MDIA Analysis

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MORTGAGE EXPERT
5 · 11 · 09

On May 8, 2009 the Federal Reserve Board (Board) issued a final rule implementing changes to the Truth in Lending Act (TILA) made by the Mortgage Disclosure Improvement Act of 2008 (MDIA). The final rule (the “MDIA Rule”) advances to July 30, 2009 the compliance date for early disclosure requirements adopted by the Board in a July 2008 rulemaking, and expands the requirements. Mortgage loan applications taken on or after July 30, 2009 will be subject to waiting periods that delay consummation of the loans for a specified time after the early, estimated TILA disclosures are provided to the consumer, and after the corrected TILA disclosures are received by the consumer. The MDIA Rule will be published in an upcoming edition of the Federal Register.

Background. The MDIA is part of the Housing and Economic Recovery Act of 2008 that became law on July 30, 2008. The MDIA was amended by the Emergency Economic Stabilization Act of 2008 to exclude mortgage loans secured by timeshare plans from the new waiting period requirements. Also on July 30, 2008, the Board adopted a final rule amending Regulation Z (the “July Rule”). Among other changes, the July Rule extends the existing requirement to provide early TILA disclosures to additional transactions. Currently, if a consumer applies for a mortgage loan that is subject to the Real Estate Settlement Procedures Act (RESPA) and is for the purchase or initial construction of the consumer’s principal dwelling, the creditor must provide early, estimated TILA disclosures before consummation or not later than three business days after receipt of the application, whichever is earlier. The July Rule extends the early disclosure requirement to all loans subject to RESPA that will be secured by the consumer’s principal dwelling, such as a refinance loan. The July Rule also prohibits the creditor and any other person from imposing a fee on the consumer in connection with such a loan before the consumer receives the required early disclosures. If the early disclosures are mailed to the consumer, the consumer is deemed to receive the disclosures three business days after they are mailed. A limited exception to the fee restriction permits the imposition of a bona fide and reasonable fee to obtain a credit report before the consumer receives the early disclosures. Originally, these changes made by the July Rule were to go into effect on October 1, 2009.

The MDIA essentially incorporates the changes made by the July Rule that are noted above into the TILA, expands the early disclosure requirements to all RESPA-covered loans secured by any dwelling of a consumer (and not just a consumer’s principal dwelling), and adopts additional requirements. The MDIA changes are effective on July 30, 2009, which is about two months before the compliance date provided for in the July Rule. In the MDIA Rule, the Board advances the compliance date of the corresponding provisions of the July Rule to July 30, 2009.

The MDIA also amended TILA requirements regarding variable rate loans effective January 30, 2011, unless the Board specifies an earlier compliance date. The MDIA Rule does not address the variable rate changes. The MDIA Rule also does not address the disclosure requirements for open-end home equity lines of credit (HELOCs). The Board plans to address both the variable rate changes and whether earlier disclosures are needed for HELOC transactions in connection with its ongoing comprehensive review of mortgage loan disclosures.

TILA Disclosures. The MDIA amended the TILA to require that a creditor provide early good faith estimates of TILA disclosures for all RESPA-covered loans to be secured by any dwelling of a consumer. The early disclosures must be delivered or placed in the mail not later than three business days after a creditor receives the loan application and at least seven business days before consummation of the transaction. The MDIA Rule incorporates these changes into Regulation Z.

The MDIA retains the current requirement that, if the annual percentage rate in the early disclosures is no longer accurate (based on the applicable tolerances), corrected disclosures of all changed terms must be provided. However, the MDIA changes the timing of when corrected disclosures must be provided. Currently, the corrected disclosures must be provided no later than settlement or consummation. Under the MDIA, the creditor must furnish the corrected disclosures to the consumer no later than three business days before the date of consummation. If the corrected disclosures are mailed, the consumer is deemed to receive the disclosures three business days after they are mailed. The MDIA Rule incorporates these changes into Regulation Z, and provides that the corrected disclosures must be received by the consumer no later than three business days before consummation. Additionally, the MDIA Rule provides that the annual percentage rate disclosed in the early disclosures must become inaccurate as defined in Regulation Z Section 226.22 to trigger the obligation to provide corrected disclosures. The Board confirms in the preamble to the MDIA Rule that accuracy is determined under the broader regulatory tolerances applicable to the annual percentage rate that are set forth in Regulation Z Section 226.22, and not under the narrower statutory annual percentage rate tolerances (of one-eighth of a percent for regular transactions and one-quarter of a percent for irregular transactions). The tolerances in Section 226.22 include the overstatement tolerance.

