We thought it would be helpful to summarize the Housing Assistance Lending amendment in the recently published CFPB’s ‘Know Before You Owe’ mortgage disclosure rule. Comergence has established relationships with housing authorities so we understand the nuances of this business and it’s important for this community to understand how we can significantly reduce HFA exposure to compliance issues, fines and enforcement exposure.
Here are the key take away points.
The Consumer Financial Protection Bureau (CFPB) released proposed amendments to the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosures (TRID), also referred to as the “Know Before You Owe” (KBYO) mortgage disclosure rule, on the last business day of July. The CFPB noted that they were hesitant to make major changes “that would involve substantial reprogramming of systems so soon after the October 2015 effective date.” The recent proposal, however, is fortuitous for Housing Finance Agencies (HFAs) as proposed amendments to the rule would ensure housing assistance program eligibility for reduced disclosure requirements under partial exemption. The CFPB hopes this will entice more lenders and third party originators to form partnerships with HFAs. The partial exemption also provides guidance on recording fee and transfer tax charges that will protect HFAs from losing eligibility for the exemption, as well as excluding these charges from the exemption’s cost limitations.
Partial Exemption from Disclosure
An unforeseen impact of the TRID/KBYO rule has been an impaired ability for HFAs and their partners to comply with partial exemption criteria. The proposed revisions are considered a safe and compliant change since the partial exemption basically only applies to housing finance loans, originated by HFAs and nonprofits, that offer non-interest bearing subordinate liens as a means of providing down payment assistance to low-to-moderate income consumers. Adding to the overall justification for these provisions, the CFPB reflects on its reference to HFA’s as “quasi-governmental entities, chartered by either a state or a municipality, that engage in diverse housing financing activities for the promotion of affordable housing,” to include subordinate financing and down payment assistance. Lending under this umbrella includes determining consumer repayment capacity and providing homeownership counseling. As a part of the proposed rule amendment, the CFPB specifically calls out their understanding of housing finance loan structures; for example, these loans are low interest or non-interest bearing, with deferred or contingent repayment structures. They are also typically first liens of relatively small loan amounts, between $2,500 to $10,000.
Difficulty Finding Lending Partners
HFAs have made a point of connecting with CFPB to establish their concerns over the impact of TRID/KBYO. One of the most trying difficulties is the ability to find lending partners to assist in making housing finance loans post implementation. Many loan origination systems (LOSs) and other vendor solutions have not been set up to properly support loans offered by HFAs. In many scenarios, lenders are unable to generate RESPA disclosures forcing HFAs to manually prepare these disclosures, which is extremely error prone. Additionally, many housing finance loans fail the 1-percent fee threshold and are not able to close due to non-compliance. This occurs because the loan balances are so low; 1-percent of $2,500 is only $25. This issue is most commonly seen with recording fees and transfer taxes, which are not even under the direct control of HFAs.
What Needs to Change?
The CFPB has therefore proposed two amendments that will expand the current partial exemption for HFAs. The first being to make certain HFAs maintain eligibility under the partial exemption. The goal is to ensure that partial exemption supports housing finance lending as intended, allowing the provision of streamlined disclosures on low-cost, non-interest bearing subordinate lien transactions. Disclosures that fall under this classification are simpler to generate and calculations are more straight forward, with minimal finance charges as established under partial exemption regulation. This reduces the procedural burden tied to generating disclosures, therefore making it easier for HFAs and their third party originators to make loans available to low-to-moderate income consumers. The second is to exclude recording and transfer taxes from the 1-percent threshold. Smaller loan amounts, typically originated by HFAs, make it significantly more difficult to meet the 1-percent threshold, recording fees and transfer taxes often cause the total fees to exceed this limit. The CFPB believes the 1-percent threshold is overly restrictive given this scenario. Subsequently, this issue can make it difficult for HFAs to meet the partial exemption criteria.
Amendment Call to Action
The amendments to TRID/KBYO disclosure requirements have been issued by the CFPB for commentary. In effort to ensure that all of the proposed changes are appropriately addressed, the industry is prompted to provide their comments on the following areas related to loans originated by HFAs and their partners:
- Should the scope of the partial exemption be modified by excluding recording fees and transfer tax?
- Should the 1-percent continue to be the threshold for costs?
- What are the potential areas of abuse that would be more relevant under loan eligibility requirements for 1-pecent assistance?
- Should there be expanded alternative approaches on loans originated under the partial exemption?
- Should the partial exemption have an explicit limitation to HFAs and third party creditors working with HFAs?
Trusted Business Partners
The clarification of partial exemption, streamlined disclosures and 1-percent fee threshold requirements should give HFAs an opportunity to expand their third party relationships and grow housing finance lending as laid out by the CFPB. Proper adherence to these proposed amendments will be crucial. Given the regulatory climate and continued focus on examination results, having trusted, knowledgeable partners when originating housing finance loans is more important than ever. Historically it has been challenging for HFAs to manage their third party partners, to include vetting corporate and loan officer licensing, as well as renewals. Administration and oversight of these processes is traditionally a manual effort that is difficult to maintain and ties up valuable resources. When it’s time to evaluate partners, you can be sure that Comergence brings knowledge, safety and soundness, and competitive strength to this valuable consumer lending channel.
Contact Comergence at firstname.lastname@example.org for more information on our due diligence services.