Significant Changes Coming for Mortgage Lenders and Brokers?

By Hafez Daraee

This past July, the Federal Reserve Board (the "Board") published proposed rules that could make sweeping changes to the closed-end residential loan and dwelling-secured, open-end credit plan rules of the Truth in Lending Act ("TILA"). These newly proposed rules focus on changes to the disclosures given at all stages of the lending process.

Closed-End Residential Loan Disclosures

The Board proposes five changes:

1. Two new publications will replace the current consumer handbook on adjustable rate mortgages. They will be required before the earlier of (1) submission of an application or (2) payment of a nonrefundable fee. The adjustable rate mortgage ("ARM") program disclosure will still be required, but its format will change to a question-and-answer format with a related table.
2. Within three business days after the application, the creditor must provide a new APR disclosure that includes charges imposed by third parties, even if the provider is selected by the consumer. The term "finance charge" is to be replaced by "interest and settlement charges." The APR must be disclosed in 16-point font and in close proximity to a graph comparing the APR to the Home Ownership and Equity Protection Act average (a prime offer rate to borrowers with excellent credit.) And a new form, "key questions about risk," must be presented as a table, to better define key terms.
3. Two alternatives are proposed for disclosures required three days prior to closing. The first would require a final TILA form three days before consummation even if the earlier TILA disclosure was accurate. The second alternative requires the creditors to redisclose the TILA information but requires a three-day wait to close only if the APR exceeds the application's range of rates or if an adjustable rate feature is added.
4. After closing, the proposed new rules require at least 60 days before a payment is due if the ARM rate adjustment affects the payment. In the case of a negatively amortized loan, the waiting period would be 15 days. Also, the creditors must give a borrower at least 45 days' notice before force-placing insurance.
5. Finally, the Board is considering rules that prohibit yield spread premiums to brokers and overages to employees. Moreover, creditors could no longer be compensated based on credit terms or conditions.

Dwelling-Secured, Open-End Credit Plan

1. Currently required disclosures under Regulation Z will be replaced with transaction-specific disclosures, given within three days of the application.
2. The account-opening disclosure is changed to include certain costs and terms to be listed in a table. Interests and fees are renamed "finance charges and other charges."
3. The change-in-term notices must be provided 45 days in advance of the change in current terms, instead of the current 15 days. Also, some changes must be presented in a table format.
4. The Board's proposed rules would limit a creditor's ability to suspend or to terminate a home equity line of credit. For example, a creditor would be prohibited from such termination for nonpayment unless the payment was more than 30 days past due. The Board is also considering a new "safe harbor" for suspensions based on a "significant" decline in property values. If the combined loan-to-value ratio at origination was 90 percent or greater, a decline of 5 percent would be considered significant. And a creditor could not consider late payment or nonpayment as an adverse mark on a credit report. The Board is also considering rules requiring suspension to include additional information regarding a consumer's right to request reinstatement.

The Board's proposal is sweeping and significant. The Board has requested that comments in support of or in opposition to the above proposed rules be submitted before November 27, 2009.

Published Fall 2009

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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