Compliance - Part 3 Flashcards

Question

What is a Precomputed finance charge? [V-1.1 Truth in Lending Act]

Answer 1

Precomputed Finance Charges A precomputed finance charge includes, for example, interest added to the note amount that is computed by the add-on, discount, or simple interest methods. If reflected in the face amount of the debt instrument as part of the consumer’s obligation, finance charges that are not viewed as prepaid finance charges are treated as precomputed finance charges that are earned over the life of the loan. Think: interest

Answer 2

The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the creditor requires use of the third party. Charges imposed on the consumer by a settlement agent are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge is not otherwise excluded from the finance charge. Immediately below the finance charge definition, the chart presents five captions applicable to determining whether a loan-related charge is a finance charge. The first caption is “charges always included.” This category focuses on specific charges given in the regulation or commentary as examples of finance charges. The second caption, “charges included unless conditions are met,” focuses on charges that must be included in the finance charge unless the creditor meets specific disclosure or other conditions to exclude the charges from the finance charge. The third caption, “conditions,” focuses on the conditions that need to be met if the charges identified to the left of the conditions are permitted to be excluded from the finance charge. Although most charges under the second caption may be included in the finance charge at the creditor’s option, third-party charges and application fees (listed last under the third caption) must be excluded from the finance charge if the relevant conditions are met. However, inclusion of appraisal and credit report charges as part of the application fee is optional. The fourth caption, “charges not included,” identifies fees or charges that are not included in the finance charge under conditions identified by the caption. If the credit transaction is secured by real property or the loan is a residential mortgage transaction, the charges identified in the column, if they are bona fide and reasonable in amount, must be excluded from the finance charge. For example, if a consumer loan is secured by a vacant lot or commercial real estate, any appraisal fees connected with the loan must not be included in the finance charge. The fifth caption, “charges never included,” lists specific charges provided by the regulation as examples of those that automatically are not finance charges (e.g., fees for unanticipated late payments).

Answer 3

-Interest -Transaction fees -Loan origination fees consumer points -Credit guarantee insurance premiums -Charges imposed on the creditor for purchasing the loan, which are passed on to the consumer -Discounts for inducing payment by means other than credit -Mortgage broker fees -Other examples: Fee for preparing TILA disclosures, real estate construction loan inspection fees, fees for post-consummation tax or flood service policy, required credit life insurance charges

Answer 4

Charges included unless conditions are met: -Premiums for credit life, A&H, or loss of income insurance UNLESS: Insurance not required, disclosures are made, and consumer authorizes -Debt cancellation fees UNLESS: Coverage not required, disclosures are made, and consumer authorizes -Premiums for property or liability insurance -UNLESS: Consumer selects insurance company and disclosures are made -Premiums for vendor’s single interest (VSI) insurance -UNLESS: Insurer waives right of subrogation, consumer selects insurance company, and disclosures are made -Security interest charges (filing fees), insurance in lieu of filing fees and certain notary fees -UNLESS: The fee is for lien purposes, prescribed by law, payable to a third public official and is itemized and disclosed -Charges imposed by third parties -UNLESS: Use of the third party is not required to obtain loan and creditor does not retain the charge -Charges imposed by third party closing agents -UNLESS: Creditor does not require and does not retain the fee for the particular service -Appraisal and credit report fees (Application fees may include appraisal or credit report fees) -UNLESS: Charged to all applicants; Application fees, if charged to all applicants, are not finance charges. Application fees may include appraisal or credit report fees.

Answer 5

-Fees for title insurance, title examination, property survey, etc. -Fees for preparing loan documents, mortgages, and other settlement documents -Amounts required to be paid into escrow, if not otherwise included in the finance charge -Notary fees -Pre-consummation flood and pest inspection fees -Appraisal and credit report fees

Answer 6

-Charges payable in a comparable cash transaction. -Fees for unanticipated late payments -Overdraft fees not agreed to in writing -Seller’s points -Participation or membership fees -Discount offered by the seller to induce payment by cash or other means not involving the use of a credit card -Interest forfeited as a result of interest reduction required by law -Charges absorbed by the creditor as a cost of doing business

Answer 7

Annual Percentage Rate Definition – 12 CFR 1026.22 (Closed-End Credit) Credit costs may vary depending on the interest rate, the amount of the loan and other charges, the timing and amounts of advances, and the repayment schedule. The APR, which must be disclosed in nearly all consumer credit transactions, is designed to take into account all relevant factors and to provide a uniform measure for comparing the cost of various credit transactions. The value of a closed-end credit APR must be disclosed as a single rate only, whether the loan has a single interest rate, a variable interest rate, a discounted variable interest rate, or graduated payments based on separate interest rates (step rates), and it must appear with the segregated disclosures. Segregated disclosures are grouped together and do not contain any information not directly related to the disclosures required under (12 CFR 1026.18). Since an APR measures the total cost of credit, including costs such as transaction charges or premiums for credit guarantee insurance, it is not an “interest” rate, as that term is generally used. APR calculations do not rely on definitions of interest in state law and often include charges, such as a commitment fee paid by the consumer, that are not viewed by some state usury statutes as interest. Conversely, an APR might not include a charge, such as a credit report fee in a real property transaction, which some state laws might view as interest for usury purposes. Furthermore, measuring the timing of value received and of payments made, which is essential if APR calculations are to be accurate, must be consistent with parameters under Regulation Z. The APR is often considered to be the finance charge expressed as a percentage. However, two loans could require the same finance charge and still have different APRs because of differing values of the amount financed or of payment schedules. For example, the APR is 12 percent on a loan with an amount financed of $5,000 and 36 equal monthly payments of $166.07 each. It is 13.26 percent on a loan with an amount financed of $4,500 and 35 equal monthly payments of $152.18 each and final payment of $152.22. In both cases the finance charge is $978.52. The APRs on these example loans are not the same because an APR does not only reflect the finance charge, it relates the amount and timing of value received by the consumer to the amount and timing of payments made The APR is a function of: The amount financed, which is not necessarily equivalent to the loan amount. For example, if the consumer must pay at closing a separate 1 percent loan origination fee (prepaid For example, if the consumer must pay at closing a separate 1 percent loan origination fee (prepaid finance charge) on a $100,000 residential mortgage loan, the loan amount is $100,000, but the amount financed would be $100,000 less the $1,000 loan fee, or $99,000. The finance charge, which is not necessarily equivalent to the total interest amount (interest is not defined by Regulation Z, but rather by state or other federal law). For example: If the consumer must pay a $25 credit report fee for an auto loan, the fee must be included in the finance charge. The finance charge in that case is the sum of the interest on the loan (i.e., interest generated by the application of a percentage rate against the loan amount) plus the $25 credit report fee. If the consumer must pay a $25 credit report fee for a home improvement loan secured by real property, the credit report fee must be excluded from the finance charge. The finance charge in that case would be only the interest on the loan. The payment schedule, which does not necessarily include only principal and interest (P + I) payments. For example: If the consumer borrows $2,500 for a vacation trip at 14 percent simple interest per annum and repays that amount with 25 equal monthly payments beginning one month from consummation of the transaction, the monthly P + I payment will be $115.87, if all months are considered equal, and the amount financed would be $2,500. If the consumer’s payments are increased by $2.00 a month to pay a non-financed $50 loan fee during the life of the loan, the amount financed would remain at $2,500 but the payment schedule would be increased to $117.87 a month, the finance charge would increase by $50, and there would be a corresponding increase in the APR. This would be the case whether or not state law defines the $50 loan fee as interest. If the loan above has 55 days to the first payment and the consumer prepays interest at consummation ($24.31 to cover the first 25 days), the amount amount financed would be $2,500. Although the amount financed has been reduced to reflect the consumer’s reduced use of available funds at consummation, the time interval during which the consumer has use of the $2,475.69, 55 days to the first payment, has not changed. Since the first payment period exceeds the limitations of the regulation’s minor irregularities provisions (See 12 CFR 1026.17(c)(4)), it may not be treated as regular. In calculating the APR, the first payment period must not be reduced by 25 days (i.e., the first payment period may not be treated as one month) Financial institutions may, if permitted by state or other law, precompute interest by applying a rate against a loan balance using a simple interest, add-on, discount or some other method, and may earn interest using a simple interest accrual system, the Rule of 78s (if permitted by law) or some other method. Unless the financial institution’s internal interest earnings and accrual methods involve a simple interest rate based on a 360-day year that is applied over actual days (even that is important only for determining the accuracy of the payment schedule), it is not relevant in calculating an APR, since an APR is not an interest rate (as that term is commonly used under state or other law). Since the APR normally need not rely on the internal accrual systems of a bank, it always may be computed after the loan terms have been agreed upon (as long as it is disclosed before actual consummation of the transaction).

Answer 8

Proper calculation of the finance charge and APR are of primary importance. The regulation requires that the terms “finance charge” and “annual percentage rate” be disclosed more conspicuously than any other required disclosure, subject to limited exceptions. The finance charge and APR, more than any other disclosures, enable consumers to understand the cost of the credit and to comparison shop for credit. A creditor’s failure to disclose those values accurately can result in significant monetary damages to the creditor, either from a class action lawsuit or from a regulatory agency’s order to reimburse consumers for violations of law. If an APR or finance charge is disclosed incorrectly, the error is not, in itself, a violation of the regulation if: • The error resulted from a corresponding error in a calculation tool used in good faith by the financial institution. • Upon discovery of the error, the financial institution promptly discontinues use of that calculation tool for disclosure purposes. • The financial institution notifies theCFPBin writing of the error in the calculation tool. When a financial institution claims a calculation tool was used in good faith, the financial institution assumes a reasonable degree of responsibility for ensuring that the tool in question provides the accuracy required by the regulation (15 U.S.C. 1640 (c)). For example, the financial institution might verify the results obtained using the tool by comparing those results to the figures obtained by using another calculation tool. The financial institution might also verify that the tool, if it is designed to operate under the actuarial method, produces figures similar to those provided by the examples in Appendix J to the regulation. The calculation tool should be checked for accuracy before it is first used and periodically thereafter.

Answer 9

Subpart B – Open-End Credit Subpart B relates to open-end credit. It contains rules on accountopening disclosures 12 CFR 1026.6 and periodic statements (12 CFR1026.7-.8). It also describes special rules that apply to credit card transactions, treatment of payments 12 CFR1026.10 and credit balances 12 CFR1026.11, procedures for resolving credit billing errors 12 CFR1026.13, annual percentage rate calculations 12 CFR1026.14, rescission requirements 12 CFR 1026.15 and advertising (12 CFR1026.16).

Answer 10

Time of Disclosures (Periodic Statements) – 12 CFR 1026.5(b) For credit card accounts under an open-end (not home-secured) consumer credit plan, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the payment due date disclosed on the periodic statement and that payments are not treated as late for any purpose if they are received within 21 days after mailing or delivery of the statement. In addition, for all open-end consumer credit accounts with grace periods, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the date on which a grace period (if any) expires and that finance charges are not imposed as a result of the loss of a grace period if a payment is received within 21 days after mailing or delivery of a statement. For purposes of this requirement, a “grace period” is defined as a period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate. For non-credit card open-end consumer plans without a grace period, creditors must adopt reasonable policies and procedures designed to ensure that periodic statements are mailed or delivered at least 14 days prior to the date on which the required minimum periodic payment is due. Moreover, the creditor must adopt reasonable policies and procedures to ensure that it does not treat as late a required minimum periodic payment received by the creditor within 14 days after it has mailed or delivered the periodic statement.

Answer 11

For open-end, not home-secured credit, the following applies: Creditors are required to provide consumers with 45 days’ advance written notice of rate increases and other significant changes to the terms of their credit card account agreements. The list of “significant changes” includes most fees and other terms that a consumer should be aware of before use of the account. Examples of such fees and terms include: • Penalty fees; • Transaction fees; • Fees imposed for the issuance or availability of the open end plan; • Grace period; and • Balance computation method. Changes that do not require advance notice include: • Reductions of finance charges; • Termination of account privileges resulting from an agreement involving a court proceeding; • Increase in an APR upon expiration of a specified period of time previously disclosed in writing; • Increases in variable APRs that change according to an index not under the card issuer’s control; and • Rate increases due to the completion of, or failure of a consumer to comply with, the terms of a workout or temporary hardship arrangement, if those terms are disclosed prior to commencement of the arrangement. A creditor may suspend account privileges, terminate an account, or lower the credit limit without notice. However, a creditor that lowers the credit limit may not impose an overlimit fee or penalty rate as a result of exceeding the new credit limit without a 45-day advance notice that the credit limit has been reduced. For significant changes in terms (with the exception of rate changes, increases in the minimum payment, certain changes in the balance computation method, and when the change results from the consumer’s failure to make a required minimum periodic payment within 60 days after the due date), a creditor must also provide consumers the right to reject the change. If the consumer does reject the change prior to the effective date, the creditor may not apply the change to the account (12 CFR 1026.9(h)(2)(i)). In addition, when a consumer rejects a change or increase, the creditor must not: • Impose a fee or charge, or treat the account as in default solely as a result of the rejection; or • Require repayment of the balance on the account using a method that is less beneficial to the consumer than one of the following methods: (1) the method of repayment prior to the rejection; (2) an amortization period of not less than five years from the date of rejection; or (3) a minimum periodic payment that includes a percentage of the balance that is not more than twice the percentage included prior to the date of rejection.

Answer 12

Finance Charge (Open-End Credit) – 12 CFR 1026.6(a)(1) and 1026.6(b)(3) Each finance charge imposed must be individually itemized. The aggregate total amount of the finance charge need not be disclosed.

Answer 13

Determining the Balance and Computing the Finance Charge There are three common methods to determine the balance to which the periodic rate is applied:the previous balance method, the daily balance method, and the average daily balance method, which are described as follows: • Previous balance method. The balance on which the periodic finance charge is computed is based on the balance outstanding at the start of the billing cycle. The periodic rate is multiplied by this balance to compute the finance charge. • Daily balance method. A daily periodic rate is applied to either the balance on each day in the cycle or the sum of the balances on each of the days in the cycle. If a daily periodic rate is multiplied by the balance on each day in the billing cycle, the finance charge is the sum of the products. If the daily periodic rate is multiplied by the sum of all the daily balances, the result is the finance charge. • Average daily balance method. The average daily balance is the sum of the daily balances (either including or excluding current transactions) divided by the number of days in the billing cycle. A periodic rate is then multiplied by the average daily balance to determine the finance charge. If the periodic rate is a daily one, the product of the rate multiplied by the average balance is multiplied by the number of days in the cycle. In addition to those common methods, financial institutions have other ways of calculating the balance to which the periodic rate is applied. By reading the financial institution’s explanation, the examiner should be able to calculate the balance to which the periodic rate was applied. In some cases, the examiner may need to obtain additional information from the financial institution to verify the explanation disclosed. If the examiner is unable to understand the disclosed explanation, he or she should discuss the explanation with management and should remind management of Regulation Z’s requirement that disclosures be clear and conspicuous. When a balance is determined without first deducting all credits and payments made during the billing cycle, that fact and the amount of the credits and payments must be disclosed. If the financial institution uses the daily balance method and applies a single daily periodic rate, disclosure of the balance to which the rate was applied may be stated as any of the following: A balance for each day in the billing cycle. The daily periodic rate is multiplied by the balance on each day and the sum of the products is the finance charge. • A balance for each day in the billing cycle on which the balance in the account changes. The finance charge is figured by the same method as discussed previously, but the statement shows the balance only for those days on which the balance changed. • The sum of the daily balances during the billing cycle. The balance on which the finance charge is computed is the sum of all the daily balances in the billing cycle. The daily periodic rate is multiplied by that balance to determine the finance charge. • The average daily balance during the billing cycle. If this is stated, the financial institution may, at its option, explain that the average daily balance is or can be multiplied by the number of days in the billing cycle and the periodic rate applied to the product to determine the amount of interest. If the financial institution uses the daily balance method but applies two or more daily periodic rates, the sum of the daily balances may not be used. Acceptable ways of disclosing the balances include: • A balance for each day in the billing cycle; • A balance for each day in the billing cycle on which the balance in the account changes; or • Two or more average daily balances. If the average daily balances are stated, the financial institution may, at its option, explain that interest is or may be determined by 1) multiplying each of the average daily balances by the number of days in the billing cycle (or if the daily rate varied during the cycle, by multiplying the number of days that the applicable rate was in effect), 2) by multiplying each of the results by the applicable daily periodic rate, and 3) adding these products together. In explaining the method used to find the balance on which the finance charge is computed, the financial institution need not reveal how it allocates payments or credits. That information may be disclosed as additional information, but all required information must be clear and conspicuous. NOTE: 12 CFR 1026.54 prohibits a credit card issuer from calculating finance charges based on balances for days in previous billing cycles as a result of the loss of a grace period (a practice sometimes referred to as “double-cycle billing”). Finance Charge Resulting from Two or More Periodic Rates Some financial institutions use more than one periodic rate in computing the finance charge. For example, one rate may apply to balances up to a certain amount and another rate to balances more than that amount. If two or more periodic rates apply, the financial institution must disclose all rates and conditions. The range of balances to which each rate applies also must be disclosed (12 CFR 1026.6(a)(1)). It is not necessary, however, to break the finance charge into separate components based on the different rates 20 If a creditor does not disclose the effective (or quotient method) APR on a HELOC periodic statement, it must instead disclose the charges (fees and interest) imposed as provided in 12 CFR 1026.7(a).

Answer 14

Annual Percentage Rate (Open-End Credit) The disclosed APR on an open-end credit account is accurate if it is within one-eighth of one percentage point of the APR calculated under Regulation Z.

Answer 15

Determination of APR – 12 CFR 1026.14 The basic method for determining the APR in open-end credit transactions involves multiplying each periodic rate by the number of periods in a year. This method is used in all types of open-end disclosures, including: • The corresponding APR in the initial disclosures; • The corresponding APR on periodic statements; • The APR in early disclosures for credit card accounts; • The APR in early disclosures for home-equity plans; • The APR in advertising; and • The APR in oral disclosures. The corresponding APR is prospective, and it does not involve any particular finance charge or periodic balance. A second method of calculating the APR is the quotient method. At a creditor’s option, the quotient method may be disclosed on periodic statements for home-equity plans subject to 12 CFR 1026.40 (home-equity lines of credit or HELOCs).20 The quotient method reflects the annualized equivalent of the rate that was actually applied during a cycle. This rate, also known as the effective APR, will differ from the corresponding APR if the creditor applies minimum, fixed, or transaction charges to the account during the cycle (12 CFR1026.14(c)). Brief Outline for Open-End Credit APR Calculations on Periodic Statements NOTE: Assume monthly billing cycles for each of the calculations below. I. Basic method for determining the APR in an open-end credit transaction. This is the corresponding APR (12 CFR 1026.14(b)). A. Monthly rate x 12 = APR II. Optional effective APR that may be disclosed on HELOC periodic statements A. APR when only periodic rates are imposed (12 CFR 1026.14(c)(1)). 1. Monthly rate x 12 = APR Or 2. (Total finance charge / sum of the balances) x 12 = APR B. APR when minimum or fixed charge, but not transaction charge imposed (12 CFR 1026.14(c)(2)). 1. (Total finance charge / amount of applicable balance21) x 12 = APR22 C. APR when the finance charge includes a charge related to a specific transaction (such as a cash advance fee), even if the total finance charge also includes any other minimum, fixed, or other charge not calculated using a periodic rate (12 CFR 1026.14(c)(3)). 1. (Total finance charge / (all balances + other amounts on which a finance charge was imposed during the billing cycle without duplication23) x 12 = APR24 D. APR when the finance charge imposed during the billing cycle includes a minimum or fixed charge that does not exceed 50 cents for a monthly or longer billing cycle (or pro rata part of 50 cents for a billing cycle shorter than monthly) (12 CFR 1026.14(c)(4)). 1. Monthly rate x 12 = APR E. APR calculation when daily periodic rates are applicable if only the periodic rate is imposed or when 21 For the following formulas, the APR cannot be determined if the applicable balance is zero. (12 CFR 1026.14(c)(2)) 22 Loan fees, points, or similar finance charges that relate to the opening of the account must not be included in the calculation of the APR. 23 The sum of the balances may include the average daily balance, adjusted balance, or previous balance method. When a portion of the finance charge is a minimum or fixed charge but not a transactional charge is imposed (12 CFR 1026.14(d)). 1. (Total finance charge / average daily balance) x 12 = APR Or 2. (Total finance charge / sum of daily balances) x 365 = APR 21 For the following formulas, the APR cannot be determined if the applicable balance is zero. (12 CFR 1026.14(c)(2)) 22 Loan fees, points, or similar finance charges that relate to the opening of the account must not be included in the calculation of the APR. 23 The sum of the balances may include the average daily balance, adjusted balance, or previous balance method. When a portion of the finance charge is

Answer 16

Change in Terms Notices for Home Equity Plans Subject to 12 CFR 1026.40 – 12 CFR 1026.9(c) Servicers are required to provide consumers with 15 days’ advance written notice of a change to any term required to be disclosed under 12 CFR 1026.6(a) or where the required minimum periodic payment is increased. Notice is not required when the change involves a reduction of any component of a finance charge or other charge or when the change results from an agreement involving a court proceeding. If the creditor prohibits additional extensions of credit or reduces the credit limit in certain circumstances (if permitted by contract), a written notice must be provided no later than three business days after the action is taken and must include the specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also must state that fact.

Answer 17

Payments – 12 CFR 1026.10 (Open-End Credit) Creditors are required to credit a payment to the consumer’s account as of the date of receipt, except when a delay in crediting does not result in a finance or other charge. If a creditor fails to credit a payment, as required by 12 CFR 1026.10(a) or (b), in time to avoid the imposition of finance or other charges, the creditor shall adjust the consumer’s account so that the charges imposed are credited to the consumer’s account during the next billing cycle. If a card issuer makes a material change in the address for receiving payments or procedures for handling payments, and such change causes a material delay in the crediting of a payment to the consumer’s account during the 60–day period following the date on which such change took effect, the card issuer may not impose any late fee or finance charge for a late payment on the credit card account during the 60–day period following the date on which the change took effect.

Answer 18

Timely Settlement of Estates – 12 CFR 1026.11(c) Issuers are required to establish procedures to ensure that any administrator of an estate can resolve the outstanding credit card balance of a deceased account holder in a timely manner. If an administrator requests the amount of the balance: • The issuer is prohibited from imposing additional fees on the account; • The issuer is required to disclose the amount of the balance to the administrator in a timely manner (safe harbor of 30 days); and • If the balance is paid in full within 30 days after disclosure of the balance, the issuer must waive or rebate any trailing or residual interest charges that accrued on the balance following the disclosure.

Answer 19

Billing Error Resolution – 12 CFR 1026.13 (Open-End Credit) A billing error notice is a written notice from a consumer that: • Is received by a creditor at the address disclosed under 12 CFR 1026.7(a)(9) or (b)(9), as applicable, no later than 60 days after the creditor transmitted the first periodic statement that reflects the alleged billing error; • Enables the creditor to identify the consumer’s name and account number; and • To the extent possible, indicates the consumer’s belief and the reasons for the belief that a billing error exists, and the type, date, and amount of the error. The creditor shall mail or deliver written acknowledgment to the consumer within 30 days of receiving a billing error notice, unless the creditor has complied with the appropriate resolution procedures of 12 CFR 1026.13(e) and (f), as applicable, within the 30–day period. Furthermore, the creditor credit must comply with the appropriate resolution procedures provided by 12 CFR 1026.13(e) and (f), as applicable, within two complete billing cycles (but in no event later than 90 days) after receiving a billing error notice. Until a billing error is resolved, the following rules apply: • The consumer need not pay (and the creditor may not try to collect) any portion of any required payment that the consumer believes is related to the disputed amount (including related finance or other charges). • The creditor or its agent is also prohibited from making or threatening to make an adverse report to any person about the consumer’s credit standing, or report that an amount or account is delinquent, because the consumer failed to pay the disputed amount or related finance or other charges. • A creditor shall not accelerate any part of the consumer’s indebtedness or restrict or close a consumer’s account solely because the consumer has exercised in good faith rights provided by this section. A creditor is not prohibited, however, from taking action to collect any undisputed portion of the item or bill; from deducting any disputed amount and related finance or other charges from the consumer’s credit limit on the account; or from reflecting a disputed amount and related finance or other charges on a periodic statement, provided that the creditor indicates on or with the periodic statement that payment of any disputed amount and related finance or other charges is not required pending the creditor’s compliance with this section. If a creditor determines that a billing error occurred as asserted, it must within the applicable time limits: • Correct the billing error and credit the consumer’s account with any disputed amount and related finance or other charges, as applicable; and • Mail or deliver notification of the correction to the consumer. If, after conducting a reasonable investigation, a creditor determines that no billing error occurred or that a different billing error occurred from that asserted, the creditor must within the applicable time limits: • Mail or deliver to the consumer an explanation that sets forth the reasons for the creditor’s belief that the billing error alleged by the consumer is incorrect in whole or in part; • Furnish copies of documentary evidence of the consumer’s indebtedness, if the consumer so requests; and • If a different billing error occurred, correct the billing error and credit the consumer’s account with any disputed amount and related finance or other charges, as applicable. If a creditor determines that a consumer owes all or part of the disputed amount and related finance or other charges, determine whether the credit complied with the requirements provided in (12 CFR 1026.13(g)). A creditor that has fully complied with the requirements of 12 CFR 1026.13 has no further responsibilities under this section (other than as provided in 12 CFR 1026.13(g)(4)) if a consumer reasserts substantially the same billing error. NOTE: Special credit card provisions provide additional protections for consumers, including provisions relating to unauthorized use (12 CFR 1026.12).

Answer 20

Minimum Payments – 12 CFR 1026.7(b)(12) For credit card accounts under an open-end credit plan, card issuers generally must disclose on periodic statements an estimate of the amount of time and the total cost (principal and interest) involved in paying the balance in full by making only the minimum payments, an estimate of the monthly payment amount required to pay off the balance in 36 months and the total cost (principal and interest) of repaying the balance in 36 months. Card issuers also must disclose a minimum payment warning and an estimate of the total interest that a consumer would save if that consumer repaid the balance in 36 months, instead of making minimum payments.

Answer 21

Advertising for Open-End Plans– 12 CFR 1026.16 The regulation requires that loan product advertisements provide accurate and balanced information, in a clear and conspicuous manner, about rates, monthly payments, and other loan features. The advertising rules ban several deceptive or misleading advertising practices, including representations that a rate or payment is “fixed” when in fact it can change. If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor. If any finance charges or other charges are set forth in an advertisement, the advertisement must also clearly and conspicuously state the following: • Any minimum, fixed, transaction, activity or similar charge that is a finance charge under 12 CFR 1026.4 that could be imposed; • Any periodic rate that may be applied expressed as an APR as determined under (12 CFR 1026.14(b)). If the plan provides for a variable periodic rate, that fact must be disclosed; and • Any membership or participation fee that could be imposed. If any finance charges or other charge or payment terms are set forth, affirmatively or negatively, in an advertisement for a home-equity plan subject to the requirements of 12 CFR 1026.40, the advertisement also must clearly and conspicuously set forth the following: • Any loan fee that is a percentage of the credit limit under the plan and an estimate of any other fees imposed for opening the plan, stated as a single dollar amount or a reasonable range; • Any periodic rate used to compute the finance charge, expressed as an APR as determined under (12 CFR 1026.14(b)); and • The maximum APR that may be imposed in a variable-rate plan. Regulation Z’s open-end home-equity plan advertising rules include a clear and conspicuous standard for home-equity plan advertisements, consistent with the approach taken in the advertising rules for consumer leases under Regulation M. Commentary provisions clarify how the clear and conspicuous standard applies to advertisements of home-equity plans with promotional rates or payments, and to Internet, television, and oral advertisements of home-equity plans. The regulation allows alternative disclosures for television and radio advertisements for home-equity plans. The regulation also requires that advertisements adequately disclose not only promotional plan terms, but also the rates or payments that will apply over the term of the plan. Regulation Z also contains provisions implementing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which requires disclosure of the tax implications of certain home-equity plans.

Answer 22

Subpart C – Closed-End Credit Subpart C relates to closed-end credit. It contains rules on disclosures 12 CFR 1026.17-.20, treatment of credit balances 12 CFR1026.21, annual percentage rate calculations 12 CFR 1026.22, rescission rights 12 CFR 1026.23, and advertising (12 CFR1026.24). The TILA-RESPA Integrated Disclosures must be given for most closed-end transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR1026.33. The TILA-RESPA Integrated Disclosures do not apply to HELOCs, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. Truth in Lending disclosures (TIL disclosures) and the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet must still be provided for certain closed-end loan transactions.

Answer 23

Disclosures, Generally Timing Generally, all disclosures provided to consumers must be made clearly and conspicuously in writing, in a form that the consumer may keep ((12 CFR 1026.17(a), 1026.37(o), 1026.38(t)). However, the timing of the disclosures may change depending on the transaction (12 CFR1026.19(a), 1026.19(e)(1)(iii), 1026.19(f)(1)(ii), 1026.19(g)). Disclosures in connection with non-mortgage closed-end loans and specified housing assistance loan programs for low- and moderate-income consumers must be provided before consummation of the transaction (12 CFR 1026.3). For most closed-end transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33 (including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes), disclosures must be provided in accordance with the timing requirements outlined in 12 CFR1026.19(e), (f) and (g). Generally, a creditor is required to mail or deliver the Loan Estimate within three business days of receipt of the consumer’s loan application and to ensure that the consumer receives the Closing Disclosure no later than three business days before loan consummation (12 CFR1026.19(e)(iii), 1026.19(f)(1)(ii)). If the loan is a purchase transaction, the special information booklet must also be provided within three business days of receipt of the consumer’s application (12 CFR1026.19(g)). The specifics of these disclosure timing requirements are further discussed below, including a discussion about revised disclosures. Mortgage loans not subject to 12 CFR1026.19(e) and (f) (e.g., reverse mortgages, and chattel-dwelling loans) have different disclosure requirements. For reverse mortgages, disclosures must be delivered or mailed to the consumer no later than the third business day after a creditor receives the consumer’s written application (12 CFR 1026.19(a)). For chattel-dwelling mortgage loans, disclosures must be provided to the consumer prior to consummation of the loan (12 CFR 1026.17(b)). Revised disclosures are also required within three business days of consummation if certain mortgage loan terms change (12 CFR1026.19(a)(2)). For loans like reverse mortgages, the consumer will receive the Good Faith Estimate (GFE), HUD-1 Settlement Statement (HUD-1), and Truth in Lending disclosures as required under the applicable sections of both TILA and RESPA. Consumers receive TIL disclosures for chattel-dwelling loans that are not secured by land, but the GFE and the HUD-1 are not required. Finally, certain variable rate transactions secured by a dwelling have additional disclosure obligations with specific timing requirements both prior to and after consummation (see 12 CFR1026.20(c) and (d) below).

Answer 24

Generally Disclosures provided for closed-end transactions must reflect the credit terms to which the parties will be legally bound as of the outset of the credit transaction. If information required for the disclosures is unknown, the creditor may provide the consumer with an estimate, using the best information reasonably available. The disclosure must be clearly marked as an estimate. Variable and Adjustable Rate If the terms of the legal obligation allow the financial institution, after consummation of the transaction, to increase the APR, the financial institution must furnish the consumer with certain information on variable rates. Variable rate disclosures are not applicable to rate increases resulting from delinquency, default, assumption, acceleration, or transfer of the collateral. Some of the more important transaction-specific variable rate disclosure requirements follow. • Disclosures for variable rate loans must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. If the variable rate transaction includes either a seller buydown that is reflected in a contract or a consumer buydown, the disclosed APR should be a composite rate based on the lower rate for the buy-down period and the rate that is the basis for the variable rate feature for the remainder of the term. • If the initial rate is not determined by the index or formula used to make later interest rate adjustments, as in a discounted variable-rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for as long as it is applied and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation (i.e., the fully indexed rate). o If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the adjustment, from changing to the fully indexed rate, the effect of that rate or payment cap needs to be reflected in the disclosures. o The index at consummation need not be used if the contract provides a delay in the implementation of changes in an index value (e.g., the contract indicates that future rate changes are based on the index value in effect for some specified period, such as 45 days before the change date). Instead, the financial institution may use any rate from the date of consummation back to the beginning of the specified period (e.g., during the previous 45-day period). • If the initial interest rate is set according to the index or formula used for later adjustments but is set at a value as of a date before consummation, disclosures should be based on the initial interest rate, even though the index may have changed by the consummation date.

Answer 25

Finance Charge – 12 CFR 1026.18(c) The total amount of the finance charge must be disclosed for all loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) must be treated as accurate if the amount disclosed as the finance charge (1) is understated by no more than $100 or (2) is greater than the amount required to be disclosed.

Answer 26

Amount Financed – 12 CFR 1026.18(b), 1026.18(c), 1026.38(o)(3) Definition The amount financed is the net amount of credit extended for the consumer’s use. It should not be assumed that the amount financed under the regulation is equivalent to the note amount, proceeds, or principal amount of the loan. The amount financed normally equals the total of payments less the finance charge. To calculate the amount financed, all amounts and charges connected with the transaction, either paid separately or included in the note amount, must first be identified. Any prepaid, precomputed, or other finance charge must then be determined. The amount financed must not include any finance charges. If finance charges have been included in the obligation (either prepaid or precomputed), they must be subtracted from the face amount of the obligation when determining the amount financed. The resulting value must be reduced further by an amount equal to any prepaid finance charge paid separately. The final resulting value is the amount financed. When calculating the amount financed, finance charges (whether in the note amount or paid separately) should not be subtracted more than once from the total amount of an obligation. Charges not in the note amount and not included in the finance charge (e.g., an appraisal fee paid separately in cash on a real estate loan) are not required to be disclosed under Regulation Z and must not be included in the amount financed. An itemization of the amount financed is required (except as provided in 12 CFR 1026.18(c)(2) or (c)(3)), unless the loan is subject to 12 CFR 1026.19(e) and (f) (i.e., most closed-end mortgage loans).

Answer 27

Calculating the Amount Financed A consumer signs a note secured by real property in the amount of $5,435. The note amount includes $5,000 in proceeds disbursed to the consumer, $400 in precomputed interest, $25 paid to a credit reporting agency for a credit report, and a $10 service charge. Additionally, the consumer pays a $50 loan fee separately in cash at consummation. The consumer has no other debt with the financial institution. The amount financed is $4,975. The amount financed may be calculated by first subtracting all finance charges included in the note amount ($5,435 - $400 - $10 = $5,025). The $25 credit report fee is not a finance charge because the loan is secured by real property. The $5,025 is further reduced by the amount of prepaid finance charges paid separately, for an amount financed of $5,025 - $50 = $4,975. The answer is the same whether finance charges included in the obligation are considered prepaid or precomputed finance charges. The financial institution may treat the $10 service charge as an addition to the loan amount and not as a prepaid finance charge. If it does, the loan principal would be $5,000. The $5,000 loan principal does not include either the $400 or the $10 precomputed finance charge in the note. The loan principal is increased by other amounts that are financed that are not part of the finance charge (the $25 credit report fee) and reduced by any prepaid finance charges (the $50 loan fee, not the $10 service charge) to arrive at the amount financed of $5,000 + $25 - $50 = $4,975. Conversely, the financial institution may treat the $10 service charge as a prepaid finance charge. If it does, the loan principal would be $5,010. The $5,010 loan principal does not include the $400 precomputed finance charge. The loan principal is increased by other amounts that are financed that are not part of the finance charge (the $25 credit report fee) and reduced by any prepaid finance charges (the $50 loan fee and the $10 service charge withheld from loan proceeds) to arrive at the same amount financed of $5,010 + $25 - $50- $10 = $4,975.

Answer 28

Payment Schedule – 12 CFR 1026.18(g) For transactions that are not subject to 12 CFR 1026.19(e) and (f), the disclosed payment schedule must reflect all components of the finance charge. It includes all payments scheduled to repay loan principal, interest on the loan, and any other finance charge payable by the consumer after consummation of the transaction. However, any finance charge paid separately before or at consummation (e.g., odd days’ interest) is not part of the payment schedule. It is a prepaid finance charge that must be reflected as a reduction in the value of the amount financed. At the creditor’s option, the payment schedule may include amounts beyond the amount financed and finance charge (e.g., certain insurance premiums or real estate escrow amounts such as taxes added to payments). However, when calculating the APR, the creditor must disregard such amounts. If the obligation is a renewable balloon payment instrument that unconditionally obligates the financial institution to renew the short-term loan at the consumer’s option or to renew the loan subject to conditions within the consumer’s control, the payment schedule must be disclosed using the longer term of the renewal period or periods. The long-term loan must be disclosed with a variable rate feature. If there are no renewal conditions or if the financial institution guarantees to renew the obligation in a refinancing, the payment schedule must be disclosed using the shorter balloon payment term. The short-term loan must be disclosed as a fixed rate loan, unless it contains a variable rate feature during the initial loan term.

