Executive Summary of New TILA Rule

The board advises in the preamble to the new rule that “nothing in this rule should be construed or interpreted to be a determination that acts or practices restricted or prohibited under this rule are, or are not, unfair or deceptive before the effective date of this rule.” The board also advises that “acts or practices occurring before the effective dates of these rules will be judged on the totality of the circumstances under other applicable laws or regulations” and that “acts or practices occurring after the rule’s effective dates that are not governed by these rules will continue to be judged on the totality of the circumstances under other applicable laws or regulations.” This appears to be an attempt by the board to preclude claims that certain existing practices constitute unfair or deceptive practices simply because the practices will be prohibited by the new rule.

Authority and Liability
Certain of the provisions of the new rule were adopted under the board’s general rulemaking authority under Section 105 of Truth In Lending Act, and certain provisions were adopted under the board’s authority to regulate certain practices under Section 129(l)(2) of TILA. While Section 129(l)(2) was added to TILA by the Home Ownership and Equity Protection Act, the board has authority under the section to adopt rules applicable to both HOEPA loans and non-HOEPA loans. Further, violations of rules adopted under Section 129(l)(2) result in liability under the HOEPA special statutory damages provision that provides for damages equal to the sum of all finance charges and fees paid by the consumer, whether or not the loans involved are HOEPA loans. Thus, there can be significant liability for violating the new requirements adopted under the Section 129(l)(2) authority.

New Restrictions for Non-HOEPA Loans
The board used its authority under Section 129(l)(2) to adopt protections that apply to non-HOEPA loans. Certain protections apply to a new category of principal dwelling-secured loans called “higher-priced mortgage loans” and certain protections apply to any mortgage loans secured by a consumer’s principal dwelling.

A. Higher-Priced Mortgage Loans.

1. Definition
   A “higher-priced mortgage loan” is defined as a consumer credit transaction secured by a consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate (as calculated by the board) for a comparable transaction, as of the date that the rate is set, by at least 1.5 percentage points for a first lien transaction or at least 3.5 percentage points for a junior lien transaction. Construction loans, temporary or bridge loans with terms not exceeding 12 months, reverse mortgage loans and home equity lines of credit are excluded from the definition of higher-priced mortgage loan. (Unlike HOEPA, there is no exclusion for loans to purchase a consumer’s primary dwelling.)

   The board proposes to amend the rules under the Home Mortgage Disclosure Act to conform the requirement to report certain loans as loans with higher interest rates (so-called “trigger loans”) with the definition of higher-priced mortgage loan effective for loans closed on or after Jan. 1, 2009.

2. Protections
   The following four protections apply to higher-priced mortgage loans:

   a. Repayment Ability. A creditor may not extend credit based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation. A creditor must follow HOEPA requirements to assess repayment ability. (See below for changes to the HOEPA requirements regarding repayment ability.) i. The board originally proposed that a creditor could not engage in a pattern or practice of doing so. The final rule applies the prohibition on an individual loan basis. b. Prepayment Penalties. A loan may not include a prepayment penalty (including the computation of an unearned interest refund by a method that is less favorable to the consumer than the actuarial method) unless certain conditions are satisfied. i. The penalty must be otherwise allowed by law, including HOEPA for HOEPA loans. ii. The penalty may apply only during the two-year period following consummation. iii. The penalty may not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor. iv. The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation. c. Escrow for Property Taxes and Insurance. A creditor may not extend a first lien loan unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor. i. Escrow accounts are not required for loans secured by shares in a cooperative. ii. Insurance premiums need not be escrowed for loans secured by condominium units if the condominium association has an obligation to the condominium unit owners to maintain a master insurance policy on the condominium units. (An escrow still is required for taxes.) iii. A creditor or servicer may permit a borrower to cancel an escrow account based on a written and dated request from the borrower that is received no earlier than 365 days after consummation. d. Evasion Prohibited. For credit that does not meet the definition of open-end credit, a creditor may not structure the mortgage loan as an open-end plan to evade the requirements applicable to higher-priced mortgage loans. This prohibition already exists for HOEPA loans.

