[co-authors: Nathan Viebrock, William Mayberry, Michael Lacy]*
Earlier last week, the Consumer Financial Protection Bureau issued an interpretive rule intended to “make it easier for consumers with urgent financial needs to obtain access to mortgage credit more quickly in the middle of the [coronavirus] COVID-19 pandemic.” The rule clarifies how the right of consumers to waive certain protections provided in the TILA-RESPA Integrated Disclosure rule (TRID) and Regulation Z may be handled during the ongoing crisis.
The interpretative rule is a favorable development for both creditors and distressed consumers. The latter could receive urgently needed mortgage proceeds nearly one week sooner. For creditors, however, it is important to appreciate that the rule is narrow in scope. Briefly, it should not be interpreted as negating the need for continued diligent adherence to the rules for waiting periods and loan rescissions contained in the TRID and Regulation Z.
Below, we first provide some background information on the affected rules, and then discuss specific elements of the interpretive rule along with their likely impact on mortgage originations.
- Timing of three-day waiting period waivable if COVID-19 causes a bona fide personal emergency.
Under the TRID, creditors typically must issue a Closing Disclosure that identifies the final terms of the transaction to a consumer at least three days before closing. This period is designed to give consumers time to evaluate the final loan terms and property condition to ensure that all parties understand the nature of the transaction and want to move forward with closing. This mandatory waiting period presents a challenge for borrowers who are seeking to expeditiously close a mortgage transaction, especially those borrowers whose urgency is related to a personal emergency. For that reason, the TRID includes the possibility of a waiver for consumers who have a bona fide personal financial emergency and can document that emergency in writing. Lenders have been hesitant to rely on these waivers because only one example — a consumer in foreclosure proceedings — was provided by the CFPB in commentary to the initial rule.
The interpretive rule specifically identifies COVID-19 as an event that could cause a bona fide personal emergency meriting the use of a waiver of the three-day waiting period. Consumers seeking a waiver must still provide written documentation to the creditor that describes the emergency, modifies or waives the waiting period, and includes the signature of all consumers liable on the legal obligation. Creditors may be more willing to accept waivers and expedite closings now that the CFPB has issued this rule expressing the CFPB’s recognition that a COVID-19-related fallout could qualify as a bona fide personal emergency.
- Rescission period also could be waived in the event of a COVID-19 personal emergency.
Predating COVID-19, a consumer facing a “bona fide personal financial crisis” could elect to waive his or her right to rescind a covered transaction within three days of closing. The interpretative rule clarifies that the COVID-19 pandemic qualifies as such a crisis. Creditors are not required to release any funds to consumers until the rescission period has passed, unless a consumer has formally waived the rescission period due to a bona fide personal financial emergency. In the official commentary to Regulation Z, the CFPB states that “the existence of the consumer’s waiver will not, of itself, automatically insulate the creditor from liability for failing to provide the right of rescission.” Given that commentary, and a lack of examples of events that qualify as bona fide personal emergencies, mortgage originators have been hesitant to honor rescission waivers even where personal emergencies may exist, given that there is significant risk associated with doing so. Here, the CFPB has clarified that a financial need that arises out of the COVID-19 pandemic could qualify as a bona fide personal emergency under Regulation Z. The interpretive rule provides much-needed clarity to creditors that are receiving waiver requests from consumers wanting to receive proceeds faster and could lead to creditors becoming more comfortable accepting and honoring rescission period waivers from consumers.
- The interpretative rule does not relax the rules for obtaining waivers of the right to rescind.
Regulation Z requires lenders to provide two copies of the notice of the right to rescind to each consumer who has an ownership interest in the property. Regulation Z also contains rules governing the notice’s format, content, and timing. This notice must be a separate document and is required to include certain material disclosures. To this end, creditors must utilize the appropriate model form in appendix H of Regulation Z or provide a substantially similar notice. Notice of the right to rescind need not be given prior to consummation of the subject loan transaction, but the regulatory three-day rescission period will not begin to run until notice is given. If a creditor fails to comply with these requirements, the rescission period is automatically extended from three days to three years. If a creditor were to choose to forgo providing notice based on the mistaken belief that the COVID-19 pandemic excuses the need to comply, the borrower or any owner of the property subsequently could argue that the waiver that they had given was a nullity based on the lack of informed consent. In addition, the creditor also could be subject to an Unfair or Deceptive Acts or Practices claim from such persons asserting they had been misled into waiving their legal right to rescind without adequate disclosure.
- Changed circumstance resulting in changed price permissible.
The interpretive rule also aims to relax the circumstances in which creditors can modify the good faith estimate of settlement service charges identified in a Loan Estimate. While the TRID limits circumstances for changing the costs of settlement services to “extraordinary events beyond the control of any interested party,” the interpretive rule clarifies that COVID-19 does qualify as an extraordinary event that could result in there being changes to the initial good faith estimate of settlement charges provided in the Loan Estimate. If creditors can document that fallout from the COVID-19 pandemic has had a direct impact on the cost of certain settlement service providers, then it may be permissible to increase those providers’ charges to consumers beyond the prices identified in the Loan Estimate. These changes still would need to be reflected in a modified Loan Estimate or the Closing Disclosure.
- The interpretive rule is not a temporary suspension of the TRID.
While these changes should come as welcome relief for originators wrestling with how to respond to waiver requests, it is worth noting that the interpretive rule is narrow in scope. The CFPB is likely to scrutinize any attempts by settlement service providers to cut out these critical protections — waiting periods, rescission rights, and good faith estimates of the cost of settlement services — unless doing so is truly necessary for the consumer to respond to a personal emergency arising out of COVID-19. Creditors now have two examples of events that would qualify as personal emergencies for waiving the TRID’s three-day waiting period and have one example of an event that would qualify for purposes of the rescission rule. Creditors may want to proceed cautiously when considering whether to expand their lists of qualifying emergency events beyond those that are very similar in nature to those examples expressly identified by the CFPB.
Conclusion
The TRID and Regulation Z provide lenders with explicit requirements that must be followed to honor consumers’ waiver requests. While installing policies and procedures to process waiver requests may be fairly straightforward, the more difficult question for creditors to decide will be when to recognize that an event is an actual financial emergency that arises out of the COVID-19 pandemic. Creditors could choose to take consumers’ waiver statements at face value, but that approach is not without risk. If a consumer submits a waiver request, especially at the suggestion of a creditor, but is not truly experiencing a bona fide personal financial emergency, then years later that creditor may be faced with responding to regulatory inquiries or consumer lawsuits arising out of the consumer’s coerced waiver of important consumer rights.
This is a positive step forward for creditors that are receiving waiver requests from consumers who submit residential mortgage applications, but one to which creditors will need to be prudent about responding.
* Troutman Sanders
