2008 Final Regulations on Protections for Home Mortgage Loan Borrowers
In July 2008, the Federal Reserve Board revised Regulation Z to include most of the protections for home mortgage loan borrowers it had proposed in December 2007. 73 Federal Register 1672 (January 9, 2008). Most noted among the withdrawn proposals was the proposal to prohibit a creditor from paying a mortgage broker more than a consumer had agreed in advance that the broker would receive.
Most of the revisions to Regulation Z were scheduled to take effect October 1, 2009. 73 Federal Register 44522 (July 30, 2008).
- Higher-priced mortgage loans. For a newly defined category of higher-priced mortgage loans (HPML)
—that is, consumer-purpose, closed-end loans secured by a consumer’s principal dwelling and having an annual percentage rate (APR) that exceeds an index of average prime offer rates for a comparable transaction (as published by the FRB on its website) by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans—the FRB adopted four protections:
— Repayment ability. Regulation Z Section 226.35(b)(1) prohibits creditors from extending credit without regard to a consumer’s ability to repay from sources other than the collateral itself
— Verification of repayment ability. Regulation Z Section 226.35(b)(1) and 226.34(a)(4) require creditors to verify income and assets they rely upon to determine repayment ability
— Prepayment penalties. Regulation Z Section 226.35(b)(2) prohibits prepayment penalties except under certain conditions.
— Escrow accounts. Regulation Z Section 226.35(b)(3) requires creditors to establish escrow accounts for taxes and insurance, but permit creditors to allow borrowers to cancel escrows 12 months after loan consummation.
These revisions were scheduled to become effective October 1, 2009, except for the escrow account requirements, which were scheduled to take effect April 1, 2010 (October 1, 2010 for loans secured by
manufactured homes).
- Protections for all closed-end loans secured by principal dwelling. In connection with all consumer-purpose, closed-end loans secured by a consumer’s principal dwelling, the FRB added a new Section 226.36 to Regulation Z to prohibit any creditor or mortgage broker from coercing, influencing, or otherwise encouraging an appraiser to provide a misstated appraisal in connection with a mortgage loan (Section 226.36(b)) and to prohibit mortgage servicers from “pyramiding” late fees, failing to credit payments as of the date of receipt, or failing to provide loan payoff statements upon request within a reasonable time Section 226.36(c)).
The FRB withdrew its proposal to require servicers to deliver fee schedules to consumers upon request and its proposal to prohibit any creditor from paying a mortgage broker more than the consumer had agreed in advance that the broker would receive.
These revisions were scheduled to become effective October 1, 2009.
- Advertising rules. The FRB amended Regulation Z’s rules on advertising substantially as proposed in December 2007, with the following significant changes:
— Modifying when an advertisement is required to disclose certain information about tax implications.
— Using the term “promotional” rather than “introductory” to describe open-end credit rates or payments applicable for a period less than the term of the loan and removing the requirement that advertisements with promotional rates or payments state the word “introductory.”
— Excluding radio and television advertisements for home equity plans from the requirements regarding promotional rates or payments.
— Allowing advertisements for closed-end credit to state that payments do not include mortgage insurance premiums rather than requiring advertisements to state the highest and lowest payment amounts.
— Removing the prohibition on the use of the term “financial advisor” by a for-profit mortgage broker or mortgage lender.
- Earlier transaction-specific disclosures. The Federal Reserve Board revised Regulation Z Section 226.19(a) to require creditors to provide TILA disclosures for all closed-end loans secured by a consumer’s principal dwelling and subject to the Real Estate Settlement Procedures Act (RESPA) no later than three business days after application, and before the consumer pays any fee except a reasonable fee for the review of the consumer’s credit history.
This early disclosure requirement was scheduled to become effective October 1, 2009. However, the Housing and Economic Recovery Act of 2008 (the Housing Bill), signed by President Bush on July 30, 2008, the same day the Regulation Z revisions appeared in the Federal Register, included a more detailed early disclosure requirement effective July 30, 2009.
On May 8, 2009, the Federal Reserve Board announced its revision of the July 2008 amendments to implement the earlier July 30, 2009 implementation date.
In the preamble to its July 2008 revised Regulation Z, the board recognized that TILA disclosures needed to be updated to reflect the increased complexity of mortgage products. In early 2008, the FRB began testing the current TILA mortgage disclosures and potential revisions through one-on-one interviews with rulemaking.7
7. 73 Federal Register 44522, 44524 (July 30, 2008).
Housing and Economic Recovery Act of 2008
In July 2008, Congress enacted and President Bush signed the Housing and Economic Recovery Act of 2008 (also known as “the Housing Bill”), which included three amendments to TILA: (1) a provision requiring early and enhanced disclosures for closed-end home mortgage loans; (2) a section addressing the fiduciary duty of mortgage loan servicers; and (3) an increase in the civil penalties available in individual actions alleging violations of TILA.
- Enhanced Mortgage Loan Disclosures
The most important of these amendments relates to enhanced early mortgage loan disclosures, effective July 30, 2009.8
8. TILA Section 128(b), 15 USC § 1638(b).
Under the Act, early disclosures are required for any closed-end extension of credit secured by “the dwelling”9 of a consumer (excluding time-share interests) and subject to the Real Estate Settlement Procedures Act (RESPA). On May 8, 2009, the Federal Reserve Board announced revisions to Regulation Z to implement these enhanced early disclosures, except for the special rules for variable rate/variable payment loans (which it anticipated proposing later in 2009 as part of its comprehensive review of closed-end mortgage loans).