B. Principal Dwelling-Secured Mortgage Loans

1. Protections.
   The following protections apply to consumer credit transactions secured by a consumer’s principal dwelling, except for home equity lines-of-credit.

   a. Non-Coercion or Influence of Appraiser. In connection with a consumer credit transaction secured by a consumer’s principal dwelling, a creditor, mortgage broker, or affiliate of a creditor or mortgage broker may not, directly or indirectly, coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of the dwelling. i. Non-Reliance on Non-Conforming Appraisal. A creditor may not extend credit based on an appraisal if the creditor at or before loan consummation knows of a violation of this prohibition in connection with the 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 the dwelling. b. Servicing Practices. In connection with a consumer credit transaction secured by a consumer’s principal dwelling, a servicer may not: i. Prompt Crediting of Payments. Fail to credit a payment to the consumer’s account as of the date of receipt, except when a delay in crediting does not result in a charge to the consumer or in the reporting of negative information to a consumer reporting agency. A. Exception. 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 must credit the payment as of five days after receipt. ii. No Pyramiding of Late Charges. 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 an applicable grace period. (This practice is prohibited by existing laws. Effectively, the prohibition subjects the practice to the HOEPA special statutory damages provision, and permits state attorneys general to enforce the prohibition, as they are granted authority by TILA to enforce Section 129 violations.) iii. Payoff Statement. 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 of the consumer’s obligation that would be required to satisfy the obligation in full as of a specified date. It is considered to be reasonable under most circumstances to provide the payoff statement within five business days of receipt of the request. (The board describes this timeframe as a safe harbor and not a requirement.)

   2. Certain Proposals Not Adopted.

   a. Broker Compensation Proposal. The board proposed to prohibit a creditor from making any payment, directly or indirectly, to a mortgage broker unless the broker entered into a written agreement with the consumer before the consumer paid a fee to any person or submitted a loan application to the broker. As proposed, the creditor’s payment to the broker could not exceed the total compensation amount specified in the written agreement, reduced by any amounts paid directly by the consumer or by any other source. Based on consumer testing and comments received on the proposal, the board decided not to adopt the proposal and will continue to assess methods to address concerns regarding yield spread premiums. b. Servicer Fee and Charge Statement. The board decided not to adopt a requirement for a servicer to provide to the consumer, within a reasonable time after receiving a consumer’s request, a schedule of all specific fees and charges that the servicer may impose on the consumer in connection with servicing the consumer’s account.

Modification of HOEPA Loan Rules

A. Prepayment Penalties

1. Additional Conditions For Exception. The exception to the prohibition against prepayment penalties for HOEPA loans is revised to require that:
   

   a. The penalty may apply only during the two-year period following consummation. b. The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.

2. Existing Conditions. The existing exception provides that a prepayment penalty is allowed on a HOEPA loan if:
   

   a. The penalty can be exercised only for the first five years. This condition will be replaced by the new two-year limitation. b. The source of the prepayment funds is not a refinancing by the creditor or an affiliate of the creditor. This statutory-based condition will remain. c. At consummation, the consumer’s total monthly debts, including amounts owed under the mortgage, do not exceed 50 percent of the consumer’s verified monthly gross income. This statutory-based condition will remain, but the verification requirements are modified to incorporate the new repayment ability verification provisions addressed below. d. The penalty must be allowed by other applicable law. This statutory-based condition will remain.

