Basic Real Estate Regulation Z

1
Basic Real Estate Regulation Z

• Purchase Non-Purchase Rules

2
Learning Objectives

• Learn about the regulatory requirements of
  Regulation Z by reviewing the
• Basic rules for Purchase-money real estate
  transactions and
• Basic rescission rules for Non-purchase money
  real estate transactions
• Review the risks when errors occur
• Legal
• Reputation
• Regulatory

3
Introduction

• Lifecycle of a Real Estate Loan
• Pre-Closing Disclosures
• Closing Disclosures
• Post-Closing Disclosures
• Application procedures are discussed in the Basic
  B Lecture

4
Pre-Closing - Regulation Z
5
Providing Early Disclosures

• When are TIL disclosures required to be provided
  to borrowers?

6
Providing Early Disclosures

• Section 226.17(b)
• Before Consummation
• This is a general rule that requires the
  creditor to provide disclosures to the consumer
  before consummation of the transaction.
• Staff Commentary 3
• It is not sufficient for the creditor merely to
  show the consumer the document containing the
  disclosures before the consumer signs and becomes
  obligated. The consumer must be free to take
  possession of and review the document in its
  entirety before signing.
• Section 226.19(a)
• Within 3 days of Application
• A residential mortgage transaction has a
  special timing rule that requires a good faith
  estimates of the disclosures required by section
  226.18 to be provided within three business days
  of written application or consummation, whichever
  is earlier
• Exception if denied within the three-day period

7
Residential Mortgage Transaction

• What is a residential mortgage transaction?
• A transaction to finance the purchase or
  construction of the consumers principal dwelling
• Are early disclosures different from the final
  disclosure?
• Not really, the early disclosure is not based on
  the legal obligation but is a good faith estimate
  of the transaction

8
Early Disclosures

• Special Rule
• Early disclosures can be the final disclosure if
  the APR at closing does not change by more than
  tolerance (1/8 of 1 percent regular)
• However, most banks automatically provide the
  final disclosure regardless of this rule

9
Early Disclosure

• Which disclosure do you check when two are
  provided? (early final)
• Both, Maybe
• What happens when the early disclosure is
  incorrect and the final is correct?
• The courts would probably rule against the bank
  if the early is wrong.

10
Early Disclosure

• While the early disclosure is not based on the
  legal obligation, lenders can use the GFE could
  serve as a proxy for the legal obligation when
  calculating the early disclosure as the
  regulation only requires a good faith estimate.
• Make sure the math is correct.

11
Closing Disclosures - Regulation Z
12
Objectives

• Basis for Disclosures
• What the TIL Disclosure should Disclose
• Calculations
• Make sure the numbers right
• Learn how to check a disclosure calculation
• Preventing Legal, Reputation Regulatory Risks
• Civil Liability
• Communication of Errors
• Regulatory Enforcement
• Internal Reviews
• Rescission Rules
• Non-Purchase Money Transactions

13
Basis for Disclosures
14
Basis for Disclosures

• Legal Obligation
• The TIL disclosure shall reflect the terms of the
  legal obligation (other than the early
  disclosure)
• Unknown Information
• If any information is unknown, disclosures shall
  be based on the best information reasonably
  available at the time of the disclosure
• clearly state the disclosure is an estimate
• ARM loans based on todays rates (do not use
  estimates)
• Construction loans using Appendix D will use
  estimates

15
Basis for Disclosures

• Special Rule Per Diem Interest
• Section 226.17(c)(2)(ii) allows creditors to
  disclose per diem interest based on information
  known to the creditor at the time that the
  disclosure documents are prepared for
  consummation of the transaction.
• In other words, if the loan closing is postponed
  by a day or two, the pre diem interest on the
  final disclosure, prepared in advance, would be
  correct even if the actual charge differs by the
  time disclosures are provided to the borrower.
• The Board notes that creditors should exercise
  diligence in ascertaining the correct information
  when preparing disclosures.

16
Basis for Disclosures

• The Staff Commentary for Regulation Z includes
  rules for preparing disclosures with unusual
  terms
• Examples include
• consumer buydowns
• wraparound financing
• graduated payment mortgages
• reverse mortgages
• Any lenders making unusual loans??

