TILA: What’s Changing, When
Alterations to the Truth in Lending Act likely will affect brokers’ daily duties
By Anthony F. Geraci, managing partner, Geraci Law Firm
Brokers who broker hardor private-money loans to lenders — and even those brokers who
broker conventional loans — should be
aware of recent changes to Regulation Z
of the Truth in Lending Act (TILA). They
should also know about other important
legislation that could affect their ability to
broker loans. Lenders, too, should be concerned about complying with these new
laws, which require brokers to negotiate
terms in a certain way.
This past July, the Federal Reserve Board
amended Regulation Z, which implements
TILA. Most of these amendments are set
to take place Oct. 1. They include a new
definition of “higher-priced mortgages”
and require certain additional disclosures
and prohibitions on these loan types.
Higher-priced mortgages are those that
exceed certain percentages of a newly defined index, the “average prime offer rate.”
Those percentages are as follows:
■ For first-lien mortgages, 1.5 percentage
points over the average-prime-offer rate
■ For junior-lien mortgages, 3. 5 percent-
age points over the average-prime-offer
Brokers should use the average-prime-offer rate in effect on the date that they
lock in the rate for the borrower. For now,
it appears that this rate is the weekly Freddie Mac Primary Mortgage Market Survey
rate for 30-year, fixed-rate loans.
other than the dwelling. These, however,
seem to be more examples than requirements. You should be able to rely on any
source of repayment as long as it is not the
dwelling being financed. Lenders will be
presumed to comply with this section if
the loan’s term is seven years or longer and
if brokers or lenders verify the assets.
Further, if the loan is a higher-priced
mortgage, the broker or lender can’t require a prepayment penalty if the payment
of the loan adjusts in the first four years.
If the payment doesn’t adjust, brokers or
lenders can require as much as a two-year
The amendments to Regulation Z also
affect brokers’ ability to advertise loans.
All disclosures must be made clearly and
conspicuously, which even means that all
disclosures must be in the same font and
size. In addition, any interest rate should
show the effective annual percentage rate.
Also, if the loan contains an adjustable interest rate, brokers must disclose in equal
■ The period of time that the index rate
is in effect; and
■ The current annual percentage rate
that would be in effect using the index
and the margin.
If the loan contains a balloon payment,
that amount — and when the balloon
payment will take place — must also be
There are also a few prohibited terms
in advertising. Brokers cannot advertise
“fixed” rates without conspicuously disclosing the number of payments, amount
of payments, terms, etc., close to the term
“fixed.” Brokers also may not advertise
“government loan programs” if the loan
program is not sponsored or endorsed by
a government agency. Furthermore, brokers and lenders may not use other lenders’
names without disclosing:
■ That the broker or lender paying for the
advertisement is not associated with the
named lender; and
■ The name of the creditor or company
paying for the advertisement.
Finally, brokers may not use the word
“counselor” to refer to a for-profit brokerage or lender.
Illustration: Dennis Wunsch
Exemptions to the rule
The Federal Reserve Board has defined
some exemptions to higher-priced mortgages, including:
■ Home equity lines of credit;
■ Financing of the initial construction
of a dwelling;
■ Bridge loans;
■ Reverse mortgages; and
■ Non-owner-occupied properties.
What isn’t exempt is financing for the
acquisition of a borrower’s primary residence. While TILA’s high-cost-loan law
exempts such financing, that same financing isn’t exempt from the definition of
brokers or lenders who rely upon the “
estimated” TILA disclosure may no longer do
so and must provide final, hard disclosures
at the time of loan consummation.
Finally, the disclosure must label the
payment schedule as follows: “Payments
will vary based on interest rate changes.”
■ ■ ■
Significant changes to the residential-lend-ing world are occurring. The requirements
likely will become tighter, stronger and
more confusing as time goes on. Brokers
are strongly advised to hire expert legal
counsel if they need help navigating the
changing seas of residential lending.
In dealing with higher-priced mortgages,
brokers and lenders must consider the
borrowers’ ability to repay and must verify their assets. Brokers and lenders may
regard consumers’ current and reasonably
expected income, employment and assets
Another major change put in motion in
2008 was a significant but rarely-heard-of amendment to TILA — the Mortgage
Disclosure Improvement Act. Comments
on this legislation will be accepted by the
Disclaimer: This article was written for educational
and informational purposes only. Nothing in this article
should be construed as legal advice. Consult an attorney to determine what is legal and appropriate in your
Anthony F. Geraci, managing partner of Geraci Law Firm, is a leading expert
in real estate finance law and designs mortgage pools and funds. He advises
mortgage brokers and lenders on federal and state lending and licensing laws. He
has created more than $10 billion in mortgage pools and other security offerings,
and he also advises clients on real estate finance compliance issues. Reach Geraci
at (949) 379-2600 or firstname.lastname@example.org.
Federal Reserve until Feb. 9. The changes
are set to take effect on July 31.
As is, the act amends TILA to mandate
that required early disclosures be given
at least seven business days before loan
This requirement affects all consumer
loans secured by a dwelling, defined by
TILA as any residential property that includes one to four units. As it stands, this
requirement would apply to non-owner-occupied and owner-occupied properties.
Also significant is that no fees other than
a credit-report fee may be collected until
the early disclosures are given.
For the private-money and subprime
(aka, nonprime) lending world, this
amendment is significant. Business models in these sectors rely upon swift closings that usually happen within a week’s
time. Now, the soonest a loan could close
is seven business days, assuming that brokers or lenders give the early disclosures
on the same day that they receive the
Further, mortgage professionals must
give the following disclosure to borrowers: “You are not required to complete
this agreement merely because you have
received these disclosures or signed a loan
application.” The loan disclosures must be
provided in the form of final disclosures
when the transaction is consummated.
Therefore, most financial institutions and
Until Feb. 9, the Federal Reserve Board will
accept comments for proposed changes to
Regulation Z of the Truth in Lending Act.
These changes implement the Mortgage
Disclosure Improvement Act.
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