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Ch 3 Federal Financial Disclosure Laws
Terms in this set (68)
Real Estate Settlement Procedures Act (RESPA)
• Effective June 20, 1975
• HUD promulgated Regulation X; now implemented by CPFB
• Purpose is to help consumers become better shoppers for settlement services and to eliminate unnecessary increases in the costs of settlement services due to kickbacks and referral fees.
•Section 6—Protects homeowners against loan servicing abuses
•Section 8—Prohibits kickbacks, fee-splitting, and unearned fees
•Section 9—States a seller cannot require the use of particular title company
•Section 10—Identifies amounts that can be charged to maintain escrow accounts
A service provided in connection with a prospective or actual settlement, including:
• Origination of a federally related mortgage loan
• Mortgage broker services
• Services related to the origination, processing, or federal mortgage loan funding
• Title services
Service providers not
regulated by RESPA:
• Building/remodeling contractors
• Service and repair contractors
• Moving companies
• Home improvement or design companies
Regulation X applies to federally-related mortgage loans secured by first or subordinate liens on residential real properties for one-to-four families.
The rules and regulations of RESPA apply to:
12 CFR §1024.05
• Conventional loans
• FHA, VA, and government sponsored loans
• Purchase loans
• Reverse mortgages
• Property improvement loans
• Equity lines of credit
Transactions Not Covered
The following types of transactions are not covered:
•Sale where the home seller takes back the mortgage •Rental property transaction
•Temporary construction loans*
•Other business purpose transaction
•Property of 25 acres or more*
•Vacant or unimproved property, unless a dwelling will be constructed or moved onto the property within two years
RESPA will apply to
after TRID implementation date 10.03.15
RESPA Mortgage Servicing Final Rules
The Regulation X final rule implements Dodd-Frank
Act sections addressing servicers' obligations to
correct errors asserted by mortgage loan borrowers.
•A mortgage servicer is the company that collects monthly mortgage payments, pays taxes, insurance, etc. as they come due, and notify the borrower of late payments.
•Most Regulations X and Z amendments were made to reduce bad practice by mortgage servicers.
Section 8 : Kickbacks, Fee-Splitting, and Unearned Fees
Section 8 of the Real Estate Settlement and Procedures Act:1
• Prohibits giving or accepting fees, kickbacks, or any thing of value for referrals of settlement service business.
• A referral is any action directed to a person, which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business.2
• Defines prohibited thing of value to include, without limitation, monies, salaries, commissions, fees, etc.
• Prohibits fee-splitting and receiving unearned fees for services not performed
Section 8 of RESPA:
•Prohibits a "required use" of specific settlement service
•Does not prohibit fee payments for attorneys, title companies, etc.
•Allows consumer services discounts if settlement services are a total price lower than the sum of the individual settlement services, if:
- The use of any such combination is optional to the purchaser
- The lower price for the combination is not made up by higher costselsewhere
•Subjects violators to criminal and civil penalties
Affiliated Business Arrangements (AFBA)
• Regulation X recognizes the validity of affiliated business arrangements involving real estate settlement services for federally related mortgage loans.
• An affiliated business arrangement is a situation where a person in a position to refer settlement services has an affiliate relationship with or a direct ownership interest of more than 1% in a provider of settlement services and refers business to that provider.
Section 9 : Seller Required Title Insurance
Seller Required Title Insurance
• Section 9 of RESPA1 prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a sale condition.
• Buyers may sue a seller who violates this provision for an amount three times all title insurance charges.
Section 10 : Limits on Escrow Accounts
• Section 10 of RESPA - Sets a limit on the amount
required to be put into an escrow account
• Escrow account
- Holds money that mortgage lenders
collect every month.
• Loan programs/lenders may require escrow accounts as a loan condition. For example:
- A mortgage loan including mortgage insurance MUST have an escrow account
- Any government insured or guaranteed loans
- A loan that meets the TILA definition of "higher priced"
loan must have escrow account for at least 60 months
• Each month, lenders may require borrowers to pay into the escrow account no more than 1/12th of the total of disbursements payable during the year,
plus an amount necessary to pay for any shortage in the account.