Answer 29

Annual Percentage Rate (Closed-End Credit) – 12 CFR 1026.22 Calculating the Annual Percentage Rate – 12 CFR 1026.22 The APR must be determined under one of the following: • The actuarial method, which is defined by Regulation Z and explained in Appendix J to the regulation. The U.S. Rule, which is permitted by Regulation Z and briefly explained in Appendix J to the regulation. The U.S. Rule is an accrual method that seems to have first surfaced officially in an early 19th-century United States Supreme Court case, Story v. Livingston, 38 U.S. 359 (1839). Whichever method is used by the financial institution, the rate calculated will be accurate if it is able to “amortize” the amount financed while it generates the finance charge under the accrual method selected. Financial institutions also may rely on minor irregularities and accuracy tolerances in the regulation, both of which effectively permit somewhat imprecise, but still legal, APRs to be disclosed. Accuracy Tolerances The disclosed APR on a closed-end transaction is accurate for: • Regular transactions (which include any single advance transaction with equal payments and equal payment periods, or an irregular first payment period and/or a first or last irregular payment), if the disclosed APR is within oneeighth of 1 percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(2)). • Irregular transactions (which include multiple advance transactions and other transactions not considered regular), if the disclosed APRis within one-quarter of 1 percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(3)). • Mortgage transactions, if the disclosed APR is within oneeighth of 1 percentage point for regular transactions or onequarter of 1 percentage point for irregular transactions or if: 1) The rate results from the disclosed finance charge, and: a) The disclosed finance charge is considered accurate under 12 CFR1026.18(d)(1) or 1026.38(o)(2), as applicable; or b) The disclosed finance charge is calculated incorrectly but is considered accurate for purposes of rescission, under 12 CFR1026.23(g) or (h), whichever applies (12 CFR1026.22(a)(4)). 2) The disclosed finance charge is calculated incorrectly but is considered accurate under 12 CFR 1026.18(d)(1) or 1026.38(o)(2), as applicable, or 12 CFR 1026.23 (g) or (h), and either: a) The finance charge is understated, and the disclosed APR is also understated but is closer to the actual APR than the APR that would be considered accurate under 12 CFR1026.22(a)(4); or b) The disclosed finance charge is overstated and the disclosed APR is also overstated but is closer to the actual APR than the APR that would be considered accurate under (12 CFR 1026.22(a)(4)). For example, in an irregular transaction subject to a tolerance of one-fourth of 1 percentage point, if the actual APR is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under 12 CFR 1026.22(a)(4), a disclosed APR of 8.65 percent is considered accurate under (12 CFR1026.22(a)(5)). However, a disclosed APR below 8.50 percent or above 9.25 percent would not be considered accurate.

Answer 30

Accuracy Tolerances The disclosed APR on a closed-end transaction is accurate for: • Regular transactions (which include any single advance transaction with equal payments and equal payment periods, or an irregular first payment period and/or a first or last irregular payment), if the disclosed APR is within oneeighth of 1 percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(2)). • Irregular transactions (which include multiple advance transactions and other transactions not considered regular), if the disclosed APRis within one-quarter of 1 percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(3)). • Mortgage transactions, if the disclosed APR is within oneeighth of 1 percentage point for regular transactions or onequarter of 1 percentage point for irregular transactions or if: 1) The rate results from the disclosed finance charge, and: a) The disclosed finance charge is considered accurate under 12 CFR1026.18(d)(1) or 1026.38(o)(2), as applicable; or b) The disclosed finance charge is calculated incorrectly but is considered accurate for purposes of rescission, under 12 CFR1026.23(g) or (h), whichever applies (12 CFR1026.22(a)(4)). 2) The disclosed finance charge is calculated incorrectly but is considered accurate under 12 CFR 1026.18(d)(1) or 1026.38(o)(2), as applicable, or 12 CFR 1026.23 (g) or (h), and either: a) The finance charge is understated, and the disclosed APR is also understated but is closer to the actual APR than the APR that would be considered accurate under 12 CFR1026.22(a)(4); or b) The disclosed finance charge is overstated and the disclosed APR is also overstated but is closer to the actual APR than the APR that would be considered accurate under (12 CFR 1026.22(a)(4)). For example, in an irregular transaction subject to a tolerance of one-fourth of 1 percentage point, if the actual APR is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under 12 CFR 1026.22(a)(4), a disclosed APR of 8.65 percent is considered accurate under (12 CFR1026.22(a)(5)). However, a disclosed APR below 8.50 percent or above 9.25 percent would not be considered accurate.

Answer 31

Construction-Only and Construction-Permanent Loans – 12 CFR 1026.17(c)(6), 12 CFR 1026.37-.38, and Appendix D Due to the structure of construction-permanent and certain other multiple advance loans, Regulation Z includes certain optional provisions to help a creditor estimate the components of the APR and finance charge computations for these loans. In many instances, the amount and dates of advances are not predictable with certainty since they depend on the progress of the work. Regulation Z provides that the APR and finance charge for such loans may be estimated for disclosure based on the best information reasonably available at the time of disclosure (12 CFR 1026.17(c)(2)(i)). Further, a creditor has optionality as to whether it discloses the advances separate or together as one transaction in certain circumstances. First, a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction or disclosed as separate transactions (12 CFR 1026.17(c)(6)(i)). Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction (12 CFR 1026.17(c)(6)(ii)). Because construction loans or constructionpermanent loans may be disclosed as one transaction, or as multiple transactions, computations can be impacted by this decision. If the actual schedule of advances is not known, the methods set forth in Appendix D may be used to estimate the interest portion of the finance charge and the annual percentage rate and to make disclosures (12 CFR Part 1026 App. D). At its option, the financial institution may rely on the representations of other parties to acquire necessary information (for example, it might look to the consumer for the dates of advances). In addition, if either the amounts or dates of advances are unknown (even if some of them are known), the financial institution may, at its option, use Appendix D to the regulation (and its associated commentary) to make calculations and disclosures. The finance charge and payment schedule obtained through Appendix D may be used with volume one of the CFPB’s APR tables or with any other appropriate computation tool to determine the APR. If the financial institution elects not to use Appendix D, or if Appendix D cannot be applied to a loan (e.g., Appendix D does not apply to a combined construction-permanent loan if the payments for the permanent loan begin during the construction period), the financial institution must make its estimates under 12 CFR 1026.17(c)(2) and calculate the APR using multiple advance formulas.

Answer 32

Interest Reserves In a multiple advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan amount for that interest payment purpose. If the creditor requires interest reserves for construction loans, Appendix D provides further guidance. Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D (Comment App. D-5). If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under Appendix D (Comment App. D-5.i). If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures. To reflect the effects of such compounding, the creditor should use the formula in Appendix D (Comment App. D-5.ii).

Answer 33

No - Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D

Answer 34

If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures.

Answer 35

In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges and points and fees that would not be imposed but for the construction financing. Those amounts must be in disclosures for the construction phase and may not be included in the disclosures for the permanent phase.

Answer 36

If a creditor charges separate amounts for the finance charges and points and fees for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges and points and fees must be allocated to permanent financing.

Answer 37

Fees and charges that are not used to compute the finance charge or points and fees may be allocated between the transactions in any manner the creditor chooses (Comment 17(c)(6)-5).

Answer 38

Confusion often arises over whether to use the 360-day or 365-day year in computing interest, particularly when the finance charge is computed by applying a daily rate to an unpaid balance. Many single payment loans or loans payable on demand are in this category. There are also loans in this category that call for periodic installment payments. Regulation Z does not require the use of one method of interest computation in preference to another (although state law may). It does, however, permit financial institutions to disregard the fact that months have different numbers of days when calculating and making disclosures. This means financial institutions may base their disclosures on calculation tools that assume all months have an equal number of days, even if their practice is to take account of the variations in months to collect interest. For example, a financial institution may calculate disclosures using a financial calculator based on a 360-day year with 30-day months, when, in fact, it collects interest by applying a factor of 1/365 of the annual interest rate to actual days.

Answer 39

Yes -Disclosure violations may occur, however, when a financial institution applies a daily interest factor based on a 360-day year to the actual number of days between payments. In those situations, the financial institution must disclose the higher values of the finance charge, the APR, and the payment schedule resulting from this practice. For example, a 12 percent simple interest rate divided by 360 days results in a daily rate of .033333 percent. If no charges are imposed except interest, and the amount financed is the same as the loan amount, applying the daily rate on a daily basis for a 365-day year on a $10,000 one year, single payment, unsecured loan results in an APR of 12.17 percent (.033333 percent x 365 = 12.17 percent), and a finance charge of $1,216.67. There would be a violation if the APR were disclosed as 12 percent or if the finance charge were disclosed as $1,200 (12 percent x $10,000). *Violations are subject to tolerances rules, however: 1/8 of 1 percent for regular loans and 1/4 of 1 percent for irregular loans However, if there are no other charges except interest, the application of a 360-day year daily rate over 365 days on a regular loan would not result in an APR in excess of the one eighth of one percentage point APR tolerance unless the nominal interest rate is greater than 9 percent. For irregular loans, with one-quarter of 1 percentage point APR tolerance, the nominal interest rate would have to be greater than 18 percent to exceed the tolerance. NOTE: Notwithstanding the APR tolerance, a creditor’s disclosures must reflect the terms of the legal obligation between the parties (12 CFR 1026.17(c)(1)), and the APR must be determined in accordance with either the actuarial method or the U.S. Rule method (12 CFR 1026.22(a)(1)). A creditor may not ignore, for disclosure purposes, the effects of applying a 360-day year daily rate over 365 days. (Comment 17(c)(3)-1.ii).

Answer 40

Required Deposit – 12 CFR 1026.18(r) A required deposit, with certain exceptions, is one that the financial institution requires the consumer to maintain as a condition of the specific credit transaction. It can include a compensating balance or a deposit balance that secures the loan. The effect of a required deposit is not reflected in the APR. Also, a required deposit is not a finance charge since it is eventually released to the consumer. A deposit that earns at least 5 percent per year need not be considered a required deposit.

Answer 41

Transactions with TILA-RESPA Integrated Disclosures – Generally On December 31, 2013, the CFPB published a final rule implementing Sections 1098(2) and 1100A(5) of the Dodd-Frank Act, which directed the CFPB to publish a single, integrated disclosure for mortgage loan transactions, which includes mortgage loan disclosure requirements under TILA and sections 4 and 5 of RESPA. The amendments in the final rule, referred to as the TILA-RESPA Integrated Disclosure Rule or TRID, are applicable to covered closed-end mortgage loans for which a creditor or mortgage broker received an application on or after October 3, 2015. As a result, Regulation Z now houses the integrated forms, timing, and related disclosure requirements for most closed-end consumer mortgage loans. The integrated disclosures are not used to disclose information about reverse mortgages, HELOCs, chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages use, as applicable, the GFE, HUD-1, and TIL disclosures. Most closed-end mortgage loans are exempt from the requirement to provide the GFE, HUD-1, and servicing disclosure requirements of (12 CFR 1024.6, 1024.7, 1024.8, 1024.10, and 1024.33(a)). Instead, these loans are subject to disclosure, timing, and other requirements under TILA and Regulation Z. Specifically, the provisions mentioned in the first sentence of this paragraph do not apply to the following federally related mortgage loans: • Loans subject to the TILA-RESPA Integrated Disclosure requirements for certain closed-end consumer credit transactions secured by real property or a cooperative unit set forth in (12 CFR 1026.19(e), (f), and (g)); or • Certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention (12 CFR 1026.3(h)). NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages).

Answer 42

• Loans subject to the TILA-RESPA Integrated Disclosure requirements for certain closed-end consumer credit transactions secured by real property or a cooperative unit set forth in (12 CFR 1026.19(e), (f), and (g)); or • Certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention (12 CFR 1026.3(h)). NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages).

Answer 43

Use TILA-RESPA Integrated Disclosures (See Regulation Z): • Most closed-end mortgage loans, including: o Construction-only loans o Loans secured by vacant land or by 25 or more acres

Answer 44

Continue to use TIL25 and RESPA disclosures (as applicable): • HELOCs (subject to disclosure requirements under 12 CFR 1026.40) 26 • Reverse mortgages (subject to existing TIL and GFE disclosures) • Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA) NOTE: In both cases, there is a partial exemption from these disclosures under 12 CFR 1026.3(h) for loans secured by subordinate liens and associated with certain housing assistance loan programs for low- and moderate- income persons. *What is the exception? Are they subject to TRID as described above, or not?*

Answer 45

Creditors making closed-end consumer credit transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33, and subject to the provisions of 12 CFR 1026.19(e) and (f), must provide consumers with a Loan Estimate under 12 CFR 1026.37, Closing Disclosure under 12 CFR 1026.38, the special information booklet as required, under 12 CFR 1026.19(g), and, as applicable for ARM transactions, the CHARM booklet. The special information booklet is described in further detail below. Closed-end consumer credit secured by real property (excludes chattel not attached to real), and excluding reverse mortgages, must provide: -Loan estimate (LE) -Closing Disclosure (CD) -Special information booklet as required -The Charm Booklet (ARM transactions), as applicable

Answer 46

Early disclosures (Loan Estimate) – 12 CFR 1026.19(e) 12 CFR 1026.19(e) requires the creditor to provide good faith estimates of the Loan Estimate disclosures (see 12 CFR 1026.37 for information on the content, form, and format of the disclosure). The creditor generally must deliver or place in the mail the Loan Estimate no later than three business days after receiving the consumer’s application, and no later than seven business days before consummation (12 CFR 1026.19(e)(1)(i) and (iii)). Generally, the creditor is responsible for ensuring that the Loan Estimate and its delivery meet the rule’s content, delivery, and timing requirements. (See 12 CFR 1026.19(e) and 1026.37.) If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf. If it does so, the mortgage broker must comply with all requirements of 12 CFR 1026.19(e), as well as the three-year record retention requirements in (12 CFR 1026.25(c)) (12 CFR 1026.19(e)(1)(ii)). The creditor is expected to maintain communication with mortgage brokers to ensure that the Loan Estimate and its delivery satisfy the rule’s requirements, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(e)(1)(ii); Comment 19(e)(1)(ii) -1 and -2). Timing – Loan Estimate – early disclosures The Loan Estimate must be delivered or placed in the mail to the consumer no later than the third business day after the creditor or mortgage broker receives the consumer’s application for a mortgage loan. (12 CFR 1026.19(e)(1)(iii)(A)). If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail (this applies to electronic delivery as well) (12 CFR 1026.19(e)(1)(iv); Comment 19(e)(1)(iv)-2). Other than for transactions secured by a consumer’s interest in a timeshare plan, the Loan Estimate must be delivered or placed in the mail no later than the seventh business day before consummation (12 CFR 1026.19(e)(1)(iii)(B) and (C)).

Answer 47

For purposes of the TILA-RESPA Integrated Disclosures rule, an “application” is defined in 12 CFR 1026.2(a)(3)(ii). For transactions subject to 12 CFR 1026.19(e), (f), or (g), an application consists of the submission of the following six pieces of information: 1. Name 2. Income 3. SSN 4. Property Address 5. Property value estimate 6. Mortgage loan amount sought A - Address ( property) L - Loan amt I - Income E - Estimate of the property value N - Name S - SSN This definition of application is similar to the definition under Regulation X (12 CFR 1024.2(b)), except that it does not include the seventh “catch-all” element of that definition, that is, “any other information deemed necessary by the loan originator.” An application may be submitted in written or electronic format, and includes a written record of an oral application (Comment 2(a)(3)-1). This definition of application does not prevent a creditor from collecting whatever additional information it deems necessary in connection with the request for the extension of credit. However, once a consumer has submitted27 the six pieces of information discussed above to the creditor for purposes of obtaining an extension of credit, the creditor has an application for purposes of the requirement for delivery of the Loan Estimate to the consumer and must abide by the three business day timing requirement (Comment 2(a)(3)-1). If the creditor determines, within the three business day period, that the consumer’s application will not or cannot be approved on the terms requested by the consumer, or if the consumer withdraws the application within that period, the creditor does not have to provide the Loan Estimate. However, if the creditor does not provide the Loan Estimate, it will not have complied with the Loan Estimate requirements if it later consummates the transaction on the terms originally applied for by the consumer. If a consumer amends an application and a creditor determines the amended application may proceed, then the creditor is required to comply with the Loan Estimate requirements, including delivering or mailing a Loan Estimate within three business days of receiving the amended or resubmitted application (Comment 19(e)(1)(iii)-3). A “business day” for purposes of providing the Loan Estimate is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions (Comment 19(e)(1)(iii)-1, 12 CFR 1026.2(a)(6)). NOTE: The term “business day” is defined differently for other purposes, including counting days to ensure the consumer receives the Closing Disclosure on time (12 CFR 1026.2(a)(6), 1026.19(e)(1)(iii)(B) and (e)(1)(iv), and 1026.19(f)(1)(ii)(A) and (f)(1)(iii)). For these other purposes, business day means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a) (12 CFR 1026.2(a)(6); Comment 2(a)(6)-2; Comments 19(e)(1)(iii)-1 and 19(f)(1)(ii)-1). Creditors are required to act in good faith and exercise due diligence in obtaining information necessary to complete the Loan Estimate (Comment 17(c)(2)(i)-1). Normally, creditors may rely on the representations of other parties in obtaining information (12 CFR 1026.17(c)(2)(i)). NOTE: There may be some information that is not reasonably available to the creditor at the time the Loan Estimate is made. In these instances, except as otherwise provided in 12 CFR 1026.19, 1026.37, and 1026.38, the creditor may use estimates even though it knows that more precise information will be available by the point of consummation. However, new disclosures may be required under 12 CFR 1026.17(f) or 1026.19 (Comment 17(c)(2)(i)-1). When estimated figures are used, they must be designated as such on the Loan Estimate (Comment 17(c)(2)(i)-2). The consumer may modify or waive the seven business day waiting period after receiving the Loan Estimate if the consumer determines that the mortgage loan is needed to meet a bona fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period (12 CFR 1026.19(e)(1)(v)). Whether a consumer has a bona fide personal financial emergency is determined by the facts surrounding the consumer’s individual situation. One example is the imminent sale of the consumer’s home at foreclosure, where the foreclosure sale will proceed unless loan proceeds are made available to the consumer during the waiting period (12 CFR 1026.19(e)(1)(v); Comment 19(e)(1)(v)-1). To modify or waive the waiting period, the consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and is signed by all consumers primarily liable on the legal obligation (12 CFR 1026.19(e)(1)(v)). The creditor may not provide the consumer with a pre-printed waiver form (12 CFR 1026.19(e)(1)(v)).

Answer 48

Good faith requirement and tolerances Creditors are responsible for ensuring that the figures stated in the Loan Estimate are made in good faith and consistent with the best information reasonably available to the creditor at the time they are disclosed (12 CFR 1026.19(e)(3); Comment 19(e)(3)(iii)-1 through -3). Whether or not a Loan Estimate was made in good faith is determined by calculating the difference between the estimated charges originally provided in the Loan Estimate and the actual charges paid by or imposed on the consumer in the Closing Disclosure (12 CFR 1026.19(e)(3)(i) and (ii)). Generally, if the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate, it is not in good faith (12 CFR 1026.19(e)(3)(i)). As as the creditor’s estimate is consistent with the best information reasonably available, and the creditor charges the consumer less than the amount disclosed on the Loan Estimate, the Loan Estimate is considered to be in good faith (12 CFR 1026.19(e)(3)(i)). 27 When a consumer uses an online application system that allows the information to be saved, the application must be submitted before the Loan Estimate timing requirements are triggered. The general rule is that the estimated closing cost is in good faith if the charge does not exceed the amount disclosed in the Loan Estimate. Unless there is an exception, depending on the specific circumstances, the creditor may not charge more than the amounts disclosed on the Loan Estimate (12 CFR 1026.19(e)(3)(i)). For certain charges, there are different tolerances when charges exceed the amounts disclosed. Zero tolerance. For charges other than those that are specifically excepted, as noted below, creditors may not charge consumers more than the amount disclosed on the Loan Estimate, other than for changed circumstances that permit a revised Loan Estimate (12 CFR 1026.19(e)(3)(i) and (iv). The zero tolerance charges generally include but are not limited to the following: • Fees for required services paid to the creditor, mortgage broker, or an affiliate of either (12 CFR 1026.19(e)(3)(i), Comment 19(e)(3)(i)-1(i)-(iii)); • Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third-party service provider for a settlement service or transfer taxes (12 CFR 1026.19(e)(3)(i)), Comment 19(e)(3)(i)-1(iv)-(v)). 10 percent cumulative tolerance. Charges for third-party services and recording fees paid by or imposed on the consumer are grouped together and are subject to a 10 percent cumulative tolerance. This means the creditor may charge the consumer more than the amount disclosed on the Loan Estimate for any of these charges so long as the total sum of the charges does not exceed the sum of all such charges disclosed on the Loan Estimate by more than 10 percent (12 CFR 1026.19(e)(3)(ii)(A)). These charges are: • Recording fees (Comments 19(e)(3)(ii)-1.ii and -4); • Charges for required third-party services if: o The charge is not paid to the creditor or the creditor’s affiliate (12 CFR 1026.19(e)(3)(ii)(B)); and o The consumer is permitted by the creditor to shop for the third-party service (12 CFR 1026.19(e)(3)(ii)(C); 12 CFR 1026.19(e)(1)(vi); Comment 19(e)(1)(vi)-1 through 7)). NOTE: If a creditor has failed to issue the written list of providers or failed to disclose a specific settlement service on the written list, the creditor may still be determined, based on all the relevant facts and circumstances, to have permitted a consumer to shop for purposes of determining good faith (Comment 19(e)(3)(iii)-2). Variances permitted without tolerance limits. Creditors may charge consumers more than the amount disclosed on the Loan Estimate without any tolerance limitation for certain costs or terms, but only if the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. These charges may be paid to the creditor or the creditor’s affiliates as long as the charges are bona fide (12 CFR 1026.19(e)(3)(iii)). These charges are: • Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account (12 CFR 1026.19(e)(3)(iii)(A)-(C)). • Charges paid to third-party service providers for services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor’s written list of service providers (12 CFR 1026.19(e)(3)(iii)(D); Comment 19(e)(3)(iii)-2). • Property taxes and other charges paid to third-party service providers for services not required by the creditor (12 CFR 1026.19(e)(3)(iii)(E)). List of services for which a consumer may shop. In addition to the Loan Estimate, if the consumer is permitted to shop for a settlement service, the creditor, no later than three business days after receiving the application, must provide the consumer with a written list of settlement services for which the consumer can shop. This list must: • Identify at least one available settlement service provider for each service; and • State that the consumer may choose a different provider of that service (12 CFR 1026.19 (e)(1)(vi)(C)).28 NOTE: The use of Model Form H-27 in Appendix H is not required. However, creditors who use that form properly are deemed to be in compliance with 12 CFR 1026.19(e)(1)(vi)(C) (Comment 19(e)(1)(vi)-3). Regardless of whether a creditor provides a revised written list of providers, determining whether the charges for required services were disclosed in good faith will depend on whether the creditor permitted the consumer to shop for those services, and is based on all relevant facts and circumstances (Comments 19(e)(1)(vi)-1 and 19(e)(3)(ii)-6). Refunds within 60 days of consummation. If the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)). • For charges subject to zero tolerance, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer (12 CFR 1026.19(e)(3)(i)). • For charges subject to a 10 percent cumulative tolerance, to the extent the total sum of the charges exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, the difference must be refunded to the consumer (12 CFR 1026.19(e)(3)(ii)). 28 The Preamble to the 2017 Amendments explained that creditors may issue a revised written list of providers when a settlement service is added as a result of a reason provided for under 12 CFR 1026.19(e)(3)((iv). (See Preamble, 82 FR 37,677 (Aug. 11, 2017))

Answer 49

Creditors may provide a revised LE for informational purposes (or to reset the LE) Loan Estimate - Revisions and Corrections Creditors are generally bound by the original Loan Estimate and must determine the estimate’s good faith by calculating the difference between the estimated charges originally provided and the actual charges paid by the consumer. Creditors may provide a revised Loan Estimate for informational purposes. Regardless of whether a creditor provides a revised Loan Estimate to reset tolerances or for informational purposes only, any disclosures on the revised Loan Estimate disclosure must be based on the best information reasonably available to the creditor at the time the revised disclosures are provided (Comment 19(e)(3)(iv)-1-2, 4-5).

Answer 50

Creditors must determine the LE's good faith by calculating the difference between the estimated charges originally provided and the actual charges paid by the consumer. For purposes of determining whether the estimates are in good faith, the creditor may use a revised estimate of a charge instead of the amount originally disclosed (in certain circumstances) Creditors may provided a revised LE (as described above) for informational purposes or to reset tolerances

Answer 51

For purposes of determining whether the estimates are in good faith, the creditor may use a revised estimate of a charge instead of the amount originally disclosed if the revision is due to one of the specific circumstances set out in 12 CFR 1026.19(e)(3)(iv)(A) through (F). Specific circumstances” (A)” and “(B)” relate to “changed circumstances,” as described below:

Answer 52

A and B related to changed circumstances. (A): Changed circumstances – increased settlement charges. Changed circumstances that occur after the Loan Estimate is provided to the consumer that cause estimated settlement charges to increase more than is permitted under the TILA-RESPA Integrated Disclosure rule (12 CFR 1026.19(e)(3)(iv)(A)). • A creditor may provide and use a revised Loan Estimate redisclosing a settlement charge and compare that revised estimate to the amount imposed on the consumer for purposes of determining good faith if changed circumstances cause the estimated charge to increase or, in the case of charges subject to the 10 percent cumulative tolerance under 12 CFR 1026.19(e)(3)(ii), cause the sum of those charges to increase by more than the 10 percent tolerance (12 CFR 1026.19(e)(3)(iv)(A); Comment 19(e)(3)(iv) (A)-1). Examples of changed circumstances affecting settlement costs include (Comment 19(e)(3)(iv)(A)-2): o A natural disaster that damages the property or otherwise results in additional closing costs; o A creditor’s estimate of title insurance is no longer valid because the title insurer goes out of business; or o New information not relied on when the Loan Estimate was provided is discovered, such as a neighbor of the seller filing a claim contesting the property boundary. (B): Changed circumstances – consumer eligibility. Changed circumstances that occur after the Loan Estimate is provided to the consumer that affect the consumer’s eligibility for the terms for which the consumer applied or the value of the security for the loan (12 CFR 1026.19(e)(3)(iv)(B)). For both (A) Changed circumstances – increased settlement charges, and (B) Changed circumstances – consumer eligibility: • A creditor also may provide and use a revised Loan Estimate if a changed circumstance affected the consumer’s creditworthiness or the value of the security for the loan and resulted in the consumer being ineligible for an estimated loan term previously disclosed (12 CFR 1026.19(e)(3)(iv)(B) and Comment 19(e)(3)(iv)(B)-1). This may occur when a changed circumstance causes a change in the consumer’s eligibility for specific loan terms disclosed on the Loan Estimate, which in turn results in increased cost for a settlement service beyond the applicable tolerance threshold (Comment 19(e)(3)(iv)(A)-2). For example: • The creditor relied on the consumer’s representation to the creditor of a $90,000 annual income but underwriting determines that the consumer’s annual income is only $80,000. • There are two co-applicants applying for a mortgage loan and the creditor relied on a combined income when providing the Loan Estimate, but one applicant subsequently becomes unemployed. Note on Changed Circumstances: A changed circumstance permitting a revised Loan Estimate under 12 CFR 1026.19(e)(3)(iv)(A) and (B) is: • An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction (12 CFR 1026.19(e)(3)(iv)(A)(1)); • Information specific to the consumer or transaction that the creditor relied upon when providing the original Loan Estimate and that was inaccurate or changed after the disclosures were provided (12 CFR 1026.19(e)(3)(iv)(A)(2)); or • New information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate.

Answer 53

(C): Revisions requested by the consumer. The consumer requests revisions to the credit terms or the settlement that cause the estimated charge to increase. For example, a consumer grants a power of attorney authorizing a family member to consummate the transaction on the consumer’s behalf, and the creditor provides revised disclosures reflecting the fee to record the power of attorney (Comment 19(e)(3)(iv)(C)-1).

Answer 54

(D): Rate locks after initial Loan Estimate. If the interest rate for the loan was not locked when the Loan Estimate was provided and, upon being locked at some later time, points or lender credits for the mortgage loan change, the creditor is required to provide a revised disclosure no later than three business days after the interest rate is locked and may use the revised disclosure to compare the points and lender credits charged. The revised disclosure must reflect the revised interest rate as well as any revisions to the points disclosed on the Loan Estimate pursuant to 12 CFR 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms that have changed due to the new interest rate (12 CFR 1026.19(e)(3)(iv)(D); Comment 19(e)(3)(iv)(D)-1). If the interest rate is locked on or after the date on which the creditor provides the Closing Disclosure and the Closing Disclosure is inaccurate as a result, then the creditor must provide the consumer a corrected Closing Disclosure, at or before consummation, reflecting any changed terms (Comment 19(e)(3)(iv)(D)-2).

Answer 55

(E): Expiration of Loan Estimate. If the consumer indicates an intent to proceed with the transaction more than 10 business days (or any additional number of days as extended by the creditor orally or in writing) after the Loan Estimate was delivered or placed in the mail to the consumer, a creditor may use a revised Loan Estimate. No justification is required for the change to the original estimate of a charge other than the lapse of 10 business days or the additional number of days as extended by the creditor (12 CFR 1026.19(e)(3)(iv)(E); Comment 19(e)(3)(iv)(E)-1 and -2).

Answer 56

(F): Construction loans. Creditors also may use a revised Loan Estimate where the transaction involves financing of new construction and the creditor reasonably expects that settlement will occur more than 60 calendar days after the original Loan Estimate has been provided if the original Loan Estimate clearly and conspicuously stated that at any time prior to 60 days before consummation, the creditor may issue revised disclosures (12 CFR 1026.19(e)(4)(i). NOTE: 12 CFR 1026.19(e)(3) does not include technical errors, miscalculations, or underestimations of charges as reasons for which creditors are permitted to provide revised Loan Estimates.

Answer 57

Timing – Loan Estimate – revised disclosures The general rule is that the creditor must deliver or place in the mail the revised Loan Estimate to the consumer no later than three business days after receiving the information sufficient to establish that one of the reasons for the revision has occurred (12 CFR 1026.19(e)(4)(i); Comment 19(e)(4)(i)-1). The creditor may not provide a revised Loan Estimate on or after the date the creditor provides the consumer with the Closing Disclosure (12 CFR 1026.19(e)(4)(ii); Comment 19(e)(4)(ii)-1.ii). Instead, the creditor may use the initial or a corrected Closing Disclosure to reset tolerances for purposes of determining good faith provided one of the specific circumstances under the rule is present. Any such revised disclosure must be provided to the consumer within three business days of receiving information sufficient to establish a reason for a revised estimate (12 CFR 1026.19(e)(4)(i).

Answer 58

Creditor provides LE/consumer indicates intent to proceed Predisclosure activity A creditor or other person generally may not impose any fee on a consumer in connection with the consumer’s application for a mortgage transaction until the consumer has received the Loan Estimate and has indicated intent to proceed with the transaction (12 CFR 1026.19(e)(2)(i)(A)) This restriction includes limits on imposing: • Application fees; • Appraisal fees; • Underwriting fees; and • Other fees imposed on the consumer.

Answer 59

Credit report fee The only exception to this exclusion is for a bona fide and reasonable fee for obtaining a consumer’s credit report (12 CFR 1026.19(e)(2)(i)(B); Comment 19(e)(2)(i)(A)-1 through -5 and Comment 19(e)(2)(i)(B)-1).

Answer 60

Credit report fee The only exception to this exclusion is for a bona fide and reasonable fee for obtaining a consumer’s credit report (12 CFR 1026.19(e)(2)(i)(B); Comment 19(e)(2)(i)(A)-1 through -5 and Comment 19(e)(2)(i)(B)-1).

Answer 61

Documentation of intent to proceed. To satisfy the record retention requirements of 12 CFR 1026.25, the creditor must document the consumer’s communication of the intent to proceed (12 CFR 1026.19(e)(2)(i)(A)). A consumer indicates intent to proceed with the transaction when the consumer communicates, in any manner, that the consumer chooses to proceed after the Loan Estimate has been delivered, unless a particular manner of communication is required by the creditor (12 CFR 1026.19(e)(2)(i)(A)). This may include: • Oral communication in person immediately upon delivery of the Loan Estimate; or • Oral communication over the phone, written communication via email, or signing a pre-printed form after receipt of the Loan Estimate. A consumer’s silence is not indicative of intent to proceed (Comment 19(e)(2)(i)(A)-2).

Answer 62

Yes - Written information for consumers before the Loan Estimate is provided (12 CFR 1026.19(e)(2)(ii)). A creditor or other person may provide a consumer with estimated terms or costs prior to the consumer receiving the Loan Estimate, if the person clearly and conspicuously states at the top of the front of the first page of the written estimate and in font size no smaller than 12-point font “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing the loan” (12 CFR 1026.19(e)(2)(ii); Comment 19(e)(2)(ii)-1). In addition, the written estimate may not have headings, content, and format substantially similar to the Loan Estimate or the Closing Disclosure (12 CFR 1026.19(e)(2)(ii); Comment 19(e)(2)(ii)-1). The CFPB has provided a model of the required statement in form H-26 of Appendix H to Regulation Z.

Answer 63

Final Disclosures (Closing Disclosure) – 12 CFR 1026.19(f) For loans that require a Loan Estimate (i.e., most closed-end mortgage loans secured by real property or a cooperative unit) and that proceed to closing, creditors must provide a new final disclosure reflecting the actual terms of the transaction; it is called the Closing Disclosure. The form integrates and replaces the HUD-1 and the final TIL disclosure for these transactions; ***explore TRID/CD/LE disclosures & applicability more***

Answer 64

The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan (12 CFR 1026.19(f)(1)(ii)). NOTE: If the creditor mails the disclosure six business days prior to consummation, it can assume that it was received three business days after sending (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(iii)).

Answer 65

The Closing Disclosure generally must contain the actual terms and costs of the transaction (12 CFR 1026.19(f)(1)(i)). Creditors may estimate disclosures using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made. However, creditors must act in good faith and use due diligence in obtaining the information. The creditor normally may rely on the representations of other parties in obtaining the information, including, for example, the settlement agent. The creditor is required to provide corrected disclosures containing the actual terms of the transaction at or before consummation (Comments 19(f)(1)(i)-2, -2.i, and -2.ii). •The Closing Disclosure must be in writing and contain the information prescribed in 12 CFR 1026.38. The creditor must disclose only the specific information set forth in 12 CFR 1026.38(a) through (s), as shown in the CFPB’s form in Appendix H-25 (12 CFR 1026.38(t)). • If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms of the transaction and complies with the other requirements of 12 CFR 1026.19(f), including the timing requirements, and requirements for providing corrected disclosures due to subsequent changes (Comment 19(f)(1)(i)-1). • New three-day waiting period. If the creditor provides a corrected disclosure, it must provide the consumer with an additional three-business-day waiting period prior to consummation if the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added to the transaction (12 CFR 1026.19(f)(2)(ii). “Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law (12 CFR 1026.2(a)(13); Comment 2(a)(13)-1).

Answer 66

“Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law (12 CFR 1026.2(a)(13); Comment 2(a)(13)-1).

Answer 67

Timing and Delivery - Closing Disclosure. Generally, the creditor is responsible for ensuring that the consumer receives the Closing Disclosure form no later than three business days before consummation (12 CFR 1026.19(f)(1)(ii)(A); Comment 19(f)(1)(v)-3). The creditor also is responsible for ensuring that the Closing Disclosure meets the content, delivery, and timing requirements (12 CFR 1026.19(f) and 1026.38). For timeshare transactions, the creditor must ensure that the consumer receives the Closing Disclosure no later than consummation (12 CFR 1026.19(f)(1)(ii)(B)). If the Closing Disclosure is provided in person, it is considered received by the consumer on the day it is provided. If it is mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is delivered or placed in the mail (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(ii)-2). However, if the creditor has evidence that the consumer received the Closing Disclosure earlier than three business days after it is mailed or delivered, the creditor may rely on that evidence and consider the Closing Disclosure to be received on that date (Comments 19(f)(1)(iii)-1 and -2).

Answer 68

Multiple consumers. In transactions that are not rescindable, the Closing Disclosure may be provided to any consumer with primary liability on the obligation (12 CFR 1026.17(d)). In rescindable transactions, the creditor must provide the Closing Disclosure separately and meet the timing requirements for each consumer who has the right to rescind under TILA (see 12 CFR 1026.23).

Answer 69

Settlement agents. Creditors may contract with settlement agents to have the settlement agent provide the Closing Disclosure to consumers on the creditor’s behalf, provided that the settlement agent complies with all relevant requirements of 12 CFR 1026.19(f) (12 CFR 1026.19(f)(1)(v)). Creditors and settlement agents also may agree to divide responsibility with regard to completing the Closing Disclosure, with the settlement agent assuming responsibility to complete some or all the Closing Disclosure (Comment 19(f)(1)(v)-4). Any such creditor must maintain communication with the settlement agent to ensure that the Closing Disclosure and its delivery satisfy the requirements described above, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(f)(1)(v); Comment 19(f)(1)(v)-3). In transactions involving a seller, the settlement agent is required to provide the seller with the Closing Disclosure reflecting the actual terms of the seller’s transaction no later than the day of consummation (12 CFR 1026.19(f)(4)(i) and (ii)). NOTE: “Business day” has a different meaning for purposes of providing the Closing Disclosure than it is for purposes of providing the Loan Estimate after receiving a consumer’s application. For purposes of providing the Closing Disclosure, the term business day means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a) (See 12 CFR 1026.2(a)(6), 1026.19(f)(1)(ii)(A) and (f)(1)(iii)).

Answer 70

Three-business-day waiting period. The loan may not be consummated less than three business days after the Closing Disclosure is received by the consumer. If a settlement is scheduled during the waiting period, the creditor generally must postpone settlement, unless the consumer determines that the extension of credit is necessary to meet a bona fide personal financial emergency and waives the waiting period. The written waiver describes the emergency, specifically modifies, or waives the waiting period, and bears the signature of all consumers who are primarily liable on the legal obligation. Pre-printed forms for this purpose are prohibited (12 CFR 1026.19(f)(1)(iv)).

