Financial Regulatory Report

Recently, I came across an article written by Senator Elizabeth Warren entitled “Don’t Make Bad Bill on Bank Deregulation Worse.”  In this article, the Senator warned against efforts by the House to add additional deregulation measures to the bill that was approved by the Senate (S-2155, “The Economic Growth, Regulatory Relief and Consumer Protection Act”), opining that such efforts, if successful, would make the Senate bill even more dangerous than it already was. Regardless of anyone’s view on the merits of S-2155 or the House’s efforts to supplement it, I was struck by one of the examples she gave of the “dangerous” measures the House was considering adding to the bill.  It reminded me of the story about the boy who cried “wolf” so often that when a real wolf approached the town in which the boy lived, his cries of “wolf” raised no alarm among its residents. The example I’m talking about is described by Senator Warren as “[a] section that repeals existing protections to help prevent borrowers from getting gouged on title-insurance fees when they get a mortgage.”  Sounds evil! But what does this section actually do?  Let’s take a look. The section she refers to appears to be Section 101 of Title I of H.R. 3978.  This provision, which I’ll refer to as the TRID Improvement provision, seeks to amend a disclosure requirement contained in the TILA/RESPA Integrated Disclosures rule (TRID), which was adopted several years ago by the federal Bureau of Consumer Financial Protection (CFPB) pursuant to a mandate in the Dodd-Frank Act.  The purpose of the TRID was to ameliorate deficiencies in the prior disclosure regime, which required two separate sets of form disclosures, one mandated by the Truth in Lending Act (TILA) and the other by the Real Estate Settlement Procedures Act (RESPA).   As stated by the CFPB in the preamble to TRID, “[t]he information on these [two sets of] forms is overlapping and the language is inconsistent. Not surprisingly, consumers often find the forms confusing. It is also not surprising that lenders and settlement agents find the forms burdensome to provide and explain.” The disclosure requirement in TRID that the TRID Improvement provision would amend requires disclosure of the full premium rate for lender’s title insurance and a discounted rate for the simultaneous issuance of owner’s title insurance (calculated as the full premium rate for owner’s title insurance plus the amount the consumer must pay to simultaneously obtain lender’s title insurance less the full premium rate for lender’s title insurance).  However, this is not how title insurance premium rates are established in many, if not most, states.  In at least 25 states (per the CFPB’s own research), State law or custom requires title insurance agents to quote the full premium rate for owner’s title insurance and a special (discounted) rate for the simultaneous issuance of lender’s title insurance. For example, assume that under the applicable state law or title rate filing in one of these states, the full premium rate is $1,000 for lender’s title insurance and $1,200 for owner’s title insurance but, if purchased at the same time, the lender’s title insurance would cost only $400.  In that circumstance, the title agent would be required to quote $400 as the cost of the lender’s title insurance and $1,200 as the cost of the owner’s title insurance.  However, TRID would require the loan originator to disclose the cost of the lender’s title insurance as $1,000 and the cost of the owner’s title insurance as $600 ($1,200 + $400 - $1,000).  Confused?  Me too. The TRID Improvement provision is intended to eliminate this confusion by requiring lender’s and owner’s title insurance premium rates to be disclosed on the TRID forms exactly as they are required to be quoted by the title insurance agent under applicable state law or custom.  It would accomplish this result by adding the following sentence to the relevant federal statute, which is RESPA §4(a): “Charges for any title insurance premium disclosed on such forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.” So where is the “gouging” of consumers?  Beats me.  Let’s assume that the TRID Improvement provision becomes law and TRID is thereafter revised accordingly.  If the borrower in the above example then elected to purchase owner’s title insurance, he/she would have to pay $400 for the lender’s title insurance and $1,200 for the owner’s title insurance, exactly as disclosed on the TRID forms and as quoted by the title insurance agent.  However, if the consumer elected not to purchase owner’s title insurance, the lender would be required by TRID to give the borrower a revised Loan Estimate disclosing the cost of lender’s title insurance when purchased by itself, i.e., $1,000.  If it didn’t, it would likely have to refund to the borrower most or all of the $600 difference between the amount disclosed on the initial Loan Estimate for lender’s title insurance (when purchased together with owner’s title insurance) and the actual cost (when purchased by itself). Not only would borrowers not be “gouged” if the TRID Improvement provision were enacted into law, they would also not be confused.  The disclosures on the TRID forms would be identical to the title insurance premium rates quoted by the title agent as well as to the rates established under state law and/or in the title insurance ratings manual.  And isn’t the goal of TRID to make the forms less confusing to borrowers and easier for lenders and settlement agents to explain to them? Painting all of the changes that the House might attempt to add to S-2155 with such a broad brush, as Senator Warren has done, seems short-sighted.   So as not to run the same risk as the boy who cried wolf once too often, a better approach would seem to be for her to encourage or at least not vilify non-controversial amendments, like the TRID Improvement provision, that the House might add to S-2155 notwithstanding other provisions that she deems truly objectionable.