Top-Cited Federal Reserve System Compliance Violations in 2023 Under the Truth in Lending Act for the TILA RESPA Integrated Disclosure
Before the Dodd–Frank Act was enacted in 2010, consumers applying for most closed-end, residential mortgage loans received disclosures under both the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), of loan and settlement costs, respectively. But the disclosures overlapped to a degree and risked overloading the consumer with pages of complex information. To address this issue, the Dodd–Frank Act directed the Consumer Financial Protection Bureau (CFPB) to combine the required TILA and RESPA disclosures into a single disclosure, commonly known as the TILA RESPA integrated disclosure (TRID),1 and to conduct consumer testing of the disclosure to improve comprehension.2 The CFPB’s final rule implementing the TRID, which became effective in October 2015, requires creditors to provide a Loan Estimate within three business days after receiving an application3 and a Closing Disclosure at least three business days prior to consummation.4
A review of data from Federal Reserve compliance examinations showed that violations of the Closing Disclosure requirements as set out in Regulation Z, TILA’s implementing regulation, were among the top-cited violations in 2023. Those violations of Regulation Z involved understating the finance charge for discounted, adjustable rate mortgages (ARMs) and incorrectly listing the names of the settlement service providers.
The format for Consumer Compliance Outlook common violation articles is to first summarize the regulatory requirements and then discuss the violations, root causes, and sound practices that can help prevent violations.
REGULATORY REQUIREMENTS
Disclosure of finance charge: 12 C.F.R. §1026.38(o)(2)
Requires disclosure of the “Finance Charge,” using that term and expressed as a dollar amount, and the following statement: “The dollar amount the loan will cost you.” The disclosed finance charge and other disclosures affected by it, including the amount financed and the annual percentage rate (APR), will be treated as accurate if the finance charge: (i) is understated by no more than $100; or (ii) is greater than the amount required to be disclosed.
UNDERSTATED FINANCE CHARGE FOR ARM LOANS
Examiners observed the disclosure of understated finance charges for discounted ARM loans in excess of the finance charge $100 tolerance. A discounted ARM loan provides the borrower with a lower interest rate for a period of time, after which a variable rate applies, typically based on an index and a margin. For these loans, the disclosures must reflect a composite APR based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation.5 Errors occurred because the fully indexed interest rate was not included in the finance charge determinations. The understated finance charge also affected the accuracy of the APR of some of the loans because the APR is calculated using the finance charge.6
The root causes included an issue with the software used to prepare the disclosures, modest weaknesses in training because staff was unaware of the proper calculation steps, and weaknesses in internal controls that failed to flag miscalculations in the loan software.
REGULATORY REQUIREMENTS
Disclosure of settlement services: 12 C.F.R. §1026.38(f)(2)
Requires disclosure of settlement services that a borrower did not shop for and provided by persons other than the creditor or a mortgage broker. These services must be itemized with their corresponding costs and the name of the person receiving final payment. A total of all itemized amounts designated borrower-paid at or before closing must also be disclosed. Examples of services that cannot be shopped for are: appraisal fee, appraisal management company fee, credit report fee, flood determination fee, government funding fee, homeowners association certification fee, lender’s attorney fee, and tax status research fee.
LISTING INCORRECT INFORMATION
Examiners also observed disclosures that inputted incorrect information into the field for third-party services the borrower cannot shop for. The root cause was loan processors making mistakes while manually inputting the data, reflecting inadequate training for inputting information and inadequate controls to detect the errors before providing the disclosures to the borrower.
The table lists compliance practices that examiners have observed and recommend to mitigate compliance risks.
TABLE: Sound Compliance Practices
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Training |
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Consumer Complaints |
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Controls |
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Monitoring |
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Policies and Procedures |
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CONCLUSION
This article discusses common violations and sound practices to mitigate risks related to the Closing Disclosure. This disclosure provides critical loan information to applicants to help them make informed decisions, so it is important that accurate information be provided. Violations noted here involving understated finance charges and APRs are particularly significant because the harm is material and may involve restitution. Specific issues and questions about TILA and Regulation Z requirements should be raised with your primary regulator.
ENDNOTES
1 12 U.S.C. §5532(f).
2 12 U.S.C. §5532(b)(3).
3 12 C.F.R. §1026.19(e)(1).
4 2 C.F.R. §1026.19(f)(1).
6 The APR is subject to a tolerance of one-eighth of one percentage point for loans whose monthly payments are generally uniform (“regular transaction”), while loans with nonuniform payments such as ARM loans (“irregular transaction”) are subject to a tolerance of one-quarter of one percentage point. 12 C.F.R. §1026.22(a)(2) and (3), respectively; Interagency Examination Procedures for the Truth in Lending Act at p. 41. Whether an understated finance charge affects the accuracy of the APR depends on the degree to which the finance charge is understated in excess of the $100 tolerance. A larger understatement is more likely to affect the APR’s accuracy. But note: If the finance charge for a mortgage loan is understated within the $100 tolerance, all other disclosures calculated using the finance charge, such as the APR and amount financed, are deemed accurate. 12 C.F.R. §1026.18(d)(1).