Answer 71

Average charges. In general, the amount imposed on the consumer for any settlement service must not exceed the amount the settlement service provider actually received for that service. However, an average charge may be imposed instead of the actual amount received for a particular service, as long as the average charge satisfies the following conditions (12 CFR 1026.19(f)(3)(i)-(ii); Comment 19(f)(3)(i)-1): • The average charge is no more than the average amount paid for that service by or on behalf of all consumers and sellers for a class of transactions; The creditor or settlement service provider defines the class of transactions based on an appropriate period of time, geographic area, and type of loan; • The creditor or settlement service provider uses the same average charge for every transaction within the defined class; and • The creditor or settlement service provider does not use an average charge: o For any type of insurance; o For any charge based on the loan amount or property value; or o If doing so is otherwise prohibited by law.

Answer 72

Closing Disclosures - Revisions and Corrections (12 CFR 1026.19(f)(2)). Creditors must re-disclose terms or costs on the Closing Disclosure if certain changes occur to the transaction after the initial Closing Disclosure is provided that cause the disclosures to become inaccurate. There are three categories of changes that require a corrected Closing Disclosure containing all changed terms (12 CFR 1026.19(f)(2)): • Changes that occur before consummation that require a new three-business-day waiting period (12 CFR 1026.19(f)(2)(ii)); • Changes that occur before consummation and do not require a new three-business-day waiting period; and (12 CFR 1026.19(f)(2)(i)); • Changes that occur after consummation. (12 CFR 1026.19(f)(2)(iii))

Answer 73

Changes before consummation requiring new waiting period. If one of the following occurs after delivery of the Closing Disclosure and before consummation, the creditor must provide a corrected Closing Disclosure containing all changed terms and ensure that the consumer receives it no later than three business days before consummation (12 CFR 1026.19(f)(2)(ii); Comment 19(f)(2)(ii)-1). • The disclosed APR becomes inaccurate. If the APR previously disclosed becomes inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected APR disclosure and all other terms that have changed. The APR’s accuracy is determined according to 12 CFR 1026.22 (12 CFR 1026.19(f)(2)(ii)(A)). Generally, if the APR and finance charges are overstated because the interest rate has decreased, the APR is considered accurate and no new waiting period is required (12 CFR 1026.22). In addition, in connection with high-cost mortgages, TILA expressly provides there is no waiting period if the creditor extends a second offer of credit with a lower annual percentage rate to the consumer (15 U.S.C. 1639(b)(3)). • The loan product changes. If the loan product is changed, causing the product description disclosed to become inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected loan product and all other terms that have changed (12 CFR 1026.19(f)(2)(ii)(B)). • A prepayment penalty is added. If a prepayment penalty is added to the transaction, the creditor must provide a corrected Closing Disclosure with the prepayment penalty provision disclosed and all other terms that have changed (12 CFR 1026.19(f)(2)(ii)(C)). The consumer may waive this period if the consumer is facing a bona fide personal financial emergency (12 CFR 1026.19(f)(1)(iv)).

Answer 74

Changes before consummation not requiring new waiting period; consumer’s right to inspect. For any other changes before consummation that do not fall under the three categories above (i.e., related to the APR, the loan product, or the addition of a prepayment penalty), the creditor still must provide a corrected Closing Disclosure with any terms or costs that have changed and ensure that the consumer receives it. For these changes, there is no additional three-business-day waiting period required. The creditor must ensure only that the consumer receives the corrected Closing Disclosure at or before consummation (12 CFR 1026.19(f)(2)(i); Comments 19(f)(2)(i)-1 and -2). However, a consumer has the right to inspect the Closing Disclosure during the business day before consummation (12 CFR 1026.19(f)(2)(i)). If a consumer asks to inspect the Closing Disclosure the business day before consummation, the Closing Disclosure presented to the consumer must reflect any adjustments to the costs or terms that are known to the creditor at the time the consumer inspects it (12 CFR 1026.19(f)(2)(i)). A creditor may satisfy the obligation to provide the Closing Disclosure by ensuring that a settlement agent that provides a consumer with the disclosures complies with the requirements of 12 CFR 1026.19(f) (12 CFR 1026.19(f)(1)(v); Comment 19(f)(2)(i)-2). Changes due to events occurring after consummation

Answer 75

Changes due to events occurring after consummation. Creditors must provide a corrected Closing Disclosure if an event in connection with the settlement occurs during the 30-calendar-day period after consummation that causes the Closing Disclosure to become inaccurate and results in a change to an amount paid by the consumer from what was previously disclosed (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-1). NOTE: A creditor is not required to provide corrected disclosures under this provision if the only changes that would be required to be disclosed in the corrected disclosure are changes to per-diem interest and any disclosures affected by the change in per-diem interest, even if the amount of per-diem interest actually paid by the consumer differs from the amount disclosed under 12 CFR 1026.38(g)(2) and (o). Nonetheless, if a creditor is providing a corrected disclosure under 12 CFR 1026.19(f)(2)(iii) for reasons other than changes in per-diem interest and the per-diem interest has changed as well, the creditor must disclose in the corrected disclosures under 12 CFR 1026.19(f)(2)(iii) the correct amount of the per-diem interest and provide corrected disclosures for any disclosures that are affected by the change in per-diem interest (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-2). When a post-consummation event requires a corrected Closing Disclosure, the creditor must deliver or place in the mail a corrected Closing Disclosure not later than 30 calendar days after receiving information sufficient to establish that such an event has occurred. (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-1) In transactions involving a seller, the settlement agent must provide the seller with a corrected Closing Disclosure if an event occurs within 30 days of consummation that makes the disclosures inaccurate as they relate to the amount actually paid by the seller. The settlement agent must deliver or mail a corrected closing disclosure no later than 30 days from receiving information that establishes the Closing Disclosure is inaccurate and results in a change to an amount actually paid by the seller from what was previously disclosed. (12 CFR 1026.19(f)(4)(ii))

Answer 76

Changes due to clerical errors. The creditor must provide a corrected Closing Disclosure to correct non-numerical clerical errors no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(iv)). An error is clerical if it does not affect a numerical disclosure and does not affect the timing, delivery, or other requirements imposed by 12 CFR 1026.19(e) or (f) (Comment 19(f)(2)(iv)-1).

Answer 77

Refunds related to the good faith analysis. The creditor can cure a tolerance violation of 12 CFR 1026.19(e)(3)(i) or (ii) by providing a refund to the consumer and delivering or placing in the mail a corrected Closing Disclosure that reflects the refund no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)).

Answer 78

Special Information Booklet - 12 CFR 1026.19(g) Creditors generally must provide a copy of the special information booklet, otherwise known as the home buying information booklet, to consumers who apply for a consumer credit transaction secured by real property or a cooperative unit. For loans using the Loan Estimate and Closing Disclosure forms, creditors provide the “Your Home Loan Toolkit: A Step-by-Step Guide,” designed by the CFPB to replace the “Shopping for Your Home Loan: Settlement Cost Booklet” as the special information booklet. This requirement is not limited to closed-end transactions and applies to most consumer credit transactions secured by real property or a cooperative unit, except in a few circumstances (see below). The special information booklet is required pursuant to Regulation Z (12 CFR 1026.19(g)(1)) as well as Section 5 of RESPA (12 U.S.C. 2604) and 12 CFR 1024.6 of Regulation X. The booklet is published by the CFPB to help consumers applying for federally related mortgage loans understand the nature and cost of real estate settlement services.

Answer 79

If the consumer is applying for a HELOC subject to 12 CFR 1026.40, the creditor (or mortgage broker) can provide a copy of the brochure titled “What You Should Know About Home Equity Lines of Credit” instead of the special information booklet (12 CFR 1026.19(g)(1)(ii)).

Answer 80

The creditor need not provide the special information booklet if the consumer is applying for a real property-secured consumer credit transaction that does not have the purpose of purchasing a one-to-four family residential property, such as a refinancing, a closed-end loan secured by a subordinate lien, or a reverse mortgage (12 CFR 1026.19(g)(1)( iii)).

Answer 81

Creditors must deliver or place in the mail the special information booklet not later than three business days after receiving the consumer’s loan application (12 CFR 1026.19(g)(1)(i)).

Answer 82

If the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three-business-day period, the creditor need not provide the special information booklet (12 CFR 1026.19(g)(1)(i); Comment 19(g)(1)(i)-3).

Answer 83

If the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three-business-day period, the creditor need not provide the special information booklet (12 CFR 1026.19(g)(1)(i); Comment 19(g)(1)(i)-3).

Answer 84

If the consumer uses a mortgage broker, the mortgage broker must provide the special information booklet and the creditor need not do so (12 CFR 1026.19(g)(1)(i)).

Answer 85

Creditors generally are required to use the booklets designed by the CFPB and may make only limited changes to the special information booklet. (12 CFR 1026.19(g)(2)) The CFPB may issue revised or alternative versions of the special information booklet from time to time in the future. Creditors should monitor the Federal Register for notice of revisions (Comment 19(g)(1)-1).

Answer 86

Q: Is the purpose of the credit for personal, family or household use? A: Regulation Z does not apply, except for the rules of issuance of and unauthorized use liability for credit cards. (Exempt credit includes loans with a business or agricultural purpose, and certain student loans. Credit extended to acquire or improve rental property that is not owner-occupied is considered business purpose credit.) Q: Is the consumer credit extended to a consumer? A: Regulation Z does not apply. (Credit that is extended to a land trust is deemed to be credit extended to a consumer.) Q: Is the consumer credit extended by a creditor? A: The institution is not a “ creditor” and Regulation Z does not apply unless at least one of the following tests is met: 1. The institution extends consumer credit regularly and a. The obligation is initially payable to the institution and b. The obligation is either payable by written agreement in more than four installments or is subject to a finance charge. 2. The institution is a card issuer that extends closed-end credit that is subject to a finance charge or is payable by written agreement in more than four installments. 3. The institution is not the card issuer, but it imposes a finance charge at the time of honoring a credit card. Q: Is the loan or Credit plan secured by real property, a coop unit, or a dwelling? A: Yes - Regulation Z applies N: Regulation Z does not apply, but may apply later if the loan is refinanced for an amount at or below the annual threshold limit (as annually adjusted). If the principal dwelling is taken as collateral after consummation, rescission rights will apply and, in the case of open-end credit, billing disclosures and other provisions of Regulation Z will apply.

Answer 87

The finance charge is a measure of the cost of consumer credit represented in dollars and cents. Along with APR disclosures, the disclosure of the finance charge is central to the uniform credit cost disclosure envisioned by the TILA Finance charges include any charges or fees payable directly or indirectly by the consumer and imposed directly or indirectly by the financial institution either as an incident to or as a condition of an extension of consumer credit. The finance charge on a loan always includes any interest charges and often, other charges. Regulation Z includes examples, applicable both to open-end and closed-end credit transactions, of what must, must not, or need not be included in the disclosed finance charge (12 CFR 1026.4(b)).

Answer 88

Reg Z = finance charge tolerances for legal accuracy TILA = finance charge tolerances under Regulatory Agency orders Regulation Z provides finance charge tolerances for legal accuracy that should not be confused with those provided in the TILA for reimbursement under the regulatory agency orders. As with disclosed APRs, if a disclosed finance charge were legally accurate, it would not be subject to reimbursement. Under the TILA and Regulation Z, finance charge disclosures for open-end credit must be accurate since there is no tolerance for finance charge errors. However, both the TILA and Regulation Z permit various finance charge accuracy tolerances for closed-end credit. Tolerances for the finance charge in a closed-end transaction, other than a mortgage loan, are generally $5 if the amount finances is less than or equal to $1,000 and $10 if the amount finances exceeds $1,000. For transactions that are subject to 12 CFR 1026.19(e) and (f) (i.e., transactions subject to the TILA-RESPA Integrated Disclosure Rule), the tolerances applicable to finance charges are also applicable to the total of payments disclosure. Tolerances for certain transactions consummated on or after September 30, 1995, are noted below. Credit secured by real property or a dwelling: The disclosed finance charge is considered accurate if it is not understated by more than $100. Overstatements are not violations. Rescission rights after the three-business-day rescission period (closed-end credit only 12 CFR 1026.23(g)): Tolerances for accuracy, General Rule – One- half of 1 percent tolerance: The disclosed finance charge is considered accurate if it is not understated by more than one-half of 1 percent of the credit extended or $100, whichever is greater. The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than one-half of 1 percent of the face amount of the note or $100, whichever is greater. The disclosed finance charge and the total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments). Tolerances for accuracy, Refinancings – One percent tolerance, for the initial and subsequent refinancings of residential mortgage transactions when the new loan is made at a different financial institution. (Excludes high-cost mortgage loans subject to 12 CFR 1026.32, transactions in which there are new advances, and new consolidations.): The disclosed finance charge is considered accurate if it is not understated by more than 1 percent of the credit extended or $100, whichever is greater, The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater. The disclosed finance charge and the total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments). Tolerance for disclosures. After the initiation of foreclosure on the consumer’s principal dwelling that secures the credit obligation: • The disclosed finance charge is considered accurate if it is understated by no more than $35. • The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than $35. • The disclosed finance charge and the total of payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments). NOTES: • Normally, the finance charge tolerance for a rescindable transaction is either 0.5 percent of the credit transaction or, for certain refinancings, 1 percent of the credit transaction. However, in the event of a foreclosure, the consumer may exercise the right of rescission if the disclosed finance charge is understated by more than $35. • Tolerances for the total of payments disclosure as discussed in 12 CFR 1026.38(o)(1) are similar to the tolerances applicable to the finance charge. Special tolerances apply to the disclosure of the total of payments for purposes of the right of rescission, for transactions subject to 12 CFR 1026.19(e) and (f). (12 CFR 1026.23(g)(1)(ii), (g)(2)(ii)). See the “Finance Charge Tolerances” charts within these examination procedures for help in determining appropriate finance charge tolerances.

Answer 89

Creditors are required to comply with TRID for disclosure of construction loans and construction-permanent loans that are closed-end consumer credit transactions secured by real property or a cooperative unit (12 CFR 1026.19(e)(1) and .19(f)(1)). These transactions have two distinct phases. First, the construction phase usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period, with the consumer generally paying only accrued interest until construction is completed. Unless the obligation is paid when construction is completed (i.e., a construction-only loan), it is a construction-permanent loan and the construction period converts to the second phase, the permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. The longstanding provisions of 12 CFR 1026.17(c)(6)(ii) apply to construction and construction-permanent loans, as well as the option to use Appendix D. Appendix D provides an optional method of calculating the annual percentage rate and other disclosures for construction loans in disclosing construction financing (Comment 17(c)(6)-2). While the 2017 TRID amendments provide additional guidance on how a creditor may use Appendix D to disclose construction loans and construction-permanent loans, the 2017 TRID amendments do not require the use of Appendix D or its corresponding official commentary when disclosing the terms of construction loans or construction-permanent loans. Specific regulatory provisions and official commentary applicable to construction loan disclosures are discussed below.

Answer 90

This means that for construction-only loans, a creditor may treat all of the advances as a single transaction or disclose each advance as a separate transaction. If these advances are treated as one transaction and the timing and amounts of advances are unknown, creditors must make disclosures based on estimates, based on the best information reasonably available at the time the disclosure is provided to the consumer, as provided in 12 CFR 1026.17(c)(2).

Answer 91

Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one or more than one transaction (12 CFR 1026.17(c)(6)(ii)). In addition to disclosure options described above for multiple advance loans, for construction-permanent loans where the permanent phase may be financed by the same creditor, the creditor also has the option to provide either one combined disclosure for both the construction financing and the permanent financing, or separate disclosures for the two phases (12 CFR 1026.17(c)(6)(ii); Comment 17(c)(6)-2).

Answer 92

•As a single transaction, with one disclosure combining both phases. • As two separate transactions, with one disclosure for each phase. • As more than two transactions, with one disclosure for each advance and one for the permanent financing phase Comment 17(c)(6)-3).

Answer 93

Regulation Z clarifies the timing requirements for providing the Loan Estimate for construction and construction-permanent loans based on when the creditor receives an application (12 CFR 1026.19(e)(1)(iii)). Comment 19(e)(1)(iii)-5 provides examples of different scenarios, illustrating how the timing requirements would apply. For example, where a creditor receives an application for both the construction and permanent phases of a transaction, the creditor must deliver or place in the mail either a single Loan Estimate (if the phases are treated as one transaction) or two or more Loan Estimates (if the phases are treated separately) within three business days of receiving the application and not later than seven business days before consummation.

Answer 94

Delivery of Disclosures – 12 CFR 1026.19(e)(1)(iii) Regulation Z clarifies the timing requirements for providing the Loan Estimate for construction and construction-permanent loans based on when the creditor receives an application (12 CFR 1026.19(e)(1)(iii)). Comment 19(e)(1)(iii)-5 provides examples of different scenarios, illustrating how the timing requirements would apply. For example, where a creditor receives an application for both the construction and permanent phases of a transaction, the creditor must deliver or place in the mail either a single Loan Estimate (if the phases are treated as one transaction) or two or more Loan Estimates (if the phases are treated separately) within three business days of receiving the application and not later than seven business days before consummation.

Answer 95

Completion of Loan Estimate and Closing Disclosure Generally, a financial institution will make disclosures for construction loans in the same manner as it discloses terms for non-construction loans, following the guidance of applicable regulations (See 12 CFR 1026.37 and 1026.38). The financial institution may, at its option, use Appendix D to Regulation Z to estimate and disclose the terms of multiple-advance construction and construction-permanent loans (12 CFR Part 1026, App. D). This appendix reflects the approach taken in 12 CFR 1026.17(c)(6)(ii), which permits creditors to provide separate or combined disclosures for the construction period and for the permanent financing, as discussed above. The financial institution may, at its option, use Appendix D to the regulation to assist in estimating and disclosing the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction. Appendix D may also be used in multiple-advance transactions other than construction loans, when the amounts or timing of advances is unknown at consummation (Comment App. D-1). Appendix D and its associated commentary provide additional guidance and clarification on how to complete various portions of the Loan Estimate and Closing Disclosure. Additional guidance and examples are intended to inform the accurate disclosure of information related to Loan Term (Comment App. D. 7.i), Loan Product (Comment App. D 7.ii), Interest Rate (Comment App. D. 7.iii), Increases in Periodic Payment (Comment App. D. 7.iv), Projected Payments Table (Comment App. D. 7.v), Disclosure of Construction Costs (Comment App. D. 7.vi), and Inspection and Handling Fees (Comment App. D. 7.vii).

Answer 96

Loans Receiving Non-TILA-RESPA Integrated Disclosures, Generally Creditors making closed-end loans to consumers not subject to the TILA-RESPA Integrated Disclosures Rule (i.e., other than loans where 12 CFR 1026.19(e) and (f) require the Loan Estimate and the Closing Disclosure) must provide the consumer with the Truth in Lending (TIL) disclosure, as outlined in 12 CFR 1026.17 and 1026.18. Creditors engaged in specified housing assistance programs for low- and moderate-income consumers would also provide their consumers with the TIL Disclosure (12 CFR 1026.3(h)).

Answer 97

TIL Disclosure. The TIL disclosure provided for these loans includes a payment schedule (12 CFR 1026.18(g)). The disclosed payment schedule must reflect all components of the finance charge. It includes all payments scheduled to repay loan principal, interest on the loan, and any other finance charge payable by the consumer after consummation of the transaction. However, any finance charge paid separately before or at consummation (e.g., odd days’ interest) is not part of the payment schedule. It is a prepaid finance charge that must be reflected as a reduction in the value of the amount financed. At the creditor’s option, the payment schedule may include amounts beyond the amount financed and finance charge (e.g., certain insurance premiums or real estate escrow amounts such as taxes added to payments). However, when calculating the APR, the creditor must disregard such amounts. If the obligation is a renewable balloon payment instrument that unconditionally obligates the financial institution to renew the short-term loan at the consumer’s option or to renew the loan subject to conditions within the consumer’s control, the payment schedule must be disclosed using the longer term of the renewal period or periods. The long-term loan must be disclosed with a variable rate feature. If there are no renewal conditions or if the financial institution guarantees to renew the obligation in a refinancing, the payment schedule must be disclosed using the shorter balloon payment term. The short-term loan must be disclosed as a fixed rate loan, unless it contains a variable rate feature during the initial loan term.

Answer 98

Variable and Adjustable Rate Transactions; 12 CFR 1026.18(f), 1026.20(c) and (d) Closed-end transactions generally If the terms of the legal obligation allow the financial institution, after consummation of the transaction, to increase the APR, the financial institution must furnish the consumer with certain information on variable rates. In addition, variable rate disclosures are not applicable to rate increases resulting from delinquency, default, assumption, acceleration, or transfer of the collateral. Some of the more important transaction-specific variable rate disclosure requirements follow. • Disclosures for variable rate loans must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. • If the variable rate transaction includes either a seller buy-down that is reflected in a contract or a consumer buy-down, the disclosed APR should be a composite rate based on the lower rate for the buy-down period and the rate that is the basis for the variable rate feature for the remainder of the term. • If the initial rate is not determined by the index or formula used to make later interest rate adjustments, as in a discounted variable rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for as long as it is applied and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation (i.e., the fully indexed rate). o If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the adjustment, from changing to the fully indexed rate, the effect of that rate or payment cap needs to be reflected in the disclosures. o The index at consummation need not be used if the contract provides a delay in the implementation of changes in an index value (e.g., the contract indicates that future rate changes are based on the index value in effect for some specified period, such as 45 days before the change date). Instead, the financial institution may use any rate from the date of consummation back to the beginning of the specified period (e.g., during the previous 45-day period). • If the initial interest rate is set according to the index or formula used for later adjustments but is set at a value as of a date before consummation, disclosures should be based on the initial interest rate, even though the index may have changed by the consummation date.

Answer 99

Adjustable Rate Mortgage Disclosures Disclosure of Post-Consummation Events - Initial Rate Change for Adjustable Rate Mortgages – 12 CFR 1026.20(d) Creditors, assignees, or servicers29 (referred to collectively as creditors) of adjustable rate mortgages, or ARMs, secured by the consumer’s principal dwelling and with terms of more than one year are generally required to provide consumers with certain information pertaining to the ARM’s initial rate change.30 This information must be provided in a disclosure that is separate from all other documents, and the disclosure must be provided between 210 and 240 days before the first payment at the adjusted rate is due. If the first payment at a new rate is due within the first 210 days after consummation, the creditor must provide the rate change disclosure at consummation. Disclosures required under this section must provide consumers with information related to the timing and nature of the rate change. If the new rate pursuant to the change disclosed is not known and the creditor provides an estimate, the rate must be identified as an estimate. If the creditor is using an estimate, it must be based on the index within 15 business days prior to the date of the disclosure. The calculation is made using the index reported in the source of information that the creditor uses in the explanation of how the interest rate is determined.

Answer 100

Disclosures required under 12 CFR 1026.20(d) must also include, among others: • The date of the disclosure. • A statement explaining that the time period that the current rate has been in effect is ending, that the current rate is expiring, and that a change in the rate may result in a change in the required payment; providing the effective date of the change and a schedule of any future changes; and describing any other changes to the loan terms, features, or options taking effect on the same date (including expiration of interest-only or payment-option features). • A table containing the current and new interest rates, the current and new payments, including the date the new payment is due, and for interest-only or negative amortization loans, the amount of the current and new payment allocated to principal, interest, and escrow (if applicable). NOTE: The new payment allocation disclosed is the expected payment allocation for the first payment for which the new interest rate will apply. • An explanation of how the interest rate is determined, including (among other things) an explanation of the index or formula used to determine the new rate and the margin. • Any limitations on the interest rate or payment increase for each scheduled increase and over the life of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments. • An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change. • If the creditor is using an estimated rate or payment, a statement that the actual new interest rate and new payment will be provided to the consumer between two and four months prior to the first payment at the new rate. • For negative amortization loans, creditors must provide a statement indicating that the new payment will not be allocated to pay loan principal and will not reduce the balance of the loan; instead, the payment will only apply to part of the interest, thereby increasing the amount of principal. • A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer. • The telephone number of the creditor, assignee, or servicer for use if the consumer anticipates that he or she may not be able to make the new payments. • A statement providing specified alternatives (which include refinancing, selling the property, loan modification, and forbearance) available if the consumer anticipates not being able to make the new payment. A website address for either the CFPB’s or the Department of Housing and Urban Development’s (HUD) list of homeownership counselors and counseling organizations, the HUD toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations, and the CFPB’s website address for state housing finance authorities contact information. • For more information pertaining to the required format of the disclosures required under 12 CFR 1026.20(d), please see 12 CFR 1026.20(d)(3) and the model and sample forms H-4(D)(3) and (4) in Appendix H.

Answer 101

Creditors, assignees, or servicers31 (referred to collectively as creditors) of ARMs secured by a consumer’s principal dwelling with a term greater than one year are generally required to provide consumers with disclosures prior to the adjustment of the interest rate on the mortgage,32 if the interest rate change will result in a payment change as follows: • For ARMs where the payment changes along with a rate change, disclosures must be provided to consumers between 60 and 120 days before the first payment at the new amount is due. • For ARMs where the payment changes in connection with a uniformly scheduled interest rate adjustment occurring every 60 days (or more frequently), the disclosures must be provided between 25 and 120 days before the first payment at the new amount is due. • For ARMs originated prior to January 10, 2015, in which the contract requires the adjusted interest and payment to be calculated based on an index that is available on a date less than 45 days prior to the adjustment date, disclosures must be provided between 25 and 120 days before the first payment at the new amount is required. • For ARMs where the first adjustment occurs within 60 days of consummation and the new interest rate disclosed at the time was an estimate, the disclosures must be provided as soon as practicable, but no less than 25 days before the first payment at the new amount is due. Disclosures required under 12 CFR 1026.20(c) must contain specific information, which includes, among others: A statement explaining that the time period during which the consumer’s current rate has been in effect is ending and that the rate and payment will change; when the interest rate will change; dates when additional interest rate adjustments are scheduled to occur; and any other change in loan terms or features that take effect on the same date that the interest rate and payment change, such as an expiration of interest-only treatment or payment-option feature. • A table explaining the current and new interest rates, the current and new payments, including the date the new payment is due, and for interest-only or negative amortizing loans, the amount of the current and new payment allocated to principal, interest, and amounts for escrow (if applicable). • An explanation of how the new interest rate is determined, including (among other things) the index or formula used to determine the new rate and the margin, and any application of previously foregone interest rate increases from past adjustments; • Any limitations on the interest rate and payment increase for each scheduled increase for the duration of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments. • An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change; For negative amortization loans, creditors must provide a statement indicating that the new payment will not reduce the balance of the loan, rather, the payment will only apply to part of the interest, thereby increasing the amount of principal; and • A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer. For more information pertaining to the required format of the disclosures required under 12 CFR 1026.20(c), please see 12 CFR 1026.20(c)(3) and the model and sample forms H-4(D)(1) and (2) in Appendix H.

Answer 102

Exemptions to the Adjustable Rate Mortgage Disclosure Requirements – 12 CFR 1026.20(c)(1)(ii) and (d)(1)(ii) Disclosures under 12 CFR 1026.20(c) and (d) are not required for ARMs with a term of one year or less. Likewise, disclosures under 12 CFR 1026.20(c) are not required if the first interest rate and payment adjustment occurs within the first 210 days and the new rate disclosed at consummation pursuant to 12 CFR 1026.20(d) was not an estimate. ARM disclosures for payment changes are exempt under 12 CFR 1026.20(c)(1)(ii)(C) where the servicer is a debt collector under the Fair Debt Collection Practices Act (FDCPA) and a consumer has exercised the right under FDCPA section 805(c) to prohibit debt collector communications regarding the debt.

Answer 103

See TILA manual page 39

Answer 104

See TILA manual page 40

Answer 105

See manual page 41

Answer 106

See manual page 42

Answer 107

See manual page 43

Answer 108

Refinancings – 12 CFR 1026.20(a) When an obligation is satisfied and replaced by a new obligation to the original financial institution (or a holder or servicer of the original obligation) and is undertaken by the same consumer, it must be treated as a refinancing for which a complete set of new disclosures must be furnished. A refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the earlier one to be considered a refinancing under the regulation. The finance charge on the new disclosure must include any unearned portion of the old finance charge that is not credited to the existing obligation (12 CFR 1026.20(a)).

Answer 109

A renewal of an obligation with a single payment of principal and interest or with periodic interest payments and a final payment of principal with no change in the original terms. • An APR reduction with a corresponding change in the payment schedule. • An agreement involving a court proceeding. • Changes in credit terms arising from the consumer’s default or delinquency. • The renewal of optional insurance purchased by the consumer and added to an existing transaction, if required disclosures were provided for the initial purchase of the insurance.

Answer 110

•Increases the rate based on a variable rate feature that was not previously disclosed; or • Adds a variable rate feature to the obligation. If, at the time a loan is renewed, the rate is increased, the increase is not considered a variable rate feature. It is the cost of renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. If the original debt is not canceled in connection with such a renewal, the regulation does not require new disclosures. Also, changing the index of a variable rate transaction to a comparable index is not considered adding a variable rate feature to the obligation.

Answer 111

Escrow Closing Notice. Before cancelling an escrow account, an Escrow Closing Notice must be provided to any consumers for whom an escrow account was established in connection with a closed-end consumer credit transaction secured by a first lien on real property or a dwelling, except for reverse mortgages (12 CFR 1026.20(e)(1)). For this purpose, the term escrow account has the same meaning given to it as under Regulation X, 12 CFR 1024.17(b), and the term servicer has the same meaning given to it as under Regulation X, 12 CFR 1024.2(b). There are two exceptions to the requirement to provide the notice:

Answer 112

(N/A to reverse mortgages, and): •Creditors and servicers are not required to provide the notice if the escrow account that is being canceled was established solely in connection with the consumer’s delinquency or default on the underlying debt obligation (Comment 20(e)(1)-2). • Creditors and servicers are not required to provide the notice when the underlying debt obligation for which an escrow account was established is terminated, including by repayment, refinancing, rescission, and foreclosure (Comment 20(e)(1)-3).

Answer 113

For loans subject to the Escrow Closing Notice requirement, if the creditor or servicer cancels the escrow account at the consumer’s request, the creditor or servicer must ensure that the consumers receive the notice no later than three business days (i.e., all calendar days except Sundays and the legal public holidays (See 12 CFR 1026.2(a)(6), 12 CFR 1026.19(f)(1)(ii)(A) and (f)(1)(iii)) before the consumer’s escrow account is canceled (12 CFR 1026.20(e)(5)(i)). If the creditor or servicer cancels the escrow account and the cancellation is not at the consumer’s request, the creditor or servicer must ensure that the consumer receives the notice no later than 30 business days before the closure of the consumer's escrow account (12 CFR 1026.20(e)(5)(ii). If the Escrow Closing Notice is not provided to the consumer in person, the consumer is considered to have received the notice three business days after it is delivered or placed in the mail (12 CFR 1026.20(e)(5)(iii).

Answer 114

The creditor or servicer must disclose (12 CFR 1026.20(e)(1)-(2)): • The date on which the account will be closed; • That an escrow account may also be called an impound or trust account; • The reason that the escrow account will be closed; • That without an escrow account, the consumer must pay all property costs, such as taxes and homeowner’s insurance, directly, possibly in one or two large payments a year; • A table, titled “Cost to you,” that contains an itemization of the amount of any fee the creditor or servicer imposes on the consumer in connection with the closure of the consumer’s escrow account, labeled “Escrow Closing Fee,” and a statement that the fee is for closing the escrow account; Under the reference “In the future”: o The consequences if the consumer fails to pay property costs, including the actions that a state or local government may take if property taxes are not paid and the actions the creditor or servicer may take if the consumer does not pay some or all property costs, such as adding amounts to the loan balance, adding an escrow account to the loan, or purchasing a property insurance policy on the consumer’s behalf that may be more expensive and provide fewer benefits than a policy that the consumer could obtain directly; o A telephone number that the consumer can use to request additional information about the cancellation of the escrow account; o Whether the creditor or servicer offers the option of keeping the escrow account open and, as applicable, a telephone number the consumer can use to request that the account be kept open; and o Whether there is a cutoff date by which the consumer can request that the account be kept open. The creditor or servicer may also, at its option, disclose (12 CFR 1026.20(e)(3)): • The creditor or servicer’s name or logo; • The consumer’s name, phone number, mailing address, and property address; • The issue date of the notice; • The loan number; or • The consumer’s account number. In addition, the disclosures must: • Contain a required heading that is more conspicuous than and precedes the required disclosures discussed above (12 CFR 1026.20(e)(4)). • Be clear and conspicuous. This standard generally requires that the disclosures in the Escrow Closing Notice be in a reasonably understandable form and readily noticeable to the consumer (Comment 20(e)(2)-1). • Be written in 10-point font, at a minimum (12 CFR 1026.20(e)(4)). Be grouped together on the front side of a one-page document. The disclosures must be separate from all other materials, with the headings, content, order, and format substantially similar to model form H-29 in Appendix H to Regulation Z (12 CFR 1026.20(e)(4)). This requirement, however, does not preclude creditors and servicers from modifying the disclosures to accommodate particular consumer circumstances or transactions not addressed by the form or from adjusting the statement required by 12 CFR 1026.20(e)(2)(ii)(A), concerning consequences if the consumer fails to pay property costs, to the circumstances of the particular consumer (Comment 20(e)(4)-3).

Answer 115

Successors In Interest – 12 CFR 1026.20(f) If, upon confirmation, a servicer provides a confirmed successor in interest who is not liable on the mortgage loan obligation with an optional notice and acknowledgment form in accordance with Regulation X, 12 CFR 1024.32(c)(1), the servicer is not required to provide to the confirmed successor in interest any written disclosure required by 12 CFR 1026.20(c) (rate adjustments with corresponding change in payment), 12 CFR 1026.20(d) (initial rate adjustment), and 12 CFR 1026.20(e) (escrow account cancellation notice), unless and until the confirmed successor in interest either assumes the mortgage loan obligation under State law or has provided the servicer an executed acknowledgement form in accordance with Regulation X, 12 CFR 1024.32(c)(1)(iv), and the confirmed successor in interest has not revoked such acknowledgement form.

Answer 116

Treatment of Credit Balances – 12 CFR 1026.21 When a credit balance in excess of $1 is created in connection with a transaction (through transmittal of funds to a creditor in excess of the total balance due on an account, through rebates of unearned finance charges or insurance premiums, or through amounts otherwise owed to or held for the benefit of a consumer), the creditor is required to: • Credit the amount of the credit balance to the consumer’s account; • Refund any part of the remaining credit balance, upon the written request of the consumer; and • Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than 6 months, except that no further action is required if the consumer’s current location is not known to the creditor and cannot be traced through the consumer’s last known address or telephone number.

Answer 117

Closed-end Advertising – 12 CFR 1026.24 If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor. Disclosures required by this section must be made “clearly and conspicuously.” To meet this standard in general, credit terms need not be printed in a certain type size nor appear in any particular place in the advertisement. For advertisements for credit secured by a dwelling, a clear and conspicuous disclosure means that the required information is disclosed with equal prominence and in close proximity to the advertised rates or payments triggering the required disclosures. If an advertisement states a rate of finance charge, it must state the rate as an “annual percentage rate,” using that term. If the APR may be increased after consummation, the advertisement must state that fact. If an advertisement is for credit not secured by a dwelling, the advertisement must not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the APR. If an advertisement is for credit secured by a dwelling, the advertisement must not state any other rate, except that a simple annual rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the APR. That is, an advertisement for credit secured by a dwelling may not state a periodic rate, other than a simple annual rate, that is applied to an unpaid balance.

Answer 118

“Triggering terms” – The following are triggering terms that require additional disclosures: • The amount or percentage of any down payment; • The number of payments or period of repayment; • The amount of any payment; and • The amount of any finance charge. An advertisement stating a triggering term must also state the following terms as applicable: • The amount or percentage of any down payment; • The terms of repayment, which reflect the repayment obligations over the full term of the loan, including any balloon payment; and • The “annual percentage rate,” using that term, and, if the rate may be increased after consummation, that fact.

Answer 119

For any advertisement secured by a dwelling, other than television or radio advertisements, that states a simple annual rate of interest, and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement must state in a clear and conspicuous manner: • Each simple rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin must be disclosed based on a reasonably current index and margin. • The period of time during which each simple annual rate of interest will apply. • The APR for the loan.

Answer 120

•Stating that rates or payments for loans are “fixed” when those rates or payments can vary without adequately disclosing that the interest rate or payment amounts are “fixed” only for a limited period of time, rather than for the full term of the loan; • Making comparisons between actual or hypothetical credit payments or rates and any payment or rate available under the advertised product that are not available for the full term of the loan, with certain exceptions for advertisements for variable rate products; • Characterizing the products offered as “government loan programs,” “government-supported loans,” or otherwise endorsed or sponsored by a federal or state government entity even though the advertised products are not government-supported or sponsored loans; • Displaying the name of the consumer’s current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender; • Making claims of debt elimination if the product advertised would merely replace one debt obligation with another; • Creating a false impression that the mortgage broker or lender is a “counselor” for the consumer; and • In foreign-language advertisements, providing certain information, such as a low introductory “teaser” rate, in a foreign language, while providing required disclosures only in English.

