lead to additional appraisal or inspection costs or illness by a buyer or seller that could delay closing and lead to the imposition of additional costs, such as a rate lock extension fee. In these circumstances, creditors may wish to reset tolerances with a Closing Disclosure even outside the time permitted by the four-business day limit. If creditors cannot pass these increased costs to consumers in the specific transactions where they arise, creditors may spread the costs across all consumers by pricing their loan products with added margins. The proposal also noted that some creditors may be seeking other ways to avoid absorbing these unexpected costs, such as denying applications from consumers, even after providing the consumer a Closing Disclosure. For these reasons, the Bureau proposed to allow creditors to reset tolerances using a Closing Disclosure without regard to the four-business day limit. Under the proposal, as under the current rule, to reset tolerances with a Closing Disclosure, creditors would have been 20 required to provide the Closing Disclosure to the consumer within three business days of receiving information sufficient to establish that a reason for revision applies. Further, as under the current rule, creditors would have been allowed to reset tolerances only under the limited circumstances described in § 1026.19(e)(3)(iv). The proposal would have removed the four-business day limit for resetting tolerances with both initial and corrected Closing Disclosures. The proposal cited two reasons for this approach. First, the proposal noted a concern that applying the four-business day limit to initial Closing Disclosures but not corrected Closing Disclosures could incentivize creditors to provide consumers with initial Closing Disclosures very early in the lending process, which in some circumstances might be inconsistent with the description of the Closing Disclosure as a “statement of the final loan terms and closing costs,”35 and the requirement under § 1026.19(f)(1)(i) that the disclosures on the Closing Disclosure are to be a statement of “the actual terms of the transaction.” Second, the proposal noted that applying the four-business day limit to initial Closing Disclosures but not corrected Closing Disclosures could create operational challenges and burden for creditors. Accordingly, the Bureau proposed to amend § 1026.19(e)(4)(i) to provide that, subject to the requirements of § 1026.19(e)(4)(ii), if a creditor uses a revised estimate pursuant to § 1026.19(e)(3)(iv) for the purpose of determining good faith under § 1026.19(e)(3)(i) and (ii), the creditor shall provide a revised version of the disclosures required under § 1026.19(e)(1)(i) or the disclosures required under § 1026.19(f)(1)(i) (including any corrected disclosures provided 35 12 CFR 1026.38(a)(2). 21 under § 1026.19(f)(2)(i) or (ii)) reflecting the revised estimate within three business days of receiving information sufficient to establish that one of the reasons for revision applies. The Bureau also proposed to amend comment 19(e)(4)(ii)-1 to remove the reference to the four-business day limit, for consistency with the proposed amendments to § 1026.19(e)(4)(i). In addition, the proposal would have amended the comment to provide two additional examples that further clarify how creditors may provide revised estimates on Closing Disclosures in lieu of Loan Estimates for purposes of determining good faith. The Bureau also proposed conforming amendments to the heading of § 1026.19(e)(4)(ii) and to comments 19(e)(1)(ii)-1 and 19(e)(4)(i)- 1 in light of these proposed amendments. Finally, the proposal would have made several changes to § 1026.19(e)(4) and its commentary to reflect amendments to the rule made by the January 2015 Amendments regarding interest rate dependent charges. Section 1026.19(e)(3)(iv)(D), as adopted by the 2013 TILARESPA Final Rule, previously required creditors to provide the consumer with a revised disclosure with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms on the date the interest rate is locked. The January 2015 Amendments changed § 1026.19(e)(3)(iv)(D) to provide creditors with more time (three business days) to provide the revised disclosures. This amendment harmonized the timing requirement in § 1026.19(e)(3)(iv)(D) with other timing requirements for providing a revised Loan Estimate adopted in the 2013 TILA-RESPA Final Rule and addressed operational challenges associated with the prior requirement that gave creditors less time to provide revised disclosures regarding interest rate dependent charges. To implement this change, the Bureau revised § 1026.19(e)(3)(iv)(D) to state that, no later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures 22 required under § 1026.19(e)(1)(i) to the consumer with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms. In the January 2015 Amendments, the Bureau also adopted modified versions of proposed comments 19(e)(3)(iv)(D)-1 and 19(e)(4)(i)-2 to reflect that change. To further reflect the changes made by the January 2015 Amendments to § 1026.19(e)(3)(iv)(D), the Bureau proposed to amend § 1026.19(e)(4)(i) and comment 19(e)(4)(i)-1. The Bureau also proposed to remove existing comment 19(e)(4)(i)-2, regarding the relationship to § 1026.19(e)(3)(iv)(D), which the proposal stated may no longer be necessary. The Bureau solicited comment on several specific