Mortgage Loans : Regulation Z TILA

TILA Regulation Z

TILA for Mortgage

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The 2016 Servicing Rule took effect on October 19, 2017, except the provisions related to successors in interest and periodic statements for consumers in bankruptcy, which took effect on April 19, 2018. The CFPB concurrently issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA) to clarify the interaction of the FDCPA and specified mortgage servicing rules in Regulations X and Z. (81 Fed. Reg. 71977) (October 19, 2016).

In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)11 amended several provisions of TILA, including: (1) the addition of a new safe-harbor qualified mortgage category for portfolio mortgages of certain insured depository institutions and insured credit unions; (2) modification of the waiting period requirements for high-cost mortgage loan consummation under certain conditions; (3) clarification of “customary and reasonable” as they pertain to fee appraisers who voluntarily donate appraisal services to certain charitable organizations; and (4) student loan protections in the event of bankruptcy or death of the student or non-student obligor. The EGRRCPA also amended TILA to exclude manufactured or modular housing retailers and their employees from loan originator compensation requirements when specific conditions are met,and amended the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) regarding employment transition of certain loan originators. These provisions were generally effective on May 24, 2018, except for the student loan protections, which became effective on November 24, 2018, and the SAFE Act changes, which became effective on November 24, 2019. On November 16, 2019, the Bureau issued an interpretive rule on the SAFE Act changes,

Subpart E (12 CFR 1026.31 through 1026.45) certain disclosures and provide limitations for closed-end credit transactions and open-end credit plans that have rates or fees above specified amounts or certain prepayment penalties (12 CFR 1026.32). Special disclosures are also required, including the total annual loan cost rate, for reverse mortgage transactions (12 CFR 1026.33). The rules also prohibit specific acts and practices in connection with high-cost mortgages, as defined in 12 CFR 1026.32(a), (12 CFR 1026.34); in connection with closed-end higher-priced mortgage loans, as defined in 12 CFR 1026.35(a), (12 CFR 1026.35); and in connection with an extension of credit secured by a dwelling (12 CFR 1026.36). This subpart also sets forth disclosure requirements, effective October 3, 2015, for certain closed-end transactions secured by real property, or a cooperative unit, as required by 12 CFR 1026.19(e) and (f) 12 CFR 1026.37-38, disclosures for mortgage transfers 12 CFR 1026.39, and disclosure requirements for periodic statements for residential mortgage loans (12 CFR 1026.41). In addition, it contains minimum standards for transactions secured by a dwelling, including provisions relating to ability to repay and qualified mortgages

Annual Percentage Rate Definition – 12 CFR 1026.22 (Closed-End Credit) Credit costs may vary depending on the interest rate, the amount of the loan and other charges, the timing and amounts of advances, and the repayment schedule. The APR, which must be disclosed in nearly all consumer credit transactions, is designed to take into account all relevant factors and to provide a uniform measure for comparing the cost of various credit transactions. The APR is a measure of the cost of credit, expressed as a nominal yearly rate. It relates the amount and timing of value received by the consumer to the amount and timing of payments made. The disclosure of the APR is central to the uniform credit cost disclosure envisioned by the TILA. The value of a closed-end credit APR must be disclosed as a single rate only, whether the loan has a single interest rate, a variable interest rate, a discounted variable interest rate, or graduated payments based on separate interest rates (step rates), and it must appear with the segregated disclosures. Segregated disclosures are grouped together and do not contain any information not directly related to the disclosures required under

Financial institutions may, if permitted by state or other law, precompute interest by applying a rate against a loan balance using a simple interest, add-on, discount or some other method, and may earn interest using a simple interest accrual system, the Rule of 78s (if permitted by law) or some other method. Unless the financial institution’s internal interest earnings and accrual methods involve a simple interest rate based on a 360-day year that is applied over actual days (even that is important only for determining the accuracy of the payment schedule), it is not relevant in calculating an APR, since an APR is not an interest

The regulation requires that the terms “finance charge” and “annual percentage rate” be disclosed more conspicuously than any other required disclosure, subject to limited exceptions. The finance charge and APR, more than any other disclosures, enable consumers to understand the cost of the credit and to comparison shop for credit. A creditor’s failure to disclose those values accurately can result in significant monetary damages to the creditor, either from a class action lawsuit or from a regulatory agency’s order to reimburse consumers for violations of law. If an APR or finance charge is disclosed incorrectly, the error is not, in itself, a violation of the regulation if: • The error resulted from a corresponding error in a calculation tool used in good faith by the financial institution. • Upon discovery of the error, the financial institution promptly discontinues use of that calculation tool for disclosure purposes. • The financial institution notifies the CFPB in writing of the error in the calculation tool.

