TILA Examination Procedures - Revised!

On May 2, 2011, the Office of Thrift Supervision (OTS) issued revisions to its examination procedures. The OTS has revised its examination procedures for closed-end loans as a result of recent Federal Reserve Board (FRB) revisions to Regulation Z, which implements the Truth in Lending Act (TILA).

Specifically, the revised procedures cover:

(1) Loan Originator Compensation: The prohibition on payments to loan originators, including mortgage brokers and loan officers employed by depository institutions, based on the terms of the transaction, other than the loan amount;

(2) Mortgage Disclosure Improvement Act: Required disclosure of payment examples if the loan's interest rate or payments can change and a statement that a consumer is not guaranteed to be able to refinance the transaction in the future;

(3) Appraiser Independence: Requirements for appraiser independence for consumer credit transactions secured by a consumer's principal dwelling, whether a closed-end loan or a home equity line of credit; and

(4) Helping Families Save Their Homes Act: Requirements that consumers receive notice when their mortgage loan has been sold or transferred. Examiners will be required to evaluate whether savings associations meet specific requirements.

LOAN ORIGINATOR COMPENSATION

Revised Examination Criteria

• A loan originator, including mortgage brokers and mortgage loan officers employed by depository institutions, may not receive compensation that is based on the interest rate of the loan (i.e., a yield spread premium) or other loan terms. Loan originators can continue to receive compensation that is based on a percentage of loan amount.

• A loan originator that receives compensation directly from the consumer may not receive compensation from the lender or another party.

• A loan originator may not direct or "steer" a consumer to a mortgage loan that is not in the consumer's interest in order to increase the loan originator's compensation.
• A loan originator can obtain a "safe harbor" for compliance with the anti-steering requirement by presenting the consumer with loan options that include: 1) the loan with the lowest interest rate; 2) the loan with the lowest interest rate without any risky features (such as prepayment penalties, negative amortization or a balloon payment in the first seven years); and 3) the loan with the lowest total dollar amount for origination points or fees and discount points.

MORTGAGE DISCLOSURE IMPROVEMENT ACT

Revised Examination Criteria

The Mortgage Disclosure Improvement Act (MDIA) of 2008 amended the TILA to require that borrowers are alerted to the risk of payment increases before they take out mortgages with variable rates or payments. This amendment requires that lenders' cost disclosures include a payment summary in the form of a table, stating the following:

• The initial interest rate and the corresponding monthly payment;

• For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan; and,
• The fact that consumers might not be able to avoid increased payments by refinancing their loans.

APPRAISER INDEPENDENCE 

Revised Examination Criteria

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the TILA to include several provisions that protect the integrity of the appraisal process when the consumer's home secures the loan, whether a closed-end loan or a home equity line of credit. 

Specifically, the appraisal independence provisions:

• Prohibit coercion, bribery and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;

• Prohibit appraisers and appraisal management companies from having a financial or other interest in the property or the credit transaction;

• Prohibit a creditor from extending credit, if it knows, before consummation, of coercion or a conflict of interest;

• Require that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and,
• Require the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management company hired by the creditors.

HELPING FAMILIES SAVE THEIR HOMES ACT 

Revised Examination Criteria

The Helping Families Save Their Homes Act amended the TILA to require that consumers be notified of the sale or transfer of their mortgage loan. 

The purchaser or assignee that acquires the loan must provide the required disclosures no later than 30 days after the date on which it acquired the loan.

VISIT LIBRARY

Office of Thrift Supervision (OTS)
Consumer Affairs Laws and Regulations:
Examination Handbook - Section 1305
May 2011

FRB: Publishes TILA Interim Rule - Update

Today, the Federal Reserve Board approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA).

The Board is issuing this interim rule to clarify certain aspects of a September 24, 2010 interim rule, in response to public comments.

The September interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which amended TILA to require mortgage lenders to disclose examples of how a loan's interest rate or monthly payments can change.

Those statutory amendments are effective on January 30, 2011.

