The Federal Reserve Board (Fed) has issued a proposal that would require additional consumer protections and disclosures for mortgage loans. This is the second phase of the Fed’s review of the mortgage lending rules under Regulation Z, the Truth in Lending Act (TILA). Below are the links to the two proposals issued last year on closed-end mortgages and home equity lines of credit (HELOCs), which comprised the first phase of this review: 1 http://www.cuna.org/download/rcc_090209.pdf http://www.cuna.org/download/rcc_093009a.pdf This latest proposal includes the following: • Changes to the disclosures that borrowers receive for reverse mortgages and changes to the rules for reverse mortgage advertising and the prohibition on certain practices with regard to reverse mortgages. • Changes to the disclosures that explain the borrower’s to rescind certain mortgage loans and changes to the responsibilities of the lender if the borrower exercises this right. • Requirements to ensure that borrowers receive new disclosures when the parties agree to modify the key terms of a closed-end mortgage loan. • Revising the disclosure rules for credit insurance and debt cancellation and suspension products. This would require the disclosure of the maximum premium or charge per period; the maximum benefit amount, along with a statement that the borrower will be responsible for the balance above the maximum benefit amount; that the cost depends on the balance or interest rate, if applicable; and information about the Fed’s website that provides information about these products. The proposal also includes changes with regard to the disclosure of eligibility requirements that were proposed last year and the disclosure to the borrower that the product may not be necessary. For the eligibility requirements, this would include additional statements as to the time period and age limit for coverage and this would allow lenders to make the eligibility determinations prior to the time of enrollment. These disclosures must be in at least 10-point type size and consistent with the model forms and sample language provided in the proposal. Also, if these disclosures are provided early, the lender must then redisclose the maximum premium or charge per period if this is different at the time of the loan closing. With some of the constrains that have been placed on credit union operations this year such as the opt in requirements for overdraft programs and the ongoing NCUA assessments, the changes on credit life and debt cancellation will have a negative impact on fee income which has caused concern by many credit unions. To view the model form, click here. 1. What impact will this change have on your operations? 2. Do you think this change will have any impact on the number of your members who sign up credit life and debt cancellation? For all mortgage loans, the proposal would: • Require lenders to refund fees if the borrower decides to withdraw the loan application three business days after they receive their loan cost disclosures. • Require loans servicers to provide borrowers information about the owner of the loan upon request within ten days. • The proposal also includes other provisions with regard to mortgage loans, such as changes in the determination of whether a mortgage loan is a “higher-priced” loan for purposes of other Regulation Z provisions that implement the Home Ownership Equity Protection Act (HOEPA). After reviewing comments to this proposal, the Fed then plans to issue a final rule to incorporate the issues in this proposal and the proposals that were issued last year. Comments are due by December 23, 2010. Please submit comments to the LSCU by December 9, 2010. If commenting directly to the Fed, you must refer to Docket No. R-1390.
