Common Questions Under MDIA/TILA Amendments

American Bankers Association:
Common Questions Under MDIA/TILA Amendments

For the benefit of our Members, ABA is issuing the following set of FAQs relating to the recent amendments to the Truth in Lending Act, as published in by Federal Register Notice (74 FR 23289) on May 19, 2009. The new requirements will become effective on July 30, 2009.

The following item represent the more common questions posed by ABA members. ABA offers this guidance for purposes of general information only, and does not intend anything contained herein to be used or referenced as legal advice.
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In a situation where the applicant is floating the rate, do we have to redisclose each time there is a rate movement?
No. Creditors are not required to redisclose every time there is a market shift. Rather, the creditor would wait until consummation, and then reach the determination of whether to redisclose. Generally, lenders are required to redisclose (and follow the three-day waiting period) prior to closing when the annual percentage rate that will be offered to the borrower at closing is off by more than 1/8 of 1% from the initial disclosure given to the borrower. Interim changes in market interest rates and fees need not be disclosed to the borrower.

What risk do banks face for allowing waivers of the waiting periods before consummation?
The sole waiver expressly authorized by the Federal Reserve Board (Board) is a waiver of the post closing three business day waiting period prior to disbursement in a refinance transaction when the borrowers will lose their primary residence before the waiting period expires due to expiration of a mortgage foreclosure redemption period. Other waivers must meet the standard of constituting a "bona fide personal financial emergency," as per comment 19(a)(3)-1. No further specific example is set forth under the final rules. The Board specifically warns that "waivers should not be used routinely to expedite consummation for reasons of convenience." 74 FR 23296. Without further guidance from the Board, banks will therefore face considerable uncertainty, and the risk the potential for regulatory violations and court action about whether the waiver was appropriate or properly executed.

Does the Board allow banks to consider e-mailing the corrected TILA disclosures as a faster method of delivery? Do the new rules require the bank to follow the waiting periods regardless of the delivery method, i.e., fax mail; email etc.?
If a creditor places corrected disclosures in the mail, the consumer is deemed to receive the corrected disclosures three business days after they are mailed. Creditors that use e-mail may (but are not required to) follow that approach. Creditors may instead rely on actual proof of receipt of the disclosure to begin the counting of the required waiting period. For example, if a creditor provides disclosures through e-mail, the creditor may presume that the consumer receives the disclosures three business days after they are e-mailed, OR, if a creditor delivers corrected disclosures electronically (consistent with the E–Sign Act), the creditor may rely on evidence of actual delivery (such as documentation that the mortgage loan disclosure was delivered by e-mail, if documentation is available) to determine when the three-business-day waiting period begins.

Under the new redisclosure requirements, is the TIL form the only disclosure that needs to be redisclosed, or do any other disclosures need to be sent to borrower?
This rule amends TILA, and only TIL-related disclosures are affected. No other corrected disclosure form is required to be delivered to the consumer upon redisclosure. (Note, however, that if you add or change a variable rate feature to a residential mortgage loan, the ARM loan disclosures required by Section 19 of Regulation Z must be provided as soon as possible. Likewise, changing loan programs will trigger a requirement to provide a new GFE disclosure under rules effective in January, 2010.)

Please clarify, in instances where the loan is a "brokered" transaction, does the GFE/TIL have to come from the lender, or would the disclosures provided by the broker suffice?
The creditor, not the mortgage broker, is responsible for providing TILA disclosures. See the comment 3 to Section 19(b) of Regulation Z. Banks should not rely on the broker to provide disclosures for on behalf of the institution (unless the broker is a captive entity described in Comment 19(b)-3). In short, banks should provide their own disclosures regardless of what the independent mortgage broker does.

If the APR decreases before consummation, and it decreases by more than allowed by tolerance, is the lender required to redisclose and wait an additional three days to close?
The result of ABA discussions with Board staff supports the following analysis. However, there continues to be some disagreement among industry members, so ABA will seek written guidance on this subject.

The final rules sets forth that in instances where the disclosed APR overstates the actual APR, the corrected disclosures are not required where the APR previously disclosed is considered accurate under the tolerances in § 226.22. See 74 FR 23293; § 19(a)(2)(ii)-1. Under § 226.22, over-disclosures shall be treated as accurate (therefore voiding the need to issue corrected disclosures) if the finance charge is greater than the amount required to be disclosed. Specifically, section 226.22(a)(4) (which is a section that was not affected by the MDIA final rule) states that the APR is accurate if (i) disclosed APR "results from" disclosed finance charge; and (ii) the disclosed finance charge is accurate under 226.18(d)(1). Section 226.18(d)(1)(ii) (also unaffected by the MDIA final rule) provides that a finance charge shall be treated as accurate if it is greater than the amount required to be disclosed.

As ABA has consistently advised, however, that the new regulations do not sanction a pattern and practice of over-disclosures as an allowable means of avoiding the redisclosure requirements under 19(a)(2)(ii). Rather, creditors must structure their systems to arrive to accurate APR figures, and in the specific instances that they over-disclose, such over-disclosures may be considered accurate by following the rules of elements outlined under § 226.22.

