Truth-in-Lending Amendments
Regulation Z, Subpart C, Closed End Credit, Section 226.17,
General Disclosure Requirements
Effective July 30, 2009
Please note, the author of this blog post is Gordon W. Schlicke
Sec 226.2
General Business Day Definition. With regard to the timing of mandatory disclosures, the definition of a general business day is: “A day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. This definition is also is used for purposes of the rule prohibiting the collection of a fee (other than a fee for obtaining a consumer’s credit history) before the consumer receives the early disclosures. However, for purposes of rescission under Sec.226.15 the term means all calendar days except Sundays and the legal public holidays.
Consumer Fees. Prohibits consumer fees in connection with the consumer’s application for a mortgage loan before receiving the GFE disclosure. Permits a fee for obtaining the consumer’s credit history before the consumer has received the GFE provided the fee is bona fide and reasonable in amount.
Sec. 226. 17
GFE Redisclosure. If closed-end credit disclosures are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the creditor shall disclose before consummation: (1) any changed term, unless the disclosure was based on “best known information at the time” and labeled as such, and (2) all changed terms, if the APR at time of consummation varies from the APR disclosed earlier by more than .125% in a regular transaction (FRM) and .250% in an irregular transaction (ARM).
Sec. 226.19
GFE Timing. On RESPA-related purchase and refinance transactions, requires the Good Faith Estimate (GFE) be delivered or placed in the mail not later than the third business day after the creditor receives the consumer’s written application. If the GFE is mailed, the consumer is considered to have received it three business days after mailing. There are no further rules regarding the delivery of disclosures by overnight courier, electronic transmission.
An application is received when it reaches the creditor in any of the ways applications are normally transmitted–by mail, hand delivery, or through an intermediary agent or broker. If an application reaches the creditor through an intermediary agent or broker, the application is received when it reaches the creditor, rather than when it reaches the agent or broker.
Seven Business Day Waiting Periods. The creditor shall deliver or place in the mail the good faith estimates required of this section not later than the seventh business day before consummation of the transaction. The seven business-day waiting period begins when the creditor delivers the early disclosures or places them in the mail, not when the consumer receives or is deemed to have received the early disclosures.
For example, if a creditor delivers the early disclosures to the consumer in person or places them in the mail on Monday, June 1, consummation may occur on or after Tuesday June 9, the seventh business day following delivery or mailing of the early disclosures.
If the APR disclosed is not accurate then the creditor must make corrected disclosures of all changed terms including the APR so that the consumer receives them not later than the third business day before consummation.
Assume consummation on a FRM is scheduled for Thursday, June 11 and the early disclosures for a regular mortgage transaction disclose an APR of 7.00%. However, the lender learns that the APR at consummation will be 7.15%. The creditor must make sure the consumer receives new disclosures on or before Monday, June 8. If re-disclosure occurs after this day, the consummation date must be moved into the future.
Waiver of Disclosure Waiting periods. If a consumer determines that an extension of credit is needed to meet a bona fide personal financial emergency, the consumer may shorten or waive the waiting period after the consumer receives accurate TILA disclosures that reflect the final costs and terms. To shorten or waive a waiting period, the consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all the consumers who will be primarily liable on the legal obligation. Creditors may not use pre-printed forms for this purpose.
For example, a consumer might receive the initial early disclosures with the expectation of closing the loan within 60 days. However, the consumer’s financial circumstances might change in the interim, creating a need to consummate the loan immediately. If the APR stated in the early disclosures is no longer accurate, after receiving a corrected disclosure the consumer can provide a signed statement describing the financial emergency in order to waive the three-business-day waiting period and close.
Consumer Notice. Required disclosures in this section now must contain the following language:
You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.
Imposition of fees. Neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer’s application for a mortgage transaction before the consumer has received the disclosures required this section. A fee may be imposed for obtaining the consumer’s credit history before the consumer has received the disclosures required provided the fee is bona fide and reasonable in amount.
