- August 14, 1995
- All Issuing Offices
- Regulation Z: High-Cost Mortgage Act
Your customers and colleagues may have heard about a new federal law affecting loan transactions; the amendment of Regulation Z. As a matter of general information, this bulletin is intended to give you some information concerning the new "hassles" for certain high-cost financing.
The Truth-in-Lending Act (15 U.S.C. 1601-1666j), was amended by the Community Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160). The Community Development Act contained the Home Ownership & Equity Protection Act of 1994 (HOEPA). HOEPA added a new section to the Truth-in-Lending Act addressing certain mortgages bearing rates or fees above a certain percentage or amount. HOEPA also added a new section to the Truth-in-Lending Act addressing reverse mortgage transactions (RAMS).
To carry out the requirements of HOEPA, the Federal Reserve Board of Governors promulgated amendments to Regulation A. Those amendments (Final Rules) can be found in 60 Federal Register 15463 (The Final Rule amending Regulation Z is effective March 22, 1995. Compliance is optional until October 1, 1995. On and after October 1, 1995, compliance is mandatory.) What is new about the revision of Regulation Z is:
- a new disclosure requirement for certain mortgages (written warning statement
delivered to borrower before loan documents are executed);
- special disclosure requirements for RAMS (reverse annuity mortgages); and
- a three day before-executing-documents-cooling off period for borrowers.
Mortgages covered by the new rules are the same kinds of mortgages covered by the earlier versions of Regulation Z: Mainly closed-end mortgages (including home equity loans) for personal, family or household purposes. Equity lines of credit, home purchase loans and business loans, for example, are not within the reach of the earlier versions of Regulation Z; nor within the reach of this most recent amendment to it.
Stewart Title Guaranty's Underwriting Manual, Volume II Sections 19.48.1 through 19.48.8 discuss, among other things, what loan transactions are within the purview of the federal Truth-in-Lending Act (15 U.S.C. 1601, et seq., as amended) and its implementing regulation (Regulation Z: 12 CFR 226).
The foregoing requirements are layered on extant Regulation Z requirements. The new requirements are additional requirements: Not substitutes for the old requirements.
I. Closed-End Mortgages (non-revolving credit mortgages)
New rules applicable to certain closed-end mortgages: (Disclosure and three day pre-closing "cooling-off" period). If the transaction is a:
- consumer credit transaction (loan for personal, family or household purposes);
- secured by a closed-end mortgage;
- on the borrower's principal dwelling;
- the annual percentage rate at consummation will exceed by more than 10 percentage
points the applicable yield on treasury securities; or,
- the total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount or $400;
- the following disclosure must be given to the borrower three days before the loan documents are executed by the borrower:
You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.
The annual percentage rate of your loan will be _______________.
Your regular (frequency) payment will be $ _______________.
(Your interest rate may increase. Increases in the interest rate could increase your payment. The highest amount your payment could increase is to $ _____________.)
RAM transactions covered under the Final Rule must provide the borrower with a disclosure form similar to the form notice set out above at least three business days prior to "consummation" of a closed-end credit transaction: or the first transaction under an open-end credit plan.
For purposes of Regulation Z, a "reverse mortgage transaction" means a nonrecourse consumer credit obligation in which:
- a mortgage, deed of trust or equivalent security interest securing one or
more advances is created in the consumer's principal dwelling, and
- any principal, interest or shared appreciation (or equity) is due and payable
(other than in the case of default) only after
- consumer dies, or
- dwelling is transferred, or
- consumer ceases to occupy the dwelling as a principal dwelling.
- consumer dies, or
Two other matters addressed in the Final Rule should be mentioned. The first is waiver. A borrower covered by the Final Rule may waive the three day pre-closing waiting period after receiving the aforementioned disclosures. The waiver provision of the Final Rule applies to both covered closed-end mortgages and RAMS, as defined in the Final Rule. Waiver is permissible only if the extension of credit is needed to meet a bona fide "personal financing emergency". The borrower's waiver must be in writing (12 CFR Part 226 [§226.31(c)(iii)]. The second matter is to emphasize the fact that unless the ALTA Endorsement Form 2 is issued, the Exclusion from Coverage in the ALTA Loan Policy (10/17/92) [Exclusion 5], makes it unnecessary for the title insurer to be concerned with the requirements of Regulation Z.
Moreover, Regulation Z imposes no liability on an escrow agent who closes an escrow involving an extension of credit. [See §19.48.7, Underwriting Manual].
Certain familiar mortgage provisions may not be included in covered closed-end mortgage transactions under the circumstances set out in 12 CFR §226.32. The kind of provisions limited by the new Final Rule (with attendant exceptions to the limitations) are: (1) balloon payments; (2) negative amortization; (3) advance payments; (4) increased interest rate following default; (5) certain rebates of interest; and (6) prepayment penalties.
If you have questions concerning the High Cost Mortgage Act, contact your local underwriting personnel.
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.