1 regulation z the regit is a changin’ june 30, 2009

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Regulation Z

The Reg…It Is A Changin’

June 30, 2009

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Reg. Z Background

• Promotes the informed use of consumer credit

• Provides disclosures for terms and costs

• Enhances advertising intended to assist consumers in comparison shopping for credit

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History of the Changes• Fed issued new changes for the early TIL to be effective

10-1-09 but….

• Congress passed the Housing and Economic Recovery Act in July 2008, which included the Mortgage Disclosure Improvement Act…

• Congress wins! The changes to the early TIL become effective 7-30-09.

• Fed issues implementing regulation for the MDIA on May 8, 2009.

Copyright 2009, Integrated Compliance Solutions, LLC

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Goal of Regulation Z Changes

• Provide additional consumer protections for mortgage and home-equity loans

• Prevent unscrupulous subprime lending; other sections apply to all loans secured by a consumer’s principal dwelling

• Protect consumers from unfair credit billing and credit card practices

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Effective Dates

•July 30, 2009: Early disclosure timing, re-disclosures and early fee collection rules

•October 1, 2009: Advertising and higher-priced mortgage provisions (except the escrow rules)

•April 1, 2010: Escrow requirements for first-lien higher- priced loans and HOEPA-covered loans

•October 1, 2010: Escrow requirements for manufactured homes

•July 1, 2010: Open-end credit card disclosures

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Summary of Changes

•Creates new category of loans – “higher-priced” mortgage loans and additional protection for these loans

•Lenders are now required to evaluate a borrower’s ability to repay the loan.

•Prohibits lenders and brokers from coercing a real estate appraiser regarding a home’s value.

•Prohibits specific mortgage servicing practices.

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Changes continued…. •Additional advertising disclosures for loan rates, monthly payments

•Changes the advertising rules, specifically for RE-Secured loan ads

•New early TIL disclosure within three days after a consumer applies for a loan that will be secured by a consumer’s principal dwelling; early fee restrictions

Note – this includes home equity loans, second homes or a loan to refinance a consumer’s existing REM.

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Are You Ready ? ?

Over 800 pages of guidance!

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For All Mortgage Loans

For all consumer purpose closed end secured by a consumer’s principal dwelling –

•Creditors & Brokers are prohibited from coercing an appraiser regarding value of a dwelling

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For All Mortgage Loans

•Prohibits mortgage servicers from “pyramiding” late fees, failing to credit payments as of the date of receipt

•Mandates mortgage servicers provide loan payoff statements upon request within a reasonable time (5 days after request received)

Let’s Get Started!

• One of the important concepts for the provision of the early TIL concerns the definition of “business day”…there are 2!

– General Definition (as referenced in the preamble to the Reg)-Means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.

– Precise Definition (per the preamble)-all calendar days except Sundays and specific legal public holidays’

• This is the definition for rescission purposes as well.• Applies to Sections 226.15, 226.19(a)(1)(ii), 226.19(a)(2), 226.23 and

226.31

11Copyright 2009, Integrated Compliance Solutions, LLC

General Disclosure Requirements

• The early disclosure requirements apply to:– Closed end loans that are:– Covered by RESPA and – Secured by a dwelling

• Expanded to include any extensions of credit secured by the dwelling of a consumer (i.e., home refinance loans, home equity loans and 2nd homes)

• Does not include HELOCs, business purpose, modifications, construction-only loans


Content of Early Disclosures

New Notice Required on TIL Form:

• Must include clearly and conspicuously:

“You are not required to compete this agreement merely because you have received these disclosures or signed a loan application.”

• Must be on Early TILs for all applications received on or after July 30, 2009.


Timing of Early Disclosures

• Must be provided no later than 3 days (“general” definition) after receipt of a written application (received on or after July 30, 2009.)

• The consumer cannot be required to pay any fee except for obtaining a credit report until the early TIL is received:

• If given in person-received when handed to applicant• If mailed, deemed received 3 business days after mailing

– Business day definition is that used for rescission. (Precise)

• Must wait a minimum of 7 business days before loan can close– Begins when disclosures are delivered or placed in the mail– Closing can occur any time on 7th day after delivery


Counting the Days…

SUN MON TUE WED THU FRI SATJune 1

Early TIL delivered

June 2 (1)

June 3 (2)

June 4(3)

June 5(4)

Ok to collect

fees

June 6(5)

June 7 June 8 (6)

June 9 (7)

Earliest day loan can close

June 10 June 11 June 12 June 13


Business day (Precise Definition) –Monday through Saturday, excluding Sundays and Federal Holidays. Period begins when early disclosures are delivered by the bank not when received by the consumer. Count like you would for rescission.