Please clarify how the waiting periods are measured differently for initial disclosures as opposed to re-disclosures.
On the initial disclosures, the seven-business day waiting period before consummation begins when the creditor delivers or places the early disclosures in the mail, NOT when the consumer receives them. On re-disclosures, consummation may not occur until three business days after the consumer receives the corrected disclosure (either by evidence or presumed delivery). In terms of imposing fees, however, the lender may impose fees three business days after mailing the initial disclosures, unless the lender can prove that the disclosures were received earlier. If the disclosures are delivered to the borrower face-to-face, the creditor can impose a fee when the disclosures are handed over to the borrower. The same rule applies to faxes, FedEx and email – if lender can prove the borrower received the disclosure before the three business days expires, lender may impose a fee at the time of delivery of the disclosure.

Is there anything expressly written in the new regulations that prohibit the practice of obtaining pre-authorized credit card information and not processing the charge until the required timeframe to collect a fee has passed in accordance with the MDIA?
The MDIA regulations prohibit the imposition of fees prior to the borrower's receipt of estimated TILA disclosures. Even if the borrower agrees to have his credit card charged, many legal experts that we have spoken with are interpreting the rule so that obtaining pre-authorized credit cards would be deemed to be "imposing a fee" (whether or not it is paid later). Although there is no express regulatory language prohibiting the practice, current thinking suggests that this practice poses significant risk of regulatory violation and/or litigation.

Does an application taken for a property address that is "To Be Determined" count as a "complete application" under the new regulations? Is "To Be Determined" a valid property address for purposes of triggering the new TILA early disclosure requirements?
The term application under TILA is defined by Section 2 of HUD's Regulation X (RESPA), which states that the application is a submission of a borrower's financial information in anticipation of a credit decision. 24 CFR 3500.2(b). Until January 1, 2010, Regulation X provides that if a submission does not state or identify a specific property, the submission is an application for a prequalification and not an application under Regulation X. Since changes to the RESPA regulations are now finalized, and further clarifications are pending, ABA recommends that banks stay alert to HUD pronouncements on this issue.

Can you clarify whether the MDIA rules apply to construction loans?
The Board regulations state that the MDIA early disclosures apply to a mortgage transaction subject to the Real Estate Settlement Procedures Act (RESPA) that is secured by the consumer's dwelling (other than a home equity line of credit or mortgage loan secured by a time share). See § 226.19(a)(1)(i). RESPA applies broadly, but does not apply to "temporary financing such as a construction loan." That exemption is explained in the RESPA regulations (24 C.F.R. 3500.2), which sets forth:

"The exemption for temporary financing does not apply to a loan made to finance construction of one- to four-family residential property if the loan is used as, or may be converted to, permanent financing by the same lender or is used to finance transfer of title to the first user. If a lender issues a commitment for permanent financing, with or without conditions, the loan is covered. Any construction loan for new or rehabilitated one- to four-family residential property, other than a loan to a bona fide builder (a person who regularly constructs one- to four-family residential structures for sale or lease), is subject to RESPA if its term is for two years or more. A "bridge loan" or "swing loan" in which a lender takes a security interest in otherwise covered one- to four-family residential property is not covered by RESPA."
Who must receive the disclosures under the new TILA requirements?
The answer depends on whether the loan is a rescindable transaction. In accordance with 226.17(d), if there is more than one borrower, the disclosures may be made to any borrower who is primarily liable on the obligation. However, if the transaction is rescindable, the disclosures must be made to each person who has the right to rescind.

Can mortgage brokers collect upfront fees, or do MDIA restrictions apply to creditors and brokers alike?
Under the new MDIA-TILA regulations, no creditor or other person may impose a fee on a loan applicant in connection with a mortgage loan application before the applicant receives the early disclosures. Disclosures are considered "received" 3 full business days after mailing or after evidence of delivery, such as return receipt or if delivery is done in person. (The only exception is the credit report fee which can be collected at application.)

Do the new regulation's disclosure "wait periods" begin when the mortgage broker provides disclosures or when the lender issues the applicable disclosures?
The new disclosure wait periods, both for initial disclosures as well as re-disclosure, begin when the "creditor" issues (by mail, electronically, or in person) the disclosures to the borrower. The requirement to disclose and the related "wait periods" will depend on whether the mortgage broker is considered a "legal agent" (i.e. acting on behalf) of the creditor. If the broker is not acting on behalf of the creditor, compliance with the new disclosures and related requirements would be required.

Can the loan be locked at the time of application?
Yes, so long as no fees are imposed or collected. The only restriction under the new regulation is that the no fees, other than a bona fide and reasonable fee to obtain a credit report, may be charged before the delivery of the initial disclosures. Remember that "delivery" requires actual delivery, evidence of delivery, or the 3-business day "mail" presumption as defined by the rule.