MBA Regulatory Compliance Conference

Renaissance Washington DC Downtown Hotel Washington, D.C. September 25, 2011

Workshop: Quick Guide to TILA

By Robert M. Jaworski, Esq. Reed Smith, LLP

I.
A.

OVERVIEW OF TRUTH-IN-LENDING ACT/REGULATION Z

Purpose and Scope

1

The overriding purpose of the Truth-in-Lending Act, (TILA), and its implementing regulation, Regulation 2 Z, is to ensure a meaningful disclosure of credit terms so that consumers are better able to "shop" for credit and to use credit wisely. It generally applies to any loan payable in four or more installments or on which a finance charge is imposed to a natural person for personal, family, or household purposes. Special rules apply to loans secured by a lien on a dwelling and by a lien on the borrower's principal dwelling. In summary, TILA, as amended in 2008 by the Mortgage Disclosure Improvement Act of 2008 (MDIA), and Regulation Z attempt to achieve the purposes for which TILA was enacted by:
3

Establishing uniform definitions for certain credit terms which all lenders are required to use. Developing, through the efforts of the Federal Reserve Board (FRB), model disclosure forms and clauses that, if used appropriately by a lender, will result in the lender being deemed to be in compliance with the Act's disclosure provisions. Requiring creditors to provide loan disclosures containing specified items of information to borrowers no later than the earlier of consummation or three days after receiving the borrower's written application for a closed-end dwelling-secured mortgage loan, and delaying the collection of any significant fees until after such disclosures have been delivered. Mandating that certain information on this disclosure be grouped together and segregated from all other information required to be disclosed, such as by putting the grouped information in the socalled Federal Box. Providing consumers with an absolute right to rescind certain transactions in which a lien is taken on the borrower's principal dwelling at any time generally up to midnight of the third business day following consummation. Prohibiting creditors and mortgage brokers from coercing, influencing or otherwise encouraging appraisers to misstate or misrepresent the value of a home that secures a closed-end dwellingsecured loan.
1

15 U.S.C. 1601 et seq. 12 C.F.R. 226.1 et seq. The MDIA is contained in Sections 2501 through 2503 of the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. 110289, enacted on July 30, 2008. The MDIA was amended by the Emergency Economic Stabilization Act of 2008, Pub. L. 110343, enacted on October 3, 2008.

Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

Imposing rules relating to the servicing of closed-end dwelling-secured loans. Imposing special rules relating to higher priced mortgage loans (HPMLs) and HOEPA loans (Section 32 mortgages). Requires purchasers of mortgage loans secured by the borrowers principal dwelling to notify the borrower of the purchase within 30 days Regulating the advertising practices of lenders. Creating a formal procedure that creditors must follow in resolving billing-error disputes with their customers. B. Finance Charge , APR and Amount Financed

The three primary credit terms defined under TILA are finance charge, annual percentage rate or APR, and amount financed. The finance charge is defined generally as "the cost of consumer credit as a dollar amount" and includes any charge payable directly or indirectly by the consumer "as an incident to or as a condition of the extension of credit." Examples of charges that would be considered to be part of the finance charge include interest and anything resembling interest, points or loan or finders' fees, service fees payable on the loan account, any mortgage broker fees paid by the borrower, inspection fees for the staged disbursements of construction loan proceeds, tax service fees, flood zone life-of-loan monitoring service charges, premiums for mortgage insurance protecting the lender against the borrower's default or other credit loss (PMI), credit, life, accident, health or loss of income insurance premiums if required as a condition of obtaining the credit, and hazard insurance premiums if required to be purchased through the lender. Examples of charges that would not be considered part of the finance charge include application fees (charged to all applicants), late charges, default charges, sellers' points, the cost of a flood zone certification required for closing, fees paid to government officials to perfect a security interest, third-party charges for services not required by the creditor so long as the creditor does not retain any part of the charge, voluntary credit life, accident, health or loss of income insurance premiums which are disclosed as such, required hazard insurance premiums which are disclosed as being obtainable by the consumer from any source, and, with respect particularly to mortgage loans, title examination fees and title insurance premiums, escrow funds to pay for future taxes and insurance, appraisal and credit report fees and notary fees, and fees for preparing certain mortgage documents. Tolerances. For closed-end credit secured by real property or a dwelling, a disclosed finance charge is generally considered accurate if it is not more than $100 below the actual finance charge. For rescission purposes, this tolerance is 1/2 of 1% of the total amount of credit extended, except for refinancings with no cash out (that are not 32 loans), for which the tolerance is 1% of the total amount of credit extended. For extended rescission purposes in connection with a loan in foreclosure, the finance charge tolerance is only $35. Finally, any disclosed finance charge that exceeds the actual finance charge is considered accurate; i.e., overdisclosure of a finance charge is not a violation of TILA. The annual percentage rate or APR is defined as "a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received from the consumer to the amount and timing of payments made." It is to be determined using either the actuarial method or the United States Rule method, and is generally considered accurate for purposes of TILA if it is no more than 1/8th of one percentage point (for regular transactions) or 1/4 of one percentage point (for irregular transactions) below the true APR (with respect to "regular" transactions). A disclosed APR is also considered accurate if, despite exceeding the one eighth of 1% APR tolerance limit, it is based on an incorrect finance charge that is within the applicable finance charge tolerance limit.