• Lenders must perform escrow account analyses once a year and notify borrowers of any shortage.
- Any excess of $50 in the escrow account must be returned to the borrower.
• The new rule only affects "higher-priced" mortgage
Prohibition on Certain Fees
• Federal law requires that consumers of credit be provided with specific disclosures.
• RESPA prohibits lenders and servicers from charging a fee for the preparation of the Truth in Lending Statement (TIL) or other disclosures/statements required by the Truth in Lending Act or RESPA.
• RESPA (and other regulations) require and regulate disclosures that lenders must deliver at particular times during the loan process.
• Required disclosures regarding settlement services must be provided to the borrower:
- At the time of loan application.
- Before settlement.
- At settlement
- After settlement.
At or within 3 Business days of application:
-Home Loan Toolkit (CFPB)
-Loan Estimate (TILA)
-Affiliated Business Arrangement Disclosure Statement
: If required by lender, at or 3 business days of application
If settlement service provider is other than the lender, the AfBA must be given at or before the time of referral (if borrower requests)
-Closing Disclosure 3 days prior to consummation (TILA)
-Finalized Closing Disclosure (TILA)
-Initial Escrow Statement (within 45 days of closing)
-Annual Escrow Statement
-Servicing Transfer Statement
Introduction to the TILA-RESPA Disclosures
• Designed to help consumers become more informed shoppers
- Help consumers understand their options - Choose the best deal - Avoid surprises at closing
• Rate Checker
- Provides interest rates based on loan terms and
type, a borrower's credit score, and the state of the subject property
- Interest rate comparisons can be made
Your Home Loan Toolkit
• After October 3, 2015, the Your Home Loan Toolkit will replace the Special Information Booklet due to the TILA-RESPA Integrated Disclosure rule.
• The toolkit must be provided to the primary borrower three (3) business days after receipt of a completed application.
Mortgage Servicing Disclosure Statement
• Mortgage Servicing Disclosure Statement
- Information about a lender's intentions to service a loan, sell, or transfer servicing to another lender.
- Servicing of a Mortgage Loan
- The continued maintenance of a mortgage loan, including accepting escrow payments and paying charges when due.
Disclosures Before Settlement Occurs
• Affiliated Business Arrangement Disclosure (AFBA or ABA)
- From the referring party to the consumer at or
prior to the time of referral.
• Closing Disclosure
- Combines the HUD-1 and TIL into a form providing consumer information about settlement service provider charges.
• Must be delivered to borrower within three (3) business
days prior to loan consummation
Disclosures at Settlement
• Closing Disclosure
- The actual finalized settlement costs of the loan transaction.
- Should be delivered to borrower within three (3) business days of loan consummation
• Initial Escrow Statement
- Itemizes the estimated taxes, insurance premiums, and escrow account charges during
the loan's first 12 months.
- Usually given at settlement, but lender has 45 days from settlement to deliver.
Disclosures After Settlement
RESPA requirements continue after the loan closes:
•Annual Escrow Statement—Summarizes escrow account deposits and payments during the servicer's 12-month computation year. Must be delivered once a year.
•Servicing Transfer Statement
-Required if the loan servicer sells or assigns the servicing rights to another servicer.
-The loan servicer must notify the borrower 15 days before the date of a servicing transfer.
Provisions Related to the Good Faith Estimate (GFE)
Section 1024.7 of Regulation X identifies provisions related to the terms expressed in a GFE.
• Availability of Terms
- The estimate of the charges and terms for settlement services must be available for 10 business days from
when the GFE is provided.
- This provision does not apply to the interest rate, charges, the adjusted origination charges, per diem interest, and terms dependent upon the interest rate.
- Borrowers and lenders may agree to a rate lock for a pre-determined period of time.
