Transcript Update on New TILA Regulations

Update on New
TILA Regulations
Joseph M. Kolar
[email protected]
202.349.8020
Understanding new consumer protections
under TILA/HOEPA
• Mortgage Disclosure Improvement Act
• New Underwriting Requirements for Higher
Priced Mortgage Loans
• Advertising, Appraiser, and Servicing
Restrictions
• “Transfer of Loan” Disclosure
• Proposed Comprehensive Changes
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Mortgage Disclosure Improvement Act (MDIA)
Effective for all loan applications received on or
after July 30, 2009
• Initial Fee Restrictions
• Early Disclosures
• “No Requirement to Complete” Statement
• Seven Business Days Prior to Consummation
• Three Business Days Prior to Consummation
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MDIA – Initial Fee Restrictions

No fees may be collected, except for a reasonable credit report fee,
until consumer has received early disclosures.

Applies to lender and to all other parties

Differs from RESPA Rule – See FAQ (GFE-General) #10
Q: At what point can a loan originator charge a loan applicant fees
for services other than the cost of obtaining a credit report?
A: After a loan applicant both receives a GFE and indicates an
intention to proceed with the loan covered by the GFE, the loan
originator may collect fees beyond the cost of a credit report for
origination-related services.
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MDIA – Early Disclosures
•
Early disclosure rules apply to all closedend mortgage loans covered by TILA and
RESPA, other than timeshares.
•
No longer limited to only purchase-money
transactions secured by principal dwelling.
•
Remember: In rescindable loan, all parties
with interest in property get disclosures.
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MDIA – Early Disclosures
• Early disclosure must be placed in the mail
or delivered both
– No later than the third business day
after the lender receives a written
application, AND
– No later than the seventh business
day before consummation.
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MDIA – Early Disclosures
• The general definition of “business day” is
used for initial three-day period (e.g., all
days in which lender’s offices are open to
the public), BUT
• “Rescission” definition is used for sevenday, pre-consummation waiting period
(e.g., all calendar days except Sundays
and federal holidays).
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MDIA – Early Disclosures
• If early disclosures are mailed, receipt is
assumed three business days later
(“rescission” definition)
• Fees may therefore be collected after
midnight on third business day following
mailing (i.e.,on the 4th day) (but remember
RESPA)
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MDIA – “No Requirement to
Complete” Statement
• “You are not required to complete this
agreement merely because you have
received these disclosures or signed a
loan application.”
• Phrase must be “in conspicuous type size
and format” and “grouped together with
the disclosures required by” Regulation Z.
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MDIA - Three Business Days
Prior to Consummation
• If APR at consummation will differ by more than
1/8 of 1% (1/4 for irregular transactions) from the
APR in the most recent disclosure, corrected
disclosures must be received by the consumer
no later than the third business day before
consummation.
• If corrected disclosures are mailed, receipt is
deemed to have occurred three business days
after mailing (“rescission” definition).
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MDIA - Three Business Days
Prior to Consummation
• If APR at consummation will be
overdisclosed because of an
overdisclosed finance charge, then
redisclosure may not be required.
• Some investors may still require
redisclosure for both increased and
decreased APRs beyond the applicable
tolerances.
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Liability for MDIA Violations
•
•
TILA Actual Damages – must prove “detrimental
reliance”
Probably Not Statutory Damages
Majority of caselaw suggests “timing” violation does
not trigger statutory damages (See In re Ferrell, 539
F.3d 1186 (9th Cir. 2008))
• But no case has ruled on specific MDIA sections yet
• Statutory Damages (up to $4,000 per violation) do
apply to expanded variable rate disclosure (proposed,
but not yet effective)
•
•
•
State Unfair and Deceptive Acts and Practices
(UDAP) laws (which typically allow private right
of action)
Any Cure?
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New TILA/HOEPA Rule Overview
• Broad new rule, adopted principally under the Federal
Reserve Board’s authority under Section 129 of the Truth
in Lending Act
• TILA Section 129(l)(2): “The Board, by regulation or order,
shall prohibit acts or practices in connection with—
– (A) mortgage loans that the Board finds to be
unfair, deceptive, or designed to evade the
provisions of this section; and
– (B) refinancing of mortgage loans that the Board
finds to be associated with abusive lending
practices, or that are otherwise not in the interest of
the borrower.”
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Effective Dates
• General effective date – October 1, 2009
– Servicing rules effective for both new and
existing loans as of that date
– April 1, 2010 for escrow requirements on
sitebuilt homes
– October 1, 2010 for escrow requirements on
manufactured housing loans
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TILA/HOEPA Rule - Summary
• A new category of “higher-priced mortgage loans”
(“HPMLs”) created, with specific requirements
relating to HPMLs;
• New rules for all closed-end mortgage loans
secured by the principal dwelling, including rules
in relation to origination and servicing; and
• New advertising rules to curb various practices
the Federal Reserve Board considers deceptive,
for both open-and closed-end mortgage loans.
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HPML Threshold
• APR exceeds “average prime offer rate” (APOR)
– plus 150/350 basis points for first/subordinate
liens
– APOR, available at FFIEC website for various
loan types, is based on the Freddie Mac Primary
Mortgage Market Survey