issues related to the proposal, including on the extent to which the four-business day limit has caused situations where creditors cannot provide either a revised Loan Estimate or Closing Disclosure to reset tolerances even if a reason for revision under § 1026.19(e)(3)(iv) would otherwise permit the creditor to reset tolerances. The Bureau requested information on the frequency and the cause of such occurrences and on the average costs and the nature of such costs associated with such occurrences. The Bureau also requested information that would assist in evaluating potential consequences of the proposal. In particular, some commenters in response to the 2016 Proposal expressed concern that removal of the four-business day limit could result in some creditors providing Closing Disclosures very early in the lending process and that doing so could have negative effects on some consumers. The proposal noted the Bureau’s understanding that some creditors currently provide the Closing Disclosure to consumers so early in the process that the terms and costs are nearly certain to be revised. Commenters stated in response to the 2016 Proposal that eliminating the four-business day limit for resetting tolerances with a Closing 23 Disclosure could remove a disincentive to providing Closing Disclosures before final terms and costs are reliably available (i.e., under the current rule, waiting to provide the Closing Disclosure until close to the time of consummation decreases, to some extent, the likelihood of a timing issue arising with respect to resetting tolerances with corrected Closing Disclosures). Accordingly, the Bureau requested comment on the extent to which creditors are providing Closing Disclosures to consumers so that they are received substantially before the required three business days prior to consummation with terms and costs that are nearly certain to be revised. The Bureau requested comment on the number of business days before consummation consumers are receiving the Closing Disclosure and whether creditors are issuing corrected Closing Disclosures pursuant to § 1026.19(f)(2). In addition, the Bureau requested comment on the extent to which creditors might change their practices regarding provision of the Closing Disclosure if the proposal to remove the four-business day limit is adopted. The Bureau also requested comment on potential harms to consumers where creditors provide Closing Disclosures to consumers so that they are received more than the required three business days prior to consummation with terms and costs that are nearly certain to be revised. The Bureau additionally requested comment on whether it should consider adopting measures to prevent such harms in a future rulemaking. The Bureau also requested comment on other potential consequences that might result from removing the four-business day limit that applies to resetting tolerances with a Closing Disclosure. For example, compared to current rules, the proposed changes could allow creditors to pass more costs on to consumers. The Bureau solicited comment on whether the circumstances for resetting tolerances in § 1026.19(e)(3)(iv) provide sufficient protection against potential consumer harm or whether additional limitations are appropriate for resetting tolerances 24 after the issuance of a Closing Disclosure. For example, the Bureau requested comment on whether it would be appropriate to allow creditors to reset tolerances with a corrected Closing Disclosure in circumstances that are more limited than those described in § 1026.19(e)(3)(iv) (for example, only when the increased costs result from a consumer request or unforeseeable event, such as a natural disaster). The Bureau also requested comment on whether the rule should be more restrictive with respect to resetting tolerances with a corrected Closing Disclosure for certain third-party costs (such as appraisal fees) and creditor fees (such as interest rate lock extension fees) and the types of costs and fees that might be subject to any more restrictive rules. The Bureau also requested comment on whether removing the four-business day limit might result in confusion or information overload to the consumer as a result of receiving more corrected Closing Disclosures. The Bureau requested comment on additional consumer protections that might be appropriate to promote the purposes of the disclosures or prevent circumvention or evasion and additional potential consumer harms the Bureau had not identified. Comments The Bureau received 43 unique comments from industry commenters (including trade associations, creditors, and industry representatives), a consumer advocate group, and others. Most industry commenters supported the proposal to remove the four-business day limit. These commenters generally stated that the four-business day limit arbitrarily leads to situations where creditors must absorb costs that could otherwise be passed to consumers through resetting tolerances, and that those costs are passed to all consumers in the form of an increased cost of credit. Industry commenters also noted legal and compliance risks associated with the uncertainty around current rules, and stated that this uncertainty has had an adverse impact on the cost of credit. These commenters supported the proposal because it would address these issues 25 by expressly permitting creditors to 