MGMT IANCE MANAGEMENT
By CArL g. Pry, CrCM
A Case in Point: Why It’s Important
to Read New Rules Carefully
It’s A CLi Ché to s Ay that compliance professionals should carefully read the text of any new rule or regulation. But it’s a cliché for a reason: there are often incorrect assumptions and unintended consequences with new rules. you don’t want to under-comply, of course, but you also don’t want to overdo it. A recent amendment to regulation Z is truly a
case study on this point.
By now we’re all familiar with the
amendments the Mortgage Disclosure
Improvement Act (MDIA) made to
Reg. Z. The law accelerated the effective date (from October 1, 2009, to July
30, 2009) made by an earlier amendment requiring early Truth in Lending
(TIL) disclosures for additional loan
types. At first glance, the details seem
fairly straightforward:
Transactions requiring early disclo- ■
sures are expanded to include “any
extension of credit secured by the
dwelling of a consumer” 1 rather
than only those secured by the con-
sumer’s principal dwelling.
Revised early disclosures are required ■
if pre-closing changes to the loan
move the APR out of tolerance.
Required delay periods between dis- ■
closure (seven business days from
the initial early TIL, three days from
any revised early TIL) and closing
are established.
Done deal, right? Although cumbersome from an operations standpoint, the changes themselves seem
pretty easy to understand. But again,
not so fast—make sure you understand exactly what is going on here.
MYTH #1: The new early TIL
requirement is exactly the same
as for the GFE under RESPA.
This seems logical: whenever you pro-
vide a good faith estimate (GFE), you’d
also provide an early TIL. After all,
revised Reg. Z requires an early TIL
“in a mortgage transaction subject to
the Real Estate Settlement Procedures
Act... that is secured by the consumer’s
dwelling.” 2 But don’t read this requirement backward (i.e., GFE always
equals early TIL)—consider how the
term “consumer” is defined in Reg Z.
Without considering rescission, a
“consumer” is “a natural person to
whom consumer credit is offered or extended.” 3 Therefore, you must provide
an early TIL if the consumer’s (read:
the borrower’s) dwelling secures the
loan. Fine, isn’t that also how RESPA
reads? Not quite—under RESPA, a GFE
must be provided for any “federally
related mortgage loan,” which is a loan
“that is secured by a first or subordinate
lien on residential real property.”4 No
mention is made of whose property it
must be, though.
If I apply for a loan and my friend
agrees to put up his vacation home including land as collateral (yeah, right,
you say, but let’s keep rescission out
of it), no early TIL would be required
because the “consumer’s” dwelling is
not being pledged, but a GFE would
be, as it would be secured by residential
real property.
On the other hand, if I apply for
a loan secured by my mobile home
without land (which is considered a
“dwelling” under Reg. Z), would an
early TIL be required? No GFE is
required because without land, you
don’t have residential real property. An
early TIL? Not required: even though
secured by a dwelling, “a transaction
must be a Federally related mortgage
loan under RESPA” 5 for an early TIL
to be necessary.
So the coverage of RESPA is slightly
broader than Reg. Z’s early TIL requirement. While there is nothing wrong
with providing an early TIL when you
don’t have to for the sake of simplicity,
be sure you know why you’re doing so
if that’s the route you choose.
MYTH #2: A business day is a
business day is a business day.
This concerns timing requirements:
three business days from application to
provide early disclosures; seven business days from the initial early TIL or
three business days from any revised
early TIL to close. But understand the
different meanings of “business day.”
Reg. Z and RESPA both state that
you have three business days to deliver
or mail the early TIL and GFE using a
“general definition” of business day: “a
day on which the creditor’s offices are
open to the public for carrying on substantially all of its business functions.” 6
That hasn’t changed. But for both the
seven- and three-day delay periods
between disclosure and closing, Reg. Z
specifies a “more precise definition of
‘business day’ (all calendar days except
Sundays and specified Federal legal
public holidays).” 7 This is also used
for rescission purposes and means essentially any day the mail runs.
That sounds pretty good because
even if you’re not open, Saturday is
still a business day and many borrowers don’t want to wait longer to close
than they have to. But it gets more
