Truth in Lending / RESPA Regulatory Changes

Transcription

1 Steve H. Powell & Company Truth in Lending / RESPA Regulatory Changes Truth in Lending and RESPA Update Note: This publication is not offered as legal advice. Readers should seek legal counsel for advice about specific situations. 6/5/2009

2 Table of Contents Truth in Lending Changes: Introduction and Purpose of Seminar... 1 Newly Defined and Key Terms... 2 Initial TIL Disclosure... 4 HOEPA Prepayment Penalty Limitations... 6 Rules for Higher Priced Mortgage Loans (HPML)... 7 Requirements for both HPML and HOEPA Loans... 9 Requirements for any credit secured by a consumer s principal dwelling Advertising Requirements for closed end credit RESPA Changes: Introduction and Purpose of Seminar Newly Defined Terms Good Faith Estimate HUD 1/1A Settlement Statement Mortgage Servicing Disclosure... 60

3 Truth in Lending Changes Introduction and Purpose of Seminar The Board of Governors of the Federal Reserve System have made significant changes to Regulation Z, Truth in Lending that will have a significant impact on your institution s lending compliance program and loan operations. These changes were made primarily to promote the informed use of consumer credit through requiring disclosures and imposing limitations and prohibitions in connection with credit secured by a consumer s principal dwelling. While these Truth in Lending changes greatly affect both open-end and closed-end consumer credit, this seminar will explain the key requirements as related to consumer closed-end credit as it applies to consumer mortgage transactions and closed-end advertising of consumer lending products. Are you confident that your institution will be ready for your next Regulatory Compliance Examination? This seminar will explain the key requirements of these complex regulations in simple terms and provide common sense solutions for implementing the changes by the mandated deadlines. The final TIL revisions include: 1. New defined terms that promote responsible lending by financial institutions and provide protections for consumers in the residential mortgage market 2. Additional requirements for providing the initial TIL disclosure 3. Limited changes relative to HOEPA (high cost) loans 4. New category of higher-priced mortgage loans 5. New escrow requirements relative to higher-priced mortgage loans 6. Requirements for both higher priced mortgage loans and HOEPA loans 7. New prohibitions for all closed-end mortgage loans secured by principal residences 8. Additional requirements and prohibitions relative to advertising practices 1 Steve H. Powell & Company

4 Newly Defined Terms and Key Terms The revisions to the Regulation provided key changes to some of the defined terms that drive the compliance requirements. Advertisement means a commercial message in any medium that promotes directly or indirectly, a credit transaction. Business Day means a day on which the creditor s offices are open to the public for carrying on substantially all of its business functions. However, for the purposes of rescission, initial Truth in Lending disclosure requirements, and certain home mortgage transactions, the term means all calendar days except Sundays and legal public holidays. Higher-priced mortgage loans means a consumer credit transaction secured by the consumer s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling. Higher-priced mortgage loans does not include a transaction to finance the initial construction of a dwelling, a temporary or bridge loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-mortgage transaction, or a home equity line of credit loan. Average prime offer rate means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers from a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The Board publishes average prime offer rates for a broad range of loan types to derive these rates. Escrow account for the purposes of Truth in Lending has the same meaning as defined in HUD s Regulation X (12 CFR (b) as amended). HUD s Regulation X defines an escrow account as any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay. The definition encompasses any account established for this purpose, including a ``trust account'', ``reserve account'', ``impound account'', or other term in different localities. An ``escrow account'' includes any arrangement where the servicer adds a portion of the borrower's payments to principal and subsequently deducts from principal the disbursements for escrow account items. 2 Steve H. Powell & Company

5 Mortgage Broker means a person, other than an employee of a creditor, who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. The term includes a person meeting this definition, even if the consumer credit obligation is initially payable to such person, unless the person provides the funds for the transaction at consummation out of the person s own resources, out of deposits held by the person, or by drawing on a bona fide warehouse line of credit. Appraiser is a person who engages in the business of providing assessments of the value of dwellings. The term includes persons that employ, refer, or manage appraisers and affiliates of such persons. Open-end credit means consumer credit extended by a creditor under a plan in which (i) the creditor reasonably contemplates repeated transactions; (ii) the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid Closed-end credit means consumer credit other than open-end credit as defined above. 3 Steve H. Powell & Company

6 Initial Truth in Lending Disclosure As of May 2009, the Federal Reserve revised Truth in Lending, Regulation Z, early disclosure requirements to incorporate the Mortgage Disclosure Improvement Act of 2008 (MDIA). These revisions include the MDIA statutory provisions which require additional compliance relative to the providing of the initial disclosure statement. In addition, these changes require mandatory compliance of the Initial Truth in Lending Disclosure information to become effective July 30, Per the Financial Institution Letter #FIL , all written applications received by lenders on or after July 30, 2009 must comply with the early disclosure requirements of Regulation Z as amended in May of The following are revisions to the initial TIL Disclosure requirements: An initial disclosure must be provided to all consumer purpose applications which are for the purpose of purchasing, constructing, refinancing, or home equity loans of any dwelling secured loan. (Previously this only applied to principal dwellings) The initial Truth in Lending Disclosure must be provided within 3 business days of application and at least 7 business days before loan closing. The initial Truth in Lending Disclosure must include the statement You are not required to complete this agreement merely because you have received these disclosures or signed a loan application A Bank must provide an amended initial Truth in Lending Disclosure if the loan is outside of tolerance over or under by more than 1/8 of 1% (.125) for a regular transaction or ¼ of 1% (.25) for an irregular transaction and the amended initial Truth in Lending Disclosure must be given at least 3 business days before loan closing. The waiting period made be waived for a bona fide emergency which mirrors the waiver allowance relative to right of rescission. No fee will be allowed until after the early disclosure has been deemed to have been received by the applicant with the exception of a credit report fee. 4 Steve H. Powell & Company

