By: Jennifer M. Monty, Esq.
After months of speculation and questions, President Obama released his proposed plan to stop rising foreclosures. Announced on Tuesday, February 18-President Obama’s plan calls for widespread changes to the lending and servicing industries.
Over the past several years, servicers have routinely engaged in loss mitigation, including loan modifications. Under President Obama’s new plan, the government will provide $75 billion in government funding to further support loan modifications for qualifying mortgages. Additional incentives may be given for refinancing existing mortgages.
President Obama’s plan calls for two major changes for existing mortgages: refinancing and modification. Traditionally, a refinancing involves satisfying the old Note and Mortgage and replacing it with a new Note and Mortgage, usually for a different amount or at a lower interest rate. Modifications keep the existing Note and Mortgage in place, but change some of the terms- i.e. payment amounts and interest rates.
Before the announcement of the plan, there were questions regarding the need to provide new disclosures for refinancings and modifications. With the announcement of the new plan, refinancings and modifications will soar, and these questions need to be answered. No details have been provided regarding when and how disclosures must be given under the President’s new plan. Until there is an announcement of any changes, the Truth in Lending Act will govern what disclosures need to be given to homeowners.
The federal Truth-In-Lending Act (TILA) is a disclosure statute that imposes obligations on creditors when they extend credit to consumers. TILA was originally drafted as a consumer protection act. Its purpose is to promote informed use of credit by requiring creditors to provide meaningful disclosures of credit terms to consumers. If a loan is given to a homeowner, with a mortgage placed on the home property, TILA requires additional disclosures, and the right to rescind (cancel) the transaction for three days after the disclosures are provided.
The general rule is that TILA disclosures need to be provided for refinancings, but not modifications. “Refinancing” is a defined term under TILA (12 CFR 226.20(a)). A refinance only occurs when the existing Note and Mortgage are satisfied and replaced. However, if the existing Note and Mortgage are satisfied and replaced, TILA provides five specific exemptions that do not require new disclosures:
- A renewal of a single payment with no change in the original terms;
- A reduction in the annual percentage rate with corresponding change in the payment schedule;
- An agreement involving a court proceeding;
- A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased or the new amount financed exceeds the unpaid balance plus the earned finance charge and premiums for continuation of insurance; and
- The renewal of option insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required.
Many of these new “refinancings” will likely result in a reduction in the APR, removing the need to provide for new disclosures. However, servicers must be cautious when there are changes to the underlying balance of the loan.
Although changes in payment or collateral do not require new disclosures, if the new amount financed exceeds the original unpaid balance and earned finance charge, a disclosure must be provided. Under TILA, if a borrower had a Note and Mortgage for $100,000, new disclosures should be provided if the “Refinanced” Note and Mortgage is over $100,000. Often servicers will add in attorney’s fees or loan modification fees. If it is a true refinancing, with the old Note and Mortgage being replaced and satisfied, new disclosures would be required if any amount is added to the loan balance for a loan modification fee, attorney’s fee, refinance charge, pre-payment penalty, or closing costs.
Until additional guidance is provided for refinancings under President Obama’s plan, follow the requirements under TILA. When in doubt as to whether a TILA disclosure should be provided, the safe route is to provide the disclosure.
If you have any questions on this information, please contact Jennifer M. Monty, Esq. an associate focused on litigation & defense within the Real Estate Default Group located in the Cleveland office of Weltman, Weinberg & Reis Co., L.P.A. Jennifer can be reached at (216) 685-1136 or via e-mail at firstname.lastname@example.org.
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