17
Disclosure Calculations

• The Note
• The Payment Schedule
• The Amount Financed
• The Finance Charge
• The APR

18
Calculations

• Once the basis for the TIL disclosure is
  determine, it is time to calculate required
  information
• Compliance Officers should understand this method
  even if other staff members or outside
  consultants perform the periodic reviews

19
The Note
20
The Note

• Start with the Legal Obligation
• Identify the loan amount
• The loan amount in the note is used to verify the
  amount financed on the TIL disclosure
• Review the contract terms
• Note rate
• Terms
• Payment amounts
• If an ARM note, the specific rate change terms
• Index value
• Rate caps
• Rate margins
• Rounding
• Are the note terms correct?
• Errors are legal issues that must be resolved
  before a correct TIL disclosure can be developed

21
The Payment Schedule
22
The Payment Schedule

• Determine the Payment Schedule
• Number of payments
• Timing of payments
• Use the amounts and time period listed in the
  note (legal obligation)
• Verify the payment calculation Note Example
  link
• Is the math correct?
• Does the loan amount
• _at_ the interest rate
• _at_ the of payments
• the payment amount
• If not, you may have a legal problem first

23
The Amount Financed
24
The Amount Financed

• Verify the Amount Financed
• Principal loan amount (not always the note amt)
• Plus any other amounts financed
• Minus any prepaid finance charge
• This in a independent calculation. You should
  not rely on the TIL disclosure for this amount.
• Again, look at the note it is your starting point

25
The Amount Financed

• What documents do you need to calculate the
  amount financed?
• Two Documents
• The Note-To verify the loan amount
• The HUD-1- To determine the prepaid finance
  charges

26
The Amount Financed

• What is a prepaid finance charge?
• Defined in Regulation Z Section - 226.2(a)(23)
• It is a finance charge paid separately in cash or
  by check before or at consummation of a
  transaction, or withheld from the proceeds of the
  credit at any time.

27
The Amount Financed

• You must know what charges are finance charges
  before can identify what charges are prepaid when
  determining the amount financed
• HUD 1 is the document to review

28
The Finance Charge

• What is it?

29
The Finance Charge

• A Finance Charge is a specific charge listed in
  Section 226.4
• Includes exemptions
• Special rules
• Dont be fooled
• This section does not list every charge possible.
• This is the Regulation Z conundrum

30
The Finance Charge

• Third Party Charges - 226.4(a)(1)
• Paid to someone other than creditor
• Creditor requires use of third party, or
• Retains a portion of charge
• Example - PMI

31
The Finance Charge

• Closing Agent Charges - 226.4(a)(2)
• Fees charged by third parties to conduct loan
  closing
• Creditor requires service or
• Retains a portion of the charge
• Can be exempt if part of a lump-sum closing fee
  and represents only a small portion of the total

32
The Finance Charge

• Mortgage Brokers Fees - 226.4(a)(3)
• Always considered a finance charge
• Even if creditor does not require use of the
  broker or retain a portion of the charge

33
The Finance Charge

• Listed Charges - 226.4(b)
• points
• origination fees
• appraisal
• credit report
• Regulation Z does not list all possible charges
  or have the same name for each charge

34
The Finance Charge

• Excluded Amounts - 226.4(c)
• Application fee
• if charged to all applicants
• Sellers points
• Charges not paid by the borrower
• Real estate related fees -4(c)(7)
• Most important section

35
The Finance Charge

• Excluded Amounts - 226.4(c)
• Real estate related fees -4(c)(7)
• (i) Fees for title examination, abstract of
  title, title insurance, property survey, and
  similar purposes.
• (ii) Fees for preparing loan-related documents,
  such as deeds, mortgages, and reconveyance or
  settlement documents.
• (iii) Notary and credit-report fees.
• (iv) Property appraisal fees or fees for
  inspections to assess the value or condition of
  the property if the service is performed prior to
  closing, including fees related to
  pest-infestation or flood-hazard determinations.
• (v) Amounts required to be paid into escrow or
  trustee accounts if the amounts would not
  otherwise be included in the finance charge.