Answer 121

Subpart D – Miscellaneous Subpart D contains rules on oral disclosures 12 CFR 1026.26, disclosures in languages other than English 12 CFR 1026.27, record retention 12 CFR 1026.25, effect on state laws (12 CFR 1026.28), state exemptions 12 CFR 1026.29, and rate limitations (12 CFR 1026.30).

Answer 122

Record Retention – 12 CFR 1026.25 As a general rule, the creditor must retain evidence of compliance with Regulation Z (other than advertising requirements under 12 CFR 1026.16 and 12 CFR 1026.24, and other than certain requirements for mortgage loans) for two years after the date disclosures are required to be made or action is required to be taken (12 CFR 1026.25(a)). This includes, for example, evidence that the creditor properly handled adverse credit reports in connection with amounts subject to a billing dispute under 12 CFR 1026.13, and properly handled the refunding of credit balances under 12 CFR 1026.11 and 12 CFR 1026.21. The creditor may retain the evidence by any method that reproduces records accurately (including computer programs) (Comment 25(a)-2). A creditor must permit the enforcing agency to inspect its relevant records for compliance (12 CFR 1026.25(b)).

Answer 123

The record retention period for mortgage loans is generally three years (12 CFR 1026.25(c)). A creditor must retain evidence of compliance with the requirements of 12 CFR 1026.19(e) and (f) for three years after the later of the date of consummation, the date disclosures are required to be made, or the date the action is required to be taken (12 CFR 1026.25(c)(1)(i)).

Answer 124

For Closing Disclosures, the record retention period is five years. The creditor must retain completed closing disclosures required by 12 CFR 1026.19(f)(1)(i) or (f)(4)(i), and all documents related to such disclosures, for five years after consummation (12 CFR 1026.25(c)(1)(ii)(A)). If a creditor sells, transfers, or otherwise disposes of its interest in a mortgage loan subject to 12 CFR 1026.19(f) and does not service the mortgage loan, the creditor must provide a copy of the closing disclosures to the owner or servicer of the mortgage, and the new owner or servicer must retain such disclosures for the remainder of the five-year period.

Answer 125

For loan originator compensation, creditors and loan originator organizations must retain records-related requirements for mortgage loan originator compensation and the compensation agreement that governs those payments for three years after the date of payment (12 CFR 1026.25(c)(2)).

Answer 126

A creditor must retain evidence to show compliance with the minimum standards for loans secured by a dwelling in 12 CFR 1026.43 for three years after consummation of a transaction covered by that section (12 CFR 1026.25(c)(3)).

Answer 127

• Preempted by federal law; • Not preempted by federal law; or • Substituted in lieu of the TILA and Regulation Z requirements. *Preemption is a legal doctrine that allows a higher level of government to limit or even. eliminate the power of a lower level of government to regulate a specific issue. Under the. Supremacy Clause of the US Constitution, federal law takes precedence over state and. local law.

Answer 128

State law provisions are preempted to the extent that they contradict the requirements in the following chapters of the TILA and the implementing sections of Regulation Z: • Chapter 1, “General Provisions,” which contains definitions and acceptable methods for determining finance charges and annual percentage rates. • Chapter 2, “Credit Transactions,” which contains disclosure requirements, rescission rights, and certain credit card provisions. • Chapter 3, “Credit Advertising,” which contains consumer credit advertising rules and APR oral disclosure requirements. For example, a state law would be preempted if it required a financial institution to use the terms “nominal annual interest rate” in lieu of “annual percentage rate.”

Answer 129

Conversely, state law provisions are generally not preempted under federal law if they call for, without contradicting chapters 1, 2, or 3 of the TILA or the implementing sections of Regulation Z, either of the following: • Disclosure of information not otherwise required. A state law that requires disclosure of the minimum periodic payment for open-end credit, for example, would not be preempted because it does not contradict federal law. • Disclosures more detailed than those required. A state law that requires itemization of the amount financed, for example, would not be preempted, unless it contradicts federal law by requiring the itemization to appear with the disclosure of the amount financed in the segregated closedend credit disclosures.

Answer 130

The relationship between state law and Chapter 4 of the TILA (Credit Billing) involves two parts. The first part is concerned with Sections 161 (correction of billing errors) and 162 (regulation of credit reports) of the TILA; the second part addresses the remaining sections of Chapter 4. State law provisions are preempted if they differ from the rights, responsibilities, or procedures contained in Sections 161 or 162. An exception is made, however, for state law that allows a consumer to inquire about an account and requires the bank to respond to such inquiry beyond the time limits provided by federal law. Such a state law would not be preempted for the extra time period. State law provisions are preempted if they result in violations of Sections 163 through 171 of Chapter 4. For example, a state law that allows the card issuer to offset the consumer’s credit-card indebtedness against funds held by the card issuer would be preempted, since it would violate (12 CFR1026.12(d)). Conversely, a state law that requires periodic statements to be sent more than 14 days before the end of a free-ride period would not be preempted, since no violation of federal law is involved.

Answer 131

A financial institution, state, or other interested party may ask the CFPB to determine whether state law contradicts Chapters 1 through 3 of the TILA or Regulation Z. The party also may ask if the state law is different from, or would result in violations of, Chapter 4 of the TILA and the implementing provisions of Regulation Z. If the CFPB determines that a disclosure required by state law (other than a requirement relating to the finance charge, APR, or the disclosures required under 12 CFR1026.32) is substantially the same in meaning as a disclosure required under TILA or Regulation Z, generally creditors in that state may make the state disclosure in lieu of the federal disclosure.

Answer 132

Subpart E – Special Rules for Certain Home Mortgage Transactions Subpart E contains special rules for mortgage transactions. 12 CFR1026.32 requires certain disclosures and provides limitations for closed-end credit transactions and open-end credit plans that have rates or fees above specified amounts or certain prepayment penalties. 12 CFR1026.33 requires special disclosures, including the total annual loan cost rate, for reverse mortgage transactions. 12 CFR 1026.34 prohibits specific acts and practices in connection with high-cost mortgages, as defined in 12 CFR1026.32(a). 12 CFR 1026.35 provides requirements for higher-priced mortgage loans. 12 CFR 1026.36 prohibits specific acts and practices in connection with an extension of credit secured by a dwelling. 12 CFR1026.37 and 12 CFR 1026.38 set forth disclosure requirements for certain closed-end transactions secured by real property or cooperative unit, as required by 12 CFR 1026.19(e) and (f).

Answer 133

General Rules – 12 CFR 1026.31 The requirements and limitations of this subpart are in addition to, and not in lieu of, those contained in other subparts of Regulation Z. The disclosures for high-cost, reverse mortgage, and higher-priced mortgage transactions must be made clearly and conspicuously in writing, in a form that the consumer may keep and in compliance with specific timing requirements.

Answer 134

Requirements for High-Cost Mortgages – 12 CFR 1026.32 The requirements of this section generally apply to a high-cost mortgage, which is a consumer credit transaction secured by the consumer’s principal dwelling (subject to the exemptions discussed below) that meets any one of the following three coverage tests. • The APR will exceed the average prime offer rate (APOR), as defined in 12 CFR 1026.35(a)(2), applicable for a comparable transaction as of the date the interest rate is set by: o More than 6.5 percentage points for first-lien transactions (other than as described below); o More than 8.5 percentage points for first-lien transactions where the dwelling is personal property and the loan amount is less than $50,000; or o More than 8.5 percentage points for subordinate-lien transactions. The total points and fees (see definition below) for the transaction will exceed: o For transactions with a loan amount of $20,000 or more, 5 percent of the total loan amount, with the loan amount to be adjusted annually on January 1st by the annual percentage change in the Consumer Price Index reported on the preceding June 1st; or o For transactions with a loan amount of less than $20,000, the lesser of 8 percent of the total transaction amount or $1,000, with the loan amount to be adjusted annually on January 1st by the annual percentage change in the Consumer Price Index reported on the preceding June 1st. NOTE: The “total loan amount” (using the face amount of the note) for closed-end credit is calculated by taking the amount financed (see 12 CFR 1026.18(b)) and deducting any cost listed in 12 CFR 1026.32(b)(1)(iii), (iv), or (vi) that is both included in points and fees and financed by the creditor. The “total loan amount” for open-end credit is the credit plan limit when the account is opened. • The terms of the loan contract or open-end credit agreement permit the creditor to charge a prepayment penalty (see definition below) more than 36 months after consummation or account opening, or prepayment penalties that exceed more than 2 percent of the amount prepaid (12 CFR 1026.32(a)(1)(iii)). NOTE: 12 CFR 1026.32(d)(6) prohibits prepayment penalties for high-cost mortgages. However, if a mortgage loan has a prepayment penalty that may be imposed more than 36 months after consummation or account opening or that is greater than 2 percent of the amount prepaid, the loan is a high-cost mortgage regardless of interest rate or fees. Therefore, the prepayment penalty coverage test above effectively bans transactions of the types subject to HOEPA coverage that permit creditors to

Answer 135

Exemptions from HOEPA Coverage – 12 CFR 1026.32(a)(2) • Reverse mortgage transactions subject to 12 CFR 1026.33; • A transaction that finances the initial construction of a dwelling; • A transaction originated by a Housing Finance Agency, where the Housing Finance Agency is the creditor for the transaction; or • A transaction originated pursuant to the U.S. Department of Agriculture’s Rural Development Section 502 Direct Loan Program

Answer 136

Determination of APR for High-Cost Mortgages – 12 CFR 1026.32(a)(3) The APR used to determine whether a mortgage is a high-cost mortgage is calculated differently from the APR that is used on TILA disclosures. Specifically, the APR for HOEPA coverage is based on the following: • If the APR will not vary during the length of the loan or credit plan (i.e., for fixed-rate transactions), the interest rate in effect as of the date the interest rate for the transaction is set (12 CFR 1026.32(a)(3)(i)); • If the interest rate may vary during the term of the loan or credit plan in accordance with an index, the interest rate that results from adding the maximum margin permitted at any time during the term of the loan or credit plan to the index rate in effect as of the date the interest rate for the transaction is set, or to the introductory interest rate, whichever is greater (12 CFR 1026.32(a)(3)(ii)); or • If the interest rate may or will vary during the term of the loan or credit plan other than as described above (i.e., as in a step-rate transaction), the maximum interest rate that may be imposed during the life of the loan or credit plan (12 CFR 1026.32(a)(3)(iii)).

Answer 137

For a closed-end transaction, calculate the points and fees by including the following charges (12 CFR 1026.32(b)(1)): • All items included in the finance charge under 12 CFR 1026.4(a) and (b), except that the following items are excluded: o Interest or the time-price differential o Any premiums or other charges imposed in connection with a federal or state agency program for any guaranty or insurance that protects the creditor against the consumer’s default or other credit loss (i.e., upfront and annual Federal Housing Administration (FHA) premiums, U.S. Department of Veterans Affairs (VA) funding fees, and USDA guarantee fees); o Premiums or other charges for any guaranty or insurance that protects creditors against the consumer’s default or other credit loss and is not in connection with a federal or state agency program (i.e., private mortgage insurance (PMI) premiums) as follows:  The entire amount of any premiums or other charges payable after consummation (i.e., monthly or annual PMI premiums); or  If the premium or other charge is payable at or before consummation, the portion of any such premium or other charge that is not in excess of the permissible up-front mortgage insurance premium for FHA loans, but only if the premium or charge is refundable on a pro rata basis and the refund is automatically issued upon the notification of the satisfaction of the underlying mortgage loan. The permissible up-front mortgage insurance premiums for FHA loans are published in HUD Mortgagee Letters, available online at: http://portal.hud.gov/hudportal/HUD?src=/progra m_offices/administration/hudclips/letters/mortgag ee. o Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either, unless the charge is required to be included under 12 CFR 1026.32(b)(1)(i)(C), (iii), or (v); o Up to two bona fide discount points payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR for a comparable transaction by more than one percentage point; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than one percentage point, or o If no discount points have been excluded above, then up to one bona fide discount point payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed: The APOR for a comparable transaction by more than two percentage points; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than two percentage points. NOTE: In the case of a closed-end plan, a bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or timeprice differential appropriate for the amount of discount points paid by the consumer (12 CFR 1026.32(b)(3)). • All compensation paid directly or indirectly by a consumer or creditor to a loan originator (as defined in 12 CFR 1026.36(a)(1) that can be attributed to the transaction at the time the interest rate is set unless: o That compensation is paid by a consumer to a mortgage broker, as defined in 12 CFR 1026.36(a)(2), and already has been included in points and fees under (12 CFR 1026.32(b)(1)(i)); o That compensation is paid by a mortgage broker, as defined in 12 CFR 1026.36(a)(2), to a loan originator that is an employee of the mortgage broker; o That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or • All items listed in 12 CFR 1026.4(c)(7), other than amounts held for future taxes, unless all of the following conditions are met: o The charge is reasonable; o The creditor receives no direct or indirect compensation in connection with the charge; and o The charge is not paid to an affiliate of the creditor. • Premiums or other charges paid at or before consummation, whether paid in cash or financed, for any credit life, credit disability, credit unemployment, or credit property insurance, or for any other life, accident, health, or loss-ofincome insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract. • The maximum prepayment penalty that may be charged or collected under the terms of the mortgage or credit plan. • The total prepayment penalty incurred by the consumer if the consumer refinances an existing mortgage loan, orterminates an existing open-end credit plan in connection with obtaining a new mortgage loan, with a new mortgage transaction extended by the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either.

Answer 138

For an open-end credit plan, points and fees mean the following charges that are known at or before account opening (12 CFR 1026.32(b)(2)): • All items included in the finance charge under 12 CFR 1026.4(a) and (b), except that the following items are excluded: o Interest or the time-price differential; o Any premiums or other charges imposed in connection with a federal or state agency program for any guaranty or insurance that protects the creditor against the consumer’s default or other credit loss (i.e., upfront and annual FHA premiums, VA funding fees, and USDA guarantee fees); o Premiums or other charges for any guaranty or insurance that protects creditors against the consumer’s default or other credit loss and is not in connection with a federal or state agency program (i.e., private mortgage insurance (PMI) premiums) as follows:  If the premium or other charge is payable after account opening, the entire amount of such premium or other charge, or  If the premium or other charge is payable at or before account opening, the portion of any such premium or other charge that is not in excess of the permissible up-front mortgage insurance premium for FHA loans, but only if the premium or charge is refundable on a pro rata basis and the refund is automatically issued upon the notification of the satisfaction of the underlying mortgage loan. The permissible up-front mortgage insurance premiums for FHA loans are published in HUD Mortgagee Letters, available online at: https://www.hud.gov/program_offices/administratio n/hudclips/letters/mortgagee o Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either, unless the charge is required to be included under 12 CFR 1026.32(b)(2)(i)(C), (iii), or (iv); o Up to two bona fide discount points payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR by more than one percentage point; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than one percentage point, or o If no discount points have been excluded above, then up to one bona fide discount point payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR by more than two percentage points; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than two percentage points. NOTE: A bona fide discount point means an amount equal to 1 percent of the credit limit when the account is opened, paid by the consumer, that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer (12 CFR 1026.32(b)(3)(ii)). • All compensation paid directly or indirectly by a consumer or creditor to a loan originator (as defined in 12 CFR 1026.36(a)(1)) that can be attributed to the transaction at the time the interest rate is set unless: o That compensation is paid by a consumer to a mortgage broker, as defined in 12 CFR 1026.36(a)(2), and already has been included in points and fees under (12 CFR1026.33(b)(2)(i)); or o That compensation is paid by a mortgage broker as defined in 12 CFR1026.36(a)(2) to a loan originator that is an employee of the mortgage broker; or o That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or o That compensation is paid by a retailer of manufactured homes to its employee. NOTES: • A person is not a loan originator if the person does not take a consumer credit application or offer or negotiate credit terms available from a creditor to that consumer based on the consumer’s financial characteristics, but the person performs purely administrative or clerical tasks on behalf of a person who does engage in such activities. For purposes of 12 CFR 1026.36, “credit terms” include rates, fees, or other costs, and a consumer’s financial characteristics include any factors that may influence a credit decision, such as debts, income, assets or credit history (12 CFR 1026.36(a)(6)). • A retailer of manufactured or modular homes or an employee of such a retailer who does not receive compensation or gain for engaging in loan originator activities in excess of any compensation or gain received in a comparable cash transaction, and who does not directly negotiate with the consumer or lender on loan terms, is not a loan originator, provided the retailer or employee discloses to the consumer in writing any corporate affiliation with any creditor. Where the retailer has a corporate affiliation with any creditor, at least one unaffiliated creditor must also be disclosed (15 U.S.C. 1602(dd)(2)(C)(ii)). • All items listed in 12 CFR1026.4(c)(7), other than amounts held for future taxes, unless all of the following conditions are met: o The charge is reasonable; o The creditor receives no direct or indirect compensation in connection with the charge; and o The charge is not paid to an affiliate of the creditor. • Premiums or other charges paid at or before account opening for any credit life, credit disability, credit unemployment, or credit property insurance, or for any other life, accident, health, or loss-of-income insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract. • The maximum prepayment penalty that may be charged or collected under the terms of the credit plan. • The total prepayment penalty incurred by the consumer if the consumer refinances an existing closed-end credit transaction with an open-end credit plan, or terminates an existing open-end credit plan in connection with obtaining a new open-end credit with the current holder of the existing transaction or plan, a servicer acting on behalf of the current holder, or an affiliate of either. In addition to the charges listed above, points and fees for openend credit plans include the following items: • Fees charged for participation in the credit plan, payable at or before account opening, as described in 12 CFR 1026.4(c)(4), and • Any transaction fee that will be charged to draw funds on the credit line, as described in (12 CFR 1026.32(b)(2)(viii)).

Answer 139

Prepayment Penalty Definition – 12 CFR1026.32(b)(6) For closed-end credit transactions, a prepayment penalty is a charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due, with limited exceptions. For open-end credit plans, a prepayment penalty is a charge imposed by the creditor if the consumer terminates the credit plan prior to the end of its term. NOTE: Waived, bona fide third-party charges that are later imposed if the closed-end transaction is prepaid or the consumer terminates the open-end credit plan sooner than 36 months after consummation or account opening are not considered prepayment penalties. NOTE: For closed-end transactions insured by the Federal Housing Administration and consummated before January 21, 2015, interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty, so long as the interest is charged consistent with the monthly interest accrual amortization method used for those loans. (See Comment 32(b)(6)-1(iv))

Answer 140

High-Cost Mortgage Disclosures – 12 CFR 1026.32(c) In addition to the other disclosure requirements of Regulation Z, high-cost mortgages require certain additional information to be disclosed in conspicuous type size to consumers before consummation of the transaction or account opening. These disclosures include: • Notice to the consumer using the required language in 12 CFR1026.32(c)(1); • The annual percentage rate (12 CFR1026.32(c)(2)); • Specified information concerning the regular or minimum periodic payment and the amount of any balloon payment, if permitted under the high-cost mortgage limitations in 12 CFR1026.32(d) (12 CFR1026.32(c)(3)). • For variable-rate transactions, a statement that the interest and monthly payment may increase, and the amount of the single maximum monthly payment based on the maximum interest rate required to be included in the contract (12 CFR 1026.32(c)(4)) and • The total amount borrowed for closed-end credit transactions or the credit limit for the plan when the account is opened for an open-end credit plan (12 CFR 1026.32(c)(5)). NOTE: For closed-end credit transactions, if the amount borrowed includes charges to be financed under 12 CFR 1026.34(a)(10), this fact must be stated, grouped together with the disclosure of amount borrowed. The disclosure of the amount borrowed will be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.

Answer 141

High-Cost Mortgage Limitations – 12 CFR 1026.32(d) Certain loan terms, including negative amortization, interest rate increases after default, and prepayment penalties are prohibited for high-cost mortgages. Others, including balloon payments and due-on-demand clauses, are restricted. • Balloon payments, defined as payments that are more than two times a regular periodic payment, are generally prohibited for high-cost mortgages (12 CFR 1026.32(d)(1)(i)). However, balloon payments are allowed in certain limited circumstances. o For closed-end transactions, balloon payments are permitted when (a) the loan has a payment schedule that is adjusted to seasonal or irregular income of the consumer; (b) the loan is a “bridge” loan made in connection with the purchase of a new dwelling and matures in 12 months or less; (c) the creditor is a small creditor operating in a rural or underserved area that meets the criteria set forth in 12 CFR 1026.43(f) for small creditor rural or underserved balloon-payment qualified mortgages; or, (d) until April 1, 2016, the creditor is a small creditor that meets the criteria set forth in 1026.43(e)(6)) for temporary balloon-payment qualified mortgages (12 CFR 1026.32(d)(1)(ii)). o For an open-end credit plan where the terms of the plan provide for a draw period where no payment is required, followed by a repayment period where no further draws may be taken, the initial payment required after conversion to the repayment phase of the credit plan is not considered a “balloon” payment. However, if the terms of an open-end credit plan do not provide for a separate draw period and repayment period, the balloon payment limitation applies (12 CFR1026.32(d)(1)(iii)). • Acceleration clauses or demand features are limited and may only permit creditors to accelerate and demand repayment of the entire outstanding balance of a high-cost mortgage if: o There is fraud or material misrepresentation by the consumer in connection with the loan (12 CFR 1026.32(d)(8)(i)); o The consumer fails to meet the repayment terms of the agreement for any outstanding balance that results in a default on the loan (12 CFR 1026.32(d)(8)(ii)); or o There is any action (or inaction) by the consumer that adversely affects the rights of the creditor’s security interest for the loan, such as the consumer failing to pay required taxes on the property (12 CFR 1026.32(d)(8)(iii) and comments 32(d)(8)(iii)-1 and -2).

Answer 142

Prohibited Acts or Practices in Connection with High-Cost Mortgages – 12 CFR 1026.34 In addition to the requirements in 12 CFR 1026.32, Regulation Z imposes additional requirements for high-cost mortgages, several of which are discussed below. Refinancing Within OneYear – 12 CFR1026.34(a)(3) A creditor or assignee cannot refinance a consumer’s high-cost mortgage into a second high-cost mortgage within the first year of the origination of the first loan, unless the second high-cost mortgage is in the consumer’s interest.

Answer 143

Repayment Ability for High-Cost Mortgages – 12 CFR1026.34(a)(4) Among other requirements, a creditor extending high-cost mortgage credit subject to 12 CFR 1026.32 must not make such loans without regard to the consumer’s repayment ability as of consummation or account opening as applicable (12 CFR 1026.34(a)(4)). For closed-end credit transactions that are high-cost mortgages, 12 CFR1026.34(a)(4) requires a creditor to comply with the repayment ability requirements set forth in 12 CFR1026.43. For open-end credit plans that are high-cost mortgages, a creditor may not open a credit plan for a consumer where credit is or will be extended without regard to the consumer’s repayment ability as of account opening, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, and current obligations, including any mortgage-related obligations. • For the purposes of these open-end requirements, mortgage-related obligations include, among other things, property taxes, premiums and fees for mortgage-related insurance that are required by the creditor, fees and special assessments such as those imposed by a condominium association, and similar expenses required by another credit obligation undertaken prior to or at account opening and secured by the same dwelling that secures the high-cost mortgage transaction (12 CFR1026.34(a)(4)(i)). • A creditor must also verify both current obligations and the amounts of income or assets that it relies on to determine repayment ability using W-2s, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets (12 CFR 1026.34(a)(4)(ii)). For open-end high-cost mortgages, a presumption of compliance is available, but only if the creditor: Verifies the consumer’s repayment ability as required under 12 CFR1026.34(a)(4)(ii)); • Determines the consumer’s repayment ability taking into account current obligations and mortgage-related obligations, using the largest required minimum periodic payment based on the assumptions that: o The consumer borrows the full credit line at account opening with no additional extensions of credit; o The consumer makes only required minimum periodic payments during the draw period and any repayment period; and o If the APR can increase, the maximum APR that is included in the contract applies to the plan at account opening and will apply during the draw and any repayment period (12 CFR 1026.34(a)(4)(iii)(B)). • Assesses the consumer’s repayment ability, taking into account either the ratio of total debts to income or the income the consumer will have after paying current obligations (12 CFR1026.34(a)(4)(iii)(C)). NOTE: No presumption of compliance will be available for an open-end high-cost mortgage transaction in which the regular periodic payments, when aggregated, do not fully amortize the outstanding principal balance except for transactions with balloon payments permitted under 12 CFR 1026.32(d)(1)(ii).

Answer 144

High-Cost Mortgage Pre-Loan Counseling – 12 CFR1026.34(a)(5) Creditors that originate high-cost mortgages must receive written certification that the consumer has obtained counseling on the advisability of the mortgage from a counselor approved by HUD, or if permitted by HUD, a state housing finance authority (specific content for the certifications can be found in (12 CFR1026.34(a)(5)(iv)). Counseling must occur after the consumer receives a good faith estimate or initial TILA disclosure required by 12 CFR 1026.40 (or, for transactions where neither of those disclosures are provided, the disclosures required by (12 CFR 1026.32(c)). Additionally, counseling cannot be provided by a counselor who is employed by, or affiliated with, the creditor. A creditor may pay the fees for counseling but is prohibited from conditioning the payment of fees upon the consummation of the mortgage transaction or, if the consumer withdraws his or her application, upon receipt of the certification. However, a creditor may confirm that a counselor provided counseling to the consumer prior to paying these fees. Finally, a creditor is prohibited from steering a consumer to a particular counselor.

Answer 145

Recommended Default – 12 CFR1026.34(a)(6) Creditors (and mortgage brokers) are prohibited from recommending or encouraging a consumer to default on an existing loan or other debt prior to, and in connection with, the consummation or account opening of a high-cost mortgage that refinances all or any portion of the existing loan or debt.

Answer 146

Loan Modification and Deferral Fees – 12 CFR 1026.34(a)(7) Creditors, successors in interest, assignees, or any agents of these parties may not charge a consumer any fee to modify, renew, extend, or amend a high-cost mortgage, or to defer any payment due under the terms of the mortgage.

Answer 147

Late Fees – 12 CFR 1026.34(a)(8) Late payment charges for a high-cost mortgage must be permitted by the terms of the loan contract or open-end agreement and may not exceed 4 percent of the amount of the payment that is past due. Late payment charges are permitted only if payment is not received by the end of the 15-day period beginning on the day the payment is due or, where interest on each installment is paid in advance, by the end of the 30-day period beginning on the day the payment is due. Creditors are also prohibited from “pyramiding” late fees—that is, charging late payments if any delinquency is attributable only to a late payment charge that was imposed due to a previous late payment, and the payment otherwise is considered a full payment for the applicable period (and any allowable grace period). If a consumer fails to make a timely payment by the due date then subsequently resumes making payments but has not paid all past due payments, the creditor can continue to impose late payment charges for the payments outstanding until the default is cured.

Answer 148

Fees for Payoff Statements – 12 CFR 1026.34(a)(9) A creditor or servicer may not charge a fee for providing consumers (or authorized representatives) with a payoff statement on a high-cost mortgage. Payoff statements must be provided to consumers within five business days after receiving the request for a statement. A creditor or servicer may charge a processing fee to cover the cost of providing the payoff statement by fax or courier only, provided that such fee may not exceed an amount that is comparable to fees imposed for similar services provided in connection with a non-high-cost mortgage and that a payoff statement be made available to the consumer by an alternative method without charge. If a creditor charges a fee for providing a payoff statement by fax or courier, the creditor must disclose the fee prior to charging the consumer and must disclose to the consumer that other methods for providing the payoff statement are available at no cost. Finally, a creditor is permitted to charge a consumer a reasonable fee for additional payoff statements during a calendar year in which four payoff statements have already been provided without charge other than permitted processing fees.

Answer 149

Reverse Mortgages – 12 CFR 1026.33 A reverse mortgage is a non-recourse transaction secured by the consumer’s principal dwelling thatties repayment (other than upon default) to the homeowner’s death or permanent move from, or transfer of the title of, the home. Special disclosure requirements apply to reverse mortgages.

Answer 150

Higher-Priced Mortgage Loans – 12 CFR 1026.35(a) A mortgage loan subject to 12 CFR 1026.35 (higher-priced mortgage loan) is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an APR that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by: • 1.5 or more percentage points for loans secured by a first lien on a dwelling where the amount of the principal obligation at the time of consummation does not exceed the maximum principal obligation eligible for purchase by Freddie Mac; • 2.5 or more percentage points for loans secured by a first lien on a dwelling, where the amount of the principal obligation at the time of consummation exceeds the maximum principal obligation eligible for purchase by Freddie Mac; or • 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling.

Answer 151

Average prime offer rate means an APR that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The CFPB publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly, as well as the methodology it uses to derive these rates. These rates are available on the website of the Federal Financial Institutions Examination Council (FFIEC). http://www.ffiec.gov/ratespread/newcalchelp.aspx. Additionally, creditors extending mortgage loans subject to 12 CFR 1026.43(c) must verify a consumer’s ability to repay as required by (12 CFR 1026.43(c)). Finally, the regulation prohibits creditors from structuring a home-secured loan that does not meet the definition of open-end credit as an open-end plan to evade these requirements.

Answer 152

Higher-Priced Mortgage Loans Escrow Requirement – 12 CFR 1026.35(b) In general, a creditor may not extend a higher-priced mortgage loan (including high-cost mortgages that also meet the definition of a higher-priced mortgage loan), secured by a first lien on a principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor. An escrow account for a higher-priced mortgage loan need not be established for: • A transaction secured by shares in a cooperative, • A transaction to finance the initial construction of a dwelling, • A temporary or “bridge” loan with a term of 12 months or less, or • A reverse mortgage subject to (12 CFR 1026.33). There is also a limited exemption that allows creditors to establish escrow accounts for property taxes only (rather than for both property taxes and insurance) for loans secured by dwellings in a “common interest community” under 12 CFR 1026.35(b)(2)(ii), where dwelling ownership requires participation in a governing association that is obligated to maintain a master insurance policy insuring all dwellings (12 CFR1026.35(b)(2)(ii)).

Answer 153

There is also a limited exemption that allows creditors to establish escrow accounts for property taxes only (rather than for both property taxes and insurance) for loans secured by dwellings in a “common interest community” under 12 CFR 1026.35(b)(2)(ii), where dwelling ownership requires participation in a governing association that is obligated to maintain a master insurance policy insuring all dwellings (12 CFR1026.35(b)(2)(ii)). An exemption to the higher-priced mortgage loan escrow requirement is available for first-lien higher-priced mortgage loans made by certain creditors that operate in a “rural” or “underserved” area (12 CFR 1026.35(b)(2)(iii) and its associated commentary). To make use of this exemption, a creditor: 1. Must have made, during the preceding calendar year (or if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years), a covered transaction secured by a first lien on a property that is located in an area that meets the definition of either “rural” or “underserved” as set forth in (12 CFR 1026.35(b)(2)(iv));33 2. Together with its affiliates, must not have extended more than 2,000 covered transactions (secured by first liens, that were sold, assigned, or otherwise transferred to another person or subject at the time of consummation to a commitment to be acquired by another person) in the preceding calendar year (or if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years), 3. Together, with its affiliates that regularly extended34 covered transactions (secured by first liens), must have had less than $2 billion in total assets 35 as of the preceding December 31st (or if an application was received before April 1 of the current year, as of either of the two preceding December 31sts), and 4. The creditor and its affiliates must not maintain escrow accounts for any extensions of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services. However, such creditors (and their affiliates) are permitted to maintain escrow accounts established to comply with the rule for applications received on or after April 1, 2010, and before May 1, 2016 without losing the exemption and to offer an escrow account to accommodate distressed borrowers. For first-lien higher-priced mortgage loans originated by a creditor that would not be required to establish an escrow account based on the above exemption, if that creditor has obtained a commitment for a higher-priced mortgage loan to be acquired by another company that is not eligible for the exemption, an escrow account must be established. Since an escrow account will be established for this loan, however, note that if the creditor that has obtained a commitment for the higher-priced mortgage loan to be acquired by a non-exempt company would like to remain eligible for the exemption above, neither the creditor nor its affiliates can service the loan on or beyond the second periodic payment under the terms of the loan. 33 The regulation defines these two terms in 12 CFR 1026.35(b)(2)(iv)(A) and (B). A rural area is a county that is neither in a metropolitan statistical area or a micropolitan statistical area that is adjacent to a metropolitan statistical area; or a census block that is not in an urban area, as defined by the U.S. Census Bureau using the latest decennial census of the United States; or a county or a census block that has been designated as “rural” by the CFPB pursuant to the application process established in 2016. See Application Process for Designation of Rural Area under Federal Consumer Financial Law; Procedural Rule, 81 FR 11099 (March 3, 2016). The provisions related to the application process ceased to have any force or effect on December 4, 2017 (12 CFR 1026.35(b)(2)(iv)(A)(3)). An underserved area is a county defined by using Home Mortgage Disclosure Act data for the preceding year to determine whether it is a county in which no more than two creditors extended covered transactions secured by first liens on properties in the county five or more times. A property is in a rural or underserved area for a particular year if it is listed as a rural or underserved county by the CFPB, is identified as in a rural or underserved area by any automated tool on the Bureau’s website or is not designated as located in an urban area in the most recent delineation of urban areas announced by the Census Bureau by any automated address search tool that the Census Bureau provides on its public website for that purpose. 34 See Comment 35(b)(2)(iii)-1.iii for discussion of “ regularly extended” as it applies to affiliates in 12 CFR 1026.35(b)(2)(iii)(C). 35 The asset threshold is adjusted automatically each year, based on the year-toyear change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers. A creditor or servicer may cancel an escrow account only upon the earlier of termination of the underlying loan, or a cancellation request from the consumer five years or later after consummation. However, a creditor or servicer is not permitted to cancel an escrow account, even upon request from the consumer, unless the unpaid principal balance of the higherpriced mortgage loan is less than 80 percent of the original value of the property securing the loan and the consumer is not currently delinquent or in default on the loan (12 CFR 1026.35(b)(3)).

Answer 154

Higher-Priced Mortgage Loans Appraisal Requirement – 12 CFR1026.35(c) 36 General Requirements, Exception, and Safe Harbor A creditor may not extend a higher-priced mortgage loan without first obtaining a written appraisal of the property to be mortgaged. The appraisal must be performed by a state-certified or licensed appraiser (defined in part as an appraiser who conducts the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) and the requirements applicable to appraisers in Title IX of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and its implementing regulations). The appraisal must include a physical visit of the interior of the dwelling. The appraisal requirements do not apply to:

Answer 155

The appraisal must include a physical visit of the interior of the dwelling. The appraisal requirements do not apply to: • Qualified mortgages (QM) under 12 CFR 1026.43 or under rules on qualified mortgages adopted by HUD, VA, or USDA, including mortgages that meet the QM criteria for these rules and are insured, guaranteed, or administered by those agencies; • An extension of credit equal to or less than the applicable threshold amount that is published in the official staff commentary to the regulation, which is adjusted every year as applicable to reflect increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers;37 • A transaction secured by a mobile home, boat, or trailer; • A transaction to finance the initial construction of a dwelling; • A loan with maturity of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwelling intended to become the consumer’s principal dwelling;  A cost estimate of the value of the manufactured home securing the transaction obtained from an independent cost service provider; or  A valuation, as defined in 12 CFR 1026.42(b)(3), of the manufactured home performed by a person who has no direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is performed and has training in valuing manufactured homes. o Transactions secured by an existing (used) manufactured home and land are not exempt from the appraisal requirement. A creditor may obtain a safe harbor for compliance with 12 CFR 1026.35(c)(3)(i) by ordering that the appraisal be completed in conformity with USPAP and the requirements applicable to appraisers in Title IX of FIRREA and its implementing regulations, verifying that the appraiser is certified or licensed through the National Registry; and confirming that the written appraisal contains the elements listed in Appendix N of Regulation Z. In addition, the creditor must have no actual knowledge that the facts or certifications contained in the appraisal are inaccurate (12 CFR1026.35(c)(3)(ii)). A reverse mortgage transaction subject to (12 CFR 1026.33(a)). • A refinancing secured by a first lien, as defined in 12 CFR 1026.20(a) (except that the creditor need not be the original creditor or a holder or servicer of the original obligation), provided that the refinancing meets the following criteria: o The credit risk of the refinancing is retained by the person who held the credit risk of the existing obligation and there is no commitment, at consummation, to transfer the credit risk to another person; or, the refinancing is insured or guaranteed by the same Federal government agency that insured or guaranteed the existing obligation; o The regular periodic payments under the refinance loan do not:  Cause the principal balance to increase;  Allow the consumer to defer repayment of principal; or  Result in a balloon payment, as defined in (12 CFR1026.18(s)(5)(i)). o The proceeds from the refinancing are used solely to satisfy the existing obligation and amounts attributed solely to the costs of the refinancing. • A transaction secured by a manufactured home under the following conditions:38 o If the transaction is for a new manufactured home and land, the exemption shall only apply to the requirement that the appraiser conduct a physical visit of the interior of the new manufactured home. o If the transaction is for a manufactured home and not land, for which the creditor obtains one of the following and provides a copy to the consumer no later than three business days prior to consummation of the transaction:  For a new manufactured home, the manufacturer's invoice for the manufactured home securing the transaction, provided that the date of manufacture is no earlier than 18 months prior to the creditor's receipt of the consumer's application for credit; 36 The higher-priced mortgage loans appraisal requirement was adopted pursuant to an interagency rulemaking conducted by the Board of Governors of the Federal Reserve System (Board), the CFPB, the Federal Deposit Insurance Corporation (FDIC), the FHFA, the NCUA, and the Office of the Comptroller of the Currency (OCC). The Board codified the rule at 12 CFR 226.43, and the OCC codified the rule at 12 CFR Part 34. There is no substantive difference among these three sets of rules. 37 From January 1, 2015, through December 31, 2015, the threshold amount was $25,500. See Comment 35(c)(2)(ii) – 3. Effective January 1, 2022, to December 31, 2022, the threshold is $28,500. 38 Prior to July 18, 2015, appraisal requirements do not apply to transactions secured in whole or in part by a manufactured home (12 CFR 1026.35(c)(2)). This section describes how the exemption will work under an amendment to the rule that takes effect on July 18, 2015.

