Proposed Rule to Enhance Consumer Protections and Disclosures for Home Mortgage Transactions

Transcription

1 September 17, 2010 Prpsed Rule t Enhance Cnsumer Prtectins and Disclsures fr Hme Mrtgage Transactins By Jseph Gabai Backgrund On August 16, 2010, the Federal Reserve Bard ( Bard ) issued tw prpsed rules and three final rules gverning federal Truth-in-Lending Act ( TILA ) requirements fr residential mrtgage lans. This client alert summarizes the Bard s prpsed rule t enhance cnsumer prtectins and disclsures fr hme mrtgage transactins. Previus client alerts addressed the Bard s ther fur issuances. Histry and Scpe This is the mst recent f a series f prpsed and final rules that are designed t require mre effective disclsures, and establish cmprehensive prtectins, fr cnsumers wh btain hme mrtgages. In particular, the Bard issued massive prpsals t upgrade its regulatin f clsed-end and pen-end mrtgage transactins in August f The Bard stated that it plans t issue final rules that cmbine the elements f the 2009 and 2010 prpsals. This prpsal cvers a wide array f tpics amng thers, reverse mrtgages, the right f rescissin, disclsures fr lan mdificatins, refunding fees fr withdrawn applicatins, infrmatin requests submitted t lan servicers, the definitin f higher-priced mrtgage lans, advertising fr hme equity lines f credit ( HELOCs ), and disclsures fr credit insurance and similar prducts. Many f these items reflect lngstanding cncerns f cnsumer advcates. As in the case f ther recent Bard issuances, this prpsal was issued fllwing extensive cnsumer testing. The mdel frms prpsed by the Bard embrace a philsphy f cnveying a simple message, rather than frms that prvide mre detailed infrmatin but risk infrmatin verlad. This massive prpsal at rughly 1,000 pages, lnger than the telephne bks f many cities devtes cnsiderable space t reverse mrtgages. Because nly a limited number f ur readers ffer reverse mrtgage prducts, this client alert fcuses n the ther elements f the Bard s prpsal. As authrity fr the issuance f its prpsal, the Bard cites its general pwer t issue regulatins under Sectin 105 f TILA. The Bard als cites Sectin 129(1)(2)(A) f TILA, which authrizes the Bard t prhibit acts r practices relating t mrtgage lans that it finds t be unfair, deceptive, r designed t evade prvisins f the Hme Ownership and Equity Prtectin Act ( HOEPA ). In develping its prpsal in reliance n Sectin 129(l)(2)(A), the Bard nted that it has cnsidered the standards currently applied t the Federal Trade Cmmissin Act s prhibitin against unfair r deceptive acts r practices, as well as the standards applied by similar state statutes. In additin, the Bard cites Sectin 129(l)(2)(B) f TILA, which authrizes the Bard t prhibit acts r practices relating t Mrrisn & Ferster LLP mf.cm Attrney Advertising

2 refinancings that the Bard finds t be assciated with abusive lending practices r that therwise are nt in the interests f a brrwer. The cmment perid runs fr 90 days frm the publicatin f the Bard s prpsal in the Federal Register. Highlights f Prpsed Rule and Analysis Vluntary Credit Insurance and Debt Cancellatin/Suspensin Cverage (Sectin 226.4(d), Sectins 226.6(a)(5), (b)(5), and Sectin (h) f Regulatin Z) Currently, the premiums r charges fr vluntary credit insurance, debt cancellatin cverage, and debt suspensin cverage are excluded frm the finance charge if the creditr prvides certain disclsures and the cnsumer initials r signs a separate affirmative written request fr the insurance r debt cancellatin/suspensin prduct. In its August 2009 prpsal, the Bard prpsed t treat all premiums and charges fr credit insurance r debt cancellatin/suspensin cverage as finance charges in the case f a clsed-end cnsumer credit transactin secured by real prperty r a dwelling, even if the purchase is vluntary. Fr ther transactins, the premiums and charges may cntinue t be excluded frm the finance charge if the purchase is vluntary and the creditr cmplies with the disclsure and signature requirements. The Bard prpses that creditrs use a new disclsure that highlights essential infrmatin in a shrt, blunt, questin-and-answer frmat: D I need this prduct? Hw much des it cst? What is the maximum benefit amunt? Can I receive benefits? Hw lng des the cverage last? This disclsure will be required whether the credit insurance r debt cancellatin/suspensin cverage is vluntary r invluntary. A creditr must fulfill the cnditins f the regulatin befre the cnsumer enrlls in the insurance r cverage written in cnnectin with the credit transactin. A creditr must use a disclsure that is substantially similar in headings, cntent, and frmat t ne f tw sets f mdel frms prpsed by the Bard. The creditr has an affirmative bligatin t determine, at r prir t the time f enrllment, that the cnsumer meets any age r emplyment eligibility criteria. If the cnsumer des nt meet thse criteria at that time, the prduct is nt