-2Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

The finance charge and APR must be disclosed more conspicuously than any other terms, except the creditor's identity. The amount financed is essentially the amount of credit provided to or on behalf of the consumer. It is calculated by determining the principal loan amount, adding any other amounts that are financed by the creditor and are not part of the finance charge, and subtracting any prepaid finance charges. The tolerance rules applicable to the finance charge also apply to the amount financed. C. Disclosure Requirements for Closed-End Loans

The MDIA amended TILA to require creditors to provide consumers with an estimated TILA disclosure (early TIL) within three business days following receipt of the consumers application for a closed-end loan to be secured by a dwelling. (Previously, an early TIL had only been required in connection with purchase money transactions.) The early TIL (and any subsequent TIL) must contain specified items of information concerning the loan. The early TIL (and any subsequent TIL) must be in a format that groups together and segregates the most significant of the required items of information, namely, the finance charge, the APR, the total amount of payments and the amount financed. This is done, typically, by placing these items in the so-called Federal Box at the top of the page. The early TIL must also include a statement that receipt of an early-TIL or the signing of an application does not require the consumer to complete the loan transaction. Effective January 30, 2011, the FRB, under the authority of the MDIA, adopted an interim final rule amending the requirements in Regulation Z regarding disclosure of the payment schedule on closed-end 4 loans. The new disclosures are designed to alert borrowers, up-front, to the risks of payment increases. Under the interim rule, the creditors disclosures must include a payment summary, in tabular format, stating (1) the initial interest rate and payment amount, (2) for ARM and step-rate loans, the maximum interest rate and payment amount that could occur during (a) the first 5 years of the loan term and (b) the life of the loan, and (3) the fact that consumers might be able to avoid increased payments by refinancing their loans. In addition, the interim rule requires creditors to disclose certain loan features, such as balloon payments or options to make only minimum payments that will cause the principal amount of the loan to increase. Model forms have been developed by the FRB to meet the disclosure requirements in Regulation Z, and should be utilized to the extent possible. They can be found in the Appendices to Regulation Z. Use of these model forms in appropriate circumstances will be deemed to constitute compliance with TILAs disclosure provisions. The MDIA also amended TILA to require that, for any loan for which an early-TIL must be provided, neither the creditor nor any other person (including a mortgage broker) may impose a fee (other than a fee to pay for the consumers credit report) before the early-TIL has been delivered to the consumer. An early-TIL that has been mailed to the consumer will be considered to have been delivered to the consumer three business days after mailing. Closing of such a loan may not occur until at least seven business days have passed after the early-TIL was sent to the consumer. If the APR disclosed on the early-TIL becomes inaccurate (outside of the APR tolerance limit), the creditor must provide a corrected disclosure with all changed terms. The consumer must receive the corrected disclosure no later than three business days before closing. (For this purpose, a business day means any day except Sundays and federal holidays.) A corrected disclosure that has been mailed to the consumer will be considered to have been delivered to the consumer three business days after mailing.
4

75 Fed. Reg. 58470 (Sept. 24, 2010); see also, 75 Fed. Reg. 81836 (Dec. 29, 2010)(clarification).

-3Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

Consumers may waive either of these waiting periods to meet a bona fide personal financial emergency. To do so, the consumer must give the creditor a dated written statement (not a printed form) that describes the emergency, specifically modifies or waives the waiting period, and is signed by all consumers who will be primarily liable on the obligation. D. Disclosure Requirements for Closed-End ARM Loans

Regulation Z requires that, with respect to closed-end adjustable rate mortgage (ARM) loans which have a term greater than one year and which are secured by the consumers principal dwelling, a booklet published by the FRB entitled Consumer Handbook on Adjustable-Rate Mortgages and an ARM program disclosure must be given to the consumer no later than when the consumer is provided with an application form or pays a non-refundable fee, whichever occurs first. An ARM program disclosure must be given for each variable-rate program in which the consumer expresses an interest. Each ARM program disclosure must contain specified items of information concerning the ARM program. Model ARM program clauses have been developed by the FRB. E. Disclosure Requirements for HELOCs

