Scotsman Guide - February 2009 Residential Edition

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.

Higher-priced mortgages

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
rate

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 prepayment penalty.

Advertising changes

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 prominence:

■ 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 disclosed.

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 higher-priced mortgages.

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.

Higher-priced requirements 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

Disclosure changes

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 specific situation.

Comments Period

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 anthony@geracilawfirm.com.

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 consummation.

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 application.

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.