When a financial institution claims a calculation tool was used in good faith, the financial institution assumes a reasonable degree of responsibility for ensuring that the tool in question provides the accuracy required by the regulation (15 U.S.C. 1640 (c)). For example, the financial institution might verify the results obtained using the tool by comparing those results to the figures obtained by using another calculation tool. The financial institution might also verify that the tool, if it is designed to operate under the actuarial method, produces figures similar to those provided by the examples in Appendix J to the regulation. The calculation tool should be checked for accuracy before it is first used and periodically thereafter

Change in Terms Notices for Home Equity Plans Subject to 12 CFR 1026.40 – 12 CFR 1026.9(c) Servicers are required to provide consumers with 15 days’ advance written notice of a change to any term required to be disclosed under 12 CFR 1026.6(a) or where the required minimum periodic payment is increased. Notice is not required when the change involves a reduction of any component of a finance charge or other charge or when the change results from an agreement involving a court proceeding. If the creditor prohibits additional extensions of credit or reduces the credit limit in certain circumstances (if permitted by contract), a written notice must be provided no later than three business days after the action is taken and must include the specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also must state that

Subpart C – Closed-End Credit Subpart C relates to closed-end credit. It contains rules on disclosures 12 CFR 1026.17-.20, treatment of credit balances 12 CFR 1026.21, annual percentage rate calculations 12 CFR 1026.22, rescission rights 12 CFR 1026.23, and advertising (12 CFR 1026.24). The TILA-RESPA Integrated Disclosures must be given for most closed-end transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33. The TILA-RESPA Integrated Disclosures do not apply to HELOCs, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. Truth in Lending disclosures (TIL disclosures) and the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet must still be provided for certain closed-end

business days of receipt of the consumer’s loan application and to ensure that the consumer receives the Closing Disclosure no later than three business days before loan consummation (12 CFR 1026.19(e)(iii), 1026.19(f)(1)(ii)). If the loan is a purchase transaction, the special information booklet must also be provided within three business days of receipt of the consumer’s application (12 CFR 1026.19(g)). The specifics of these disclosure timing requirements are further discussed below, including a discussion about revised disclosures. Mortgage loans not subject to 12 CFR 1026.19(e) and (f) (e.g., reverse mortgages, and chattel-dwelling loans) have different disclosure requirements. For reverse mortgages, disclosures must be delivered or mailed to the consumer no later than the third business day after a creditor receives the consumer’s written application (12 CFR 1026.19(a)). For chattel-dwelling mortgage loans, disclosures must be provided to the consumer prior to consummation of the loan (12 CFR 1026.17(b)). Revised disclosures are also required within three business days of consummation if certain mortgage loan terms change (12 CFR 1026.19(a)(2)). For loans like reverse mortgages, the consumer will receive the Good Faith Estimate (GFE), HUD-1 Settlement Statement (HUD-1), and Truth in Lending disclosures as required under the applicable sections of both TILA and RESPA. Consumers receive TIL disclosures for chattel-dwelling loans that are not secured by land, but the GFE and the HUD-1 are not required. Finally, certain variable rate transactions secured by a dwelling have additional disclosure obligations with specific timing requirements both prior to and after consummation (see 12 CFR 1026.20(c) and (d) below).

Variable and Adjustable Rate

• Disclosures for variable rate loans must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation.