7 226.19(a)(1)(i) Expansion of Initial TIL Disclosure Requirement (a) Mortgage transactions subject to RESPA. (1)(i) Timing of Disclosures. In a mortgage transaction subject to the Real Estate Settlement Procedures Act that is secured by the consumer s principal dwelling, other than a home equity line of credit, the creditor shall make good faith estimates of the disclosures required by section before consummation, or shall deliver or place them in the mail not later than three business days after the creditor receives the consumer s written application, whichever is earlier. (1)(ii) Imposition of fees. Except as noted in paragraph (a)(1)(iii) of this section, neither a creditor nor any other person may impose a fee on the consumer in connection with the consumer s application for a mortgage transaction subject to this section before the consumer has received the disclosures required by this section. If the disclosures are mailed to the consumer, the consumer is considered to have received them three (3) business days after they are mailed. (1)(iii) Exception to fee restriction. A creditor or other person may impose a fee for obtaining the consumer s credit history before the consumer has received the disclosures required by paragraph (a)(1)(i) of this section, provided the fee is bona fide and reasonable in amount. Note: The financial institution may not charge any fees with the application, with the exception of charging a fee to cover the cost of obtaining a credit report, until the consumer has received the early TIL. Management should take steps to ensure that any credit report fee charged prior to providing an early TIL does not include any other amount other than the direct charge to obtain the credit report. 5 Steve H. Powell & Company

8 HOEPA Pre Payment Penalty Limitations Limitations as related pre-payment penalties on HOEPA (high cost) Loans (d) Limitations. A mortgage transaction subject to this section shall not include the following terms: (6) Prepayment penalties. Except as allowed under paragraph (d)(7) of this section, a penalty for paying all or part of the principal before the date on which the principal is due. A prepayment penalty includes computing a refund of unearned interest by a method that is less favorable to the consumer than the actuarial method, as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 U.S.C. 1615(d). (7) Prepayment penalty exception. A mortgage transaction subject to this section may provide for a prepayment penalty (including a refund calculated according to the rule of 78s) otherwise permitted by law if, under the terms of the loan: (7)(i) The penalty will not apply after the two-year period following consummation; (7)(ii) The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; (7)(iii) At consummation, the consumer's total monthly debt payments (including amounts owed under the mortgage) do not exceed 50 percent of the consumer's monthly gross income, as verified in accordance with Sec (a)(4)(ii); and (7)(iv) The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation. Under the prior rule, the HOEPA limitations provided a pre-payment penalty could not apply after 5 years following consummation. Effective October 1, 2009, a pre-payment penalty may not be applied after the two-year period following consummation of a HOEPA (high cost) loan. This change was made to coincide with the limitations which will apply to higher-priced mortgage loans. However, it should be noted that the repayment ability rule is a newly defined requirement that applies to both HOEPA and higher-priced loans. 6 Steve H. Powell & Company

9 Rules for Higher Priced Mortgage Loans (HPML) (b) Rules for higher-priced mortgage loans. (b)higher-priced mortgage loans are subject to the following restrictions: (b)(1) Repayment ability. A creditor shall not extend credit based on the value of the consumer s collateral without regard to the consumer s repayment ability of the consummation as required by section (a)(4). (b)(2) Prepayment penalties. A loan may not include a penalty described by (a)(4) unless: (b)(2)(i) The penalty is otherwise permitted by law, including section (d)(7) if the loan is a mortgage transaction described in section (a); and (b)(2)(ii) Under the terms of the loan (A) the penalty will not apply after the two-year consummation; (B) the penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and (C) the amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation. (b)(3) Escrows: (b)(3)(i) Failure to escrow for property taxes and insurance. Except as provided below, a creditor may not extend a loan secured by a first lien on a principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer s default or other credit loss. (b)(3)(ii) Exceptions for loans secured by shares in a cooperative and for certain condominium units. (A) Escrow accounts need not be established for loans secured by shares in a cooperative; and (B) Insurance premiums described in paragraph (b)(3)(i) of this section need not be included in escrow accounts for loans secured by condominium units, where the condominium association has an obligations to the condominium unit owners to maintain a master policy insuring condominium units. (b)(3)(iii) Cancellation. A creditor or servicer may permit a consumer to cancel the escrow account required in paragraph (b)(3)(i) of this section only in response to a consumer s dated written request to cancel the escrow account that is received no earlier than 365 days after consummation. 7 Steve H. Powell & Company

10 (b)(4) Evasion; open-end credit. In connection with credit secured by a consumer s principal dwelling that does not meet the definition of open-end credit in section 226.2(a)(20), a creditor shall not structure home-secured loans as an open-end plan to evade the requirements of this section. The financial institution has made a higher-priced mortgage loan if the loan is secured by the borrower s principal residence and the APR exceeds the APOR plus 1.5 points for a first lien or exceeds the APOR plus 3.5 points for a subordinate lien. If the loan is a higher-priced mortgage loan, the following rules must be followed: Must verify repayment ability May not include a prepayment penalty unless the penalty meets certain requirements If the loan is a first lien on the dwelling, an escrow account must be established at least for the first year Only the consumer can cancel the escrow requirement, but only after the first complete year of the loan The financial institution may not structure the loan as an open-end product to evade the requirements of closed-end higher-priced loans It is noted that requirements for the escrow section is not mandatory until April 1, 2010 for sitebuilt homes and October 1, 2010 for mobile home loans. 8 Steve H. Powell & Company