cnsidered vluntary and the premium r charge will be a finance charge. (As nted abve, the Bard wuld treat all such premiums and charges as finance charges in the case f a clsed-end cnsumer credit transactin secured by real prperty r a dwelling.) Fr debt suspensin cverage, the creditr als must disclse that the bligatin t pay principal and interest is nly suspended, that interest will cntinue t accrue during the suspensin perid, and that the balance will increase during the suspensin perid. Cmment: Cnsumer grups have never liked vluntary credit insurance, debt cancellatin cverage, and debt suspensin cverage, believing these t be verpriced prducts that mst cnsumers will never have the pprtunity t use. These grups als believe that sme cnsumers have been victims f insurance packing. The Bard s prpsal respnds t these cncerns. Creditrs will be required t prvide an in yur face disclsure that is intended t cause the cnsumer t think carefully abut whether the prduct is really in his/her best interest. Further, the prpsal respnds t reprts that sme creditrs have sld cverage particularly unemplyment cverage that sme cnsumers were nt eligible t receive in the first instance. Cnsumer Credit Prvided t Revcable Living Trusts (Paragraph 226.3(a)-8 f the Regulatin Z Cmmentary) Regulatin Z generally des nt apply t credit extended t rganizatins, including entities such as crpratins and limited liability cmpanies. There has lng been an exceptin t this rule fr cnsumer credit extended t certain land trusts that are established t serve a functin similar t that f a mrtgage Mrrisn & Ferster LLP mf.cm Attrney Advertising

3 The Bard prpses t treat credit extended t revcable living trusts as a frm f cnsumer credit. These transactins wuld require the full array f cnsumer credit disclsures, including ntices f right t cancel. With this prpsal, the Bard frmally recgnizes that revcable living trusts are cmmnly established by individuals as estate planning tls. Accrdingly, the Bard is prpsing t ignre the fact that trusts are legal entities and, instead, t lk t the substance f these transactins. On this basis, lans t these trusts will receive the same disclsures that individuals receive. Cmment: While the Bard prpses t bring lans t revcable living trusts within Regulatin Z, the fact is that mst banks will nt make a mrtgage lan t a revcable living trust. In the vast majrity f cases, title t the family hme is held by the trust, the bank makes the lan t the individuals wh are the trustrs f the trust, and the trust executes a mrtgage instrument t secure the lan. These transactins already are subject t Regulatin Z because the individuals are receiving cnsumer credit. The individuals receive TILA disclsures and ntices f the right t cancel, where applicable. The Bard s prpsal will require banks t cnsider als prviding TILA disclsures and ntices f the right t cancel t the trust itself. In fact, sme banks already fllw this apprach. Right f Rescissin (Sectin and Sectin f Regulatin Z) The Bard prpses t clarify, strengthen, and mdernize the frms, prcedures and rules f the rad fr the right f rescissin. While mst f the changes are designed t benefit cnsumers, sme will better prtect creditrs. The prpsal affects bth HELOCs and clsed-end lans. Cnsumers will be entitled t rescind a transactin nly in writing. Creditrs may, but need nt, accept ther methds f rescissin, such as faxes and s. Fr the three-business-day perid fllwing the rescindable transactin, the cnsumer will be able t send the rescissin ntice t the creditr r the creditr s agent fr receiving ntice, as designated in the ntice f right t cancel. If there is n designatin in the ntice, the rescissin ntice may be sent t the servicer f the lan. After the three-business-day perid fllwing the rescindable transactin, the cnsumer will be able t send the rescissin ntice t the current wner f the lan r the servicer f the lan. Receipt by any such prper recipient will be treated as receipt by the creditr r wner f the lan. This means that servicers will need t develp prcedures t respnd quickly t the receipt f rescissin ntices. As at present, an pen right f rescissin will be cut ff by the first t ccur f: three years after the transactin, transfer f all f the cnsumer s interest in the prperty, r a sale f the prperty. (Under TILA, the rescissin perid can be extended in cnnectin with certain administrative prceedings.) The prpsal clarifies that each f the fllwing will cut ff an pen right f rescissin: a refinancing with a creditr ther than the current hlder, paying ff the lan, a freclsure sale, a sale f the prperty in the frm f an installment sale r in which the cnsumer takes back financing, a transfer f the prperty by peratin f law fllwing the cnsumer s death, r a gift f the prperty. A bankruptcy filing by the cnsumer generally will nt terminate the right f rescissin if the cnsumer retains an interest in the prperty after the bankruptcy