Update on New TILA Regulations

1. Update on New TILA Regulations Joseph M. Kolarjkolar@buckleysandler.com202.349.8020

2. Understanding new consumer protectionsunder TILA/HOEPA • Mortgage Disclosure Improvement Act • New Underwriting Requirements for HigherPriced Mortgage Loans • Advertising, Appraiser, and Servicing Restrictions • “Transfer of Loan” Disclosure • Proposed Comprehensive Changes

3. Mortgage Disclosure Improvement Act (MDIA) Effective for all loan applications received on or after July 30, 2009 • Initial Fee Restrictions • Early Disclosures • “No Requirement to Complete” Statement • Seven Business Days Prior to Consummation • Three Business Days Prior to Consummation

4. MDIA – Initial Fee Restrictions • No fees may be collected, except for a reasonable credit report fee, until consumer has received early disclosures. • Applies to lender and to all other parties • Differs from RESPA Rule – See FAQ (GFE-General) #10 Q: At what point can a loan originator charge a loan applicant fees for services other than the cost of obtaining a credit report? A: After a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE, the loan originator may collect fees beyond the cost of a credit report for origination-related services.

5. MDIA – Early Disclosures • Early disclosure rules apply to all closed-end mortgage loans covered by TILA and RESPA, other than timeshares. • No longer limited to only purchase-money transactions secured by principal dwelling. • Remember: In rescindable loan, all parties with interest in property get disclosures.

6. MDIA – Early Disclosures • Early disclosure must be placed in the mail or delivered both – No later than the third business day after the lender receives a written application, AND – No later than the seventh business day before consummation.

7. MDIA – Early Disclosures • The general definition of “business day” is used for initial three-day period (e.g., all days in which lender’s offices are open to the public), BUT • “Rescission” definition is used for seven-day, pre-consummation waiting period (e.g., all calendar days except Sundays and federal holidays).

8. MDIA – Early Disclosures • If early disclosures are mailed, receipt is assumed three business days later (“rescission” definition) • Fees may therefore be collected after midnight on third business day following mailing (i.e.,on the 4th day) (but remember RESPA)

9. MDIA – “No Requirement toComplete” Statement • “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” • Phrase must be “in conspicuous type size and format” and “grouped together with the disclosures required by” Regulation Z.

10. MDIA - Three Business DaysPrior to Consummation • If APR at consummation will differ by more than 1/8 of 1% (1/4 for irregular transactions) from the APR in the most recent disclosure, corrected disclosures must be received by the consumer no later than the third business day before consummation. • If corrected disclosures are mailed, receipt is deemed to have occurred three business days after mailing (“rescission” definition).

11. MDIA - Three Business DaysPrior to Consummation • If APR at consummation will be overdisclosed because of an overdisclosed finance charge, then redisclosure may not be required. • Some investors may still require redisclosure for both increased and decreased APRs beyond the applicable tolerances.

12. Liability for MDIA Violations • TILA Actual Damages – must prove “detrimental reliance” • Probably Not Statutory Damages • Majority of caselaw suggests “timing” violation does not trigger statutory damages (See In re Ferrell, 539 F.3d 1186 (9th Cir. 2008)) • But no case has ruled on specific MDIA sections yet • Statutory Damages (up to $4,000 per violation) do apply to expanded variable rate disclosure (proposed, but not yet effective) • State Unfair and Deceptive Acts and Practices (UDAP) laws (which typically allow private right of action) • Any Cure?

13. New TILA/HOEPA Rule Overview • Broad new rule, adopted principally under the Federal Reserve Board’s authority under Section 129 of the Truth in Lending Act • TILA Section 129(l)(2): “The Board, by regulation or order, shall prohibit acts or practices in connection with— – (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and – (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

14. Effective Dates • General effective date – October 1, 2009 – Servicing rules effective for both new and existing loans as of that date – April 1, 2010 for escrow requirements on sitebuilt homes – October 1, 2010 for escrow requirements on manufactured housing loans

15. TILA/HOEPA Rule - Summary • A new category of “higher-priced mortgage loans” (“HPMLs”) created, with specific requirements relating to HPMLs; • New rules for all closed-end mortgage loans secured by the principal dwelling, including rules in relation to origination and servicing; and • New advertising rules to curb various practices the Federal Reserve Board considers deceptive, for both open-and closed-end mortgage loans.

