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News you can use: More Proposed Truth in
Lending Act (TILA) Regulations
Under the proposed regulations almost all settlement charges will be deducted from the loan amount to determine the “amount financed” for the calculation of the APR. Currently some settlement charges are deemed to be finance charges and others not. In its comments, the Fed opined that “[u]nder the current “some fees in, some fees out” approach ... mortgage lenders ... have an incentive to ... shift some of the costs from the interest rate into ancillary fees that are excluded from the finance charge and not considered when calculating the APR, resulting in a lower APR than otherwise would have been disclosed. This further undermines the usefulness of the APR and has resulted in the proliferation of ‘junk fees’...” The Fed observed that “[i]n consumer testing ... virtually no participant understood the disclosure of the amount financed.”
The proposed regulations provide that almost all settlement charges imposed by the lender or third parties would be classified as finance charges except seller’s points, casualty insurance premiums, default charges, and similar charges. Also, charges payable in a comparable cash transaction, such as deed recording fees and taxes, would be excluded. The net result is that the disparity between the APR and the interest rate on the Note would be greater, but there would be more consistency between different loans and different lenders.
"Truth in Lending" Disclosure Form
Virtually everything on the form [view form here] is required by the proposed regulations. The borrowers’ names, address and the date of closing must be disclosed; as well as the name of the lender and the Loan Originator’s unique identifier, as defined by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. The Loan Summary must include the Loan Amount, Loan Term, Loan Type and Features, and total settlement charges. The APR must be highlighted as shown. The APR must be illustrated on a graph, comparing it with the Average Best APR available, and APR’s available for borrowers with poor credit history. The lender must disclose the monthly savings for a 1% reduction in the APR. There must be an interest rate and payment summary, in the format of the sample form, showing the monthly payments (including escrows) at various change dates. Information about rate adjustments, negative amortization, prepayment penalties, caps on adjustments, tax and hazard insurance escrow requirements, and total payments must be included in the specified formats. And, certain disclosures shown in the form must be included. The proposed regulations have detailed specifications for the format for different kinds of loans, all very similar to the attached sample.
"Truth in Lending" Disclosure Form Delivery
The TILA regulations effective July 30 require that early disclosure must be mailed or given no later than the 3rd business day after written application and at least 7 business days before closing thus NO closing may be conducted until at least 7 business days after disclosure. This rule is not changed.
The current regulations also require re-disclosure if the APR increases by more than .125% (1/8 point) over the most recent disclosure (.25%, 1/4 point, in a few situations). Re-disclosure must be received by the borrower, if delivered in person, at least 3 business days before closing. If mailed, or sent by FedEx, fax, or email, it must be sent 6 business days before closing (3 days are presumed for delivery and 3 days for the Borrower to review) except with proof of delivery (e.g. FedEx receipt, return fax signed by borrower) the 3 day review period begins upon delivery.
The change proposed is that the Lender must give a final disclosure within these time limits, in ALL cases, whether or not the APR changes. This is a major difference between the TILA regulations and the Good Faith Estimate requirements of the RESPA regulations - the RESPA regs restrict increases of certain costs, but do not require that final cost numbers be given to borrowers before closing. It would seem that the Fed is attempting to force lenders to give final closing cost numbers (i.e., a final HUD-1) a minimum of 3 days before closing. The Fed's "... proposal would require creditors to finalize settlement costs earlier than RESPA does: at least three business days before consummation, and as much as a week before consummation if the creditor mails the disclosures to the consumer."
The proposed regulations would apply in situations which are not now regulated, as well as those currently covered. The Fed explicitly intends that these regulations apply to "... real property that does not include a dwelling, such as vacant land, and transactions that are not subject to RESPA, such as construction loans." Only transactions that are primarily for " ... business, commercial, or agricultural purposes ..." are excluded.
Mortgate Broker’s Compensation
The proposed regulations prohibit any person from compensating a loan officers or mortgage brokers (collectively called "Loan Originators"), directly or indirectly, based on the terms or conditions of a loan transaction. Compensation includes all remuneration, including annual bonuses and awards of merchandise or other prizes. The Fed’s rational is "[b]ecause the loan originator could not receive compensation based on the interest rate or other terms, the originator would have no incentive to alter the terms made available by the [lender] to deliver a more expensive loan."
Loan Originators are defined to also include loan officers employed by lenders. The Fed commented that loan officers employed directly by lenders “... frequently have the same discretion over loan pricing that mortgage brokers have to modify a loan’s terms to increase their compensation, and there is evidence to suggest [that they do].”
One exception is that if the borrower pays the Loan Originator directly, say one point (1% of the loan amount), it would be acceptable, so long as the Loan Originator does NOT receive any other compensation for that transaction. Thus, yield spread premiums would be prohibited, but points paid by the borrower directly to the Loan Originator would be "kosher."
The Fed is considering an alternative: the rule would be as described but the Loan Originator would be able to be compensated based on the loan amount - but no other term or condition of the loan. The Fed is requesting comments from the public on whether or not this exception should be adopted.
In addition the Fed is proposing a rule which would prohibit a Loan Originator from directing or "steering" a borrower to a higher cost loan from a lender that pays higher compensation, when a lower cost loan is available from another lender. The Fed is also asking for public comment on whether or not it should adopt this rule.