36
Verify the Amount Financed

• Review a copy of the HUD-1
• Know which amounts paid by the borrower are
  finance charges
• Those that are paid at or before closing are
  prepaid finance charges

37
Example

• Note Amount
• should include all amounts financed along with
  proceeds
• Subtract HUD-1 Prepaid finance charges

• 100,000 Note Amount
• -1,500 PPFC
• 98,500 Amount Financed
• Make sure you add the PPFC back in the finance
  charge

38
Verify the APR
39
Verify the APR

• Independent Calculations
• Amount Financed
• Payment Schedule
• Once the amounts are independently verified, you
  are ready to verify the disclosed APR using an
  independent calculation method

40
Verify the APR

• The OCCs APR windows program is currently used
  by most examiners to verify TIL disclosure
  calculations
• Excellent tool for bank compliance officers for
  internal review checks

41
APR Rules

• Special rules for real estate loans

42
APR Calculation Rules

• Section 226.22 of Regulation Z contains rules for
  APR calculations along with the specific
  mathematical calculation in Appendix J
• Special Mortgage Rules
• The 100 rule
• Found in section 226.22(a)(4)
• The Additional Tolerance Rule
• Found in Section 226.22(a)(5)

43
APR Calculation Rules

• The 100 Rule
• If the annual percentage rate disclosed in a
  transaction secured by real property or a
  dwelling varies from the actual rate determined
  in accordance with Appendix J of Regulation Z, in
  addition to the tolerances applicable under
  paragraphs (a)(2) 1/8 and (3)- 1/4 of
  this section, the disclosed annual percentage
  rate shall also be considered accurate if
• (i) the rate results from the disclosed finance
  charge and
• (ii)
• (A) the disclosed finance charge would be
  considered accurate under section 226.18(d)(1)
  is understated by no more than 100 or
• (B) for purposes of rescission, if the
  disclosed finance charge would be considered
  accurate under section 226.23(g) or (h),
  whichever applies.

44
APR Calculation Rules

• The Additional Tolerance Rule
• In a transaction secured by real property or a
  dwelling, in addition to the tolerances
  applicable under paragraphs (a)(2) and (3) of
  this section, if the disclosed finance charge is
  calculated incorrectly but is considered accurate
  under section 226.18(d)(1) or section 226.23(g)
  or (h), the disclosed annual percentage rate
  shall be considered accurate
• (i) if the disclosed finance charge is
  understated, and the disclosed annual percentage
  rate is also understated but it is closer to the
  actual annual percentage rate than the rate that
  would be considered accurate under paragraph
  (a)(4) of this section
• (ii) if the disclosed finance charge is
  overstated, and the disclosed annual percentage
  rate is also overstated but it is closer to the
  actual annual percentage rate than the rate that
  would be considered accurate under paragraph
  (a)(4) of this section.

45
APR Calculation Rules

• Example
• 75.00 understatement
• 100
• ____________________________
• 8.40 8.50 8.65 8.875 9.00 9.125
• Assume
• 75 understatement
• .125 Tolerance
• 9.00 Correct APR

46
The TIL Disclosure Review
47
Regulation Z

• Disclosure Review
• In addition to verifying the calculations for the
  APR and finance charge, you should review the TIL
  disclosure form for compliance with other
  required disclosure information outlined in
  Section 226.18
• Review key terms that have special real estate
  significance

48
Regulation Z

• Disclosure Review - 226.18
• Amount financed
• Know what a prepaid finance charge is
• Itemization of amount financed
• footnote 40 Good faith estimate can be a
  substitute
• Finance Charge
• Know how the 100 rule applies

49
Regulation Z

• Disclosure Review - 226.18
• Variable Rate
• If the annual percentage rate may increase after
  consummation in a transaction secured by the
  consumer's principal dwelling with a term greater
  than one year, the following disclosures
• (i) The fact that the transaction contains a
  variable-rate feature.
• (ii) A statement that variable-rate disclosures
  have been provided earlier.

50
Regulation Z

• Disclosure Review - 226.18
• Security Interest
• Spreader clause Rescission
• Security Interest Charges
• filing fees and taxes, and all funds disbursed
  for such purposes may be aggregated in a single
  disclosure.
• This disclosure may appear, at the creditor's
  option, apart from the other required
  disclosures.
• The inclusion of this information on a statement
  required under the Real Estate Settlement
  Procedures Act is sufficient disclosure for
  purposes of Truth in Lending.

51
Regulation Z

• Disclosure Review - 226.18
• Assumption policy.
• In a residential mortgage transaction, a
  statement whether or not a subsequent purchaser
  of the dwelling from the consumer may be
  permitted to assume the remaining obligation on
  its original terms.