B. Repayment Ability

1. Revised Provisions. The repayment ability provisions are revised.
   

   a. The new rule prohibits with any HOEPA loan the extension of credit based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations and mortgage-related obligations (including tax, insurance and similar obligations). i. Thus, the current prohibition that a creditor not engage in a pattern or practice of making HOEPA loans without regard to the consumer’s repayment ability is replaced with a prohibition against making any HOEPA loan without regard to the consumer’s repayment ability. b. The new rule requires a creditor to verify the consumer’s repayment ability for each HOEPA loan by verifying the amounts of income and assets relied on to determine repayment ability through the consumer’s W-2 form, tax returns, payroll receipts, financial institution records or other third party documents that provide reasonably reliable evidence of the consumer’s income or assets, and verifying the consumer’s current obligations. i. Consistent with the revised prohibition against making any HOEPA loan without regard to the consumer’s repayment ability, the verification requirement applies to each HOEPA loan. ii. An affirmative defense is added under which a creditor would not violate the verification requirement if the amounts of income and assets relied upon are not materially greater than the amounts of the consumer’s income or assets that the creditor could have verified at the time of consummation. c. A creditor is presumed to have complied with the repayment ability assessment requirement if the creditor: i. Complies with verification of income and asset requirements. ii. Determines repayment ability based on the largest payment of principal and interest scheduled in the first seven years following consummation (but the presumption would not apply if the regularly scheduled payments during such period would result in negative amortization). iii. Assesses at least one of the following: A. Total debt-to-income ratio. B. Remaining income after payment of debt.

Advertising
The new rule contains prohibitions against certain deceptive advertising practices adopted under the board’s Section 129(l)(2) authority, and advertising requirements adopted under the board’s Section 105 authority.

A. Prohibited Practices. Rules adopted under Section 129(l)(2) prohibit the following seven deceptive or misleading advertising practices in connection with closed-end credit secured by a dwelling.

1. Misleading Advertisement 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 advertised rate may increase is prohibited, unless certain disclosure requirements are satisfied regarding the ability of the rate and/or payment to change.

2. Misleading Comparisons. Making any comparison in an advertisement between an actual or hypothetical consumer’s current credit payments or rate and any payment or simple annual rate that will be available under the advertised product for less than the term of the loan is prohibited, unless certain disclosure requirements are satisfied regarding rates and payments that will apply over the full loan term.

3. Misrepresentations About Government Endorsement. Making any statement in an advertisement that the product offered is a “government loan program”, “government-supported loan”, or is otherwise endorsed or sponsored by any federal, state, or local government entity is prohibited, 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.

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 is prohibited unless the advertisement appropriately discloses the name of the party making the advertisement and that the party is not affiliated with or working for the current lender.

5. Misleading Claims of Debt Elimination. Making any 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 is prohibited.

6. Misleading Use of 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 is prohibited.

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 amortizing payment, only in English in the same advertisement is prohibited.

B. Requirements. Rules adopted under Section 105 for open-end and closed-end credit advertisements require more complete disclosures regarding rates and payments in a clear and conspicuous manner. In particular, new requirements are intended to regulate the disclosure of rates and payments to ensure that low promotional or teaser rates or payments are not given undue emphasis.

Initial Disclosures

A. Expansion of Requirement to Provide. The requirement to provide initial TILA disclosures within three business days of application is expanded to any mortgage transactions secured by a principal dwelling and subject to RESPA. Currently, initial disclosures are required only for RESPA-covered loans to acquire or initially construct a consumer’s principal dwelling.

B. Fee Restriction. Neither a creditor nor any other person may impose a fee on the consumer in connection with an application for a mortgage transaction subject to the up front disclosure requirement before the consumer receives the required disclosures. If the disclosures are mailed to the consumer, the consumer is deemed to receive them three business days after they are mailed. A bona fide and reasonable fee to obtain a credit report may be collected from the consumer before the consumer receives the disclosures.

Related:

New TILA Rules Create HMDA Urgency
While the Federal Reserve board’s final unfair mortgage practices rule under the Truth in Lending Act is an important development, there is a related regulatory development of more immediate concern — a board proposal to amend the Home Mortgage Disclosure Act rules to conform with the new TILA rules effective for loans closed on or after Jan. 1, 2009.

New Rules on High-Cost Loans
Under new rules announced today, subprime lending has been dramatically altered. On high-cost loans — stated-income loans are prohibited, escrow accounts are mandatory and prepayment penalties are limited.

Richard J. Andreano is a partner at the Washington, D.C.-based law firm of Weiner Brodsky Sidman Kider PC. He focuses on regulatory compliance, transactional and administrative matters for residential housing and financial clients. He graduated with honors from the The George Washington University Law School, J.D., in 1983.
e-mail Rich at andreano@wbsk.com