Please feel free to fax your responses to the LSCU at 850.558.1029; e-mail them to Vice President of Regulatory Affairs Bill Berg at email@example.com and to Compliance Specialist Scott Morris at firstname.lastname@example.org; or you may also contact us at 800.342-1266, x1028 or x2165. If you would like a copy of the proposed rule, click here. Reverse Mortgages There are also significant changes that will apply to credit unions who offer reverse mortgages regarding the timing, content, and format for the required disclosures. Members would receive disclosures with the application that highlight the basic features and risks of reverse mortgages. Since few credit unions are offering reverse mortgages to obtain more information about reverse mortgages, click here. Right of Rescission Members have three business days after closing to rescind certain mortgage loans. This may extend for up to three years after closing if the lender fails to provide certain “material” disclosures or the notice of the right to rescind. Under the proposal, the three-day time period would start the later of the loan closing, delivery of the rescission notice, or delivery of the “material” disclosures. The right to rescind would also extend to those who guarantee the loan and pledge their homes and to others who pledge their principal home. These other parties would also receive the rescission notice and “material” disclosures, although only one consumer needs to receive the other disclosures in connection with the loan. For additional information on Changes to the Rescission notice, click here. Loan Modifications Requiring New Disclosures The proposal would require new TILA disclosures for closed-end mortgage loans when parties to an existing closed-end mortgage loan agree to modify key terms. This would replace the current provisions that determine whether new TILA disclosures are required for refinancings between existing parties. The key terms include a change to the interest rate; monthly payment (unless it is a decrease); loan term; an advancement of new funds that are added to the loan amount; adding new property as collateral; or adding/changing an adjustable rate feature or adding other risk factors, such as a prepayment penalty, interest-only payments, negative amortization, a balloon payment, a demand feature, no or low documentation, and shared equity or appreciation. If a modification occurs due to changes to the rate for ARMs that require new TILA disclosures, these would replace the current notice that is required when the rate adjusts. However, if the modified loan is also an ARM, then these current notices must be provided in the future when the rate adjusts. The proposal last year would modify these current notices, and this proposal would further clarify that such notices would be required if the loan is being converted to a fixed rate, as long as the existing loan allows the conversion and indicates how the new rate will be calculated. However, if this information about the conversion and new rate is not provided and/ or if a conversion fee is charged, then new TILA disclosures would need to be provided instead. Amounts advanced to fund an escrow account would not be considered for purposes of determining if there is a change in the monthly payment or advancement of new funds that would otherwise require new TILA disclosures. In addition, current rules allow an index to be changed to a comparable index if it becomes unavailable and this would also not be considered a modification requiring new TILA disclosures. However, new TILA disclosures would be required if a fee is imposed as part of a modification, regardless of the terms that are changed. New TILA disclosures would not be required for modifications in connection with a court proceeding or for modifications for borrowers in default or delinquency, unless the loan amount or interest rate is increased or if a fee is imposed. New disclosures would also not be required if the modification lowers the interest rate with no additional changes, other than a decrease in payment and/or an extension of the loan term, as long as no fee is imposed. Interest Rate Coverage Test for HOEPA Rules
The proposal would change how to determine whether a loan is a “higher-priced mortgage loan” for purposes of the recent HOEPA rules that were issued in 2008 and how points and fees are calculated for purposes of determining whether the loan is a HOEPA loan under other provisions of Regulation Z for “high cost” mortgage loans. Specifically, the proposal would replace the APR as the rate that is compared to the average prime offer rate (APOR) for purposes of determining whether the loan is a “higher-priced mortgage loan.” Instead, the lender would calculate a different, internal rate that would then be compared to the APOR for purposes of making this determination. This internal rate would not be disclosed to borrowers. The reason for this change is because under the proposal issued last year, the APR calculation would include most third-party closing costs, which means more loans would be considered “higher-priced.” The internal rate calculation under this proposal is intended to reduce this increase in “higher-priced” loans by only incorporating the rate, points, and origination fees that the lender or broker charges, while excluding third-party costs. For the separate determination of whether a loan is a HOEPA loan, the proposal would indicate that most third-party fees would not be counted towards the “points and fees” test that determines HOEPA coverage. This is intended to preserve the existing “points and fees” test. In cases in which a lender finances the initial construction of a home and then provides permanent financing