This article examines the recent changes to the Truth-in-Lending Act (TILA), also known as Regulation Z, and digests proposed future changes.
11/24/2009: Updates appear in blue.
The purpose of the act
The Truth-in-Lending Act (TILA), also known as Regulation Z (Reg Z), was originally enacted in 1968 to protect consumers by providing greater transparency by lenders in consumer credit transactions, including loans secured by real estate. In direct response to the recent subprime mortgage crisis, the Federal Reserve Board of Governors (the Board) has amended or proposed amendments to Reg Z several times in the last few years.
In May and June of 2008, the first tuesday writing staff wrote two articles detailing the parameters of and disclosures required by Reg Z. These articles can be found here and here. The amendments that follow are meant to supplement and update those articles.
July 30, 2008 changes
On July 30, 2008, the Board amended Reg Z by adopting several rules related to higher-priced mortgage loans, appraiser coercion on Reg Z-controlled loans, servicers of Reg Z loans, and the advertising requirements of Reg Z-controlled lenders. All changes are effective October 1, 2009, unless otherwise noted.
Establishing rules for higher-priced mortgages
- A higher-priced mortgage is defined as a loan with an interest rate which exceeds the prime rate for a comparable transaction by more than:
- 1.5% for loans secured by first liens on a dwelling; and
- 3.6% for loans secured by subordinate liens on a residence. [12 Code of Federal Regulations §226.34(a)(1)-(3)]
- The homeowner’s ability to repay must be considered on higher-priced mortgage loans as part of the specified set of underwriting guidelines. [12 CFR §226.34(a)(4)]
- Prepayment penalties on higher-priced mortgage loans are only allowed if:
- the prepayment penalty is limited to two years following the loan origination;
- it is funded by a lender other than the same lender or an affiliate of the same lender, if the loan is a refinance; and
- principal and interest do not adjust within four years after the loan origination, if the loan is an adjustable rate mortgage (ARM). [12 CFR §226.35(b)(2)]
- A lender originating a higher-priced mortgage loan secured by a principal dwelling must impound for property taxes, homeowner’s insurance, and any other kind of insurance required by the lender. Borrowers may elect to cancel this impound account one year after the loan origination. [12 CFR §226.35(b)(3)] Effective date: April 1, 2010
- A lender may not subvert these new regulations by structuring a closed-end credit transaction as an open-end credit transaction. [12 CFR §226.35(b)(4)]
Defining a mortgage broker and prohibiting appraiser coercion
- A mortgage broker is a person other than a lender’s employee who arranges a mortgage for compensation. [12 CFR §226.36(a)]
- No lender or mortgage broker may in any way coerce or encourage an appraiser to misrepresent the value of a dwelling securing a Reg Z loan. [12 CFR §226.36(b)] Effective date: October 1, 2009
For related articles, please see “‘What number do you need to get your deal done?’ led to real estate price inflation” and “The Home Valuation Code of Conduct”.
Servicing Reg Z loans
- A payment must be credited on the date it is received. [12 CFR §226.36(c)(i)]
- A late fee may not be charged on an unpaid late fee when all other payments are current except for that late fee. [12 CFR §226.36(c)(ii)]
- A payoff statement must be provided within a reasonable time (usually five business days) after receiving a request from the borrower, or an agent of the borrower, such as an escrow officer or a broker. [12 CFR §226.36(c)(iii)]
Prohibited advertising practices
- An advertisement soliciting a borrower for a mortgage controlled by Reg Z may not:
- represent an ARM as “fixed” without indicating the fixed rate is only available for a limited time;
- compare the rates and payments of the advertised loan with a hypothetical loan unless the advertisement states the payments applicable over the entire life of the advertised loan;
- represent loan products as government supported, endorsed, or sponsored;
- include the name of the borrower’s current lender unless accompanied by a prominent disclosure that the advertisement is not from the current lender;
- claim the advertised loan eliminates debt when it merely refinances the existing debt;
- create an impression that the lender or broker is potentially acting as a counselor of the borrower; and
- introduce a teaser rate in a foreign language without also providing the required disclosures in the same language. [12 CFR §226.24]
Changes to disclosure requirements
- Reg Z disclosures must now be delivered no later than three business days after a loan application and before any fee, other than a credit report fee, is paid by the borrower. For the purposes of Reg Z disclosure delivery, a business day is any day except Sunday and all specified legal public holidays. [12 CFR §226.19(a)(1)] Effective Date: July 30, 2009.*
* This effective date was originally scheduled for October 1, 2009, but was changed by amendments made on May 19, 2009.