The Loan Estimate
• Effective October 3, 2015
• Loan Estimate integrates
- Good Faith Estimate
- Truth in Lending Statement
• Must be delivered to the borrower within 3 business days of receipt of a complete application or placed in the mail within 3 business days of receipt of a complete application
Loan Estimate Differences
• Disclosure of: interest rate lock, Cash to Close, TIP
• Compares payment during and after the years that mortgage insurance is in place
• Provides comparisons of payments made and the principal reduction of the loan in the first 5 years
• Estimated Cash to Close is disclosed; provision for Lender Credits to be deducted from the Estimated Closing Costs
• Provides information on servicing and delivery of appraisal disclosure about the likelihood of future refinance transactions of the subject loan is made
• Designated place for borrowers to sign and confirm they have received the Loan Estimate is a new Additions to Disclosure Forms section
• The definition of a complete application has changed to the initial six items of information that a MLO receives and no more:
Good way to remember it is by the acronym PENCIL
P- Personal Info (name)
E- Estimate of Property Value
N- Number (Social Security #)
C- Current Address
I- Income (gross monthly)
L- Loan Amount
Lenders are required to adhere to the six items above and add nothing further
Loan Estimate Disclosure
If a consumer receives a written estimate of loan terms or an itemized closing cost statement, the top of the first page must contain the statement:
"Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan."
Loan Estimate Exemptions
• Does NOT apply to:
- Home equity lines of credit
- Reverse mortgages
- Loans to secure a fractional interest in real estate
- Loans for mobile homes or dwellings not affixed to real property
- Loans made by a person or entity that makes five or fewer mortgages in a calendar year.
- Loans made to a non-natural person (business entity)
Loan Estimate: Responsibilities
The creditor has the ultimate responsibility for correct and timely delivery of disclosures to the consumer. If a mortgage broker:
•Receives a complete loan application
-Either the lender or the mortgage broker may
make the initial disclosures.
•Completes the Loan Estimate
-The wholesale lender's name (if known) must be used.
Availability of Terms
• Estimate of charges and terms for settlement services must be available for at least 10 business days from when the Loan Estimate is provided.
• 10-business day provision does not apply to
- Interest rate
- Terms dependent upon the interest rate
- Adjusted origination charges
- Per diem interest
Loan Estimate Requirements
• Must deliver/place in the mail the revised Loan Estimate to the consumer no later than 3 business days after receiving the information sufficient to obtain a credit decision
• If a new Loan Estimate is required because of a changed circumstance, it must be disclosed and received by the borrower 4 days prior to consummation of the loan
• Two definitions of Business Day
• Revised disclosures may not be delivered at the same time as the Closing Disclosure
Loan Estimate - Changed Circumstances
A changed circumstance, for purposes of a Loan Estimate, can be any of the following:
•An event that is beyond the control of creditor or borrower that occurs, such as a natural disaster in the property's community, which results in increased settlement costs.
•Information that was known or provided at the time of the application changed subsequent to the application and caused a change in the initial loan terms, interest rates, or settlement service provider charges.
•New information regarding the borrower or the loan that the creditor did not rely on when supplying the Loan Estimate, as in a borrower becoming unemployed prior to closing during the course of the loan.
Loan Estimate - Tolerance Guidelines
• Tolerance guidelines: closing costs greater than Loan Estimate = not made in good faith
• Valid changed circumstances
- An event that is beyond the control of the creditor or the borrower that occurs
- Information that was known or provided at the time of the application changed subsequent to the application and caused a change in the initial loan terms, interest rates, or settlement service provider charges
- New information regarding the borrower or the loan that the creditor did not rely on when supplying the Loan Estimate
• No intent to proceed
Loan Estimate - Tolerance Cures
• Charges that can change by any amount
• Charges for third-party services & recording fees paid by or imposed on consumer are grouped together & subject to 10% cumulative tolerance
• Charges that may not change on the Closing Disclosure by any amount from the amounts disclosed on the Loan Estimate
Beyond applicable tolerance threshold, the creditor must refund the excess no later than 60 calendar days after consummation.
• Replaces the existing HUD-1 form and the
final Truth In Lending Statement*
• Must contain the actual terms and costs; at or before consummation*
• New disclosure required if cost vary from original prior to consummation; borrower gets a new 3 business day waiting period**
See Regulation Z
Closing Disclosure (cont.)