At Time of Application Regulation Z requires that, with respect to open-end home equity line of credit loans (HELOCs), a brochure published by the FRB entitled What You Should Know About Home Equity Lines of Credit and a HELOC plan disclosure must be given to the consumer at the time he/she is provided with an application. The HELOC plan disclosure must contain specified items of information concerning the HELOC plan . Additional items of information are required to be disclosed for variable-rate HELOC plans. Before First Transaction Is Made Under The Plan Regulation Z also requires that, with respect to HELOCs, a disclosure containing specified items of information be given to consumers before they make their first purchase, receive their first advance or pay any fees under the plan (other than an application or refundable membership fee). Periodic Statement Finally, Regulation Z states that, with respect to HELOCs, creditors must mail or deliver to the consumer a periodic statement for each billing cycle (in which there is a closing credit or debit balance in excess of $1 or on which a finance charge is imposed), and must do so at least 14 days before the end of any grace period within which the new balance or any portion thereof must be paid to avoid additional finance charges. The periodic statement must disclose specified items of information concerning the borrowers HELOC account. F. Right of Rescission

Lenders are required under TILA and Regulation Z to provide certain borrowers with a separate document (Notice of Right to Cancel) stating that a security interest is being taken on the borrower's principal dwelling as a result of the transaction, that they have a right to rescind the transaction, how they can exercise the right and when it expires, and what effect rescission would have. Two copies of the document must be given to each person whose ownership interest is or will be subject to the security interest. Note that a consumer can generally only have one principal dwelling at a time. A vacation or other home would not be a principal dwelling. Lenders may not disburse funds until the right of rescission has expired or unless the consumer waives the right to meet a "bona fide personal financial emergency," in a signed and dated statement (not a printed form) describing the emergency and specifically waiving the right. -4Copyright 2011 Robert M. Jaworski All Rights Reserved
US_ACTIVE-106183462.2

The right of rescission expires at midnight of the third business day (any day excluding Sundays and federal holidays) following the latest of three events: (1) the giving of the notice of the right to rescind to the borrower; (2) the giving of the material TILA disclosures; and (3) consummation of the transaction (as defined under state law). If one of these events does not occur, the right to rescind can remain open for up to three years. (Material disclosures consist of the required disclosures of the APR, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations referred to in the rules governing Section 32 mortgages and HPMLs.) When a right of rescission is exercised, the security interest becomes void, the consumer is not liable for any amount, including any finance charge, and, within 20 calendar thereafter, the lender must refund to the consumer all funds paid to anyone in connection with the transaction. Once the creditor does so, the consumer is responsible for returning to the creditor any money or property (or its reasonable value, if return of the property is impracticable or inequitable) that has been delivered to him/her. The right of rescission does not apply to purchase money mortgage loans OR to refinance loans with the same creditor where there is no "cash out." With respect to cash out refinance loans with the same creditor, the right of rescission only applies to the cash out. G. Appraisal Coercion

Regulation Z was amended in 2008 to deal with the problem of lenders, mortgage brokers and others attempting to influence the independent judgments of appraisers to increase their valuations of properties 5 so as to qualify borrowers for the loans for which they have applied (the 2008 Amendments). The 2008 Amendments, which became effective on October 1, 2009, prohibit any creditor or mortgage broker, or its affiliate, from coercing, influencing or otherwise encouraging an appraiser to misstate or misrepresent the value of a home that secures a closed-end loan secured by the borrowers principal dwelling. The 2008 Amendments also prohibit a creditor who knows there has been a violation of this prohibition in connection with an appraisal from extending credit based on that appraisal, unless the creditor documents that it has used reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the propertys value. Examples of actions that violate the prohibition include: Implying that the appraiser might not be hired, now or in the future, depending on how he/she values the property. Not hiring an appraiser because a previous appraisal came in too low. Telling an appraiser that a minimum value is needed to approve the loan. Refusing to pay an appraiser because the appraisal came in too low. Not paying all or a portion of the appraisers compensation unless the loan closes. Examples of actions that do not violate the prohibition include: Asking an appraiser to consider additional information about the property or comparable properties. Requesting an appraiser to provide additional information about the basis for his/her valuation. Requesting an appraiser to correct factual errors. Obtaining multiple appraisals, provided the creditor chooses the most reliable one rather than the highest one. Refusing to pay an appraiser for breach of contract or substandard performance.
5

73 Fed. Reg. 44522 (July 30, 2009).

-5Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

Taking action permitted or required by federal or state law or agency guidance. Implementing a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 6 (Dodd-Frank), the FRB, on October 28, 2010, adopted an interim final rule imposing further 7 requirements and restrictions concerning the process of obtaining appraisals for dwelling secured loans. The rule, which became effective on April 1, 2011:
Prohibits coercion and other similar actions that can cause appraisers to base the appraised value of properties on factors other than their independent judgment; Prohibits appraisers and appraisal management companies from having financial or other interests in the properties they are asked to appraise or the credit transactions in connection with which the appraisals are requested; Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties have not been materially misstated; Requires creditors or settlement service providers having information about appraiser misconduct to report such suspected misconduct to the appropriate state licensing authorities; and Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or appraisal management companies hired by the creditors.

H.

