Merging Reg Z and RESPA

The 1996 banking act, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), directed the Federal Reserve Board and the Department of Housing and Urban Development to work together to create a single disclosure that will satisfy the requirement of both the Truth in Lending Act and the Real Estate Settlement Procedures Act. The idea was to simplify paperwork for banks while reducing the problems that result in subtle but significant differences between the requirements of each act and regulation.

The Notice of Proposed Rulemaking is out, with comments due on January 31. The notice poses a series of questions and asks for suggestions on how to carry out the legislative mandate of the 1996 act while also fulfilling the requirements of TILA and RESPA.

In the course of taking an application and making the loan, RESPA requires as many as eight disclosures: Good Faith Estimate, Required Service Provider, Special Information Booklet, Controlled Business Arrangement Referral, Transfer of Servicing, HUD-1, Initial Escrow Notice, and annual Escrow Notices. With the exception of the annual escrow notices, all of these notices occur during the application for and closing of a loan.

There are two points in time when most of the notices are given. The Good Faith Estimate, Special Information Booklet, Transfer of Servicing, and Required Service Provider disclosures are given when taking the application or within three days. The Controlled Business Arrangement Referral Notice is given when the referral is made, which will most often occur when the application is taken. Thus, five of the notices are provided at the beginning of the application process. Two notices, the HUD-1 and the Initial Escrow Notice, are provided at closing.

Truth in Lending disclosures are given to applicants at the same times. For loans subject to the early disclosure requirement, the disclosure must be provided to the applicant within three days of taking the application. The Federal Reserve Board designed this timing rule to coincide with the early RESPA disclosures. Final Truth in Lending disclosures are due at or before consummation.

Truth in Lending also requires additional disclosures for certain types of loans. Early program disclosures must be provided at or before application for home equity programs and adjustable rate mortgages. There are also special timing requirements (three days before consummation) for "high cost" mortgages and reverse mortgages.

To comply with both Truth in Lending and RESPA, lenders prepare as many as eight disclosures under RESPA and two or more disclosures under Truth in Lending. Most of these disclosures are provided to consumers at two points in time. These are the disclosures that could be merged into a single disclosure.

The differences in these disclosures stem partly from the fact that they are designed by two different agencies. But there are also fundamental statutory differences. RESPA and Truth in Lending have purposes that are close but not the same. Truth in Lending is designed to inform the customer about the cost of credit. The regulation has complex instructions on what is a cost of credit -a finance charge - and what fees and charges are excludable. Truth in Lending's other purpose is to promote informed shopping for credit - to help the customer find the most favorable terms. The APR, supported by the Total Finance Charge, is the calculation and disclosure designed to promote informed credit shopping.

RESPA is designed to inform the customer about the cost of settlement. To accomplish this, the HUD-1 contains detailed information about the nature and amount of each fee that is paid at settlement. RESPA thus requires the disclosure of much more detailed information than Truth in Lending but requires few calculations. In the process of drafting Regulation X, HUD has designed disclosure techniques that are intended to help consumers identify unfair credit costs. To this extent, Regulation X can also be seen as an aid to credit shoppers.

The Notice of Proposed Rulemaking describes the presently required disclosures under each regulation and describes the statutory source for each disclosure. In theory, it should be possible to merge into a single format the disclosures that would meet the different purpose of each act.

The Notice asks for comment on three topics. First, the agencies are seeking recommendations on how the disclosures can be made more consistent. This would include suggestions for content, timing, and format.

Second, the agencies are seeking recommendations for ways to enhance the educational value of disclosures for consumers. They are particularly interested in any suggestions for different methods of disclosure that would help consumers and fulfill the statutory requirements.

Third, the agencies are asking for any reports, information, or other material that would help them in the redesign of the disclosures.

The Notice also indicates that the agencies will consider ideas that would require changes to either or both statutes. This means that they are completely open to your suggestions. Should the agencies identify desirable changes to disclosure content, timing, or procedures that would be inconsistent with the current laws, they may submit recommendations to Congress.

ACTION STEPS

Meet with loan staff to learn what consumers complain about - and like - with respect to loan disclosures. Compile these suggestions and send them to the FRB and/or HUD.
While meeting with loan staff, ask them what disclosures and calculations cause them the most problems.
Focus particularly on problems that result from differences between Regulation Z and RESPA. Make a list and include it in your comment letter.
Review your internal monitoring and audit findings. Look for any persistent RESPA and Reg Z disclosure problems and calculation errors. Add these to your comment letter.