- What’s the CFPB?
- What’s the ability-to-pay rule?
- What happens when that rule is violated?
- What does it have to do with the new Closing Disclosure that will replace HUD-1?
Real estate professionals know the HUD-1 well. “Please send me an updated HUD-1” — the term rolls easily off the tongue with no hesitation.
As well it should. It’s been the law of the land since 1974 when the Department of Housing and Urban Development mandated the HUD-1 settlement statement be used in federally backed residential mortgage transactions. Any real estate pro worth his or her salt has looked at hundreds, perhaps thousands of HUD-1s. But as of Aug. 1, 2015, the HUD-1 is out, and the Closing Disclosure is in.
The new Closing Disclosure form is now required, under mandate of the Consumer Financial Protection Bureau (CFPB), and it’s replacing the HUD-1 in most residential mortgage transactions.
The CFPB is a relative newcomer to the real estate landscape, created under the Dodd-Frank Act, as an independent agency housed under the Board of Governors of the Federal Reserve.
The CFPB began operations in 2011 and immediately became the big dog in mortgage finance supervision. By statute, the CFPB has overarching regulatory control of all existing federal consumer protection laws. That includes RESPA, TILA, HMDA, HOEPA and ILSA, and supervisory authority for consumer protection matters with the FDIC, HUD and the OCC, among others.
Why the need for such dramatic regulatory retooling? As explained in a legislative dissertation on Dodd-Frank and the mortgage crisis, “During the last decade, the [mortgage] market went through an unprecedented cycle of expansion and contraction … fueled in part by the securitization of mortgages and … sophisticated derivative products. So many other parts of the American financial system were drawn into mortgage-related activities that when the bubble collapsed in 2008, it sparked the most severe recession in the United States since the Great Depression.”
Congress enacted Dodd-Frank behind a belief that business practices within the mortgage and investment markets exacerbated financial volatility and inflated the housing bubble.
The CFPB’s self-stated mission is: “[To help] consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” But the residential mortgage sector is only a part of the bureau’s bailiwick. The CFPB opened its doors in July 2011 and has already grown to employ over 1,600 people with an operating budget of over $500 million.
Under Dodd-Frank, sweeping powers for consumer financial protection have been aggregated to the CFPB, transferred from seven existing federal agencies. These powers include “all authority to prescribe rules, issue orders or guidelines pursuant to any federal consumer financial law.” In addition to mortgage financing, the CFPB supervises consumer credit cards, student loans, banks, credit unions and loan servicing companies.
It’s no surprise the CFPB’s primary focus is consumer protection and that its policies and priorities are clearly consumer-oriented. But does the CFPB tip the scales too far, in favor of the consumer’s interests at the expense of the lenders? Case in point, the CFPB’s rule regarding a borrower’s ability to repay is one of the most important changes affecting the mortgage industry.
Under the ability-to-repay rule, lenders are required to document eight specific underwriting criteria. Failure to adequately satisfy the requirement exposes the lender to enforcement actions and penalties.
Violations of the ability-to-repay (ATR) rule are enforceable by the CFBP or by aggrieved borrowers. The bureau can bring civil actions in court and administrative enforcement proceedings to obtain remedies such as civil penalties and cease-and-desist orders. Borrowers can bring private actions against the lender seeking actual and statutory damages, court costs and attorney fees.
The specter of a greater threat to lenders and investors looms within another provision of the ATR rule. A borrower facing foreclosure can now mount a defense claiming violation of the ability-to-repay rule. If successful, the borrower-plaintiff could recoup three years’ finance charges plus loan costs, as well as actual damages, attorney fees and court costs. It is not apparent within the rule how would impact foreclosure proceedings.
In the years ahead this provision might prove controversial as borrowers in default litigate ATR claims and forestall foreclosure actions while loan servicers scurry to find old origination files to fend off these claims.
ATR actions could result in a boom-town business both for consumer advocacy attorneys and lenders’ defense counsel alike while in the meantime defaulted mortgages sit on the books and mortgaged housing stock remains in limbo.
Welcome to the brave new age of consumerism. Gone are the days of caveat emptor. It is now the lenders’ burden to demonstrate both the borrowers’ creditworthiness and their ability to manage a debt load, according to government prescribed standards.
Does the rule go too far in assigning responsibility to the lender while downplaying the borrowers’ accountability and self-reliance? There’s a whiff of the parent-child relationship in the CFPB-consumer paradigm stipulated under Dodd-Frank.
This is an important point to remember when viewing the changes that affect a real estate closing. It’s not about the real estate anymore or the seller — or even the deal itself. The CFPB’s focus is on the consumer, and this is the backdrop behind the roll out of the new Closing Disclosure requirement.
Craig Roberts is the president of Capstone Settlement Inc. You can find him on LinkedIn.