In November 2013, the Consumer Financial Protection Bureau (CFPB) adopted regulations that integrate the disclosures required to be provided to borrowers under the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA). The TILA-RESPA Integrated Disclosure (TRID) requirements, which took effect October 3, 2015, apply to closed-end consumer credit transactions secured by real property. The TRID regulations require creditors to provide two new forms to borrowers, the Loan Estimate and the Closing Disclosure.
The Loan Estimate replaces the Good Faith Estimate required under RESPA and the initial TILA disclosures. It is intended to aid borrowers in understanding the features, costs and risks associated with the mortgage loan for which they are applying and must be provided to borrowers within three business days after they submit a mortgage loan application. While the CFPB has dedicated substantial time and resources to the implementation of TRID, the mortgage lending industry continues to seek guidance regarding compliance with TRID requirements.
One area of continued confusion centers around the disclosure of owner’s and lender’s title insurance policy premiums on the Loan Estimate. The CFPB’s current calculation method for disclosing title insurance premiums is likely to result in borrower confusion, and, without proper explanation, could encourage borrowers to make decisions regarding their mortgage loan that may not be in their best interest. Thus, participants in the mortgage lending industry, including creditors, title insurance companies, and real estate agents, should be familiar with TRID’s title insurance premium disclosure requirements in order to ensure that borrowers understand the disclosures and are able to make informed decisions regarding their mortgage loan.
TRID Disclosure Requirements – Title Insurance Premiums
As part of the TRID requirements, the CFPB revised Regulation Z (TILA’s implementing regulation) to require that creditors provide consumers a Loan Estimate that discloses certain costs associated with mortgage transactions. The costs disclosed on the Loan Estimate include an itemization of the amounts borrowers are likely to pay (or have contracted to pay) at closing, such as the cost of title insurance premiums.
The lender’s title insurance premium is disclosed on the Loan Estimate at the full premium rate (not the simultaneous issue rate often charged when an owner’s title insurance policy is also issued). The amount disclosed for an owner’s title insurance premium is generally based on a basic owner’s title insurance policy rate and should include a parenthetical describing the owner’s insurance premium as “optional” (if paid by the borrower).
However, an owner’s title insurance policy may be available at a special rate due to the simultaneous issuance of both a lender’s and owner’s title insurance policy. In order to inform consumers of the incremental cost of obtaining both an owner’s and lender’s title insurance policy, the TRID regulations require creditors to calculate the owner’s title insurance premium by (i) adding the simultaneous issuance premium for the lender’s title insurance policy (if any) to the full owner’s title insurance premium; and (ii) subtracting from this amount the full premium for the lender’s insurance policy that would be charged in a transaction where a consumer declines to purchase an owner’s title insurance policy. The amount resulting from this calculation (i.e., the incremental cost of the owner’s title insurance policy) must be disclosed as the owner’s title insurance premium on the Loan Estimate.
For example, assume the basic owner’s title insurance premium is $1,318, the basic lender’s policy premium is $1,218, and the simultaneous issuance premium for the lender’s policy is $100. In such case, the lender’s title insurance premium would be disclosed on the Loan Estimate as $1,218 (under Part B or C), and the owner’s title insurance premium would be disclosed on the Loan Estimate as $200 under Part H ($1,318 + $100 = $1,418 – $1,218 = $200).
If the owner’s title insurance cost is to be paid by the seller pursuant to contractual agreement, the word “optional” may be removed from the Loan Estimate. However, in situations where the seller pays for the owner’s title insurance policy on behalf of the buyer, disclosures on the Loan Estimate will be inaccurate. The CFPB has unofficially provided (not in written guidance) at least three ways in which the additional credit between the seller and the buyer may be disclosed:
- The remaining credit could be applied to any other title insurance cost, including the lender’s title insurance cost.
- The remaining credit can be considered to be a general seller credit and disclosed as such in the Summaries of Transactions table on page 3 of the Closing Disclosure.
- Use of a credit specifying the remaining amount for the owner’s title insurance cost in the Summaries of Transactions table on page 3 of the losing Disclosure. This credit could be disclosed as a “simultaneous issue credit” in the “Summaries of Transactions” section.
Complications Resulting from TRID’s Title Insurance Disclosure Requirements
By disclosing the owner’s title insurance policy premium as “optional,” the Loan Estimate may signal to borrowers that they do not need an owner’s title insurance policy and can reduce costs by electing to decline this service (instead relying on the lender’s title insurance policy.) However, lender’s title insurance coverage protects only the creditor and does not protect the borrower. Title defects discovered or claims made by others post-closing could be financially devastating to a borrower with no insurance protection.
Despite these concerns, the TRID regulations require creditors to disclose owner’s title insurance as “optional” in order to inform borrowers that the creditor does not require owner’s title insurance (even if such coverage is in the best interest of the borrower). The CFPB places the burden on participants in the mortgage lending industry, including creditors, realtors, title insurance agents and underwriters, etc., to provide borrowers with sufficient information to make an informed decision regarding whether to obtain owner’s title insurance coverage.
In addition, by disclosing the owner’s title insurance policy premium as an incremental cost, the Loan Estimate actually provides borrowers with an inaccurate disclosure of the full cost of an owner’s title insurance policy. This could create consumer confusion in situations where the amounts disclosed on the Loan Estimate do not correlate to the title insurance rates quoted by title insurance agents in accordance with applicable state law.
The CFPB elected to use the incremental cost disclosure in the Loan Estimate because disclosing a discounted lender’s title insurance premium in cases of simultaneous issuance, and showing the owner’s policy at the full premium, may result in consumers making inaccurate conclusions regarding the cost of the owner’s title insurance policy. The CFPB wants borrowers to be able to determine if the additional cost for title insurance to protect themselves from losses that could result from a title defect is warranted. While there is no indication on the Loan Estimate that the owner’s title insurance premium is disclosed as an incremental cost and not the full rate, the CFPB believes the creditor should be responsible for alleviating any consumer confusion that arises from the discrepancy between the owner’s title insurance premium disclosed on the Loan Estimate and the premium disclosed by title agents in accordance with applicable state law.
Despite the myriad of information issued by the CFPB regarding compliance with TRID regulations, implementation of TRID continues to be a potential source of frustration for both borrowers and participants in the mortgage lending industry. In some instances, the CFPB has elected to rely on creditors and others in the mortgage lending industry to clear up any confusion created by the new TRID requirements. While the CFPB acknowledges the discrepancies and challenges created by the disclosure of an owner’s title insurance premium in cases of simultaneous issuance, the CFPB believes it is incumbent upon creditors and others in the mortgage lending industry to explain such discrepancies to borrowers. Thus, creditors should ensure that their employees understand the TRID regulations and are able to explain the required disclosures in a manner that enables borrowers to make informed decisions regarding their mortgage loans.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.