estate is created. An errr in a material disclsure leaves pen the right f rescissin. There has been an expansin and clarificatin f the items that cnstitute a material disclsure, with different rules applying t HELOCs and clsed-end transactins. Fr several f the numerical disclsures, there are new tlerances that apply. In general, where the misdisclsures wuld nt tend t mislead a cnsumer t his/her detriment, the tlerance is unlimited. Fr example, the tlerance fr understating the ttal f all ne-time fees t pen a HELOC is $100, but the tlerance fr verstating thse fees is unlimited. If the creditr prvides incrrect r incmplete material disclsures, the three-business-day perid will nt begin t run, leaving an pen right f rescissin. T fix this prblem and get the three-business-day perid Mrrisn & Ferster LLP mf.cm Attrney Advertising

4 started, the creditr will have t prvide a cmplete and crrect set f material disclsures tgether with a cmplete, crrect, and updated ntice f right t cancel. In cntrast, if the material disclsures were crrect and cmplete, but the ntice f right t cancel was incrrect r incmplete, the creditr will get the three-business-day perid started by delivering a cmplete, crrect, and updated ntice f right t cancel t the cnsumer. The prpsal will require creditrs t prvide nly ne cpy f the ntice f right t cancel t each cnsumer entitled t rescind, in cntrast with the requirement f tw cpies under the current rule. There are detailed rules fr the mandatry and ptinal cntents f the ntice f right t cancel. A creditr will be deemed t satisfy these rules if it uses ne f the apprpriate mdel frms published by the Bard r a substantially equivalent ntice. In practice, creditrs are likely t rutinely use the mdel frms. The cntents f the mdel frms are less legalistic and mre cnsumer-friendly than the current mdel frms, but als less infrmative. The ntice f right t cancel must identify the last date t rescind. If the creditr cannt prvide an accurate date (e.g., as will happen when the lan dcuments are sent t the cnsumer s hme and the creditr will nt necessarily knw when the cnsumer will sign and return them), the creditr may prvide the date that it reasnably and in gd faith believes the rescissin perid will end. If the date turns ut t be shrt f the requisite three-business-day rescissin perid, the creditr can cmply with the regulatin by ntifying the cnsumer that the deadline in the first rescissin ntice has changed and by prviding a new rescissin ntice that prvides a rescissin perid which expires three business days frm the date the cnsumer receives the secnd ntice. The creditr will be able t give the cnsumer a lnger perid t rescind s lng as the creditr hnrs rescissins made thrugh the end f that date. The ntice f right t cancel must include a tear-ff frm at the bttm which allws the cnsumer t exercise his/her right f rescissin. The creditr may, at its ptin, ppulate this frm with the cnsumer s name, prperty address and lan number. The creditr may nt require the cnsumer t cmplete a blank with the lan number. The cnsumer can rescind by sending in the frm at the bttm f the ntice f right t cancel, r by sending in any ther written ntice. The prpsed regulatin prvides mre precise rules fr the creditr s actins fllwing its receipt f a rescissin ntice frm the cnsumer. The first set f rules applies when the creditr receives the rescissin ntice befre it has disbursed funds. The secnd set f rules applies when the creditr receives the rescissin ntice after it has disbursed funds but where the parties are nt in a curt prceeding. The third set f rules applies when the creditr receives the rescissin ntice after it has disbursed funds but where the parties are in a curt prceeding. Cllectively, these rules are designed t prvide a mre equitable prcess based upn the circumstances at the time f the rescissin. Nevertheless, where the creditr believes that the cnsumer des nt have the legal right t rescind a funded lan, the creditr s nly means f fully prtecting its rights will be t g t curt, as is the case at present. A prpsed amendment t the Regulatin Z Cmmentary ( Cmmentary ) states that when a creditr cntests a rescissin, the curt nrmally will first determine if the right t rescind has expired. If it has nt, the curt will next determine the amunts wned by the cnsumer and creditr, and then the prcedures fr the cnsumer t tender any mney r prperty. The curts cntinue t have the right t mdify the rescissin prcedures. The Cmmentary states that this includes a mdificatin f the lan when the cnsumer is in bankruptcy r when the equities dictate. The Cmmentary als states that a curt may mdify the frm r manner f the cnsumer s tender, such as by rdering payment in installments r by apprving the parties agreement t an alternative frm f tender. The prpsed rule changes the prcedures that apply when the cnsumer wishes t waive r mdify the right t rescind. The creditr must prvide the ntice f right t cancel and the required Regulatin Z disclsures befre the cnsumer can waive r mdify the right. (This is the same apprach used fr waivers r mdificatins relating t high-cst mrtgage disclsures under Sectin (c)(1)(iii) f Regulatin Z, and fr waivers r mdificatins relating t Regulatin Z disclsures fr clsed-end dwelling secured lans under Mrrisn & Ferster LLP mf.cm Attrney Advertising