Sec. 226.24
New Advertising Rules. The new standard complements the existing clear and conspicuous standard that applies to open-end credit disclosures. Advertisements may include only the simple annual interest rate, or the rate at which interest will accrue along with and not more conspicuously than the disclosed APR. Additionally, if an advertisement includes a simple annual interest rate, such as a teaser rate, and more than one rate may apply to the loan’s term, the advertisement must include
• Each simple annual rate of interest that will apply
• The time period for which the rate will apply; and
• The loan’s APR
If an advertisement states any payment amount, the ad must include
• The amount of each payment that will apply during the loans’ term, including any balloon payment
• The period of time each payment will apply; and
• The fact that the payments do not include taxes and insurance premiums if a first-lien loan
Prohibited Advertising Practices include unfair, deceptive acts or anything associated with abusive lending practices or otherwise not in the borrowers best interest. These are
• Using the term “fixed” when advertising a variable–rate loan transaction with a planned payment increase without including information about the time period for which the rate or payment is fixed and stating “ARM” if applicable.
• Comparing the advertised rate or payment to an actual or hypothetical rate of payment without disclosing the rates or payments that will apply during the entire loan’s term and that they do not include taxes and insurance, if applicable.
• Misrepresenting that a loan is government endorsed.
• Using the name of the borrower’s current lender without including the actual advertiser’s name and disclosing that the current lender is not associated with the advertisement.
• Making a misleading claim that debt will be eliminated or waived rather than replaced.
• Using the term “counselor” to refer to a for-profit mortgage broker or creditor
• Providing an advertisement in one language while providing required disclosures in another.
A New Category: Higher-priced loans. Definition: A consumer credit transaction secured by a consumer’s principal dwelling with an annual percent rate (APR) that exceeds the average prime mortgage offer rate for a comparable transaction as of the date the interest rate is set by
• 1.5 or more percentage points for loans secured by a first lien on a dwelling, or 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling
In this new category, loans are priced higher than prime mortgage loans and priced between prime and Section 32 loans. The section prohibits creditors from extending credit based on the value of the property (equity loans) without regard to the consumer’s repayment ability as of consummation of the loan, including the consumer’s reasonably expected income, current obligations, employment, assets other than the collateral, and mortgage related obligations. Requires creditors to verify income and assets relied upon in making the loan. Prohibits prepayment penalties except under limited conditions. Requires creditors to establish escrow accounts (for first lien loans) for taxes and insurance, but permits creditors to allow borrowers to opt out of the escrows 365 days after loan consummation (this is effective April 1, 2010 and October 1, 2010 for manufactured homes.)
The new category should not be confused with existing HOEPA loans, often referred to as Section 32 loans. Higher-priced loans have lower triggers than HOEPA loans and therefore encompass more loans. Additionally, the rule for higher-priced loans applies to purchase money mortgages, which are excluded from HOEPA’s coverage. But like, HOEPA, the final rule for higher-priced loans excludes home equity lines of credit (HELOC’s) and construction and reverse mortgage loans.
Sec. 226.32
Prepayment Penalty Rules. A mortgage transaction subject to the high-priced loan section may provide for a prepayment penalty if, under the terms of the loan:
• The penalty will not apply after the two-year period following consummation;
• The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor;
• At consummation, the consumer’s total monthly debt payments (including amounts owed under the mortgage) do not exceed 50 percent of the consumer’s monthly gross income;
• The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.
Sec. 226.34
Borrower’s Repayment ability. Prohibits lenders from extending mortgage credit to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.
Reserve Accounts. Defines mortgage-related obligations as property taxes, premiums for mortgage-related insurance required by the creditor as set forth in §226.35(b)(3)(i), and similar expenses.
Requires verification of repayment ability. Lender must verify amounts of the consumer’s income or assets that it relies on to determine repayment ability, including expected income or assets, by the consumer’s Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.
Requires verification of the consumer’s current obligations. Lender must determine the consumer’s repayment ability using the largest payment of principal and interest scheduled in the first seven years following consummation of the loan and take into account current obligations and mortgage-related obligations; the ratio of total debt obligations to income, or the income the consumer will have after paying debt obligation.
Sec. 226.35(b)(3)
Establishing Escrow Accounts for principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. Also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence.
Administration of escrow accounts requires creditors to establish before the consummation of a loan secured by a first lien on a principal dwelling an escrow account for payment of property taxes and premiums for mortgage-related insurance required by creditor.
Optional insurance items. Does not require that escrow accounts be established for premiums for mortgage-related insurance that the creditor does not require in connection with the credit transaction, such as an earthquake insurance or debt-protection insurance.
Limited exception. A creditor is required to escrow for payment of property taxes for all first lien loans secured by condominium units regardless of whether the creditor escrows insurance premiums for a condominium unit.