My Early TIL is Wrong!!

• Triggered by APR outside of tolerance– No new disclosure required if APR is originally overstated or

within tolerance (.125% fixed, .25% ARM/construction)

• Need to provide – New set of disclosures

• Do not need to highlight changes– Re-disclose only the changed terms

• Must disclose all new terms.• For example, a different APR will probably require disclosure

of a new finance charge and payment schedule



• Corrected disclosure must be received by consumer no later than 3 business days before consummation– Depending on timing of discovery of error, creditor may be

required to delay closing– If delivered in person, consummation may occur any time on the

3rd business day following delivery (Precise definition)– If provided by mail, the consumer is considered to have received

disclosures 3 business days after they are placed in the mail• This also applies to electronic mail or courier delivery• If electronic disclosures are provided consistent with the E-

SIGN Act or overnight courier is used, creditor can rely on evidence of actual delivery such as a certified mail receipt or email to determine start of 3 business day waiting period.



• Assume loan is to close June 11 with a disclosed APR of 7.00%. – On June 11, the APR will be 7.10%. A corrected disclosure is not

needed– On June 11, the APR will be 7.15%. A corrected disclosure is needed


1. SUN MON TUE WED THU FRI SATJune 1 June 2 June 3 June 4 June 5 June 6

June 7 June 8

Revised disclosure

given - hand

delivered

June 9 June 10 June 11

Scheduled

closing

June 12 June 13


• What happens in revised disclosure is mailed?


1. SUN MON TUE WED THU FRI SATJune 1 June 2 June 3 June 4 June 5 June 6

June 7 June 8

Revised disclosure mailed to consumer

June 9 Receipt Day 1

June 10 Receipt Day 2

June 11Received

(Original scheduled closing)

June 12 Day 1 to closing

June 13 Day 2 to closing

June 14 June 15 New

closing date

June 16 June 17 June18 June 19 June 20


• Remember! Consummation may not occur until both the 7 business day waiting period and the 3 business day waiting periods have expired.



Early TIL delivered

June 2(1)

June 3 (2)

Revised disclosure delivered in person

June 4(3)(1)

June 5(4)(2)

June 6 (5)(3)

After receipt of corrected

disclosures

June 7 June 8 (6)

June 9 (7)

Earliest day loan can close

June 10 June 11 June 12 June 13


• Remember! Consummation may not occur until both the 7 business day waiting period and the 3 business day waiting periods have expired.



Early TIL delivered

June 2 (1)

June 3 (2)

Revised disclosure

mailed

June 4(3)(1)

June 5(4)(2)

June 6 (5)(3)

Receipt of corrected

disclosures

June 7 June 8 (6)(1)

June 9 (7) (2)

Originalscheduled

closing

June 10

(3)Earliest day loan can close

June 11 June 12 June 13

Consumer Waiver

• A consumer may waive or modify the right to the 7 or additional 3-day waiting period after disclosures are made, provided…– Consumer must have a bona fide personal financial emergency

• Bona fide personal financial emergency is to be based on the facts of each case. No examples given in regulation.

• Should not be used routinely– Waiver must

• Be written (preprinted forms not allowed)• Consistent with the requirements of waiver for a rescission period• Signed by each consumer who will be primarily liable on the legal

obligation• If multiple consumers are liable, creditor may provide disclosures to one


Rules for Timeshares

• If the APR becomes inaccurate, creditor must disclose all changed terms no later than consummation or settlement. (3 days does not apply)

• General definition of business days apply: days creditors offices are open to the public for carrying on substantially all of its business functions.


Let’s Summarize….

• Provide early TIL disclosures to all consumer dwelling-related applicants within three days of receipt of the application (old timing)

• Can only charge a fee for a credit report prior to the consumer’s receipt of the TIL disclosure

• Must include the statement “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” on the early TIL

• Must re-disclose if a TIL disclosure is inaccurate • Consummation of the loan cannot take place any earlier than the seventh

business day (“precise”) from the day the early TIL was provided• If a corrected TIL was provided, consummation of the loan may not occur until

three business days (“precise”) after the consumer receives the corrected TIL• Can waive waiting periods for only bona fide personal financial emergency• For timeshares, provide the TIL the earlier of within three business days of

receipt of an application or before consummation occurs, whichever is earlier


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New Category of Loan “Higher Priced” Mortgage Loan –

Is a consumer-purpose closed-end loan secured by a consumer’s principal dwelling and having an annual percentage rate (APR) that exceeds the “average prime offer rate” for a comparable transaction published by the Board by at least 1.5 percentage points for first-lien loans, or 3.5 percentage points for subordinate lien loans.

