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?