Answer 156

Additional Appraisals The appraisal provisions in 12 CFR1026.35(c) also require creditors to obtain an additional written appraisal before extending a higher-priced mortgage loan in two instances: * First, when the dwelling that is securing the higher-priced mortgage loan was acquired by the seller 90 or fewer days prior to the consumer’s agreement to purchase the property and the price of the property has increased by more than 10 percent. * Additionally, when the dwelling was acquired by the seller between 91 and 180 days prior to the consumer’s agreement to purchase the property, and the price of the property has increased by more than 20 percent. A creditor must obtain an additional interior appraisal meeting the same requirements as the first appraisal (written report by a certified or licensed appraiser in compliance with USPAP and FIRREA based upon an interior property visit), unless the creditor can demonstrate, by exercising reasonable diligence, that the circumstances necessitating an additional appraisal do not apply. A creditor can meet the reasonable diligence requirement if it bases its determination on information contained in certain written source documents (such as a copy of the seller’s recorded deed or a copy of a property tax bill) (See Appendix O of Regulation Z). If, after exercising reasonable diligence, the creditor is unable to determine whether the circumstances necessitating an additional appraisal apply, the creditor must obtain an additional appraisal. If the creditor is required to obtain an additional written appraisal, the two required appraisals must be conducted by different appraisers. Each appraisal obtained must include a physical visit of the interior of the dwelling. In instances where two appraisals are required, creditors are allowed to charge for only one of the two appraisals. One of the two required written appraisals must contain an analysis of the difference between the price at which the seller obtained the property and the price the consumer agreed to pay to acquire the property, an analysis of changes in market conditions between when the seller acquired the property and when the consumer agreed to purchase the property, and a review of improvements made to the property between the two dates. The higher-priced mortgage loan additional appraisal requirements do not apply to the extension of credit that finances the acquisition of a property: * From a local, state, or federal government agency; * From a person who acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedures as a result of the person’s exercise of rights as the holder of a defaulted mortgage; * From a nonprofit entity as part of a local, state, or federal government program permitted to acquire single-family properties for resale from a person who acquired title through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedures; * From a person who acquired title to the property by inheritance or by court order as a result of a dissolution of marriage, civil union, or domestic partnership, or of partition of joint or marital assets; * From an employer or relocation agency in connection with the relocation of an employee; * From a servicemember who received a deployment or permanent change-of-station order after the servicemember purchased the property; * Located in a federal disaster area if the requirements of Title XI of FIRREA have been waived by the federal financial institutions regulatory agencies for as long as that waiver would apply; or * Located in a rural county as defined by the CFPB in 12 CFR1026.35(b)(2)(iv)(A).

Answer 157

Application Disclosures and Copy of Appraisal Finally, creditors must provide consumers who apply for a loan covered by the appraisal requirements in 12 CFR1026.35(c) with a disclosure providing information relating to appraisals. A creditor must provide consumers with disclosures no later than the third business day after the creditor receives an application for a higher-priced mortgage loan, or no later than the third business day after the loan requested becomes a higher-priced mortgage loan. Additionally, a creditor must provide, at no cost to the consumer, a copy of each written appraisal performed in connection with a loan covered by the appraisal requirements in 12 CFR1026.35(c) no later than three business days prior to consummation or, if the loan will not be consummated, no later than 30 days after the creditor determines that the loan will not be consummated. 39

Answer 158

Loan Originator – 12 CFR1026.36(a) The term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: * Takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or * Through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition. The term “loan originator” also includes a creditor that engages in loan origination activities if the creditor does not finance the transaction at consummation out of the creditor’s own resources, including by drawing on a bona fide warehouse line of credit or out of deposits held by the creditor. The term “loan originator” does not include: * A person who performs purely administrative or clerical tasks on behalf of a person who takes applications or offers or negotiates credit terms; * A retailer of manufactured or modular homes or an employee of such a retailer who does not receive compensation or gain for engaging in loan originator activities in excess of any compensation or gain received in a comparable cash transaction, and who does not directly negotiate with the consumer or lender on loan terms (including rates, fees, and other costs), if such retailer or employee discloses to the consumer in writing any corporate affiliation with any creditor. Where the retailer has a corporate affiliation with any creditor, at least one unaffiliated creditor must also be disclosed (15 U.S.C. 1602(dd)(2)(C)(ii)); * A person who performs only real estate brokerage activity and is licensed or registered in accordance with applicable state law, unless that person is compensated by a creditor or loan originator for a consumer credit transaction subject to (12 CFR1026.36); * A seller financer that meets the criteria established in (12 CFR1026.36(a)(4) or (a)(5)); or * A servicer, or a servicer’s employees, agents, and contractors who offer or negotiate the terms of a mortgage for the purpose of renegotiating, modifying, replacing, or subordinating principal of an existing mortgage where consumers are behind in their payments, in default, or have a reasonable likelihood of becoming delinquent or defaulting. This exception does not, however, apply to such persons if they refinance a mortgage or assign a mortgage to a different consumer. An “individual loan originator” is a natural person who meets the definition of “loan originator.” Finally, a “loan originator organization” is any loan originator that is not an individual loan originator. A loan originator organization would include banks, thrifts, finance companies, credit unions and mortgage brokers.

Answer 159

Prohibited Loan Originator Compensation: Payments Based on a Term of a Transaction – 12 CFR1026.36(d)(1) With limited exceptions, loan originators cannot receive (and no person can pay directly or indirectly), compensation in connection with closed-end consumer credit transactions secured by a dwelling based on a term of a transaction, the terms of multiple transactions, or the terms of multiple transactions by multiple individual loan originators. The loan originator compensation provisions do not apply to open-end home-equity lines of credit or to credit secured by a consumer’s interest in a timeshare plan described in 11 U.S.C. 101(53D). A “term of a transaction” is any right or obligation of the parities to a credit transaction. The amount of credit extended is not a term of a transaction, provided that such compensation is based on a fixed percentage of the amount of credit extended (but may be subject to a minimum or maximum dollar amount). NOTE: A review of whether compensation, which includes salaries, commissions, and any financial or similar incentive, is based on the terms of a transaction requires an objective analysis. If compensation would have been different if a transaction term had been different, then the compensation is prohibited. The regulation does not prevent compensating loan originators differently on different transactions, provided the difference is not based on a term of a transaction or on a proxy for a term of a transaction (a factor that consistently varies with a term or terms of the transaction over a significant number of transactions and which the loan originator has the ability to manipulate). * An individual loan originator may receive (and a person may pay): * Compensation in the form of a contribution to a defined contribution plan that is a designated tax-advantage plan unless the contribution is tied to the terms of the individual’s transaction(s) (12 CFR 1026.36.(d)(1)(iii)); * Compensation in the form of a benefit under a defined benefit plan that is a designated tax-advantaged plan (12 CFR1026.36(d)(1)(iii)); * Compensation under a non-deferred profits-based compensation plan provided that: o The compensation paid to an individual loan originator is not directly or indirectly based on the terms of the individual’s transaction(s); and o Either:  The compensation paid to the individual loan originator does not exceed 10 percent (in aggregate) of the individual loan originator’s total compensation corresponding to the time period for which the compensation under the nondeferred profits-based compensation plan is paid; or  The individual loan originator was the loan originator of 10 or fewer transactions during the 12 months preceding the date that the compensation was determined (12 CFR 1026.36(d)(1)(iv)). For more information pertaining to permissible compensation, see the commentary to (12 CFR1026.36(d)). 40 In addition to the requirements listed here, 12 CFR 1026.25(c) imposes specific record retention requirements for creditors and loan originator organizations that compensate loan originators.

Answer 160

Prohibited Loan Originator Compensation: Dual Compensation – 12 CFR1026.36(d)(2) Prohibited Loan Originator Compensation: Dual Compensation – 12 CFR1026.36(d)(2) Loan originators that receive compensation directly from consumers in consumer credit transactions secured by a dwelling (except for open-end home-equity lines of credit or to loans secured by a consumer’s interest in a timeshare plan) may not receive additional compensation directly or indirectly from any other person in connection with that transaction (12 CFR 1026.36(d)(1)(i)(A)(1)). This prohibition includes compensation received from a third party to the transaction to pay for some or all of the consumer’s costs (12 CFR 1026.36(d)(1)(i)(B)). Further, a person is prohibited from compensating a loan originator when that person “knows or has reason to know” that the consumer has paid compensation to the loan originator (12 CFR 1026.36(d)(2)(i)(A)(2)). However, even if a loan originator organization receives compensation directly from a consumer, the organization can compensate the individual loan originator, subject to 12 CFR 1026.36(d)(1) (12 CFR 1026.36(d)(2)(i)(C)). AKA as an LO, you can receive compensation from a consumer, or a consumer and your org, but not from two consumers or a consumer and a third-party

Answer 161

Prohibition on Steering – 12 CFR 1026.36(e) Loan originators are prohibited from directing or “steering” consumers to loans based on the fact that the originator will receive greater compensation for the loan from the creditor than in other transactions that the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer’s interest. A loan originator complies with the prohibition on steering (but not the loan originator compensation provisions) by obtaining loan options from a significant number of the creditors with which the loan originator regularly does business and, for each loan type in which the consumer has expressed interest, presenting the consumer with loan options for which the loan originator believes in good faith the consumer likely qualifies, provided that the presented loan options include all of the following: * The loan with the lowest interest rate; * The loan with the lowest interest rate without certain enumerated risky features (such as prepayment penalties, negative amortization, or a balloon payment in the first seven years); and * The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar 40 In addition to the requirements listed here, 12 CFR 1026.25(c) imposes specific record retention requirements for creditors and loan originator organizations that compensate loan originators. amount of discount points, origination points or origination fees). The anti-steering provisions do not apply to open-end homeequity lines of credit or to loans secured by a consumer’s interest in a timeshare plan.

Answer 162

Loan Originator Qualification Requirements – 12 CFR1026.36(f) Individual loan originators and loan originator organizations must, when required under state or federal law, be registered and licensed under those laws, including the Safe and Fair Enforcement for Mortgage Licensing Action of 2008 (SAFE Act).41 Loan originator organizations other than government agencies or state housing finance agencies must: * Comply with all applicable state law requirements for legal existence and foreign qualification; (12 CFR 1026.36(f)(1)); and * Ensure that each individual loan originator who works for the loan originator organization (e.g., an employee, under a brokerage agreement) is licensed or registered to the extent that the individual is required to be licensed or registered under the SAFE Act or excluded from those requirements because the individual is authorized to act with temporary authority pursuant to 12 U.S.C. 5117 prior to acting as a loan originator in a consumer credit transaction secured by a dwelling (12 CFR1026.36(f)(2)). The requirements are different for loan originator organizations whose employees are not required to be licensed and are not licensed pursuant to 12 CFR1008.103 or state SAFE Act implementing laws (including employees of depository institutions and bona fide nonprofits). For their employees hired on or after January 1, 2014 (or hired before this date but not subject to any statutory or regulatory background standards at the time, or for any individual loan originators regardless of when hired that the organization believes, based on reliable information do not meet the qualification standards), loan originator employers must obtain before the individual acts as a loan originator in a consumer credit transaction secured by a dwelling: * A criminal background check through the Nationwide Mortgage Licensing System and Registry (NMLSR) or, in the case of an individual loan originator who is not a registered loan originator under NMLSR, a criminal background check from a law enforcement agency or commercial service (12 CFR 1026.36(f)(3)(i)(A)); A credit report from a consumer reporting agency (as defined in section 603(p) of the Fair Credit Reporting Act) secured, where applicable, in compliance with section 604(b) of FCRA (12 CFR 1026.36(f)(3)(i)(B)); and * Information from the NMLSR about any administrative, civil, or criminal findings by any government jurisdiction or, in the case of an individual loan originator who is not a registered loan originator under the NMLSR, such information from the individual loan originator (12 CFR 1026.36(f)(3)(i)(C)). Based on the information obtained above and any other information reasonably available, the loan originator employer must determine for such an employee prior to allowing the individual to act as a loan originator in a consumer credit transaction secured by a dwelling: * That the individual has not been convicted of, or pleaded guilty or nolo contendere to, a felony in a domestic or military court during the preceding seven-year period or, in the case of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering, at any time (12 CFR 1026.36(f)(3)(ii)(A)(1)); and NOTE: Whether the conviction of a crime is considered a felony is determined by whether the conviction was classified as a felony under the law of the jurisdiction under which the individual is convicted. Additionally, a loan originator organization may employ an individual with a felony conviction (or a plea of nolo contendere) as a loan originator if that individual has received consent from the FDIC, (or the Board, as applicable) the NCUA, or the Farm Credit Administration (FCA) under their own applicable statutory authority (12 CFR 1026.36(f)(3)(iii)). * Has demonstrated financial responsibility, character, and general fitness such as to warrant a determination that the individual loan originator will operate honestly, fairly, and efficiently. The loan originator organization must also provide periodic training to each such employee that covers federal and state legal requirements that apply to the individual loan originator’s loan origination activities. The SAFE Act provides certain loan originators with temporary authority to act as loan originators while applying for a stateloan originator license (12 U.S.C. 5117). If an individual loan originator may act as a loan originator with temporary authority under 12 U.S.C. 5117, the loan originator organization is not required to comply with the screening and training requirements described in (12 CFR 1026.36(f)(3)). 42

Answer 163

12 CFR1026.36(g) applies to closed-end consumer credit transactions secured by a dwelling except a loan that is secured by a consumer’s interest in a timeshare plan described in (11 U.S.C. 101(53D)). For purposes of 12 CFR1026.36(g), a loan originator includes all creditors that engage in loan origination activities, not just those who table fund. For consumer credit transactions secured by a dwelling, loan originator organizations must include certain identifying information on loan documentation provided to consumers. The loan documents must include the loan originator organization’s name, NMLSR ID (if applicable), and the name of the individual loan originator that is primarily responsible for the origination as it appears in the NMLSR, as well as the individual’s NMLSR ID. This information is required on credit applications, the Loan Estimate, the Closing Disclosure, the note or loan contract, and the documents securing an interest in the property.

Answer 164

Policies and Procedures to Ensure and Monitor Compliance – 12 CFR 1026.36(j) Depository institutions (including credit unions) must establish and maintain written policies and procedures reasonably designed to ensure and monitor compliance of the depository institution, its employees, and its subsidiaries and their employees with the requirements of 12 CFR1026.36(d) (prohibited payments to loan originators), 1026.36(e) (prohibition on steering), 1026.36(f) (loan originator qualifications), and 1026.36(g) (name and NMLSR ID on loan documents). The written policies and procedures must be appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the depository and its subsidiaries (12 CFR1026.36(j)).

Answer 165

Prohibition on Mandatory Arbitration or Waivers of Certain Consumer Rights – 12 CFR 1026.36(h) A contract or other agreement for a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not include terms that require mandatory arbitration or any other nonjudicial procedure to resolve any controversy arising out of the transaction. Also, a contract or other agreement relating to such a consumer credit transaction may not be applied or interpreted to bar a consumer from bringing a claim in court under any provision of law for damages or other relief in connection with an alleged violation of any federal law. However, a creditor and a consumer could agree, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.

Answer 166

Prohibition on Financing Credit Insurance – 12 CFR1026.36(i) Creditors are prohibited from “financing” (i.e., providing a consumer the right to defer payment beyond the monthly period in which the premium or fee is due), either directly or indirectly, premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling). This prohibition includes financing fees for credit life, credit disability, credit unemployment, credit property insurance, or any other accident, loss-of-income, life, or health insurance or payment for debt cancellation or suspension. This prohibition does not apply to credit unemployment insurance where the premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the premiums, and the premiums are paid under a separate insurance contract and not to an affiliate of the creditor. This prohibition also does not apply to credit insurance where premiums or fees are “calculated” and paid in full “on a monthly basis” (i.e., determined mathematically by multiplying a rate by the actual monthly outstanding balance).

Answer 167

Negative Amortization Counseling – 12 CFR1026.36(k) A creditor may not extend a negative amortizing mortgage loan to a first-time borrower in connection with a closed-end transaction secured by a dwelling, other than a reverse mortgage or a transaction secured by a timeshare, unless the creditor receives documentation that the consumer has obtained homeownership counseling from a HUD-certified or approved counselor. Additionally, a creditor extending a negative amortizing mortgage loan to a first-time borrower may not steer, direct, or require the consumer to use a particular counselor.

Answer 168

Loan Servicing Practices Servicers of mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time, not to exceed seven business days of a written request. Payment Processing – 12 CFR 1026.36(c)(1) For a closed-end consumer credit transaction secured by a consumer’s principal dwelling, a loan servicer: * Cannot fail to credit a periodic payment to the consumer’s loan account as of the date of receipt, except in instances where the delay will not result in a charge to the consumer or in the reporting of negative information to a consumer reporting agency. NOTE: For the purposes of 12 CFR 1026.36(c) a periodic payment is “an amount sufficient to cover principal, interest, and escrow for any given billing cycle.” If the consumer owes late fees, other fees, or non escrow payments but makes a full periodic payment, the servicer must credit the periodic payment as of the date of receipt. * Cannot retain a partial payment (any amount less than a periodic payment) in a suspense or unapplied payment account without disclosing to the consumer in the periodic statement (if required) the total amount(s) held in the suspense account and applying the payment to the balance upon accumulation of sufficient funds to equal a periodic payment. If a servicer has provided written requirements for accepting payments in writing but then accepts payments that do not conform to the written requirements, the servicer must credit the payment as of five days after receipt. If a loan contract has not been permanently modified but the consumer has agreed to a temporary loss mitigation program, a periodic payment under 12 CFR 1026.36(c)(1)(i) is the amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle under the loan contract, regardless of the payment due under the temporary loss mitigation program (Comment .36(c)(1)(i)-4). If a loan contract has been permanently modified, a periodic payment under 12 CFR 1026.36(c)(1)(i) is an amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle under the modified loan contract (Comment .36(c)(1)(i)-5).

Answer 169

Pyramiding of Late Fees – 12 CFR 1026.36(c)(2) In connection with a closed-end consumer credit transaction secured by a consumer’s principal dwelling, a servicer may not impose on the consumer any late fee or delinquency charge in connection with a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a periodic payment for the applicable period and is received on its due date or within any applicable courtesy period.

Answer 170

Providing Payoff Statements – 12 CFR 1026.36(c)(3) For consumer credit transactions secured by a consumer’s dwelling, including home equity lines of credit under 12 CFR 1026.40(a), a creditor, assignee, or servicer may not fail to provide, within a reasonable time but no more than seven business days, after receiving a written request from the consumer or person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to pay the consumer’s obligation in full as of a specific date. NOTE: For purposes of 12 CFR 1026.36(c)(3), when a creditor, assignee, or servicer is not able to provide the statement within seven business days because a loan is in bankruptcy or foreclosure, because the loan is a reverse mortgage or shared appreciation mortgage, or because of natural disasters or similar circumstances, the payoff statement must be provided within a reasonable time.

Answer 171

TILA-RESPA Integrated Disclosures – 12 CFR 1026.37 and 12 CFR 1026.38 For most closed-end consumer mortgages, creditors must provide two disclosures, the Loan Estimate and the Closing Disclosure, to consumers for mortgage applications received on or after October 3, 2015. The Loan Estimate is a three-page form that provides disclosures to help consumers understand the key features, costs, and risks of the mortgage loan for which they are applying. This form must be delivered or placed in the mail no later than three business days after the creditor receives a consumer’s mortgage loan application. The Closing Disclosure is a five-page form that helps consumers understand all of the costs of the transaction. This form generally must be received by the consumer at least three business days before consummation. Both forms use similar language and design to make it easier for consumers to locate key information, such as the interest rate, monthly payments, and costs to close the loan.

Answer 172

The LE replaces the GFE The Loan Estimate form replaces the Good Faith Estimate designed by HUD under RESPA, and the “early” Truth in Lending disclosure designed by the Board under TILA. The regulation and the Official Interpretations contain detailed instructions as to how each line on the Loan Estimate form should be completed. There are sample forms for different types of loan products. The Loan Estimate form also incorporates new disclosures required by Congress under the Dodd-Frank Act.

Answer 173

The Closing Disclosure form replaces the HUD-1 for loan closing, which was designed by HUD under RESPA. The Closing Disclosure form also replaces the revised Truth in Lending disclosure designed by the Board under TILA. The rule and the Official Interpretations contain detailed instructions as to how each line on the Closing Disclosure form should be completed. The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction. Refer to CFPB’s TILA-RESPA Guide to Forms for a detailed, step-by-step walkthrough for completing the Loan Estimate and the Closing Disclosure.

Answer 174

Loan Estimate – Content of Disclosures for Certain Mortgage Transactions – 12 CFR 1026.37 Loan Estimate form required (12 CFR1026.37(o)) The Loan Estimate generally must provide consumers with a good faith estimate of credit costs and transaction terms and satisfy timing and delivery requirements set forth in the rule. For any transactions subject to 12 CFR1026.19(e) that are federally related mortgage loans subject to RESPA (which will include most mortgages), creditors must use form H-24, set forth in Appendix H (12 CFR 1026.37(o)(3)(i)). (See also 12 CFR 1024.2(b) for definition of federally related mortgage loan). For other loans subject to 12 CFR1026.19(e) that are not federally related mortgage loans, the disclosures must be made with headings, content, and format substantially similar to form H-24 (12 CFR 1026.37(o)(3)(ii)). The disclosures may be provided to the consumer in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. 7001 et seq.) (12 CFR1026.37(o)(3)(iii))

Answer 175

Information required on the Loan Estimate form. Most disclosures on the Loan Estimate form are required to be labeled using specific nomenclature, headings, and formatting. For example, the regulation requires that the form disclose the contract sale price, labeled “Sale Price” (or if there is no seller, the estimated value of the property, labeled “Prop. Value”). Further, in some instances, the regulation directs lines on the disclosure to be left blank where there is no charge (See, e.g., 12 CFR1026.37(g)(2)(v)) or sets forth the maximum number of items that may be disclosed (See, e.g., 12 CFR 1026.37(g)(3)(v)). See the regulation, Form H-24, and the Regulation Z procedures for specific obligations regarding each required disclosure.

Answer 176

Rounding. Dollar amounts must be rounded to the nearest whole dollar where noted in the regulation, including adjustments after consummation for loan amount, interest rate, and periodic payment; and details about prepayment penalties and balloon payments, minimum and maximum amounts for principal and interest payments and range of payments, maximum mortgage insurance premiums, escrows, taxes and insurance and assessments, closing costs (loan costs and other costs), cash to close, and adjustable payment and comparisons (12 CFR1026.37(o)(4)(i)(A)). The amount for prepaid interest paid per day and the monthly amounts required to be disclosed for escrows of homeowner’s insurance, mortgage insurance, or property taxes must not be rounded (12 CFR 1026.37(o)(4)(i)(A)). The loan amount (the total amount the consumer will borrow, as reflected by the face amount of the note) must not be rounded, and if the amount is a whole number, must be truncated at the decimal point (12 CFR 1026.37(o)(4)(i)(B)). If an amount is required to be rounded but is composed of other amounts that are not required or permitted to be rounded, the unrounded amounts should be used to calculate the total, and the final sum should be rounded. Conversely, if an amount is required to be rounded and is composed of rounded amounts, the rounded amounts should be used to calculate the total (Comment 37(o)(4)-2). Percentage amounts must be rounded where noted in the regulation to three decimal places, but trailing zeros to the right of the decimal place must be dropped (e.g., 2.49999 percent APR is disclosed as 2.5 percent, and 7.005 percent APR is disclosed as 7.005 percent). The items rounded include the interest rate, adjustments after consummation (to the loan amount, interest rate, or periodic payment), points itemized under origination charges, prepaid interest rate, adjustable interest rate, annual percentage rate, and total interest percentage or TIP (12 CFR 1026.37(o)(4)(ii); Comment 37(o)(4)(ii)-1).

Answer 177

Page 1: General information, loan terms, projected payments, and costs at closing Page 1 of the Loan Estimate discloses general information about the creditor, the applicant(s), and the loan. It also includes a Loan Terms table with descriptions of applicable information about the loan, a Projected Payments table, a summary Costs at Closing table, and a link for consumers to obtain more information about loans secured by real property or cooperative unit at a website maintained by the CFPB (12 CFR 1026.37(a)- (e)).

Answer 178

General information. Page 1 of the Loan Estimate requires the title “Loan Estimate” and the statement “Save this Loan Estimate to compare with your Closing Disclosure” (12 CFR 1026.37(a)(1), (2)). The top of page 1 also requires the name and address of the creditor (12 CFR 1026.37(a)(3)). A logo can be used for, and a slogan included along with, the creditor’s name and address, so long as the logo or slogan does not cause this information to exceed the space provided on Form H-24 for that information (12 CFR1026.37(o)(5)(iii)). If there are multiple creditors, only the name of the creditor completing the Loan Estimate should be used (Comment 37(a)(3)-1). If a mortgage broker is completing the Loan Estimate, the mortgage broker should make a good faith effort to disclose the name and address of the creditor as required by 12 CFR1026.19(e)(1)(i). However, if the name of the creditor is not yet known, this space may be left blank (Comment 37(a)(3)-2). Below the creditor information, the form requires the date that the creditor mails or delivers the disclosures to the consumer; the name and mailing address of the consumer(s) applying for the credit; the address, including the zip code, of the property that secures or will secure the transaction, or if the address is unavailable, the location of such property, including a zip code; and the contract sale price (or if there is no seller, the estimated value of the property) (12 CFR1026.37(a)(4)-(6)). On the top right side of the first page, the form requires the loan term to maturity (stated in years or months, or both, as applicable); and loan purpose (purchase, refinance, construction or home equity loan) (12 CFR 1026.37(a)(8)-(9)). This section of the form also requires the product type (adjustable rate, step rate, or fixed rate) and, preceding the type, any features that may change the periodic payment, including negative amortization, interest only, step payment, balloon payment, or seasonal payment features, as applicable. If the product has an adjustable or step rate, or a feature that may change the periodic payment, the product disclosure must also be preceded by a disclosure of the duration of any introductory rate or payment period, and the first adjustment period, as applicable (12 CFR1026.37(a)(10). This section of the form also requires the loan type (conventional, FHA, VA, or other), and loan ID number (12 CFR1026.37(a)(11)-(12)). Further, there must be a statement of whether the interest rate is locked for a specific time, and if so, the date and time when that period ends. The form must also include a statement that the interest rate, any points, and any lender credits may change unless the interest rate has been locked, and the date and time (including the applicable time zone) at which estimated closing costs expire (12 CFR 1026.37(a)(13)).

Answer 179

Loan Terms table The Loan Terms table follows the general information requirements on page 1 of the Loan Estimate. For the Loan Terms table, the creditor must disclose the loan amount (the total amount the consumer will borrow, as reflected by the face amount of the note), interest rate applicable to the transaction at consummation, and specified principal and interest payments. (12 CFR1026.37(b)(1)-(3)) For each such element, the disclosure must answer the question, either affirmatively or negatively, whether the amount can increase after consummation. If the amount can increase, the loan must disclose additional information (12 CFR 1026.37(b)(6)). The Loan Terms table must also include information about prepayment penalties and balloon payments.

Answer 180

Loan amount. The loan amount is disclosed in accordance with the face amount of the note. If the loan amount may increase after consummation, the disclosure must include the maximum principal balance for the transaction and the due date of the last payment that may cause the principal balance to increase. The disclosure must also indicate whether the maximum principal balance is potential or is scheduled to occur under the terms of the legal obligation (12 CFR 1026.37(b)(6)(1); 12 CFR 1026.37(b)(6)(i)).

Answer 181

Interest rate. If it is an adjustable rate transaction where the interest rate at consummation is not known, the disclosed rate is the fully indexed rate (which means the index value and margin at the time of consummation) (12 CFR1026.37(b)(2)). If the interest may increase after consummation, the creditor must disclose the frequency of interest rate adjustments, the date when the interest rate may first adjust, the maximum interest rate, and the first date when the interest rate can reach the maximum interest rate, followed by a reference to the adjustable rate table required by 12 CFR1026.37(j) in the Closing Cost Details section of the Loan Estimate. If the loan term may increase based on an interest rate adjustment, that fact must be included, as well as the maximum possible loan term determined in accordance with 12 CFR 1026.37(a)(8) (12 CFR 1026.37(b)(6)(ii)).

Answer 182

Principal and interest payment. The creditor must disclose the initial periodic payment that will be due under the terms of the legal obligation, immediately preceded by the applicable unit period, and a statement referring to the payment amount that includes any mortgage insurance and escrow payments that are required to be disclosed in the Projected Payments table (12 CFR 1026.37(b)(3)). If the monthly principal and interest payment can increase after closing, the creditor must also disclose: the scheduled frequency of adjustments to the periodic principal and interest payment; the due date of the first adjusted principal and interest payment; the maximum possible periodic principal and interest payment; and the date when the periodic principal and interest payment may first equal the maximum principal and interest payment (12 CFR 1026.37(b)(6)(iii)). If any adjustments to the principal and interest payment are not the result of a change to the interest rate, the creditor must reference the adjustable payment table disclosure required by 12 CFR 1026.37(i). If there is a period during which only interest is required to be paid, the disclosure must also state that fact and the due date of the last periodic payment of such period (12 CFR 1026.37(b)(6)(iii)).

Answer 183

Prepayment penalties and balloon payments. The Loan Terms table must also state affirmatively or negatively whether the transaction includes a prepayment penalty (for these purposes, a charge imposed for paying all or part of a transaction's principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction's principal sooner than 36 months after consummation) or a balloon payment (for these purposes, a payment that is more than two times a regular periodic payment) (12 CFR1026.37(b)(4) and (5))

Answer 184

Projected Payments table. The Projected Payments table is located directly below the Loan Terms table on page 1 of the Loan Estimate. The Projected Payments table shows estimates of the periodic payments that the consumer will make over the life of the loan. Creditors must disclose estimates of the following periodic payment amounts in the Projected Payments table: periodic principal and interest (or range of periodic payments); mortgage insurance; estimated escrow; and estimated total monthly payment (12 CFR 1026.37(c)(2)). Creditors must also disclose estimated taxes, insurance, and assessments, even if not paid with escrow funds (and whether these items will be paid with funds from the consumer’s escrow account) (12 CFR 1026.37(c)(4)). Generally, the creditor will show in one column the initial periodic payment (or range of payments if required). Depending on the features of the loan, subsequent periodic payments also may be required to be disclosed. However, no more than four separate periodic payments or ranges of payments may be disclosed, beginning with the initial periodic payment. Events that require disclosure of separate periodic payments or ranges include: changes to the periodic principal and interest payment; a scheduled balloon payment; an automatic termination of mortgage insurance or its equivalent; and the anniversary of the due date of the initial periodic payment or range of payments that immediately follows the occurrence of multiple events that change the periodic principal and interest. The regulation addresses how to disclose these events when the event occurs after the third separate periodic payment or range of payments disclosed (12 CFR1026.37(c)(1)). Each separate payment or range of payments must be itemized according to the regulation, including the amount payable for principal and interest. The regulation provides instructions for itemizing payments that include an interest-only payment, payments on loans with an adjustable interest rate, and payments on a loan that has both an adjustable interest rate and a negative amortization feature. Additionally, the regulation requires that each separate periodic payment or range of payments itemizes the maximum amount payable for mortgage insurance premiums corresponding to the principal and interest payment and the amount payable into escrow (with a statement that the amount disclosed can increase over time and a calculation of the total monthly payment) (12 CFR1026.37(c)(2)). Below the estimated total monthly payment, the Projected Payments table discloses estimated taxes, insurance, and assessments. These are stated as a monthly amount and include a statement that the amount may increase over time. The creditor provides these estimates even if there will be no escrow account established for these costs. The table also requires a statement of whether the amount disclosed includes payments for property taxes or other amounts; a description of any such other amounts; and an indication of whether such amounts will be paid by the creditor using escrow account funds. The table also includes a statement that the consumer must separately pay the taxes, insurance, and assessments that are not paid by the creditor using escrow account funds; and a reference to the information disclosed under the subheading on the Loan Estimate titled “Initial Escrow Payment at Closing” (12 CFR 1026.37(c)(4)). The creditor estimates property taxes and homeowner's insurance using the taxable assessed value of the real property or cooperative unit securing the transaction after consummation, including the value of any improvements on the property or to be constructed on the property, if known, whether or not such construction will be financed from the proceeds of the transaction, for property taxes; and the replacement costs of the property during the initial year after the transaction, for premiums or other charges for insurance against loss of or damage to property identified in 12 CFR1026.4(b)(8) (12 CFR 1026.37(c)(5)).

Answer 185

Costs at Closing table. This table, located at the bottom of page 1, provides disclosures on estimated Closing Costs and estimated Cash to Close (12 CFR1026.37(d)(1)). These disclosures offer the consumer a high-level summary of estimated closing costs and cash required to close (including closing costs) and reference the more detailed itemizations found on page 2 of the Loan Estimate (12 CFR1026.37(d)(1)(i)(E) and 1026.37(d)(1)(ii)(B)). Items that are disclosed include an estimate of Total Closing Costs, as well as the key inputs making up this total: Loan Costs, Other Costs, and Lender Credits (and the fact that total closing costs include these amounts) (12 CFR 1026.37(d)(1)(i)). These disclosures also provide a high-level summary of the estimated amount of cash required to close, which is also itemized more specifically on page 2 of the Loan Estimate (12 CFR1026.37(d)(1)(ii)). The regulation provides an optional alternative Cash to Close table for transactions that do not involve a seller or for simultaneous subordinate financing. The creditor may alternatively disclose, using the label “Cash to Close,” the cash to or from the consumer (pursuant to 12 CFR 1026.37(h)(2)(iv)), a statement of whether the disclosed estimated amount is due from or to the consumer, and a statement referring the consumer to the alternative Calculating Cash to Close table for transactions without a seller or for simultaneous subordinate financing (pursuant to 12 CFR 1026.37(h)(2)) (12 CFR 1026.37(d)(2)).

Answer 186

-General information -Loan Terms Table -Loan Amount -Interest Rate -Principal and Interest Payment -Prepayment Penalties and Balloon Payments -Projected Payments Table -Costs at Closing Table

Answer 187

Page 2: Closing cost details

Answer 188

Page 2: Closing cost details Page 2 of the Loan Estimate contains a good faith itemization of the “Loan Costs” and “Other Costs” associated with the loan (12 CFR1026.37(f) and (g)). Generally, Loan Costs are those costs paid by the consumer to the creditor and third-party providers of services that the creditor requires to be obtained by the consumer during the origination of the loan (12 CFR 1026.37(f)). Other Costs include taxes, governmental recording fees, and certain other payments involved in the real estate closing process (12 CFR1026.37(g)). Page 2 also includes an itemized “Calculating Cash to Close” table to show the consumer how the amount of cash needed at closing is calculated (12 CFR1026.37(h)). In addition, for transactions with adjustable monthly payments not based on changes to the interest rate, or if the transaction is a seasonal payment product (as described in 12 CFR 1026.37(a)(10)(ii)(E)), page 2 must include an Adjustable Payment (AP) table with relevant information about how the monthly payments will change (12 CFR1026.37(i)). Further, for transactions with adjustable interest rates, page 2 must include an Adjustable Interest Rate (AIR) table with relevant information about how the interest rate will change (12 CFR1026.37(j)). If state law requires additional disclosures, those additional disclosures may be made on a document whose pages are separate from, and not presented as part of, the Loan Estimate (Comments 37(f)(6)-1 and 37(g)(8)-1).

Answer 189

Loan Costs table. This table includes all loan costs associated with the transaction, broken down into an itemization of three types of costs: * (1) Origination charges that the consumer will pay to each creditor and loan originator for originating and extending credit (including separate itemization for points paid to the creditor to reduce the interest rate as both a percentage of the amount of credit extended and dollar amount) (up to 13 line items); the following items should be itemized separately in the Origination Charges subheading: o Compensation paid directly by a consumer to a loan originator that is not also the creditor (Comments 37(f)(1)-2 and -5); or o Any charge imposed to pay for a loan level pricing adjustment assessed on the creditor that is passed on to the consumer as a cost at consummation and not as an adjustment to the interest rate (Comment 37(f)(1)-5). * (2) Services the consumer cannot shop for (items provided by persons other than the creditor or mortgage broker that the consumer cannot shop for and will pay for at settlement, such as appraisal fees and credit report fees) (up to 13 line items); and * (3) Services the consumer can shop for (such as a pest inspection fee, survey fee, or closing agent fee) (up to 14 line items) (12 CFR 1026.37(f)(2) and (3)). Regarding origination fees, only charges paid directly by the consumer to compensate a loan originator are included in the itemization. Compensation of a loan originator paid indirectly by the creditor through the interest rate is not itemized (but is itemized on the Closing Disclosure; see below) (Comment 37(f)(1)-2). NOTE: Items that are a component of title insurance must include the introductory description of “Title -” (12 CFR 1026.37(f)(2)(i) and (g)(4)(i)). NOTE: The disclosure of “lender credits,” as identified in 12 CFR 1026.37(g)(6)(ii), is required by 12 CFR 1026.19(e)(1)(i). “Lender credits,” as identified in 12 CFR 1026.37(g)(6)(ii), represents the sum of non-specific lender credits and specific lender credits. Non-specific lender credits are generalized payments from the creditor to the consumer that do not pay for a particular fee on the disclosures provided pursuant to 12 CFR 1026.19(e)(1). Specific lender credits are specific payments, such as a credit, rebate, or reimbursement, from a creditor to the consumer to pay for a specific fee. Non-specific lender credits and specific lender credits are negative charges to the consumer (Comment 19(e)(3)(i) -5). The sum of these amounts must be disclosed as Total Loan Costs. The regulation includes a required order and terminology for each item (12 CFR 1026.37(f)(1)-(5)). If the creditor does not have enough lines for each subheading, it must disclose the remaining items as an aggregate number (12 CFR 1026.37(f)(6)(i)). An addendum is not permitted for origination charges or charges the consumer cannot shop for that exceed the maximum number of lines but is permitted for services the consumer can shop for, provided the creditor appropriately references the addendum (12 CFR 1026.37(f)(6)(ii)).