11 Requirements for both Higher Priced and HOEPA (high cost) Loans (a)(4) Repayment Ability (a)(4) Repayment Ability. May not extend credit to a consumer based on the value of a consumer s collateral without regard to the consumer s repayment ability as of consummation, including the consumer s current and reasonable expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations. (a)(4)(i) Mortgage-related obligations. For purposes of this paragraph (a)(4), mortgagerelated obligations are expected property taxes, premiums for mortgage-related insurance required by the creditor as set forth in section (b)(3)(i), and similar expenses. (a)(4)(ii) Verification of repayment ability. Under this paragraph (a)(4) a creditor must verify the consumer s repayment ability as follows: (A) A creditor must verify amounts of income or assets that is relies on to determine repayment ability, including expected income or assets, by the consumer s Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonable reliable evidence of the consumer s income or assets. (B) Notwithstanding paragraph (a)(4)(ii)(a), a creditor has not violated paragraph (a)(4)(ii) if the amounts of income and assets that the creditor relied upon in determining repayment ability are not materially greater than the amounts of the consumer s income or assets that the creditor could have verified pursuant to paragraph (a)(4)(ii)(a) at the time the loan was consummated. (C) A creditor must verify the consumer s obligations. (a)(4)(iii) Presumption of compliance. A creditor is presumed to have complied with this paragraph (a)(4) with respect to a transaction if the creditor: (A) Verifies the consumer s repayment ability as provided above ((a)(4)(ii)); (B) Determines the consumer s repayment ability using the largest payment of principal and interest scheduled in the first seven years following consummation and taking into account current obligations and mortgagerelated obligations as defined in paragraph (a)(4)(i); and 9 Steve H. Powell & Company

12 (C) Assesses the consumer s repayment ability taking into account at least one of the following: The ratio of total debt obligations to income, or the income the consumer will have after paying debt obligations. (a)(4)(iv) Exclusions from presumption of compliance. Notwithstanding the previous paragraph, no presumption of compliance is available for a transaction for which: (A) The regular periodic payments for the first seven years would cause the principal balance to increase; or (B) The term of the loan is less than seven years and the regular periodic payments when aggregated do no fully amortize the outstanding principal balance. (a)(4)(v) Exemption. This paragraph (a)(4) does not apply to temporary or bridge loans with terms of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months. For any higher-priced mortgage or HOEPA mortgage, the financial institution must be able to verify income and debts. The institution must include in the verification of debts other mortgage related debt including mortgage related expenses such as insurance and taxes, as well as other mortgage debt the creditor has knowledge of such as piggy-back second liens. Based on the Staff Commentary to the Regulation, it appears that in order to retain the presumption of compliance, the financial institution will not be able to originate a balloon mortgage with a term of less than 7 years. If the financial institution loses the presumption of compliance, the consumer may be able to rebut the creditor s decision to make the higher-priced loan in a court of law, which may lead to civil damages and significant reputational risk. Possible alternatives to ensure that the Bank retains the presumption of compliance are to originate seven-year balloon loans with a fixed rate or originate traditional ARM (Adjustable Rate Mortgages) where the Bank can document repayment based on the highest payment within seven years. However, additional costs with these alternatives should be considered and the Bank may want to seek legal counsel for additional options. 10 Steve H. Powell & Company

13 Requirements for any credit secured by a consumer s principal dwelling Prohibited acts or practices in connection with credit secured by a consumer s principal dwelling. (a) Mortgage broker defined. For purposes of this section the term mortgage broker means a person, other than an employee of a creditor, who for compensation or other monetary gain, or in expectation of compensation or other monetary pain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. (b) Misrepresentation of value of consumer s dwelling. (1) Coercion of appraiser. In connection with a consumer credit transaction secured by a consumer s principal dwelling, no creditor or mortgage broker, and no affiliate of a creditor or mortgage broker shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling. (b)(1)(i) Examples of actions that violate this paragraph include: (A) Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer s principal dwelling; (B) Excluding an appraiser from consideration for future engagement because the appraiser reports a value of the consumer s principal dwelling that does not meet or exceed a minimum threshold; (C) Telling an appraiser a minimum reported value of a consumer s principal dwelling that is needed to approve the loan; (D) Failing to compensate an appraiser because the appraiser does not value a consumer s principal dwelling at or above a certain amount; and (E) Conditioning an appraiser s compensation on loan consummation. (b)(1)(ii) Examples of actions that do not violate this paragraph include: (A) Asking an appraiser to consider additional information about a consumer s principal dwelling or about comparable properties; 11 Steve H. Powell & Company

14 (B) Requesting that an appraiser provide additional information about the basis for a valuation; (C) Requesting that an appraiser correct factual errors in a valuation; (D) Obtaining multiple appraisals of a consumer s principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; (E) Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract, and (F) Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance. (b)(2) When extension of credit is prohibited. In connection with a consumer credit transaction secured by a consumer s principal dwelling, a creditor who knows, at or before loan consummation, of a violation of paragraph (b)(1) of this section in connection with an appraisal shall not extend credit based on such appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling. (b)(3) Appraiser defined. As used in this paragraph, an appraiser is a person who engages in the business of providing assessments of the value of dwellings. The term appraiser includes persons that employ, refer, or manage appraisers and affiliates of such persons. (c)(1) Servicing practices. In connection with a consumer credit transaction secured by a consumer s principal dwelling, no servicer shall: (c)(1)(i) Fail to credit a payment to the consumer s loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in reporting of negative information to a consumer reporting agency, or except as provided in paragraph (c)(2) of this section; (c)(1)(ii) Impose on the consumer any late fee or delinquency charge in connection with a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within any applicable grace period; or (c)(1)(iii) Fail to provide, within a reasonable time after receiving a request from the consumer or any person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to satisfy the consumer s obligation in full as of a specified date. 12 Steve H. Powell & Company