5 Sectin (a)(3) f Regulatin Z.) As at present, a waiver r mdificatin f the right t rescind is nly valid if the cnsumer determines that funds are needed t meet a bna fide persnal financial emergency. A prpsed amendment t the Cmmentary clarifies that a bna fide persnal financial emergency typically, but nt always, will invlve imminent lss f r harm t a dwelling r harm t the health r safety f a natural persn. A prpsed amendment t the Cmmentary identifies three examples f circumstances in which there is a bna fide persnal financial emergency: (i) imminent sale f the prperty at freclsure, where the lan is needed t stp the freclsure during the rescissin perid; (ii) a need fr immediate repairs t ensure that the dwelling is habitable during the rescissin perid; and (iii) imminent need fr healthcare services, where the lan is needed t btain thse services during the rescissin perid. In cntrast, the Cmmentary states that there is n bna fide persnal financial emergency when: (i) the cnsumer wishes t buy gds r services but nt n an emergency basis, r (ii) the cnsumer wishes t invest immediately in a financial prduct. The existence f a bna fide persnal financial emergency is a questin f fact, and the creditr cannt ignre facts that are in its pssessin. Each cnsumer entitled t rescind must sign a dated written statement (but nt a printed frm) that describes the emergency, specifically mdifies r waives the rescissin right, and bears each cnsumer s signature. The cnsumers can sign ne frm, r they can each sign their wn frms. There is a prpsed change in the exemptin frm the right f rescissin fr a refinancing r cnslidatin f a clsed-end credit transactin by the same creditr. At present, this exemptin applies when the refinancing r cnslidatin is dne by the creditr t whm the lan was initially payable. Fr example, this wuld include an riginal creditr that makes a lan, sells it, cntinues t service it, and later refinances it. The prpsal narrws this exemptin (which nw relates nly t mdificatins that qualify as new transactins under Sectin (a), discussed belw), allwing it t be used nly by an riginal creditr that is als the current hlder f the debt bligatin. Hwever, this exemptin des nt apply t the extent f any new advance f mney. As at present, there are tw mdel rescissin frms fr clsed-end credit transactins. The H-8 is the general frm and the H-9 is the refinancing frm. The Cmmentary clarifies that the H-9 is t be used nly where the transactin invlves a new advance f mney by the riginal creditr that is als the current hlder f the debt bligatin. In all ther situatins, the H-8 frm is t be used. Cmment: Sme creditrs ffer HELOCs that are used in cnnectin with the purchase f a cnsumer s principal dwelling. The first advance frm such a HELOC is used t pay part f the purchase price f the dwelling, and is exempt frm the right f rescissin because it is a residential mrtgage transactin. Subsequent advances may be used fr any purpse, d nt qualify as residential mrtgage transactins, and are subject t the right f rescissin. The current set f mdel rescissin frms in Appendix G f Regulatin Z is nt adequate fr these situatins, and it therefre is necessary t prepare and utilize a custmized rescissin frm. The Bard s prpsal als des nt include a mdel rescissin frm fr these situatins. If the final rule des nt cntain a mdel rescissin frm fr these situatins, it will cntinue t be necessary t prepare and utilize a custmized rescissin frm. Cmment: While the prpsal prvides mre detailed rescissin rules, thse rules still leave many pen issues. Fr example, while the Cmmentary states that a curt may mdify the frm r manner f the cnsumer s tender, such as by rdering payment in installments, the Cmmentary des nt address whether the creditr s security interest may remain in place while thse installments are being made r whether the creditr is entitled t receive interest n the amunt due (and, if s, at what rate). It als des nt address what will happen if the brrwer fails t make the payments r if the brrwer files fr bankruptcy. Sme curts have held that rescissin is an equitable prcess, leaving cnsiderable pprtunity fr the exercise f judicial discretin and creativity. As at present, a creditr will be well advised t cntact a cnsumer immediately after he/she rescinds and, if the rescissin is lawful, t enter int an agreement with the cnsumer that addresses the rescissin amunts and prcedures Mrrisn & Ferster LLP mf.cm Attrney Advertising

