I. INTRODUCTION
The Board of Governors of the Federal Reserve System (FRB) issued amendments to Regulation Z that provide additional consumer protections for mortgage and home-equity loans. The regulation applies to all loans secured by a consumer’s principal dwelling.
The regulation:
(a) Prohibits lenders and brokers from coercing a real estate appraiser to misstate a home’s value;
(b) Prohibits certain mortgage servicing practices;
(c) Requires additional disclosure information about loan rates, monthly payments, and other features. The amendments would also ban seven deceptive or misleading advertising practices; and
(d) Requires creditors to provide a good faith estimate of the loan costs within three days after a consumer applies for a loan that will be secured by a consumer’s principal dwelling (including a home improvement loan or a loan to refinance a consumer’s existing loan).
II. NEW RULES AFFECTING ALL MORTGAGE LOANS
A. Coercion of Appraisers
The new regulation prohibits a creditor or mortgage broker, or its affiliate, in connection with a consumer credit transaction secured by a consumer’s dwelling, from directly or indirectly:
1. Coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of a consumer’s principal dwelling; and
2. Extending credit based on an appraisal when the creditor knows that prohibited conduct (coercion of an appraiser) has occurred.
The regulation does not specifically define the terms “coerce, influence, or otherwise encourage.” Instead, such acts are clarified by way of illustrative examples. For example, “pressure” or “coercion”would include:
1. Implying that retention of the appraiser depends on the amount at which the appraiser values the property.
2. Failing to compensate or retain an appraiser in the future because the appraisal comes in too low.
3. Conditioning compensation on the loan closing.
The commentary to the regulation clarifies that a misrepresentation or misstatement of a dwelling’s value is not material if it does not affect the credit decision or the terms on which credit is extended.
B. Servicing Abuses
In addition, the regulation prohibits the following servicing practices:
1. Failing to credit payments to a consumer’s loan account as of the day that they are received unless:
a. A delay in crediting does not result in a finance or other charge or in the reporting of negative information to a reporting agency.
2. Imposing a late fee or delinquency charge on a consumer for making an otherwise timely payment that would be the full amount currently due, but for the payment’s failure to include a previously assessed late fee (a/k/a pyramiding fees).
3. Failing to provide an accurate statement of payoff within a reasonable time after a request from the consumer or any person acting on behalf of the consumer.
If a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer must credit the payment as of five days following receipt.
C. Effective Date
The effective date of the final regulation applying to all mortgage loans is October 1, 2009.
III. REVISIONS TO ADVERTISING RULES
A goal of the final rules is to ensure that mortgage loan advertisements provide accurate and balanced information and do not contain misleading or deceptive representations. As a result, the rules require that advertisements for both open-end and closed-end mortgage loans provide accurate and balanced information, in a clear and conspicuous manner, about rates, monthly payments and other loan features.
A. Open-End Home Equity Plans
1. Discounted and premium rates
An advertisement for a variable-rate home-equity plan that states an initial APR that is not based on the index and margin that will be used to make later rate adjustments must also state the period of time that the initial rate will be in effect and a reasonably current APR that would have been in effect using the index and margin. These disclosures must be stated with equal prominence and in close proximity to the statement of the initial APR.
2. Balloon payment
Advertisements that include information about minimum periodic payments are required to state (if applicable) that a balloon payment may result. Balloon payment disclosures must be equally prominent and in close proximity to the statement of a minimum periodic payment. The final rule clarifies that the disclosure is triggered when an advertisement contains a statement of any minimum periodic payment amount and a balloon payment may result if only minimum periodic payments are made. Additionally, the final rule clarifies that a balloon payment results if paying the minimum periodic payments would not fully amortize the outstanding balance by a specified date or time and the consumer must pay the outstanding balance at such time.
3. Tax implications
Open-end home equity advertisements distributed in paper form or through the Internet (rather than by radio or television) stating that the advertised extension of credit may exceed the fair market value of the dwelling must clearly and conspicuously state that the interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes. The advertisement must also include a statement that the consumer should consult a tax adviser for further information regarding the deductibility of interest and charges. The final rule requires that the additional tax disclosures be given only when an advertisement states that extensions of credit greater than the fair market value of the dwelling are available. The rule does not apply to advertisements that merely imply that extensions of credit greater than the fair market value may occur.
4. Promotional rates and payments
The rule requires additional disclosures for advertisements of open-end home equity loans with promotional rates or payments. Such advertisements must:
a. Use the term “promotional” in immediate proximity to each mention of the introductory rate or payment.
b. Disclose the following information in a clear and conspicuous manner with each listing of the promotional rate or payment:
(1) The period of time during which the promotional rate or promotional payment will apply;
(2) For a promotional rate, any APR that will apply under the plan;
(3) For a promotional payment, the amounts and time periods of any payments that will apply under the plan; and
(4) For variable rate transactions, payments that are based on a reasonably current index and margin.
c. Exceptions and alternative disclosures would apply for certain types of media (e.g., banner and television advertisements).