Answer 190

Other Costs table. The Other Costs table captures costs established by government action, determined by standard calculations applied to ongoing fixed costs, or based on an obligation incurred by the consumer independently of any requirement imposed by the creditor (Comment 37(g)-1). The table includes: Taxes and other governmental fees (recording fees and other taxes, and transfer taxes paid by the consumer, separately itemized); * Prepaids (amounts paid by the consumer before the first scheduled payment, such as homeowner’s insurance premiums, mortgage insurance premiums, prepaid interest, and property taxes, plus up to 3 additional line items); * Initial escrow payment at closing (items that the consumer will be expected to place into a reserve or escrow account at consummation to be applied to recurring periodic charges; these include homeowner’s insurance, mortgage insurance, and property taxes, plus up to 5 additional line items); and * Other amounts the consumer is likely to pay (such as real estate agent commissions, up to five line items) (12 CFR 1026.37(g)(1)-(4), Comment 37(g)(4)-4). NOTE: Items that disclose any premiums paid for separate insurance, warranty, guarantee, or event-coverage products not required by the creditor must include the parenthetical description (optional) at the end of the label (12 CFR 1026.37(g)(4)(ii)). As with Loan Costs, the regulation includes a required order, terminology, and specific information regarding each Other Costs line item, such as the applicable time period covered by the amount paid at consummation and the total amount to be paid. Items that disclose any premiums paid for separate insurance, warranty, guarantee, or event-coverage products not required by the creditor must include the parenthetical description (optional) at the end of the label (12 CFR 1026.37(g)(4)(ii)). An addendum is not permitted; if the creditor does not have enough lines for each subheading, it must disclose the remaining items as an aggregate number (12 CFR 1026.37(g)(8)). The sum of these amounts must be disclosed as a line item as Total Other Costs (12 CFR 1026.37(g)(5)). Below this total, the sum of Total Loan Costs and Total Other Costs, less any lender credits (separately itemized), must be disclosed as a line item as Total Closing Costs (12 CFR1026.37(g)(6)).

Answer 191

Total loan costs (left side of page) + Total other costs (right side of page) - lender credits = total closing costs

Answer 192

Calculating Cash to Close table. The Calculating Cash toClose table shows the consumer how the amount of cash needed at closing is calculated (12 CFR1026.37(h)(1)). The creditor must itemize the total amount of cash or other funds that the consumer must provide at consummation. The itemization includes:

Answer 193

Calculating Cash to Close table. The Calculating Cash toClose table shows the consumer how the amount of cash needed at closing is calculated (12 CFR1026.37(h)(1)). The creditor must itemize the total amount of cash or other funds that the consumer must provide at consummation. The itemization includes: * Total closing costs. The amount disclosed under 12 CFR 1026.37(g)(6), labeled “Total Closing Costs” (12 CFR 1026.37(h)(1)(i)); * Closing costs to be financed. The amount of any closing costs to be paid out of loan proceeds, disclosed as a negative number, labeled “Closing Costs Financed (Paid from your Loan Amount)” (12 CFR1026.37(h)(1)(ii)); Note: The formula for calculating the amount of closing costs financed can be found in (Comment 37(h)(1)(ii)(1). * Down payment and other funds from the borrower, labeled “Down Payment/Funds from Borrower.” The formula for determining this disclosure depends on the type of purchase transaction (12 CFR1026.37(h)(1)(iii)). (For a nonpurchase transaction, use the Funds from Borrower formula in 12 CFR 1026.37(h)(1)(v) as provided for in (12 CFR 1026.37(h)(1)(iii)(B)). * Deposit, labeled “Deposit.” In a purchase transaction as defined in 12 CFR 1026.37(a)(9)(i), the amount that is paid to the seller or held in trust or escrow by an attorney or other party under the terms of the agreement for the sale of the property, disclosed as a negative number; in all other transactions, the amount of zero dollars (12 CFR 1026.37(h)(1)(iv)); * Funds for the borrower, labeled “Funds for Borrower.” The formula for calculating the disclosure is set forth in (12 CFR1026.37(h)(1)(v)); * Seller credits, labeled “Seller Credits.” The amount the seller will pay for total loan costs and total other costs, to the extent known, disclosed as a negative number (12 CFR 1026.37(h)(1)(vi). * Adjustments and other credits, labeled “Adjustments and Other Credits.” Determined in accordance with (12 CFR 1026.37(h)(1)(vii)); and * Estimated Cash to Close, labeled “Cash to Close.” The sum of the amounts disclosed under 12 CFR 1026.37(h)(1)(i) to (vii) (12 CFR 1026.37(h)(1)(viii)).

Answer 194

For transactions without a seller or for simultaneous subordinate financing transactions, the creditor can use the optional alternative table and provide, under the heading Closing Cost Details, the total amount of cash or other funds that must be provided by the consumer at consummation with an itemization of the following component amounts (12 CFR 1026.37(h)(2)): * Loan amount. The amount disclosed under 12 CFR 1026.37(b)(1)), labeled “Loan Amount” (12 CFR 1026.37(h)(2)(i)); * Total closing costs. The amount disclosed under 12 CFR 1026.37(g)(6), disclosed as a negative number if the amount is a positive number and disclosed as a positive number if the amount is a negative number, and labeled “Total Closing Costs” (12 CFR1026.37(h)(2)(ii)); * Payoffs and payments. The total amount of payoffs and payments to third parties not otherwise disclosed under 12 CFR1026.37(f) and (g), labeled “Total Payoffs and Payments” (12 CFR 1026.37(h)(2)(iii)); * Cash to or from consumer. The amount of cash or other funds due from or to the consumer and a statement of whether the disclosed estimated amount is due from or to the consumer, calculated by the sum of the loan amount, total closing costs and payoffs and payments under 12 CFR 1026.37(h)(2)(i)-(iii)), labeled “Cash to Close” (12 CFR 1026.37(h)(2)(iv)); * Closing costs financed. The sum of the amounts disclosed under 12 CFR1026.37(h)(2)(i) and (iii) (loan amount and payoffs and payments) but only to the extent that the sum is greater than zero and less than the total closing costs (12 CFR1026.37(g)(6)), labeled “Closing Costs Financed (Paid from your Loan Amount)” (12 CFR1026.37(h)(2)(v)).

Answer 195

Adjustable Payment (AP) table. This table is for transactions with adjustable monthly payments for reasons other than adjustments to the interest rate, or if the transaction is a seasonal payment product. The table provides consumers with relevant information about how the monthly payments will change. If the transaction does not contain such terms, the table may not be on the Loan Estimate (12 CFR 1026.37(i); Comment 37(i)-1).

Answer 196

The AP table requires answers to the following questions: * Whether there are interest-only payments and, if so, the period during which the interest-only payment would apply (12 CFR1026.37(i)(1)); * Whether the amount of any periodic payment can be selected by the consumer as an optional payment and, if so, the period during which the consumer can select optional payments (12 CFR1026.37(i)(2)); Whether the loan is a step payment product and, if so, the period during which the regular periodic payments are scheduled to increase (12 CFR 1026.37(i)(3)); * Whether the loan is a seasonal payment product and, if so, the period during which the periodic payments are not scheduled (12 CFR 1026.37(i)(4)); and * A subheading of monthly principal and interest payments, with specified information about the first payment change and amount; frequency of subsequent changes; and maximum periodic payment that may occur during the loan term (and first date the maximum is possible) (12 CFR 1026.37(i)(5).

Answer 197

Adjustable Interest Rate (AIR) table. For transactions with adjustable interest rates, an Adjustable Interest Rate (AIR) table provides consumers with relevant information about how the interest rate will change (12 CFR 1026.37(j)). The adjustable interest rate table must be completed if the interest rate may increase after consummation. However, if the legal obligation does not permit the interest rate to adjust after consummation, this table is not permitted to appear on the Loan Estimate (12 CFR1026.37(j)(1); Comment 37(j)-1)).

Answer 198

The AIR table includes the following information (12 CFR 1026.37(j)): * For non-step-rate products, the index upon which adjustments to the interest rate will be based and the margin that is added to the index to determine the interest rate (12 CFR1026.37(j)(1)); * For step-rate products, the maximum amount of any adjustments to the interest rate that are scheduled and predetermined (12 CFR 1026.37(j)(2)); * The initial interest rate at consummation (12 CFR 1026.37(j)(3)); * The minimum/maximum interest rate for the loan, after any introductory period expires (12 CFR 1026.37(j)(4)); * The frequency of adjustments (first and subsequent adjustments) (12 CFR 1026.37(j)(5)); and * Any limits on interest rate changes (12 CFR1026.37(j)(6))

Answer 199

Page 3: Additional information about the loan Page 3 of the Loan Estimate contains contact information, a Comparisons table, an Other Considerations table, and, if desired, a Signature Statement for the consumer to sign to acknowledge receipt (See 12 CFR 1026.37(k), (l), (m), and (n)).

Answer 200

Contact information The top of page 3 includes the name and NMLSR or License ID number for the creditor and mortgage broker, if any; and name and NMLSR or License ID of individual loan officer who is the primary contact for the consumer, along with that person’s email address and phone number (12 CFR 1026.37(k)).

Answer 201

The Comparisons table follows the contact information and allows consumers to compare loans. Each of these disclosures must be accompanied by a specified descriptive statement (12 CFR 1026.37(l)).

Answer 202

The creditor must provide the: * Total dollar amount of principal, interest, mortgage insurance, and loan costs scheduled to be paid through the end of the 60th month after the due date of the first periodic payment; * Total dollar amount of principal scheduled to be paid through the end of the 60th month after the due date of the first periodic payment; * Annual percentage rate using that term and the abbreviation “APR” and expressed as a percentage; and * Total interest percentage that the consumer will pay over the life of the loan, expressed as a percentage of the amount of credit extended, using the term “Total Interest Percentage” and the abbreviation “TIP.”

Answer 203

The TIP calculation is the same for the Loan Estimate and for the Closing Disclosure: total interest (including prepaid interest) that the consumer will pay over the life of the loan is divided by the loan amount to arrive at the total interest percentage (TIP) 12 CFR 1026.37(l)(3); 12 CFR 1026.38(o)(5). The TIP is computed assuming that the consumer makes each monthly payment in full and on time and does not make any overpayments 15 U.S.C. 1638(a)(19); 12 CFR 1026.37(l)(3); Comment 37(l)(3)-1. To calculate the TIP for fixed rate loans add the sum of interest payments for the full term of the loan to the amount of prepaid interest and divide that total by the loan amount. To calculate the TIP for a variable-rate loan, compute the amount of interest that the consumer will pay according to the terms of the loan. If the loan has an index and margin, use the index existing at consummation (12 CFR 1026.37(b)(2); Comment 17(c)(1)-10). For Adjustable Rate products under 12 CFR 1026.37(a)(10)(i)(A), compute the TIP in accordance with comment 17(c)(1)-10 (Comment 37(l)(3)-2). Comment 17(c)(1)- 10 provides guidance and examples for adjustable mortgages with discounted and premium variable-rate terms. Where the initial rate is not based upon the index or formula used for later interest rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate (Comment 17(c)(1)-10). For step-rate products under 12 CFR 1026.37(a)(10)(i)(B), compute the TIP in accordance with 12 CFR 1026.17(c)(1) and its associated commentary (Comment 37(l)(3)-2). For loans that have a negative amortization feature under 12 CFR1026.37(a)(10)(ii)(A), compute the TIP using the scheduled payment, even if it is a negatively amortizing payment amount, until the consumer must begin making fully amortizing payments under the terms of the legal obligation (Comment 37(l)(3)-3). NOTE: Prepaid interest that is paid by someone other than the consumer is not included in the calculation. Further, if prepaid interest was disclosed as a negative number on the Loan Estimate or the Closing Disclosure, the negative value is used in the TIP calculation (Comment 37(l)(3)-1).

Answer 204

Other Considerations Below the Comparisons table is a section regarding “other considerations” about the loan. This section includes disclosures on appraisals, assumptions, whether homeowner’s insurance is required, applicable late payment fees, a warning about refinancing, whether the creditor intends to service the loan or transfer servicing, liability after foreclosure. The section also provides for an optional, clear and conspicuous statement, if applicable, that the creditor may issue a revised Loan Estimate any time prior to 60 days before consummation pursuant to 12 CFR 1026.19(e)(3)(iv)(F) for transactions involving new construction where the creditor reasonably expects that settlement will occur more than 60 days after the provision of the Loan Estimate (12 CFR 1026.37(m)). The consumer is not required to sign the Loan Estimate. If the creditor adds a signature statement on page 3 of the Loan Estimate to confirm receipt by the consumer, it must use the model form language. If the creditor chooses not to use the confirm receipt table, it must include a statement that “You do not have to accept this loan because you have received this form or signed a loan application” (12 CFR 1026.37(n)).

Answer 205

Closing Disclosure form required – 12 CFR1026.38(t)(3)(i) The Closing Disclosure generally must contain the actual terms and costs of the transaction and must satisfy timing and delivery requirements set forth in the rule. For any loans subject to 12 CFR1026.19(f) that are federally related mortgage loans subject to RESPA (which will include most mortgages), creditors must use form H-25, set forth in Appendix H (12 CFR1026.38(t)(3)(i) (See also 12 CFR 1024.2(b) for definition of federally related mortgage loan). For other loans subject to 12 CFR1026.19(f) that are not federally related mortgage loans, the disclosures must contain the exact same information and be made with headings, content, and format substantially similar to form H-25 (12 CFR 1026.38(t)(3)(ii)).

Answer 206

Information required on the Closing Disclosure. As with the Loan Estimate, most disclosures on the Closing Disclosure form are required to be labeled using specific nomenclature, headings, and formatting. Similarly, in some instances, the regulation directs lines on the disclosure to be left blank where there is no charge or sets forth the maximum number of items that may be disclosed. See the regulation, Form H-25, and the Regulation Z procedures for specific obligations regarding each required disclosure.

Answer 207

Rounding. Dollar amounts generally must not be rounded except where noted in the regulation (12 CFR1026.38(t)(4)(i)). If an amount must be rounded but is composed of other amounts that are not required or permitted to be rounded, the unrounded amounts should be used to calculate the total, and the final sum should be rounded. Conversely, if an amount is required to be rounded and is composed of rounded amounts, the rounded amounts should be used to calculate the total (Comment 38(t)(4)-2). Percentage amounts should not be rounded and are disclosed up to three decimals, as needed, except where noted in the regulation. If a percentage amount is a whole number, only the whole number should be disclosed, with no decimals (12 CFR1026.38(t)(4)(ii)).

Answer 208

Page 1: General information, loan terms, projected payments, and costs at closing General information, the Loan Terms table, the Projected Payments table, and the Costs at Closing table are disclosed on the first page of the Closing Disclosure (12 CFR 1026.38(a), (b), (c), and (d)). These disclosures mirror the disclosures in the Loan Estimate, and there is a required statement to compare the document with the Loan Estimate (12 CFR1026.38(a)(2)). Page 1 of the Closing Disclosure is similar, but not identical, to the Loan Estimate. Page 1 of the Closing Disclosure provides general closing, transaction, and loan information. It also includes a Loan Terms table with descriptions of applicable information about the loan, a Projected Payments table, and a summary Costs at Closing table (12 CFR1026.38(a)-(d)).

Answer 209

General information The top of page 1 of the Closing Disclosure requires the title “Closing Disclosure” and a specified statement to compare the disclosure with the Loan Estimate (12 CFR 1026.38(a)(1) and (2)). The top of page 1 also requires general closing, transaction, and loan information. Closing information includes the date that the Closing Disclosure was delivered to the consumer, closing date (i.e., the date of consummation), the disbursement date, settlement agent conducting the closing, file number assigned by the settlement agent, property address or location, and sale price (or appraised property value if there is no seller) (12 CFR 1026.38(a)(3)). For transactions without a seller for which the creditor has not obtained an appraisal, the creditor may disclose the estimated value of the property, using the estimate provided by the consumer at application or the estimate the creditor used to determine approval of the credit transaction (Comment 38(a)(3)(vii)-1). Transaction information includes the borrower’s name and mailing address, the seller’s name and mailing address, and the name of the creditor making the disclosure (12 CFR 1026.38(a)(4)). Loan information includes the loan term, purpose, product, loan type, loan ID number (using the same number as on the Loan Estimate), and mortgage insurance case number (MIC #), if required by the creditor (12 CFR 1026.38(a)(5)). Other than the MIC #, this information is determined by the same definitions for those items on the Loan Estimate, updated to reflect the terms of the legal obligation at consummation (Comment 38(a)(5)-1).

Answer 210

Loan Terms table The Loan Terms table is located under the above-described general information disclosures. The information for this table is the same as that required in the Loan Estimate under 12 CFR 1026.37(b), updated to reflect the terms of the legal obligation at consummation (12 CFR1026.38(b)).

Answer 211

Projected Payments table The Projected Payments table is located directly below the Loan Terms table on page 1 of the Closing Disclosure. The information for this table is generally the same as that required in the Loan Estimate under 12 CFR 1026.37(c)(1) through (4), updated to reflect the terms of the legal obligation at consummation (other than the reference to closing cost details required by 12 CFR 1026.37(c)(4)(vi)). The estimated escrow payments disclosed on the Closing Disclosure for transactions subject to RESPA are determined under the escrow account analysis described in Regulation X, 12 CFR 1024.17. For transactions not subject to RESPA, estimated escrow payments may be determined under the escrow account analysis described in Regulation X, 12 CFR 1024.17 or in the manner set forth in 12 CFR1026.37(c)(5). There is also a required reference to the detailed escrow account disclosures on page 4 of the Closing Disclosure (12 CFR 1026.38(c)).

Answer 212

Costs at Closing table This table, located at the bottom of page 1, provides disclosures on Closing Costs and Cash to Close (12 CFR1026.38(d)). These disclosures offer the consumer a high-level summary of closing costs and reference the more detailed itemizations found on pages 2 and 3 of the Closing Disclosure (12 CFR 1026.38(d)(1)(i)(E) and 1026.38(d)(1)(ii)(B)). Items that are disclosed on the Cash at Closing table include Total Closing Costs, as well as the key inputs making up this total: Loan Costs and Other Costs, less Lender Credits (and the fact that total closing costs include these amounts) (12 CFR 1026.38(d)(1)(i)). The table also discloses Cash Required to Close (12 CFR1026.38(d)(1)(ii)). For transactions without a seller or simultaneous subordinate financing transactions, the creditor must use the alternative Calculating Cash to Close table when the alternative costs at closing table was used on the Loan Estimate (12 CFR 1026.38(d)(2)).

Answer 213

Page 2: Closing Cost Details; Loan costs and other costs Page 2 of the Closing Disclosure contains an itemization of the “Loan Costs” and “Other Costs” associated with the loan (12 CFR1026.38(f), (g), and (h)). In each case, the amounts paid by the consumer, seller, and others are separately disclosed. For items paid by the consumer or seller, amounts that are paid at closing are disclosed in a column separately from amounts paid before closing (12 CFR 1026.38(f). The number of items in the Loan Costs and Other Costs tables can be expanded and deleted to accommodate the disclosure of additional line items and to keep the Loan Costs and Other Costs tables on page 2 of the Closing Disclosure (12 CFR 1026.38(t)(5)(iv)(A); Comment 38(t)(5)(iv)-2). However, items that are required to be disclosed even if they are not charged to the consumer (such as Points in the Origination Charges subheading) cannot be deleted (Comment 38(t)(5)(iv)-1). Further, the Loan Costs and Other Costs tables can be disclosed on two separate pages of the Closing Disclosure but only if the page cannot accommodate all of the costs required to be disclosed on one page (12 CFR 1026.38(t)(5)(iv)(B); Comment 38(t)(5)(iv)-2). When used, these pages are numbered page 2a and 2b (Comment 38(t)(5)(iv)-3). For an example of this permissible change to the Closing Disclosure, see form H-25(H) of Appendix H to Regulation Z.

Answer 214

Loan Costs table All loan costs associated with the transaction are listed in a table under the heading “Loan Costs,” with the items and amounts listed under four subheadings: (A) * Origination charges; (B) * Services borrower did not shop for; (C) Services borrower did shop for; and (D) * Total loan costs (12 CFR1026.38(f)(1) through (f)(5)). Items should generally be the same as disclosed on the Loan Estimate, updated to reflect the terms of the legal obligation at consummation, except as discussed below (12 CFR1026.38(f)).

Answer 215

Origination Charges. All loan originator compensation is disclosed as an origination charge, including compensation from the creditor to a third-party loan originator (which was not disclosed on the Loan Estimate). Compensation from the consumer to a third-party loan originator is designated as Borrower-Paid at Closing or before closing on the Closing Disclosure (12 CFR 1026.38(f)(1); Comment 38(f)(1)-2). Compensation from the creditor to a third-party loan originator is designated as Paid by Others on the Closing Disclosure (Comment 38(f)(1)-2). This line item must also disclose the name of the loan originator ultimately receiving the payment (12 CFR1026.38(f)(1)). A designation of “(L)” can be listed with the amount to indicate that the creditor pays the compensation at consummation. This is the same as the amount of third-party compensation included in points and fees for purposes of determining the consumer’s ability to repay the loan. Compensation to individual loan originators is not calculated or disclosed on the Closing Disclosure (Comment 38(f)(1)-3).

Answer 216

Services the consumer did or did not shop for. The following are disclosed under “Services Borrower Did Not Shop For,” regardless of where it was located on the Loan Estimate: * Items that the consumer could have shopped for but did not. * When a consumer chooses a provider that is on the written list of providers for a service on the Loan Estimate (12 CFR 1026.38(f)(2)). Items are re-alphabetized when an item is added to or removed from a particular subheading. The amounts that are designated as Borrower-Paid at or before closing are subtotaled as Total Loan Costs (Borrower-Paid) (12 CFR1026.38(f)(5)). Amounts designated as Seller-Paid or Paid by Others are not included in this subtotal (rather, they are included elsewhere in the Closing Cost Subtotal) (Comment 38(f)(5)-1; 12 CFR 1026.38(h)(2)).

Answer 217

E. Taxes and Other Governmental Fees F. Prepaids G. Initial Escrow Payment as Closing H. Other I. Total Other Costs

Answer 218

Taxes and other government fees. Itemized transfer taxes paid by the consumer and by the seller are disclosed, instead of just the sum total of transfer taxes to be paid by the consumer (12 CFR1026.38(g)(1)).

Answer 219

Prepaids. An itemization of homeowner’s insurance premiums, mortgage insurance premiums, prepaid interest, property taxes and a maximum of three additional items (see 12 CFR 1026.37(g)(2)), the name of the person ultimately receiving the payment or government entity assessing the property tax, and the total of all such itemized amounts that are designated Borrower-Paid at or before closing. If no interest is collected prior to the interest collected with the first monthly payment, zero dollars should be disclosed (12 CFR 1026.38(g)(2); Comment 38(g)(2)-3).

Answer 220

Initial escrow payment at closing. Property taxes paid during different time periods may be disclosed as separate items (12 CFR1026.38(g)(3)).

Answer 221

Other. This section of the table includes charges for services that are required or obtained in the real estate closing by the consumer, the seller, or other party, and the name of the person ultimately receiving the payment, even if not initially disclosed on the Loan Estimate (12 CFR1026.38(g)(4)). This includes all real estate brokerage fees, homeowner’s or condominium association charges paid at consummation, home warranties, inspection fees, and other fees that are part of the real estate closing but not required by the creditor or not disclosed elsewhere on the Closing Disclosure (Comment 38(g)(4)-1). The amount of real estate commissions paid must be the total amount paid to any real estate brokerage as a commission, regardless of the identity of the party holding any earnest money deposit (Comment 38(g)(4)-4). If there are costs that are a component of title insurance services, their label must begin with “Title -” and, if there are costs designated Borrower-Paid at or before closing for any premiums paid for separate insurance, warranty, guarantee, or eventcoverage products, they must be labeled “(optional)” (12 CFR 1026.38(g)(4)(i) and (ii)). The sum of any of these amounts that are Borrower-Paid must be disclosed as a line item as Total Other Costs (Borrower-Paid) (12 CFR1026.38(g)(5)). Below this total, the sum of Total Loan Costs and Total Other Costs (Borrower-Paid), less any lender credits (separately itemized), must be disclosed as a line item as Total Closing Costs (Borrower-Paid) (12 CFR1026.38(g) and (h)).

Answer 222

Page 3 of the Closing Disclosure contains the Calculating Cash to Close table and Summaries of Transactions tables (12 CFR 1026.38(i), (j), and (k)).

Answer 223

Calculating Cash to Close The Calculating Cash to Close table permits the consumer to see what costs have changed from the Loan Estimate. This table contains nine items: * Total Closing Costs; * Closing Costs Paid before Closing; * Closing Costs Financed; * Down Payment/Funds from Borrower; * Deposit; * Funds for Borrower; * Seller Credits; * Adjustments and other Credits; and * Total Cash to Close (12 CFR1026.38(i)). The table has three columns that disclose (1) the amount for each item as it was disclosed on themost recent Loan Estimate provided to the consumer, (2) the final amount for the item, and (3) an answer to the question “Did this change?” (12 CFR 1026.38(i)). The amounts disclosed in the Loan Estimate column will be the amounts disclosed on the most recent Loan Estimate (or revised Loan Estimate) Provided to the consumer (12 CFR1026.38(i)(1)(i), (3)(i), (4)(i), (5)(i), (6)(i), (7)(i), (8)(i), (9)(i)). When amounts have changed, the disclosure must indicate where the consumer can find the amounts that have changed since being provided the Loan Estimate. For example, if the Seller Credit amount changed, the creditor can indicate that the consumer should “See Seller Credits in Section L” (Comment 38(i)-3). Other examples of language for these items are found in example form H-25(B) in Appendix H to Regulation Z.

Answer 224

Increases in total closing costs that exceed legal limits. When the increase in Total Closing Costs exceeds the legal limits on closing costs set forth in 12 CFR 1026.19(e)(3), the form must disclose a statement that an increase in closing costs exceeds the legal limits by the dollar amount of the excess in the “Did this change?” column (12 CFR1026.38(i)(1)(iii)(A)(3)). A statement directing the consumer to the Lender Credit on page 2 or a principal reduction must also be included if either is provided as a refund for the excess amount (Comment 38(i)(1)(iii)(A)-3). The dollar amount must be the sum of all excess amounts, taking into account the different methods of calculating excesses of the limitations on increases in closing costs under 12 CFR1026.19(e)(3)(i) and (ii) (12 CFR 1026.38(i)(1)(iii)(A)(3)).

Answer 225

Closing Costs Paid Before Closing. The amount disclosed in the Loan Estimate column for the “Closing Costs Paid Before Closing” item is zero dollars (12 CFR1026.38(i)(2)(i)). The Final column should disclose the same amount designated as Borrower-Paid Before Closing in the Closing Costs Subtotals of the Other Costs table on page 2 of the Closing Disclosure. Under the subheading “Did this change?” if the amount disclosed here is different from the amount disclosed in the Loan Estimate, include a statement of that fact; and if it is equal to the amount disclosed on the Loan Estimate, include a statement of that fact (12 CFR1026.38(i)(2)(iii)).

Answer 226

Alternative Calculating Cash to Close table For transactions without a seller or for simultaneous subordinate financing where the alternative Calculating Cash to Close table was used on the Loan Estimate, the Closing Disclosure must also use the alternative Calculating Cash to Close table under (12 CFR1026.38(e)). These items include: * Loan amount; * Total closing costs; * Closing costs paid before closing; * Payoffs and payments; * Cash to or from consumer; and * Closing costs financed. The table has three columns that disclose (1) the amount for each item as it was disclosed on themost recent Loan Estimate provided to the consumer, (2) the final amount for the item, and (3) an answer to the question “Did this change?” along with a statement of whether the amount increased, decreased, or is equal to the amount disclosed in the Loan Estimate (12 CFR 1026.38(e), Comment 38(e)-6). Generally, the amounts disclosed in the Loan Estimate column will be the Loan Amount, Total Closing Costs, Closing Costs Paid before Closing, and the Total Payoffs and Payments (12 CFR 1026.38(e)(1)(i), (2)(i), (3)(i), (4)(i)). Cash to or from the consumer is disclosed in the first two columns of the row labeled Cash to Close. The first column contains amounts disclosed in the most recent Loan Estimate provided to the consumer. The second column discloses the final amount due from or to the consumer, calculated by the sum of the amounts disclosed (pursuant to 12 CFR1026.38(e)(1)(i), (2)(i), (3)(i), (4)(i)) as final Loan Amount, Total Closing Costs, Closing Costs Paid before Closing, and the Total Payoffs and Payments, disclosed as a positive number with the statement of whether the funds are due from or to the consumer (12 CFR 1026.38(e)(5)). Closing Costs Financed are disclosed in the third column of the row labeled Cash to Close in the Calculating Cash to Close table. This amount is calculated by the sum of the final Loan Amount (12 CFR 1026.38(e)(1)(ii)) and the final Total Payoffs and Payments (12 CFR 1026.38(e)(4)(ii)), but only to the extent that the sum is greater than zero and less than or equal to the sum of borrower paid closing costs (disclosed under 12 CFR 1026.38(h)(2)) designated Borrower-Paid Before Closing (12 CFR 1026.38(e)(6)).

Answer 227

Summaries of Transactions table. The Summaries of Transactions table contains required itemizations of the borrower’s and the seller’s transactions (12 CFR 1026.38(j)-(k)). The table discloses amounts due from or payable to the consumer and seller at closing, as applicable (12 CFR 1026.38(k)(1) and (2)). A separate Closing Disclosure can be provided to the consumer and the seller that does not reflect the other party’s costs and credits by omitting specified disclosures on each separate Closing Disclosure (12 CFR 1026.38(t)(5)(v),(vi),(ix)). Additional pages may be attached to the Closing Disclosure to add lines to provide a complete listing of all items required to be shown on the Closing Disclosure and for customary recitals and information used locally in real estate closings (for example, breakdown of payoff figures, a breakdown of the consumer's total monthly mortgage payments, an accounting of debits received and check disbursements, a statement stating receipt of funds, applicable special stipulations between consumer and seller, and the date funds are transferred) (Comment 38(j)-6). Generally, the Summaries of Transactions table is similar to the Summary of Borrower’s Transaction and Summary of Seller’s Transaction tables on the HUD-1 Settlement Statement provided under Regulation X prior to the TILA-RESPA Integrated Disclosure rule taking effect. There are some modifications to the Closing Disclosure related to the handling of the disclosure of the consumer’s deposit, the disclosure of credits, and specific guidance on other matters that may not have been clear in the HUD-1 instructions. In transactions without a seller, the Seller-Paid column for Closing Costs may be deleted on page 2, and a Payoffs and Payments table may be substituted for the Summaries of Transactions table and placed before the alternative Calculating Cash to Close table on page 3 of the closing Disclosure (12 CFR 1026.38(t)(5)(vii)(B)). For an example, see page 3 of form H25(J) of Appendix H to Regulation Z. In some transactions, there are contractual or legal limits on what refunds may be provided to the consumer, and, instead, principal is reduced. Principal reductions may also be utilized in circumstances where refunds do not need to be provided. In transactions with a principal reduction that occurs immediately or very soon after closing, the principal reduction must be disclosed in the Summaries of Transactions table on the standard Closing Disclosure pursuant to (12 CFR 1026.38(j)(1)(v)).

Answer 228

Borrower’s Transaction -Amounts due from borrower -Adjustments -Adjustments for items paid by seller in advance. -Itemization of amounts already paid by or on behalf of borrower -Adjustments for items unpaid by seller -Calculation of the borrower’s transaction -Items paid outside of closing

Answer 229

Amounts due from the borrower. The sale price of the property, sale price of any personal property included in the sale, and total amount of closing costs designated Borrower-Paid at Closing, calculated with lender credits as a negative number pursuant to 12 CFR 1026.38(h)(2) and (h)(3) (12 CFR 1026.38(j)(1)(ii)- (iv)). The contract sale price of the property does not include the price of tangible personal property if the buyer and seller have agreed to a separate price for such items. Manufactured homes are not considered personal property for this disclosure (Comment 38(j)(1)(ii)-1).

Answer 230

Adjustments. This includes a description and the amount of any additional items that the seller has paid prior to the real estate closing but reimbursed by the consumer at closing, and a description and the amount of any other items owed by the consumer at the real estate closing not otherwise disclosed pursuant to 12 CFR 1026.38(f), (g), or (j) (12 CFR 1026.38(j)(1)(v)). Amounts not otherwise disclosed under 12 CFR 1026.38(j) that are owed to the seller but payable to the consumer after the real estate closing must be disclosed under the heading “Adjustments,” including rent that the consumer will collect after closing for a period of time prior to the real estate closing, and a tenant’s security deposit (Comment 38(j)(1)(v)-1). Other consumer charges owed by the consumer at the real estate closing and not otherwise disclosed under 12 CFR 1026.38(f), (g), and (j) will not have a corresponding credit in the summary of the seller’s transaction under 12 CFR 1026.38(k)(1)(iv) (Comments 38(j)(1)(v)-1 and -2).

Answer 231

Adjustments for items paid by seller in advance. The prorated amount of prepaid taxes due from the consumer to reimburse the seller, and the time periods. The taxes are labeled city/town taxes, county taxes, and/or assessments as appropriate (12 CFR 1026.38(j)(1)(vi)-(ix)). If there are additional items paid by the seller and due from the consumer, they are also itemized. Examples include taxes paid in advance, flood or insurance premiums if the insurance is under the same policy, mortgage insurance for assumed loans, condominium assessments, fuel or supplies on hand, and ground rent paid in advance (Comment 38(j)(1)(x)-1).

Answer 232

Itemization of amounts already paid by or on behalf of borrower. These amounts are itemized in the second part of the Summary of Transactions table. These include the following: * Deposits, and if there is no deposit, this line is left blank. If the deposit was reduced to pay closing charges prior to closing, the reduction should be shown in the Closing Cost Detail table designated as Borrower-Paid Before Closing (Comments 38(j)(2)(ii)-1 and -2). * The loan amount is the construction or purchase loan amount for a structure or purchase of a new manufactured home that is real property. For construction loans or loans for manufactured homes that are real property under state law, the loan amount for the current transaction must be disclosed, and the sales price of the land and the construction cost or the price of the manufactured home should be disclosed separately (Comment 38(j)(2)(iii)-1). Existing loans assumed or taken subject to are itemized with the outstanding amount of any loans that the consumer is assuming or taking title subject to (Comment 38(j)(2)(iv)-1). * If the seller is providing a lump sum at closing that is not otherwise itemized, to pay for loan costs and any other obligations of the seller to be paid directly to the consumer, this amount is labeled Seller Credit (12 CFR 1026.38(j)(2)(v)). When the consumer receives a generalized credit from the seller for closing costs or where the seller (typically a builder) is making an allowance to the consumer for items to purchase separately, the amount of the credit must be disclosed. However, if the Seller Credit is attributable to a specific loan cost or other cost listed in the Closing Cost Details tables, that amount should be reflected in the Seller-Paid column in the Closing Cost Details tables. * Any other obligations of the seller to be paid directly to the consumer, such as for issues identified at a walk-through of the property prior to closing, are disclosed here (Comments 38(j)(2)(v)-1 and-2). * Other credits are itemized with a description and the amounts paid by or on behalf of the consumer, and not otherwise disclosed. Examples of other credits include credits from a real estate agent not attributable to a specific closing cost, subordinate financing proceeds, satisfaction of existing subordinate liens by consumer, transferred escrow balances, gift funds provided at closing, and any additional amounts not already disclosed under 12 CFR 1026.38(f), (g), and (j)(2) that are owed to the consumer but payable to the seller before the real estate closing (“Adjustments”), including rent paid to the seller from a tenant before the real estate closing for a period extending beyond the closing (Comments 38(j)(2)(vi)-1 through -6).

Answer 233

Adjustments for items unpaid by seller include prorated unpaid taxes due from the seller to reimburse the consumer at closing, along with the time period and labeled city/town taxes, county taxes, and/or assessments as appropriate (12 CFR 1026.38(j)(2)(vii)–(x)). If there are additional items that have not been paid and that the consumer is expected to pay after closing but which are attributable to the time prior to closing, they are itemized here (12 CFR 1026.38(j)(2)(xi)). Examples include utilities used but not paid for by the seller or interest on a loan assumption (Comment 38(j)(2)(xi)-1).

Answer 234

Calculation of the borrower’s transaction is disclosed by including the Total Due from Borrower at Closing, the amount labeled Total Paid Already by or on Behalf of Borrower at Closing, if any, disclosed as a negative number, and a statement that the resulting amount is due from or to the consumer, and labeled Cash to Close (12 CFR 1026.38(j)(3)).