6 The Bard has als prpsed a revisin t the Cmmentary t clarify that a guarantr will have the right t rescind where: (i) the brrwer has the right t rescind because he/she is a natural persn t whm cnsumer credit is ffered r extended and in whse principal dwelling a security interest is r will be retained r acquired, and (ii) the guarantr pledges his/her wn principal dwelling as additinal security fr the cnsumer credit transactin, and persnally guarantees the brrwer s repayment f the cnsumer credit transactin. Advertising (Sectin f Regulatin Z) In 2008, the Bard significantly revised the advertising rules that apply t clsed-end credit transactins secured by a dwelling. See Sectin (i) f Regulatin Z and the related Cmmentary prvisins. The Bard prpses t revise the advertising rules fr HELOCs in a smewhat cmparable manner. Prepayment Penalties n Clsed-End Lans (Paragraph (k)(1)-1 f the Regulatin Z Cmmentary) The Bard prpses t amend the Cmmentary t clarify that prepayment penalties include charges determined by treating the lan balance as utstanding fr a perid after prepayment in full and applying the interest rate t such balance, even if the charge results frm the interest accrual amrtizatin methd used fr the transactin. Fr example, if a FHA lan is prepaid n April 15th, and the creditr charges interest n the principal balance fr the full mnth f April, the interest that is charged in excess f that earned thrugh the date f payff will be treated as a prepayment penalty. This is the case ntwithstanding that the FHA des nt regard this amunt as a penalty. Early Disclsures fr Clsed-End Lans (Sectin (a) f Regulatin Z) The Bard has prpsed t mdify its rules gverning early disclsures fr cnsumer credit transactins secured by real prperty r a dwelling. Currently, these rules generally require the creditr t deliver r mail the gd faith estimates f the Regulatin Z disclsures nt later than the third business day after receipt f the cnsumer s written applicatin. If the disclsures are mailed, they are deemed t have been received three business days after they are mailed. Fees (ther than bna fide and reasnable credit reprt fees) cannt be impsed until the cnsumer has received the disclsures. The early disclsures must be delivered r mailed nt later than the seventh business day befre cnsummatin f the credit transactin. If the disclsed APR becmes inaccurate, the creditr must prvide crrected disclsures at least three business days befre cnsummatin. The current rule applies t lans that are subject t RESPA. The prpsed rule applies t all clsed-end cnsumer credit transactins secured by real prperty r a dwelling, whether r nt RESPA applies. Hwever, creditrs will be able t rely n the RESPA and HUD Regulatin X rules in determining when a written applicatin has been received. Under the prpsal, neither the creditr nr any ther persn will be able t impse a nnrefundable fee fr three business days after the cnsumer receives the early disclsures. Any fee paid during this three-day perid must be refunded t the cnsumer if the cnsumer requests a refund during that perid and he/she decides nt t enter int the credit transactin. If the creditr r ther persn relies n the allwed presumptin f receipt f disclsures that are mailed r delivered ther than in persn, a nnrefundable fee may nt be impsed until after the sixth business day fllwing the date that the disclsures are s mailed r delivered. A ntice f the right t receive the refund is cntained in the Bard s Key Questins t Ask Abut Yur Mrtgage dcument, which must be prvided at the time the cnsumer is prvided with an applicatin frm r befre the cnsumer pays a nn-refundable fee, whichever is earlier. If husing r credit cunseling is required by applicable law, a bna fide and reasnable cunseling fee is nt subject t the prhibitin n Mrrisn & Ferster LLP mf.cm Attrney Advertising

7 pre-disclsure fees and is nt refundable. A bna fide and reasnable credit reprt fee als need nt be refundable. A final Regulatin Z disclsure will need t be prvided at least three-business-days befre cnsummatin. The final Regulatin Z disclsure must be prvided fr all transactins, even if nne f the items cntained in the early disclsure have changed. Only certain f the disclsed items may be estimated. An additinal three-business-day waiting perid is required if the creditr must send a crrected final disclsure. The Bard is seeking cmment n tw alternative appraches relating t the creditr s duty t send a crrected disclsure. Fr purpses f the seven- and three-business-day disclsure perids and the nnrefundable fee rules, a business day is defined t mean any calendar day except Sundays and the legal public hlidays referenced in Sectin 226.2(a)(6) f Regulatin Z. Waivers and mdificatins f the seven- and three-business-day disclsure perids remain permitted in the event f a bna fide persnal financial emergency. The waiver and mdificatin prcedures are similar t thse that apply t the right f rescissin. The prpsed Cmmentary references