for the purchase, the proposal would clarify that the construction phase would not be considered a “higher-priced” mortgage loan. However, an internal rate must be calculated based on charges for both phases to determine if the permanent financing would be considered a “higher-priced” mortgage. The proposal would also clarify that the lender may deliver TILA disclosures that cover both the initial and permanent financing, or may deliver separate disclosures for each phase. Borrower’s Right to a Refund of Fees and Other Related Issues For mortgage loans, the proposal would require the lender to refund fees paid by the borrower, other than the credit report fee, if the borrower decides not to proceed with the loan and requests the refund within three business days after receiving the early disclosures, which would be provided three business days after application under the mortgage loan proposal issued last year. The lender may presume that the borrower receives the early disclosures three business days after delivery, in which case the fees would be refundable for up to six business days after delivery. Also, the lender must provide the refund within three business days after the request, and this refund right must be disclosed to the borrower at the time of application, which would be included in the “Key Questions to Ask About Your Mortgage” document that would be provided at application under the proposal issued last year. Under these proposed provisions, “business day” means any day except for Sundays and public holidays. Under current rules, fees may not be charged until the borrower receives the early disclosures. Under the proposal, this would prohibit charging fees, even if they are refundable at a later time. This would include the lender taking a post-dated check, the lender agreeing not to cash a check until a later time, or if the lender initiates or places a hold on a debit or credit card account, although it would be permissible to take the card account information, as long as the lender does not initiate a charge. However, as further described below, the proposal would require counseling in connection with an application for a reverse mortgage loan. The lender may collect a reasonable fee for counseling in these situations prior to providing the early disclosures, which would not be refundable, similar to the fee for the credit report. These provisions for counseling fees would also apply to any other loan in which counseling may be required. HELOC Advertisements
Under the proposal, HELOC advertisements stating that any lower payments apply for less than the full term of the plan must state the period of time in which those lower payments apply and the amounts and time periods of other payments that would apply. For these provisions that apply to “promotional payments,” the current definition of “promotional payment” only includes temporary lower payments that are not derived from the applicable index and margin. This would be expanded under this proposal in that it would now include lower payments, even if it they are derived from the applicable index and margin. This definition would now include, for example, interest-only payments based on the applicable index and margin since they would be less than the fully amortizing payments, or a balloon payment that would be due later. However, this would not include payments that may be lower because the borrower may make additional draws on the HELOC later. Specifically, the following acts and practices with regard to these advertisements would be prohibited, which mirror the ones outlined for closed-end loans in the 2008 Fed final rule: Use of the term “fixed” to refer to either rates, payments, or home-equity plans, unless certain conditions are satisfied. For variable rate plans, “fixed” may only be used if: • The phrase “variable rate” appears in the advertisement before the first use of the term “fixed” and is at least as conspicuous as any use of the word “fixed;” and • Each use of “fixed” is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed and the fact that the rate may change and the payment may increase after that period. For non-variable plans in which the payment may increase, “fixed” may only be used if each term “fixed” is accompanied by an equally prominent and closely proximate statement of the time period that the payment is fixed, and the fact that the payment may increase after that period. For advertisements for both variable and non-variable plans, “fixed” may only be used if: • The phrase “variable rate” appears with equal prominence with the term “fixed,” and • Each use of the word “fixed” that refers to a rate, payment, or plan either: 1) refers solely to the plans for which rates are fixed and is accompanied by an equally prominent and closely proximate statement of the time period that the payment is fixed, and the fact that the payment may increase after that period; or 2) refers to variable rate plans and is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed, and the fact that the rate may change and the payment may increase after that period. • Comparisons between actual or hypothetical payments or rates and payments or rates that are available under the plan for less than the full term, unless: 1) the advertisement provides the required disclosure described above with regard to promotional and post-promotional rates; and 2) if the plan is variable rate and the advertised payment or rate is based on the index and margin that will be used over the term of the loan, the advertisement must include an equally prominent statement closely proximity to the payment or rate that the rate or payment is subject to adjustment and the time when the adjustment will