- Final statement of closing cost the borrower will incur - Final Truth in Lending Statement, disclosing APR
• Considered received:
- If provided in person, as of third day.
- If mailed or delivered by electronic methods, three (3) business days after it is delivered or placed in the mail.
- If a creditor has documented evidence of earlier receipt of the disclosures by the borrower, as of that date.
• Creditor vs settlement agent responsibilities
See Regulation Z, 12 CFR §1026.19(f)
Closing Disclosure Requirements
• Creditor must deliver or place in the mail the revised Loan Estimate to the consumer no later than 3 business days
after receiving the information sufficient to establish that one of the reasons for the revision has occurred.
• After the creditor provides the Closing Disclosure, a revised Loan Estimate may not be issued.
• The creditor remains responsible for all compliance and delivery requirements of the Disclosure.
• The settlement agent does, however, have the responsibility for the delivery of the closing estimate that accurately reflects the costs of the transaction to the seller.
• Creditors must ensure that consumers receive the Closing Disclosure no later than three (3) business days before consummation.
• With a timeshare transaction, the creditor must ensure that the Closing Disclosure is received by the consumer on the day of loan consummation.
Consumers may waive or modify the three (3) business day waiting period when:
- The extension of credit is needed for a bona fide
personal financial emergency.
- The consumer has received the Closing Disclosure.
- The consumer
a. gives the creditor a dated written statement that describes the emergency
b. specifically modifies or waives the waiting period
c. bears the signature of all consumers who are
primarily liable for to mortgage
Closing Disclosure Revisions and Corrections
• Creditor must make sure that the revised Loan Estimate is received at least 4 business days prior to the consummation of the mortgage loan.
• If the borrower has received the first Closing Disclosure the creditor may issue revised changes on the Closing Disclosure prior to loan consummation.
• For loans that require a Loan Estimate and proceed to closing, creditors must provide a new final disclosure reflecting the actual terms of the transaction called the
Changes to Correct or Revise Closing Disclosures
• The 3-business-day waiting period requirement applies to a corrected Closing Disclosure that is provided when there are:
- Changes to the loan's APR;
- Changes to the loan product; or
- The addition of a prepayment penalty.
• If other types of changes occur, creditors must ensure that the consumer receives a corrected
Closing Disclosure at or before consummation.
• Changes that occur to the APR before consummation that require a new three (3) business day waiting period include the disclosed APR on a closed-end transaction accurate for either:
- Regular transactions - Irregular transactions
• For these changes, there is no additional three (3) business day waiting period required. The creditor must ensure only that the consumer receives the revised Closing Disclosure at or before consummation.
Three other disclosures exist that may be provided to the borrower after loan consummation:
• Escrow Closing Notice
• Partial Payment Policy Disclosure
• Servicing Transfer Disclosure Statement
Apply TILA Regs to MLO Practices
• Are the disclosures that are provided to the consumers on the correct form?
• Are disclosures provided to the consumers within the timeframes required by new TILA regulations?
• Are the allowable tolerances on the Loan Estimate and Closing Disclosure complied with on the form or is there a potential for redisclosure and lender tolerance fees?
For failure to properly provide certain disclosures in an accurate manner, statutory penalties may be imposed - up to $25,000 per day for violations.
Truth in Lending Act (TILA) : Overview
• Provisions are implemented by Regulation Z.
• Regulation Z regulates the disclosure of interest rates or finance charges imposed by lenders.
• Requires creditors to make disclosures of all finance charges and related aspects of credit transactions.
• Establishes a 3-day right of recession in certain transactions.
• Credit offered must be subject to a finance charge or payable by written agreement in more than four installments.
• Credit includes all real estate loans made to consumers if the loan is for other than business/commercial purposes.