May 19, 2009 changes
In May of this year, the Board integrated, in part, the Mortgage Disclosure Improvement Act (MDIA) into the existing Reg Z scheme. In addition to changing the effective date of the change to the disclosure requirements, the following changes were made to Reg Z and went into effect July 30, 2009:
- The early disclosure requirement applies to all loans secured by residences, regardless of whether they are the borrower’s principal dwelling. [12 CFR §226.19(a)(1)]
- The signing of the loan agreement by the borrower may take place no sooner than the seventh day after the disclosures are delivered. If the disclosures are mailed, the delivery date is the date of mailing and not the date of the borrower’s receipt. [12 CFR §226.19(a)(2)]
- If at the time of closing, the annual percentage rate (APR) has changed more than .125% (.250% for ARMs) from the APR disclosed on the latest Reg Z disclosure given to the borrower, the lender must re-disclose. At least three business days must pass after the borrower receives the re-disclosure before the borrower can be committed to the loan agreement. If the re-disclosure is mailed, this three-business day period begins three days after the mailing date. [12 CFR §226.19(a)(2); Staff Commentary 12 CFR §226.19(a)(2)(ii)(3)]
- Upon delivery of an accurate Reg Z disclosure, a borrower may choose to shorten or waive either or both waiting periods by providing a dated, written statement in the borrower’s own words describing the financial emergency which necessitates the waiver. This statement must be signed by all borrowers responsible for repayment of the loan. This statement cannot be on a form pre-printed with provisions used to explain typical waiver conditions. [12 CFR §226.19(a)(3)]
- All Reg Z disclosures must contain the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” [12 CFR §226.19(a)(4); see first tuesday Form 221§8]
Additionally, under the Helping Families Save Their Homes Act, Reg Z now also requires change of ownership must be disclosed to a borrower in writing by the new owner within 30 days after the sale or transfer of the loan. This only applies to the new owner of the loan if he acquires more than one mortgage loan in any 12-month period. [15 United States Code 1641(g)]
See also our recent blog entry regarding these changes here.
August 11, 2009 proposed changes
In addition to the two sets of changes which are already approved and have gone into effect or will soon go into effect, the Board has released another set of changes which are currently up for public comment.
Proposals for changing disclosures include:
- an improvement of the APR disclosure to include most fees and settlement costs which might be paid by borrowers;
- a requirement that lenders show how the borrower’s APR compares with the average rate offered to borrowers with excellent credit;
- a requirement that lenders provide a final Reg Z disclosure at least three business days before closing;
- a requirement that lenders show consumers how monthly payments might increase on their ARMs; and
- developing a disclosure which meets both Reg Z and Real Estate Settlement Procedures Act (RESPA) requirements.
In addition to changes to the form of the disclosure, the Board is also considering the following restrictions on mortgage broker and lender practices. These restrictions would prohibit:
- payments to a mortgage broker or loan officer based on a loan’s terms or interest rate; and
- a mortgage broker or loan officer from steering borrowers to transactions that are not in the borrower’s best interest in order to increase the mortgage broker or loan officer’s compensation.
The proposals also include changes to disclosures on home equity lines of credit (HELOCs) which would:
- prohibit lenders from terminating an account for payment-related reasons unless the borrower is more than 30 days late in making a payment; and
- provide additional protections related to account suspensions, credit limit restrictions, and account reinstatements.