Brokers must know the critical amendments, which took effect two months sooner than expected By Laura Marquez-Garrett and Miriam Cho, attorneys, Foster Pepper PLLC As published in Scotsman Guide's Residential Edition, September 2009.
The latest amendments to Regulation Z, which implements the Truth in Lending Act (TILA), contain an element of surprise in their start date. Originally expected to take effect this coming Oct. 1, the amendments went live on July 30.
The reason for the hurry is to keep up with new legislation. In July 2008, President George W. Bush signed into law the Housing and Economic Recovery Act of 2008, considered the one of the most-significant pieces of housing legislation in decades. Among the myriad changes in the housing act is amendment of TILA via the Mortgage Disclosure Improvement Act of 2008 (MDIA).
Congress amended the MDIA -- enacted as part of the housing act -- in connection with enactment of the Emergency Stabilization Act of 2008 this past Oct. 3. The Regulation Z changes are meant to implement MDIA's amended provisions.
The Regulation Z amendments' stated goal is to increase consumer awareness and involvement in the loan process. They purport to accomplish this by creating brief waiting periods after disclosures are provided but before loan consummation, requiring additional disclosures and imposing restrictions on charging fees before making the requisite TILA disclosures.
Although the Regulation Z revisions are not extensive, brokers must familiarize themselves with the new rules or else find themselves subject to liability.
What changed
Here is an overview of the changes, categorized by key phrases and terms.
• Any consumer dwelling: The revisions do not change the application of TILA, which still applies to loans for the purchase or construction of a residence, refinances and home-equity loans. TILA's disclosure requirements do, however, now apply to loans secured by any consumer dwelling, not just principal dwellings.
• Good-faith estimate (GFE): A GFE still must be provided within three business days after the creditor receives the consumer's written application. But now the creditor must wait at least seven business days before completing the transaction.
• Revised GFE: Revised GFEs also are subject to the Regulation Z revisions. A revised GFE must be provided if the annual percentage rate disclosed becomes inaccurate (as defined by the act), and corrected disclosures that include all changed terms must be provided. There is now a three-day waiting period between
disclosure of the revised GFEs and completing the transaction.
• Notice to consumers: Original and revised GFEs must contain the following statement: "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."
• Business day: Business days are defined as "a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions." The term also refers to all calendar days, except for Sundays and legal public holidays.
• Emergency exception to waiting periods: There is a means by which consumers can waive the seven-day and three-day waiting periods. To do so, they must determine that the extension of credit is necessary because of a "bona fide personal financial emergency." To get this waiver, the consumer must produce a dated, written statement that describes the emergency, specifically modifies or waives the waiting period, and is signed by all of the consumers who will be primarily liable on the loan. Printed forms are, however, strictly prohibited.
• Fees: Creditors and others are prohibited from charging any fees in connection with the loan application until the consumer has received the disclosures. Note that consumers are considered to have received mailed disclosures three business days after they are mailed. The exception to this rule is in the case of obtaining a consumer's credit history. Creditors and other persons may impose a fee for credit histories, as long as it is bona fide and "reasonable in amount."
What to expect
There's no way to know whether the Regulation Z revisions will increase or decrease legal
disputes. The subjectivity of the phrase "reasonable in amount" in the credit-report-fee exception, for example, creates potential for disputes.
Brokers also should pay close attention to what constitutes a business day; missing the mark by one day can be an adequate basis for liability. Similarly, even if you think a consumer received the disclosure two days after mailing, the rule provides that consumers are considered to have received the disclosure three days after mailing. Waiting the extra day before charging fees is a good rule of thumb.
Although the Regulation Z revisions clearly prohibit printed forms in the case of consumer "emergencies," do not read this restriction narrowly. Its purpose is to prevent creditors from getting around the waiting periods by talking consumers into waiving their rights and
otherwise simplifying the waiver process. A cautious creditor will do its best to distance itself from the waiver decision and the document-making process.
Finally, under the Regulation Z revisions and the prior rules, parties often are confused about when an application is considered received for purposes of triggering the creditor's duty to disclose. Application of the rule varies from state to state.
But in some cases, liability has been attached even when a loan officer did not believe the application was complete.
Indeed, pulling credit and/or receiving some but not all of a consumer's information can trigger the duty to provide a GFE. When in doubt, err on the side of providing disclosures too early and too often.
The importance of keeping up
Even the best-run companies increasingly find themselves struggling to understand the multitude of complex rules and regulations that govern the lending industry. Whether the rule prohibits abbreviations, requires a fixed-dollar amount rather than a percentage, or requires listing a fee on line No. 801 and not No. 808, even the smallest deviation can lead to devastating liability.
The burden remains on industry professionals to know every rule and to train their employees accordingly. Borrowers have filed and succeeded on cases based only on the fact that a GFE was mailed one day late -- even though it was well in advance of consummation of
the transaction.
A quick look at state-regulator Web sites and pending enforcement actions will show countless examples of minor errors and oversights. Regardless of how minor they are, those mistakes come with steep penalties, fines and restitution -- even when consumers are satisfied.
Thus, in addition to the revisions' stated purpose of increasing consumer awareness, these changes also may serve as a reminder to mortgage professionals: You can never be too familiar with state and federal regulations. And you can never provide your employees with too much training.
Now is a good time to review the rules and to update internal handbooks and guidelines. In some cases, companies should consider hiring experienced attorneys to perform spot audits as a way to prepare for and ensure ongoing compliance with lending-industry guidelines. At the least, preventive measures will show good faith when confronted by
state regulators.