Dear Director Chopra,
CHLA writes to seek assistance with compliance challenges arising from changes to the LLPA pricing grid for Fannie Mae and Freddie Mac loans – specifically, with respect to how Change of Circumstance (COC) rules under the Truth in Lending Act (TILA) [12 CFR 1026.19(e)(3)(iv)[(A)(2)] will apply to a Fannie or Freddie loan affected by the new 40% Debt-to-Income (DTI) threshold.
CHLA recently wrote FHFA to express concerns that the new pricing grid will raise LLPAs on first-time homebuyers with loans over a 40% DTI. That CHLA letter also cited concerns that the 40% DTI cliff could create confusion and frustration among borrowers. This purpose of this letter is to address TRID compliance issues and to reduce borrower confusion and frustration.
Specifically, we make three requests of the Bureau:
(1) Respond to questions posed near the end of this letter regarding the 3-day Change of Circumstance (COC) requirements as they apply to the LLPA 40% DTI cliff.
(2) Update the Bureau’s “Your Home Loan Toolkit” guide to discuss the impact on GSE mortgage fees and the underwriting process affected by the LLPA 40% DTI cliff.
(3) Create a phase-in period for compliance with COC disclosures related to the LLPA 40% DTI cliff, just as the Bureau did previously for comprehensive TRID changes – and refrain from “regulation by enforcement” with respect to smaller IMBs.
BACKGROUND
The governing COC language in the Truth in Lending Act is12 CFR 1026.19(e)(3)(iv):
(iv) Revised estimates. For the purpose of determining good faith under paragraph (e)(3)(i) and (ii) of this section, a creditor may use a revised estimate of a charge instead of the estimate of the charge originally disclosed under paragraph (e)(1)(i) of this section if the revision is due to any of the following reasons: 2
(A) Changed circumstance affecting settlement charges. Changed circumstances cause the estimated charges to increase or, in the case of estimated charges identified in paragraph (e)(3)(ii) of this section, cause the aggregate amount of such charges to increase by more than 10 percent. For purposes of this paragraph, “changed circumstance” means:
(1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
(2) Information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under paragraph (e)(1)(i) of this section and that was inaccurate or changed after the disclosures were provided; or
(3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section. [Note: our bolding]
The lender is required to provide a revised disclosure to the consumer, documenting the COC, within three (3) business days of receiving information that there is a changed circumstance:
(4) Provision and receipt of revised disclosures.
(i) General rule. Subject to the requirements of paragraph (e)(4)(ii) of this section, if a creditor uses a revised estimate pursuant to paragraph (e)(3)(iv) of this section for the purpose of determining good faith under paragraphs (e)(3)(i) and (ii) of this section, the creditor shall provide a revised version of the disclosures required under paragraph (e)(1)(i) of this section or the disclosures required under paragraph (f)(1)(i) of this section (including any corrected disclosures provided under paragraph (f)(2)(i) or (ii) of this section) reflecting the revised estimate within three business days of receiving information sufficient to establish that one of the reasons for revision provided under paragraphs (e)(3)(iv)(A) through (F) of this section applies.
Under (A)(2), a lender may re-price a loan if information relied on by a lender is later determined to be inaccurate. The COC must disclose any pricing increase to the consumer within three days of this determination.
Currently, there are limited instances when lenders rely on this section to re-price a loan, which are typically caused by external events. However, the new LLPA pricing grid with the 40% DTI component will cause a significant increase in the number of Change of Circumstance events for lenders – caused not by external events, but by changes arising during the underwriting process.
Under prior LLPA rules, a re-determination of income pushing the DTI over 40% did not create a pricing increase, so there was no need to issue a COC notice. However, new LLPA pricing rules mean lenders could use the COC to reprice loans due to DTI during the underwriting process, reducing the certainty borrowers sought when locking a mortgage loan interest rate.
In short, the new DTI LLPA pricing grid will significantly increase COC notices of loan re-pricing during the loan process, thus frustrating borrowers. To ensure borrowers are maximally informed on this issue, we ask you to add a detailed discussion of LLPAs and DTIs in “Your Home Loan Toolkit.” We suggest placing it just after the “Understand Your Credit” section. 3
COMPLIANCE QUESTIONS
CHLA members will do their best to comply in good faith with COC requirements arising from the new LLPA pricing grid. However, we have several questions about compliance:
- Will the Bureau take enforcement action based on technical considerations regarding when a lender concluded that the 40% DTI cliff is breached, triggering a COC?
- The current underwriting practice is to wait until all income and expense information is obtained to determine a DTI. Will the Bureau now require underwriters to make daily or periodic re-calculations of DTI as information comes in during the underwriting process?
- Will the Bureau take enforcement action over the inadvertent failure to immediately act on new information – e.g. if a pay stub arrives in the office of the underwriter that would cause a breach of the 40% DTI cliff, but the underwriter is on vacation for several days?
- Will the Bureau ever take enforcement action against lenders based on a preliminary DTI determination at time of loan application that a loan is below 40% DTI, that subsequently turns out to be above 40% DTI during the comprehensive underwriting process?
- Will the Bureau take enforcement action against smaller lenders when aggregators or Fannie Mae or Freddie Mac buy loans from such lenders and arrive at a different calculation as to whether a loan exceeds the 40% DTI cliff?
PHASED-IN COMPLIANCE PEROID/NO REGULATION BY ENFORCEMENT
The LLPA 40% DTI cliff could have a major impact on borrowers, who may challenge income calculations to try to maintain the rate they locked at application, or who may try to restructure the loan in order to stay below 40%. It will also require lender and aggregator system changes.
In light of this and complexities cited in the questions above, CHLA asks the Bureau to create a phase-in period for compliance with COC disclosures related to the LLPA 40% DTI cliff, as the Bureau did previously for major TRID changes. This will give time to address these questions.
Further, CHLA’s has long expressed concerns that smaller IMBs lack the mortgage volume economies of scale to pay for third party consultants and lawyers that specialize in interpreting detailed compliance questions for issues like this. Therefore, CHLA asks the Bureau to refrain from “regulation by enforcement” for smaller IMB compliance efforts with COC requirements related to the LLPA 40% DIT cliff, when such smaller IMBs are trying to comply in good faith.
We appreciate your consideration of our comments and requests.
Sincerely,
COMMUNITY HOME LENDERS OF AMERICA