– Calculated as of time of rate lock
• Lenders need to analyze carefully whether FHA,
jumbo, and PMI loans end up in the HPML
category
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Loan Categories
• HPMLs include only closed-end loans secured by
the borrower’s principal dwelling. This excludes
– HELOCs
– Loans on second homes and investment
properties
– Short-term construction loans
• Unlike HOEPA, HPMLs will include purchase
money loans
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Ability to Repay
• Requires lender to verify the consumer’s
repayment ability (e.g., verifying the
consumer’s income, assets and current
obligations)
• Presumption if underwrite loan based on
highest P&I payment over 7 years, and
considers DTI ratio or residual income
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Other Requirements on HPMLs
•
Strict prepayment penalty restrictions
– No prepayment penalties for loans where the payment may
change in first four years; and
– Prepayment penalties limited to a two year duration for other loans
and may not be imposed in a same creditor refinance
•
First-lien HPMLs must be escrowed for at least the first year
• Anti-evasion provision to prevent creditors from structuring loan as
an open end loan to avoid HPML status
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Practical Effect
• If a HPML goes to default or foreclosure, a plaintiff may
claim that the lender did not comply with the underwriting
requirements (didn’t verify employment with third party
documentation, e.g.)
• Claim could be based on actual personal data that was
in the application or otherwise, showing the borrower
could not have paid the loan
• Claim could be based “on information and belief” if no
other basis.
• Will “information and belief” be enough to beat a motion to
dismiss under the Twombly pleading standard?
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Add’l Requirements on all
Closed-End Loans Secured by
Borrower’s Principal Dwelling
• Appraiser anti-coercion (under Sec. 129)
• Servicing (under Sec. 129)
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Appraiser Coercion
• Very broad anti-coercion rule that prohibits not only
coercion but also any act that might influence the
appraisal or “otherwise encourage” misstatement of
value.
• The rule provides
– examples of acts that are violations (e.g. “[t]elling an
appraiser a minimum reported value of a consumer’s
principal dwelling that is needed to approve the loan.”);
– examples of acts that are not violations (“[a]sking an
appraiser to consider additional information about a
consumer’s principal dwelling or about comparable
properties.”).
• Lender must not extend credit if knows at consummation
coercion occurred unless it documents diligence to
ensure appraised value not misstated
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Appraiser Coercion
• May be hard to defend against claims that the
lender knew of appraiser coercion
• Because of section 129 liability, the penalties for
claims of influencing the appraiser are high
• Like “ability to repay” claims, expect appraiser
coercion counterclaims in foreclosures
– What will plaintiffs have to plead to survive
motion to dismiss?
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Servicing Requirements
• Prompt response to payoff requests (5 days)
• Application of payments the same day as they
are “received.”
– Will create numerous operational difficulties for
payments received other than in the ordinary
course.
• No late fee pyramiding.
– Already illegal – it appears that industry did not
even bother to comment on this section.
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Liability
• Most sections were promulgated under the Board’s Section 129
authority. Liability under this provision includes:
– The increased closed-end TILA liability statutory damages of
$400-$4000 capped at $500,000 for a class action plus attorneys
fees
– Plus two additional types of liability:
• Actual damages, which are now are potentially available for violations
of some of the new requirements
– Actual damages are and have been available since the inception
of TILA in 1968 but have almost never been proven because it is
difficult to attribute actual losses to disclosure violations
• “All finance charges” under section 130(a)(4) for violations of Section
129 (“materiality” requirement)
• No explicit class action cap on either of these types of damages
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TILA – Advertising Rules
Effective October 1, 2009, among other things,
• Credit terms advertised must be actually available
• If an advertisement for credit secured by dwelling discloses a payment, must
show:



The amount of each payment over loan term, including any balloon payment.
The period of time each payment will apply; and
If secured by a first lien on a dwelling, the fact that the payments do not include
taxes and insurance, if applicable, and that the actual payment obligation will be
greater
•
Can’t say “government supported or endorsed loan” if not FHA or VA loan
•
Can’t use “counselor” unless non-profit entity
•
Can’t use name of current lender, unless state own name prominently and
state advertiser is not associated with current lender
•
Prohibitions on Misleading Advertising carry Sec. 129 liability
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TILA – New Section 404
• Effective May 20, 2009, enacted as Sec. 404 of “Helping Families
Save Their Homes Act”
• Within 30 days of loan sale or transfer, new owner or assignee (law
says “new creditor”) must notify borrower
• Notice must include:





Identity, address, phone number of new owner (law says “new creditor”)
Date of transfer
How to reach agent or authorized person acting for new owner
Location of place where transfer of ownership of debt is recorded
Any other relevant information regarding new owner
• Applies to loans secured by consumer’s principal dwelling
• TILA statutory damages apply to compliance failure
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Preparing for New Comprehensive
TILA Changes
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Compensation Restrictions

No compensation paid to a “loan originator” based
on the terms or features of the loan.

