Rule Changes Effective in 2015 Affecting Seller Financing

Overview

The Consumer Financial Protection Bureau (CFPB), an independent federal agency, is responsible for protection of consumers involved with financial products and services including mortgages, credit cards and other consumer financial products.  The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, as a response to the financial crisis of 2007-2008.

Under the Truth in Lending Act (TILA) (Regulation Z) and the Real Estate Settlement Procedures Act (RESPA) (Regulation X), the CFPB is authorized to issue rules to protect consumers when applying for and closing on a mortgage loan.  The CFPB has finalized a rule known as the TILA-RESPA Rule establishing new integrated disclosure requirements and forms along with substantial compliance guidance.  This rule will take effect on August 1, 2015.  The TILA-RESPA Rule will apply to transactions for which the creditor or mortgage broker receives an application on or after that date.  This rule will affect transactions for most closed-end consumer credit transactions secured by real property.  It will not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property.  The rule also does not apply to persons or entities that make five or fewer mortgages per year as they are not considered “creditors”.

The purpose of the new mortgage forms required to replace current overlapping forms including terms and costs of mortgage loans is an effort to eliminate consumer confusion and help them make the decision that is best for them with no surprises at closing.

An understanding of compliance obligations under the TILA-RESPA Rule is essential for entities originating closed-end residential mortgage loans, settlement service providers, secondary market participants, software providers, and other companies that serve as business partners to creditors.

The TILA-RESPA rule combines four disclosures into two forms, a Loan Estimate, and a Closing Disclosure.

Loan Estimate Disclosure General Requirements

Generally, the creditor must use Form H-24 prescribed by the FCPB. This disclosure is defined as a good faith estimate of the credit costs and transaction terms for the transaction.  This new form is referred to as the Loan Estimate and integrates and replaces the current RESPA GFE and the initial TIL.  This form is required to be provided within three business days of receipt of the consumer’s loan application.

The Loan Estimate:

  1. Must contain a good faith estimate of credit costs and transaction terms.
  2. Must be in writing and contain information required by §1026.37 (Form H-24).
  3. Must satisfy delivery timing and method requirements.
  4. May only be revised or corrected when specific requirements are met.
  5. May be provided by either the creditor or the mortgage broker when the mortgage broker receives a consumer’s application.

 Specific Information Required on Form H-24

  1. General information, loan terms, projected payments, and costs at closing.
  2. Closing cost details.
  3. Additional information about the loan such as contact information, comparisons table, other considerations table, and signature statement for consumer to acknowledge receipt.

Closing Disclosure General Requirements

Generally, the creditor must use Form H-25 prescribed by the FCPB.  Creditors must provide a new final disclosure referred to as the Closing Disclosure for loans requiring a Loan Estimate that proceed to closing.  This new form combines the current HUD-1 and final TIL disclosures.  This disclosure must be received by the consumer no later than three business days before consummation of the loan.

The Closing Disclosure:

  1. Must contain the actual terms and costs of the transaction.
  2. Must be in writing and contain the information prescribed in § 1026.38 (Form H-25).
  3. Must be replaced by a corrected disclosure if the actual terms or costs of the transaction change prior to consummation of the loan
  4. Requires an additional three-day waiting period if a corrected disclosure is provided.

Specific Information Required on Form H-25

  1. General information, loan terms, projected payments, and costs at closing.
  2. Loan costs and other costs.
  3. Calculating cash to close, summaries of transactions, and alternatives for transactions without a seller.
  4. Additional information about this loan (Assumption, Security Interest, Escrow, etc.).
  5. Loan calculations, other disclosures and contact information.

It is advisable that creditors dealing with transactions for closed-end consumer credit transactions secured by real property become familiar with the compliance requirements for these new disclosures well before the effective date of August 1, 2015.  The CFPB link below contains many helpful resources including a Compliance Guide, Guide to Forms, Disclosure Timeline, Forms & Samples, Videos, and additional information to help you in dealing with the new TILA-RESPA requirements.

http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

Construction Insurance: Challenges Posed by the Texas Anti-Indemnity Act

Prior to the passage of the Texas Anti-Indemnity Act back in 2011, the parties most active in the state’s construction industry could still readily determine the degree of insurance coverage and indemnity they were securing regarding various projects. However, since that law went into effect on January 1, 2012, significant confusion over such issues has been introduced into the field of Texas construction law — and it’s unlikely to dissipate anytime soon.

Balancing Constitutional Rights Against Insurance Industry Concerns

Today, many in the Texas construction industry might argue that this law has had a chilling effect on their constitutional right to contract with others.  As one scholar has put it, referencing a long-standing legal principle cited in numerous U.S. Supreme Court cases, “Parties should be allowed to create contracts however they wish, as long as they do not violate the State’s police power or public policy.” Unfortunately, the Texas Anti-Indemnity Act “binds parties’ hands and prevents them from contracting as they wish.”

While many in the insurance industry pushed hard to pass this legislation, especially since the Act was designed to “protect insurance companies from exposure to liability for claims which they did not agree to underwrite” — major questions remain unanswered. One of the Act’s most glaring deficiencies is its failure to provide clear definitions of critical terms. These could have provided guidance to the courts that are now handling pending lawsuits. Many of these specific deficits are clearly pointed out in a well-researched 2014 article published in St. Mary’s Law Journal.

Types of Questions the Courts Must Now Specifically Address

  • Exactly which types of indemnity (risk-transferring) agreements are strictly forbidden under the Texas Anti-Indemnity Act? Jurists will soon be asking their sharpest law clerks to help them interpret Texas Insurance Code Section 151.101 where this vague statute is located. They will also need to spend considerable time reviewing Title 10 of the same code which addresses property and casualty insurance contracts – among many others;
  • Are most of the standard builder’s risk insurance policies common available now void? For many years, these policies have been among the first negotiated by most parties to construction projects since they help cover losses tied to the damages many new buildings incur while under construction;
  • Are policies which include a “duty to defend” now void under the Act? Strong arguments can be made that this is a very distinct provision apart from the broader duty to indemnify;
  • How can insurance companies legally offset possible losses caused by the Texas Anti-Indemnity Act, without penalizes customers with higher rates? As one scholar has pointed out, “If [insurance] companies interpret the statute broadly, they risk losing business, as they can no longer offer additional insured status or obtain indemnity agreements from other insurance companies;”
  • Which uncontroverted facts support the claim that the Texas AntiIndemnity Act was passed due to the troubling “unequal bargaining positions between owners, general contractors, and subcontractors”? Hasn’t capitalism always encouraged parties with the most money to fully insulate themselves from as much litigation as possible? As the Mary Law Journal article notes, if this was one of the true motives for passing this legislation, why did the legislature completely exclude residential construction from the Act, given the common belief that there is probably more unequal bargaining power within that specific field of construction than most others?
  • Which specific and compelling state rights are being upheld by this Act, at the apparent expense of citizens’ constitutional right to contract with one another as they choose?

Until significant case law is decided regarding the proper scope of this Act, those most active in the Texas construction industry may need to spend far more time conferring with their attorneys about the best possible ways to protect themselves against excessive litigation caused by this questionable law.