DS News

70 incorrect information by design. e CFPB has mandated title and closing agents to withhold the actual cost of title insurance to the consumer. Moreover, the disclosure itself may actually expose consumers to greater risk by dissuading them from purchasing title insurance altogether. Whether or not TRID will ultimately have a positive effect on the consumer or on the real estate lending world itself remains to be seen. One thing is for sure, however: it will have a significant—and likely unintended—impact on the Default Title industry. THE ORIGINS OF THE NEW TELA/RESPA INTEGRATED DISCLOSURE e CFPB was created by the Dodd-Frank Act. e Dodd-Frank Wall Street Reform and Consumer Protection Act was passed on July 21st, 2010 as a response to the Great Recession, the U.S. Financial Crisis of 2007, and the Subprime Mortgage Crisis of 2007. According to its own language, the stated aim of the Act was "to promote financial stability of the United States by improving accountability and transparency in the financial system, [and] . . . to protect consumers from abusive financial services practices." Prior to its passage, President Obama referred to the legislation as a "sweeping overhaul of the financial regulatory system . . . on a scale not seen since the reforms that followed the Great Depression." He was right. e Act itself contains sixteen separate titles which require regulators to create 243+ new federal rules and regulations (one of which is TRID). Apart from these new rules, the Act also called for the creation of a new federal agency: the CFPB. e CFPB is an independent agency of the US government tasked with regulating the American lending and finance industries. e Bureau's own website describes its mission as "making markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products." e CFPB was often referred to as a "cop on the beat" by Elizabeth Warren, one of the Bureau's top incorporators whom many assumed would be its first director. Warren's analogy perfectly foretold the Bureau's regulation-through-enforcement approach. e CFPB spent its first year issuing various rules, proposals, and marketing material aimed at reforming the consumer finance world. One of these rules was TRID. e Bureau first proposed TRID in a 1099- page document on July 9th, 2012. e final Disclosure Rule was then issued four months later on November 20, 2013. is new rule will go into full force and effect on August 1, 2015: less than a month away from this article's publication. e idea behind the Integrated Disclosure is relatively simple: to protect consumers. However, the disclosure only applies to some mortgages. e rule does not apply to equity lines of credit, reverse mortgages, mortgages secured by mobile and manufactured homes, and those mortgages by creditors of five or fewer mortgages per year. DOES INTEGRATED DISCLOSURE PROTECT CONSUMERS? While the Disclosure as a whole may very well be beneficial, it has two major pitfalls regarding the default title industry which may operate to financially injure consumers. First, the form exposes new homeowners to significant risk by potentially dissuading them from purchasing title insurance. Second, the form itself intentionally discloses erroneous costs of title insurance to the consumer. e CFPB requires Owner's Title Insurance to be listed as "optional" on the Disclosure. While this at first appears to be merely an innocuous label, it may in fact serve to the detriment of homeowners. Title Insurance plays a pivotal role in any real estate transaction, protecting the homeowner's property interest against claims resulting from defects, liens, and encumbrances on title. In fact, more than a third of all title searches reveal a problem according to ALTA. Such defects are typically costly, with the potential to deprive a homeowner of some or all of her property. e danger of listing owner's insurance as "optional," then, is that a thrifty purchaser may be tempted to opt out of title insurance to save on the cost of the premium: an ultimate savings which pales in comparison the financial risk of title defects on the consumer's new investment. Does this serve to "protect" the consumer? e second—and more disturbing—pitfall of the TRID is that title insurance costs are inaccurately disclosed by design. When obtaining title insurance in most states, the homebuyer will receive a discount on the lender's policy when purchased simultaneously along with their own owner's policy. e premium of the lender's policy is discounted because both policies share the same substantive title search, examination, and underwriting process. e new discounted rate of the lender's policy is referred to as "simultaneous-issue pricing." Under TRID, the simultaneous-issue discounted rate is not disclosed to the consumer. Instead, the CFPB has mandated that the Loan Estimate and Closing Disclosure show the full, non-discounted rate of the lender's policy premium. Of course, the full rate is not what the homebuyer will pay at closing. To adjust for this difference, TRID fiddles with the owner's premium using a system of behind-the-scenes calculations which are not apparent on the face of the form nor disclosed to the consumer. e result, of course, is that correct price of title insurance is withheld from the consumer. In her May 14, 2015 testimony before Congress's House Committee on Financial Services, ALTA President Diane Evans urged the CFPB "to allow the title and settlement industry to disclose the price of title insurance accurately to consumers" saying that "TRID fails consumers in this regard." is is the only instance on the entire form where the actual charge for a product or service is incorrectly disclosed. How does withholding the actual price of title insurance serve to educate consumers? Well, it doesn't. It's just another unintended consequence. EFFECTS ON THE DEFAULT INDUSTRY Default title companies will be required to rework their current software and internal processes to comply with the new requirements. e CFPB estimates that it will cost $1.3 billion for the lending and real estate industry to implement TRID. e title and settlement industry alone is thought to incur $67,800,000 per year over the next five years. ese exorbitant costs will largely be placed on small businesses. According to the CFPB, 85% of lenders, brokers, and closing agents qualify as small businesses. In fact, the majority of ALTA member-companies report as employing three or fewer people each. Brett C. Beehler, Vice President of Acer Title & Escrow, has concerns that smaller companies will not fare well under the CFPB's regulation. "Undoubtedly, the new regulations will have a major impact on some smaller, family-owned settlement companies that may deem the costs of compliance to be too great to continue operating as a profitable title company and, unfortunately, we are already seeing some of this play out throughout the industry." Can smaller agencies survive the cost of preparing for and ultimately complying with TRID? One thing is for certain: the default title and settlement landscape will radically transform over the next year. Outside of the implementation costs, current settlement companies are faced with a potential decrease in business. As previously mentioned,

• Cover