By Todd R. Pajonas and Matthew K. Scheriff
New York aw Journal
September 02, 2009
"The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"
These words were uttered by our 40th President, Ronald Reagan, to a group of Future Farmers of America in 1988. Regardless of your political party affiliation, the Mortgage Disclosure Improvement Act of 2008 (MDIA), which has now taken effect for mortgage applications taken on or after June 30, 2009, illustrates the ways in which the government sometimes "helps" us.
Among other things, MDIA provides rules governing when certain fees may be collected in conjunction with a mortgage loan application, the timeliness of the Truth-in-Lending (TIL) disclosures, and requirements for re-disclosing the TIL when a consumer's annual percentage rate has changed since the previous disclosure.
The new law affects any funds borrowed by consumers for all mortgage loans secured by a dwelling, except a home equity line of credit or a loan secured for business purposes. Therefore, it is of utmost importance for anyone involved in residential real estate to have an understanding of the requirements brought about by MDIA. The changes can affect the loan application process, closing preparation procedures, and timeliness of funds. This especially holds true for states such as New York, where attorneys routinely calculate out closing adjustments while sitting at the settlement table. Certain changes to closing charges previously disclosed to a consumer in their Truth-in-Lending Disclosure statement could result in a closing being adjourned and a very unhappy client.
In addition to the changes in closing procedures, mortgage banks, institutional lenders, and mortgage brokers will all have to modify their application processes, fee collection policies, disclosure processes and record-keeping systems to insure compliance with MDIA. Knowing that the pendulum has now swung to more conservative underwriting practices, some lenders may adopt procedures that are more restrictive than MDIA provides allowing them to err on the side of caution.
On July 30, 2008, the Board of Governors of the Federal Reserve System published a final rule amending 12 CFR 226, which is better known as Regulation Z. The purpose of Regulation Z, among other things, is to promote the informed use of consumer credit by requiring disclosures about its terms and costs, and to allow consumers to cancel certain credit transactions involving dwelling-secured mortgage loans. The changes made on July 30, 2008, affected the Truth in Lending Act (TILA) 15 USC 1601, as well as the Home Ownership and Equity Protection Act (HOEPA).
However, also on July 30, 2008, Congress enacted the Housing and Economic Recovery Act of 2008, known as the Mortgage Disclosure Improvement Act of 2008, which also provided for amendments to TILA. Accordingly, the Board of Governors of the Federal Reserve System subsequently made a further revision to Regulation Z to comply with the changes mandated by Congress in HOEPA. The changes required by MDIA can be broken down into three different areas: 1) What types of transactions are affected by MDIA? 2) What are the initial Truth-in-Lending disclosure requirements? and 3) What are the requirements when a disclosure needs to be amended?
What types of transactions are affected by MDIA? Initially, the changes enacted by the board were designed to protect consumers for transactions involving their principal dwelling. However, MDIA expanded the requirement to include all "mortgage transactions subject to the Real Estate Settlement Procedures Act (RESPA) that is secured by the consumer's dwelling, other than a home equity line of credit…." 12 CFR 226.19(a)(1)(i). Since RESPA, which is codified at 12 USC 2602, governs almost every loan made on a one-to-four family dwelling in the United States, it stands to reason that virtually every one-to-four family residential loan has the capacity to fall within the confines of MDIA unless there is a specific exception.
Currently, home equity lines of credit (HELOCs) are not subject to MDIA and may be provided by lending institutions without concern for the additional disclosure requirements. It is possible that there may yet be supplemental legislation adding them to MDIA in some form.
MDIA concerns itself primarily with transactions where there is an extension of consumer credit secured by a dwelling, regardless of who occupies the dwelling. Accordingly, if you were purchasing a retirement condominium for your parents, the provisions of MDIA would apply to the transaction. However, both the Truth in Lending Act and Regulation Z do not apply to credit extensions that are primarily for business purposes. For example, 12 CFR 226.3(a)(1) specifically provides that Regulation Z does not apply to "[a]n extension of credit primarily for a business, commercial or agricultural purpose." Consequently, if a property which would otherwise fall under the purview of RESPA was purchased with the sole intent to provide investment income, it would be exempt from the requirements of MDIA.
On a practical note, it may become all the more important for a consumer to properly decide his true intent in borrowing. The interest rate of a mortgage loan can vary widely depending on the use of a property—if it is used for a primary residence, second home, or rental property. It is not uncommon for borrowers to "fudge" this information in order to obtain lower loans. If the consumer changes his or her intended use of the property from an exempt business use to a personal use, upon hearing about the different interest rate, a TIL disclosure would be required. This "change of heart" could lead to a delay in closing.
What are the initial Truth-in-Lending disclosure requirements? The primary function of a Truth-in-Lending disclosure is to provide the consumer with information necessary to make an informed choice about his loan. Among other items a TIL disclosure provides consumers with the annual percentage rate (APR), finance charges, the amount financed, and the total amount of payments required to satisfy the loan. The APR represents the actual present value of the money to be borrowed over the length of the mortgage term. It can be affected by items such as certain fees, points, and mortgage insurance, but is not affected by such items as title insurance premiums, property appraisals and document preparation.
