On December 5, 2008, the Federal Reserve Board announced proposed amendments to Regulation Z (“Truth in Lending”) that will implement the Mortgage Disclosure Improvement Act of 2008 (“MDIA”). The proposed rules supplement and, to some extent, revise the amendments to Regulation Z that were published in July of 2008. Both regulatory actions are designed to help prevent a repeat of the current mortgage and foreclosure crisis.  

In this update, we will refer to the proposed rules as “the proposed MDIA rules” and the final Regulation Z changes published in July as the “new HOEPA rules.” (The Regulation Z amendments that were published in July were promulgated under the rulemaking authority granted to the Board by the Home Ownership and Equity Protection Act of 1994 (“HOEPA”)). When making reference to the pre-existing “high cost”/HOEPA rules, we will refer to them as “the Section 32 rules,” since they are codified in Section 226.32 of Regulation Z. 1  

Portions of the new HOEPA rules only apply to “higher priced” mortgage loans. Although the Board adopted the “higher priced” trigger in an attempt to focus these particular provisions on subprime loans, most lenders believe that at least some of their prime loans will be covered by these restrictions. This is especially true of jumbo mortgage loans, which, due to the tightened credit markets, are significantly more expensive today than they have been in recent years. Lenders should review their lending practices carefully to determine if the higher priced loan restrictions might apply to some of their loans. It is dangerous to assume that they will not apply simply because the lender doesn’t make subprime or Alt-A loans.  

Comments on the proposed MDIA rules are due by February 9, 2009. Lenders must implement compliance with most of the new HOEPA rules by October 1, 2009. However, contrary to the Board’s notice of July 30, 2008, some of the HOEPA requirements will now be effective two months earlier, on July 30, 2009.  

A Refresher on the New HOEPA Rules  

The new HOEPA rules contain several new restrictions and requirements that will apply to many home mortgage loans. First, early Truth-In-Lending (“TIL”) disclosures will be required on both purchase money and non-purchase money loans. Moreover, creditors will be prohibited from charging fees, other than credit report fees, before the consumer receives the disclosures. Technically, the new HOEPA rules only extend TIL’s current early disclosure requirements to non-purchase money loans secured by the consumer’s principal dwellings. However, the MDIA further extends coverage to all dwelling-secured loans. Thus, early disclosures will have to be provided on loans secured by second homes, as well as primary residences. In addition, the MDIA accelerated the effective date of the new disclosure requirements from October 1, 2009, to July 30, 2009.  

The following additional restrictions will also apply if the loans are secured by the consumer’s principal dwellings:  

  • All attempts to coerce or influence appraisers by lenders, brokers or their affiliates are prohibited, and a lender is prohibited from closing the loan if it has reason to believe such influence occurred. In short, lenders who are still allowing any contact between sales personnel and appraisers are living dangerously;
  • No pyramiding of late charges;  
  • Payments must be posted on the dates received. This could impact the long-standing practice of effective dating on first lien home loans. The rules also contain some guidance for applying partial payments; and  
  • Servicers must provide payoff statements within a reasonable period of time after they are requested.  

Finally, the new HOEPA rules modify the advertising requirements for both closed-end and open-end mortgages. These changes include additional disclosures for advertisements for adjustable rate and adjustable payment loans. Creditors and brokers will also be prohibited from using the current lenders’ or servicers’ names in advertisements without also clearly and conspicuously disclosing the advertisers’ names.

The new HOEPA rules impose additional restrictions on “higher priced” mortgage loans. A “higher priced” mortgage loan is one in which the Annual Percentage Rate (“APR”) exceeds, by a specified amount, the “average prime offer rates” from the Freddie Mac Primary Mortgage Market Survey. The threshold is 1.5 percent for first lien loans and 3.5 percent for subordinate lien loans. The creditor must use the index value as of the rate lock date.  

The new limitations that apply only to “higher priced loans” are:  

  • Creditors will be prohibited from extending a loan without regard to the borrower’s ability to repay the loan and some verification of that ability will be required. The final rule does not contain a requirement that the creditor engage in a pattern or practice of lending based on collateral before the creditor violates the rule. However, the final rule contains guidelines that creditors should follow to achieve a presumption of compliance;  
  • Prepayment penalties or fees are prohibited if the loan payments can change within the first four years of the loan. In the case of other “higher priced” mortgage loans, the prepayment penalties or fees may not be imposed 1) later than two years after the origination of the loan or 2) if the loan is being prepaid through a refinancing by the creditor or an affiliate of the creditor. These new prepayment fee restrictions will also apply to all Section 32 loans; and  
  • Effective with loan applications received on or after April 1, 2010, (in the case of loans on site built dwellings) or October 1, 2010, (in the case of manufactured home loans), the creditor must require escrows for taxes and insurance. (For those of us old enough to remember the litigation surrounding escrow accounts and the resulting state laws and RESPA escrow accounting rules, it really seems as if we have come “full circle”). There are limited exceptions to the escrow requirements for loans secured by condominiums and cooperatives. Also, creditors may allow the borrowers to opt out of the escrow account requirement after one year.  

The Proposed MDIA Changes to Regulation Z  

The proposed MDIA changes to Regulation Z will:  

  • Extend the early TIL disclosure requirements to closed-end mortgage loans secured by all dwellings. Again, it will also prohibit lenders from charging fees, other than credit report fees, before providing the disclosures;  
  • Require that lenders provide the disclosures no later than three business days after application and seven business days before consummation. In other words, there will be a seven business day waiting period between the time the disclosures are delivered or mailed and consummation of the loan. If the APR contained in the early disclosures becomes inaccurate, the creditor must redisclose and then wait at least three business days before consummating the loan. Note: This three business day period begins when the consumer receives the disclosures, not when the creditor mails them; and  
  • Require creditors to include a disclosure notifying borrowers that they are not obligated to complete the loan simply because disclosures are provided.  

In cases in which the loan is necessary to meet a “bona fide personal financial emergency,” the consumer may waive or modify the seven and three business day waiting periods. However, the consumer must receive the disclosures prior to the waiver or modification. The proposed waiver and modification requirements are substantially similar to those that apply to the right to rescind and the Section 32 waiting period today.  

The Board is proposing that the general definition of business day be used for purposes of compliance with the three business day disclosure requirement and the seven business day waiting period. This would mean that, for these purposes, “business day” would include any day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. However, for purposes of presuming when the mailed disclosures are received, creditors could use the alternate definition of “business day.” That is, a “business day” would be any day other than Sunday and a federal legal holiday. This is the same definition of “business day” that applies to the three day rescission period and the Section 32 waiting period today.  

Most of the MDIA disclosure requirements do not apply to loans secured by time shares. Also, the proposed MDIA rules will not apply to open-end credit (i.e., Home Equity Lines Of Credit (“HELOC”)). The Board is still reviewing the current open-end rules and will be issuing revised HELOC disclosure requirements in 2009. In short, plan for a very busy New Year!