CFPB Finalizes Rule to Eliminate the “Black Hole” Issue

On Thursday, April 26, 2018, the Consumer Financial Protection Bureau (“CFPB”) announced its long-awaited final amendments to the TILA/RESPA Integrated Disclosure Rule (“TRID”) that aim to eliminate the “black hole” issue.[1] Currently, the “black hole” issue limits a creditor’s ability to reset fee tolerances with a revised Closing Disclosure more than four business days before closing. The final rule is effective June 1, 2018, and eliminates a problem that has continued to plague creditors and increase costs to originate mortgage loans.

The “Black Hole” Issue

By way of background, TRID requires creditors to provide consumers with good faith estimates of loan terms and closing costs on the Loan Estimate. An estimated closing cost is disclosed in good faith if the charge paid by the consumer does not exceed the amount disclosed beyond the permitted tolerances under the rule.

If a borrower requests a revision or if a valid “changed circumstance”[2] exists, creditors may use revised estimates to reset tolerances. In effect, the revised estimates are compared to the charges actually paid by the consumer at closing determine whether a cost was disclosed in good faith. Typically, a revised Loan Estimate is the disclosure used to reset tolerances, but a Closing Disclosure may also be used in certain circumstances.

With respect to timing, the rule requires creditors to provide the consumer with these revised estimates within three business days of the creditor receiving information sufficient to establish a changed circumstance. In addition, creditors may not provide a revised Loan Estimate on or after the date a Closing Disclosure is provided the consumer, and the consumer must receive any revised Loan Estimate no later than four business days prior to consummation. If there are less than four business days between the time the revised estimates must be provided and consummation, a creditor may provide the revised estimate on a Closing Disclosure. However, there is currently no similar provision in the rule expressly permitting creditors to use a Closing Disclosure to reset tolerances if there are four or more days between the time the revised estimates must be provided and consummation.

As a result, issues arise where creditors are unable to provide either a revised Loan Estimate (because the initial Closing Disclosure has been provided) or a corrected Closing Disclosure (because there are more than four days prior to consummation) to reset tolerances. This situation is referred to as the “black hole” issue in the rule. Currently, if a changed circumstance occurs in the “black hole” that increases charges subject to tolerances, creditors could be forced to absorb costs that would otherwise be born by consumers.

The Final Rule

The final rule eliminates the “black hole” issue by removing the four-business-day limit on using a Closing Disclosure to increase closing costs subject to tolerances. Accordingly, the rule will soon permit creditors to reset tolerances with either an initial or corrected Closing Disclosure regardless of the number of days before closing. Creditors must still provide a revised version of the Loan Estimate or Closing Disclosure reflecting the revised estimate within three business days of receiving information establishing that a valid changed circumstance has occurred.

Despite initial concerns that removing the timing restriction may result in creditors providing an initial Closing Disclosure very early in the origination process, the CFPB declined to impose additional restrictions on a creditor’s ability to reset tolerances with a Closing Disclosure.

With these amendments, creditors will soon gain the flexibility needed to revise the Closing Disclosure and add or increase legitimate fees to a transaction. This flexibility will benefit both the creditor and the consumer alike by avoiding increased prices to obtain mortgage loans.

[1] The Final Rule was published in the Federal Register on May 2, 2018, and can be found here.

[2] 12 C.F.R. § 1026.19(e)(3)(iv). Valid changed circumstances include: an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. Id. § 1026.19(e)(3)(iv)(A).