Required in two general areas:
• When creditors offer credit but before the transaction is consummated
• When credit terms are advertised to potential customers
• Specific disclosures required by Regulation Z:
- Loan Estimate and Closing Disclosure
- Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet) and adjustable rate mortgage (ARM) loan program details
- When Your Home is on the Line Disclosure
• Regulation Z disclosure requirements regarding post-consummation events include:
- Rate adjustments with a corresponding change in
payment - Initial rate adjustment
Annual Percentage Rate (APR)
• For residential mortgages, disclosure of the annual percentage rate (APR) is very important.
- The APR tells a borrower the total cost of financing a loan in percentage terms, as a relationship of the total
finance charges to the total amount financed.
- The APR is generally higher than the note rate.
- The finance charge is the cost of consumer credit as a
- Finance charges include fees charged by a mortgage broker.
Charges Included in the Finance Charge
• Examples of finance charges:
- Interest, time price differential, and any amount payable under an add-on or discount system of additional charges
- Service, transaction, activity, and carrying charges
- Points, loan fees, assumption fees, finder's fees, and similar charges
Charges Excluded from the Finance Charge
• Seller's points
• Interest forfeited as a result of an interest reduction on a time deposit used as security for an extension of credit
• Fees in a transaction secured by real property or in a residential mortgage transaction.
Real Success - If you cannot determine the APR in advance
of an interest quote, other cost info may be given, as well as:
• For open-end credit
—Corresponding annual percentage rate
• For closed-end credit
—APR for a sample transaction
Loan Estimate (LE)
• Creditors must provide the Loan Estimate no later than the 3rd business day after the creditor receives the consumer's written application or the 7th business day before consummation of the transaction.
• The earliest a loan may close is the seventh business day
after the initial disclosures are delivered or in the mail.
• The only fee that may be collected prior to these disclosures are fees for credit reports.
• MLOs and servicers are prohibited from charging a fee for the preparation of the Loan Estimate.
Other Data Included in the Loan Estimate
• Name of the lender/creditor
• Number, amount, and timing of payments scheduled to repay the obligation
• Late payment and prepayment provisions
• Address of the subject property
• Whether the loan may be assumed by a
• Notice that consumers may not be able to refinance to a lower rate in the future
APR Accuracy and Redisclosure
• The APR is considered accurate if it does not vary from the APR initially disclosed by more than:
- 1/8% (.125) for a regular transaction
- 1/4% (.25) for an irregular transaction
• An irregular transaction is one that includes one or more of the features:
- Multiple advances
- Irregular payment periods
- Irregular payment amounts
• If the APR is rendered inaccurate prior to loan consummation, the borrower must:
- Receive a corrected Closing Disclosure no later than three business days prior to loan consummation or
- The corrected Loan Estimate no later than four days prior to loan consummation.
• A borrower may be able to waive the waiting periods if there is a bona fide personal financial emergency.
Mortgage Disclosure Improvement Act - 3/7/3 Rule
These disclosure requirements are the 3/7/3 Rule:
• Initial disclosure must be given within three business days of receipt of a completed application.
• The earliest a loan may be consummated is on the seventh business day.
• Corrected TIL disclosures must be received by consumers at least three business days prior to loan consummation.
When considering these waiting periods, Regulation Z defines a business day to be all calendar days except Sundays and the legal public holidays specified in U.S.C. 6103(a)
Qualified Mortgage (QM)
• Dodd-Frank Act provides that qualified mortgages:
- Are entitled to a presumption that the creditor making the loan satisfied the Ability-To-Repay requirements.
- Must meet requirements prohibiting or limiting the risky features that harmed consumers in the recent mortgage crisis.
• The final rule provides a rebuttable presumption for higher-priced mortgage loans.
• The CFPB granted limited legal protection to creditors in return for implementation of the new regulations.
• Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue qualified mortgages.
• Final Rule
- Provides that consumers may show a violation by revealing, at the time the loan was originated, the consumer's income and debt obligations left insufficient residual income to meet living expenses.
- Creates a strong presumption for prime loans that constitute qualified
• It excludes open-end credit plans, timeshare plans, reverse mortgages, or certain temporary loans.