For purposes of this portion of the rules, the following definitions apply:
a. The term “promotional rate” means, in a variable-rate plan, any annual percentage rate that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than a reasonably current annual percentage rate that would be in effect under the index and margin that will be used to make rate adjustments under the plan.
b. The term “promotional payment” means:
(1) For a variable rate plan, any minimum payment applicable for a promotional period that:
(a) Is not derived by applying the index and margin to the outstanding balance once such index and margin will be used to determine other minimum payments under the plan; and
(b) Is less than other minimum payments under the plan derived by applying a reasonably current index and margin that will be used to determine the amount of such payments, given an assumed balance.
(2) For a plan other than a variable-rate plan, any minimum payment applicable for a promotional period if that payment is less than other payments required under the plan given an assumed balance.
c. The term “promotional period” means a period of time, less than the full term of the loan, that the promotional rate or promotional payment may be applicable.
5. Clear and conspicuous standard
The regulation specifies how the “clear and conspicuous standard” would apply to advertisements for home-equity plans with introductory rates or payments, and to Internet, television, and oral advertisements of home-equity plans.
6. Effective Date
The provisions of the final rule relating to advertising rules for open-end home-equity plans took effect on October 1, 2009.
B. Closed-End Credit
1. Clear and conspicuous standard
The regulation clarifies how the clear and conspicuous standard applies to rates or payments in advertisements for home-secured loans.
2. Advertisement of rates and payments
The amendments are intended to disclose all rates or payments that will apply over the term of the loan as well as the time periods for which those rates or payments will apply.
a. Generally. Advertisements cannot state any rate other than an APR, except that a simple annual rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the APR.
b. Buydowns. Additional disclosures are required when an advertisement includes information showing the effect of the buydown agreement on the payment schedule.
c. Discounted variable-rate transactions. An advertisement for a discounted variable-rate transaction that advertises a reduced or discounted simple annual rate must show with equal prominence and in close proximity to that rate, the limited term to which the simple
d. Disclosure of all rates. An advertisement for credit secured by a dwelling that states a simple annual rate of interest when more than one simple annual rate of interest will apply over the term of the advertised loan must clearly and conspicuously disclose:
(1) Each simple annual rate of interest that will apply.
(2) The period of time during which each simple annual rate of interest will apply.
(3) The APR for the loan.
e. Disclosure of all payments. An advertisement for credit secured by a dwelling that states the amount of any payment must clearly and conspicuously disclose:
(1) The amount of each payment that will apply over the term of the loan including any balloon payment, if the consumer makes only the minimum payments specified in an advertisement, not just the repayment terms that will apply for a limited time.
(2) The period of time during which each payment will apply.
(3) The fact that the payments do not include amounts for taxes and insurance premiums, if applicable. This requirement applies only to credit secured by a first lien on a dwelling.
f. Tax implications. Closed-end home equity home advertisements distributed in paper form or through the Internet (rather than by radio or television) and that relate to an extension of credit secured by a consumer’s principal dwelling stating that the advertised extension of credit may exceed the fair market value of the dwelling must clearly and conspicuously state that the interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for federal income tax purposes. The advertisement must also include a statement that the consumer should consult a tax advisor for further information on the deductibility of the interest. The final rule requires that the additional tax disclosures be given only when an advertisement states that the extension of credit greater than the fair market value of the dwelling are available. The rule does not apply to advertisements that merely imply that extensions of credit greater than the fair market value may occur.
g. Exceptions. The proposal would allow alternative disclosures for television and radio advertisements for information provided orally. The final rule is amended to also provide alternative disclosures for information provided in visual text in television advertisements.
3. Prohibition on certain acts or practices
The regulation prohibits the following practices:
a. Using the word “fixed” to refer to rates or payments when the rate or payment would be “fixed” for a limited time.
b. Comparing a consumer’s actual or hypothetical current payments or rates and any payment that would apply if the consumer obtains the advertised loan unless the advertisement includes:
(1) A comparison to all applicable payments or rates for the advertised product that will occur over the term of the loan;and
(2) A statement that the advertised payments do not include amounts for taxes and insurance, if applicable.
c. Advertising a product as being endorsed or sponsored by a governmental entity, unless the advertisement is for an FHA, VA, or similar loan program that is endorsed or sponsored by a federal, state or local government entity.
d. Displaying the name of the consumer’s current lender in an advertisement unless the advertisement also prominently discloses that the advertising mortgage lender is not affiliated with the customer’s current lender.
e. Claiming that the advertised product will eliminate debt or result in a waiver or forgiveness of a consumer’s existing loan obligations with another creditor.
f. Giving the false impression that a broker or lender has a fiduciary relationship with the borrower.
g. Providing information about trigger terms or required disclosures only in a foreign language, but providing other trigger terms or required disclosures only in English in the same advertisement.
4. Effective Date
The provisions of the final rule relating to advertising rules for closed-end credit took effect on October 1, 2009.