Please visit out archive for relevant posts, such as our compliance update of October 14, 2010. (Archive)

The MDIA seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. Under the Board's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.

• This interim rule clarifies that creditors' disclosure should reflect the first rate adjustment for a "5/1 ARM" loan because the new rate typically becomes effective within 5 years after the first regular payment due date.

• Today's interim rule also corrects the requirements for interest-only loans to clarify that creditors' disclosures should show the earliest date the consumer's interest rate can change rather than the due date for making the first payment under the new rate.

• The rule also clarifies which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.

Creditors have the option of complying with either the Board's September 2010 interim rule as originally published or as revised by this interim rule until October 1, 2011, at which time compliance with this interim rule will become mandatory.

Comment Period Deadline: 60 days after imminent publication in the Federal Register. Contact Information in Federal Register.

Visit Library for Issuance

FRB: TILA Interim Rule - request for public comment.
Clarifying 9/24/10 Interim Rule.
December 22, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FRB: Issues Final, Interim, and Proposed TILA Rules

Recently, the Federal Reserve Board (FRB) has issued both Final, Interim, and Proposed revisions to the Truth in Lending Act (TILA).

We have notified you of some of these revisions in previous compliance updates.

Some of the final, interim, and proposed rules are a direct response to the Dodd-Frank Act (Act). Others predate the Act.

The implementation of requirements under the Act are taking place in a dynamically unfolding time frame, with very specific dates by which the mandated regulatory compliance must be activated correctly, fully, and seamlessly. As new final and proposed revisions are promulgated and set forth by federal agencies, including the new Bureau of Consumer Financial Protection, it is incumbent on affected financial institutions to provide written policies and procedures as well as corrective actions throughout their mortgage origination platforms.

The importance of monitoring and implementation is critical to timely and comprehensive compliance. Failure to comply with the required changes, in many instances, exposes a financial institution to, among other things, substantial, civil monetary penalties.

In this Mortgage Compliance Update, we will provide a brief synopsis of the following recent Final, Interim, and Proposed revisions to TILA.

• Proposed: Second phase of the FRB's comprehensive review and update of the mortgage lending rules in the regulation.
• Interim: Implements provisions of the Mortgage Disclosure Improvement Act (MDIA) to disclose how regular mortgage payments can change over time.
• Proposed: Escrow account requirements for higher-priced, first-lien "jumbo" mortgage loans.
• Final: Loan Originator Compensation
• Final: Notification of Sale or Transfer of Loan

HIGHLIGHTS

Second Phase of Comprehensive Review

Issuance: September 24, 2010
Comments Deadline: December 23, 2010

General Review

The first phase of the FRB's regulatory review of mortgage lending rules commenced with the publication of two proposals in August 2009 that were meant to improve the disclosures for closed-end home mortgage loans and open-end home equity lines of credit. After considering the comments to the proposals, the FRB plans to issue final rules that combine the 2009 and 2010 proposals.

According to the FRB, the latest proposal would:

• Improve the disclosures consumers receive for reverse mortgages and impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information.
• Prohibit certain unfair practices in the sale of financial products with reverse mortgages.
• Improve the disclosures that explain a consumer's right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right.
• Ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan

Reverse Mortgages

The FRB's proposed rules for reverse mortgages would:

• Prohibit creditors from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product.
• Require that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan.

All Mortgages

The FRB proposing amendments pertaining to all types of mortgages that would:

• Ensure that consumers have time to review their loan cost disclosures before they become obligated for fees, by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after they receive the disclosures.
• Clarify that when a consumer requests information from their loan servicer about the owner of the loan, the servicer must provide the information within a reasonable time, which generally would be 10 business days.