16. HPML Threshold • APR exceeds “average prime offer rate” (APOR) – plus 150/350 basis points for first/subordinate liens – APOR, available at FFIEC website for various loan types, is based on the Freddie Mac Primary Mortgage Market Survey – Calculated as of time of rate lock • Lenders need to analyze carefully whether FHA, jumbo, and PMI loans end up in the HPML category

17. Loan Categories • HPMLs include only closed-end loans secured by the borrower’s principal dwelling. This excludes – HELOCs – Loans on second homes and investment properties – Short-term construction loans • Unlike HOEPA, HPMLs will include purchase money loans

18. Ability to Repay • Requires lender to verify the consumer’s repayment ability (e.g., verifying the consumer’s income, assets and current obligations) • Presumption if underwrite loan based on highest P&I payment over 7 years, and considers DTI ratio or residual income

19. Other Requirements on HPMLs • Strict prepayment penalty restrictions – No prepayment penalties for loans where the payment may change in first four years; and – Prepayment penalties limited to a two year duration for other loans and may not be imposed in a same creditor refinance • First-lien HPMLs must be escrowed for at least the first year • Anti-evasion provision to prevent creditors from structuring loan as an open end loan to avoid HPML status

20. Practical Effect • If a HPML goes to default or foreclosure, a plaintiff may claim that the lender did not comply with the underwriting requirements (didn’t verify employment with third party documentation, e.g.) • Claim could be based on actual personal data that was in the application or otherwise, showing the borrower could not have paid the loan • Claim could be based “on information and belief” if no other basis. • Will “information and belief” be enough to beat a motion to dismiss under the Twombly pleading standard?

21. Add’l Requirements on allClosed-End Loans Secured byBorrower’s Principal Dwelling • Appraiser anti-coercion (under Sec. 129) • Servicing (under Sec. 129)

22. Appraiser Coercion • Very broad anti-coercion rule that prohibits not only coercion but also any act that might influence the appraisal or “otherwise encourage” misstatement of value. • The rule provides – examples of acts that are violations (e.g. “[t]elling an appraiser a minimum reported value of a consumer’s principal dwelling that is needed to approve the loan.”); – examples of acts that are not violations (“[a]sking an appraiser to consider additional information about a consumer’s principal dwelling or about comparable properties.”). • Lender must not extend credit if knows at consummation coercion occurred unless it documents diligence to ensure appraised value not misstated

23. Appraiser Coercion • May be hard to defend against claims that the lender knew of appraiser coercion • Because of section 129 liability, the penalties for claims of influencing the appraiser are high • Like “ability to repay” claims, expect appraiser coercion counterclaims in foreclosures – What will plaintiffs have to plead to survive motion to dismiss?

24. Servicing Requirements • Prompt response to payoff requests (5 days) • Application of payments the same day as they are “received.” – Will create numerous operational difficulties for payments received other than in the ordinary course. • No late fee pyramiding. – Already illegal – it appears that industry did not even bother to comment on this section.

25. Liability • Most sections were promulgated under the Board’s Section 129 authority. Liability under this provision includes: – The increased closed-end TILA liability statutory damages of $400-$4000 capped at $500,000 for a class action plus attorneys fees – Plus two additional types of liability: • Actual damages, which are now are potentially available for violations of some of the new requirements – Actual damages are and have been available since the inception of TILA in 1968 but have almost never been proven because it is difficult to attribute actual losses to disclosure violations • “All finance charges” under section 130(a)(4) for violations of Section 129 (“materiality” requirement) • No explicit class action cap on either of these types of damages

26. TILA – Advertising Rules Effective October 1, 2009, among other things, • Credit terms advertised must be actually available • If an advertisement for credit secured by dwelling discloses a payment, must show: • The amount of each payment over loan term, including any balloon payment. • The period of time each payment will apply; and • If secured by a first lien on a dwelling, the fact that the payments do not include taxes and insurance, if applicable, and that the actual payment obligation will be greater • Can’t say “government supported or endorsed loan” if not FHA or VA loan • Can’t use “counselor” unless non-profit entity • Can’t use name of current lender, unless state own name prominently and state advertiser is not associated with current lender • Prohibitions on Misleading Advertising carry Sec. 129 liability

27. TILA – New Section 404 • Effective May 20, 2009, enacted as Sec. 404 of “Helping Families Save Their Homes Act” • Within 30 days of loan sale or transfer, new owner or assignee (law says “new creditor”) must notify borrower • Notice must include: • Identity, address, phone number of new owner (law says “new creditor”) • Date of transfer • How to reach agent or authorized person acting for new owner • Location of place where transfer of ownership of debt is recorded • Any other relevant information regarding new owner • Applies to loans secured by consumer’s principal dwelling • TILA statutory damages apply to compliance failure

