(This is the fourth in a multi-part MortgageOrb series focused on the impact that the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosure rules are having on the mortgage industry thus far. To read Part 1, click here. To read Part 2, click here. To read Part 3, click here.)
More than four months after implementation, the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules continue to frustrate mortgage lenders and their vendor partners. Not only does recent research show that the new disclosures are boosting origination costs for lenders and lengthening the time to close by an average of three to five business days, but serious problems also remain with regard to how the disclosures work with more complex loan products – in particular, construction-to-permanent loans.
Because construction-to-permanent loans are, in essence, two separate loan products packaged into a single transaction, it has been challenging for lenders to use the new disclosures with these loans. Howard Sellinger, executive vice president and chief information officer of HomeTrust Bank, which does a significant amount of construction-to-permanent business each year, says the problem with TRID is that it “only works with plain vanilla loans.” And, without further guidance from the CFPB, lenders dealing in these loans will continue to face challenges meeting compliance, he says.
“Logically, a construction loan, which is short term in nature – six to 12 months – is going to be structured much differently than a 30-year, fixed-rate mortgage,” Sellinger explains. “And, when you have two loans that have dissimilar terms and you try to apply the new disclosures, it just plain doesn’t work. There aren’t even enough fields in the form to … describe it … and when you merge them together, you come out with something that doesn’t resemble either transaction.”
For now, lenders offering construction-to-permanent loans that wish to keep them under a single set of disclosures have, for the most part, been reconciling the differences in the data fields as best as possible – but the forms simply cannot come out right.
“We’re really struggling with this – and we think the CFPB really missed the boat on that type of lending,” Sellinger says. “We’ve even changed our products; before, we would originate some fixed-rate loans, which we would get us into the construction … we would do a modification agreement, and then we would sell [the loan]. But, those investors are no longer buying those loans from us. So now, the only [type of construction-to-permanent loan] customers can get is one that is truly adjustable – and if the direction of interest rates is up, well, it’s just unfortunate for the consumer.”
In a bulletin released in mid-January, the CFPB says lenders can continue to have a choice as to whether they disclose construction-to-permanent loans as one loan or two loans.
“Section 1026.17(c)(6)(ii) of Regulation Z has long provided that when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction for purposes of required disclosures,” the CFPB’s bulletin states. “The creditor can use either one combined disclosure for both the construction financing and the permanent financing or a separate set of disclosures for the two phases. This rule applied before the Know Before You Owe mortgage disclosure rule was issued, and it continues to apply, including for the loan estimate and closing disclosure.”
Most lenders agree, however, that the CFPB’s recent clarification as to how TRID can be applied to construction-to-permanent loans fell way short of expectations.
“The CFPB’s additional guidance to construction lending was extremely minor and did not address the most significant issues,” Sellinger says. “We are in the process of drafting a letter which clearly identifies these issues and includes our proposal for dealing with them.”
“In all honesty, I’m not sure the CFPB fully understands the difficulties associated with construction disclosure under the regulation as currently written,” he adds.
The problem with using separate sets of disclosures, Sellinger says, is that most loan origination systems (LOS) cannot accommodate that.
“I agree with that approach, but the only way to do that in my mortgage lending system is to create shadow files – I would literally have to create three files: one loan as construction only, one as permanent only and a third as the true construction-to-permanent loan,” he explains. “But, if you think about it, it is still a problem because that construction-to-permanent loan is the one that would have to be used to drive all the documents. There’s no field [in the LOS] for me to check that says ‘Disclose this separately.’ I’d have to force that to happen. So, what we’re really waiting for is that final CFPB guidance regarding construction-to-permanent lending. It’s very possible that we will stop originating construction-to-permanent transactions – and literally do two closings so that the first loan is a construction loan … but that’s only going to make it more expensive for the consumer.”
Sellinger says the ideal solution – and one that he has suggested to the CFPB – is to “create an addendum to the loan estimate and the closing disclosure that just addresses the construction period.”
“If I do a 30-year construction-to-permanent loan and the perm portion is a 5/1 adjustable-rate mortgage (ARM), that 5/1 ARM looks just the same as a purchase 5/1 ARM. So, that part of the disclosure should be the same,” he says. “What is unique is the construction period – and the construction terms can be completely different from the permanent terms. So, [my suggestion is to] simply create a page that informs the borrower of what they need to know about the construction loan. The CFPB does not need to duplicate all of the disclosures that relate to the closing, to the fees, because it really is going to be one transaction. All the fees should be included in one disclosure.”
To that end, Sellinger and his colleagues and HomeUnion are in the process of drafting a letter to the CFPB describing “the supplemental page we propose.” The firm is also working on “samples of what the loan estimate [disclosure] would look like in the typical construction-permanent transaction.”
As per the January bulletin, the CFPB has added a commentary provision to Appendix D, which provides a special procedure to estimate and disclose the terms of a construction loan with multiple advances. The commentary provision, however, does not address other elements of the projected payments sections, and this has been a major problem for lenders offering construction-to-permanent loans. Additionally, the CFPB does not clarify in the fact sheet that Appendix D applies only when the actual timing or amount of the multiple advances are not known.
“Appendix D includes guidance for the calculation of the interest portion of the finance charge, as well as guidance regarding disclosures,” the CFPB’s bulletin states, adding that the commentary section “demonstrates how the projected payments table may be disclosed when the construction phase and permanent phase are disclosed as either separate transactions or as a single transaction.”
But, as Sellinger points out, because the commentary provision is not applied to the other sections of the loan estimate and the closing disclosure, “there is a question as to the extent to which Appendix D applies.”
“One of the things Appendix D says is that [the lender] should disclose that, for example, one half of the entire loan amount is disbursed for the construction period,” he explains. “Now, let’s say I make that computation and that’s the amount I show as principle and interest … Now, the description [in the disclosure] that is associated with that is supposed to tell the borrower whether or not that amount can increase. Well, if I assume that no more than 50% is disbursed during the construction period, then no, it cannot increase. But, I know that at some point during the construction period, it will be fully disbursed – then, in that case, yes, the amount of the payment will increase. But, as a lender, I can’t be so sure whether the disclosure, from a technical standpoint, should have me show the borrower that, ‘No, it’s not going to increase.’
“The [CFPB is also] ruling that if I disclose it as two separate transactions, I’m supposed to show the construction loan as having a balloon payment,” he adds. “But, in a construction-to-permanent loan, a balloon payment cannot exist – it automatically rolls over to permanent financing. So, what is the benefit of telling the customer that there is a balloon payment? There are just so many conflicts with this regulation.”
The bureau says in its bulletin that it is “considering additional guidance to facilitate compliance with the Know Before You Owe mortgage disclosure rule, including possibly a webinar on construction loan disclosures.”
Sellinger says TRID is likely to present ongoing problems for lenders dealing in all loan types, purchases and refinances. The most important question lenders should be asking themselves, he says, is, “How many loans do we think typically get closed in the last four days of a rate lock period?
“Because, those last four days have now become pretty critical,” he says, adding that if a lender misses the rate lock period due to the closing having been delayed by TRID, then it will have no choice but to either “pay a fee to extend it or re-lock it at a higher rate.”
He says this might not be much of an issue right now because volume is low, but as lenders move into busier periods and volume increases, there will likely be more instances in which lenders miss the lock period.