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. Other industry commenters, while generally supportive of the proposal, expressed concerns about unintended consequences and some suggested additional parameters or guidance around the timing or accuracy rules that apply to Closing Disclosures. These comments are discussed more fully below. Only one consumer advocate group commented on the proposal. That commenter urged the Bureau not to adopt the proposal, primarily citing concerns about consumer confusion and information overload. That commenter suggested that the proposal would lead to consumers receiving an increased number of disclosures, which the commenter believes would undermine the purpose of the Closing Disclosure and overwhelm consumers. The consumer advocate group commenter also stated that the proposal would remove the disincentive from providing Closing Disclosures to consumers very early, which the commenter believes would undermine the distinction between the Loan Estimate and the Closing Disclosure. Instead of finalizing the proposal, that commenter urged the Bureau to amend the rule to provide that a Closing Disclosure can only be given three business days before consummation, with redisclosure permitted thereafter only under the circumstances in § 1026.19(f)(2)(i) and (ii). One individual commenter expressed opposition to the proposal and urged the Bureau to increase the four-business day limit to a seven-business day limit, rather than eliminating it altogether, so as to retain a deterrent against early Closing Disclosures. An industry commenter opposed such an approach, stating that simply extending the four-business day limit to a larger number of days would not fully address current issues. 26 Numerous commenters responded to the Bureau’s specific requests for comment on issues related to the four-business day limit and the potential effects of the proposal. These comments are discussed below. The Effect of the Four-Business Day Limit As noted above, the proposal requested information on the extent to which the fourbusiness day limit has created situations where creditors cannot provide either a revised Loan Estimate or a corrected Closing Disclosure to reset tolerances. The proposal requested information on the frequency and the cause of such occurrences and on the average costs and the nature of such costs associated with such occurrences. Industry commenters generally stated that the four-business day limit has created compliance problems and imposed costs on creditors. One industry trade association commenter noted that a large creditor had reported tolerance cures of $60,000 in one month attributable to issues with the four-business day limit. That same commenter noted that a mid-sized creditor had reported that between 13 and 37 percent of its tolerance cures each month during a fivemonth period were attributable to the four-business day limit. The commenter also noted that absorbing such costs is more difficult for small creditors. Another commenter estimated costs incurred by creditors for some common events associated with the four-business day limit: $825 per affected loan for lock extension fees and a minimum of $150 per affected loan for property inspections due to weather events. Other commenters provided specific examples of problems created by the four-business day limit. For example, one industry commenter described a delay in the final construction of a home and a corresponding rate lock extension fee being incurred after the initial Closing Disclosure had been sent to the consumer six days before the originally scheduled consummation 27 date. That commenter noted another example of additional survey costs incurred due to a newly filed property lien during the six days before consummation. In both instances, the creditor absorbed the increased costs because of the four-business day limit. Another industry commenter provided other examples, including another instance of fees that were incurred due to issues discovered during a title search close to the consummation date. An industry trade association commenter noted that its member banks did not report the frequent need to reset tolerances in close proximity to consummation, but said that its members reported isolated situations of absorbing costs from valid changed circumstances, denying requests for changes to loan terms, or starting the loan process over rather than accommodating the change. Another industry commenter stated that it typically works with the same title companies and other service providers and does not price its loans to absorb costs associated with the four-business day limit. That commenter has not denied applications because of the inability to reset tolerances, but stated that it has heard reports of such occurrences at other creditors from potential customers, including that some consumers have lost home purchase contracts where applications are denied late in the process. Another industry commenter stated that it believes most lenders absorb the additional costs associated with the four-business day limit, rather than denying applications, due to concerns about customer service and the risk of delay. While not citing specific instances of problems with the four-business day limit, numerous other industry commenters stated that costs will frequently change after a Closing Disclosure has been provided to the consumer for reasons