15 (c)(2) If a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt. (c)(3) For purposes of this paragraph, the terms servicer and servicing have the same meanings as provided in 24 CFR (b) as amended. (d) This section does not apply to a home equity line of credit subject to section 226.5b. Financial institutions must follow certain appraisal and servicing requirements on all credit secured by the consumer s principal dwelling. Appraisal requirements are as follows: Practice arms length transactions for appraisal requirements Do not require that the appraisal be based on a certain amount Prohibits the creditor from making the loan if the creditor knows of any coercion that has occurred Does not allow for any material misstatements of the appraised value of the property. Servicing requirements are: Credit all loan payments as of the day received if received by 5:00 p.m. Does not allow for the pyramiding of late fees Providing timely payoff statements. Note: Commentary to the regulation states that providing payoff statements within 5 days of receipt of the payoff request is considered reasonable 13 Steve H. Powell & Company

16 Advertising requirements for closed end credit Clear and conspicuous standard. (b) Clear and conspicuous standard. Disclosures required by this section shall be made clearly and conspicuously. (c) Advertisement of rate of finance charge. If an advertisement states a rate of finance charge, it shall state the rate as an annual percentage rate, using that term. If the annual percentage rate may be increased after consummation, the advertisement shall state that fact. If an advertisement is for credit not secured by a dwelling, the advertisement shall not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate. If an advertisement is for credit secured by a dwelling, the advertisement shall not state any other rate, except that a simple annual rate that is applied to an unpaid balance may be stated in conjunction with, but nor more conspicuously than, the annual percentage rate. (d)(1) Advertisements of terms that require additional disclosures. Triggering terms. If any of the following terms is set forth in an advertisement, the advertisement shall meet the requirements of paragraph (d)(2) of this section: (i) The amount or percentage of any downpayments (ii) The number of payments or period or repayment (iii) The amount of any payment (iv) The amount of any finance charge (d)(2) Additional terms. An advertisement stating any of the terms in paragraph (d)(1) of this section shall state the following terms, as applicable (an example of one or more typical extensions of credit with a statement of all the terms applicable to each may be used): (i) The amount or percentage of the downpayment. (ii) The terms of repayment, which reflect the repayment obligations over the full term of the loan, including any balloon payment. 14 Steve H. Powell & Company

17 (iii) The ``annual percentage rate,'' using that term, and, if the rate may be increased after consummation, that fact. (e) Catalogs or other multiple-page advertisements; electronic advertisements (e)(1) If a catalog or other multiple-page advertisement, or an electronic advertisement (such as an advertisement appearing on an Internet Web site), gives information in a table or schedule in sufficient detail to permit determination of the disclosures required by paragraph (d)(2) of this section, it shall be considered a single advertisement if (i) The table or schedule is clearly and conspicuously set forth; and (ii) Any statement of the credit terms in paragraph (d)(1) of this section appearing anywhere else in the catalog or advertisement clearly refers to the page or location where the table or schedule begins. (e)(2) A catalog or other multiple-page advertisement or an electronic advertisement (such as an advertisement appearing on an Internet Web site) complies with paragraph (d)(2) of this section if the table or schedule of terms includes all appropriate disclosures for a representative scale of amounts up to the level of the more commonly sold higher-priced property or services offered. (f) Disclosure of Rates and Payments in Advertisements for Credit Secured by a Dwelling. (f)(1) Scope. The requirements of this paragraph apply to any advertisement for credit secured by a dwelling, other than television or radio advertisements, including promotional materials accompanying applications. (f)(2)(i) Disclosure of rates in general. If an advertisement for credit secured by a dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement shall disclose in a clear and conspicuous manner: (A) Each simple annual rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin shall be disclosed based on a reasonably current index and margin; 15 Steve H. Powell & Company

18 (B) The period of time during which each simple annual rate of interest will apply; and (C) The annual percentage rate for the loan. If such rate is variable, the annual percentage rate shall comply with the accuracy standards in Sec. Sec (c) and (f)(2)(ii) Clear and conspicuous requirement. For purposes of paragraph (f)(2)(i) of this section, clearly and conspicuously disclosed means that the required information in paragraphs (f)(2)(i)(a) through (C) shall be disclosed with equal prominence and in close proximity to any advertised rate that triggered the required disclosures. The required information in paragraph (f)(2)(i)(c) may be disclosed with greater prominence than the other information. (f)(3)(i) Disclosure of payments in general. In addition to the requirements of paragraph (c) of this section, if an advertisement for credit secured by a dwelling states the amount of any payment, the advertisement shall disclose in a clear and conspicuous manner: (A) The amount of each payment that will apply over the term of the loan, including any balloon payment. In variable-rate transactions, payments that will be determined based on the application of the sum of an index and margin shall be disclosed based on a reasonably current index and margin; (B) The period of time during which each payment will apply; and (C) In an advertisement for credit secured by a first lien on a dwelling, the fact that the payments do not include amounts for taxes and insurance premiums, if applicable, and that the actual payment obligation will be greater. (f)(3)(ii) Clear and conspicuous requirement. For purposes of paragraph (f)(3)(i) of this section, a clear and conspicuous disclosure means that the required information in paragraphs (f)(3)(i)(a) and (B) shall be disclosed with equal prominence and in close proximity to any advertised payment that triggered the required disclosures, and that the required information in paragraph (f)(3)(i)(c) shall be disclosed with prominence and in close proximity to the advertised payments. (f)(4) Envelope excluded. The requirements in paragraphs (f)(2) and (f)(3) of this section do not apply to an envelope in which an application or solicitation is mailed, or to a 16 Steve H. Powell & Company

