Congress enacted the Housing and Economic Recovery Act of 2008 in July of 2008, which included amendments to Regulation Z Truth in Lending known as the Mortgage Disclosure Improvement Act of 2008 (MDIA). In October 2008, Congress amended the MDIA as part of the enactment of the Emergency Economic Stabilization Act of 2008. The MDIA seeks to warn borrowers of the risks of payment increases before they take out mortgage loans with variable rates or payments and was enacted to provide more meaningful disclosure of the true cost of borrowing. The purpose was to empower borrowers to make informed decisions for their particular circumstances and to allow prospective applicants to comparison shop. To effectuate this purpose, the lender must provide the initial Good Faith Estimate, and the initial Truth in Lending statements quoting the final Annual Percentage Rate and then deliver or mail the early disclosures no later than three business days after the creditor receives a consumer’s written application.
This legislation also replaces the former 3-day waiting period for initial disclosure with a 7-day waiting period that may not include Saturdays and does not include Sundays or holidays. Lenders must allow applicants a 7 business-day waiting period after mailing or delivering the disclosures prior to the closing of the loan. This timing is not based on receipt date by the consumer; it is triggered with the mailing or delivery by the lender. Credit unions and other lenders must set forth the initial interest rate and corresponding monthly payment amount that includes escrow amounts for property insurance, taxes and any private mortgage insurance; the maximum interest rate and payment during the first five years and the maximum interest rate and payment possible over the life of the loan for adjustable-rate loans; and a statement that consumers might not be able to avoid increased payments by refinancing their loans. Initial Disclosures are no longer limited to the consumer’s principal residence and must be provided for mortgage loans secured by any consumer dwelling, including primary, secondary and non-owner occupied dwellings.
Also, if the Annual Percentage Rates (APR) increase or decrease by more than .125% before the 7-day period has ended, the lender is required to provide updated disclosure documents, and the waiting period starts over to ensure that the borrower has adequate time to make an informed decision. Moreover, lenders may collect a fee for the reasonable cost of a credit report prior to the issuance of the initial disclosures, but cannot collect fees for appraisals, loan applications or other services until the buyer consents to the transaction.
In December 2010, the Board of the Federal Reserve System issued an interim rule amending the Regulation Z Truth in Lending legislation to clarify and revise aspects of the requirements of the MDIA. This interim rule was effective January 30, 2011 and compliance with these clarification provisions is optional until October 1, 2011. The rule changes the monthly payment schedule replacing it with a tabular summary, provides worst case examples if the interest rate and monthly payment can increase, and discloses that consumers are not guaranteed the ability to refinance their transaction in the future.
These new requirements will likely lengthen the time to close loans, resulting in the expiration of more credit reports, which will in turn require new credit reports be obtained at additional cost to the borrower. This risks changes occurring in the report that could result in lower credit scores, endangering the deal or at least causing additional delays.