9. Whether “the dwelling” includes more than one dwelling if a consumer has multiple dwellings presumably will be determined by the FRB through amendments to Regulation Z. Conceivably, this early disclosure requirement may be more expansive than the one planned by the FRB when it amended Regulation Z in July 2008, because it could apply to a second home as well as a “principal dwelling.”
- Early disclosures. The early disclosures must be delivered or placed in the mail three business days after the creditor receives the consumer’s written loan application and this must occur at least seven business days before consummation.10
10. The additional requirements described from this point on do not apply to timeshare plans. 15 USC § 1638(b)(2)(G).
In addition to the specific disclosures already required by TILA and Regulation Z, the early disclosures must state, in conspicuous type size and format: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”
At consummation, as is already the practice with most (but not all) lenders although TILA has not required it, a final set of the disclosures must be provided. This provision was scheduled to take effect July 30, 2009.
- Special rules for variable rate/payment loans. The Housing Bill added another disclosure requirement for closed-end loans secured by a consumer’s dwelling (whether or not subject to RESPA, but not including time-share transactions) if they have annual rates of interest that are variable or regular payments that may be variable.
The payment schedule must be labeled: “Payment Schedule: Payments Will Vary Based on Interest Rate Changes.”
The disclosures must state, in conspicuous type size and format, examples of adjustments to the regular required payment based on the change in the interest rate specified by the loan contract. Among the examples required is an example that reflects the maximum payment amount of the regularly required payments on the extension of credit, based on the maximum interest rate allowed under the contract, in accordance with FRB regulations (which the FRB must adopt after conducting consumer testing to determine the appropriate format for providing the disclosures so the disclosures can be easily understood, including the fact that the initial regular payments are for a specific time period that will end on a certain date, that payments will adjust afterwards potentially to a higher amount, and that there is no guarantee that the borrower will be able to refinance to a lower amount).
These requirements were scheduled to take effect on a date to be determined by the Federal Reserve Board or January 30, 2011, whichever is earlier.
- Redisclosure if APR becomes inaccurate. The TILA amendment made by the Housing Bill also requires redisclosure, using a “corrected” TILA disclosure statement, if the disclosed annual percentage rate (APR) becomes inaccurate (that is, it changes so as to be outside the tolerance specified in Section 107(c) of TILA (15 USC § 1606(c)—not greater than ⅛ percent more or less than the actual rate or rounded to the nearest ¼ percent for regular transactions, or not greater than ¼ percent more or less for irregular transactions11).
11. 12 CFR § 226.22(a).
The corrected statement must be delivered no later than three business days before consummation of the
transaction.12
12. This requirement of redisclosing the full corrected TILA disclosure statement differs from the rule applicable to loans not subject to early disclosure. Generally, when redisclosure is required, a lender has the option of disclosing merely the changed terms or providing a complete set of new disclosures. Commentary § 226.19(a)(2)-1.
- Fee payment prohibited. Until the consumer receives the early disclosures, he or she must not be required to pay any fee to the creditor or any other person except for a bona fide and reasonable fee for obtaining the consumer’s credit report. If the disclosures were mailed, the consumer is considered to have received them three business days after the date of mailing.
- Waiver. The Housing Bill amendment includes the possibility of waiving the timing requirements for these early disclosures, if the consumer determines the extension of credit is needed to meet a bona fide personal financial emergency. The consumer must provide a dated written statement describing the emergency and specifically waiving or modifying the timing requirements. The statement must be signed by all consumers entitled to receive the early TILA disclosures.13 The creditor must provide to the consumers, at or before the time of waiver or modification, final TILA disclosures.
13. Regulation Z, 12 CFR § 226.17(d) provides that if more than one consumer is primarily liable on a transaction, other than a rescindable transaction, disclosures may be given to any one of them. If the transaction is rescindable, the disclosures must be made to each consumer who has the right to rescind. Accordingly, only the consumer to whom the early disclosures are given must sign the waiver, unless the transaction is rescindable, in which case each consumer who has a right to rescind must sign the waiver.
- Civil Penalty Increase
The Housing Bill, effective July 30, 2008, increased the civil penalties available in individual actions for TILA violations to an amount not less than $400 and not greater than $4,000.14 The previous amount was not less than $200 and not greater than $2,000.
14. TILA Section 130(a)(2)(A)(iii); 15 USC § 1640(a)(2)(A)(iii).
- Fiduciary Duties of Mortgage Loan Servicers
The Housing Bill added a new Section 129A to TILA to provide, unless otherwise specified in an investment contract between a mortgage loan servicer and an investor, that a servicer of pooled residential mortgages owes the duty to maximize the net present value of the pooled mortgages to all investors and parties having a direct or indirect interest in the investment, not to any individual party or group of parties.15
15. TILA Section 129A, 15 USC § 1639a.
The Servicer is deemed to act in the best interests of all the investors and parties if it agrees to or implements a modification or workout plan, including any modification or refinancing undertaken pursuant to the HOPE for Homeowners Act of 2008,16 for a residential mortgage or a class of residential mortgages that constitute a part or all of the pooled mortgages in the investment, provided the mortgage meets the following criteria: (1) default on the payment has occurred or is reasonably foreseeable; (2) the property securing the mortgage is occupied by the borrower; and (3) the anticipated recovery on the principal outstanding obligation of the mortgage under the modification or workout plan exceeds, on a net present value basis, the anticipated recovery on the principal outstanding obligation of the mortgage through foreclosure.
16. The Hope for Homeowners Act of 2008, also contained in Section 1402 of the Housing Bill, established a voluntary program to provide Federal Housing Administration (FHA) insurance in connection with refinanced loans for distressed borrowers to support long-term, sustainable homeownership.