Determine after Rate Lock or the last time the rate is set prior to closing (has to be “final” APR).

Business Day Requirements

General

Precise

Copyright 2009, Integrated Compliance Solutions, LLC 26

DefinitionRegulatory Requirement

Initial disclosures: 3 BD of applicationConsumer presumed receipt: 3 BD after mailing disclosuresConsummation can occur: 7 BD from providing or mailing disclosuresCorrected disclosure received: 3 BD before consummationTime share disclosures: 3 BD of applicationRight of rescission: 3 BD from consummationReverse mortgage consummation: 3 BD after receipt of disclosures

BD=Business Day

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Average Prime Offer Rate?For the foreseeable future, the Board will obtain or, as applicable, derive average prime offer rates from the Freddie Mac Primary Mortgage Market Survey.

They will be published each Thursday.

Comparable Transaction Tables are now available on the FFIEC’s Rate Spread Calculator page in Excel format:http://www.ffiec.gov/ratespread/default.aspx

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“Higher Priced” Mortgage Loan

•Includes home purchase loans, refinances and equity installment loans (all typical closed-end RE products, all lien positions)

•Excludes: reverse mortgages,construction-only loans, HELOCs and Bridge loans

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Higher Priced Mortgage Loans

Protections for these loans include –

•Must verify consumer’s ability to repay from sources other than the collateral•Must verify income and assets you are relying on to repay the debt (with documents!)•Prohibits prepayment penalties – with a few exceptions•Requires lenders to establish escrow accounts for taxes and insurance

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Higher Priced Mortgage Loans

WARNING:

You cannot make an equity loan that would fail the HPM test into a HELOC to avoid the rules. That would be a serious violation under the revised regulation!

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Ability to Pay•Verifying repayment ability has been made a requirement (most of you are already doing this anyway)

•Sources of repayment ability include current and reasonably expected income, employment, and assets other than the collateral

•Verify using 3rd party documents: W-2, tax returns, bank statements, etc.

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Ability to Pay

• Rule requires assessing not just the consumer’s ability to pay loan principal and interest, but also the consumer’s ability to pay property taxes, homeowners insurance, homeowner’s association dues, condominium fees and similar mortgage-related expenses.

•Creditor is responsible for assessingrepayment ability as of consummation.

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Ability to Pay

A creditor is presumed to have complied if each of three requirements are satisfied:

•Verifying repayment ability;

•Determining the repayment ability using “largest scheduled payment” of principal and interest in the first 7 years following consummation and taking into account property tax and insurance obligations and similar mortgage-related expenses; and

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Ability to Pay

•Assessing the consumer’s repayment ability using at least one of the following measures:

a ratio of total debt obligations to income, or the income the consumer will have left

over after paying debt obligations.

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Largest Scheduled Payment

• Creditor will have a presumption ofcompliance if the creditor uses the largest scheduled payment of principal and interest in the first 7 years

•This payment could be higher, or lower, than the payment determined according to the fully indexed rate and fully-amortizing payment

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Pre-Payment Penalties •For both higher-priced mortgage loans and HOEPA loans prepayment penalties are prohibited on 4-year fixed term or lower ARMs•Higher-priced mortgage loans & HOEPA loans—greater than 4/1 ARMs—have limited prepayment penalty periods to a maximum of two years following consummation

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Pre-Payment Penalties

Warning –

The penalty must be permitted by other applicable state law, and it must not apply in the case of a refinancing by the same creditor or its affiliate.

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Pre-Payment Penalties

• A higher priced mortgage loan (whether or not it is a HOEPA loan) having a prepayment penalty that does not conform to these requirements is subject to a three-year right of rescission

•The right of rescission, however, does not extend to home purchase loans, and construction loans

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Escrow Requirement

•Must establish an escrow account for property taxes and homeowners insurance on a higher priced mortgage loan secured by a first lien on a principal dwelling (watch 1st lien “equity loans”!)

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Escrow Requirement

A creditor may allow a consumer to cancel the escrow account, but no sooner than 12 months after consummation

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Escrow Requirement

•Escrows required for all covered loans secured by site-built homes for which creditors receive applications on or after April 1, 2010

•and for all covered loans secured by manufactured housing for which creditors receive applications on or after October 1, 2010.