occur. • Misleading statements that a plan is part of a government loan program or is supported or endorsed by the government. • Use of the lender’s name on an advertisement that is not sent on behalf of the lender, unless the advertisement discloses with equal prominence the name of the entity issuing the advertisement and includes a clear and conspicuous statement that the entity is not associated or acting on behalf of the borrower’s current lender. • Misleading claims that the advertised plan will eliminate the borrower’s obligations to the current lender. The proposal provides numerous examples of such claims that would be prohibited. • Prohibiting the use of the term counselor when referring to the advertised lender or broker. • Foreign language advertisements that provide some of the required disclosures only in English. Other Provisions The proposal includes a number of other provisions, as follows: • Describing how certain practices regarding the prepayment of Federal Housing Administration (FHA) loan constitute prepayment penalties for purposes of TILA disclosures and the 2008 HOEPA rules. Specifically, when a borrower prepays an FHA loan in full, the borrower must pay interest through the end of the month in which this payment is made, even if the prepayment is
made before the end of that month. The proposal would indicate that the amount of interest paid between the prepayment date and the end of that month would now be considered a prepayment penalty under TILA. Clarifying current provisions requiring servicers, to the best of their knowledge, to provide borrowers with the name, address, and telephone number of the owner of the loan, upon the written request of the borrower. Under the proposal, this must be provided within a reasonable time after the borrower’s request and ten business days after receiving the request would be considered “reasonable.” Revocable living trusts would now be considered consumer credit and would be subject to TILA, even though the trust is not a natural person. Clarifying how creditors may comply with the “ability to pay” provisions of the 2008 HOEPA rules when making short-term balloon loans. QUESTIONS TO CONSIDER REGARDING THE PROPOSED RULE
1. Currently, interest rates for variable-rate HELOCs may not be changed unless they are based on an index or rate that is publicly available and not under control of the lender. The official staff commentary under the new credit card rules indicates that the creditor exercises control over the index if: 1) there is a minimum rate “floor” below which the rate may not fall; and 2) if the variable rate can be calculated on any index value that existed during a period of time, such as the highest index value during the given period, although creditors may still be able to base the value on the index on a particular day or based on the average index value during the specific period. Although not included in this proposal, the Fed is requesting comment on whether these commentary provisions for credit cards should also apply to HELOCs and requests specific reasons as to whether or not these should apply to HELOCs. 2. When a borrower prepays an FHA loan in full, the borrower must pay interest through the end of the month in which this payment is made, even if the prepayment is made before the end of that month. The proposal would indicate that the amount of interest paid between the prepayment date and the end of that month would now be considered a prepayment penalty under TILA. Do you agree with this approach?
3. For closed-end ARM mortgage loans, should lenders be required to use an index that is outside of their control and publicly available, which is currently not required? What are the benefits to borrowers if the index is in the lender’s control? What are the risks to borrowers? Are interest rates higher or more volatile when an internal index is used? Are internal indexes more common for certain types of lenders, such as credit unions, and/or more common in certain regions or certain types of ARM loans? 4. The proposal would require new TILA disclosures for closed-end mortgage loans when parties to an existing closed-end mortgage loan agree to modify key terms, which includes a change to the interest rate; monthly payment (unless it is a decrease); loan term; an advancement of new funds that are added to the loan amount; adding new property as collateral; or adding/changing an adjustable rate feature or adding other risk factors, such as a prepayment penalty, interest-only payments, negative amortization, a balloon payment, a demand feature, no or low documentation, and shared equity or appreciation. Are these appropriate or to what extent should the scope be broader or narrower? 5. Under the proposal, any modification in which a fee is imposed would be considered a new transaction, requiring new TILA disclosures. This will result in more transactions that would require new disclosures. In order to limit the impact, should this include all fees or just certain fees, such as “reasonable” fees or those retained by the lender? What types of fees and amounts should be permitted? Should de minimis fees be permitted in which the modification would not require new disclosures? Should this be a dollar amount or percentage amount and what should the amount be? Are there examples of modifications that would require a fee that should not be considered a new transaction, such as a loan workout for defaults or delinquencies? Have fees
