Update on New TILA Regulations

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Update on New TILA Regulations
Joseph M. Kolarjkolar_at_buckleysandler.com202.349
.8020
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Understanding new consumer protectionsunder
TILA/HOEPA

• Mortgage Disclosure Improvement Act
• New Underwriting Requirements for HigherPriced
  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 closed-end
  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 lenders offices are open to the
  public), BUT
• Rescission definition is used for seven-day,
  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 toComplete 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 DaysPrior 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 DaysPrior 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 Boards 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 borrowers 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 consumers
  repayment ability (e.g., verifying the consumers
  income, assets and current obligations)
• Presumption if underwrite loan based on highest
  PI 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 (didnt
  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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Addl Requirements on allClosed-End Loans
Secured byBorrowers 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.
  telling an appraiser a minimum reported value
  of a consumers principal dwelling that is needed
  to approve the loan.)
• examples of acts that are not violations
  (asking an appraiser to consider additional
  information about a consumers 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
  Boards 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
• Cant say government supported or endorsed loan
  if not FHA or VA loan
• Cant use counselor unless non-profit entity
• Cant 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 consumers 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. 
• Borrowers 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 originators compensation, if the
  loan is not in the consumers interest. 
• A broker could not direct a borrower to Lender
  As fixed rate product that pays more
  compensation than Lender Bs ARM product that
  pays less, unless the loan is in consumers
  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
  consumer likely qualifies for the options
  presented.

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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 borrowers 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 originators unique identifier
  required under the SAFE Act.