52
Regulation Z

• Another Disclosure
• Rate Limitation 226.30
• While not a calculation, when looking at the
  note, check for this disclosure
• Special Rule relating to the Note
• Lenders must include in a consumer credit
  contract (Note) secured by a dwelling the maximum
  interest rate that may be imposed during the loan
  term

53
Understated Disclosures

• Legal, Reputation, Regulatory Risks

54
Disclosure Risks

• What is the highest risk violation when making a
  consumer loan?
• APR Finance Charge Understatement violations on
  real estate loans
• What should your bank do to reduce legal and
  reputation risk?
• Know the legal liability limits
• Implement internal reviews

55
Legal Risks

• Civil Liability - TILA - Section 130(a)
• .any creditor who fails to comply with any
  requirement imposed under this chapterwith
  respect to any person is liable to such person in
  an amount equal to the sum of
• any actual damage sustained by such person as a
  result of the failure
• in the case of an individual action twice the
  amount of any finance charge. not be less than
  100 nor greater than 1,000,
• in the case of a closed-end credit plan that is
  secured by real property or a dwelling, not less
  than 200 or greater than 2,000
• in the case of a class action, such amount as the
  court may allow, except thatshall not be more
  than the lesser of 500,000 or 1 per centum of
  the net worth of the creditor

56
Legal Risks

• Civil Liability - TILA - Section 130(b)
• Correcting Errors
• No liability, if within sixty days after
  discovering an error, and prior to the
  institution of an action under this section or
  the receipt of written notice of the error from
  the obligor,
• the creditor or assignee notifies the person
  concerned of the error and makes whatever
  adjustments in the appropriate account are
  necessary to assure that the person will not be
  required to pay an amount in excess of the charge
  actually disclosed, or the dollar equivalent of
  the annual percentage rate actually disclosed,
  whichever is lower.

57
Legal Risks

• Bottom Line
• Original Disclosure Stands
• Must ensure consumer does not pay any more than
  the APR Disclosed
• Banks have 60 days to fix it to avoid law suits,
  once an error is identified
• Sending a new disclosure will not fix the problem
  or reduce legal liability!!!!

58
Reputation Risks

• Notifying customers
• Contacting customer about disclosure errors will
  spread the word creating a reputation risk for
  the bank
• Regulator Enforcement
• If the regulators find the errors, they can order
  the banks to make customer reimbursements
• This can lower the compliance rating and may
  require public disclosure of the errors when a
  formal written agreement is issued by the
  regulators

59
Regulatory Risk

• Section 108(e) of the TIL gives the regulators
  authority to require banks to make customer
  reimbursements for certain violations of the Act.
• Agencies adopted
• The Joint Policy Statement on Administrative
  Enforcement of the Truth in Lending
  ActRestitution (The Policy Guide) to carry out
  the provisions of the TILA

60
Regulatory Risk

• The Policy Guide authorizes the federal Truth in
  Lending enforcement agencies to order creditors
  to make monetary and other adjustments to the
  accounts of consumers in cases where disclosures
  were inaccurate for the
• Annual Percentage Rate
• Finance Charge

61
Bottom Line

• Either the Bank makes the reimbursement or the
  Regulator may order it
• Generally reimbursement will be required for
  errors resulting from a clear and consistent
  pattern or practice of violations, gross
  negligence, or a willful violations
• The act does not preclude the agencies from
  ordering restitution for isolated disclosure
  errors.

62
Internal Review
63
Internal Review

• Who should conduct the Review?
• What special tools are required?
• What is the banks reimbursement policy?

64
Internal Review

• Who should conduct the Review?
• Line Management
• Compliance Staff
• Audit Staff
• Line Management
• Most internal compliance reviews should be
  conducted by the line management area where the
  compliance function is performed
• For example
• Consumer Lending should review TIL disclosures
  for compliance if the disclosures require line
  input

65
Internal Review

• Who should conduct the Review?
• Compliance Staff
• They could review software programs before
  implementation in the Line area
• Audit
• They could review the internal review programs of
  the line and compliance functions

66
Internal Review

• What special tools are required?
• Disclosure Reviews
• Line and compliance staff should have independent
  calculation tools to verify key TIL disclosure
  calculations
• OCC- APR Software program
• Do not use the disclosure generation program to
  check disclosures!!!!

67
Internal Review

• What is the banks reimbursement policy?
• Business, Legal, Regulatory Decisions
• Business Decision
• Low risk, do nothing (still has legal risk)
• Legal Decision
• High risk action must be taken to prevent law
  suits
• Regulatory Decision
• No choice, Its an order

68
Rescission Rules

• Non-Purchase Money Transactions

69
Rescission Rules

• What is the right of rescission?
• A consumer credit transaction
• Secured by a consumer's principal dwelling
• Each owner shall have the right to rescind the
  transaction (Cancel the deal)
• When more than one consumer in a transaction has
  the right to rescind, the exercise of the right
  by one consumer shall be effective as to all
  consumers.