Servicing Requirements

The 2008 Amendments also imposed certain requirements and prohibitions upon servicers of closed-end loans secured by the borrowers principal dwelling. These include: A prohibition against servicers pyramiding late feesimposing a late fee where a full payment has been made on time but the borrower still owes a prior late fee. A requirement that servicers credit payments as of the date of receipt. If a delay does not result in any charge to the consumer or an adverse report to a consumer reporting agency, it will not be deemed to violate this requirement. Creditors need not accept payments that do not conform to the creditors written instructions; however, if a servicer accepts such a non-conforming payment, it may credit it up to 5 days after receipt. A prohibition against servicers failing to provide payoff quotes within a reasonable time after being requested to do so5 days will be considered reasonable. I. HOEPA Loans (Section 32 Mortgages)
8

The Home Ownership and Equity Protection Act of 1994 (HOEPA) amended TILA to impose some additional restrictions and limitations upon the making of certain high-rate/high-fee mortgage loans (HOEPA loans or Section 32 mortgages). Regulation Z defines "Section 32 mortgages" as consumer credit transactions that are secured by the consumer's principal dwelling and that are not purchase money loans, reverse mortgage transactions or open-end credit plans, and which satisfy either an "APR Test" or a "Points & Fees Test." A mortgage loan satisfies the current "APR Test" if the loan's annual percentage rate at consummation is more than 8%, for first-lien loans, or 10%, for subordinate-lien loans, above the yield on Treasury securities having comparable periods of maturity. A mortgage loan satisfies
6

P.L. 111-203, 124 Stat. 1376. 76 Fed. Reg. 66554 (Oct. 28, 2010); see also, 75 Fed. Reg. 80675 (Dec. 23, 2010)(technical correction). 108 Stat. 2191 (Sept. 23, 1994).

-6Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

the "Points and Fees Test" if the total "points and fees" payable by the consumer exceeds the greater of 8% of the "total loan amount" or $400 (adjusted annually the figure for 2010 is $579). With respect to Section 32 loans, Regulation Z: Requires that a specific pre-closing disclosure be provided to borrowers (no later than 3 days before closing) detailing the terms of the loan, and informing the borrowers that a lien is being taken against their homes and that they can still back out of the deal. Prohibits non-amortizing payment schedules (balloon payments) on loans having a term of less than 5 years (except bridge loans with a term of less than 1 year). Prohibits payment schedules that result in negative amortization. Prohibits paying more than two monthly payments in advance out of the loan proceeds. Prohibits higher default interest rates. Prohibits rebates calculated using any method less favorable to the consumer than the actuarial method. Prohibits prepayment penalties unless (i) the penalty will not apply after two years, (ii) the penalty will not apply if it is being paid by the proceeds of a refinance loan from the same creditor or an affiliate, (iii) the consumers total monthly debt at closing does not exceed 50% of the consumers verified monthly gross income, and (iv) the periodic payment of principal or interest or both will not change during the first 4 years of the loan term. Prohibits due on demand clauses (except for borrower fraud, payment default and/or borrower action or inaction that puts the secured property or the lenders right in the secured property at risk). Eliminates holder-in-due-course protections for purchasers and assignees of covered loans, and requires a specified form of notice to be included on the mortgage essentially warning the assignee of this fact. Prohibits payments of loan proceeds to a home improvement contractor by means of a one-party check payable to the contractor. Prohibits the creditor or any assignee of the creditor from refinancing the loan within one year unless the new loan provides the borrower with a benefit. Prohibits the making of a HOEPA loan based on the collateral without regard to the borrowers verified ability to repay from income and assets other than the collateral (in effect, prohibiting stated income HOEPA loans). Prohibits structuring the loan as an open-end loan in order to evade the above requirements. J. Higher-Priced Mortgage Loans

The 2008 Amendments also created a new category of mortgage loans, called higher-priced mortgage loans (HPMLs), and imposed certain restrictions upon the making of HPMLs. An HPML is defined as a mortgage loan secured by the borrowers principal dwelling (i) which has an APR that exceeds by a specified amount a new index named the average prime offer rate that the FRB will publish, but (ii) which is not a temporary or bridge loan with a term of 12 months or less, a reverse mortgage loan, or a home equity line of credit. A first-lien loan will be an HPML if it has an APR that is 1.5 percent or more above the average prime offer rate for a comparable transaction, and a subordinate lien loan will be an HPML if it has an APR that exceeds the average prime offer rate for a comparable transaction by 3.5 percent or more. Lenders are prohibited from making an HPML: Based on the collateral without regard to the borrowers verified ability to repay from income and assets other than the collateral (in effect, prohibiting stated income HPMLs).