Forms and Disclosures

The following forms and disclosures, and implementation criteria and discussion, are the subjects of this proposal:

Reverse Mortgages

• Summary of Findings: Design and Testing of Truth in Lending Disclosures for Reverse Mortgages
• Key Questions to Ask about Your Reverse Mortgage
  • Open-End Reverse Mortgage Early Disclosure Model Form
  • Open-End Reverse Mortgage Account-Opening Disclosure Model Form
  • Closed-End Reverse Mortgage Model Form
  • Open-End Reverse Mortgage Early Disclosure Sample
  • Open-End Reverse Mortgage Account-Opening Disclosure Sample
  • Closed-End Reverse Mortgage Sample
  • Shared Appreciation Model Clause

Rescission

• Summary of Findings: Design and Testing of Truth in Lending Disclosures for Rescission Notices

HELOCs

• Rescission Model Form
• Rescission Sample (When Opening an Account)
• Rescission Sample (When Increasing the Credit Limit)

Closed-end Mortgages

• Rescission Model Form (General)
• Rescission Sample (General)
• Rescission Model Form (New Advance of Money with the Same Creditor)

Credit Protection

• Summary of Findings: Design and Testing of Periodic Statements for Home Equity Lines of Credit, Disclosure about Changes to Home Equity Line Credit Limits, and Disclosures about Credit Protection Products

HELOCs

• Credit Insurance, Debt Cancellation Coverage, or Debt Suspension Coverage Model Form
• Credit Life Insurance Sample
• Disability Debt Cancellation Coverage Sample
• Unemployment Debt Suspension Coverage Sample

Closed-end Mortgages

• Credit Insurance, Debt Cancellation Coverage, or Debt Suspension Coverage Model Form
• Credit Life Insurance Sample
• Disability Debt Cancellation Coverage Sample
• Unemployment Debt Suspension Coverage Sample

Mortgage Disclosure Improvement Act (MDIA) Revisions

Issuance: September 24, 2010
Effective: October 25, 2010
Compliance: January 30, 2011
Comments Deadline: November 23, 2010

• Lenders' cost disclosures must include a payment summary in the form of a table, stating the following:

  • The initial interest rate together with the corresponding monthly payment;
  • For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan; and
  • The fact that consumers might not be able to avoid increased payments by refinancing their loans.

• Requires lenders to disclose certain features, such as balloon payments, or options to make only minimum payments that will cause loan amounts to increase.

Escrow Account for Higher-Priced, First-Lien Jumbo's

Issuance: September 24, 2010
Comments Deadline: October 25, 2010

Implements the Act's provisions regarding an increase in the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans (i.e., loans exceeding the conforming loan-size limit for purchase by Freddie Mac).

In July 2008, the FRB issued final rules to establish escrow accounts for first-lien loans if a loan's APR is 1.5% or more above the applicable prime offer rate.

Under the Act - which amended TILA - the escrow requirement will apply for jumbo loans only if the loan's APR is 2.5% or more above the applicable prime offer rate. The APR threshold for non-jumbo loans remains unchanged.

Loan Originator Compensation

Issuance: September 24, 2010
Compliance: April 1, 2011

• Prohibits payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended.

• Prohibits any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly.

• Prohibits loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.

Notification of Sale or Transfer of Loan

Issuance: September 24, 2010
Effective: January 1, 2011

• New requirement for notifying consumers of the sale or transfer of their mortgage loans. Requires a purchaser or assignee that acquires a loan to provide the disclosures in writing no later than 30 days after the date on which the loan was sold, transferred or assigned.

• Certain exceptions may apply if the covered person transfers or assigns the loan to another party on or before the 30th day.

Visit Library for Issuances

Federal Reserve Board
Regulation Z: Truth in Lending Act
September 24, 2010

• Second Phase Mortgage Review, Proposed, FR - Vol. 75, No. 185 (58539-58788)
• Mortgage Disclosure Improvement Act of 2008, Interim, FR - Vol. 75, No. 185 (58470-58489)
• Escrow - Higher-Priced, First Lien Jumbos, Proposed, FR - Vol. 75, No. 185 (58505-58508)
• Loan Officer Compensation, Final, FR - Vol. 75, No. 185 (58509-58538)
• Notification of Sale or Transfer of Loan, Final, FR - Vol. 75, No. 185 (58489-58504)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.