19 banner advertisement or pop-up advertisement linked to an application or solicitation provided electronically. (g) Alternative disclosures--television or radio advertisements. An advertisement made through television or radio stating any of the terms requiring additional disclosures under paragraph (d)(2) of this section may comply with paragraph (d)(2) of this section either by: (g)(1) Stating clearly and conspicuously each of the additional disclosures required under paragraph (d)(2) of this section; or (g)(2) Stating clearly and conspicuously the information required by paragraph (d)(2)(iii) of this section and listing a toll-free telephone number, or any telephone number that allows a consumer to reverse the phone charges when calling for information, along with a reference that such number may be used by consumers to obtain additional cost information. (h) Tax implications. If an advertisement distributed in paper form or through the Internet (rather than by radio or television) is for a loan secured by the consumer's principal dwelling, and the advertisement states that the advertised extension of credit may exceed the fair market value of the dwelling, the advertisement shall clearly and conspicuously state that: (h)(1) The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes; and (h)(2) The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges. (h)(2)(i) Prohibited acts or practices in advertisements for credit secured by a dwelling. The following acts or practices are prohibited in advertisements for credit secured by a dwelling: (h)(2)(i)(1) Misleading advertising of ``fixed'' rates and payments. Using the word ``fixed'' to refer to rates, payments, or the credit transaction in an advertisement for variable-rate transactions or other transactions where the payment will increase, unless: 17 Steve H. Powell & Company

20 (i) In the case of an advertisement solely for one or more variable-rate transactions,(a) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate Mortgage,'' or ``ARM'' appears in the advertisement before the first use of the word ``fixed'' and is at least as conspicuous as any use of the word ``fixed'' in the advertisement; and (B) Each use of the word ``fixed'' to refer to a rate or payment is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed, and the fact that the rate may vary or the payment may increase after that period; (ii) In the case of an advertisement solely for non-variable-rate transactions where the payment will increase (e.g., a stepped-rate mortgage transaction with an initial lower payment), each use of the word ``fixed'' to refer to the payment is accompanied by an equally prominent and closely proximate statement of the time period for which the payment is fixed, and the fact that the payment will increase after that period; or (iii) In the case of an advertisement for both variable-rate transactions and nonvariable-rate transactions, (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate Mortgage,'' or ``ARM'' appears in the advertisement with equal prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,'' or similar terms; and (B) Each use of the word ``fixed'' to refer to a rate, payment, or the credit transaction either refers solely to the transactions for which rates are fixed and complies with paragraph (i)(1)(ii) of this section, if applicable, or, if it refers to the variable-rate transactions, is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed, and the fact that the rate may vary or the payment may increase after that period. (h)(2)(i)(2) Misleading comparisons in advertisements. Making any comparison in an advertisement between actual or hypothetical credit payments or rates and any payment or simple annual rate that will be available under the advertised product for a period less than the full term of the loan, unless: (i) In general. The advertisement includes a clear and conspicuous comparison to the information required to be disclosed under sections (f)(2) and (3); and (ii) Application to variable-rate transactions. If the advertisement is for a variable-rate transaction, and the advertised payment or simple annual rate is 18 Steve H. Powell & Company

21 based on the index and margin that will be used to make subsequent rate or payment adjustments over the term of the loan, the advertisement includes an equally prominent statement in close proximity to the payment or rate that the payment or rate is subject to adjustment and the time period when the first adjustment will occur. (h)(2)(i)(3) Misrepresentations about government endorsement. Making any statement in an advertisement that the product offered is a ``government loan program'', ``governmentsupported loan'', or is otherwise endorsed or sponsored by any federal, state, or local government entity, unless the advertisement is for an FHA loan, VA loan, or similar loan program that is, in fact, endorsed or sponsored by a federal, state, or local government entity. (h)(2)(i)(4) Misleading use of the current lender's name. Using the name of the consumer's current lender in an advertisement that is not sent by or on behalf of the consumer's current lender, unless the advertisement: (i) Discloses with equal prominence the name of the person or creditor making the advertisement; and (ii) Includes a clear and conspicuous statement that the person making the advertisement is not associated with, or acting on behalf of, the consumer's current lender. (h)(2)(i)(5) Misleading claims of debt elimination. Making any misleading claim in an advertisement that the mortgage product offered will eliminate debt or result in a waiver or forgiveness of a consumer's existing loan terms with, or obligations to, another creditor. (h)(2)(i)(6) Misleading use of the term ``counselor''. Using the term `counselor'' in an advertisement to refer to a for-profit mortgage broker or mortgage creditor, its employees, or persons working for the broker or creditor that are involved in offering, originating or selling mortgages. (h)(2)(i)(7) Misleading foreign-language advertisements. Providing information about some trigger terms or required disclosures, such as an initial rate or payment, only in a foreign language in an advertisement, but providing information about other trigger terms or required disclosures, such as information about the fully-indexed rate or fully 19 Steve H. Powell & Company