• If the variable rate transaction includes either a seller buydown that is reflected in a contract or a consumer buydown, the disclosed APR should be a composite rate based on the lower rate for the buy-down period and the rate that is the basis for the variable rate feature for the remainder of the term. • If the initial rate is not determined by the index or formula used to make later interest rate adjustments, as in a discounted variable-rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for as long as it is applied and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation (i.e., the fully indexed rate). o If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the adjustment, from changing to the fully indexed rate, the effect of that rate or payment cap needs to be reflected in the disclosures. o The index at consummation need not be used if the contract provides a delay in the implementation of changes in an index value (e.g., the contract indicates that future rate changes are based on the index value in effect for some specified period, such as 45 days before the change date). Instead, the financial institution may use any rate from the date of consummation back to the beginning of the specified period (e.g., during the previous 45-day period). • If the initial interest rate is set according to the index or formula used for later adjustments but is set at a value as of a date before consummation, disclosures should be based on the initial interest rate, even though the index may have changed by close date

Finance Charge – 12 CFR 1026.18(c) The total amount of the finance charge must be disclosed for all loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) must be treated as accurate if the amount disclosed as the finance charge (1) is understated by no more than $100 or (2) is greater than the amount required to be disclosed. Amount Financed

If the obligation is a renewable balloon payment instrument that unconditionally obligates the financial institution to renew the short-term loan at the consumer’s option or to renew the loan subject to conditions within the consumer’s control, the payment schedule must be disclosed using the longer term of the renewal period or periods. The long-term loan must be disclosed with a variable rate feature. If there are no renewal conditions or if the financial institution guarantees to renew the obligation in a refinancing, the payment schedule must be disclosed using the shorter balloon payment term. The short-term loan must be disclosed as a fixed rate loan, unless it contains a variable rate feature during the initial loan term. Annual Percentage Rate (Closed-End Credit)

Due to the structure of construction-permanent and certain other multiple advance loans, Regulation Z includes certain optional provisions to help a creditor estimate the components of the APR and finance charge computations for these loans. In many instances, the amount and dates of advances are not predictable with certainty since they depend on the progress of the work. Regulation Z provides that the APR and finance charge for such loans may be estimated for disclosure based on the best information reasonably available at the time of disclosure (12 CFR 1026.17(c)(2)(i)). Further, a creditor has optionality as to whether it discloses the advances separate or together as one transaction in certain circumstances. First, a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction or disclosed as separate transactions (12 CFR 1026.17(c)(6)(i)). Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction (12 CFR 1026.17(c)(6)(ii)). Because construction loans or construction permanent loans may be disclosed as one transaction, or as multiple transactions, computations can be impacted by this decision. If the actual schedule of advances is not known, the methods set forth in Appendix D may be used to estimate the interest portion of the finance charge and the annual percentage rate and to make disclosures (12 CFR Part 1026 App. D). At its option, the financial institution may rely on the representations of other parties to acquire necessary information

In a multiple advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan amount for that interest payment purpose. If the creditor requires interest reserves for construction loans, Appendix D provides further guidance. Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D (Comment App. D-5). If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under Appendix D (Comment App. D-5.i). If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures. To reflect the effects of such compounding, the creditor should use the formula in Appendix D (Comment App. D-5.ii). Fees and Charges In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must

360-Day and 365-Day Years – 12 CFR 1026.17(c)(3)

By State

Disclosure violations may occur, however, when a financial institution applies a daily interest factor based on a 360-day year to the actual number of days between payments. In those situations, the financial institution must disclose the higher values of the finance charge, the APR, and the payment schedule resulting from this practice.

***Use TILA-RESPA Integrated Disclosures (See Regulation Z): • Most closed-end mortgage loans, including: o Construction-only loans o Loans secured by vacant land or by 25 or more acres

Continue to use TIL20 and RESPA disclosures (as applicable): • HELOCs (subject to disclosure requirements under 12 CFR 1026.40) • Reverse mortgages21 (subject to existing TIL and GFE disclosures) • Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA)