Ability-to-Repay and Qualified Mortgage Rule Updates
Creditors must consider 8 types of information when
establishing a borrower's ability to repay a mortgage
12 CFR 1026, §1026.43
1. Current income or assets
2. Current employment status
3. Borrower's credit history
4. Monthly payment for the mortgage
5. Borrower's monthly
payments on other simultaneous mortgage loans
6. Monthly payments for other mortgage-related expenses
7. Other debts of the borrower
8. Monthly debt payments
compared to the borrower's
Borrower Must Have Sufficient Assets or Income to Pay Back Loan
• Lenders must conclude a borrower can repay the loan.
• Lenders may look at the consumer's debt-to-income ratio
- total monthly debt divided by total monthly gross income.
• Teaser Rates Cannot Mask True Cost of Mortgage
- Lenders cannot base their evaluation of a consumer's
ability to repay on teaser rates. Lenders must base their
evaluations on consumer's long term ability to repay.
- If a lender complies with the clear criteria of a qualified mortgage, consumers will have greater assurance that they can pay back the loan.
Features of Qualified Mortgages (QM)
• No excess upfront points and fees: Limits points/fees.
- A loan generally cannot be considered a qualified mortgage if the points and fees paid by the consumer exceed three percent (3%) of the total loan amount.
• No toxic loan features: Cannot have risky loan features.
• Cap on how much income can go toward debt: Qualified mortgages will be provided to people who have debt-to-income ratios less than or equal to 43 percent.
• No-doc loans not eligible: No-doc loans cannot be qualified mortgages.
• Prepayment penalties prohibited: Prepayment penalties are prohibited, except for certain fixed rate, qualified loans.
Additional Provisions of the Rule
• The final rule:
- Provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements.
- Extends the record retention requirements to demonstrate compliance for lenders and creditors from two years to three.
• The Dodd-Frank Act established others new standards concerning mortgage lending practices, including compensation of mortgage originators, Federal mortgage disclosures, and mortgage servicing.
Right of Rescission
Consumers have the right to rescind certain credit transactions. This applies to credit transactions involving the establishment of a security interest in their principal residence, such as:
• Home equity loans
• Home improvement loans
• Home equity lines of credit
This right of rescission does not apply to the following:
• Purchase loans
• Construction loans
• Commercial loans
• Loans on vacation or second homes
• Refinancing or consolidation by the same creditor
of an extension of credit already secured by the consumer's principal dwelling (exceptions apply)
• Transactions in which a state agency is a creditor
Points to remember:
• When more than one consumer has the right to rescind, the exercise of the right is effective for all consumers.
• If a consumer chooses to exercise the right to rescind, the mortgage is void and the creditor must return any money collected related to the loan within 20 calendar days.
• Consumers may rescind the credit transaction until midnight of the third business day following loan consummation, delivery of the rescission notice, or delivery of material disclosures, whichever occurs last.
Notice of Right to Rescind
• Creditors must inform consumers of their right to rescind by providing two copies of a Notice of Right to Rescind document to each consumer entitled to rescind.
• The notice must be in a separate document and
- Retention or acquisition of a security interest in the consumer's
- Consumer's right to rescind
- How to exercise the right of rescission, with a form designating the
address of the creditor's place of business
- Effects of rescission - Date on which the rescission period ends
Extended Right of Rescission
Consumers may have the right to an extended rescission period of up to three years if:
• The creditor fails to properly notify consumers of
the right to rescind.
• The creditor does not provide the consumer with
the required material disclosures
Additional Rescission Considerations for Foreclosures
• After the initiation of foreclosure, the consumer shall have the right to rescind the transaction if:
- A mortgage broker fee was not included in the finance
- The creditor did not provide the completed Notice of Rescission.
• Tolerance for disclosures. After the initiation of foreclosure, the finance charge shall be considered accurate if the disclosed charge is:
- Understated by no more than $35; or
- Greater than the amount required to be disclosed.
• Anyone who places advertising referencing consumer credit must follow the advertising provisions of the TIL Act and specific loan terms shown in the ad must be available.