outside of the creditor’s control, or due to consumer requests, even if the initial Closing Disclosure is provided close to the anticipated time of consummation. Rate lock extension fees were the fee type most frequently cited as being 28 associated with such cost changes. Several industry commenters also noted that consumers may request changes to interest rates and lender credits or points after the initial Closing Disclosure has been provided to the consumer. Another commenter noted that the four-business day limit is 29 Bureau’s intent that the Closing Disclosure act as a statement of final loan terms and closing costs. One industry commenter stated that it would be possible for a creditor to set up a process that would allow it to issue a Closing Disclosure earlier, while still containing accurate loan terms. That commenter suggested holding creditors responsible for having adequate policies and procedures to ensure that the disclosure is representative of the loan terms and actual costs known at the time of delivery. Some commenters, including both industry commenters and the consumer advocate group commenter, expressed concern that the proposal could incentivize creditors to provide Closing Disclosures earlier in the process. One industry commenter stated that creditors who do provide Closing Disclosures very early may be at a competitive advantage to those that do not. Another industry commenter stated a concern that some creditors might issue Closing Disclosures very early to appear more efficient than their competitors. Another industry commenter indicated that some creditors issue Closing Disclosures very early to provide more flexibility with scheduling closing, and noted that the four-business day limit provides a disincentive against the practice. As discussed below, some commenters who stated that the proposal could incentivize creditors to provide Closing Disclosures earlier also expressed concern that such a practice could have a detrimental effect on consumer understanding of the transaction. One industry commenter stated that it currently provides the Closing Disclosure three business days before consummation, but noted that it would likely provide the first Closing Disclosure a week earlier if the proposal is finalized. This commenter asserted that such a practice would give consumers additional time to review the Closing Disclosure and ask questions. Some commenters noted that they provide Closing Disclosures close to the time of 30 consummation and did not express that their practices would change. Other industry commenters generally stated that concerns that removing the four-business day limit would incentivize creditors to provide Closing Disclosures early are unfounded because early provision of the Closing Disclosure would be difficult to accomplish while meeting the requirements to act in good faith and exercise due diligence, and would create additional work for creditors and cause confusion for consumers. One industry trade association commenter noted that some of its member banks had expressed that providing Closing Disclosures early does not provide any advantage, because there is a high likelihood that the disclosure will undergo revisions. Closing Disclosure Timing and Consumer Understanding The Bureau requested comment on potential harms to consumers when creditors provide Closing Disclosures so that they are received more than the required three business days prior to consummation with terms and costs that are nearly certain to be revised, including potential confusion or information overload to the consumer as a result of receiving more corrected Closing Disclosures. The Bureau also requested comment on whether it should consider adopting measures to prevent such harms in a future rulemaking. Some commenters stated that the proposal could result in consumer confusion because it would remove the current disincentive to providing Closing Disclosures well before the required three business days prior to consummation, which they assert would result in earlier, and therefore more frequent, Closing Disclosures. For example, the consumer advocate group commenter expressed concern that the proposal would encourage creditors to provide Closing Disclosures very early in the lending process, which would result in more Closing Disclosures and be confusing for consumers. That commenter explained that creditors are permitted to issue multiple Loan Estimates, including Loan Estimates that do not reset tolerances. The commenter 31 expressed concern that the proposal could increase consumer confusion by encouraging multiple Closing Disclosures, and that consumers will not know which versions of the disclosures to compare. The consumer advocate group commenter also stated that consumers may become desensitized to the need to read disclosures carefully if they receive frequent Closing Disclosures. The commenter stated that increases in costs may eventually exceed what the consumer is willing to pay, which would cause them to shop with other lenders. However, if consumers are desensitized to changes, the commenter argued that consumers will be less likely to withdraw from the transaction. The consumer advocate group commenter further stated that the proposal would encourage creditors to provide Closing Disclosures that are not intended to reset tolerances, which the commenter asserted will be confusing