Previously a mortgage lender had to provide a consumer with a copy of the TIL before the loan closed. MDIA has now replaced that requirement with a more rigid time frame of providing that a TIL disclosure must be received by the consumer at least three business days prior to the collection of any fee except a credit reporting fee.
From a functional standpoint, this initial early disclosure can cause some delay in the underwriting process for a consumer. Previously, lenders would collect a fee to run a credit report and order an appraisal of the subject property once a mortgage application was completed by a prospective borrower. The new early disclosure rules now prohibit lenders from collecting the appraisal fee until this period has expired. As most lenders are reluctant to advance the appraisal fee prior to collecting it from the consumer, and the consumer is prohibited in most cases from choosing or paying the appraiser directly, the appraisal must wait until the fulfillment of the early TIL disclosure.
Moreover, the three business days begin to run from when the consumer receives the TIL disclosure, not from when it is sent to them. For example, this means that if a lender sends the TIL disclosure by regular mail it must account for the period of time it takes for the TIL to be delivered. Many lenders now use secure e-mail systems to communicate with their clients allowing them to forward the TIL and receive an electronic confirmation of receipt; that allows them to begin counting the three business days immediately. Most lenders provide a waiting period of at least five to six business days if a TIL is mailed to a client in order to account for the delivery time.
Furthermore, the new MDIA disclosure rules are sometimes referred to as the 3-7-3 disclosure model because of the additional time periods that can be involved in the loan process 12 CFR 226.19(a)(2). In addition to the initial waiting period of three business days for the initial disclosure a consumer must also wait at least seven business days from the initial disclosure in order to consummate the mortgage loan. However, unlike the three-business-day waiting period for the initial disclosure, the seven-business-day waiting period begins to run from when the consumer receives the TIL disclosure or when it is mailed. Accordingly, a TIL disclosure which has been sent by regular mail on a Monday could yield a consummated loan by the following Wednesday. The Federal Reserve Board allows a three-day "presumption of receipt" by the consumer if the TIL disclosure is sent by regular mail.
Last, MDIA provides for additional verbiage to be contained on the TIL disclosure form in a clear and conspicuous manner as follows: "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."
What are the requirements when a disclosure needs to be amended?
The final portion of the 3-7-3 disclosure model, and perhaps the most important, is the need to "re-disclose" the TIL under certain circumstances. Previous to MDIA, once a lender made a TIL disclosure a consumer would not receive an updated or corrected TIL until he was signing the loan documentation. MDIA now provides that the TIL disclosure become an ongoing disclosure if changes to the loan cause the interest rate to change more than a certain amount, depending on the type of loan.
MDIA provides two different APR differential tolerances depending on if the loan is a "regular transaction" or "irregular transaction." An APR is considered accurate if it does not vary above or below the last disclosed APR by more than .125 percent in a regular transaction. A regular transaction can be defined as most loans with a single advance of funds.
An irregular transaction is best described as a mortgage loan that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than those first and final payments which may be irregular due to a partial month payment). These loans will need a TIL re-disclosure if the last disclosed APR varies above or below .250 percent. Multiple advances are normally associated with construction loans. While loans with irregular payment periods are uncommon, loans with irregular payment amounts occur quite often. For example, payment amounts can vary if the loan is an ARM with a discounted or premium start rate, or the loan is either a fixed rate or ARM loan and has mortgage insurance which varies periodically and/or automatically terminates after a certain period of time. A loan will not be considered irregular merely because it has a variable or adjustable rate.
The TIL re-disclosure for an APR variation outside of the tolerances set for a regular or irregular loan follows the same format as the initial TIL disclosure. However, assuming that the seven-business-day period before consummation has passed, the TIL re-disclosure must be received by the consumer at least three business days prior to consummating the loan. Accordingly, if a TIL re-disclosure is placed in the mail the closing could be delayed by six business days. Therefore, it is critical for lenders, attorneys and closing agents to provide accurate closing charges to mitigate the potential delays in closing the transaction. There is also disagreement about whether MDIA only provides for a re-disclosure when the APR goes above the tolerance or whether it is necessary if it falls below the tolerance as well.
Last, MDIA does allow consumers to shorten or waive the waiting period provided in 12 CFR 226.19(a)(2) in cases of a bona fide personal financial emergency 12 CFR 226.19(a)(3). To shorten or waive the waiting period, the consumer must provide the creditor a written dated statement that describes the specific emergency, specifically modifies or waives the waiting period, and bears the signature of all consumers who will be primarily liable for the loan. Lenders are prohibited from providing preprinted forms to assist consumers with this waiver. A lender must provide a final accurate APR to the consumer in order for this waiver to be compliant.
Conclusion
The Mortgage Disclosure Improvement Act has been enacted to enhance consumer protection by requiring accurate and timely disclosures of the mortgage-related costs to borrowers, while also establishing certain waiting periods to ensure that borrowers are allowed time to contemplate the proposed terms. Obviously the legislation is well intended to help safeguard the consumer. However, many clients are still focused on "how quickly can I close." Therefore, lenders, attorneys and closing agents will have to be well versed in the additional disclosure requirements and time periods in order to avoid closing delays and to remain in compliance with the new legislation.
Todd R. Pajonas, a lawyer, and Matthew K. Scheriff, CPA, are private mortgage bankers with Stamford, Conn.-based Luxury Mortgage Corp.
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