Creditors making closed-end consumer credit transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33, and subject to the provisions of 12 CFR 1026.19(e) and (f), must provide consumers with a Loan Estimate The Loan Estimate must be delivered or placed in the mail to the consumer no later than the third business day after the creditor or mortgage broker receives the consumer’s application for a mortgage loan . If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail (this applies to electronic delivery as well) (12 CFR 1026.19(e)(1)(iv); Comment 19(e)(1)(iv)-2). Other than for transactions secured by a consumer’s interest in a timeshare plan, the Loan Estimate must be delivered or placed in the mail no later than the seventh business day before consummation (12

6 pieces of information

The consumer’s name; • The consumer’s income; The consumer’s social security number to obtain a credit report; • The property address; • An estimate of the value of the property; and • The mortgage loan amount sought.

he consumer may modify or waive the seven business day waiting period after receiving the Loan Estimate if the consumer determines that the mortgage loan is needed to meet a bona fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period

Zero tolerance. For charges other than those that are specifically excepted, as noted below, creditors may not charge consumers more than the amount disclosed on the Loan Estimate, other than for changed circumstances that permit a revised Loan Estimate (12 CFR 1026.19(e)(3)(i) and (iv). The zero tolerance charges generally include but are not limited to the following: • Fees for required services paid to the creditor, mortgage broker, or an affiliate of either (12 CFR 1026.19(e)(3)(i), Comment 19(e)(3)(i)-1(i)-(iii)); • Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third-party service provider for a settlement service or transfer taxes (12 CFR 1026.19(e)(3)(i)), Comment 19(e)(3)(i)-1(iv)-(v)). 10 percent cumulative tolerance. Charges for third-party services and recording fees paid by or imposed on the consumer are grouped together and are subject to a 10 percent cumulative tolerance. This means the creditor may charge the consumer more than the amount disclosed on the Loan Estimate for any of these charges so long as the total sum of the charges does not exceed the sum of all such charges disclosed on the Loan Estimate by more than 10 percent (12 CFR 1026.19(e)(3)(ii)(A)). These charges are: • Recording fees (Comments 19(e)(3)(ii)-1.ii and -4); • Charges for required third-party services if: o The charge is not paid to the creditor or the creditor’s affiliate (12 CFR 1026.19(e)(3)(ii)(B)); and o The consumer is permitted by the creditor to shop for the third-party service (12 CFR 1026.19(e)(3)(

Variances permitted without tolerance limit:

Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account (12 CFR 1026.19(e)(3)(iii)(A)-(C)). • Charges paid to third-party service providers for services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor’s written list of service providers (12 CFR 1026.19(e)(3)(iii)(D); Comment 19(e)(3)(iii)-2). • Property taxes and other charges paid to third-party service providers for services not required by the creditor

Refunds within 60 days of consummation. If the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)). • For charges subject to zero tolerance, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer (12 CFR 1026.19(e)(3)(i)). • For charges subject to a 10 percent cumulative tolerance, to the extent the total sum of the charges exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, the difference must be refunded to the consumer

Loan Estimate - Revisions and Corrections

(A): Changed circumstances – increased settlement charges. Changed circumstances that occur after the Loan Estimate is provided to the consumer that cause estimated settlement charges to increase more than is permitted under the TILARESPA Integrated Disclosure rule

A natural disaster that damages the property or otherwise results in additional closing costs; o A creditor’s estimate of title insurance is no longer valid because the title insurer goes out of business; or o New information not relied on when the Loan Estimate was provided is discovered, such as a neighbor of the seller filing a claim contesting the property boundary.

B) Changed circumstances – consumer eligibility: such as income different than stated

(C): Revisions requested by the consumer: title changes, power of attorney, legal

(D): Rate locks after initial Loan Estimate.

(E): Expiration of Loan Estimate. If the consumer indicates an intent to proceed with the transaction more than 10 business days (or any additional number of days as extended by the creditor orally or in writing) after the Loan Estimate was delivered or placed in the mail to the consumer, a creditor may use a revised Loan Estimate. No justification is required for the change to the original estimate of a charge other than the lapse of 10 business days or the additional number of days as extended by the creditor

(F): Construction loans. Creditors also may use a revised Loan Estimate where the transaction involves financing of new construction and the creditor reasonably expects that settlement will occur more than 60 calendar days after the original Loan Estimate has been provided if the original Loan Estimate clearly and conspicuously stated that at any time prior to 60 days before consummation, the creditor may issue revised disclosures

Documentation of intent to proceed. To satisfy the record retention requirements of 12 CFR 1026.25, the creditor must document the consumer’s communication of the intent to proceed (12 CF Oral communication in person immediately upon delivery of the Loan Estimate; or • Oral communication over the phone, written communication via email, or signing a pre-printed form after receipt of the Loan Estimate.