22 amortizing payment, only in English in the same advertisement. Due to the extensive requirements involved with the new Truth in Lending rules, it is highly recommended that all consumer advertisements be reviewed by the Bank s Compliance Officer or third party Compliance Consultant prior to being presented to the public. For all closed-end advertisements the financial institution must meet the following requirements: Ensure the advertisement is clear and conspicuous. Note: if the credit is to be secured by a dwelling and includes an advertisement of interest rates and payments, clear and conspicuous requirements are much more extensive. The Commentary to the Regulation gives examples of clear and conspicuous advertisements based on the type of medium. In addition, the Commentary provides rules for placement of the text in advertisements, which requires certain information be included immediately next to, directly above or below, and in the same type print as the interest rate and payment information, and prohibits such text included in a footnote to the advertisement. When making any comparison in an advertisement between actual or hypothetical credit payments or rates and the payments or rates available under the advertised product, the advertisement must state all applicable payments or rates for the advertised product, and the time periods for which those payments or rates will apply. Include additional requirements for variable-rate transactions, if a simple annual rate is not based on the index and margin that will be used to make subsequent rate adjustments over the term of the loan. When disclosing payments in an advertisement of credit secured by a first lien on a dwelling, the institution must include the fact that the payments do not include amounts for taxes and insurance premiums, if applicable, and that the actual obligation will be greater than the stated payment. If the advertisement is in paper form or displayed online and is advertising the consumer s principal dwelling, and the advertisement states that the advertised extension of credit may exceed the fair market value of the dwelling, the advertisement must clearly state the following: o The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for federal income tax purposes, and 20 Steve H. Powell & Company

23 o The consumer should consult a tax advisor for further information regarding the deductibility of interest and charges. The advertisement cannot use the word fixed to refer to rates, payments, or the credit transaction in an advertisement for variable-rate transactions secured by a dwelling or other transactions secured by a dwelling where the advertised payment may increase. Ensure that any comparisons are not misleading in any way to the consumer, especially in instances where a comparison may be implied to the consumer s current credit obligation. The advertisement cannot use any misleading language to imply that the credit product offered is a government loan program. The advertisement cannot use the name of the consumer s current lender in an advertisement that is not sent by or on their behalf, unless the advertisement discloses with equal prominence the name of the person or creditor making the advertisement and includes a clear and conspicuous statement that the person making the advertisement is not associated with, or acting on behalf of, the consumer s current lender. The advertisement cannot make a claim in an advertisement that the mortgage product offered will eliminate debt or result in a waiver or forgiveness of a consumer s existing loan agreement. The advertisement cannot use the term counselor in an advertisement to refer to a forprofit mortgage broker or mortgage creditor. The advertisement cannot use foreign language and English in the same advertisement. The advertisement must include the same language throughout the advertisement. Note: Alternative requirements for disclosure of information when advertising via television or radio advertisements may be followed. 21 Steve H. Powell & Company

24 RESPA Changes Introduction and Purpose of Seminar Significant changes have been made to HUD s Regulation X, RESPA that will greatly affect your institution s lending compliance program and loan operations. The changes made by this final rule are intended to protect consumers from unnecessarily high settlement costs, but place additional compliance burdens on Financial Institutions. HUD estimates its new regulation will save consumers nearly $700 at the closing table. Are you confident that your institution will be ready for your next Regulatory Compliance Examination? This seminar will explain the key requirements of these complex regulations in simple terms and provide common sense solutions for implementing the changes by the mandated deadlines. The final revisions include: 1. New defined terms that effect timing and frequency of early disclosures 2. Newly formatted Good Faith Estimate (GFE) and HUD Settlement statement and instructions 3. Improved disclosure of yield spread premiums (YSPs) to help borrowers understand how YSPs can affect borrowers settlement charges 4. Limitations on charging certain fees prior to providing a GFE 5. New limitations and defined tolerances for changes from estimated charges to actual charges 6. Provides rules for average cost pricing on GFE and HUD disclosures 7. Provides a revision in the timing and model form for the Mortgage Servicing Disclosure Note: The final revisions also included some technical changes to the regulation relative to E-Sign Act applicability, Severability clause, and technical escrow rules. Due to time constraints, these topics are not included in the presentation. 22 Steve H. Powell & Company

25 Newly Defined and Key Terms The revisions to the Regulation provided key changes to some of the defined terms that drive the compliance requirements. Application means the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower's name, the borrower's monthly income, the borrower's social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application. Balloon payment has the same meaning as balloon payment under Regulation Z; for a loan with a term of less than five years, a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance. Business day means a day on which the offices of the business entity are open to the public for carrying on substantially all of the entity's business functions. Changed circumstances means: (1)(i) Acts of God, war, disaster, or other emergency; (ii) Information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided. This may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE; (iii) New information particular to the borrower or transaction that was not relied on in providing the GFE; or (iv) Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. (2) Changed circumstances do not include: (i) The borrower's name, the borrower's monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided; or (ii) Market price fluctuations by themselves. Good faith estimate or GFE means an estimate of settlement charges a borrower is likely to incur, as a dollar amount, and related loan information, based upon common practice and experience in the locality of the mortgaged property, as provided on the form prescribed in and prepared in accordance with the Instructions in Appendix C to this part. 23 Steve H. Powell & Company