Sec. 226.36(a)(b) effective 10/1/2009
Mortgage broker defined. The term “mortgage broker” means a person, other than an employee of a creditor, who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person, even if the consumer credit obligation is initially payable to such person, unless the person provides the funds at consummation out of the person’s own resources, out of deposits held by the person, or by drawing on a bona fide warehouse line of credit.
Appraiser defined. An appraiser is a person who engages in the business of providing assessments of the value of dwellings. The term “appraiser” includes persons that employ, refer, or manage appraisers and affiliates of such persons.
Prohibited Acts: Misrepresentation of value of consumer’s dwelling.
In connection with a consumer credit transaction secured by a mortgage, no creditor or mortgage broker, or affiliate of a creditor or mortgage broker shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.
Examples of actions that violate this paragraph include:
• Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling;
• Excluding an appraiser from consideration for future work because the appraiser reports a value of dwelling that does not meet or exceed a minimum threshold;
• Telling an appraiser a minimum reported value of a consumer’s principal dwelling that is needed to approve the loan;
• Failing to compensate an appraiser because the appraiser does not value a dwelling at or above a certain amount; and
• Conditioning an appraiser’s compensation on loan consummation.
Examples of actions that do not violate this paragraph include:
• Asking an appraiser to consider additional information about a dwelling or about comparable properties;
• Requesting that an appraiser provide additional information about the basis for a valuation;
• Requesting that an appraiser correct factual errors in a valuation;
• Obtaining multiple appraisals of a principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
• Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract;
• Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.
A creditor who knows, at or before loan consummation, of a violation of this section in connection with an appraisal shall not extend credit based on such appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling.
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These changes apply to all lenders equally: bank, broker, consumer finance company, credit union.
Questions:
1) In your own opinion, why has the federal government handed down these new rules?
2) These rules went into effect Oct 1, 2009. So far, have these new rules had a negative or positive effect on your clients? What about your own business?
3) With the more stringent rules for loans that fall into the High Priced Loan category, are underwriting guidelines getting tougher, weaker, or staying the same?
My opinion is that the federal government is trying to cover their butts wherever possible. The likely hood of these rules being broke are good in this industry, or at least a loop hole found. Too many people are out for #1 (themselves), we’ve seen this time and time again.If the government keeps throwing around new rules then eventually they should be able to close all loop holes.
I have also noticed that underwriting guidelines have gotten tougher, which is unfortunate for the “average joe”. I have noticed that he is the one getting the short end of the stick now.
They are trying to protect the consumer from a bait and switch sort of process. This is to make sure they are aware of any and all changes made to their transaction from what they originally expected or signed on for. They are also trying to clearly define who is covered by these regulations so there is no confusion.
The biggest problem with these regulations is that it has slowed the process of getting through the loan process. We now have minimum days to wait before appraisal can be ordered. We have to wait for the lender to send disclosures. This has also created a whole new level of time keeping for the lo and processors to ensure these timelines are met. There are also so many times throughout the process that a fee could change that we are having to send out many updated GFE’s to the client. They are asking why am I getting another one of these? We need to have a system created maybe through point that tracks these things.
The rules have gotten tougher and underwriting guidelines have tightened up. It is harder for the average american to get financing, even if they have a down payment and good income.
It seems as if there is nothing left for the Law Makers to do but make more and more rules more ammendments more definitions as if rules made by people not activly involved in the Industry can be easily integrated into a faulty system will automaticaly change every thing and make it right. But in reality they are clogging up an already clogged system. To my mind Simplification and Clarity are what is required in an Industry that is so basic and essential to the overall economy. Some day they will have to get it right or else we will be headed for another Economic Adjustment that we cannot ever afford.
I believe that the federal government has handed down these rules to protect the consumer as well as themselves. With everything going on I think that the federal government must react and then only way to react is to make more rules. This in effect is what it going on.
Since these rules have gone into effect I wouldn’t say that they have had a negative or positive effect on my clients but I would say that it has definitely slowed down the process with all the new requirements. If the time line is taken into consideration, then it could be seen as a negative for my client.
The requirements have gotten tougher for all borrowers even if they have excellent credit and 20% down.
Once again, the government is locking the barn door after the horse has been stolen. I see no evidence that our industry was given an opportunity to at least opine on the difficulties and perhaps offer alternative solutions to the problems and violations which occured before the amended rules. Too many new rules imposed too quickly so the politicos can say “Look what we did for you” The new rules will eventually work but at what cost? and could the process have been more smooth working to benefit all?