the examples f a bna fide persnal financial emergency in the prpsed Cmmentary prvisins relating t rescissins. Disclsures fr Mdificatins f Residential Mrtgages (Sectin f Regulatin Z) Currently, the mdificatin f a clsed-end lan is nt treated as a new transactin and des nt require new Regulatin Z disclsures unless the transactin qualifies as a refinancing. A refinancing ccurs when an existing credit transactin is satisfied and replaced by a new transactin by the same cnsumer. There is an exceptin t the mdificatin rule: if the interest rate is increased in accrdance with a variable rate feature nt previusly disclsed, r if a new variable rate feature is added t the lan, the Cmmentary states that this will require new Regulatin Z disclsures. The current rule has led t cnsiderable uncertainty and incnsistent treatment. The Bard prpses t treat certain mdificatins as new transactins requiring new Regulatin Z disclsures. The new rule will apply t the mdificatin f an existing cnsumer credit transactin secured by real prperty r a dwelling, where the mdificatin is dne by the same creditr and the same cnsumer. Fr this purpse, the same creditr means the current hlder r servicer f the lan. Fr example, if a bank makes a mrtgage lan, sells the lan n a servicing retained basis, and the bank and cnsumer subsequently mdify the lan, the mdificatin will be subject t the new rule. Fr a lan subject t the new rule, any f the fllwing mdificatins will trigger new Regulatin Z disclsures: increasing the lan amunt; impsitin f any fee (regardless f hw denminated r paid); changing the lan term; changing the interest rate; increasing the peridic payment; adding an adjustable rate feature, prepayment penalty, interest-nly payments, negative amrtizatin, a balln payment, a demand feature, a n r lw dc feature, r a shared equity r shared appreciatin feature; r adding new cllateral that is real prperty r a dwelling. Hwever, certain mdificatins are exempt frm the new disclsure requirement: thse that are part f a curt prceeding; thse in cnnectin with the cnsumer s default r delinquency (unless there is an increase in the lan amunt r interest rate, r a fee is impsed n the cnsumer); r thse due t a decrease in the interest rate nly (except that a decrease in the peridic payment, an extensin f the lan term, r bth, are allwed), and prvided that n fee is impsed n the cnsumer. As prpsed, the exemptin fr mdificatins f lans in default r delinquency wuld nt include lans that are in imminent default r delinquency Mrrisn & Ferster LLP mf.cm Attrney Advertising

8 Under the prpsed rule, a typical mdificatin, extensin, cnslidatin agreement (MECA) will require a new set f disclsures. In cntrast, the exemptins prvided by the prpsed rule are sufficiently brad t cver many lan wrkuts that creditrs cmmnly prvide t delinquent r defaulted brrwers. In additin, mst infrmal payment arrangements fr example, infrmal payment deferral arrangements will nt require new Regulatin Z disclsures. Hwever, the impsitin f any fees n the cnsumer in cnnectin with these mdificatins will trigger new Regulatin Z disclsures. Fr purpses f the new mdificatin rule, an increase in the lan amunt includes any csts f the transactin (e.g., pints, appraisal fees, r title insurance fees) that are paid ut f the prceeds f the new lan amunt. Hwever, lan prceeds that are used t fund an existing r newly-established escrw accunt are nt treated as an increase in the lan amunt. Where the mdificatin des trigger new Regulatin Z disclsures, all applicable rules under the regulatin will apply: fr example, the three- and seven-business-day rules discussed abve, the right f rescissin, the rules fr higher-priced mrtgage lans, etc. The prir rule fr refinancings generally will cntinue t apply t clsed-end lans that are nt secured by real prperty r a dwelling. Ntice f Rate Adjustments (Sectin (c) f Regulatin Z) Currently, at least nce each year in which interest rate adjustments are implemented withut accmpanying payment changes, and days befre each payment adjustment, a prescribed adjustment ntice must be prvided t the cnsumer. This rule applies t a variable-rate mrtgage subject t Sectin (b) f Regulatin Z (i.e., where the APR may increase after cnsummatin in a transactin secured by the cnsumer s principal dwelling with a term greater than ne year). The Bard prpses t require at least 60, but nt mre than 120, days ntice befre a payment change that is assciated with an interest rate change. If issued in final frm, this regulatin will make it impssible t ffer ARMs with zer-day lk backs and mnthly rate and payment changes. The prpsal will cntinue t require an annual ntice where interest rate changes are nt accmpanied by payment changes. The prpsed rule will apply t ARMs subject t Sectin (b) f Regulatin Z, where the adjustment is made under the terms f the existing legal bligatin between the parties. If an adjustment is nt based n the legal