Banks Win Disclosure Battle by Default as CFPB Blunders

WASHINGTON — A technical error made by the Consumer Financial Protection Bureau has become a saving grace for lenders who had pushed, begged and pleaded for more time to comply with a new mortgage disclosure rule.

The agency said this week that it would propose extending the deadline by two months, largely due to an "administrative error" in which it forgot to formally notify Congress 60 days before the rule was set to take effect, a requirement under the Congressional Review Act.

The proposed delay is short of the five-month one sought by industry groups and nearly 300 members of Congress, but lenders were relieved nevertheless, feeling fortunate they got any reprieve at all after the CFPB rebuffed calls for a formal grace period just two weeks ago.

"Two months will allow us to get more tests under the belt and flesh out a few more questions. Plus, the fall season tends to be calmer" in terms of home sales, said Brian Koss, executive vice president of Mortgage Network. "There were a lot of unanswered questions" particularly on "programming the systems and implementation for all the loans and among all the state laws, which is complicated because there are a lot of variables involved."

The CFPB gave the industry two years to comply with its rule, which integrates the disclosure requirements of the Truth in Lending and the Real Estate Settlement Procedures acts into a single form.

As the Aug. 1 deadline was closing in, however, trade groups from the mortgage and real estate industries ramped up their efforts to push for more time, arguing that their vendors were not ready, delaying their ability to train staff and run final tests on systems.

The CFPB consistently refused to grant more time, but said in June that it would be "sensitive" to those that make a "good-faith effort" to be in compliance with the rule. That response won a mixed reaction from the industry, with some viewing it as a win while others pressed for a formal grace period or at least a clarification on what a "good-faith effort" meant.

That effort appeared unlikely to prevail, however, until the CFPB abruptly changed course after uncovering their error.

"The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015. We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks," CFPB Director Richard Cordray said in a press release. "We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time."

Most industry trade groups immediately viewed the delay as a win, even though months of their efforts were trumped by a technical error.

"This extension will help protect consumers from disruptions during a traditionally busy period for home purchases," said Frank Keating, president and chief executive of the American Bankers Association, in an emailed statement. "It will also help to assure new loan origination systems and compliance software under development by lenders and the vendors on whom they rely will be adequately installed and debugged, and staff training completed, before the effective date."

Richard Hunt, president and chief executive of the Consumer Bankers Association, said that "though banks have been working with their vendors to ensure a smooth integration, this additional time will help consumers and bankers in their ongoing partnership to achieve a more streamlined consumer experience in mortgage origination."

Still, other industry groups added that the CFPB could do more.

"Consumers would be helped even more if the CFPB also announced a specific hold-harmless period for industry to understand how the forms will work in real life transactions," said Michelle Korsmo, the chief executive of the American Land Title Association, in an emailed statement. "Under TRID, some mortgage lenders and settlement service providers may initiate additional risk-management tactics that could slow the closing process for homebuyers."

Still, Korsmo gave the agency credit for delaying the effective date.

"The bureau could have changed the effective dates for a shorter period of time. Clearly, the Bureau listened to the concerns that industry has for consumers," Korsmo said.

Regardless of how much extra time is given to the industry, some said it does not resolve industry fears of encountering compliance errors and potential lawsuits from consumers — factors that no one will know until the rule is in place and kinks are worked out.

"I do think the new forms are good. It's just the heavy handedness and the fear factor of how it will be laid out, which makes people so on edge, so they interpret it to the worst degree," Koss said. "On the ground level, many people do not know how many hits we take and costs we eat every day for the consumer."

To be sure, many in the industry said they were ready for TRID on Aug. 1 regardless of the October extension.

"On the front side, we're super excited about it" because "it's a much better, well-constructed document for the consumer," said Faramarz Moeen-Ziai, vice president of Commerce Home Mortgage. "On the operational side, any extra time helps but we are ready to go on August 1."

If the proposed delay is finalized as expected, it also means those who are ready now will have to sit on the new documents and systems for two more months.

"You can't run out ahead of time before the effective date and give consumers the new TRID disclosures partly because the consumer won't know how to compare costs easily when shopping if some lenders are still using the old documents," said Colgate Selden, a counsel at Alston & Bird's financial services and products group who was previously on the CFPB's TRID rulemaking team. "That was why the CFPB would not let some market participants come into compliance later because they wanted everyone to be in conformity on the same date which helps keep the marketplace stable from a pricing transparency perspective."

The CFPB plans to file the proposal in the Federal Register soon, which will open it to public comment.

The delay "at least gives lenders more breathing room and time to get everything in order," Selden said. "But most everyone is still moving full speed ahead as planned."