The TILA/MDIA rule is a little much; however, in the legal world with our “suit happy” sociaty, the rules were going to change. Failure to disclose the specific loan program is huge, which just opens up further investigations. All the required lending disclosures in the hands of inexperienced loan originators; I rest my case! Worst case; we can no longer close a loan in one day. Best case; A well disclosed consumer and once again, we’re covering out butts.
The federal government is just rewritting rules that they already had in place that some did not follow. they are so repeatative that it gets confusing even for some. In RESPA they want the broker to send out disclosures and not the lenders, in TILA they are requiring both to send out disclosures, instead of redisclosing with just 3 days they now are requiring 7 days, but the consumer can have an emergency and waive their 3 day???? How many LO’s are going to creat an emergency to waive the 3 days. I have already seen some try and have the borrowers wiave that they have the appraisal 3 days in advance. The law makers have to make sure they are doing something for thier hard earned money. I would not say this has a negative impact, most borrowers call and say I received something from this lender or escrow, I did not open it. Do I need to sign it and send it back? If they are not required to be in the package dated prior to the lender even accepting the loan package from the broker what good is it going to do. The consumer still relys on what they are told by their LO’s, not sure how the law is going to help other than they will have the information and it will be up to them if they do not read it. Also, how is the government going to police if you have sent it out in three days if there is no return receipt with signature required for each borrower?
Underwriting guidelines certainly have been a lot tougher over the last year. All of their requirements for submitting a loan have gotten tougher. I think if you know what they want going into it and putting together a complete file with all disclosures signed and dated and all income asset documentation along with title, etc once it gets to underwriting you should not have that many conditions in order for your loan to close on time and the borrower will not know that there is any difference in the process.
The government will not be able to pass any laws that will make everyone happy. I will rather focus on what the laws are and try my best to avoid breaking them. Guidelines are indeed tougher now, and some borrowers will find it very difficult to obtain financing. I think as time passes and common sense underwritting creeps back in, we will all be in a better situation in the future.
TILA-MDIA:
The Feds are trying to implement protection for the consumer. The problem we are facing now in the industry is not that the consumer is not protected but that there is so much protection most cannot get the loans from the banks or if they can it take forever! The new rules are a little over the top. They have slowed down my transactions thus effected me in a negative way. They were written by politicians who are trying to impress the American consumer by slapping the hands of us horrible Lenders but in turn are hurting their constituents. In regard to high priced loans or all loans: Underwriting right now is horrible. It is so hard for my UWs who have to jump through so many hoops.
HUD is issuing these rules to legislate certain risk practices, align regulations regarding appraisals with HVCC and generally prohibit risky or coercive and predatory lending practices. The limitations on higher priced loans are to make sure any “sub prime” loans have certain risk evaluation criteria that ensure loans are given to people that can repay them based on credit income etc. Problem is, the sub prime market is no longer in exitence. The redisclosure requirment and the prohibition of taking fees from consumers is good because most people collected fees up front which made consumers less likey to shop even though those funds had to be used for 3rd party reports.
It has not impacted my clients yet but I can tell you it inevitably will. I closed a purchase loan in 5 days once becuase another lender could not preform. Now, I will have to wait 7 days. Not sure why the 7 day period is for..possibly directed at consumer finance companies. I am not sure this part of the rule is beneficial at all other than creating two recission calcuations.
Underwriing guidelines are getting tougher but I think we have reached the bottom with the new version of DU that went into effect on Dec 12th. Most other lenders have stabilized their ltv’s and loan amounts from what I can tell.
I feel the Federal Government is handing down all these new rules and laws so that everyone is playing under the same rules and laws and protecting consumer. The Federal Government didn’t do anything for years until after this train wreck hit. Right now its slowing everything down from underwriting to getting the loan processed. Eventually it will all level out and things will flow smoothly.