for consumers. Several industry commenters also stated that the proposal could potentially increase consumer confusion by incentivizing earlier, and therefore more frequent, Closing Disclosures. Several commenters, including an industry trade association commenter, similarly stated that too many disclosure updates could work against consumer understanding, because consumers might ignore the disclosures and would not know which ones to use for comparison purposes. An industry commenter stated that consumers would be confused when receiving a Closing Disclosure very early and that consumers could be confused by a Closing Disclosure that purports to be a statement of final loan terms and closing costs, but is only an estimate of costs. That commenter noted that not all changes to the loan will require creditors to reset tolerances and that consumers who receive Closing Disclosures very early may not receive corrected Closing Disclosures until consummation if there are no changes that occur that would cause the creditor to reset tolerances (or one of the triggering events in § 1026.19(f)(2)(ii) occurs, which would require a new disclosure and three-day waiting period). The commenter stated that this 32 would be contrary to the purpose of the requirement to receive the Closing Disclosure three business days before consummation. Other commenters stated that the proposal would not create consumer confusion. Some industry commenters stated that the proposal would not diminish consumer understanding because creditors would remain able to reset tolerances only as permitted under § 1026.19(e)(3)(iv) and that there would not be a large increase in the number of Closing Disclosures. One industry commenter stated that consumers should not experience confusion or information overload, as it would be no different from consumers receiving revised Loan Estimates. That commenter also stated that it expects lenders to communicate with consumers to address any confusion. Another industry commenter similarly suggested that consumers might benefit from earlier Closing Disclosures and the creditor’s flexibility to issue corrected Closing Disclosures because it would facilitate a more transparent process. Some industry commenters asserted that consumers could benefit from receiving Closing Disclosures earlier in the process because they would have additional time to review the information that does not appear on the Loan Estimate. With respect to additional protections to avoid potential consumer harms associated with removing the four-business day limit, several commenters who supported the proposal also suggested that the Bureau address Closing Disclosure timing or accuracy rules, because of concerns about potential effects of the proposed rule or to address uncertainty about current rules. With respect to timing, an industry commenter requested clarification as to whether creditors can reset tolerances using a Closing Disclosure after issuing an initial Loan Estimate but without ever issuing any revised Loan Estimate. To maintain the disincentive against providing Closing Disclosures very early, an individual commenter suggested that the Bureau 33 expand the window of time prior to consummation during which a creditor can reset tolerances with a Closing Disclosure from four business days to seven business days. Another commenter noted that merely expanding that time window by a limited number of days would only partially address the problems discussed in the proposal, and did not favor that approach. The consumer advocate group commenter suggested that the rule should provide that the Closing Disclosure can only be given no more than three business days before consummation. An anonymous commenter advised that, in addition to removing the four-business day limit for resetting tolerances with a Closing Disclosure, the Bureau should also adopt a new prohibition on providing Closing Disclosures unless the creditor reasonably anticipates that the transaction will close within ten business days. An industry commenter stated that the Bureau’s supervision process could emphasize scrutiny of potentially unnecessary iterations of corrected Closing Disclosures. The commenter suggested that, as an alternative, the Bureau create a new timing requirement for resetting tolerances with a corrected Closing Disclosure, whereby any and all changes to the Closing Disclosure for resetting tolerances would be made at only one specific point in time during a transaction. Meanwhile, several commenters supported removing the timing restriction on resetting tolerances with a Closing Disclosure and stated that the Bureau should not place new timing limitations on providing Closing Disclosures. One commenter noted that the rule’s current accuracy standard is already a deterrent against providing very early Closing Disclosures because it requires that the creditor, acting in good faith, exercise due diligence in obtaining the information. With respect to Closing Disclosure accuracy, one industry commenter stated that, in addition to removing the time limit for resetting tolerances with a Closing Disclosure, the Bureau should either apply a stricter accuracy standard to the Closing Disclosure or clarify the current

 

Source: https://files.consumerfinance.gov/f/documents/cfpb_tila-respa_final-rule_amendments-to-federal-mortgage-disclosure-requirements.pdf

Web Statistics