Answer 235

-Amounts due to the seller -Adjustments for items paid by seller in advance -Itemization of amounts due from seller -Adjustments for items unpaid by seller -Calculation of the seller’s transaction -Items paid outside of closing

Answer 236

Amounts due to the seller include the sale price of the property, sale price of any personal property included in the sale, and a description and the amount of other items paid to the seller by the consumer pursuant to a contract, such as charges that were not disclosed on the Loan Estimate, or items paid by the seller prior to closing but reimbursed by the consumer at closing (12 CFR 1026.38(k)(1)(ii)-(iv)).

Answer 237

Adjustments for items paid by seller in advance include the prorated amount of prepaid taxes due from the consumer to reimburse the seller, and the time periods. The taxes are labeled city/town taxes, county taxes, and/or assessments as appropriate (12 CFR 1026.38(k)(1)(v)-(viii)). If there are additional items paid by the seller and due from the consumer, they are also itemized (12 CFR 1026.38(k)(1)(ix)). Exact same as in Borrower's Transaction column?

Answer 238

Itemization of amounts due from seller at closing are itemized in the second part of the Summary of Transactions table. These include the amount of any deposits disbursed to the seller prior to closing and seller-paid closing costs. The itemization also includes the amount of any existing loans that the consumer is assuming and the amounts of any loan secured by a first lien or a second lien on the property that will be paid off. In addition, the itemization includes seller credits, an amount that the seller will provide at the closing as a lump sum, not otherwise itemized, to pay for loan costs and other costs and any other obligations of the seller to be paid directly to the consumer. The amounts and a description of any and all other obligations required to be paid by the seller at closing are disclosed, including any lien-related payoffs, fees, or obligations (12 CFR 1026.38(k)(2)(ii)–(vii)).

Answer 239

Adjustments for items unpaid by seller include prorated unpaid taxes due from the seller to reimburse the consumer at closing, along with the time period and labeled city/town taxes, county taxes, and/or assessments as appropriate (12 CFR 1026.38(k)(2)(x)–(xii)). If there are additional items that have not been paid and that the consumer is expected to pay after closing but which are attributable to the time prior to closing, they are itemized here (12 CFR 1026.38(k)(2)(xiii)). Same as Borrower's Transaction column?

Answer 240

Calculation of the seller’s transaction is disclosed by including the Total Due to Seller at Closing, the amount labeled Total Due from Seller at Closing, if any, disclosed as a negative number, and a statement that the resulting amount is due from or to the seller, and labeled Cash (12 CFR 1026.38(k)(3)).

Answer 241

Borrower: Items paid outside of closing are costs that are not paid from closing funds but would otherwise be part of the borrower’s transaction table should be marked as “P.O.C.” for paid outside of closing. There must also be a statement of the party making the payment, such as the consumer, seller, loan originator, real estate agent, or any other person. For an example, see form H25(D) of Appendix H (Comment 38(j)(4)(i)-1). Seller: Items paid outside of closing are costs that are not paid from closing funds but that would otherwise be part of the seller’s transaction table should be marked as “P.O.C.” for paid outside of closing. There must also be a statement of the party making the payment (12 CFR 1026.38(k)(4)).

Answer 242

Page 4: Additional information about this loan Page 4 of the Closing Disclosure groups several required loan disclosures together, generally using specified language, including: * Information concerning future assumption of the loan by a subsequent purchaser required by 12 CFR1026.37(m)(2) (12 CFR1026.38(l)(1)); * Whether the legal obligation contains a demand feature that can require early payment of the loan; (12 CFR 1026.38(l)(2)); * The terms of the legal obligation that impose a fee for a late payment, including the amount of time that passes before a fee is imposed and the amount of such fee or how it is calculated (as required by 12 CFR 1026.37(m)(4)) (12 CFR 1026.38(l)(3)); * Whether the regular periodic payments can cause the principal balance of the loan to increase (i.e., whether there could be negative amortization) (12 CFR 1026.38(l)(4)); * The creditor’s policy regarding partial payments by the consumer (12 CFR1026.38(l)(5)); * A statement that the consumer is granting a security interest in the property (along with an identification of the property) (12 CFR1026.38(l)(6)); and * Specified information related to any escrow account held by the servicer, including specified estimated escrow costs over the first year after consummation (or a statement that an escrow account has not been established, with a description of specified estimated property costs during the first year after consummation) (12 CFR 1026.38(l)(7)). If the periodic principal and interest payment may change after consummation, other than due to a change in interest rate or where the loan is a seasonal payment product, page 4 of the Closing Disclosure must also include an Adjustable Payment (AP) table (12 CFR1026.38(m)). If the loan’s interest rate may increase after consummation, page 4 of the Closing Disclosure must also include the Adjustable Interest Rate (AIR) table (12 CFR1026.38(n)). These are the tables required in the Loan Estimate at 12 CFR1026.37(i) and (j), respectively, updated to reflect the terms of the loan at consummation.

Answer 243

Page 5: Loan calculations, other disclosures, and contact information Page 5 of the Closing Disclosure includes a Loan Calculations table, as well as specified other disclosures, contact information for the CFPB for questions, contact information for participants in the transaction, and if desired by the creditor, a signature table to confirm receipt of the Closing Disclosure (12 CFR 1026.38(o)-(s)).

Answer 244

Loan Calculations table The Loan Calculations table discloses: * Total of Payments (total paid after all scheduled payments of principal, interest, mortgage insurance, and loan costs are made); * Finance Charge; * Amount Financed; * Annual Percentage Rate (APR); and * Total Interest Percentage (TIP) (the total amount of interest paid over the loan term as a percentage of the loan amount) (12 CFR 1026.38(o); 12 CFR 1026.37(l)(3) and its commentary). The APR and TIP amounts should be updated from the amounts disclosed on the Loan Estimate to reflect the terms of the legal obligation at consummation. The TIP calculation is set forth in 12 CFR 1026.37(l)(3) and its commentary. NOTE: See the discussion on calculating the TIP for the comparison table on page 3 of the Loan Estimate.

Answer 245

Other Disclosures table The Other Disclosures table requires a notice regarding the lender’s obligation to provide a free copy of the appraisal (for higher-priced mortgage loans under 12 CFR 1026.35 and loans covered by the Equal Credit Opportunity Act); a specified warning about consequences of nonpayment under the contract, whether state law provides for continued consumer liability after foreclosure, a statement concerning the consumer’s ability to refinance the loan, and a statement concerning the extent that the interest on the loan can be included as a tax deduction by the consumer (12 CFR1026.38(p)). Contact information table For each lender, mortgage broker, real estate broker (buyer and seller), and settlement agent, the contact information table discloses the name, address, NMLS or state license ID (as applicable), contact name of an individual primary contact for the consumer (and NMLS ID or license ID for that person), email, and phone number (12 CFR 1026.38(r)).

Answer 246

Contact information table For each lender, mortgage broker, real estate broker (buyer and seller), and settlement agent, the contact information table discloses the name, address, NMLS or state license ID (as applicable), contact name of an individual primary contact for the consumer (and NMLS ID or license ID for that person), email, and phone number (12 CFR 1026.38(r)).

Answer 247

-Notice of new owner -Partial payment policies

Answer 248

Notice of new owner – No later than 30 calendar days after the date on which a mortgage loan is acquired by or otherwise sold, assigned, or otherwise transferred43 to a third party, the “covered person”44 shall notify the consumer clearly and conspicuously in writing, in a form that the consumer may keep, of such transfer and include: * Identification of the loan that was sold, assigned, or otherwise transferred; * Name, address, and telephone number of the covered person; * Date of transfer; * Name, address, and telephone number of an agent or party having authority, on behalf of the covered person, to receive notice of the right to rescind and resolve issues concerning the consumer’s payments on the mortgage loan; * Location where transfer of ownership of the debt to the covered person is or may be recorded in public records or, alternatively, that the transfer of ownership has not been recorded in public records at the time the disclosure is provided; and * At the option of the covered person, any other information regarding the transaction. This notice of sale or transfer must be provided for any consumer credit transaction that is secured by the principal dwelling of a consumer, as well as a closed-end consumer credit transaction secured by a dwelling or real property. Thus, it applies to both closed-end mortgage loans and open-end home equity lines of credit. This notification is required of the covered person even if the loan servicer remains the same. Regulation Z also establishes special rules regarding the delivery of the notice when there is more than one covered person. In a joint acquisition of a loan, the covered persons must provide a single disclosure that lists the contact information for all covered persons. However, if one of the covered persons is authorized to receive a notice of rescission and to resolve issues concerning the consumer’s payments, the disclosure may state contact information only for that covered person. In addition, if the multiple covered persons each acquire a partial interest in the loan pursuant to separate and unrelated agreements, they may provide either a single notice or separate notices. Finally, if a covered person acquires a loan and subsequently transfers it to another covered person, a single notice may be provided on behalf of both of them, as long as the notice satisfies the timing and content requirements with respect to each of them. In addition, there are three exceptions to the notice requirement to provide the notice of sale or transfer: * The covered person sells, assigns, or otherwise transfers legal title to the mortgage loan on or before the 30th calendar day following the date of transfer on which it acquired the mortgage loan; * The mortgage loan is transferred to the covered person in connection with a repurchase agreement that obligates the transferring party to repurchase the mortgage loan (unless the transferring party does not repurchase the mortgage loan); or * The covered person acquires only a partial interest in the mortgage loan and the agent or party authorized to receive the consumer’s rescission notice and resolve issues concerning the consumer’s payments on the mortgage loan does not change as a result of that transfer. If, upon confirmation, a servicer provides a confirmed successor in interest who is not liable on themortgage loan obligation with an optional notice and acknowledgment form in accordance with Regulation X, 12 CFR 1024.32(c)(1), the servicer is not required to provide to the confirmed successor in interest the notice of sale or transfer unless and until the confirmed successor in interest either assumes the mortgage loan obligation under State law or has provided the servicer an executed acknowledgment in accordance with Regulation X, 12 CFR 1024.32(c)(1)(iv), that the confirmed successor in interest has not revoked (12 CFR 1026.39(f)). 43 The date of transfer to the covered person may, at the covered person’s option, be either the date of acquisition recognized in the books and records of the acquiring party or the date of transfer recognized in the books and records of the transferring party. 44 A “ covered person” means any person, as defined in 12 CFR 1026.2(a)(22), who becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through a purchase, assignment, or other transfer, and who acquires more than one mortgage loan in any 12-month period. For purposes of this section, a servicer of a mortgage loan shall not be treated as the owner of the obligation if the servicer holds title to the loan or it is assigned to the servicer solely for the administrative convenience of the servicer in servicing the obligation. See 12 CFR 1026.39(a)(1).

Answer 249

Mortgage transfer notices – partial payment policies. If a creditor or servicer is required by Regulation Z to provide mortgage transfer notices when the ownership of a mortgage loan is being transferred, the notice must include information related to the partial payment policy that will apply to the mortgage loan. This post-consummation partial payment disclosure is required for a closed-end consumer credit transaction secured by a dwelling or real property, other than a reverse mortgage (12 CFR1026.39(a) and (d)). The partial payment disclosure must include (12 CFR 1026.39(d)(5)): * The heading “Partial Payment” over all of the following additional information: If periodic payments that are less than the full amount due are accepted, a statement that the covered person, using the term “lender,” may accept partial payments and apply such payments to the consumer’s loan; o If periodic payments that are less than the full amount due are accepted but not applied to a consumer’s loan until the consumer pays the remainder of the full amount due, a statement that the covered person, using the term “lender,” may hold partial payments in a separate account until the consumer pays the remainder of the payment and then apply the full periodic payment to the consumer’s loan; o If periodic payments that are less than the full amount due are not accepted, a statement that the covered person, using the term “lender,” does not accept any partial payments; and o A statement that, if the loan is sold, the new covered person, using the term “lender,” may have a different policy. The text illustrating the disclosure in form H-25 may be modified to suit the format of the mortgage transfer notice. Any modifications must be appropriate and not affect the substance, clarity, or meaningful sequence of the disclosure (Comment 39(d)(5)-1).

Answer 250

Periodic Statements for Residential Mortgage Loans – 12 CFR 1026.41 Creditors, assignees, or servicers 45 of closed-end mortgages are generally required to provide consumers with periodic statements for each billing cycle unless the loan is a fixed-rate loan and the servicer provides the consumer with a coupon book meeting certain conditions. Periodic statements must be provided by the servicer within a reasonably prompt time after the payment is due, or at the end of any courtesy period provided by the servicer for the previous billing cycle. Delivering, emailing or placing the periodic statements in the mail within four days of the close of the courtesy period of the previous billing cycle is generally acceptable.

Answer 251

* Reverse mortgage transactions covered under (12 CFR 1026.33); * Mortgage loans secured by a consumer’s interest in a timeshare plan; * Fixed-rate loans where the servicer currently provides consumers with coupon books that contain certain specified account information, contact information for the servicer, delinquency information (if applicable), and information that consumers can use to obtain more information about their account; and * Creditors, assignees, or servicers that meet the “small servicer” exemption. A mortgage loan while the consumer is a debtor in bankruptcy under Title 11 of the U.S. Code. Servicers, however, are required to send modified periodic statements (or coupon books) to consumers who have filed for bankruptcy, subject to certain exceptions (See the Certain Consumers in Bankruptcy discussion below); * Charged-off loans, if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off in accordance with (12 CFR 1026.41(e)(6)); * A successor in interest under certain conditions: if, upon confirmation, a servicer provides a confirmed successor in interest who is not liable on the mortgage loan obligation with an optional notice and acknowledgment form in accordance with Regulation X, 12 CFR 1024.32(c)(1), the servicer is not required to provide to the confirmed successor in interest a periodic statement unless and until the confirmed successor in interest either assumes the mortgage loan obligation under State law or has provided the servicer an executed acknowledgment in accordance with Regulation X, 12 CFR1024.32(c)(1)(iv), that the confirmed successor in interest has not revoked (12 CFR 1026.41(g)). NOTE: 12 CFR 1026.41(e)(4)(ii) and (iii) define a “small servicer” and provide clarification how a small servicer will be determined. A small servicer is a servicer that: (1) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which it or an affiliate is the creditor or assignee, (2) meets the definition of a Housing Finance Agency under 24 CFR 266.5, or (3) is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. To determine whether a servicer is a small servicer, generally, a servicer should be evaluated based on the mortgage loans serviced by the servicer and any affiliate as of January 1 for the remainder of the calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer has the later of six months from the time it ceases to qualify or until the next January 1 to come into compliance with the requirements of 12 CFR 1026.41. Under 12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a nonaffiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in (12 CFR 1026.36(a)(5)).

Answer 252

-Amount Due -Past Payment Breakdown -Transaction Activity -Partial Payment Information -Contact Information -Account Information -Delinquency Information

Answer 253

Amount Due * The payment due date, the amount of any late payment fee, the date that late payment fees will be assessed to the consumer’s account if timely payment is not made, and the amount due, which must be shown more prominently than other disclosures on the page; NOTE: If the transaction has multiple payment options, the amount due under each of the payment options must be provided. The commentary to Regulation Z clarifies how servicers must disclose the amount due on periodic statements when the mortgage loan has been accelerated, is in a temporary loss mitigation program, or has been permanently modified. The commentary states the following: * Acceleration. If the balance of a mortgage loan has been accelerated but the servicer will accept a lesser amount to reinstate the loan, the amount due must identify only the lesser amount that will be accepted to reinstate the loan. The periodic statement must be accurate when provided and should indicate, if applicable, that the amount due is different amount because of the temporary loss mitigation program. The explanation should be on the front page of the statement or, alternatively, may be included on a separate page enclosed with the periodic statement or in a separate letter (Comment 41(d)(2)-2). accurate only for a specified period of time. For example, the statement may include language such as “as of [date]” or “good through [date]” and provide an amount due that will reinstate the loan as of that date or good through that date, respectively (Comment 1026.41(d)(1)-1). * Temporary loss mitigation programs. If the consumer has agreed to a temporary loss mitigation program, the amount due may identify either the payment due under the temporary loss mitigation program or the amount due according to the loan contract (Comment 1026.41(d)(1)-2). o Permanent loan modifications. If the loan contract has been permanently modified, the amount due must identify only the amount due under the modified loan contract (Comment 1026.41(d)(1)-3). Explanation of Amount Due * An explanation of the amount due, including the monthly payment amount with a breakdown of how much will be applied to principal, interest, and escrow, the total sum of any fees/charges imposed since the last statement, and any payment amount past due. Mortgage loans with multiple payment options must also have a breakdown of each payment option, along with information regarding how each payment option will impact the principal; NOTE: The commentary to Regulation Z clarifies the explanation of amount due disclosures that must be included on periodic statements when mortgage loans have been accelerated or are in temporary loss mitigation programs. The commentary states the following: * Acceleration. If the balance of a mortgage loan has been accelerated but the servicer will accept a lesser amount to reinstate the loan, the explanation of amount due must list both the reinstatement amount that is disclosed as the amount due and the accelerated amount. The servicer is not required to list the monthly payment amount that would otherwise be required under (12 CFR 1026.41(d)(2)(i)). * The periodic statement must also include an explanation that the reinstatement amount will be accepted to reinstate the loan through the “as of [date]” or “good through [date],” as applicable, along with any special instructions for submitting the payment. The explanation should be on the front page of the statement or, alternatively, may be included on a separate page enclosed with the periodic statement. The explanation may include related information, such as a statement that the amount disclosed is “not a payoff amount” (Comment 41(d)(2)-1). * Temporary loss mitigation programs. If the consumer has agreed to a temporary loss mitigation program and the amount due identifies the payment due under the temporary loss mitigation program, the explanation of amount due must include both the amount due according to the loan contract and the payment due under the temporary loss mitigation program. The statement must also include an explanation that the amount due is being disclosed as a

Answer 254

Past Payment Breakdown * The total of all payments received since the last statement and the total of all payments received since the start of the calendar year, including, for each payment, a breakdown of how the payment(s) was applied to principal, interest, escrow, and/or fees and charges, and any amount held in a suspense or unapplied funds account (if applicable);

Answer 255

Transaction Activity * A list of transaction activity (including dates, a brief description, and amount) for the current billing cycle, including any credits or debits that affect the current amount due, with the date, amount, and brief description of each transaction;

Answer 256

Partial Payment Information * If a statement reflects a past partial payment held in a suspense or unapplied funds account, information explaining what the consumer must do to have the payment applied to the mortgage. Information must be on the front page or a separate page of the statement or separate letter;

Answer 257

Contact Information * Contact information for the servicer, including a toll-free telephone number and email address (if applicable) that the consumer may use to obtain information regarding the account. Contact information must be on the front page of the statement; and

Answer 258

Account Information * Account information, including the outstanding principal balance, the current interest rate, the date after which the interest rate may change if the loan is an ARM, and any prepayment penalty, as well as the web address for CFPB’s or HUD’s list of homeownership counselors or counseling organizations and the HUD toll-free telephone number to contact the counselors or counseling organizations.

Answer 259

Delinquency Information Servicers must provide consumers that are more than 45 days delinquent on past payments additional information regarding their accounts on their periodic statements. For purposes of 12 CFR 1026.41(d)(8), the length of a consumer's delinquency is measured as of the date of the periodic statement or the date of the written notice provided under (12 CFR 1026.41(e)(3)(iv)). A consumer's delinquency begins on the date an amount sufficient to cover a periodic payment of principal, interest, and escrow, if applicable, becomes due and unpaid, even if the consumer is afforded a period after the due date to pay before the servicer assesses a late fee. A consumer is delinquent if one or more periodic payments of principal, interest, and escrow, if applicable, are due and unpaid (Comment 41(d)(8)-1).

Answer 260

These items must be grouped together in close proximity to one another. To meet this requirement, the items to be provided in close proximity must be grouped together, and set off from other groupings of items. Items in close proximity may not have an unrelated text between them. Text is unrelated if it does not explain or expand upon the required disclosures. This may be accomplished in a variety of ways, for example, by presenting the information in boxes, or by arranging the items on the document and including spacing between the groupings (Comment 41(d)-1). Furthermore, the additional information must include: * The length of the consumer’s delinquency; * A notification of the possible risks of being delinquent, such as foreclosure and related expenses; * An account history for either the previous six months or the period since the last time the account was current (whichever is shorter), which details the amount past due from each billing cycle and the date on which payments were credited to the account as fully paid; * A notice stating any loss mitigation program that the consumer has agreed to (if applicable); * A notice stating whether the servicer has initiated a foreclosure process; * Total payments necessary to bring the account current; and * A reference to homeownership counseling information (See Account Information above).

Answer 261

The regulation does not prohibit adding to the required disclosures, as long as the additional information does not overwhelm or obscure the required disclosures. For example, while certain information about the escrow account (such as the account balance) is not required on the periodic statement, this information may be included. The periodic statement may be provided electronically if the consumer agrees. The consumer must give affirmative consent to receive statements electronically. For sample periodic statements, see Appendix H-30. NOTE: Servicers may modify the sample forms for periodic statements provided in Appendix H–30 to remove language that could suggest liability under the mortgage loan agreement if such language is not applicable (Comment 41(c)-5). For example, in the case of a confirmed successor in interest who has not assumed the mortgage loan obligation under State law and is not otherwise liable on the mortgage loan obligation, a servicer may modify the forms to: * Use “this mortgage” or “the mortgage” instead of “your mortgage.” * Use “The payments on this mortgage are late” instead of “You are late on your mortgage payments.” * Use “This is the amount needed to bring the loan current” instead of “You must pay this amount to bring your loan current.” (Comment 41(c)-5)

Answer 262

-None if consumer meets exemption -Modified is consumer does not meet exemption -Do servicers ever send the normal statements? Certain Consumers in Bankruptcy – 12 CFR 1026.41(e)(5) and 12 CFR 1026.41(f) Servicers must send modified periodic statements (or coupon books) to certain consumers while any consumer on a mortgage loan is a debtor in a bankruptcy under title 11 of the U.S. Code, or if such consumer has discharged personal liability for the mortgage loan under Chapter 7, 11, 12, or 13 bankruptcy (12 CFR 1026.41(f)). The modified periodic statement requirements, however, are subject to certain exemptions. Under 12 CFR 1026.41(e)(5)(i), a servicer is exempt from the periodic statement requirements with regard to a mortgage loan if: * Any consumer on the loan is a debtor in bankruptcy under title 11 of the U.S. Code, or if such consumer has discharged personal liability for the mortgage loan under Chapter 7, 11, 12, or 13 bankruptcy or the consumer has discharged personal liability for the mortgage loan through bankruptcy; and * With regard to any consumer on the mortgage loan: * The consumer requests in writing that the servicer cease providing a periodic statement or coupon book; o The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for the payment of the pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; o A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or o The consumer files with the bankruptcy court a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling and the consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the bankruptcy case. The bankruptcy exemption will no longer apply, however, if the consumer reaffirms personal liability for the loan, or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book. Servicers not meeting the above exemption must send modified periodic statements or coupon books with regard to a mortgage loan as required by 12 CFR 1026.41(f) while any consumer on a mortgage loan is a debtor in a bankruptcy under title 11 of the U.S. Code, or if such consumer has discharged personal liability for the mortgage loan under Chapter 7, 11, 12, or 13 bankruptcy. The content of the periodic statements will vary depending on whether the consumer is a debtor in a chapter 7 or 11 bankruptcy case, or a chapter 12 or 13 bankruptcy case. Appendix H includes a Sample Form of Periodic Statement for Consumer in Chapter 7 or Chapter 11 Bankruptcy (See H-30(E)) and a Sample Form of Periodic Statement for Consumer in Chapter 12 or Chapter 13 Bankruptcy (See H-30(F)) that servicers may use for consumers in bankruptcy to ensure compliance with (12 CFR 1026.41). Servicers not meeting the above exemption must send modified periodic statements or coupon books as required by (12 CFR 1026.41(f)).

Answer 263

Valuation Independence – 12 CFR 1026.42 Regulation Z seeks to ensure that real estate appraisers, and others preparing valuations, are free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions. Regulation Z also seeks to ensure that appraisers receive customary and reasonable payments for their services. Regulation Z’s valuation rules apply to creditors and settlement services providers for consumer credit transactions secured by the consumer’s principal dwelling (“covered transaction”) and includes several provisions that protect the integrity of the appraisal process when a consumer’s principal dwelling is securing the loan. In general, the rule prohibits “covered persons” from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person’s independent judgment.46 More specifically, Regulation Z: * Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment; * Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions; * 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 are not materially misstated; * Prohibits a person who prepares a valuation from materially misrepresenting the value of the consumer’s principal dwelling, and prohibits a covered person other than the person who prepares valuations from materially altering a valuation. A misrepresentation or alteration is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling; * Prohibits any covered person from falsifying a valuation or inducing a misrepresentation, falsification, or alteration of value; * Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities if the misconduct is material (i.e., likely to significantly affect the value assigned to the consumer’s principal dwelling; and * Requires the payment of customary and reasonable compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors. NOTE: Voluntary donation of appraisal services by a fee appraiser 47 to an organization eligible to receive tax deductible charitable contributions meets the customary and-reasonable requirements (15 U.S.C.1639e(i)(2)(B)). 46 This section applies to any consumer credit transaction secured by a dwelling. A “ covered person” means a creditor with respect to a covered transaction. A “ covered transaction” means an extension of consumer credit that is or will be secured by a dwelling, as defined in 12 CFR 1026.2(a)(19). 47 A fee appraiser is a state-licensed or certified appraiser, or a company using their services who receives a fee for performing appraisals.

Answer 264

Minimum Standards for Transactions Secured by a Dwelling (Ability to Repay and Qualified Mortgages) – 12 CFR 1026.43 Minimum standards for transactions secured by a dwelling – 12 CFR1026.43(a), (g), (h) Creditors originating certain mortgage loans are required to make a reasonable and good faith determination at or before consummation that a consumer will have the ability to repay the loan. The ability-to-repay requirement applies to most closedend mortgage loans; however, there are some exclusions, including: * Home equity lines of credit;48 * Mortgages secured by an interest in a timeshare plan; * Reverse mortgages; * A temporary bridge loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling; * A construction phase of 12 months or less of a construction-to-permanent loan; and * An extension of credit made pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5211; 5219). NOTE: There are additional exclusions under 12 CFR 1026.43(a) that generally include extensions of credit by various state or federal government agencies or programs or by creditors with specific designations under such programs or extensions of credit that meet certain criteria and are extended by certain creditors that the IRS has determined are 501(c)(3) nonprofits. For a full list and criteria, (see 12 CFR 1026.43(a)(3)(iv)–(vii)). Generally, loans covered under this section (which, for purposes of the prepayment penalty provisions in 12 CFR1026.43(g), includes reverse mortgages and temporary loans otherwise excluded49 from the ability-to-repay provisions) may not have prepayment penalties; however, there are exceptions for certain fixed-rate and step-rate qualified mortgages that are not higher priced mortgage loans (as defined in 12 CFR 1026.35(a)), and only if otherwise permitted by law. For such mortgages, the prepayment penalties must be limited to the first three years of the loan and may not exceed 2 percent for the first two years and 1 percent for the third year. The creditor must offer the consumer an alternative loan without such penalties that the creditor has a good faith belief that the consumer likely qualifies for, with the same term, a fixed rate or step rate, substantially equal payments, and limited points and fees (See 12 CFR 1026.43(g)). 48 For open-end credit transactions that are high-cost mortgages as defined in 12 CFR 1026.32, creditors are required to determine a borrower’s ability to repay under 12 CFR 1026.34. 49 These include a temporary or “ bridge” loan with a term of 12 months or less; a construction phase of 12 months or less of a construction-to-permanent loan; or an extension of credit made pursuant to a program administered by a housing finance agency; by certain community development or non-profit lenders, as specified in 12 CFR 1026.43(a)(3)(v); or in connection with certain federal emergency economic stabilization programs (12 CFR 1026.43(a)(3)).

Answer 265

Ability to Repay – 12 CFR1026.43(c) Except as provided under 12 CFR 1026.43(d) (refinancing of non-standard mortgages), (e) (qualified mortgages), and (f) (balloon payment qualified mortgages by certain creditors), creditors must consider the following eight underwriting factors when making a determination of the consumer’s ability to repay: * The consumer’s current or reasonably expected income or assets (excluding the value of the dwelling and any attached real property); * The consumer’s current employment status if the creditor relies on the consumer’s income in determining repayment ability; * The consumer’s monthly payment for the mortgage loan; * The consumer’s monthly payment on any simultaneous loan (i.e., a covered transaction or HELOC that is being consummated generally at the same or similar time) secured by the same dwelling that the creditor knows or has reason to know will be made, calculated in accordance with 12 CFR1026.43(c)(6); * The consumer’s monthly payment for mortgage-related obligations, including property taxes; * The consumer’s current debt obligations, alimony, and child support; * The consumer’s monthly debt-to-income ratio or residual income, calculated in accordance with 12 CFR 1026.43(c)(7); and * The consumer’s credit history. Creditors are required to verify this information using reasonably reliable third-party records, with specific rules for verification of income or assets and employment status. In the case of the consumer’s income or assets, the creditor must use third-party records that provide reasonably reliable evidence of such income or assets. Creditors may verify the information considered using the consumer’s income tax return transcripts issued by the IRS, copies of tax returns filed by the consumer, W-2s or similar documentation, payroll statements, financial institution records, receipts from check-cashing or fund transfer services, and records from the consumer’s employer or other specified records (12 CFR 1026.43(c)(4)). Regulation Z also provides rules for how creditors must apply certain underwriting factors when determining whether a consumer has the ability to repay the mortgage. For example, creditors must calculate the monthly payment for the covered transaction using the greater of the fully indexed rate or any introductory interest rate, and the monthly, fully amortizing payments that are substantially equal during the loan term. However, special rules apply to mortgages with a balloon payment, interest-only loans, and negative amortization loans due to the unique characteristics of the mortgage (12 CFR 1026.43(c)(5)). Finally, creditors may not evade the ability-to-repay requirements by structuring a closed-end loan secured by a dwelling as open-end credit that does not meet the definition of open-end credit plan. 50 A covered transaction is a consumer credit transaction that is secured by a dwelling, including any real property attached to the dwelling. A covered transaction is not a home equity line of credit under 12 CFR 1026.40; a mortgage secured by a consumer’s interest in a timeshare plan; a reverse mortgage under 12 CFR 1026.33; a temporary or “ bridge” loan with a term of 12 months or less; a construction phase of 12 months or less of a construction-to-permanent loan; or an extension of credit made pursuant to a program administered by a housing finance agency; by certain community development or non-profit lenders, as specified in 12 CFR 1026.43(a)(3)(v); or in connection with certain federal emergency economic stabilization programs.

Answer 266

Exemption from ATR Requirements for Refinancing of NonStandard Mortgages – 12 CFR1026.43(d) 12 CFR1026.43(d) provides special rules for refinancing a “non-standard mortgage” into a “standard mortgage.” A “non-standard mortgage” is a covered transaction50 as defined under 12 CFR1026.43(a) that is: * An adjustable rate mortgage with an introductory fixed interest rate for a period of one year or longer; * An interest-only loan; or * A negative amortization loan. A “standard mortgage” is a covered transaction as defined under 12 CFR1026.43(a) with: Periodic payments that do not cause the principal balance to increase, do not allow the consumer to defer repayment of the principal, or do not result in balloon payments; * Total points and fees that are not more than those allowed in 12 CFR1026.43(e)(3); * A term that does not exceed 40 years; * An interest rate that is fixed for the first five years of the loan; and * Proceeds that are used solely to pay off the outstanding principal on the non-standard mortgage and closing or settlement costs (that are required to be disclosed under RESPA). Current holders of non-standard mortgages or their servicers (collectively referred to here as “holders”) can refinance nonstandard mortgages into standard mortgages without considering a consumer’s ability to repay under 12 CFR1026.43(c), if certain conditions are met. To qualify for the exemption from the ability-to-repay requirements: * The standard mortgage must have a monthly payment that is “materially lower”51 than the non-standard mortgage; * The creditor must receive a written application from the consumer for the standard mortgage no later than two months after the non-standard mortgage is recast; and * On the non-standard mortgage, consumers must have made no more than one payment more than 30 days late during the preceding 12 months and must have made no late payments more than 30 days late in the preceding six months of the holder receiving the application for a standard mortgage. For non-standard loans consummated on or after January 10, 2014, that are refinanced into standard mortgages, the exemption from the ability-to-repay requirements for the refinancing is available only if the non-standard mortgage met the repayment ability requirements under 12 CFR1026.43(c) or the qualified mortgage requirements under 12 CFR1026.43(e) as applicable. If these conditions are satisfied and if the holder has considered whether the standard mortgage is likely to prevent the consumer from defaulting on the non-standard mortgage once the loan terms are recast, the holder is not required to meet the ability-torepay requirements in 12 CFR 1026.43(c). Finally, holders refinancing a non-standard mortgage to a standard mortgage may offer consumers rate discounts and terms that are the same as (or better than) rate discounts and terms that the holder offers to new consumers, consistent with the holder’s documented underwriting practices and to the extent not prohibited by applicable laws. For example, a holder would comply with this requirement if it has documented underwriting practices that provide for offering rate discounts to consumers with credit scores above a certain threshold, even though the consumer would not normally qualify for that discounted rate. 51 When comparing the payments, the holder must calculate the payment for the standard mortgage based on substantially equal, monthly, fully amortizing payments based on the maximum interest rate that may apply in the first five years. The holder must calculate the non-standard mortgage payment based on substantially equal, monthly, fully amortizing payments of principal and interest using: * The fully indexed rate as of a reasonable period of time before or after the date on which the creditor receives the consumer’s application for the standard mortgage;

Answer 267

Qualified Mortgages: Rebuttable Presumption and Safe Harbor – 12 CFR 1026.43(e) The rule provides a presumption of compliance with the abilityto-repay requirements for creditors that originate certain types of loans called “qualified mortgages.” There are several categories of qualified mortgages, which are discussed below. Qualified mortgages afford creditors and assignees greater protection against liability under the ability-to-repay provisions. Qualified mortgages that are not higher-priced covered transactions receive a safe harbor under the ability-to-repay provisions, which means the presumption of compliance cannot be rebutted. A qualified mortgage is higher-priced if the loan’s APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more for first-lien loans other than those that fall within the small-creditor portfolio, temporary small-creditor balloonpayment, or balloon-payment qualified mortgage definitions, and 3.5 percentage points for first-lien loans that fall within those qualified mortgage definitions or for second-lien loans. Special APR calculation rules apply to certain adjustable-rate and step-rate loans made under the general qualified mortgage definition that took effect on March 1, 2021, for purposes of determining if the loan is a higher-priced qualified mortgage. Generally, the safe harbor provides a conclusive presumption that the creditor made a good faith and reasonable determination of the consumer’s ability to repay. Qualified mortgages that are higher-priced receive a rebuttable presumption of compliance rather than a safe harbor with the ability-to-repay provisions. This means that the loan is presumed to comply with the ability to-repay provisions, but, for example, the consumer would have the opportunity to rebut that presumption in future ability-to repay litigation. For a qualified mortgage that is a higher-priced covered transaction, the presumption of compliance is rebuttable by showing that at consummation, the consumer’s income, debt obligations, alimony, child support, and monthly payments on the loan and mortgage-related obligations and simultaneous loans of which the creditor was aware at consummation would leave the consumer with insufficient residual income or assets (other than the value of the dwelling and real property) to meet living expenses (including recurring and material non-debt obligations that the creditor was aware of at consummation). Non-HPMLs: safe harbor under ATR w/presumption of compliance that is not rebuttable HPMLs: presumption of compliance that is rebuttable The term of the loan remaining as of the date on which the recast occurs, assuming all scheduled payments have been made up to the recast date, and the payment due on the recast date is made and credited as of that date; and * The remaining loan amount, which is calculated differently depending on whether the loan is an adjustable rate mortgage, interest-only loan, or negative amortization loan (12 CFR 1026.43(d)(5)).

Answer 268

Requirements for Qualified Mortgages – Generally – 12 CFR 1026.43(e)(2) and (3) Loans that are qualified mortgages under the general qualified mortgage definition must provide for regular periodic payments that are substantially equal (except for the effect that any interest rate change after consummation has on the payment in the case of an adjustable-rate or step-rate mortgage) and may not have negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. A qualified mortgage for loans greater than or equal to $100,000 (indexed for inflation) may not have points and fees paid by the consumer that exceed 3 percent of the total loan amount (although certain “bona fide discount points” are excluded for certain loans with pricing within prescribed ranges of APOR—the average prime offer rate). The rule provides guidance on calculating points and fees and thresholds for smaller loans. 52 The rule also requires that the creditor underwrite the loan (taking into account monthly payments for mortgage-related obligations) using the maximum interest rate that will apply in the first five years after the date on which the first periodic payment is due. The general definition of a qualified mortgage also considers a loan’s pricing. Under the amended rule issued by the Bureau, effective March 1, 2021, a loan greater than or equal to $110,260 (indexed for inflation) meets the general qualified mortgage definition if the APR exceeds the APOR for a comparable transaction by less than 2.25 percentage points as of the date the interest rate is set. The amended rule provides pricing thresholds higher than 2.25 percentage points above APOR for loans with smaller loan amounts, subordinate-lien transactions, and smaller manufactured housing loans. The amended rule also includes a special rule for calculating the APR for ARMs for purposes of these pricing thresholds. For a loan to be a qualified mortgage under the general definition, the creditor must also (1) consider the consumer’s monthly debt-to income ratio or residual income; current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; and debt obligations, alimony, and child support, and (2) verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support. For transactions for which a creditor received the consumer’s application prior to the amended rule’s mandatory compliance date, October 1, 2022, creditors seeking to originate general qualified mortgages will have the option of complying with either the current general qualified mortgage definition (described above) or the definition in place prior to March 1, 2021. The older definition did not include the price-based limit described in the previous paragraph and instead required that the consumer’s total monthly debt to total monthly income not exceed 43 percent. Unlike the current definition, the older definition further required that creditors calculate debt and income for purposes of determining the consumer’s debt-to income ratio using the standards contained in former Appendix Q of Regulation Z.53 52 The definition and calculation rules for points and fees are the same as those used to determine whether a closed-end mortgage is a HOEPA loan, discussed above at 12 CFR 1026.32(b)(2) 53 The General QM Final Rule, effective March 1, 2021, removed Appendix Q from Regulation Z. However, for consumer applications received prior to October 1, 2022, creditors that rely on the older General QM definition must continue to calculate debt and income for purposes of determining the consumer’s debt-toincome ratio in accordance with Appendix Q of Regulation Z as was in effect on February 28, 2021. For consumer applications received on or after October 1, 2022, creditors must rely on the current General QM definition, which does not include Appendix Q.

