Confusion Reigns Over Reg Z Changes

Recent rule changes have CUs lost in a Reg Z maze.

December 21, 2010

If credit unions thought the new Credit Card Accountability, Responsibility, and Disclosure (CARD) Act regulations were confusing, the Regulation Z mortgage lending changes surely have heads spinning.

The mortgage market collapse is responsible for new laws, numerous regulatory changes, and the seemingly endless revisions to Reg Z’s mortgage lending disclosure rules to ensure consumers receive clearer disclosures and make better decisions about mortgages.

The new Dodd-Frank Act also contains many pages of mortgage reforms. One of the most important is the requirement to integrate certain disclosures the Truth in Lending Act (TIL) and the Real Estate Settlement Procedures Act (RESPA) currently require. Dodd-Frank also requires the new Consumer Financial Protection Bureau (CFPB) to issue rule changes on these combined disclosures by July 21, 2012. 

In October, the Credit Union National Association (CUNA) submitted a letter to the Treasury Department urging the Federal Reserve Board to immediately suspend its current piecemeal process of amending Reg Z until Treasury and the CFPB finish their task of integrating TIL and RESPA disclosures.

The letter points out that this piecemeal process has imposed staggering costs and burdens on credit unions and has in many respects caused confusion for credit union members as well. This confusion will be compounded if the Fed continues issuing new rules at the same time Treasury and the CFPB proceed with efforts to integrate these disclosures.   

Here is a brief summary of recent rule changes inundating credit unions.

In August 2009, the Fed issued proposed amendments to the closed-end mortgage rules under Reg Z. At the same time, the Fed issued proposed changes to Reg Z rules that apply to home equity lines of credit. The comment period for these two proposals ended on Dec. 24, 2009, but they haven’t been finalized yet.

In September 2010, the Fed set a single-day record when it issued the following five rules—totaling 1,200 pages—dealing with mortgage lending:

1. Consumer notification of mortgage loan sales or transfers (final rule): The Fed published interim final rules in November 2009 that became effective immediately implementing a statutory change to TIL that requires consumers to receive notice when their mortgage loan has been sold or transferred. Under both the interim and final rule, any party that acquires a mortgage loan through purchase, assignment, or transfer must provide the required disclosure in writing within 30 days after the loan has been sold, transferred, or assigned. The interim rule refers to the date of transfer as the “acquisition date.”

The final rule, however, clarifies that the date of transfer may be either the date of acquisition recognized by the acquiring party, or the date of transfer recognized in the records of the transferring party. In addition, the final rule includes a third exception to the disclosure requirements, not included in the interim rule.

A party that acquires only a partial interest in the loan doesn’t have to provide the disclosures if the party authorized to receive the rescission notice and resolve loan payment issues doesn’t change as a result of the transfer. To allow credit unions time to make necessary operational changes, they may continue to follow the interim rules until the mandatory compliance date of Jan. 1, 2011.

2. Loan compensation and “steering” of loans (final rule): The rule prohibits payments to loan originators, including mortgage brokers and loan officers, based on the terms or conditions of the loan such as the interest rate. The final rule prohibits loan originators from being paid more if the borrower accepts an interest rate higher than the rate the lender required (commonly referred to as a “yield spread premium”). But loan originators may continue to receive compensation based on a percentage of the loan amount.

The rule also prohibits loan originators from “steering” a consumer to accept a mortgage loan that isn’t in the consumer’s best interest to increase the originator’s compensation. The rule applies to all closed-end mortgage loans secured by a home, not just those secured by the consumer’s principal residence.

This rule likely will have little impact on credit unions because they typically don’t engage in these prohibited practices. The final rule is effective for loan applications received on or after April 1, 2011.

3. Mortgage Disclosure Improvement Act (MDIA) disclosures (interim final rule): The rule implements MDIA provisions that require lenders to disclose in a table how borrowers’ regular closed-end mortgage payments can change over time.

Credit unions’ initial disclosures must provide the initial interest rate and corresponding monthly payment amount including any escrow amounts for taxes and property insurance and any private mortgage insurance; the maximum interest rate and payment during the first five years and the maximum interest rate and payment possible over the life of the loan for adjustable-rate or step-rate loans; and a statement that consumers might not be able to avoid increased payments by refinancing their loans.

Much of the above information is already disclosed in RESPA’s Good Faith Estimate and HUD-1 Settlement Statement. This is one reason CUNA believes the rule should be withdrawn.

The interim rule applies to all transactions secured by a dwelling (principle residence or second home) and transactions secured by real property that don’t include a dwelling or other structures.

Credit unions must comply with the interim rule for applications they receive on or after Jan. 30, 2011.

4. Additional consumer protections and disclosures for mortgages (proposed rule): This proposal would revise the rules for rescission of open-end and closed-end loans secured by consumers’ principal dwellings and would amend the disclosure rules for reverse mortgages and prohibit certain unfair acts or practices.

In addition, the proposal contains revisions to the rules for determining when a modification of an existing closed-end mortgage loan secured by real property or a dwelling is considered a new transaction requiring new disclosures.

The rule also requires misleading and burdensome new disclosures for payment protection products such as credit life, credit disability, and debt cancellation and debt suspension coverage. The Fed must receive comments on or before Dec. 23, 2010.

5. Escrow account requirements for jumbo loans (proposed rule): This proposal would revise the escrow account requirements for higher-priced, first-lien “jumbo” mortgages. The proposed rule, which implements a provision of the Dodd-Frank Act, would increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender must establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans.

Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac (or Fannie Mae). A jumbo loan for a single-family property that isn’t located in any area designated a “high-cost” area is currently $417,000. 

In July 2008, the Fed issued final rules requiring creditors to establish escrow accounts for first-lien loans if a loan’s APR is 1.5 percentage points or more above the prime offer rate.

As proposed, the escrow requirement will apply for jumbo loans only if the loan’s APR is 2.5 percentage points or more above the prime offer rate. The APR threshold for non-jumbo loans remains unchanged. The Fed must receive comments on this proposal on or before Oct. 25, 2010.

Additional changes

Expect other changes required by the Dodd-Frank Act, including new data collection under HMDA, home appraisal reforms, and requirements that mortgages be subject to conservative under-writing standards.

CUNA will continue its efforts to lessen the burden of these mortgage lending rule changes on credit unions and to provide up-to-date information on changing mortgage lending requirements.

MICHAEL McLAIN is assistant general counsel and senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185.