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Servicing

No servicer shall:

•Fail to credit a consumer’s periodic payment as of the date received;

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Prompt Credit of Payment

Rule does not require a servicer to physically enter the payment on the date received, but requires only that it be credited as of the date received.

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Servicing

No servicer shall –

•Impose a late fee or delinquency charge where the late fee or delinquency charge is due only to a consumer’s failure to include in a current payment a late fee or delinquency charge imposed on earlier payments (“pyramiding” late charges);

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Servicing

No servicer shall –

•Fail to provide an accurate payoffstatement within a reasonable time ofrequest

Five business days would normally be areasonable time to provide the statements under most circumstances

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Servicing

A Servicer may specify reasonable requirements for making payoff requests such as requiring requests to be in writing and directed to a specific address, e-mail address or fax number specified by the servicer, or orally to a specified telephone number, or any other reasonable requirement or method.

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New Advertising Rules

•All Mortgage loan advertisements must provide accurate and balanced information

•Can not contain misleading or deceptive representations

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Advertising Rules

•Apply to open-end and closed-end mortgage loans

•Must provide accurate and balanced information, in a clear and conspicuousmanner, about rates and monthly payments

•Closed-end installment ad rules did not change (auto, personal, etc.)

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Advertising Rules WEBSITE:

•You may use a clear link to “triggered” terms rather than having all of the disclosures on the same page as the “triggering terms”.

•Note: Unlike Truth In Savings, there is no dispensation for indoor signs and other media for Reg. Z. All commercial message media are subject to the above (radio, TV, brochures, signs, POS displays, etc.).

TV and Radio:

•TV and Radio Ads that contain “triggering terms” may comply one of two ways:

1. Include all of the “triggered” information required; or

2. Provide the APR and then provide a toll-free number for consumers to call and instructions that they call that number to obtain more information about credit costs and terms. This should be clearly spoken or legible.

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Advertising Rules

•Prohibition for seven deceptive or misleading practices in advertisements for closed end mortgage loans:

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Advertising Rules – 7 Prohibitions

(1) stating ‘‘fixed’’ rates or payments for loans whose rates or payments can vary without adequately disclosing that the interest rate or payment amounts are ‘‘fixed’’ only for a limited period of time, rather than for the full term of the loan (other weirdness: “fixed” cannot appear before “ARM” or “adjustable rate”).

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(2) Advertisements that compare anactual or hypothetical rate or paymentobligation to the rates or payments thatwould apply if the consumer obtains theadvertised product unless the advertisement states the rates or payments that will apply over the full term of the loan

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(3) Advertisements that characterize the products offered as ‘‘government loan programs,’’ ‘‘government-supported loans,’’ or otherwise endorsed or sponsored by a federal or state government entity even though the advertised products are not government supported or -sponsored loans

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(4) Advertisements, such as solicitation letters, that display the name of the consumer’s current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender

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(5) Advertisements that make claims ofdebt elimination if the product advertised would merely replace one debt obligation with another (borrowing from Peter to pay Paul does not “eliminate” debt – it is also the First Law of Thermodynamics)

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(6) Advertisements that create a falseimpression that the mortgage broker orlender is a ‘‘counselor’’ for the consumer; and

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(7) Foreign-language advertisements inwhich certain information, such as alow introductory ‘‘teaser’’ rate, isprovided in a foreign language, whilerequired disclosures are provided onlyin English.

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HELOC Advertising Rules

Open-end home equity plan (HELOC) –

•Ads with promotional rates must contain disclosures in close proximity to the triggering terms

Disclosures meet the requirements of the rule if appear immediately next to or directly above/below the trigger terms – in the same size font as trigger terms

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HELOC Advertising Rules

•Balloon payments must be made with equal prominence and in close proximity to the minimum payment amount advertised.

•All other HELOC ad rules remain the same (triggering terms, “negative reference” triggers, etc.).

•See Quick Reference Guide for HELOC Ads

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Closed-End RE Advertising Rules

For closed-end credit secured by a dwelling –

Disclosures meet the requirement if they appear immediately next to, above/below the trigger terms – in the same size font as the trigger terms.