There would have been a lot less fallout if these rules had been in effect years ago. It just makes good sense to protect the borrower from being misled. Most of the people who were doing business in a way these new regulations are seeking to prevent are no longer doing business because they can’t make their money the dishonest way anymore. All in all, this is pretty good legislation. It certainly prevents a client coming back after the fact and claiming any malfeasance on the brokers part. (A common and annoying refrain from an endless stream of people in the media when the subprime mortgage crisis broke – isn’t that what the rescission is for? What about signing docs at escrow?) It will make for more costly loans that have to be extended or have terms changed near the end of loan process if any changes prove necessary in the last 7 days before docs are drawn since another 7 days are required. We all know that never happens. 😉
Why did the federal governemnt hand down new rules??? I think someone said it earily, it like closing the barn door AFTER the animals have left. I think the government is trying to protect the consumer as well as themselve. The problem is no matter how many rules you have someone will find a way to break them. I think the entire loan process is becoming more difficult and with the number of disclosures I think the consumer is often confused. High priced Loan I think it is about the same
This does a good job of laying out requirements for advertising and disclosing. It would only seem as if ENFORCING this will be something that will have to lend itself to the FERA 10 year statute because of the labor intensive requirements for auditing. I am hoping that technology will find a way to automate some of these laws into our work flow process.
I think I need to do a much better job in proof reading my answers! I also think that it does a great job at defining and laying out the requirements for disclosing as well as advertising. My thought is how is it going to be enforced? Especially if the GFE is mailed (snail mail) the consumer is considered to have received it?!
The Government has handed down these rules because of the results of the last 4 years. Not to mention there was no precedent beforehand that could alleviate this. Now with the language in place there is a precedent to enforce, or mandate from.
I have only seen positive results from this now that consumers have a conversation piece to test me on. Most of the time I haven’t had a change in who I deal with since my focus was on full documentation loans, or FHA loans. In all it makes for a more educated borrower and Loan Officer.
Underwriting guidelines are definitely getting tougher but for the better. We don’t need another large wave of foreclosures and bad loans hurting the economy. At times there can be an absence of common sense but this isn’t always the case.
Nothing more than modification of existing rules. There certainly is no more grey area. We all shall be working from inside the lines.
No more bait and switch tactics. The consumer is now a well inform buyer. Unlike in the past almost anything went. All those who don’t like to pay attention to detail will have problems. There are still some that think these rules don’t apply to them.
Many of thse rules have been place but there was little or no enforcement. Qualified buyers and qualified loans professionals are the attire of the day.
Did I hear some one say? Full and accurate disclosure.(-:
The rules and regulations are for ful disclosure and uniformity in the way business is handled. It is intended to protect the customer as well as make sure that the lenders are doing business in a manner consistent with all the practices and guidelines laid out by the government. It has however made time for underwriters processing loans a lot longer and underwriters are calling for more and more documentation.
Tightening definitions and regulations. It makes sense the swing towards protecting the consumer was going to go to the extreme. My only concern while it levels off is I am finding it nearly impossible to get loans closed in a timely way in even the best cases. I have always taken compliance and full disclosure very seriously for the last ten years but find the process to be so cumbersome now, I feel my hourly wage if I was to factor it that way, is half of what it was only a year ago. That, and the consumers I would be able to help in the past cannot even get into the game anymore due to the variety of tests they need to pass to qualify – let alone jumbo/portfolio loans which cancels out high priced cities like my own. I worry we have not seen the end of the decline in high priced markets, who can even afford to buy/ let alone qualify?
The government is trying to protect the consumer, this is great but it a bit extreme. It is taking forever to complete a loan now and with all the constant changes in the rules and regulations it is time consuming to figure out if all the i’s are dotted and t’s crossed. It has affected my clients alot, It is very difficult now to get someone approved unless they are PERFECT, I would like to see some loosening up on the underwriting.
Professionally Law Makers are making it more diffcult to abide by the law or the knowledge therein.We are becomming a law abiding suit happy society. There is always going to be change fro learning something, but to empty the 25 cart of lendign practices and implement a new set of rules will always have diffrent interpertatiions, and it is hurting the client for its harder to obtaina loan and the 5 big banks aren’t lending and if they sense an error it easy tosay, REDISCLOSE now your itnto 7 days and the rates are subject to chang, here’s a answer, let the redisclosue occure in the funding table and thee shouldn’t be any LEGAL BAIT SWITH with the sensative tollerances now dictated to us you will have to pay if your trying to gouge the customer.A a computor is a computor its only as good as the information imput so if the data is off by .10 guess what there’s go the program redisclose. And I laugh about the Mortgage Broker Sec 226.36A YEs we are independent and the lenders acknowledge this they are now trying to make us look like the bad guys when in fact 60% business we complete to there guidelines etc
The protection for the consumer from goverment is welcome, of couse, the time consumed would be a function of direct relationship with it. Nothing is perfect.