IV. MORTGAGE LOAN DISCLOSURES
A. Coverage
Until the recent enactment of the MDIA, the Truth in Lending Act applied only to a “residential mortgage transaction” (loans to finance the purchase or initial construction of a consumer’s principal dwelling). The MDIA extends the early disclosure requirements to “any extension of credit secured by the dwelling of a consumer.” As a result, the early disclosure requirements apply to home refinance loans. The early disclosure requirements are no longer limited to a consumers “principal” dwelling, but must be given in connection with a dwelling-secured mortgage loan that is subject to RESPA, whether or not the loan is for the purpose of financing the purchase or initial construction of the consumer’s principal dwelling. The final rule does not revise the disclosure requirements for home equity lines of credit.
B. Timing of Delivery of Early Disclosures
The final rule adopts the requirement that a creditor deliver or mail the early disclosures for all dwelling-secured mortgage loans no later than three business days after the creditor receives the consumer’s application. For purposes of the timing of delivery of early disclosures, the general definition of “business day” (days on which a creditor’s offices are open to the public for carrying on substantially all of its business functions) applies. Board comments have been revised to clarify that if a consumer withdraws a loan application within three business days after a creditor receives it, the creditor need not make the early disclosures.
C. Waiting Periods After Early Disclosures and Corrected Disclosures
Prior to the amendments adopted under the MDIA, when a creditor provided early TILA disclosures and the APR subsequently changed beyond the specified tolerance, the creditor was required to redisclose the APR and other changed terms no later than consummation or settlement. Under the final rule, creditors in such cases are required to make corrected disclosures so that consumers receive them not later than the third business day before consummation.
Under the final rule, when creditors provide corrected disclosures, the disclosures must state an accurate APR and all changed terms. The final rule provides that if a creditor places corrected disclosures in the mail, the consumer is deemed to receive the corrected disclosures three business days after they are placed in the mail, for purposes of determining when the three-business-day waiting period begins. The comments also clarify that creditors that use e-mail or a courier other than the postal service may also follow this approach. For example, if a creditor provides disclosures through a courier service, the creditor may presume that the consumer receives the disclosures three business days after they are deposited with the courier service, for purposes of determining when the three-business-day waiting period begins.
The creditor is not required to use the presumption of receipt to determine when the waiting period begins. Thus, if a creditor delivers corrected disclosures electronically consistent with the E-Sign Act or delivers disclosures by overnight courier, the creditor may rely on evidence of actual delivery (such as documentation that the mortgage loan disclosure was delivered by certified mail or overnight delivery or e-mail, if similar documentation is available) to determine when the three-business-day waiting period begins.
1. Seven-Business-Day Waiting Period for Early Disclosures
The final rule provides that the seven-business-day waiting period begins when the creditor delivers or places the early disclosures in the mail – not when the customer receives or is deemed to receive the early disclosures. For purposes of this waiting period the precise definition of “business day” (all calendar days except Sundays and specifies legal public holidays) applies.
2. Three-Business-Day Waiting Period for Corrected Disclosures
The final rule provides that consummation of a mortgage transaction may not occur until three business days after the consumer receives corrected disclosures. For purposes of this waiting period, the more precise definition of “business day” (all calendar days except Sundays and specifies legal public holidays) applies.
3. APR Accuracy for Corrected Disclosures
A new Board comment has been added to address requests for guidance in cases where corrected disclosures have been given and the APR subsequently changes.
In such cases, the creditor should compare the APR at consummation with the APR in the most recently provided corrected disclosures (not the first set of disclosures provided) to determine whether the creditor must provide another set of corrected disclosures.
4. Consumer’s Waiver of Waiting Period Before Consummation of Mortgage Transaction
Under the final rule, if a consumer determines that an extension of credit is needed to meet a bona fidepersonal financial emergency, the consumer may shorten or waive the seven-business-day waiting period or the three-business-day 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(s), 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.
The final rule permits consumers to waive either the seven-business-day or the three-business-day waiting period and thus recognizes that a bona fide personal financial emergency could occur at any time, including after the consumer receives the early disclosures. For example, a consumer might receive the initial early disclosures with the expectation of closing the loan within sixty days. However, the consumer’s financial circumstances might change in the interim, creating a need to consummate the loan immediately. Under the final rule, 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 the loan.
5. Notice – Early Disclosures
The final rule requires that the early disclosures contain a clear and conspicuous notice containing the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” The foregoing statement must be grouped together with the other disclosures required by Section 226.19(a)(1) (early disclosures) and Section 226.19(a)(2) (corrected disclosures).
6. Time Share Transactions
Specific early disclosure requirements apply for mortgage loans secured by a consumer’s interest in a “time share plan” (time share transactions). If the APR stated in the early disclosures becomes inaccurate, the creditor must disclose all the changed terms no later than consummation or settlement. By contrast, for loans other than time share transactions, the creditor must make corrected disclosures (if required) no later than the third business day before consummation. For time share transactions, the general definition of “business day” (days the creditor’s offices are open to the public for carrying on substantially all of its business functions) is utilized.
7. Effective Date
The final rule became effective on July 30, 2009, consistent with the requirements of the MDIA and applies only to mortgage transactions for which creditors receive the consumer’s application on or after July 30, 2009.