-7Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

Without escrowing for taxes and insurance (for at least 12 months following the loan closing and until 9 the borrower asks the lender to cease escrowing). That has a prepayment penalty feature, unless (i) the penalty will not apply after two years, (ii) the penalty will not apply if it is being paid by the proceeds of a refinance loan from the same creditor or an affiliate, and (iii) the periodic payment of principal or interest or both will not change during the first 4 years of the loan term. That is structured as an open-end loan in order to evade the above requirements. K. Notification of Sale or Transfer of Mortgage Loan
10

A provision in the Helping Families Save Their Homes Act of 2009, amended TILA to require that persons who become the owner of a TILA-covered mortgage loan secured by the borrowers principal dwelling, whether by purchase, assignment or transfer, provide the borrower with written notice of the 11 transfer. The FRB indicated in an interim rule that this notice must be provided within 30 days after the date the transfer is recognized in the new owners books. Servicers which hold title or take assignments of a loan solely for administrative convenience in servicing the loan are exempted from this requirement. Also, persons need not provide this notice for loans which they sell or assign within 30 days after becoming the owner. The notices must include: The identity, address, telephone number of the new creditor. The date of transfer. Information as to how the borrower can reach an agent or party having authority to act on behalf of the new creditor. The location of the place where transfer of ownership of the debt is recorded. Any other relevant information regarding the new creditor. Subsequently, the FRB adopted a final rule, codified as 12 C.F.R. 226.39. While closely tracking the interim final rule published in November 2009, the final rule: (1) clarifies that the disclosures under 226.39 can be combined with other materials or disclosures, including the transfer of servicing notices required by RESPA, so long as the combined disclosure satisfies the timing and other requirements in 226.39; (2) clarifies that multiple covered persons who jointly acquire the loan in a single transaction must provide a single disclosure that satisfies the timing requirements for each person; (3) includes an additional exception for covered persons who acquire only partial interests in a loan, provided the party authorized to receive the consumers notice of the right to rescind and to resolve issues concerning the consumers loan payments does not change as a result of the transfer; and (4) clarifies the information to be included in the notices under certain circumstances.
9 12

Pursuant to a final rule that became effective on April 1, 2011, this escrow requirement applies to jumbo loans (loans in excess of the Fannie/Freddie conforming loan limit) only in cases where the APR is 2.5 percent or more above the average prime offer rate for a comparable transaction. 76 Fed. Reg. 11319 (March 2, 2011). This change was mandated by Dodd-Frank. At this same time, the FRB also published a proposed rule that would extend the time during which creditors must maintain mandatory escrow accounts following loan closing from 1 year to 5 years (or longer under certain circumstances, such as when the loan is delinquent or in default). 76 Fed. Reg. 11598 (March 2, 2011). This proposed rule, which has not yet been acted on, would also exempt certain creditors that operate in "rural or underserved" counties from the escrow requirement. And it would require that new disclosures be provided: (i) at least three business days before closing, to explain, as applicable, how the escrow account works or what the effects are of not having an escrow account; and (ii) at least three days before an escrow account is closed, to inform the consumer that the escrow account is being closed and explain the risk of not having an escrow account.
10

Pub. L. 111-22 (May 20, 2009). 74 Fed. Reg. 60143 (November 20, 2009). 75 Fed. Reg. 58489 (Sept. 24, 2010).

11

12

-8Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

L.

Advertising Restrictions

TILA and Regulation Z govern the advertising practices of residential mortgage lenders and brokers. They provide essentially that creditors may only advertise terms they are prepared to offer and that use of certain terms in an advertisement triggers a need to disclose other terms. They also require that required disclosures in credit advertisements be clear and conspicuous. 1. Closed-end Credit

If an advertisement for closed-end credit includes a reference to the rate of finance charged, it must be expressed in terms of the APR. A simple annual rate or periodic rate that is applied to the unpaid balance may also be stated, but not more conspicuously than the APR. If an advertisement for closed-end credit secured by a dwelling includes a reference to any one or more of the following "triggering" terms . . . The number of payments or period of repayment. The amount of any payment. The amount of any finance charge. . . . the advertisement must include all of the following items: The amount or percentage of down payment. The terms of repayment. The APR. Whether the rate may increase after the loan closing. The 2008 Amendments also require the inclusion of additional specified items of information in advertisements that disclose potentially misleading interest rates or payments including advertisements for closed-end variable-rate loans that promote an initial discounted rate, and advertisements for home-secured credit that include a simple annual interest rate when more than one simple annual interest rate will apply during the term of the advertised loan and that this information must be disclosed with equal prominence and in close proximity to the advertised rate or payment that triggered the additional information. In addition, the 2008 Amendments prohibit the following misleading advertising practices in connection with home-secured credit: Using the word fixed to refer to rates, payments or a loan in an advertisement for variable-rate loans or other loans where the payment will increase unless certain conditions are satisfied. Comparing a consumers current actual or hypothetical rates or payment amounts with the rates or payment amounts available under the advertised loan unless certain conditions are satisfied. Misrepresenting that a loan is government-endorsed or sponsored. Using the name of the consumers current mortgage lender in an advertisement, such as a direct mail solicitation, without indicating who is making the advertisement and that such person is not associated with or acting on behalf of that lender. Making misleading claims that a loan will eliminate debt. Using the term counselor to refer to a for-profit lender or broker. Advertising certain trigger terms or other required disclosures such as an initial discounted rate in a foreign language while providing other trigger terms or required disclosures, such as a fully indexed rate, only in English. 2. Open-end Credit -9Copyright 2011 Robert M. Jaworski All Rights Reserved
US_ACTIVE-106183462.2