• If an advertisement contains any one of the triggering terms about the loan, that advertisement must include required disclosures. Examples include:
- Amount of the down payment
- Amount of any payment
- Number of payments
- Period of repayment
- Amount of any finance charge
Required Advertising Disclosures
• If any triggering terms are used in an ad, all
of these disclosures must be made:
- Amount or percentage of down payment
- Terms of repayment
- Annual percentage rate, using that term spelled
out in full or APR
Terms That Do NOT Trigger Disclosure
• Examples of terms not triggering required disclosures include:
- "5% Annual Percentage Rate loan available
- "Easy monthly payments."
- "FHA financing available" or "100% VA financing
- "Terms to fit your budget."
Advertising Closed-End Credit
• Closed-end credit transaction: The balance is expected to be repaid
—along with interest and finance changes
—by a specified future date.
Additional Regulation Z provisions include:
• Rate. If an advertisement states a simple annual rate of interest and multiple rates apply over the term of the loan, the advertisement must also disclose the advertised rate:
- Each simple annual rate of interest that will apply.
- Period of time each simple annual rate of interest applies.
- The APR for the loan.
• Payment Amount. If the advertisement states the amount of any payment, it must disclose:
- The amount of each payment that applies over the term of the loan.
- The period of time during which each payment applies.
• Payment and Rate Comparisons.
- Advertisements may not compare payments or rates and a "teaser" payment or simple annual rate unless the ad includes a clear comparison to the terms required to be disclosed.
• Use of the Term "Fixed." If an ad references both variable and non-variable rate loans, the terms
"adjustable rate mortgage," "variable rate mortgage," or "ARM" must appear equally with "fixed" or "fixed rate mortgage."
- If an ad references a variable rate loan, the phrase
"adjustable rate mortgage," "variable rate mortgage," or "ARM" must appear before the use of the term "fixed."
- If the ad references a non-variable rate loan where the payment amount increases, the word "fixed" must statethe rate may vary.
• Catalogs, Multiple-Page Ads, Electronic Ads.
If a catalog or multiple-page/electronic ad gives information in a table/schedule in detail that includes triggering terms, it would be considered a single advertisement if:
- The table or schedule is clearly set forth, and
- Any statement of the triggering credit terms appearing elsewhere in the ad refers to the location where the table/schedule starts.
- The schedule of terms must include all disclosures for a representative scale of amounts.
Advertising Open-End Credit
Regulation Z was amended to comply with the Mortgage Disclosure Improvement Act of 2009 to address the unique challenges in advertising open-end credit plans.
- A loan where credit is extended to the borrower during the term and the creditor may impose a finance charge on the outstanding unpaid balance.
These loans are subject to these additional provisions:
•Additional Disclosures. If any of the triggering terms are used or the payment terms of the plan are set forth, the ad must also clearly state:
- A loan fee that is a percentage of the plan's credit limit
expressed as a single dollar amount or a rational range - A periodic rate used to compute the finance charge,
expressed as an annual percentage rate
- The maximum annual percentage rate that may be imposed in a variable-rate plan
• Additional Disclosures (cont.)
- If an ad states an initial APR not based on the index and margin used to make later rate adjustments in a variable-rate plan, the ad must indicate the time the initial rate is in effect and a current APR.
• Balloon Payments.
- In an ad that states a minimum payment, and a balloon payment would result if the minimum periodic payment is made, that fact must be stated with equal prominence and proximity.
• Promotional Rates and Payment. If a HELOC ad states a promotional rate or payment, the ad must disclose all of the following:
- The period of time when the promotional rate or payment
- If a promotional rate, any APR that applies
- If a promotional payment, the amounts and time periods of any payments that will apply.
If an ad stating a promotional rate is broadcast on radio or television, a toll-free telephone number to get additional cost information must be indicated.
Other General Provisions
Tax Implications. Care must be taken to ensure that an ad stating tax implications is not misleading. Paper or Internet ads require:
• Ads stating the extension of credit may exceed fair market value must state the interest on the loan portion not tax deductible.