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Apply to any ad for home-secured loan, other than TV or radio adsIf simple rate is disclosed and more than 1 simple rate will apply during term (ARMs), must state:Each simple rate that will apply (using “reasonably current” index and margin)Period of time that each simple rate will applyAPRNext to/above/below and same size!•See Guide for Closed-End ARM Ads•Prohibition on using the term “fixed” rate when the rate is “fixed” for a limited time

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If ad states the amount of any payment, it must stateAmount of any payment that will apply during term (using reasonably current rate, if variable)Period of time each payment will apply, andIf ad is for credit secured by first lien on dwelling:Fact that payment does not include taxes and insurance and that the actual payment will be greater

These disclosures are in addition to other required disclosures (“triggering” and “triggered” terms).

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Closed-End RE Advertising Rules Payment disclosure MUST be equally prominent and in close proximity to any triggering rateExcept that disclosure about taxes and insurance not being included, if applicable, need not be equally prominentRates and payments disclosures are not required on envelopes and pop-up or banner ads if linked to application (not sure how this will actually work online, though)

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Please refer to Guides for Closed-End ARM Loans and Fixed-Rate RE Loans.

These will be revised as interpretations become available and best practices develop after the Regulation becomes effective.

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Illustrations - ARMs5-1 ARM

Interest Rate

Term Fully Indexed Rate

Term APR Payment per $10M

5% 5 yrs 4.875% 25 yrs 4.99% 60@$53.68300@$50.39Payment does not include taxes, (full disc).

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Illustrations – ARMs“Representative Example” Text:

Additional information about our 5 year ARM – This is a variable rate loan product – the interest rate will change after consummation. As an example, for a 30 year, 5 year ARM loan with a $10,000 loan amount (assuming 20% down payment) as of May 5, 2009: Your payment schedule would be 60 payments of $53.68 at 5% and 300 payments of $50.39 at 4.875% for an APR of 4.99%. These payments do not include taxes and insurance. Your payment will be greater.

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Illustration – Fixed Rate REM

30 year Fixed Rate

Rate APR Points5.00% 5.006% 0Monthly payment per $10,000: $53.68

Payment does not include taxes or insurance. Your payment will be greater. Example requires 20% down payment. Effective as of 5/1/09.

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Penalties Under the New Z• Violations under HPM, HOEPA, Servicing, the

7 prohibited Ad practices and Appraisals could be considered “unfair, deceptive and abusive practices”, which means:

Civil Penalties (Actual & Statutory Damages, Class Action Suits, Enhanced Damages and Automatic 3-year rescission)

Administrative Enforcement

The other ad provisions and early disclosure rules are covered under old Z penalties.

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But Wait! There’s more….

Open End Lending Rules

Effective July 1, 2010

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Open End Lending Note: This Rule applies to credit cards only. See ICS White Paper emailed March 24, 2009.•For applications & Solicitations – major format and content revisions•Account Opening Disclosures – major revisions (table formats, font sizes, content, fees)•Statements – format changes (billing systems will need revision), “time to repay” disclosure w/examples and phone numbers•Changes in Terms – 45 days instead of 15 (all changes, including default rates), formats•New Advertising Requirements•Payment acceptance rule changes and revisions•No more “grace period” – “How to avoid paying interest on purchases” instead•Finance Charge changes – will include foreign transaction and cash advance fees

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What Next? Where to Start?!Identify current loan products that could exceed the pricing threshold for a higher priced mortgage loan (Excel)Watch: first position “equity” loans, jumbos and construction – these could fail the HPM testConsider product revisions on equity loans and others, if needed Work with vendor on revisions to early disclosures and open end lending disclosures Start providing “early” TIL for all; revised early TILs if neededAdd 7-day and 3-day waiting periods into procedures

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What Next? Where to Start?!Update monitoring procedures during mortgage loan processing to better identify loans crossing over the high price threshold between approval and closing Revise all mortgage-related quality control checklists Review and revise application fee processesReview all RE Advertising (brochures, website, print) and revise prior to 10/1/09.Work with online web vendors (MortgageBot, etc.) to revise ad portions of online systems.

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What Next? Where to Start?!

Work with vendors to update servicing, escrow, automated underwriting, and HMDA software

Revise third party agreements as required

Update Lending manuals/policies

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Update underwriting guidelines for higher priced mortgages

Review credit card applications and solicitations

Work with vendors and/or internal staff processing mailed payments regarding due dates and cut off times

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Train staff

Test all new forms and software

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Questions?

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Thank You!

Amanda Pickering, CRCMSenior Compliance Manager

Integrated Compliance Solutions781-330-6128

[email protected]

mailto:[email protected]

1 regulation z the regit is a changin’ june 30, 2009

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