Proposed Changes to Truth-in-Lending
Dear Reader,
Marissa Aquila, Esq., one of Bankers Advisory’s staff attorneys and our resident Truth-in-Lending expert, has authored the following article as a preview of Reg Z changes. To discuss how Bankers Advisory can help your organization monitor compliance, contact me at anna@bankersadvisory.com.
Anna DeSimone
Proposed Changes to Truth-in-Lending
by Marissa Aquila, Esq.
Staff Attorney, marissa@bankersadvisory.com
As members of the lending community are well aware, recent efforts to comply with HUD’s new RESPA requirements are taking place amidst the Federal Reserve’s implementation of revised Truth-In-Lending requirements pursuant to Regulation Z. The purpose of this article is to begin to refocus the community’s attention and energy, both of which are stretched thin and, pardon the pun, maxed-out, because ready or not, here come more changes.
The pending Regulation Z revisions affecting closed-end mortgage loans are just the latest chapter in the Federal Reserve’s comprehensive Regulation Z review which began in 2004. Thus far, this process has resulted in two new final rules affecting closed end credit transactions: the 2008 HOEPA final rule and the additional requirements of MDIA, approved in May of 2009.
The lending community should expect the next Regulation Z revisions to require new disclosures at application, within three days after application, three days prior to consummation and post-consummation. One of the more substantial changes being proposed affects the term presently referred to as the loan’s “finance charge.” If approved and implemented as proposed, the revised Regulation Z will require disclosure of the “interest and settlement charges” for the subject loan in lieu of the “finance charge” disclosure. The proposed revisions will also change the current APR calculation to include most, if not all, the fees on the HUD1.
Below are key points about the proposed Regulation Z revisions for closed-end mortgage loans:
Disclosures at Application
The proposal intends to make TIL disclosures more meaningful and user-friendly by requiring lender to:
- Provide consumers with two new Board publications entitled “Key Questions to Ask about Your Mortgage” and “Fixed vs. Adjustable Rate Mortgages” in place of the CHARM booklet presently required; and
- Revise the format and content of the ARM loan program disclosure to include a tabular question-answer format, a plain language disclosure of interest rate and payment information and disclosure of potentially risky loan features.
Disclosures within Three Days after Application
The proposals intend to make information clearer and more conspicuous. The proposal revises the calculation of the finance charge and APR to better capture most fees and costs, and will require that new TIL disclosures include:
- A graph that will show consumers how their APR compares to the APRs for borrowers with excellent credit and impaired credit
- Potential changes to the interest rate and monthly payment
- Total settlement charges, as currently required for the GFE under RESPA and Regulation X
- A summary of key loan features including the loan term, amount and type
The proposed revisions also include new format requirements, including type size, use of boldface for certain terms, placement of information and highlighting certain information in tabular format.
Disclosures Three Days before Consummation
The proposal requires creditors to provide a “final” TILA disclosure which consumers must receive at least three days before consummation. Two proposed alternatives exist to address changes which occur during the three day period prior to consummation.
- If any terms change after the “final” TILA disclosures are provided, then another final TILA disclosure would be issued three business days prior to consummation.
- If the APR exceeds a certain tolerance or an adjustable-rate feature is added after the “final” TILA disclosures are provided, then another final TILA disclosure would be issued three days prior to consummation.
Disclosures after Consummation
The proposal changes the timing, content and types of notices provided after consummation.
- For ARMs, advance notice of a payment change must be provided 60 days before the change not 25 days prior to the change and the format and content of the ARM interest rate adjust notice will be revised.
- For loans with negative amortization, a monthly statement containing information about payment options that includes the costs and effects of negatively amortizing payments must be provided.
- For creditor-placed property insurance, notice of the cost and coverage of such insurance must be provided at least 45 days before imposing a charge for the insurance.
Loan Originator Compensation
The proposal contains new limits on broker/originator compensation, including:
- Prohibiting certain payments to mortgage brokers or loan officers based on the loan’s terms and conditions; and
- Prohibiting mortgage brokers or loan officers from “steering” consumers toward transactions which are not in their interest in order to increase the mortgage broker or loan officer’s compensation.
For a comprehensive review of the proposed Regulation Z revisions consult the July 17, 2009 Board Memorandum prepared by the Federal Reserve Committee on Consumer and Community Affairs available at: http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Board%20Memo%20CE%20and%20HELOC.pdf
In general, the revised TIL disclosures will contain more of the information presently disclosed on the HUD1 Settlement Statement and the corresponding GFE disclosure. Expect the longstanding conversations regarding coordination and consistency between RESPA and TIL requirements to continue.
This article discussed the proposed Regulation Z revisions affecting closed-end mortgage transactions. Public comments regarding these proposals are available for viewing on the Federal Reserve’s website. The final rules are expected in to be adopted sometime in the next few months. Additional proposed Regulation Z revisions will affect HELOCs, stay tuned.
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