If an advertisement for open-end credit includes any of the items required by TILA or Regulation Z to be disclosed as part of an open-end credit plan, the advertisement must also disclose: Any minimum, fixed, transaction, activity or similar charge that could be imposed. The APR and, if applicable, that the plan provides for a variable periodic rate. Any membership or participation fee that could be imposed. If an advertisement for a home equity line of credit (HELOC) indicates the circumstances under which a finance charge or other charge will be imposed, or explains how the finance charge will be determined, or sets forth payment terms, affirmatively or negatively, the advertisement must also include: Any loan fee that is a percentage of the credit limit and an estimate of any other fee for opening the plan. The periodic rate used to compute the finance charge, expressed as an APR. With respect to a variable rate plan, the maximum APR that may be imposed. In addition, the 2008 Amendments require that any advertisement for a variable HELOC which discloses a discounted initial rate also disclose, with equal prominence and in close proximity to the discounted rate, the period of time that rate will be in effect and a reasonably current APR state would have been in effect using the plan index and margin. Also, HELOC advertisements: Which disclose a minimum periodic payment, must also state, if applicable, and with equal prominence and in close proximity to the minimum periodic payment, that a balloon payment may result. Which disclose that interest is or may be tax deductible, may not be misleading in that regard. (If the advertisement indicates that the credit being offered may exceed the fair market value of the property, the advertisement must indicate that the interest on the portion of the loan that exceeds the fair market value is not tax deductible and the consumer should consult a tax advisor for further information in this regard.) May not refer to a HELOC as free money or the like. Which disclose a promotional rate or a promotional payment must also state, with equal prominence and in close proximity to the promotional rate or payment, (i) how long it will apply, and (ii) in the case of a promotional rate, any APR that will apply under the plan, and (iii) in the case of a promotional payment, the amounts and time periods of any payments that will apply under the plan. M. Loan Originator Compensation Rule
13

On September 24, 2010, the FRB adopted a final rule regulating loan originator compensation. This rule became effective on April 6, 2011 (after a short court-ordered delay of its original April 1, 2011 mandatory compliance date). It was adopted by the FRB pursuant to its authority in section 129 of TILA to protect mortgage borrowers from unfair or deceptive lending practices, and was not intended specifically to implement the Dodd-Frank amendment to TILA that limits loan originator compensation which is discussed later in this summary. The rule is comprised of three prohibitions. It prohibits: (1) the payment of compensation to a loan originator (LO) that is based on a loan's terms or conditions (or allowing the LO's compensation to vary based in whole or in part on a factor that serves as a proxy for loan terms or conditions), except the amount of credit extended; (2) the payment of compensation to a LO by both the consumer and a party other than the consumer for the same loan; and (3) the steering of a consumer by a LO to a loan that
13

75 Fed. Reg. 58509 (Sept. 24, 2010).

- 10 Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

provides the LO with greater compensation as compared to other loans which the LO could have offered the consumer, unless the loan is "in the consumer's interest." With regard to the third prohibition, a safe harbor from liability is provided if the consumer is presented with loan options for which the consumer would likely qualify from a significant number of creditors with which the originator regularly does business (with three being the preferred number) for each general type of loan for which he/she expresses an interest (e.g., fixed-rate. adjustable-rate, reverse) and which include (a) the loan with the lowest rate, (b) the loan with the lowest dollar amount for origination points or fees and discount points, and (c) the loan with the lowest rate for which the consumer qualifies that does not allow for negative amortization or include a prepayment penalty provision, interest-only payments, a balloon payment within the first 7 years, a demand feature, or a shared equity or shared appreciation feature. An LO is defined in the rule essentially to mean a person who, for compensation or gain, "arranges, negotiates, or otherwise obtains an extension of consumer credit for another person." Individual loan officers employed by creditors (including banks and non-banks) and individual loan officers employed by mortgage brokers clearly fall within this definition. Mortgage brokerage companies also fall within this definition. However, creditors (except when they act in a particular transaction as a mortgage broker or close loans using the funds of a table-funding lender) are not considered LOs under the rule. N. Enforcement and Liability

