PROPOSED RULES AMENDING REGULATION Z
On July 23, 2009, the Federal Reserve Board proposed amending Regulation Z’s disclosure requirements for closed-end mortgage transactions and home equity lines of credit (HELOCs). See our Alert of July 27, 2009 regarding proposed changes to HELOCs. With respect to closed-end mortgages, the Board proposed changing the format, timing and content of the following four types of disclosures: (i) disclosures at application, (ii) disclosures within three days after application, (iii) disclosures three days before consummation and (iv) disclosures after consummation. The Board also proposed rules limiting loan originator compensation and establishing eligibility restrictions and disclosures for credit insurance and debt cancellation or debt suspension coverage (including non-mortgage transactions).
Disclosures at Application
Regulation Z currently requires creditors in variable-rate transactions to provide the Consumer Handbook on Adjustable-Rate Mortgages (CHARM) and a loan program disclosure that has 12 items of information. Under the proposal, creditors would be required to provide one-page Board publications for all closed-end mortgage loans. The “Key Questions to Ask about Your Mortgage” publication would include information about potentially risky features, such as interest-only, negative amortization and prepayment penalties. The “Fixed vs. Adjustable Rate Mortgages” publication would explain the basic differences between those types of loans. The format and content of the current ARM loan program disclosure also would be revised. For example, the disclosure would provide information on interest rates and payments and the potential risks associated with ARMs.
Disclosures within Three Days after Application
The Truth in Lending Act (TILA) and Regulation Z currently require creditors to disclose loan information (e.g., the amount financed, the finance charge, the APR, the total of payments and the amount and time of payments) within a certain period of time after application but before consummation and before a consumer has paid certain fees. The proposal provides for new format requirements. In addition, creditors would be required to (i) include most fees and costs paid by consumers in the calculation of the finance charge and annual percentage rate, (ii) provide a graph showing consumers how their APR compares to the APRs of others, (iii) summarize key loan features, such as the loan term, amount and type, and disclose the total settlement charges and (iv) disclose potential changes to the interest rate and monthly payment.
Disclosures Three Days before Consummation
Under the proposal, creditors would be required to provide a final TILA disclosure at least three business days before consummation. The Board has proposed two alternatives for redisclosure should there be changes to loan terms or settlement charges during the three-business-day waiting period.
Disclosures After Consummation
Regulation Z currently requires creditors to provide certain notices after consummation. Under the proposal, creditors would be required to provide: (i) the current ARM adjustment notice, to be given at least 60 days before payment at a new level is due (only 25 days’ advance notice is required currently); (ii) a periodic statement for payment option loans that have negative amortization, to be given at least 15 days before a periodic payment is due; and (iii) notice of the cost and coverage of creditor-placed property insurance, to be given at least 45 days before such a charge is imposed, along with evidence of insurance within 15 days of imposing the charge.
Limits on Loan Originator Compensation
The proposed rules would prohibit loan originators, including mortgage brokers and creditor employees, from receiving compensation based on the credit transaction’s terms and conditions and “steering” consumers to particular loan products.
Rules Relating to Credit Insurance and Debt Cancellation or Debt Suspension Coverage
Concerns have been raised about creditors offering products to consumers who would not satisfy eligibility requirements at the time of enrollment, thus, making the products essentially worthless. To address these concerns, the proposed rules would require creditors to determine whether a consumer meets age and/or employment eligibility criteria at the time of enrollment in the product and provide a disclosure that such a determination has been made. Unlike other proposals, this proposal is not limited to mortgage transactions, but would apply to all closed-end and open-end transactions.
Comments on the proposed rule must be received within 120 days after publication in the Federal Register, which is expected shortly.
Please contact us for more information.
- Mike Tomkies and Chuck Gall