26 Loan originator means a lender or mortgage broker. Mortgage broker means a person (not an employee of a lender) or entity that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan, including such a person or entity that closes the loan in its own name in a table funded transaction. A loan correspondent approved under 24 CFR for Federal Housing Administration programs is a mortgage broker for purposes of this part. Origination service means any service involved in the creation of a mortgage loan, including but not limited to the taking of the loan application, loan processing, and the underwriting and funding of the loan, and the processing and administrative services required to perform these functions. Prepayment penalty has the same meaning as prepayment penalty under Regulation Z; a penalty for paying all or part of the principal before the date on which the principal is due. Third party means a settlement service provider other than a loan originator. Title service means any service involved in the provision of title insurance (lender's or owner's policy), including but not limited to: title examination and evaluation; preparation and issuance of title commitment; clearance of underwriting objections; preparation and issuance of a title insurance policy or policies; and the processing and administrative services required to perform these functions. The term also includes the service of conducting a settlement. Tolerance means the maximum amount by which the charge for a category or categories of settlement costs may exceed the amount of the estimate for such category or categories on a GFE. 24 Steve H. Powell & Company

27 Good Faith Estimate Applicable 1/1/ Good faith estimate or GFE. (a) Lender to provide. 1. Except as otherwise provided in paragraphs (a), (b), or (h) of this section, not later than 3 business days after a lender receives an application, or information sufficient to complete an application, the lender must provide the applicant with a GFE. In the case of dealer loans, the lender must either provide the GFE or ensure that the dealer provides the GFE. 2. The lender must provide the GFE to the loan applicant by hand delivery, by placing it in the mail, or, if the applicant agrees, by fax, , or other electronic means. 3. The lender is not required to provide the applicant with a GFE if, before the end of the 3-business-day period: (i) The lender denies the application; or (ii) The applicant withdraws the application. 4. The lender is not permitted to charge, as a condition for providing a GFE, any fee for an appraisal, inspection, or other similar settlement service. The lender may, at its option, charge a fee limited to the cost of a credit report. The lender may not charge additional fees until after the applicant has received the GFE. If the GFE is mailed to the applicant, the applicant is considered to have received the GFE 3 calendar days after it is mailed, not including Sundays and the legal public holidays specified in 5 U.S.C. 6103(a). 5. The lender may at any time collect from the loan applicant any information that it requires in addition to the required application information. However, the lender is not permitted to require, as a condition for providing a GFE that an applicant submit supplemental documentation to verify the information provided on the application. 25 Steve H. Powell & Company

28 (b) Mortgage broker to provide. 1. Except as otherwise provided in paragraphs (a), (b), or (h) of this section, either the lender or the mortgage broker must provide a GFE not later than 3 business days after a mortgage broker receives either an application or information sufficient to complete an application. The lender is responsible for ascertaining whether the GFE has been provided. If the mortgage broker has provided a GFE, the lender is not required to provide an additional GFE. 2. The mortgage broker must provide the GFE by hand delivery, by placing it in the mail, or, if the applicant agrees, by fax, , or other electronic means. 3. The mortgage broker is not required to provide the applicant with a GFE if, before the end of the 3-business-day period: (i) The mortgage broker or lender denies the application; or (ii) The applicant withdraws the application. 4. The mortgage broker is not permitted to charge, as a condition for providing a GFE, any fee for an appraisal, inspection, or other similar settlement service. The mortgage broker may, at its option, charge a fee limited to the cost of a credit report. The mortgage broker may not charge additional fees until after the applicant has received the GFE. If the GFE is mailed to the applicant, the applicant is considered to have received the GFE 3 calendar days after it is mailed, not including Sundays and the legal public holidays specified in 5 U.S.C. 6103(a). 5. The mortgage broker may at any time collect from the loan applicant any information that it requires in addition to the required application information. However, the mortgage broker is not permitted to require, as a condition for providing a GFE that an applicant submit supplemental documentation to verify the information provided on the application. 26 Steve H. Powell & Company

29 (c) Availability of GFE terms. Except as provided in this paragraph, the estimate of the charges and terms for all settlement services must be available for at least 10 business days from when the GFE is provided, but it may remain available longer, if the loan originator extends the period of availability. The estimate for the following charges are exempted from this requirement: the interest rate, charges and terms dependent upon the interest rate, which includes the charge or credit for the interest rate chosen, the adjusted origination charges, and per diem interest. (d) Content and form of GFE. The GFE form is set out in Appendix C to this part. The loan originator must prepare the GFE in accordance with the requirements of this section and the Instructions in Appendix C to this part. The instructions in Appendix C to this part allow for flexibility in the preparation and distribution of the GFE in hard copy and electronic format. (e) Tolerances for amounts included on GFE. 1. Except as provided in paragraph (f) of this section, the actual charges at settlement may not exceed the amounts included on the GFE for: (i) The origination charge; (ii) While the borrower's interest rate is locked, the credit or charge for the interest rate chosen; (iii) While the borrower's interest rate is locked, the adjusted origination charge; and (iv) Transfer taxes. Note: Transfer tax is not a property tax. Rather, it is an excise tax on the privilege of selling property. The security deed cannot be recorded until the transfer tax is paid. It is paid at a rate of $1.00 per $1000 of the purchase price. Although customarily paid by the seller, either the buyer or the seller may pay the tax as set forth in the sales agreement. 2. Except as provided in paragraph (f) below, the sum of the charges at settlement for the following services may not be greater than 10 percent above the sum of the amounts included on the GFE: (i) Lender-required settlement services, where the lender selects the third party settlement service provider; (ii) Lender-required services, title services and required title insurance, and owner's title insurance, when the borrower uses a settlement service provider identified by the loan originator; and (iii) Government recording charges. 3. The amounts charged for all other settlement services included on the GFE may change at settlement. 27 Steve H. Powell & Company