Pursuant to Dodd-Frank, enforcement of TILA and Regulation Z against financial institution creditors other than insured depository institutions with less than $10 billion in assets is placed, effective July 21, 2011, with the new Consumer Financial Protection Bureau (CFPB). Enforcement against the remaining insured depositories is placed with the depository's primary federal regulator. Administrative enforcement generally takes the form of an order to make an adjustment to the borrower's account in an amount equal to the excess of the finance charge or the dollar equivalent of the APR actually paid over the finance charge or the dollar equivalent of the APR disclosed, whichever is less. No creditor may be subject to an adjustment order under TILA if, within 60 days after discovering a good faith disclosure error, the creditor makes the necessary adjustment voluntarily and notifies the borrower of the error. In addition, civil liability can attach to a violation of TILA equal to the borrowers actual damages. And, in an individual action, the borrower may also recover twice the amount of any finance charge but not less than $200 or more than $2,000 (or, for closed-end mortgage loans, not less than $400 or more than $4,000). In a class action, the class may also recover an amount permitted by the court but not more than $500,000 or 1% of the creditors net worth, whichever is less. Successful plaintiffs are also entitled to collect court costs and reasonable attorneys fees. Criminal liability, in the form of a fine up to $5,000.00 or imprisonment up to one year, or both, can attach to a willful and knowing violation.

II.
A. Summary

SIGNIFICANT DODD-FRANK AMENDMENTS TO TILA

Dodd-Frank makes several significant amendments to TILA, including the following: Adds new definitions to TILA, including: residential mortgage loan, qualified mortgage, mortgage originator, and servicer (Subtitle A). Adds sections 129B and 129C to TILA and amends other sections of TILA for the stated purpose of assuring that consumers receive residential mortgage loans that reasonably reflect their ability to repay them, are understandable and are not unfair, deceptive or abusive (Subtitles A and B). - 11 Copyright 2011 Robert M. Jaworski All Rights Reserved
US_ACTIVE-106183462.2

Amends HOEPA to change the definition of a high cost loan and add and/or toughen restrictions and limitations upon the making of high cost loans (Subtitle C). Amends TILA to place new responsibilities and limitations upon mortgage servicers (Subtitle E). 14 Regulates appraisal activities more closely (Subtitle F). B. New TILA Definitions (Section 1401)

A residential mortgage loan is a consumer credit transaction secured by a mortgage or deed of trust on a dwelling or a property that includes a dwelling, other than an open-end credit plan. A qualified mortgage is a mortgage loan (i) that does not allow for negative amortization and is not a balloon loan, (ii) for which the creditor verifies and documents the borrowers income and assets, (iii) that is underwritten using a fully-amortizing payment schedule (for an ARM loan, based on the maximum rate permitted during the first 5 years of the loan term) taking into account all applicable taxes, insurance and assessments, (iv) for which total points and fees do not exceed 3% of the total loan amount, and (v) that complies with debt-to-income ratios established by the Federal Reserve Board (FRB). A mortgage originator is defined essentially the same as in the S.A.F.E. Act (person who takes an application for, offers or negotiates terms of, a residential mortgage loan), except that it also includes someone who assists a consumer in obtaining or applying to obtain a residential mortgage loan, and excludes servicers. A servicer is defined by reference to the definition in RESPA. C. New TILA Section 129B (Sections 1403-1405)

New TILA section 129B prohibits improper steering, including: (1) the payment to or receipt by a mortgage originator of any direct or indirect compensation that varies based on the terms of the loan (other than the amount of the principal); (2) the receipt by a mortgage originator of compensation from the consumer (other than for bona fide third party changes) or the lender, but not both; (3) the steering of a consumer by a mortgage originator to a loan that (a) the consumer lacks a reasonable ability to repay, (b) has predatory characteristics, or (c) is not a qualified mortgage when the consumer qualifies for a qualified mortgage; and (4) abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender, or age. Section 129B does not limit the compensation that a creditor may receive on the sale of a loan, or incentive payments to mortgage originators based on the number of loans originated within a specified period. Section 129B also (1) indicates that the term creditor as used in the liability section of TILA (Section 130) includes a mortgage originator, (2) provides consumers with a private right of action against mortgage originators for improper steering, with a limit on damages equal to actual damages or 3 times the originators total compensation, whichever is higher, plus court costs and attorneys fees, and (3) authorizes the FRB to adopt regulations relating to mortgage loans that it finds to be abusive, unfair, deceptive, [or] predatory, or that are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers. D. 1. New TILA Section 129C Ability to Repay (Section 1411-1412)

14

None of these changes become effective until the FRB (or, after July 21, 2011, the CFPB) adopts implementing regulations and those regulations become effective or, if no regulations have been adopted by then, January 21,2012.