The Closing Disclosure generally must contain the actual terms and costs of the transaction form integrates and replaces the HUD-1 and the final TIL

If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms of the transaction and complies with the other requirements of New three-day waiting period. If the creditor provides a corrected disclosure, it must provide the consumer with an additional three-business-day waiting period prior to consummation if the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added to the transaction

“Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law Closing Disclosure form no later than three business days before consummation If the Closing Disclosure is provided in person, it is considered received by the consumer on the day it is provided. If it is mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is delivered or placed in the mail Settlement agents. Creditors may contract with settlement agents to have the settlement agent provide the Closing Disclosure to consumers on the creditor’s behalf, provided that the settlement agent complies with all relevant requirements

Three-business-day waiting period. The loan may not be consummated less than three business days after the Closing Disclosure is received by the consumer. A business day means all calendar days except Sundays and the legal public holidays

Three categories of changes that require a corrected Closing Disclosure containing all changed terms (12 CFR 1026.19(f)(2)): • Changes that occur before consummation that require a new three-business-day waiting period (12 CFR 1026.19(f)(2)(ii)); • Changes that occur before consummation and do not require a new three-business-day waiting period; and (12 CFR 1026.19(f)(2)(i)); • Changes that occur after consummation. The disclosed APR becomes inaccurate, The loan product changes. A prepayment penalty is added

When a post-consummation event requires a corrected Closing Disclosure, the creditor must deliver or place in the mail a corrected Closing Disclosure not later than 30 calendar days after receiving information sufficient to establish that such an event has occurred. (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-1) In transactions involving a seller, the settlement agent must provide the seller with a corrected Closing Disclosure if an event occurs within 30 days of consummation that makes the disclosures inaccurate as they relate to the amount actually paid by the seller. The settlement agent must deliver or mail a corrected closing disclosure no later than 30 days from receiving information that establishes the Closing Disclosure is inaccurate and results in a change to an amount actually paid by the seller from what was previously disclosed Changes due to clerical errors. The creditor must provide a corrected Closing Disclosure to correct non-numerical clerical errors no later than 60 calendar days after consummation Refunds related to the good faith analysis. The creditor can cure a tolerance violation of 12 CFR 1026.19(e)(3)(i) or (ii) by providing a refund to the consumer and delivering or placing in the mail a corrected Closing Disclosure that reflects the refund no later than 60 calendar days after consummation

A special information booklet, otherwise known as the home buying information booklet, to consumers who apply for a consumer credit transaction secured by real property or a cooperative unit the “Your Home Loan Toolkit”

If the consumer is applying for a HELOC subject to 12 CFR 1026.40, the creditor (or mortgage broker) can provide a copy of the brochure titled “What You Should Know About Home Equity Lines of Credit” instead of the special information booklet Creditors must deliver or place in the mail the special information booklet not later than three business days after receiving the consumer’s loan application if the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three business-day period, the creditor need not provide the special information booklet When two or more persons apply together for a loan, the creditor may provide a copy of the special information booklet to just one of them

Regulation Z provides a flexible rule for disclosure of construction loans and construction-permanent loans (12 CFR 1026.17(c)(6)). First, it provides that a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction Regulation Z provides a flexible rule for disclosure of construction loans and construction-permanent loans (12 CFR 1026.17(c)(6)). First, it provides that a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction

The TIL disclosure provided for these loans includes a payment schedule (12 CFR 1026.18(g)). The disclosed payment schedule must reflect all components of the finance charge. It includes all payments scheduled to repay loan principal, interest on the loan, and any other finance charge payable by the consumer

8/13/2021

Regulation Z TILA