CFPB Approves First Trial Disclosure Program Allowing Modified TRID Forms for Construction-to-Permanent Lending: Is the Juice Worth the Squeeze?
On November 21, 2023, the CFPB announced its first approval of a “trial disclosure program,” which is a program under Dodd-Frank Act section 1032(e) that allows the CFPB to permit use of a modified disclosure during a limited time period with a safe harbor or an exemption from compliance. The goal of the program is “to improve upon” a prescribed model form, which can inform future CFPB rulemaking. This first trial disclosure program was applied for by the Independent Community Bankers of America (ICBA) to allow provision of modified TRID forms for construction-to-permanent lending. I have been asked by many clients and the public for my thoughts on this, because I led the TRID final rule while at the CFPB, including the design of the TRID forms. While I support the trial disclosure program generally, I think there are many important questions about this particular approval, including whether the modifications will actually improve upon the TRID forms? Will anyone provide the trial disclosures? And, what does this first approval mean overall?
The ICBA’s stated goal for the trial disclosure is to “increase the availability of affordable single-close construction-to-permanent loans.” ICBA stated that, “many community banks are reluctant to offer such loans based on concerns about complying with [TRID].” The ICBA’s trial disclosure program, which is described in the CFPB’s approval, contains many modifications to the TRID forms for construction-to-permanent loans, and includes instructions on how to complete the modified sections of the forms.
As noted above, this is the first approval under the CFPB’s trial disclosure program over its 10-year history. The CFPB’s trial disclosure program has been open since about 2013, when it issued the first policy statement for the program. The CFPB issued a revised policy statement for the program in 2019, with some changes to encourage applications. But the program has been quiet until now.
Please note that no company is providing these disclosures yet. The CFPB’s final trial disclosure policy allows for trade associations and other groups to apply for a so-called “template” approval, which allows lenders to apply for authority to participate in the program described in the template and take advantage of Dodd-Frank’s compliance safe harbor or exemption (which the final policy statement refers to as a “waiver”). The CFPB states that this template approval is “non-operative” and “nonbinding on the CFPB.” This means that, although the CFPB says it intends to grant applications under the template, it is not obligated to do so. The CFPB says in the policy statement that for applications under a template, it will assess “the degree to which the applicant’s use of trial disclosures is consistent with the framework described in the TDP Waiver Template.” Thus, no lender is currently approved to provide these modified forms.
A huge barrier to participating in this program will be whether software exists to populate these forms in the manner described in the template. It is very risky to complete TRID forms by hand or through a PDF program at any significant volume (although the TRID rule allows hand-completion). In the past, I have helped a few clients complete the promulgated TRID forms for construction-to-permanent loans using PDFs, but the complicated modifications in the template and volume sought would likely preclude that route. To be able to meaningfully test these forms in the marketplace (and provide the CFPB the performance data it expects), interested lenders will most likely need a loan origination software or document production company to be on board with the test, which will likely include additional costs and contract negotiations. In addition, the software companies may be reluctant to participate in the program, because the modification instructions in the ICBA’s template are somewhat complicated and unclearly written (more on the modifications below). Deviation from the approved template could result in significant liability and be the subject of private lawsuits or enforcement, despite the waiver provided by the CFPB.
In addition, the CFPB’s template approval states that the “CFPB is interested in receiving applications from a number of lenders, rather than a single market participant.” Does this mean that the CFPB will wait to receive multiple lender applications before approving any lenders?
Also, participating in this program will require companies to create a testing plan to provide relevant performance data to the CFPB. Applicants will have to present this information to the CFPB, including:
The size, location, and nature of the consumer population to be involved in the testing program, an explanation of how the population was chosen, and a description of any plans to scale or modify the population over the duration of the testing program.
A description of test result data that the applicant expects to share with the Bureau, and
Metrics for evaluating whether the trial disclosures tested actually improve on existing disclosures.
In light of these hurdles, it will be interesting to see if any lenders submit applications for waivers under this template.
Substantively, these disclosures are a mess. It appears that many of the modifications will be confusing than the current promulgated forms. Also, the template appears to eschew any concern for “information overload,” which was a primary factor in the CFPB’s design of the TRID forms. Further, as noted above, some of the instructions are unclear and appear different from the sample forms in the template. Finally, there are concerns about whether there is sufficient space on the forms for the modified information required under the template. I will highlight just a few of the modifications below, and describe my concerns.
Loan Term. To disclose the Loan Term for the construction and permanent phases, the template says to disclose the two phases separately with the word “to” in between them. The template’s examples are:
“9 mo. To 30 yr.”
“1 year to 15yr., 5mo.”
Consumers could become confused about whether this is describing a range, because of the word “to” that is typically used to describe ranges, rather than two separate phases.
Product. The Product disclosure under the template also has separate disclosures for each phase, separated by the word “to.” The template’s examples are:
“1 year Interest Only, Fixed Rate to 7 Year Balloon Payment, 5/1 Adjustable Rate”
“13 mo. Interest Only, 3/1 Step Rate, to 30 yr. Fixed Rate”
Consumers may also become confused by the volume of information in these bullets, experience information overload, or again confuse this for a range because of the word “to.” Also, this amount of information could cause space and readability problems on the TRID forms.
Rate Lock. The Rate Lock disclosure would also be split apart, with separate Yes/No checkboxes organized vertically for each phase. But the modified forms give no clear indication to the consumer to which phase each set of checkboxes applies. Also, in the example in the template waiver, there is also the addition of a phrase “Permanent Financing Rate Float” beside the permanent phase checkboxes. It seems like this phrase could confuse a consumer. Also, is this the only allowed use of this phrase? Can it be used for the construction phase as well? Can lenders use a different phrase under the trial? The template does not address these questions.
Projected Payments. The template would split the Projected Payments table into a first column for the Construction phase only, with the timeframe in the column header rounded to the nearest whole year. The conversion to the permanent phase would be disclosed in the subsequent column with the header “Permanent.” The rounding of the construction phase timeframe in the column header to the nearest whole year will likely be confusing to consumers. There is no example of this in the template, but if the construction phase is only 9 months, it appears that the template would require the construction phase to be disclosed in the column header as “Year 1.” This would likely be very confusing to consumers.
Sample Form. The sample CD in the template’s appendix appears to include modifications that are not described in the body of the template. For example, the sample CD discloses the date of the first permanent phase payment in the Projected Payment table’s Permanent column, but this is not described in the template’s instructions.
In sum, there are real questions of whether these modifications will actually help consumers. In addition, it is uncertain whether any lenders will expend the costs and resources to deal with the significant hurdles and challenges in providing these forms under the trial disclosure program. Further, in light of some confusing aspects of the template’s instructions and sample forms, although an approval from the CFPB would theoretically provide for a compliance safe harbor, there could still be potential liability for private lawsuits or enforcement regarding whether the provided forms deviated from the template, which could affect the safe harbor. Lenders that want to conduct a trial disclosure program under the ICBA’s template approval should carefully consider these issues in advance to ensure a successful trial disclosure program.
But generally, seeing the first approval under the trial disclosure program is encouraging. It shows the CFPB still considers the trial disclosure program to be active, while other innovation programs appear to have been put on ice. It also shows the CFPB’s willingness to consider and approve trial disclosures. If you have an idea for disclosure modifications that you would like to test in actual transactions (for any model form or product, not only TRID), it may be worth applying to the CFPB for a trial disclosure program.
Please contact rich@garrishorn.com if you would like to apply for a trial disclosure program, or to discuss the issues in this blog post.