If a change occurs that does not render inaccurate under Section 226.22 the annual percentage rate set forth in the early disclosures, the creditor still would need to provide corrected disclosures before consummation consistent with Regulation Z Section 226.17(f). However, the consumer would not have to receive the corrected disclosures three business days before consummation.

For purposes of determining if the annual percentage rate is no longer accurate under Section 226.22, the annual percentage rate as of consummation should be compared to the annual percentage rate in the most recent disclosures provided to the consumer. For example, if consummation is scheduled for June 11, early disclosures were provided in May and updated disclosures were provided on June 5, the annual percentage rate as of consummation should be compared to the annual percentage rate in the June 5 disclosures.

Lenders should check with their investors to determine each investor’s requirements with regard to corrected disclosures based on the MDIA Rule.

Waiting Period Specifics. Two different definitions of “business day” will apply to the revised disclosure requirements. Regulation Z has a general and a more specific definition of “business day”. The general definition of “business day” is a day on which a creditor’s offices are open to the public for carrying on substantially all of the creditor’s business functions. Under the MDIA Rule, the general definition will continue to apply to the requirement to deliver or place in the mail early disclosures no later than three business days after receipt of an application. Using the general “business day” definition provides for consistency with RESPA. Under RESPA, a Good Faith Estimate of settlement charges must be delivered or placed in the mail within three business days after receipt of an application, and the same definition of “business day” applies to the Good Faith Estimate.

Under the more specific definition, a “business day” is all calendar days except Sundays and legal public holidays specified in 5 U.S.C. 6103(a). Currently the more specific definition applies to the right to rescind and to the pre-consummation disclosure for loans subject to the Home Ownership and Equity Protection Act. The MDIA Rule will apply the more specific definition to both the seven-business-day waiting period applicable to the early disclosures and the three-business-day waiting period applicable to the corrected disclosures. (The Board had proposed to apply the general definition of “business day” to the seven-business day waiting period. The Board decided to use the more specific definition in order to provide for consistency among creditors in the length of the waiting period.)

The Commentary added by the MDIA Rule expressly provides that both the seven-business-day and three-business-day waiting periods must expire for consummation to occur. The seven-business-day waiting period begins when the early disclosures are delivered to the consumer or placed in the mail, and not when the consumer receives the disclosures. The three-business-day waiting period begins when the consumer actually receives or is deemed to receive the corrected disclosures. If corrected disclosures are mailed, the consumer is deemed to receive the disclosures three business days after mailing. If a creditor delivers corrected disclosures by email or by a courier other than the postal service, the creditor may rely on either proof of actual receipt or the mailing rule for purposes of determining when the three-business-day waiting period begins to run.

The Commentary added by the MDIA Rule includes examples regarding the operation of the waiting periods in certain situations. One example addresses a situation in which early disclosures were delivered or placed in the mail on Monday June 1, and corrected disclosures were received by the consumer on Wednesday June 3. In this situation, consummation may not occur before Tuesday June 9. Although the three-business-day waiting period will end on Saturday June 6, the seven-business-day waiting period will not end until Tuesday June 9.

Notice. The MDIA Rule requires that both the early TILA disclosures and corrected TILA disclosures contain the following notice: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” The notice must be grouped together with the other disclosures required by Regulation Z Sections 226.19(a)(1) and 226.19(a)(2).

The Board acknowledges in the preamble to the MDIA Rule that creditors often will provide final disclosures at consummation even when they are not required to do so. To allow creditors to use standard forms that contain the notice, under the MDIA Rule creditors may include the notice in final disclosures regardless of whether the final disclosures are required.

Waiver. Under the MDIA Rule a consumer may modify or waive either or both of the seven-business-day and three-business-day waiting periods if the consumer has a bona fide personal financial emergency that must be addressed before the end of the waiting period(s). A consumer could not modify or waive the seven-business-day waiting period until he or she received the early disclosures, and a consumer could not modify or waive the three-business-day waiting period until he or she received the corrected disclosures. To modify or waive a waiting period, the consumer would need to provide a signed and dated written statement that describes the emergency and specifically modifies or waives the waiting period. All consumers who are primarily liable on the legal obligation must sign the statement.

