New Truth-in-Lending Rules Effective July 30, 2009

A lot of new legislation and regulations have been coming from Washington over the past several months. The following is an excerpt from a bulletin issued by CATIC (Connecticut Attorneys Title Insurance Company) on changes to Federal Truth-in-Lending laws.

The Mortgage Disclosure Improvement Act (MDIA) has amended the Truth-in-Lending Act (15 USC 1601) effective July 30, 2009. The principal objective of these Regulation Z amendments is to enable consumers to know, prior to closing, what their closing fees and charges will be. In too many cases in the past, mortgage lenders did not know the exact dollar amounts for the fees and charges borrowers were required to pay at closing, until shortly before the closing. In some instances consumers did not find out what they actually had to pay for certain fees until they appeared at the closing. This situation has proven problematic for creditors and consumers alike. The new disclosure model is intended to address this problem by avoiding "last-minute" fee issues.

Lender Requirements

MDIA requires creditors to provide "early disclosures" to consumers within three business days after receiving an application for a mortgage loan and before any fees, other than a reasonable fee for a consumer credit report, are collected from the consumer. This "early disclosure" requirement applies not only to loans secured by principal dwellings but also to loans on other one-to-four family properties, such as "second homes."

Once the early disclosure has been provided, the creditor must wait seven business days before closing the loan. If a change occurs that makes the annual percentage rate (APR) in the early disclosure inaccurate beyond a specified tolerance, creditors must provide new disclosures with a revised APR and wait an additional three business days before closing the loan.

Practical Implications: Anticipated Changes in Closing Procedures and Practice

Timely Pre-Closing Disclosures. The rule changes should help consumers by requiring lenders to provide "final" disclosures at least 3 days before the closing.

Postponed Closings, Higher Initial Disclosed Costs, or Escrow Closings. In those cases, however, where creditors cannot provide accurate disclosures in advance of the originally scheduled closing date, closings may have to be rescheduled. Alternatively, some creditors might disclose higher than anticipated fee amounts in their initial disclosures, in order to avoid the need for re-disclosure. Other creditors may consider the use of "escrow-style closings" (common in many western states), where the parties execute and place documents in escrow pending satisfaction of all of the closing conditions.

Changes to Loan Application, Rate Lock, and Commitment Processes. The new rules may also impact how creditors initially accept a loan application, when and how creditors lock an applicant's interest rate and points (and collect a fee for a "rate lock"), or when they extend the deadline of a rate lock agreement or a mortgage loan commitment.

Closings on Short Notice. The new disclosure rules may also affect closings that historically have taken place on short notice, such as loan modifications and private banking loans. In the past, loan terms for these transactions might be negotiated up until closing. The impact of the new rules on such transactions is not yet clear.

New Disclosure - No Consumer Requirement to Complete the Agreement. The new rule also requires that creditors include in the initial disclosure statement and in any corrected disclosure statement the following statement:

"You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."

Timeshare Loans. Creditors who make loans to finance an interest in a timeshare plan must provide the initial disclosures by the earlier of (1) consummation or (2) three business days after receipt of the consumer's application. If the initial disclosures become inaccurate before consummation, the creditor must provide revised disclosures prior to consummation (as opposed to three business days in advance).