• The consumer must be advised to consult a tax adviser about the deductibility of interest and charges.
Misrepresentations - Regulation Z prohibits:
•Misrepresentations about a loan product being government endorsed.
•Misleading use of the current lender's name in the ad.
•Using "counselor" in any ad to refer to a for-profit mortgage broker, or lender.
•In a foreign language ad, providing some information in a foreign language, with other disclosure information only in English.
Clear and Conspicuous Standard.
•A clear and conspicuous disclosure for oral advertisements means that the required disclosures are given at an understandable speed and volume.
Other Prohibited Practices
The following prohibitions of Regulation Z apply to any closed-end mortgage loan and are secured by the consumer's principal dwelling.
•Appraisal. Creditors/mortgage brokers are prohibited from influencing an appraiser to misstate the value of the dwelling including:
- Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the
appraiser values a consumer's principal dwelling.
- Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer's principal dwelling that does not meet or exceed a minimum threshold.
Creditors cannot extend credit if improper coercion has occurred.
• The following practices are not prohibited:
- Asking an appraiser to consider additional information
about the dwelling.
- Asking an appraiser to correct factual errors.
- Obtaining multiple appraisals of a consumer's principal dwelling.
- Withholding compensation from an appraiser for breach of contract.
Homeowners Protection Act (HPA)
The Federal Homeowners Protection Act, or HPA,1 requires lenders or servicers to:
- Provide disclosures concerning private mortgage insurance (PMI) on residential mortgage transactions.2
• A residential mortgage is defined as a mortgage, loan, or evidence of a security interest that is the primary single-family residence of the borrower.
• A single-family dwelling is defined as a residence consisting of one family dwelling unit.
- Ensure refinance or service home mortgages comply with its terms.
• The HPA does not cover loans that do not have private mortgage insurance or are secured by second or multi-family homes.
• Nor does it apply to:
- Veterans Affairs (VA) or Federal Housing Administration (FHA) loans.
- Loans with lender-paid PMI.
Disclosure Provisions of the HPA
The HPA requires lenders to provide an initial written disclosure regarding PMI cancellation including:
•Borrower Cancellation. Right to request a cancellation of PMI when a mortgage has been paid down to 80%. A borrower requesting PMI cancellation must have:
- A good history of payment,
- Not taken out any other loans on the property, and
- Not experienced a decline in the value of the home.
•Automatic Termination. The automatic cancellation of PMI by the lender when a mortgage has been paid down to 78%.
•Prepayment. The borrower's right to make additional
payments that bring the loan-to-value ratio to 80%.
Disclosure requirements for adjustable or fixed rate home mortgages vary based on interest accruement (must be written):
- Fixed Rate Mortgages. At loan closing, lenders must provide an initial amortization schedule with a notice stating a cancellation date that the borrower may cancel PMI.
- Adjustable Rate Mortgages. Lenders must inform the borrower when the LTV reaches 80%, but an amortization
schedule would not be provided at closing.
A final disclosure must be sent to the borrower after the PMI coverage has been terminated or canceled.
• Conforming—Loans with an original principal balance not exceeding Fannie Mae/Freddie Mac's
limit. PMI on a conforming high-risk loan must be terminated:
- By the first day of the month following the midpoint of the loan's initial amortization schedule.
• Nonconforming—Mortgage transactions with a principal balance exceeding Freddie Mac's/Fannie Mae's loan limit. If a residential mortgage transaction is a high-risk loan, PMI must be terminated:
- When the principal balance is scheduled to reach 77% of the original value of the property securing the loan.
Disclosure and Real Success
When PMI is required for high-risk residential loans:
•Lenders must provide the borrower a written notice stating that PMI will not be required after the midpoint of the amortization schedule if the borrower is current on payments.
•Disclosure of the termination at 77% LTV for lender-defined high-risk mortgages is not required.
•When PMI payments are included in a mortgage, it may be assumed that the home's equity will trigger a canceled PMI.
•HPA does not require a mortgage servicer to consider current property value, although borrowers may contact lender to have them reassess property value/early cancellation.
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