We are writing to highlight the new secondary market disclosure requirement that was enacted by Section 404 of the "Helping Families Save Their Homes Act of 2009" (the "Act"). Section 404 does not require the promulgation of regulations to implement this provision and as a result, this disclosure requirement became effective as of the effective date of the Act, May 20, 2009. As you are aware, we sent a mailing summarizing the salient provisions of the entire Act last week.
The new disclosure requirement, known as the "Section 404 disclosure," may increase litigation and compliance risk for secondary market participants by requiring disclosure to the borrower of the names and contact information of the purchasers and assignees of their mortgage loans. Notably, however, new disclosure requirement only applies to residential mortgage loans that are secured by a borrower's principal dwelling.
Section 404 of the Act amends the federal Truth-in-Lending Act ("TILA") to require that, no later than 30 days after the date on which a mortgage loan is sold or otherwise transferred to a third party, the "creditor"1 that is the new owner or assignee of the mortgage notify the borrower in writing of the following:
- The identity, address, telephone number of the new creditor;
- The date of transfer;
- How to reach an agent or party having authority to act on behalf of the new creditor;
- The location of the place where transfer of ownership of the debt is recorded; and
- Any other relevant information regarding the new creditor.
In light of the fact that this information has never been required in the past and that assignees generally avoid the disclosure of their identities as purchasers of loans, a number of questions have arisen with respect to its implementation. The market has already expressed concern regarding how current market practices, such as assignments in blank, or assignments between affiliates or to securitization trusts will be treated under this new requirement as well as who has the responsibility for making such disclosures. Further complicating matters is the fact that the Federal Reserve Board is not expected to immediately issue any guidance on the requirements of Section 404, even though the statutory requirements are already in effect.
Notwithstanding the lack of guidance, we believe the market should take a conservative stance with respect to the new requirement and issue the disclosure every time a loan is sold or transferred to a third party. As a result, a disclosure should be provided at every step in a multistep transfer chain and to transfers between affiliates.
With respect to the elements of the notice itself, we believe that while disclosure (1) above must be fulfilled by the new purchaser or assignee, disclosure (3) would most likely reference the mortgage servicer. With respect to disclosure (4), until further guidance is issued, we believe that the best implementation of that disclosure would be to merely state the location of the place where transfer is recorded if there is a recording upon transfer or sale. If there is no such recording (i.e., the assignment is in blank), we believe the disclosure requirement could be fulfilled by disclosing the last place where the transfer of ownership was recorded, and stating that in the current transfer, the assignment is not being recorded.
Please note that the Act has amended the civil liability provisions of TILA to provide borrowers with a private right of action against the assignee for noncompliance with this new disclosure requirement. A consumer may recover actual damages, as well as statutory damages of no more than:
- $4,000 in individual actions; or
- The lesser of $500,000 or 1% of a creditor's net worth in a class action.
Finally, note that this new disclosure is in addition to the mortgage servicing transfer disclosures, frequently referred to as the "Hello" and "Goodbye" letters, that are already required under the federal Real Estate Settlement Procedures Act ("RESPA") when the servicing rights on a residential mortgage loan are transferred. Unlike the existing "Hello-Goodbye" RESPA disclosures, however, again note that this new disclosure specifically identifies the holder of the loan. For most interim purchasers of mortgage loans who will either resell them or securitize them, aside from perhaps registering the loans with the MERS system, these loan assignments are simply not recoded but are held in-blank pending further disposition. The fact that the interim purchaser now has to be identified to the borrower may increase the litigation and compliance risk for the purchaser. The new disclosure requirement appears to present clear evidence of the desire on Capitol Hill for more transparency in the secondary mortgage market.0