“Loan originator” includes both the mortgage broker and
a loan officer employee of the lender.


Prohibit compensation based on rate, such as YSP or overages,
as well as compensation based on the loan amount.

Alternative – allow compensation based on loan amount.
Borrower’s direct paid compensation is not subject to this
prohibition. This would apply to any form of
compensation to the loan officer, including bonuses or
any financial incentive related to loan terms.
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Compensation Restrictions

No compensation to a loan originator if the
borrower pays the originator directly.

Thus a broker receiving compensation directly
from the borrower could not receive
compensation from any other source.

This would include broker/correspondents who
close the loan in their name, but do not fund the
loan (table-funded loans).
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Anti-Steering Rule

No “steering” a borrower to loan that would increase
the originator’s compensation, if the loan is not in
the consumer’s interest.

A broker could not direct a borrower to Lender A’s fixed
rate product that pays more compensation than Lender
B’s ARM product that pays less, unless the loan is in
consumer’s interest.

Safe harbor if

Broker presents at least three options (from a significant number
of the creditors it does business with) of the product the
consumer is interested in showing (i) the lowest rate, (ii) the
second lowest rate, and (iii) the lowest discount/origination fees
and points AND the originator has a good faith belief that the
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consumer likely qualifies for the options presented.
New Disclosure Scheme

Two new generic disclosures
 “Key
Questions To Ask About Your Mortgage”
 “Fixed vs. Adjustable Rate Mortgages” that
would be given at or before application.
 No CHARM booklet would be required.

A significantly revised ARM program
disclosure
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Proposed Closed End Rule
A significantly restructured TIL disclosure statement. Page 1:

Loan Summary - loan amount, loan term, loan type and features,
total settlement charges (from the new RESPA GFE, but with a
subset of what charges are already included in the loan amount),
and prepayment penalty.

APR with comparison of the disclosed APR on a scaled graph with
the “Average Best APR” (based on the APOR) and the “high cost
zone” which begins with the “higher priced mortgage loan” (HMPL)
threshold and runs 4% from there up the scale). This section also
discloses how much lower the borrower’s monthly payment would
be if the APR were reduced by 1%.

Interest Rate and Payment Summary - contract interest rate, initial
payment, escrow, and total payment, with several variations
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Proposed Closed End Rule
A significantly restructured TIL disclosure. Page 2:

“Key Questions About Risk,” - more tailored version of the
generic “Key Questions to Ask About Your Mortgage”
disclosure,

“More Information About Your Payments” - the very
downplayed Total Payments disclosure, disclosure of
“Interest and Settlement Charges,” which is the new name
for the Finance Charge, and amount financed disclosure)
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Proposed Closed End Rule

All-In (and thus higher) APR

Includes third party charges (title insurance, appraisal, closing
services, survey, doc prep, flood service, application fees,
recording taxes and fees, basically any charge for a third party
service that is required by the lender, even if the consumer
chooses the third party, with the exception of property insurance.

Voluntary charges, such as for mortgage life insurance, appear
to be included as well.

This higher APR calculation will result in more loans hitting the
HOEPA, HPML, and state high cost loan thresholds.
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Proposed Closed End Rule

Final TIL must be received at least 3
business days before closing
 HUD-1
would have to be given at the same time as
the final TIL disclosure.
 new
final TIL be delivered, starting a new 3
business day waiting period, if there are changes
in the disclosure during the 3-day period from
receipt of the disclosure until closing.

Alternative - new final TIL disclosure only if the change
caused the APR to increase beyond the applicable tolerance,
or if an ARM feature is added to the loan.
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Proposed Closed End Rule

Other Issues:
 Post-closing
ARM adjustment notices
given at least 60 days before payment at a
new level is due.
 Force placed insurance disclosure - 45
days before charging for placing the
insurance

Provide evidence of the placed insurance to
borrower within 15 days of placing the insurance.
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Proposed Closed End Rule

Other Issues
 Extension
of the appraiser anti-coercion
rules and loan servicing rules in the July
30, 2008 final HOEPA rule to all loans
secured by a dwelling (not limited to
principal dwelling).
A
requirement to include on the TIL
disclosure the loan originator’s “unique
identifier” required under the SAFE Act.
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