28. Preparing for New Comprehensive TILA Changes

29. Compensation Restrictions • No compensationpaid to a “loan originator” based on the terms or features of the loan.  • “Loan originator” includes both the mortgage broker and a loan officer employee of the lender. • Prohibit compensation based on rate, such as YSP or overages, as well as compensation based on the loan amount.  • Alternative – allow compensation based on loan amount.  • Borrower’s direct paid compensation is not subject to this prohibition.  This would apply to any form of compensation to the loan officer, including bonuses or any financial incentive related to loan terms.

30. Compensation Restrictions • No compensation to a loan originator if the borrower pays the originator directly.  • Thus a broker receiving compensation directly from the borrower could not receive compensation from any other source.  • This would include broker/correspondents who close the loan in their name, but do not fund the loan (table-funded loans).

31. Anti-Steering Rule • No “steering” a borrower to loan that would increase the originator’s compensation, if the loan is not in the consumer’s interest. • A broker could not direct a borrower to Lender A’s fixed rate product that pays more compensation than Lender B’s ARM product that pays less, unless the loan is in consumer’s interest.  • Safe harbor if • Broker presents at least three options (from a significant number of the creditors it does business with) of the product the consumer is interested in showing (i) the lowest rate, (ii) the second lowest rate, and (iii) the lowest discount/origination fees and points AND the originator has a good faith belief that the consumer likely qualifies for the options presented.

32. New Disclosure Scheme • Two new generic disclosures • “Key Questions To Ask About Your Mortgage” • “Fixed vs. Adjustable Rate Mortgages” that would be given at or before application. • No CHARM booklet would be required. • A significantly revised ARM program disclosure

33. Proposed Closed End Rule A significantly restructured TIL disclosure statement.  Page 1: • Loan Summary - loan amount, loan term, loan type and features, total settlement charges (from the new RESPA GFE, but with a subset of what charges are already included in the loan amount), and prepayment penalty. • APR with comparison of the disclosed APR on a scaled graph with the “Average Best APR” (based on the APOR) and the “high cost zone” which begins with the “higher priced mortgage loan” (HMPL) threshold and runs 4% from there up the scale). This section also discloses how much lower the borrower’s monthly payment would be if the APR were reduced by 1%. • Interest Rate and Payment Summary - contract interest rate, initial payment, escrow, and total payment, with several variations

34. Proposed Closed End Rule A significantly restructured TIL disclosure. Page 2: “Key Questions About Risk,” - more tailored version of the generic “Key Questions to Ask About Your Mortgage” disclosure, “More Information About Your Payments” - the very downplayed Total Payments disclosure, disclosure of “Interest and Settlement Charges,” which is the new name for the Finance Charge, and amount financed disclosure)

37. Proposed Closed End Rule • All-In (and thus higher) APR • Includes third party charges (title insurance, appraisal, closing services, survey, doc prep, flood service, application fees, recording taxes and fees, basically any charge for a third party service that is required by the lender, even if the consumer chooses the third party, with the exception of property insurance. • Voluntary charges, such as for mortgage life insurance, appear to be included as well.  •  This higher APR calculation will result in more loans hitting the HOEPA, HPML, and state high cost loan thresholds.

38. Proposed Closed End Rule • Final TIL must be received at least 3 business days before closing • HUD-1 would have to be given at the same time as the final TIL disclosure.  • new final TIL be delivered, starting a new 3 business day waiting period, if there are changes in the disclosure during the 3-day period from receipt of the disclosure until closing.  • Alternative - new final TIL disclosure only if the change caused the APR to increase beyond the applicable tolerance, or if an ARM feature is added to the loan.  

39. Proposed Closed End Rule • Other Issues: • Post-closing ARM adjustment notices given at least 60 days before payment at a new level is due. • Force placed insurance disclosure - 45 days before charging for placing the insurance • Provide evidence of the placed insurance to borrower within 15 days of placing the insurance.

40. Proposed Closed End Rule • Other Issues • Extension of the appraiser anti-coercion rules and loan servicing rules in the July 30, 2008 final HOEPA rule to all loans secured by a dwelling (not limited to principal dwelling). • A requirement to include on the TIL disclosure the loan originator’s “unique identifier” required under the SAFE Act.