"Total Payments" Disclosure - Is Your Loan Processing System Compliant?
It has been a little over a year since the integrated disclosure rules took effect and we have begun to see the regulatory agencies cite violations under the provisions of the Truth in Lending Act (TILA). It appears the honeymoon is over!
One area where we have seen increased scrutiny is in the total payments calculation and the amount disclosed on the loan estimate and closing disclosure. The Consumer Financial Protection Bureau (CFPB) consumer information tool instructs the consumer that, “This number tells you the total amount of money you will have paid over the life of your mortgage. This total includes principal, interest, mortgage insurance (if applicable), and loan costs. It assumes that you make each monthly payment as agreed – no more and no less – until the end of the loan.”
The components of the calculation appear to be straight forward. However, the method for disclosure of fees on the loan estimate and who will ultimately pay the fees does not always align with the closing disclosure. Although the loan estimate only discloses the total payments for the first five years, all of the loan costs (section D), whether ultimately paid by the consumer are factored into the equation.
What happens when the loan costs are financed? Due to the requirements of the regulation, the financed loan costs are included in the principal amount resulting in the loan costs being included twice in the calculation, which ultimately results in an overstated amount for the Total Payments disclosed. Although this defies logic, we know we cannot always use logic where regulatory requirements are concerned.
Proposed changes submitted by the CFPB in July 2016 to TILA include “tolerance provisions for the total of payments that parallel existing tolerances for the finance charge and disclosures affected by the finance charge. This change would make the treatment of the total of payments disclosure consistent with what it was prior to the Know Before You Owe mortgage disclosure rule.” Comments on the proposed rule were due by October 18, 2016, with the proposal recommending an effective date of October 1, 2017.
We have noted some loan processing systems that do not calculate the total payments amount correctly-- specifically when the loan costs are financed. Further, depending on the loan processing system, adjustments to the calculation parameters are completed at the bank level and are not defaulted in.
To ensure compliance, we recommend that the Total Payments disclosures be reviewed by the Compliance Officer to verify that the loan processing system calculations comply with the requirements of the regulation.