70
Rescission Rules

• Origins of Rescission
• Contractor Credit Transactions
• Lightening Rod Sales
• Aluminum Siding Sales

71
Rescission Rules

• Does it apply to all Real estate transactions?
• No
• Credit extensions not subject to the regulation
  are not covered
• For example, rescission does not apply to a
  business-purpose loan, even though the loan is
  secured by the customer's principal dwelling.
• Other exemptions
• Generally not applicable to transactions
  involving the purchase or construction of the
  principal dwelling

72
Rescission Rules

• Specific Exemptions
• Residential Mortgage Transaction
• a transaction in which a security interest is
  created or retained in the consumer's principal
  dwelling to finance the purchase or initial
  construction of that dwelling.
• Combination purchase/improvement loan
• Refinancing same creditor (no new money)
• A series of advances (other than an initial
  advance) or a series of single-payment
  obligations that is treated as a single
  transaction, if the rescission notice and all
  material disclosures have been given to the
  consumer at consummation.

73
Rescission Rules

• Timing
• Consumer can exercise the right of rescission
  until the last event occurs
• Midnight of the third business day following
  consummation
• Delivery of the rescission notice
• Delivery of all material TIL disclosures
• If all three events have not occurred, rescission
  period extends for three years after consummation

74
Rescission Rules

• Notice shall disclose the following
• Lender has retained a security interest in the
  consumers principal dwelling
• Consumer has right to rescind the transaction
• How to exercise right to rescind, a written form
  for that purpose, creditors address, effects of
  rescission
• Date the rescission period expires

75
Rescission Rules

• Model Forms
• Appendix H of Regulation Z contains model forms
  for rescission
• H-9 is for refinancing

76
Rescission Rules

• Disbursing Funds
• Rescission rules prohibit the creditor from
  disbursing any money to the consumer other than
  for escrow until rescission period expires
• Violations are common for this provision
• Understanding the Waiver rules can reduce
  violations

77
Rescission Rules

• Waiver
• Consumers can waive the rescission period if
• There is a bona fide personal financial
  emergency
• The consumer has signed and dated a written
  statement of the emergency
• Can not be on a preprinted form

78
Rescission Rules

• Waiver Form
• Can not use a preprinted form

Bank of Anywhere, Anywhere, USA I/We would like
to waive the rescission period on my/our mortgage
loan due to the following financial
emergency _______________________________________
__________________________________________________
__________________________________________________
___________ Customer Name_____________________
Date_______________________
79
Rescission Rules

• Waiver
• What is an example of a good or bad waiver?
• Loan to repair the dwellings heating system
  during the cold winter
• Loan to take a winter vacation to Sunny Florida

80
Rescission Rules

• When Rescission Occurs
• The Security Interest becomes void
• Creditor shall return all money collected
  including any finance charges to the consumer
  within 20 days of notice to rescind and terminate
  the security interest
• Consumer shall return any money or property
  received from the creditor after the creditor
  returns the consumers funds
• If the creditor does not take possession of the
  money or property within 20 calendar days after
  the consumer's tender, the consumer may keep it
  without further obligation.

81
Rescission Rules

• Rescission Tolerances
• One-half of one percent
• Finance charge is considered accurate if it is
  understated by no more that 1/2 of 1 percent of
  the face amount of the note or 100 whichever is
  greater on a regular rescission transaction
• One percent
• Finance charge is considered accurate if it is
  understated by no more than1 percent of the face
  amount of the note or 100 whichever is greater
  on a refinancingrescission transaction with a
  new creditor

82
Rescission Rules

• Rescission Tolerances Foreclosures
• After initiation of foreclosure the consumer
  shall have the right to rescind if
• a mortgage broker fee was not disclosed in the
  finance charge
• creditor did not provide a proper rescission
  notice
• finance charge is understated by more then 35

83
Post Closing - Regulation Z
84
Subsequent Disclosure Requirements

• Assumptions - 226.20(b)
• In Writing
• An assumption occurs when a creditor expressly
  agrees in writing with a subsequent consumer to
  accept that consumer as a primary obligor on an
  existing residential mortgage transaction.
• New Disclosures
• Before the assumption occurs, the creditor shall
  make new disclosures to the subsequent consumer,
  based on the remaining obligation.

85
Questions???