What You Need to Know About Upcoming Changes to Regulation Z

by Fredric J. Gooch, General Counsel

Background

On July 30, 2009 changes to Regulation Z, the implementing regulation for the Truth-in-Lending Act, will become effective.  These changes alter the rules that lenders must follow during the application and disclosure process.  This article will give you an overview of the important changes that are coming and give you the information you need to make sure that you are compliant with the new rules.

On July 30, 2008 the Federal Reserve Board published a final rule amending Regulation Z.  On the same day Congress enacted the Housing and Economic Recovery Act of 2008 which included a section known as the Mortgage Disclosure Improvement Act (MDIA) which included amendments to the Truth-in-Lending Act.  The MDIA expanded the requirements proposed in the board’s July 2008 rule, and set the effective date to July 30, 2009.  The new rule amends disclosure requirements, sets waiting periods and institutes fee disclosure requirements.

Expanded Disclosure Requirement

The rule expands the initial or early disclosure requirements to apply to “any extension of credit secured by the dwelling of a consumer” to include home refinance loans and home equity loans as well as loans to finance the purchase or construction of the consumer’s principal dwelling.  The previous rule did not require an initial disclosure be provided to borrowers on home refinance loans.  However, it has been a standard mortgage industry practice for most lenders to provide these initial disclosures on all mortgage loans, so most lenders will not need to modify their process to comply with the expanded requirement.  The disclosure requirements for home equity lines of credit have not been changed.

New Disclosure Language

The rule requires that all initial TILA disclosures as well as any re-disclosures (described later) contain the following notice in a clear manner:  “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”  DocuTech will be adding this sentence to Initial TILA disclosures on the synch that occurs on the evening of July 24, 2009.

Waiting Periods and Re-disclosure

Waiting periods will be instituted under the new rule that dictate when loans can be closed based on the initial disclosure dates.  A creditor will not be able to close a loan until seven business days following the mailing or delivery of the initial disclosures.   Additionally if the Annual Percentage Rate Disclosed in the initial disclosures becomes inaccurate the creditor is required to re-disclose or provide the borrower with corrected initial disclosures no later than three business days prior to the closing.  In the case of a bona fide personal financial emergency the consumer may waive the waiting period, but in order to do so the consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signatures of all the consumers who are primarily liable on the legal obligation.  Printed forms for this purpose are prohibited by the rule.  Due to the inherent risk in waiving the waiting periods, similar to waiver of the 3 day right to cancel, it will be an extremely rare circumstance when these waiting periods are actually waived.

There are a couple of important concepts that are necessary to understand to ensure that you are in compliance with the new waiting period rules.  You must understand what is meant by a business day in the statute and you must understand when a loan becomes inaccurate for the purposes of re-disclosure.  The rule applies the precise definition of a business day when dealing with the 3 or 7 day waiting period.  It is defined as “all calendar days except Sundays and the Federal legal holidays specified in 5 U.S.C. 6103(a).  Note that this is different from the general definition of a business day that applies when determining if the initial disclosures have been delivered or mailed to the consumer.  For these purposes the definition is a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.  This is consistent with the definition of business days that is utilized for RESPA compliance.  A loan is considered inaccurate for the purposes of re-disclosure if the final TILA statement is going to be out of tolerance by the standards set in 12 C.F.R. 226.22 from the most recent initial TILA disclosure given.

Fee Restrictions

It is also important to note that the new rule requires that the initial disclosures be given before any fee is collected from the borrower, with the exception of a fee for obtaining the consumer’s credit report history.  This rule is consistent with the July 2008 final HOEPA rule; however it expands the requirement to mortgages secured by a dwelling other than the borrower’s primary residence, including second or vacation homes.

Timeshare Rules

The new rule also contains special regulations for timeshare transactions.  It requires creditors to provide the early or initial disclosures to borrowers within the normal 3 day RESPA timeframe.  It does not apply the 3 or 7 day waiting periods, but does require that a TILA disclosure be provided to the borrower at consummation that is accurate within the specified tolerances.

Future Outlook

Do you ever feel like Michael Corleone from the movie The Godfather?  “Just when I thought I was out, they pull me back in.”  Remember that more changes to TILA will become effective on October 1, 2009.  These changes are related to HOEPA and the adding of Section 35 or “higher priced mortgage loans” to the regulatory structure.  Also, the Federal Reserve Board has indicated that it anticipates proposing new model disclosure forms and clauses sometime during 2009 as part of comprehensive rulemaking on closed-end mortgage disclosures.  So stay tuned as more changes are coming soon.