bligatin between the parties, this will nt trigger a ntice under Sectin (c), but it may trigger a new set f Regulatin Z disclsures under the mdificatin rules summarized abve. The cnversin f an ARM t a fixed-rate mrtgage in accrdance with the cnversin prvisins f the existing ARM (including the applicable index and margin r frmula t determine the rate upn cnversin) will trigger an adjustment ntice under Sectin (c). Hwever, new Regulatin Z disclsures may be required if the existing lan des nt prvide fr cnversin, the existing lan prvides fr cnversin but des nt state a specific index and margin r frmula (r if the lan des s state, but the parties agree t a change), a cnversin fee is charged, r ther lan terms are mdified. The required cntent f the ntices has been increased cnsiderably, with different ntices required (i) where the payment is changing, and (ii) fr annual interest rate changes. Additinal disclsures are required with respect t prepayment penalties, a telephne number t call fr infrmatin abut the lan, and a telephne number and website address fr husing cunseling resurces maintained by HUD Mrrisn & Ferster LLP mf.cm Attrney Advertising

9 Cmment: Nte that the ARM adjustment ntices are in additin t infrmatin that the servicer will be required t prvide n a timely basis in accrdance with the Ddd-Frank Act, such as peridic statements, infrmatin in respnse t qualified written requests, infrmatin in respnse t certain allegatins f errrs in servicing, and cntact infrmatin regarding the wner f the lan. The infrmatin required in the ntices must be prvided in the frm f a table with the headings, cntent, and frmat substantially similar t Frm H-4(G) (where the interest rate change is accmpanied by a payment change) r Frm H-4(K) (annual ntice f interest rate adjustments withut accmpanying payment adjustments). These are cnsumer-friendly frms that are designed t be cmprehensible t unsphisticated cnsumers. High-Cst Mrtgages (Sectin f Regulatin Z) In its prpsed amendments t Regulatin Z issued in August 2009, the Bard prpsed t eliminate virtually all f the exclusins frm the finance charge fr a clsed-end cnsumer credit transactin secured by a dwelling r real prperty. Thus, items such as title insurance premiums, credit reprt fees, and appraisal fees will be treated as finance charges fr residential mrtgage lans. This will have the effect f increasing bth the finance charge and APR fr these transactins, ptentially by significant amunts. In its August 2010 prpsal, the Bard prpses t amend the Cmmentary relating t the calculatin f the high-cst mrtgage pints and fees test by allwing creditrs t cntinue t exclude frm the finance charge thse items that were previusly excludable (e.g., such as title insurance premiums, credit reprt fees, and appraisal fees). Similarly, the ttal lan amunt will be calculated fr purpses f the high-cst mrtgage pints and fees test by allwing creditrs t cntinue t exclude frm the finance charge thse same items. This will avid the large increases in the pints and fees and APR that therwise wuld ccur. As a result, many lans that therwise wuld be treated as high-cst mrtgages will avid that characterizatin. Cmment: The Ddd-Frank Act cntains several prvisins that are triggered by a pints and fees test. Fr example, t be treated as a qualified mrtgage fr purpses f the presumptin f cmpliance with the new ability t repay requirement, a residential mrtgage lan may nt have ttal pints and fees that exceed 3% f the ttal lan amunt. See Sectin 1412 f the Ddd-Frank Act. If the pints and fees and ttal lan amunt fr purpse f the qualified mrtgage test will be defined as the Bard nw prpses fr its highcst mrtgage rule, it will be easier fr mre lans t meet the qualified mrtgage test. Sectin (a)(4)(iii) f Regulatin Z prvides a presumptin f cmpliance with the repayment ability requirements fr high-cst mrtgage lans and higher-priced mrtgage lans. The presumptin f cmpliance is available if the creditr fllws certain prcedures. The presumptin f cmpliance is nt available fr certain lan prducts, such as balln lans with terms f less than seven years ( shrt-term balln lans ). A prpsed amendment t the Cmmentary states that the exclusin f shrt-term balln lans frm the presumptin f cmpliance des nt prhibit creditrs frm actually making shrt-term balln lans that are higher-priced mrtgage lans. The prpsed cmment ges n t state that the creditr must use prudent underwriting standards and determine that the value f the cllateral is nt the basis fr repaying the bligatin, including the balln payment. The creditr need nt verify that the cnsumer has assets and/r incme at the time f cnsummatin that wuld be sufficient t pay the balln payment when it cmes due. In additin t verifying the cnsumer s ability t make regular mnthly payments, the creditr shuld verify that the cnsumer wuld likely be able t satisfy the balln payment bligatin by refinancing the lan r thrugh incme r assets ther than the cllateral. The prpsed Cmmentary prvisin is cnsistent with a letter issued by the Bard s staff in See Shrt-Term Balln Lans and Regulatin Z Repayment Ability Requirement fr Higher-Priced Mrtgage Lans, CA (Nv. 9, 2009) Mrrisn & Ferster LLP mf.cm Attrney Advertising