- 12 Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

New section 129C requires creditors to make a reasonable and good faith determination based on verified and documented information that, at closing, the consumer has a reasonable ability to repay the loan according to its terms (using a fully-amortizing payment schedule and taking into account all applicable taxes, insurance and assessments). It also establishes a rebuttable presumption of ability to repay if the loan is a qualified mortgage as defined above. Consistent with these requirements in Dodd-Frank, the FRB issued a proposed rule on May 11, 2011, which will have to be adopted by the CFPB. The proposed rule would provide the following four options for complying with the ability-to-repay requirement: Fulfill the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer's income or assets. Make a "qualified mortgage" (essentially, a loan that (i) does not have certain features, such as negative amortization, (ii) imposes fees within specified limits, and (iii) is underwritten using the maximum interest rate in the first five years), thereby giving the creditor special protection from liability (i.e., either a safe harbor or a rebuttable presumption of compliance, to be determined by the Consumer Financial Protection Bureau). For creditors operating predominantly in rural or underserved areas, make a balloon-payment qualified mortgage. Refinance your own "non-standard mortgage" (a loan with certain risky features) into a more 15 traditional "standard mortgage" with a lower monthly payment. 2. New Defenses To Foreclosure (Section 1413)

Section 129C also allows borrowers to assert a violation of the steering prohibitions in Section 129B and the ability to repay requirements in Section 129C in a foreclosure proceeding as a defense by way of recoupment or set off without regard to any limitations period in TILA. 3. Prepayment Penalty Limitations (Section 1414).

Section 129C also prohibits loans that are not qualified mortgages to carry prepayment penalties, and . only allows qualified mortgages that are not ARMs to carry prepayment penalties if: (i) the loans APR does not exceed the comparable average prime offer rate plus 1.5 percentage points (for a first-lien conforming loan), 2.5 percentage points (for a first-lien jumbo loan), or 3.5 percentage points (for a subordinate-lien loan); (ii) the prepayment penalty is not greater than 3, 2, or 1 percent of the outstanding balance due if the loan is prepaid, respectively, during the first, second or third years after the closing; (iii) there is no penalty after 3 years; and (iv) the creditor also offers the consumer a loan that does not contain a prepayment penalty.
The FRBs May 11, 2011 proposed rule would also implement the Dodd-Frank limits on prepayment penalties.

4.

Other Prohibition/Limitations (Section 1414)

Section 129C also prohibits creditors of residential mortgage loans and HELOCs from: (1) financing single premium credit insurance; (2) including mandatory arbitration clauses in the loan documents; (3) having payment schedules that allow for negative amortization; (4) making refinance loans that would cause the borrower to lose state anti-deficiency protections, without disclosing that effect in advance of closing; and (5) making non-qualified mortgages to first-time homebuyers who have not received HUDapproved homeownership counseling.
15

76 Fed Reg. 27390 (May 11, 2011).

- 13 Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

E.

Amendments to TILA Section 130 (Section 1416-1417, 1422)

Dodd-Frank amends section 130 of TILA in several regards, including the following: It increases the maximum damage award that can be made in a class action for violation of TILA (from $500,000 to $1 million). It allows borrowers to recover enhanced HOEPA damages (sum of all finance charges and fees paid by the borrower) for material violations of the new TILA anti-steering and ability to repay requirements and to assert such violations in a foreclosure proceeding as a defense by recoupment or set off, without regard to any limitations period in TILA. It extends the limitations period from 1 year to 3 years for private actions alleging violations of TILA 129 (HOEPA), or new TILA 129B or 129C. It excludes creditors and assignees from liability if the borrower is convicted of fraud in obtaining the loan. F. New TILA Disclosures (Sections 1418-1420)

Dodd-Frank requires that: (1) 6 months prior written notice be given to borrowers facing resets of hybrid ARMs (consumer credit transactions secured by the consumers principal residence that have a fixed rate of interest for an introductory rate which then resets to an adjustable rate); (2) additional disclosures be given in connection with closed-end mortgage loans; and (3) monthly statements be provided for all residential mortgage loans (other than fixed-rate loans for which equivalent information is provided via coupon books). G. HOEPA Changes (Section 1431-1433)

Dodd-Frank changes the definition of a HOEPA loan (now labeled a high cost loan[HCL]) by: including open-end and purchase money loans; lowering the APR threshold (from 8 and 10 percentage points above the applicable index for a first and a subordinate-lien loan, respectively, to 6-1/2 and 8-1/2 percentage points); changing the applicable index which is used to calculate the threshold (from the yield on Treasury securities to the average prime offer rate); lowering the points and fees threshold (from 8% to 5% of the total loan amount); expanding the list of items that count as points and fees; and adding a third category of high cost loans, i.e., loans that carry prepayment penalties that can be imposed after 6 months or that exceed 2% of the amount prepaid). Dodd-Frank also prohibits balloon payments and late fees in excess of 4% on HCLs, expands the list of limitations and restrictions that apply to HCLs, and adds two cure provisions regarding HCL violations one, within 30 days after closing for any good faith violation and, two, within 60 days after discovery or notice (but before commencement of any action) of an unintentional violation or bona fide error.

*****************************

- 14 Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2

Copyright 2011 Robert M. Jaworski All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the author.

- 15 Copyright 2011 Robert M. Jaworski All Rights Reserved

US_ACTIVE-106183462.2