Recent Updates to Regulation Z

The following is an article reprinted with permission from the upcoming Winter 2010 edition of The WWR Letter: 

Recent Updates to Regulation Z

By: V. Kelly Mulholland, Associate

Recently, amendments to Regulation Z, the implementing regulation for the Truth-in-Lending Act (“TILA”) and the Home Ownership and Equity Protection Act (“HOEPA”), became effective. The amendments added a new category of loans. These new loans are called “higher-priced mortgage” loans. The higher-priced mortgage loans include practically all loans in the subprime market. These loans have annual percentage rates (“APR”) above the average prime offer rate for a comparable transaction by at least 1.5 percentage points for first mortgages or 3.5 percentage points for second mortgages.

The rule expands the initial or early disclosure requirements to apply to lenders when their customers purchase a loan for “any extension of credit secured by the dwelling of a consumer.” The disclosure requirements now include home refinance loans, home equity loans and loans to finance the purchase or construction of the consumer’s principal dwelling. The previous rule did not require an initial disclosure to be provided to borrowers on home refinanced loans.

The amendments will affect how a lender does business. Due to the fact that lenders are also prohibited from collecting any fees before the consumer receives the disclosures, except for a fee for obtaining a consumer’s credit report, lenders must deliver or mail the early disclosures at least seven business days before consummation. If the APR contained in the early disclosures becomes inaccurate, lenders must provide revised disclosures reflecting the APR and other disclosures that change so that the consumer receives the revised disclosures at least three business days before consummation. The disclosures must inform consumers that they are not obligated to complete the transaction merely because disclosures were provided or because the consumer has applied for a loan.

Further, the Regulation provides the following restrictions on higher-priced mortgage loans that are secured by a consumer’s principal dwelling:

• The Lender has an affirmative duty to assess the borrower’s ability to repay the loan. The Lender should consider the factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income at the time the loan is originated.
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years.
• Require creditors to establish escrow accounts for property taxes and homeowners insurance for all first-lien mortgage loans.

In addition to the rules governing higher-priced mortgage loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:

• Bans creditors and mortgage brokers from coercing a real estate appraiser to overestimate a home’s value.
• Bans “abusive” servicing practices. Companies that service mortgage loans are prohibited from certain practices, such as pyramiding late fees (taking late fees from regular payments leaving a part of the scheduled payment overdue). Also, Servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans.

Because of the significant changes to the regulations, Lenders should review the regulations and must ensure that their TILA disclosures and their policies and procedures are revised to comply with these changes.

V. Kelly Mulholland is an Associate in the Litigation & Defense department of the Philadelphia office. He can be reached at (215) 599-1500 or vmulholland@weltman.com.