10 Higher-Priced Mrtgage Lan Definitin (Sectin (a) f Regulatin Z) Currently, a higher-priced mrtgage lan is defined as a cnsumer credit transactin secured by the cnsumer s principal dwelling in which the APR exceeds the Average Prime Offer Rate by 1.5% r mre, fr a first lien lan, r 3.5% r mre, fr a subrdinate lien lan. The Bard prpses t substitute a new Transactin Cverage Rate ( TCR ) fr the APR in applying the test fr a higher-priced mrtgage lan. The remainder f the test remains unchanged. The new TCR is the same as the APR, except that the prepaid finance charges that are used fr the calculatin are limited t thse prepaid finance charges that will be retained by the creditr, its affiliates, r a mrtgage brker. This will exclude prepaid finance charges such as mrtgage insurance premiums and tax service fees frm the TCR, assuming that these are paid t unaffiliated persns. As a result, mre lans that are nt truly subprime lans will avid characterizatin as higher-priced mrtgage lans. Cmment: As prpsed, yield spread premiums paid by the creditr t the brker wuld nt be included in the TCR calculatin. Nte, hwever, that yield spread premiums will themselves becme unlawful under a separate regulatin issued by the Bard n August 16, 2010 and effective n April 1, See discussin at There is n bligatin t disclse the TCR t the cnsumer. Cmment: This rule, if issued in final frm, will give creditrs an incentive t use unaffiliated service prviders, because fees paid t them will nt be included in calculating TCRs, thereby allwing mre lans t avid characterizatin as higher-priced mrtgage lans. Further, the rule will incentivize creditrs t riginate retail lans because fees paid t in-huse lan fficers will nt be included in calculating TCRs whereas fees paid by cnsumers t mrtgage brkers will be included in calculating TCRs. While a lan t finance the initial cnstructin f a dwelling is exempt frm the definitin f a higher-priced mrtgage lan, the permanent lan n that dwelling is nt exempted. Fr cnstructin-permanent lans, a creditr has lng had the ptin f prviding ne Regulatin Z disclsure fr bth the cnstructin and permanent phases r separate disclsures fr each phase. A prpsed Cmmentary prvisin states that a single TCR is calculated fr the entire transactin. This TCR is calculated using the apprpriate charges frm bth phases, regardless f whether the creditr prvides ne r tw disclsures. If the lan qualifies as a higher-priced mrtgage lan, the higher-priced mrtgage lan rules will apply nly t the permanent phase. Servicer s Respnse t Brrwer s Request fr Infrmatin (Sectin f Regulatin Z) Under the Bard s prpsed rule, when a cnsumer makes a written request fr the identity r cntact infrmatin fr the current wner and/r master servicer f the lan, the servicer must prvide the cnsumer with the name, address, and telephne number f that persn within a reasnable time and t the best f its knwledge. The prpsed rule is designed t implement Sectin 131(f)(2) f TILA. The prpsed Cmmentary states that, under mst circumstances, a reasnable time will be ten business days frm receipt f the cnsumer s written request. Fr this purpse, a business day is defined t mean a day n which the creditr s ffices are pen t the public fr carrying n substantially all f its business functins. Cmment: Sectin 1463 f the Ddd-Frank Act amends Sectin 6(k) f HUD Regulatin X t prhibit a servicer frm failing t respnd within 10 business days t a request frm a brrwer t prvide the identity, address, and ther relevant cntact infrmatin abut the wner r assignee f the lan. Hpefully, HUD will crdinate its implementing regulatin with the Bard s prpsal. If nt, presumably the Bureau will d s after it takes ver respnsibilities fr issuing regulatins under TILA and RESPA Mrrisn & Ferster LLP mf.cm Attrney Advertising

11 Cntact: Jseph Gabai (213) Andrew M. Smith (202) Sean Ruff (202) Abut Mrrisn & Ferster: We are Mrrisn & Ferster a glbal firm f exceptinal credentials in many areas. Our clients include sme f the largest financial institutins, investment banks, Frtune 100, technlgy and life science cmpanies. We ve been included n The American Lawyer s A-List fr seven straight years, and Frtune named us ne f the 100 Best Cmpanies t Wrk Fr. Our lawyers are cmmitted t achieving innvative and business-minded results fr ur clients, while preserving the differences that make us strnger. This is MF. Visit us at Because f the generality f this update, the infrmatin prvided herein may nt be applicable in all situatins and shuld nt be acted upn withut specific legal advice based n particular situatins Mrrisn & Ferster LLP mf.cm Attrney Advertising