Takeaways:

  • What’s the CFPB?
  • What’s the ability-to-pay rule?
  • What happens when that rule is violated?
  • What does it have to do with the new Closing Disclosure that will replace HUD-1?

Real estate professionals know the HUD-1 well. “Please send me an updated HUD-1” — the term rolls easily off the tongue with no hesitation.

As well it should. It’s been the law of the land since 1974 when the Department of Housing and Urban Development mandated the HUD-1 settlement statement be used in federally backed residential mortgage transactions. Any real estate pro worth his or her salt has looked at hundreds, perhaps thousands of HUD-1s. But as of Aug. 1, 2015, the HUD-1 is out, and the Closing Disclosure is in.

The new Closing Disclosure form is now required, under mandate of the Consumer Financial Protection Bureau (CFPB), and it’s replacing the HUD-1 in most residential mortgage transactions.

Background

The CFPB is a relative newcomer to the real estate landscape, created under the Dodd-Frank Act, as an independent agency housed under the Board of Governors of the Federal Reserve.

The CFPB began operations in 2011 and immediately became the big dog in mortgage finance supervision. By statute, the CFPB has overarching regulatory control of all existing federal consumer protection laws. That includes RESPA, TILA, HMDA, HOEPA and ILSA, and supervisory authority for consumer protection matters with the FDIC, HUD and the OCC, among others.

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Violations of the ability-to-repay (ATR) rule are enforceable by the CFBP or by aggrieved borrowers. The bureau can bring civil actions in court and administrative enforcement proceedings to obtain remedies such as civil penalties and cease-and-desist orders. Borrowers can bring private actions against the lender seeking actual and statutory damages, court costs and attorney fees.

The specter of a greater threat to lenders and investors looms within another provision of the ATR rule. A borrower facing foreclosure can now mount a defense claiming violation of the ability-to-repay rule. If successful, the borrower-plaintiff could recoup three years’ finance charges plus loan costs, as well as actual damages, attorney fees and court costs. It is not apparent within the rule how would impact foreclosure proceedings.

In the years ahead this provision might prove controversial as borrowers in default litigate ATR claims and forestall foreclosure actions while loan servicers scurry to find old origination files to fend off these claims.

ATR actions could result in a boom-town business both for consumer advocacy attorneys and lenders’ defense counsel alike while in the meantime defaulted mortgages sit on the books and mortgaged housing stock remains in limbo.

Welcome to the brave new age of consumerism. Gone are the days of caveat emptor. It is now the lenders’ burden to demonstrate both the borrowers’ creditworthiness and their ability to manage a debt load, according to government prescribed standards.

Does the rule go too far in assigning responsibility to the lender while downplaying the borrowers’ accountability and self-reliance? There’s a whiff of the parent-child relationship in the CFPB-consumer paradigm stipulated under Dodd-Frank.

This is an important point to remember when viewing the changes that affect a real estate closing. It’s not about the real estate anymore or the seller — or even the deal itself. The CFPB’s focus is on the consumer, and this is the backdrop behind the roll out of the new Closing Disclosure requirement.

Craig Roberts is the president of Capstone Settlement Inc. You can find him on LinkedIn.

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