been abusive or would exceptions be complicated and not used by lenders such that these exceptions should not be permitted? Also, the new transaction will be subject to the 2008 HOEPA rules if it is a “higher-priced” mortgage loan. Will the costs of complying with the 2008 rules restrict the borrower’s ability to modify their loans? 6. Should the Fed provide that a de minimis increase in the loan amount or periodic payment would not be a new transaction requiring new TILA disclosures and in what situations should these be permitted? If so, should the increase be a dollar amount or a percentage of the loan, or both, and what should the amount be? For the periodic payments, should new disclosures also be required for decreases, as well as increases? 7. Under the proposal, modifications for borrowers in default or delinquency would not require new TILA disclosures, unless the loan amount or interest rate is increased or if a fee is imposed. Should the Fed instead require some type of new, streamlined disclosures that highlight changed terms in order to assist borrowers in analyzing whether a short sale or deed-in-lieu may be a more appropriate course of action? Would you support a streamlined disclosure over the requirement to provide full TILA disclosures? What are the costs and benefits of each approach? Should the proposed exception be extended to those in “imminent” danger of default or delinquency and can “imminent” be defined in a clear way in order to facilitate compliance? 8. Under the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, those who modify existing loans do not have to register under the Act but under this proposal, new TILA disclosures may need to be given. Would these different requirements pose operational or compliance difficulties? 9. When an ARM is converted to a fixed-rate, should new TILA disclosures be required or should a notice of interest rate adjustment be provided instead, which would be provided between 60 and 120 days before the change? Would TILA disclosures be more useful to borrowers in order to decide on this conversion or whether to seek a loan elsewhere? Would liability issues, including the possibility of rescission, discourage lenders from providing ARMs with fixed-rate conversions? 10. Under current rules, fees may not be charged until the borrower receives the early disclosures. Under the proposal, this would prohibit charging fees, even if they are refundable at a later time. This would include the lender taking a post-dated check, the lender agreeing not to cash a check until a later time, or if the lender initiates or places a hold on a debit or credit card account, although it would be permissible to take the card account information, as long as the lender does not initiate a charge. Do you agree with this approach and would it appropriately facilitate the borrower’s convenience and ability to shop for a loan without feeling committed to a specific transaction? 11. For mortgage loans, the proposal would require the lender to refund fees paid by the borrower, other than the credit report fee, if the borrower decides not to proceed with the loan and requests the refund within three business days after receiving the early disclosures. This is similar to current requirements for HELOCs. Do you support or oppose this new requirement? Are there differences between HELOCs and closed-end mortgage loans with regard to the timing of loan processing and types f fees imposed that would make it difficult to comply with these proposed provisions? Would these differences or other factors cause the costs of these proposed provisions to outweigh benefits to borrowers? Should “business days” be defined as any day the lender is open, as opposed to the proposal, which would define the term as any day except Sundays and legal holidays? 12. The notice of this refund right would be provided in the “Key Questions to Ask About Your Mortgage” that the Fed created and which would be provided when the application is provided to the borrower. Do you agree with the content of this disclosure? Should this disclosure instead be provided later when the transaction-specific disclosures are provided or in some other manner, since the borrower may not otherwise remember that the fee is refundable? What fees should be excluded from the requirement that fees be refundable for three business days after the borrower receives the early disclosures?
13. The proposal would provide guidance with regard to the provisions allowing the borrower to waive the waiting period between the time the lender provides the early and/or corrected disclosures and the time of the loan closing for “bona fide” personal financial emergencies. This would include examples of what would or would not be considered such an emergency. Do you have any comments or concerns with these provisions? 14. The proposal would replace the APR as the rate that is compared to the average prime offer rate (APOR) for purposes of determining whether the loan is a “higher-priced mortgage loan.” Instead, the lender would calculate a different, internal rate that would then be compared to the APOR for purposes of making this determination. Should this be optional, even though this would result in inconsistent results among lenders? 15. Current provisions require servicers, to the best of their knowledge, to provide borrowers with the name, address, and telephone number of the owner of the loan, upon the written request of the borrower. Under the proposal, this must be provided within a reasonable time after the borrower’s request and ten business days would be considered “reasonable.” Is ten days sufficient and are there other burdens and benefits with regard to these provisions? 16. The proposal would prohibit a number of advertising acts and practices for HELOCs, which mirrors the ones imposed on closed-end mortgage advertising. Do you believe this is appropriate and are there other acts or practices that should be prohibited for HELOCs?