Though the regulatory reform law took a crucial step toward simplifying mortgage disclosures by ordering a new consumer protection regulator to harmonize two conflicting statutes, the road ahead will be long and difficult.

Several past attempts to reconcile requirements of the Truth in Lending Act with those in the Real Estate Settlement Procedures Act have failed due to regulatory turf fights and a lack of direction from Congress.

But the Dodd-Frank Act gave sole oversight of both laws to the Consumer Financial Protection Bureau (CFPB), stripping TILA authority from the Federal Reserve Board and Respa oversight from the Department of Housing and Urban Development (HUD).

This alone may make a big difference on moving forward after decades of struggle to harmonize the two laws. "It's the mortgage industry's Vietnam," said Brian Chappelle, a partner in Potomac Partners, referring to melding the two sets of disclosure requirements. "Once you bring it under one roof, you remove the turf battle between the Fed and HUD."

Though the new agency was given only one year to complete the task, Obama administration officials said they are confident this can be done.

"I think the fact that the agency can look across the marketplace" will help, said Michael Barr, Treasury assistant secretary for financial institutions.

CFPB "has authority over Respa and TILA …; the combination of those authorities will make it easier to unify the legal approach. The central challenge is finding an approach that reduces the regulatory burden on the industry and improves the ability of consumers to understand the disclosures."

Many hurdles remain, including differences in the laws themselves.

TILA, enacted in 1968, requires lenders to disclose the lending terms, including finance charges and the annual percentage rate, for mortgages.

Respa, enacted in 1974, focuses more on closing and settlement costs, including requiring a good faith estimate. The laws differ in content, coverage, timing and liability provisions.

"I think the biggest impediment is, the laws themselves impose specific disclosure and timing requirements that are inconsistent," said Steve Kaplan, a partner at K&L Gates.

The CFPB will have to decide what it wants consumers to focus on, he said.

"We've had this dance several times with hearings, and it always ends the same way, with no movement," Kaplan said. "Do people just want to know the interest rate and the total fees with some specificity, or is the model a cost-of-credit model, which is more TILA and the annual percentage rate?"

Though Respa focuses on bundling of services, TILA itemizes the charges to be used in determining the annual percentage rate.

Some industry representatives warned that the new agency must not lose sight of the goal of both laws: creating a simple, understandable mortgage disclosure for consumers.

"It's important for the disclosures to be clear, digestible and in a form consumers are going to notice," said Nessa Feddis, regulatory counsel for the American Bankers Association. "It's not possible to put everything relevant in a disclosure and still make it digestible."

But the vastly different desires of the various stakeholders, including originators, brokers, appraisers and consumer groups, have made the simplification process difficult. Consumer groups, for example, generally favor more disclosure over less, but the industry contends that too much information could just confuse borrowers.

"The consumer groups want lots of disclosure and private rights of action," said Stephen Ornstein, a partner at Sonnenschein Nath & Rosenthal. "I think the industry would like a simpler disclosure and far less exposure to civil liabilities for the secondary market."

Liability issues could prove crucial to lenders. Under TILA, lenders can face civil liability if their disclosures are inaccurate, an issue not addressed by Respa.

David Berenbaum, the chief program officer for the National Community Reinvestment Coalition, said consumer groups want to ensure that a final interpretation has tough liability standards.

"Most important is to ensure standards that hold lenders accountable at origination and make sure a consumer understands a loan," he said. "Right now, the process is so complex [that] a bad actor can manipulate it."

The disclosure laws also differ on when information must be delivered to borrowers. Though both laws say people must get disclosures three days after a loan application, TILA requires another disclosure at closing.

"The timing — while more consistent than it used to be — still does not mesh together," Kaplan said.

How to treat yield-spread premiums was also an issue until passage of regulatory reform. Though Respa severely restricted them, the reform law effectively banned them altogether, making the issue mostly moot, experts said.

"The mortgage broker fee has always been a real sticking point," said Ken Markison, an associate vice president and regulatory counsel for the Mortgage Bankers Association (MBA). "I think, now that there are changes around yield-spread premiums, maybe that will help because it will make it less of a problem. You won't spend as much energy on broker compensation based on rate because you can't do it anymore."

But industry representatives are worried that the new disclosures will come so soon after recent TILA and Respa changes. The Fed made changes in TILA rules this month, and HUD completed a six-year effort to revamp Respa just two years ago, releasing a four-page model disclosure form. Lenders complain that they spend significant resources each time a required disclosure is changed.

"I think, when people worry about merging TILA and Respa together, they worry about the implementation and technology costs associated with implementation," Chappelle said. "For the industry to make the changes in Respa last fall, that was very expensive."

John Kromer, a partner in BuckleySandler, said the industry is still recovering from the Respa changes.

"A lot of people in the industry, while we would welcome greater simplification and uniformity in the various disclosures, are very much concerned about the implementation process and the challenges that will present," he said. "Given the experience of Respa where the new 'good-faith estimate' took effect this year, there continue to be a number of operational challenges. … There needs to be recognition that these kinds of disclosure changes can have enormous challenges for lenders."

Steve Ziesel, a vice president and senior counsel for the Consumer Bankers Association, also said this is coming too soon.

"People have made a lot of changes to comply with Respa, and there are a lot of mortgage proposals coming down the pike from the Federal Reserve Board before the CFPB gets involved, so it's, 'Make new changes and then make new changes,' " he said.

But the Treasury's Barr dismissed complaints about the compliance burden of another rulemaking proposal.

"There are going to be significant changes in mortgage regulation and other regulations because of Dodd-Frank," he said. "This piece is not likely to be a large change in relation to those others but is fundamental for families to understand the mortgage they are considering."
Past attempts to harmonize the laws fell flat. In 1995, lawmakers considered adding a provision to a regulatory relief bill that would have given the Fed oversight of Respa so that mortgage disclosures were under the jurisdiction of a single regulator, but ultimately the measure was dropped from the final bill.

Instead, in 1996, Congress ordered the Fed and HUD to create a single TILA-Respa disclosure form. By the next year, the agencies had concluded that meaningful change could come only through legislation. In 1998, they submitted a 152-page report on ways to harmonize disclosures. Congress responded with hearings but took no action until the Dodd-Frank bill, which ordered the CFPB to address the issue.

"They did try it, but when you dig to the nitty-gritty, they found the disclosures cover different things and come out at different times," said Joe Gabai, a partner in Morrison & Foerster LLP. "It is going to be difficult to combine the two."

Most observers said they expect the CFPB to succeed but that the process may prove difficult.
"Now they actually do have a dictate that they do it," Gabai said. "I think they will need to be awfully creative and have to go about this in a more pragmatic way, identify disclosures susceptible to combination and those that are not feasible."

Consumer groups say they hope the CFPB will approach the issue differently.

"Previously, the consumer organizations had to fight to be at the table with the regulators," said Berenbaum of the National Community Reinvestment Coalition. "I do believe this new bureau will approach this with consumers and industry as a whole. … I think grabbing hold of the entire issue to develop a working model for Respa and TILA together is going to be a daunting project but putting it in the hands of a capable regulator like the CFPB is helpful."

The MBA's Markison, too, said this time is likely to be different.

"The effort to simplify and combine Respa and TILA disclosures has confounded people for years," Markison commented. "I think part of the problem has been that Respa and TILA have been assigned to different agencies, and part of it is that it is much easier said than done. If we can land people on the moon, though, we can certainly do this."

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