30 (f) Binding GFE. The loan originator is bound, within the tolerances provided in paragraph (e) of this section, to the settlement charges and terms listed on the GFE provided to the borrower, unless a new GFE is provided prior to settlement consistent with this paragraph (f). If a loan originator provides a revised GFE consistent with this paragraph, the loan originator must document the reason that a new GFE was provided. Loan originators must retain documentation of any reasons for providing a new GFE for no less than 3 years after settlement. (1) Changed circumstances affecting settlement costs. If changed circumstances result in increased costs for any settlement services such that the charges at settlement would exceed the tolerances for those charges, the loan originator may provide a revised GFE to the borrower. If a revised GFE is to be provided, the loan originator must do so within 3 business days of receiving information sufficient to establish changed circumstances. The revised GFE may increase charges for services listed on the GFE only to the extent that the changed circumstances actually resulted in higher charges. (2) Changed circumstances affecting loan. If changed circumstances result in a change in the borrower's eligibility for the specific loan terms identified in the GFE, the loan originator may provide a revised GFE to the borrower. If a revised GFE is to be provided, the loan originator must do so within 3 business days of receiving information sufficient to establish changed circumstances. (3) Borrower-requested changes. If a borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or the terms of the loan, the loan originator may provide a revised GFE to the borrower. If a revised GFE is to be provided, the loan originator must do so within 3 business days of the borrower's request. (4) Expiration of original GFE. If a borrower does not express an intent to continue with an application within 10 business days after the GFE is provided, or such longer time specified by the loan originator pursuant to paragraph (c) above, the loan originator is no longer bound by the GFE. (5) Interest rate dependent charges and terms. If the interest rate has not been locked by the borrower, or a locked interest rate has expired, the charge or credit for the interest rate chosen, the adjusted origination charges, per diem interest, and loan terms related to the interest rate may change. If the borrower later locks the interest rate, a new GFE must be provided showing the revised interest rate-dependent charges and terms. All other charges and terms must remain the same as on the original GFE, except as otherwise provided in paragraph (f) of this section. 28 Steve H. Powell & Company

31 (6) New home purchases. In transactions involving new home purchases, where settlement is anticipated to occur more than 60 calendar days from the time a GFE is provided, the loan originator may provide the GFE to the borrower with a clear and conspicuous disclosure stating that at any time up until 60 calendar days prior to closing, the loan originator may issue a revised GFE. If no such separate disclosure is provided, the loan originator cannot issue a revised GFE, except as otherwise provided in paragraph (f) of this section. (g) GFE is not a loan commitment. Nothing in this section shall be interpreted to require a loan originator to make a loan to a particular borrower. The loan originator is not required to provide a GFE if the loan originator does not have available a loan for which the borrower is eligible. (h) Open-end lines of credit (home-equity plans) under Truth in Lending Act. In the case of a federally related mortgage loan involving an open- end line of credit (homeequity plan) covered under the Truth in Lending Act and Regulation Z, a lender or mortgage broker that provides the borrower with the disclosures required by 12 CFR 226.5b of Regulation Z at the time the borrower applies for such loan shall be deemed to satisfy the requirements of this section. (i) Violations of section 5 of RESPA (12 U.S.C. 2604). A loan originator that violates the requirements of this section shall be deemed to have violated section 5 of RESPA. If any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement. A borrower will be deemed to have received timely reimbursement if the loan originator delivers or places the payment in the mail within 30 calendar days after settlement. 29 Steve H. Powell & Company

32 OMB Approval No Good Faith Estimate (GFE) Name of Originator Originator Address Borrower Property Address Originator Phone Number Originator Date of GFE Purpose Shopping for your loan Important dates Summary of your loan Escrow account information This GFE gives you an estimate of your settlement charges and loan terms if you are approved for this loan. For more information, see HUD s Special Information Booklet on settlement charges, your Truth-in-Lending Disclosures, and other consumer information at If you decide you would like to proceed with this loan, contact us. Only you can shop for the best loan for you. Compare this GFE with other loan offers, so you can find the best loan. Use the shopping chart on page 3 to compare all the offers you receive. 1. The interest rate for this GFE is available through. After this time, the interest rate, some of your loan Origination Charges, and the monthly payment shown below can change until you lock your interest rate. 2. This estimate for all other settlement charges is available through. 3. After you lock your interest rate, you must go to settlement within days (your rate lock period) to receive the locked interest rate. 4. You must lock the interest rate at least days before settlement. Your initial loan amount is Your loan term is Your initial interest rate is Your initial monthly amount owed for principal, interest, and any mortgage insurance is Can your interest rate rise? Even if you make payments on time, can your loan balance rise? Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise? Does your loan have a prepayment penalty? Does your loan have a balloon payment? $ years % $ per month c No c Yes, it can rise to a maximum of %. The first change will be in. c No c Yes, it can rise to a maximum of $ c No c Yes, the first increase can be in and the monthly amount owed can rise to $. The maximum it can ever rise to is $. c No c Yes, your maximum prepayment penalty is $. c No c Yes, you have a balloon payment of $ due in years. Some lenders require an escrow account to hold funds for paying property taxes or other propertyrelated charges in addition to your monthly amount owed of $. Do we require you to have an escrow account for your loan? c No, you do not have an escrow account. You must pay these charges directly when due. c Yes, you have an escrow account. It may or may not cover all of these charges. Ask us. Summary of your settlement charges A B A Your Adjusted Origination Charges (See page 2.) $ Your Charges for All Other Settlement Services (See page 2.) $ + B Total Estimated Settlement Charges $ 30 Steve H. Powell & Company Good Faith Estimate (HUD-GFE) 1