A series of final, interim, and proposed amendments to Regulation Z (Truth in Lending) were issued by the Federal Reserve Board on August 16, 2010, and contain new requirements for closed-end mortgage loans, open-end home equity lines of credit, and reverse mortgage loans.

Final Rule on Loan Originator Compensation and Steering. Effective April 1, 2011, a final rule that applies to closed-end credit secured by any dwelling of the consumer (not just the principal dwelling) prohibits various practices in connection with the compensation of "loan originators." A "loan originator" generally means any person who for compensation arranges or negotiates a mortgage transaction, including a creditor's non-administrative employees, and only includes a creditor who does not use its own funds to close the transaction. Similar prohibitions are contained in Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes additional restrictions on originator compensation that will be separately implemented by the Fed. Those provisions are summarized in an earlier Ballard Spahr legal alert.

The final rule prohibits the following:

  • Compensation to a loan originator based on the transaction’s interest rate or other terms (except compensation can be based on a fixed percentage of the loan amount).
  • A loan originator's receipt of compensation directly from the consumer if the originator is also receiving compensation from the creditor or another person.
  • Steering of a consumer by a loan originator to a transaction to increase the originator’s compensation unless such transaction "is in the consumer's interest." There is a safe harbor from the anti-steering prohibition if the originator obtains loan options from a significant number of the creditors with which the originator regularly does business and, for each type of loan in which the consumer expressed an interest, presents the consumer with loan options for which the consumer qualifies that include the loan with the lowest interest rate, the loan with the lowest total origination points and fees, and the loan with the lowest interest rate that also has no risky features (prepayment penalty, negative amortization, or a balloon payment in the first seven years).

Final Rule on Notice of Sale or Transfer of Mortgage Loans. A final rule, effective 30 days from publication in the Federal Register and with a January 1, 2011, mandatory compliance date, implements the requirement imposed by the Helping Families Save Their Homes Act of 2009 for a new owner or assignee of "mortgage loans" to send written notice to the borrower of the transfer. The requirement, which became immediately effective upon the statute’s enactment on May 20, 2009, was the subject of an interim rule published by the Fed in the Federal Register on November 20, 2009. Persons subject to the final rule may continue to comply with the interim rule until the mandatory compliance date.

The "mortgage loans" to which the notice requirement applies are any consumer credit transactions, whether closed-end or open-end, secured by a consumer’s principal dwelling. The notice must generally be sent within 30 calendar days of the transfer date, identify the loan that was transferred, and include certain information, such as the transferee's identity, address, and telephone number; the transfer date; and the location where the transfer is recorded or a statement that the transfer has not yet been recorded. The notice may be combined with other disclosures, including the transfer of servicing notice required by the Real Estate Settlement Procedures Act. Among the exceptions to the notice requirement is one for transfers in connection with a repurchase agreement that obligates the transferor to repurchase the loan. In addition, servicers who hold title to a loan or receive an assignment solely for administrative convenience are not required to provide the notice.

Interim Rule on Closed-End Mortgage Loan Disclosures. An interim rule, effective 30 days from publication in the Federal Register and requiring mandatory compliance for transactions for which applications are received on or after January 30, 2011, implements new requirements for pre-consummation TILA disclosures that were part of the Mortgage Disclosure Improvement Act of 2008. For closed-end transactions secured by a dwelling (not just a principal dwelling) or any real property other than a time-share (not just residential real property), the payment schedule that is part of the segregated "federal box" is replaced by a new "interest rate and payment summary" in the form of a table. The table must disclose the contract interest rate together with the corresponding monthly payments, including any escrows for taxes and property and/or mortgage insurance. For adjustable-rate or step-rate loans, the table must show the interest rate and payment at consummation, the maximum interest rate and payment during the first five years, and the maximum possible interest rate and payment during the loan term. Additional disclosures are required in the table for certain loans, such as loans with negative amortization or balloon payments. The interim rule also requires a separate statement that there is no guarantee the consumer will be able to refinance the loan with a new transaction. The interim rule includes model forms and clauses and a request for comments to be filed within 60 days after publication in the Federal Register.

Proposed Rule on Required Escrows for Higher-Priced Mortgage Loans. A proposed rule issued for comment would implement a provision in the Dodd-Frank Act that created a new APR threshold for when an escrow account must be established on higher-priced, first-lien "jumbo" mortgage loans secured by the consumer’s principal dwelling. In 2008, the Fed, using its authority under the Home Ownership and Equity Protection Act (HOEPA) provisions of TILA, amended Regulation Z to create a class of mortgage loans labeled "higher-priced mortgage loans" and impose certain restrictions on such loans, including a requirement that an escrow account for payment of taxes and insurance be established for first lien loans. Under the Fed’s HOEPA rule, the escrow requirement currently applies to first lien loans with an APR that is 1.5 percentage points or more above the average prime offer rate for a comparable transaction regardless of loan size. The Dodd-Frank Act’s mandatory escrow account requirement retains that APR threshold for mortgage loans that do not exceed the maximum principal amount eligible for purchase by Freddie Mac (currently $417,000 in most cases), but increases the APR threshold to 2.5 percentage points or more above the applicable average prime offer rate for so-called jumbo mortgage loans that are ineligible for purchase by Freddie Mac. The proposed rule would amend Regulation Z to make its mandatory escrow requirement consistent with the higher Dodd-Frank Act. However, the lower APR threshold would continue to apply to jumbo loans for purposes of determining whether they are "higher-priced mortgage loans" subject to the other restrictions applicable to such loans.

Proposed Rule on Rescission, Loan Modifications, Fee Refunds, and More for Mortgage Loans. A proposed rule issued for comment would make expansive changes to Regulation Z requirements for closed-end mortgage transactions, open-end home equity credit lines, and reverse mortgage loans. The proposal would make changes to the notice of right to rescind, revise the "material disclosures" that can trigger an extended right to rescind, and clarify the parties' obligations when a consumer seeks to exercise an extended right to rescind. It would also change the circumstances that trigger the requirement to provide new TILA disclosures when a loan secured by a dwelling or any real property is modified. Other proposed changes include new requirements for the timing, content, and format of reverse mortgage disclosures and new restrictions on lenders offering such mortgages; a requirement for lenders to refund fees if a consumer decides not to proceed with a loan secured by a dwelling or any real property within three business days after receiving early TILA disclosures; and a requirement for servicers to generally provide a consumer with information about the owner of a loan secured by a first lien on residential real property within 10 business days of the consumer's request for such information. A similar requirement is contained in Title XIV of the Dodd-Frank Act.