Consistent with existing waiver provisions in TILA for the right of rescission and the pre-consummation notice for loans subject to the Home Ownership and Equity Protection Act, whether such an emergency exists will depend on the facts of each case, and printed waiver forms could not be used. An example in the Commentary added by the MDIA Rule provides that a bona fide personal emergency would exist if a foreclosure sale of the consumer’s home will occur unless the loan proceeds are made available to the consumer during the waiting period.

Fee Restriction. The MDIA amends the TILA to require that a consumer receive the early disclosures before paying any fee to the creditor or other person in connection with the application for a dwelling-secured loan, except for a fee to obtain a credit report. If a fee to obtain a credit report is imposed, the fee must be bona fide and reasonable in amount. The MDIA also provides that when the early disclosures are mailed, the consumer is deemed to receive the disclosures three business days after they are mailed. The July Rule contains the same fee restriction, and provides that the more specific definition of “business day” applies for purposes of determining the three-business-day period. The MDIA Rule incorporates the fee restriction from the July Rule and advances the effective date to July 30, 2009.

The Commentary added by the MDIA Rule provides that if the early disclosures are delivered in person to the consumer a fee (other than a credit report fee) may be imposed any time after delivery, and that if the disclosures are placed in the mail a fee (other than a credit report fee) may be imposed after the consumer actually receives the disclosures or, in all cases, after midnight on the third business day following mailing. The Commentary also provides in an example that if early disclosures are mailed on a Tuesday, assuming there are no legal public holidays, a fee (other than a credit report fee) may be imposed after midnight on Friday.

Note there is a difference in the application of the three-business-day mailing rule applicable to the imposition of a fee (other than a credit report fee) after receipt of the early disclosures and the three-business-day waiting period between receipt of the corrected disclosures and consummation. As noted above, examples set forth in the Commentary provide that, assuming there are no legal public holidays (a) if early disclosures are mailed on Tuesday, a fee (other than a credit report fee) may be imposed after midnight on Friday, and (b) if a consumer receives corrected disclosures on Monday, consummation may occur on Thursday (consummation does not have to be delayed until after midnight on Thursday).

The United States Department of Housing and Urban Development amended Regulation X, the RESPA rule, in November 2008 to impose a similar fee limitation effective January 1, 2010. Under the Regulation X amendment, a loan applicant may not be charged more than a fee to obtain a credit report before the applicant receives a Good Faith Estimate of the settlement charges under RESPA. If the Good Faith Estimate is mailed, the loan applicant is deemed to receive the disclosure three calendar days after mailing, exclusive of Sundays and legal public holidays set forth in 5 USC Section 6103(a). While the mailing rule applicable to fee restriction under RESPA calculates “calendar days” in a manner that is the same as the specific definition of “business day” that is used for the mailing rule applicable to the fee restriction under TILA, there may be a difference between TILA and RESPA regarding when a fee can be imposed when relying on the respective mailing rules. As noted above, the Commentary added by the MDIA provides that when relying on the mailing rule, a fee (other than a credit report fee) may not be imposed until after midnight on the date that the consumer is deemed to receive the early disclosures. Regulation X does not expressly provide that when relying on the mailing rule a fee (other than a credit report fee) may not be imposed until after midnight on the date that the consumer is deemed to receive the Good Faith Estimate. Regulation X simply provides that a fee (other than a credit report fee) may not be imposed until after the consumer receives the Good Faith Estimate.

Timeshare Plans. The MDIA, as amended by the Emergency Economic Stabilization Act of 2008 (EESA), excepts loans to be secured by timeshare plans from the new waiting period requirements, notice requirement and fee restriction. Loans to be secured by timeshare plans will remain subject to the current requirement to provide early disclosures before consummation or within three business days of application, whichever is earlier. The MDIA Rule includes this exception for timeshare-secured loans. Under the MDIA Rule, the more general definition of “business day” that is based on when the creditor’s offices are open for conduct of substantially all business functions will apply to the three-business-day period.

As amended by EESA, the MDIA also provides that if the annual percentage rate in early disclosures for a timeshare-secured loan is no longer accurate (based on the statutory tolerances), corrected disclosures must be provided no later than settlement or consummation. The MDIA Rule implements this requirement.

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