Answer 269

Qualified Mortgages– Other Agencies – 12 CFR 1026.43(e)(4) Regulation Z provides a temporary category of qualified mortgages that are eligible to be purchased or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the government-sponsored enterprises or GSEs) while under the conservatorship of the Federal Housing Finance Agency (FHFA). This temporary category is commonly known as the GSE Patch. The GSE Patch is available for transactions that are both (1) consummated on or before the date the applicable GSE ceases to operate under conservatorship and (2) transactions for which the creditor receives the consumer’s application before October 1, 2022. However, the practical availability of the GSE Patch may be affected by policies or agreements created by parties other than the Bureau, such as the Preferred Stock Purchase Agreements (PSPAs), which include restrictions on GSE purchases that rely on the GSE Patch definition after July 1, 2021. Further, HUD, VA, and USDA have issued definitions for qualified mortgages for loans they insure, guarantee, or provide under applicable law. These definitions may be found under 24 CFR 201.7 and 24 CFR 203.19 (HUD), 38 CFR 36.4300 and 38 CFR 36.4500 (VA), and 7 CFR 3555.109 (USDA).

Answer 270

Mortgages that are originated and held in portfolio by certain small creditors are also qualified mortgages if they meet certain requirements. These mortgages must generally satisfy the requirements applicable to qualified mortgages, including prohibitions on negative-amortization, balloon-payment, and interest-only features; maximum loan terms of 30 years; and points-and-fees restrictions. The creditor must consider the consumer’s monthly debt-to-income ratio or residual income; current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; and debt obligations, alimony, and child support, and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support. A small creditor that satisfies the exemption criteria in 12 CFR 1026.35(b)(2)(iii)(B) and (C) is eligible to make small creditor portfolio qualified mortgages. (In contrast to 12 CFR 1026.43(f), below, eligibility for this qualified mortgage category is not conditioned on the small creditor operating in a rural or underserved area). For a period of three years after consummation, the creditor may not transfer the loan, or the loan will lose its status as a qualified mortgage. The qualified mortgage status continues under 12 CFR 1026.43(e)(5)(ii), however, if the creditor transfers the loan to another creditor that meets the requirements to be a small lender, or when the loan is transferred due to a capital restoration plan, bankruptcy, or state or federal governmental agency order, or if the mortgage is transferred pursuant to a merger or acquisition of the creditor. A qualified mortgage can be transferred after three years without losing its status.

Answer 271

Small Creditor Rural or Underserved Balloon-Payment Qualified Mortgages and Temporary Balloon-Payment Qualified Mortgages – 12 CFR 1026.43(f) and 1026.43(e)(6) Balloon-payment mortgages are qualified mortgages if they are originated and held in portfolio by small creditors operating in a rural or underserved area (see 12 CFR 1026.43(f)) and meet certain other requirements. These mortgages must satisfy certain requirements applicable to qualified mortgages, including prohibitions on negative-amortization and interest-only features; maximum loan terms of 30 years; and points-and-fees restrictions. These loans must have a term of at least five years, and a fixed interest rate, and meet certain basic underwriting standards. The creditor must consider the consumer’s monthly debt-to-income ratio or residual income; current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; and debt obligations, alimony, and child support, and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support, but without regard to the standards in Appendix Q. This category of qualified mortgage is not available for a loan that, at origination, is subject to a forward commitment to be acquired by a person that does not itself qualify for the category (under the requirements outlined in the next paragraph). A small creditor that satisfies the exemption criteria in 12 CFR 1026.35(b)(2)(iii)(A), (B), and (C) (higher-priced mortgage escrow requirements) is eligible to make rural or underserved balloon-payment qualified mortgages. For a period of three years after consummation, the creditor may not transfer the loan, or it will lose its status as a qualified mortgage. The qualified mortgage status continues under 12 CFR 1026.43(f)(2), however, if the creditor transfers the loan to another creditor that meets the requirements to be a small rural lender, or when the loan is transferred due to a capital restoration plan, bankruptcy, or state or federal governmental agency order, or if the mortgage is transferred pursuant to a merger or acquisition of the creditor. A qualified mortgage can be transferred after three years without losing its status. There is also a temporary qualified mortgage category for balloon-payment mortgages that would otherwise meet the requirements of 12 CFR 1026.43(f) but that are originated by small creditors that do not operate in a rural or underserved area. This category is applicable to covered transactions for which the application was received before April 1, 2016 (12 CFR 1026.43(e)(6)(ii)).

Answer 272

Qualified Mortgage – Seasoned Loans – 12 CFR 1026.43(e)(7) The Seasoned QM Final Rule, effective March 1, 2021, created a new category of qualified mortgage known as seasoned qualified mortgages. To be eligible to be a seasoned qualified mortgage, a covered transaction must be a first-lien, fixed-rate loan that has met certain performance requirements over a seasoning period of at least 36 months, be held in portfolio by the originating creditor or first purchaser until the end of the seasoning period (subject to certain enumerated exceptions), comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. A loan made by any creditor, regardless of size, is eligible to become a seasoned qualified mortgage if at the end of the seasoning period it meets the requirements in the Seasoned QM Final Rule. Loans that satisfy another QM definition at consummation also can be seasoned qualified mortgages if the requirements for seasoned qualified mortgages are met.

Answer 273

Under EGRRCPA, residential mortgages that are originated and held in portfolio by covered institutions are qualified mortgages if they meet certain statutory requirements. Such loans are subject to prepayment penalty limitations and must not have negative amortization or interest-only features, have points and fees within applicable limits, and consider and document debt, income and assets. The creditor must consider and document (as described in the statute) debt, income, and financial resources of the consumer in underwriting the loan. The loan loses its qualified mortgage status upon sale, assignment, or transfer, except in the case of a transfer (1) due to bankruptcy or failure; (2) to another covered institution that also retains the loan in portfolio; (3) pursuant to a merger or acquisition by or to another person who retains the loan in portfolio; or (4) to a wholly owned subsidiary, provided that the loan is considered an asset by the covered institution for regulatory accounting purposes. 54 This statutory provision is effective without any requirement to adopt regulations, and Regulation Z has not been amended to incorporate this provision as of the date of these procedures.

Answer 274

Subpart F relates to private education loans. It contains rules on disclosures 12 CFR1026.46, the right to cancel the loan 12 CFR 1026.47, and limitations on changes in terms after approval and on co-branding in the marketing of private education loans (12 CFR1026.48).

Answer 275

Special Disclosure Requirements for Private Education Loans – 12 CFR 1026.46 The disclosures required under Subpart F apply only to private education loans. Except where specifically provided otherwise, the requirements and limitations of Subpart F are in addition to the requirements of the other subparts of Regulation Z. A private education loan means an extension of credit that: * Is not made, insured, or guaranteed under title IV of the Higher Education Act of 1965; * Is extended to a consumer expressly, in whole or part, for postsecondary educational expenses, regardless of whether the loan is provided by the educational institution that the student attends; and * Does not include open-end credit or any loan that is secured by real property or a dwelling. A private education loan does not include an extension of credit in which the covered educational institution is the creditor if: The term of the extension of credit is 90 days or less; or * An interest rate will not be applied to the credit balance, and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments.

Answer 276

Content of Disclosures – 12 CFR 1026.47 Disclosure Requirements This section establishes the content that a creditor must include in its disclosures to a consumer at three different stages in the private education loan origination process: * Application or Solicitation Disclosures – With any application or solicitation; * Approval Disclosures – With any notice of approval of the private education loan; and * Final Disclosures – After the consumer accepts the loan. In addition, 12 CFR1026.48(d) requires that the disclosures must be provided at least three business days prior to disbursement of the loan funds.

Answer 277

Rights of the Consumer The creditor must disclose that, if approved for the loan, the consumer has the right to accept the loan on the terms approved for up to 30 calendar days. The disclosure must inform the consumer that the rate and terms of the loan will not change during this period, except for changes to the rate based on adjustments to the index used for the loan and other changes permitted by law. The creditor must disclose that the consumer also has the right to cancel the loan, without penalty, until midnight of the third business day following the date on which the consumer receives the final disclosures.

Answer 278

Limitations on Private Education Loans – 12 CFR 1026.48 This section contains rules and limitations on private education loans, including: 1. A prohibition on co-branding in the marketing of private education loans; 2. Rules governing the 30-day acceptance period and three business-day cancellation period and prohibition on disbursement of loan proceeds until the cancellation period has expired; 3. The requirement that the creditor obtain a a self-certification form from the consumer before consummation; and 4. The requirement that creditors in preferred lender arrangements provide certain information to covered educational institutions.

Answer 279

Co-Branding Prohibited Regulation Z prohibits creditors from using the name, emblem, mascot, or logo of a covered institution (or other words, pictures, or symbols readily identified with a covered institution) in the marketing of private education loans in a way that implies endorsement by the educational institution. Marketing that refers to an educational institution does not imply endorsement if the marketing includes a clear and conspicuous disclosure that is equally prominent and closely proximate to the reference to the institution that the educational institution does not endorse the creditor’s loans, and that the creditor is not affiliated with the educational institution. There is also an exception in cases where the educational institution actually does endorse the creditor’s loans, but the marketing must make a clear and conspicuous disclosure that is equally prominent and closely proximate to the reference to the institution that the creditor, and not the educational institution, is making the loan.

Answer 280

Private Education Loan Protections in the Event of Death or Bankruptcy – 15 U.S.C. 1650 TILA defines a cosigner with respect to a private education loan as any individual who is liable for the obligation of another without compensation regardless of how designated in the contract or instrument, and includes any person whose signature is requested as a condition to grant credit or to forbear on collection of the private education loan. This definition does not extend to obligations intended to consolidate a consumer’s preexisting private education loan. A cosigner does not include a spouse whose signature is required to perfect a security interest in the loan. EGRRCPA amended TILA to enhance consumer protections for student borrowers and cosigners of student loans. Specifically, a private education loan creditor may not declare a default or accelerate a debt against a student obligor on the sole basis of bankruptcy or death of a cosigner. Additionally, the holder of a private education loan must release, within a reasonable time frame, any cosigner of their obligations related to the loan, when the holder is notified of the death of a student obligor. The holder or servicer of the private education loan, as applicable, must notify, within a reasonable time frame, a cosigner who is released of their obligations. A private education loan creditor also must provide a student obligor the option to designate an individual to have the legal authority to act on behalf of the student obligor in the event of death of the obligor. These protections apply only to private education loan agreements entered into on or after November 24, 2018.

Answer 281

Subpart G – Special Rules Applicable To Credit Card Accounts and Open-End Credit Offered To College Students Subpart G relates to credit card accounts under an open-end (not home-secured) consumer credit plan (except for 12 CFR 1026.57(c), which applies to all open-end credit plans). This subpart contains rules regarding credit and charge card application and solicitation disclosures 12 CFR1026.60, as well as hybrid prepaid-credit cards (12 CFR 1026.61). It also contains rules on evaluation of a consumer’s ability to make the required payments under the terms of an account 12 CFR1026.51, limits the fees that a consumer can be required to pay 12 CFR1026.52, and contains rules on allocation of payments in excess of the minimum payment (12 CFR1026.53). The subpart also sets forth certain limitations on the imposition of finance charges as the result of a loss of a grace period 12 CFR 1026.54 and on increases in annual percentage rates, fees, and charges for credit card accounts 12 CFR1026.55, including the reevaluation of rate increases (12 CFR1026.59). This subpart prohibits the assessment of fees or charges for over-the-limit transactions unless the consumer affirmatively consents to the creditor’s payment of over-the-limit transactions (12 CFR1026.56). This subpart also sets forth rules for reporting and marketing of college student open-end credit (12 CFR1026.57). Finally, it sets forth requirements for the Internet posting of credit card accounts under n open-end (not home-secured) consumer credit plan (12 CFR 1026.58).

Answer 282

Evaluation of the Consumer’s Ability to Pay – 12 CFR 1026.51 Regulation Z requires credit card issuers to consider a consumer’s ability to pay before opening a new credit card account or increasing the credit limit for an existing credit card account. Additionally, the rule provides specific requirements that must be met before opening a new credit card account or increasing the credit limit on an existing account when the consumer is under the age of 21. When evaluating a consumer’s ability to pay, credit card issuers must perform a review of a consumer’s income or assets and current obligations. Card issuers are permitted, however, to rely on information provided by the consumer. The rule does not require card issuers to verify a consumer’s statements; a card issuer may base its determination of ability to repay on facts and circumstances known to the card issuer (Comment 51(a)(1)(i)- 2). A card issuer may also consider information obtained through any empirically derived, demonstrably, and statistically sound model that reasonably estimates a consumer’s income or assets. Card issuers may consider any income and assets to which the consumer has a reasonable expectation of access or may limit their consideration to the consumer’s independent income and assets. The rule also requires that issuers consider at least one of the following: * The ratio of debt obligations to income; * The ratio of debt obligations to assets; or * The income the consumer will have after paying debt obligations (i.e., residual income). The rule also provides that it would be unreasonable for a card issuer not to review any information about a consumer’s income, assets, or current obligations, or to issue a credit card to a consumer who does not have any income or assets. Because credit card accounts typically require consumers to make a minimum monthly payment that is a percentage of the total balance (plus, in some cases, accrued interest and fees), card issuers are required to consider the consumer’s ability to make the required minimum payments. Card issuers must also establish and maintain reasonable written policies and procedures to consider a consumer’s income or assets and current obligations. Because the minimum payment is unknown at account opening, the rule requires that card issuers use a reasonable method to estimate a consumer’s minimum payment. The regulation provides a safe harbor for card issuers to estimate the required minimum periodic payment if the card issuer: 1. Assumes utilization, from the first day of the billing cycle, of the full credit line that the card issuer is considering offering to the consumer; and 2. Uses a minimum payment formula employed by the card issuer for the product that the card issuer is considering offering to the consumer or, in the case of an existing account, the minimum payment formula that currently applies to that account, provided: a. If the minimum payment formula includes interest charges, the card issuer estimates those charges using an interest rate that the card issuer is considering offering to the consumer for purchases or, in the case of an existing account, the interest rate that currently applies to purchases; and b. If the applicable minimum payment formula includes mandatory fees, the card issuer must assume that such fees have been charged to the account.

Answer 283

Specific Requirements for Underage Consumers – 12 CFR 1026.51(b)(1) Regulation Z prohibits the issuance of a credit card to a consumer who has not attained the age of 21 unless the consumer has submitted a written application and the creditor has: * Information indicating that the underage consumer has an independent ability to make the required minimum payments on the account; or * The signature of a cosigner, guarantor, or joint applicant who has attained the age of 21, who has the ability to repay debts (based on 12 CFR1026.51) incurred by the underage consumer in connection with the account, and who assumes joint liability for all debts or secondary liability for any debts incurred before the underage consumer attains 21 years of age. For credit line increases: * If an account was opened based on the underage consumer’s independent ability to repay, in order to increase the consumer’s credit line before he or she turns 21, the issuer either must determine that the consumer has an independent ability to make the required minimum payments at the time of the contemplated increase, or must obtain an agreement from a cosigner, guarantor, or joint applicant who is 21 or older and who has the ability to repay debts to assume liability for any debt incurred on the account. * If the account was opened based on the ability of a cosigner over the age of 21 to pay, the issuer must obtain written consent from that cosigner before increasing the credit limit.

Answer 284

Limitations of Fees – 12 CFR 1026.52 Limitations on Fees During First Year After Account Opening – 12 CFR1026.52(a) During the first year after account opening, issuers are prohibited from requiring consumers to pay fees (other than fees for late payments, returned payments, and exceeding the credit limit) that in the aggregate exceed 25 percent of the initial credit limit in effect when the account is opened. An account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions. With regard to a covered separate credit feature and an asset feature on a prepaid account that are both accessible by a hybrid prepaid-credit card, where the credit feature is a credit card account under an open-end (not home-secured) consumer credit plan, this restriction also applies to fees or charges imposed on the asset feature of the prepaid account that are charges imposed as part of the plan under 12 CFR 1026.6(b)(3) (Comments 6(b)(3)(iii)(D)-1 and 52(a)(2)-2). NOTE: The 25 percent limitation on fees does not apply to fees assessed prior to opening the account.

Answer 285

Limitations on Penalty Fees – 12 CFR 1026.52(b) TILA requires that penalty fees imposed by card issuers be reasonable and proportional to the violation of the account terms. Among other things, the regulation prohibits credit card issuers from charging a penalty fee of more than $29 for paying late or otherwise violating the account’s terms for the first violation, $40 for an additional violation of the same type during the same billing cycle or one of the next six billing cycles, or 3 percent of the delinquent balance on the charge card account that requires payment of outstanding balances in full at the end of each billing cycle if payment has not been received for two or more consecutive billing cycles unless the issuer determines that a higher fee represents a reasonable proportion of the costs it incurs as a result of that type of violation and reevaluates that determination at least once every 12 months. 55 With regard to a covered separate credit feature and an asset feature on a prepaid account that are both accessible by a hybrid prepaid-credit card, where the credit feature is a credit card account under an openend (not home-secured) consumer credit plan, this provision also applies to any fee for violating the terms or other requirements of the credit feature, regardless of whether those fees are imposed on the credit or asset feature of the prepaid account (Comment 52(b)-3). Credit card issuers are not permitted to charge penalty fees that exceed the dollar amount associated with the consumer’s violation of the terms or other requirements of the credit card account. For example, card issuers are not permitted to charge a $40 fee when a consumer is late making a $20 minimum payment. Instead, in this example, the fee cannot exceed $20. The regulation also bans imposition of penalty fees when there is no dollar amount associated with the violation, such as fees based on “inactivity” fees based on the consumer’s failure to use the account to make new purchases, or declined transaction fees for credit transactions that the card issuer declines to authorize. With regard to a covered separate credit feature and an asset feature on a prepaid account that are both accessible by a hybrid prepaid-credit card where the credit feature is a credit card account under an open-end (not home-secured) consumer credit plan, the regulation prohibits a card issuer from imposing declined transaction fees in connection with the credit feature, regardless of whether the declined transaction fee is imposed on the credit feature or on the asset feature of the prepaid account (Comment 52(b)(2)(i)-7). The regulation also prohibits issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms. 55 The dollar amounts in this paragraph may be adjusted annually by the CFPB to reflect changes in the Consumer Price Index that warrant an increase or decrease of a whole dollar. The amounts increased in 2022 to $30 and $41 from $29 and $40, respectively, effective January 1, 2022. Further adjustments may be made in subsequent years (See 12 CFR 1026.52(b)(1)(ii)(D); Comment 52(b)(1)(ii) – 2).

Answer 286

Payment Allocation – 12 CFR 1026.53 When different rates apply to different balances on a credit card account, issuers are generally required to allocate payments in excess of the minimum payment first to the balance with the highest APR and then to any remaining portion to the other balances in descending order based on the applicable APR. For deferred interest programs, however, issuers must allocate excess payments first to the deferred interest balance during the last two billing cycles of the deferred interest period. In addition, during a deferred interest period, issuers are permitted (but not required) to allocate excess payments in the manner requested by the consumer. For accounts with secured balances, issuers are permitted (but not required) to allocate excess payments to the secured balance if requested by the consumer.

Answer 287

Double-Cycle Billing and Partial Grace Period – 12 CFR 1026.54 Issuers are generally prohibited from imposing finance charges on balances for days in previous billing cycles as a result of the loss of a grace period. In addition, when a consumer pays some, but not all, of a balance prior to the expiration of a grace period, an issuer is prohibited from imposing finance charges on the portion of the balance that has been repaid.

Answer 288

Restrictions on Applying Increased Rates to Existing Balances and Increasing Certain Fees and Charges – 12 CFR 1026.55 Unless an exception applies, a card issuer must not increase an annual percentage rate or a fee or charge required to be disclosed under 12 CFR1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on a credit card account. With regard to a covered separate credit feature and an asset feature on a prepaid account that are both accessible by a hybrid prepaid-credit card where the credit feature is a credit card account under an open-end (not home-secured) consumer credit plan, this restriction applies regardless of whether these fees or annual percentage rates are imposed on the asset feature of the prepaid account or on the credit feature (Comment 55(a)-3). There are some general exceptions to the prohibition against applying increased rates to existing balances and increasing certain fees or charges: * A temporary or promotional rate or temporary fee or charge that lasts at least six months, and that is required to be disclosed under 12 CFR1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii), provided that the card issuer complied with applicable disclosure requirements. Fees and charges required to be disclosed under 12 CFR 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) are periodic fees for issuance or availability of an open-end plan (such as an annual fee); a fixed finance charge (and any minimum interest charge) that exceeds $1; or a charge for required insurance, debt cancellation, or debt suspension; * The rate is increased due to the operation of an index available to the general public and not under the card issuer’s control (i.e., the rate is a variable rate); * The minimum payment has not been received within 60 days after the due date, provided that the card issuer complied with applicable disclosure requirements and adheres to certain requirements when a series of on-time payments are received; * The consumer successfully completes or fails to comply with the terms of a workout arrangement, provided that card issuer complied with applicable disclosure requirements and adheres to certain requirements upon the completion or failure of the arrangement; and * The APR on an existing balance or a fee or charge required to be disclosed under 12 CFR 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) has been reduced pursuant to the Servicemembers Civil Relief Act (SCRA) or a similar federal or state statute or regulation. The creditor is permitted to increase the rate, fee, or charge once the SCRA ceases to apply, but only to the rate, fee, or charge that applied prior to the reduction. Regulation Z’s limitations on the application of increased rates and certain fees and charges to existing balances continue to apply when the account is closed, acquired by another institution through a merger or the sale of a credit card portfolio, or when the balance is transferred to another credit account issued by the same creditor (or its affiliate or subsidiary). Issuers are generally prevented from increasing the APR applicable to new transactions or a fee or charge subject to 12 CFR1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year after an account is opened. After the first year, issuers are permitted to increase the APRs that apply to new transactions or a fee or charge subject to 12 CFR1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) so long as the creditor complies with the regulation’s 45-day advance notice requirement (12 CFR1026.9). Regulation Z’s limitations on the application of increased rates to existing balances and limitations on the increase of certain fees or charges apply upon cessation of a waiver or rebate of interest, fees, or charges if the issuer promotes the waiver or rebate.

Answer 289

Consumer consent requirement – Regulation Z requires an issuer to obtain a consumer’s express consent (or opt in) before the issuer may impose any fees on a consumer’s credit card account for making an extension of credit that exceeds the account’s credit limit. Prior to providing such consent, the consumer must be notified by the issuer of any fees that may be assessed for an over-the-limit transaction. If the consumer consents, the issuer is also required to provide written confirmation (or electronic confirmation if the consumer agrees) of the consumer’s consent and a notice of the consumer’s right to revoke that consent on the front page of any periodic statement that reflects the imposition of an over-the-limit fee. Prior to obtaining a consumer’s consent to the payment of over the-limit transactions, the issuer must provide the consumer with a notice disclosing, among other things, the dollar amount of any charges that will be assessed for an over-the-limit transaction, as well as any increased rate that may apply if the consumer exceeds the credit limit. Issuers are prevented from assessing any over-the-limit fee or charge on an account unless the consumer consents to the payment of transactions that exceed the credit limit.

Answer 290

Prohibited practices – Even if the consumer has affirmatively consented to the issuer’s payment of over-the-limit transactions, Regulation Z prohibits certain issuer practices in connection with the assessment of over-the-limit fees or charges. An issuer can only charge one over-the-limit fee or charge per billing cycle. In addition, an issuer cannot impose an over-the-limit fee on the account for the same transaction in more than three billing cycles. Furthermore, fees may not be imposed for the same transaction in the second or third billing cycle unless the consumer has failed to reduce the account balance below the credit limit by the payment due date in that cycle. Regulation Z also prohibits unfair or deceptive acts or practices in connection with the manipulation of credit limits in order to increase over-the-limit fees or other penalty charges. Specifically, issuers are prohibited from engaging in three practices: * Assessing an over-the-limit fee because the creditor failed to promptly replenish the consumer’s available credit; * Conditioning the amount of available credit on the consumer’s consent to the payment of over-the-limit transactions (e.g., opting in to an over-the-limit service to obtain a higher credit limit); and * Imposing any over-the-limit fee if the credit limit is exceeded solely because of the issuer’s assessment of accrued interest charges or fees on the consumer’s account.

Answer 291

Special Rules for Marketing to Students – 12 CFR 1026.57 Regulation Z establishes several requirements related to the marketing of credit cards and other open-end consumer credit plans to students at an institution of higher education, including the marketing of a covered separate credit feature accessible by a hybrid prepaid-credit card and prepaid account and a prepaid account where a covered separate credit feature accessible by a hybrid prepaid-credit card may be added in the future, to students at an institution of higher education (Comments 57(a)(1)-1, 57(a)(5)-1, and 57(c)-7). The regulation limits a creditor’s ability to offer a college student any tangible item to induce the student to apply for or participate in an open-end consumer credit plan offered by the creditor. Specifically, Regulation Z prohibits a card issuer from offering tangible items as an inducement: * On the campus of an institution of higher education; * Near the campus of an institution of higher education; or * At an event sponsored by or related to an institution of higher education A tangible item means physical items, such as gift cards, tshirts, or magazine subscriptions, but does not include nonphysical items such as discounts, reward points, or promotional credit terms. With respect to offers “near” the campus, the commentary to the regulation states that a location that is within 1,000 feet of the border of the campus is considered near the campus. Regulation Z also requires card issuers to submit an annual report to the CFPB containing the terms and conditions of business, marketing, or promotional agreements with an institution of higher education or an alumni organization or foundation affiliated with an institution of higher education

Answer 292

Online Disclosure of Credit Card Agreements – 12 CFR 1026.58 The regulation requires that issuers post credit card agreements on their websites and to submit those agreements to the CFPB for posting on a website maintained by the CFPB. There are three exceptions for when issuers are not required to provide statements to the CFPB: * The issuer has fewer than 10,000 open credit card accounts; or * The agreement currently is not offered to the public and the agreement is used only for one or more private label credit card plans with credit cards usable only at a single merchant or group of affiliated merchants and that involves fewer than 10,000 open accounts; or * The agreement currently is not offered to the public and the agreement is for one or more plans offered to test a new product offered only to a limited group of consumers for a limited time that involves fewer than 10,000 open accounts.

Answer 293

Reevaluation of Rate Increases – 12 CFR 1026.59 For any rate increase imposed on or after January 1, 2009, that requires 45 days advance notice, the regulation requires card issuers to review the account no less frequently than once each six months and, if appropriate based on that review, reduce the annual percentage rate. The requirement to reevaluate rate increases applies both to increases in annual percentage rates based on consumer-specific factors, such as changes in the consumer’s creditworthiness, and to increases in annual percentage rates imposed based on factors that are not specific to the consumer, such as changes in market conditions or the issuer’s cost of funds. If, based on its review, a card issuer is required to reduce the rate applicable to an account, the final regulation requires that the rate be reduced within 45 days after completion of the evaluation. This review must consider either the same factors on which the increase was originally based or the factors the card issuer currently considers in determining the annual percentage rate applicable to similar new credit card accounts.

Answer 294

Hybrid Prepaid-Credit Cards – 12 CFR 1026.61 Generally, this section applies to credit offered in connection with a prepaid account. A prepaid card is a hybrid prepaid-credit card when it has a separate accessible credit feature, or a credit feature structured as a negative balance on the asset feature of the prepaid account (except as described below). Further, a hybrid prepaid-credit card is a credit card for the purposes of this regulation with respect to those credit features. A prepaid card is a hybrid prepaid-credit card with respect to a separate credit feature when it is a single device that can be used from time to time to access the separate credit feature where the following two conditions are both satisfied: (1) the card can be used to draw, transfer, or authorize the draw or transfer of credit from the separate credit feature in the course of authorizing, settling, or otherwise completing transactions conducted with the card to obtain goods or services, obtain cash, or conduct person-to-person transfers; and (2) the separate credit feature is offered by the prepaid account issuer, its affiliate, or its business partner. A separate credit feature that is accessed by a hybrid prepaid-credit card is described as a “covered separate credit feature.” A prepaid card is not a hybrid prepaid-credit card with respect to a separate credit feature if it does not meet the two conditions discussed above, although that separate credit feature may be subject to other provisions of Regulation Z depending on its own terms and conditions, independent of the connection to the prepaid account. Generally, the regulation prohibits structuring a hybrid prepaidcredit card to access credit through a negative balance on the asset feature of a prepaid account. However, a prepaid card is not a hybrid prepaid-credit card with respect to credit extended through a negative balance on the asset feature of a prepaid account if several conditions are met. One condition is that the prepaid card cannot access credit from a covered separate credit feature that is offered by a prepaid account issuer or its affiliate. In addition, the prepaid account issuer must have an established policy and practice of either: declining to authorize any transaction for which it reasonably believes a consumer has insufficient or unavailable funds in the asset feature of the prepaid account at the time the transaction is authorized to cover the amount of the transaction; or declining to authorize such transactions except when (1) the amount of the transaction will not cause the asset feature balance to become negative by more than $10 at the time of the authorization, or (2) the issuer has received an instruction, confirmation, or request to load funds from a separate asset account to the prepaid account, but the funds have not yet settled and the amount of the transaction will not cause the asset balance to become negative at the time of the authorization by more than the incoming or requested load amount. Furthermore, under this exception, the issuer may not impose any of the following fees or charges on the asset feature of the prepaid account: * Fees or charges for opening, issuing, or holding a negative balance on the asset feature, or for the availability of credit, whether imposed on a one-time or periodic basis;56 * Fees or charges that will be imposed only when credit is extended on the asset feature or when there is a negative balance on the asset feature;57 and * Fees or charges where the amount of the fee or charge is higher when credit is extended on the asset feature or when there is a negative balance on the asset feature. * Issuers must wait at least 30 days after a prepaid account is registered before opening a covered separate credit feature accessible by a hybrid prepaid-credit card, making a solicitation or providing an application to open a covered separate credit feature that could be accessible by the hybrid prepaid-credit card, or allowing an existing credit feature opened prior to the consumer obtaining the prepaid account to become a covered separate credit feature accessible by the hybrid prepaid-credit card. Issuers must obtain an application or specific request from the consumer to link such a credit feature to a prepaid account (Comment 12(a)(1)-7.ii).

Answer 295

Civil Liability –TILA Sections 129B, 129C, 130 and 131 If a creditor fails to comply with any requirements of the TILA, other than with the advertising provisions of chapter 3, it may be held liable to the consumer for: * Actual damage, and * Cost of any successful legal action together with reasonable attorney’s fees. The creditor also may be held liable for any of the following: * In an individual action, twice the amount of the finance charge involved. * In an individual action relating to an open-end credit transaction that is not secured by real property or a dwelling, twice the amount of the finance charge involved, with a minimum of $500 and a maximum of $5,000 or such higher amount as may be appropriate in the case of an established pattern or practice of such failure. In an individual action relating to a closed-end credit transaction secured by real property or a dwelling, not less than $400 and not more than $4,000. * In a class action, such amount as the court may allow (with no minimum recovery for each class member). However, the total amount of recovery in any class actions arising out of the same failure to comply by the same creditor cannot be more than $1 million or 1 percent of the creditor’s net worth, whichever is less. A creditor that fails to comply with TILA Section 129, 15 U.S.C. Section 1639 (requirements for certain mortgages), may be held liable to the consumer for all finance charges and fees paid by the consumer unless the creditor demonstrates that the failure was not material. A mortgage originator that is not a creditor and that fails to comply with TILA Section 129B (requirements for mortgage loan originators) also may be liable to consumers for the greater of actual damages or an amount equal to three times the total amount of direct and indirect compensation or gain to the mortgage originator in connection with the loan, plus costs, including reasonable attorney’s fees. In addition, TILA Section 130(a) provides that a creditor may be liable for failure to comply with the ability-to-repay requirements of TILA Section 129C(a) unless the creditor demonstrates that failure to comply was not material. Generally, civil actions that may be brought against a creditor may be maintained against any assignee of the creditor only if the violation is apparent on the face of the disclosure statement or other documents assigned, except where the assignment was involuntary. For high-cost mortgage loans (under 12 CFR 1026.32(a)), any subsequent purchaser or assignee is subject to all claims and defenses that the consumer could assert against the creditor, unless the assignee demonstrates that it could not reasonably have determined that the loan was a high-cost mortgage loan subject to (12 CFR1026.32). In specified circumstances, the creditor or assignee has no liability if it corrects identified errors within 60 days of discovering the errors and prior to the institution of a civil action or the receipt of written notice of the error from the obligor. Additionally, a creditor and assignee will not be liable for bona fide errors that occurred despite the maintenance of procedures reasonably adapted to avoid any such error. Moreover, the TILA also provides consumers with the right to assert a violation of the TILA’s anti-steering provisions or the ability-to-repay standards for residential mortgage loan requirements “as a matter of defense by recoupment or setoff” against a foreclosure action. In general, the amount of recoupment or setoff shall be equal to the amount that the consumer would be entitled to generally under 15 U.S.C. 1640(a) for a valid claim, plus the cost to the consumer of the action (including reasonable attorney’s fees). Refer to Sections 129B, 129C, 130, and 131 of TILA for more information. 56 This provision does not prohibit fees or charges to open, issue, or hold the prepaid account generally, where the amount of the fee or charge imposed on the asset feature is not higher based on whether credit might be offered or has been accepted, whether or how much credit the consumer has accessed, or the amount of credit available. 57 This provision does not prohibit fees or charges for the actual c

Answer 296

Criminal Liability –TILA Section 112 Anyone who willingly and knowingly fails to comply with any requirement of the TILA will be fined not more than $5,000 or imprisoned not more than one year, or both.

Answer 297

Administrative Actions – TILA Section 108 TILA authorizes federal regulatory agencies, 58 when carrying out enforcement activities, to require financial institutions to make monetary and other adjustments to the consumers’ accounts when the true finance charge or APR exceeds the disclosed finance charge or APR by more than a specified accuracy tolerance. That authorization extends to unintentional errors, including isolated violations (e.g., an error that occurred only once or errors, often without a common cause, that occurred infrequently and randomly). Under certain circumstances, the TILA requires federal regulatory agencies to order financial institutions to reimburse consumers when understatement of the APRor finance charge involves: * Patterns or practices of violations (e.g., errors that occurred, often with a common cause, consistently or frequently, reflecting a pattern with a specific type or types of consumer credit); * Gross negligence; or * Willful noncompliance intended to mislead the person to whom the credit was extended. Any administrative enforcement proceeding that may be brought by a regulatory agency against a creditor may be maintained against any assignee of the creditor if the violation is apparent on the face of the disclosure statement or other documents assigned, except where the assignment was involuntary under Section 131 (15 U.S.C. 1641).

Answer 298

Specific Defenses –TILA Section 108 Defense Against Civil, Criminal, and Administrative Actions A financial institution in violation of TILA may avoid liability by: Discovering the error before an action is brought against the financial institution, or before the consumer notifies the financial institution, in writing, of the error; * Notifying the consumer of the error within 60 days of discovery; and * Making the necessary adjustments to the consumer’s account, also within 60 days of discovery (The consumer will pay no more than the lesser of the finance charge actually disclosed or the dollar equivalent of the APR actually disclosed). The above three actions also may allow the financial institution to avoid a regulatory order to reimburse the customer. An error is “discovered” if it is: * Discussed in a final, written report of examination; * Identified through the financial institution’s own procedures; or * An inaccurately disclosed APR or finance charge included in a regulatory agency notification to the financial institution. When a disclosure error occurs, the financial institution is not required to re-disclose after a loan has been consummated or an account has been opened. If the financial institution corrects a disclosure error by merely re-disclosing required information accurately, without adjusting the consumer’s account, the financial institution may still be subject to civil liability and an order to reimburse from its regulator. The circumstances under which a financial institution may avoid liability under the TILA do not apply to violations of the Fair Credit Billing Act (chapter 4 of the TILA). 58 For FFIEC guidance on how agencies implement this provision, see FFIEC, Administrative Enforcement of the Truth in Lending Act, 63 Fed. Reg. 47495 (Sept. 8, 1998).

Answer 299

Additional Defenses Against Civil Actions The financial institution may avoid liability in a civil action if it shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error that occurred despite the maintenance of procedures to avoid the error. A bona fide error may include a clerical, calculation, computer malfunction, programming, or printing error. It does not include an error of legal judgment. Showing that a violation occurred unintentionally could be difficult if the financial institution is unable to produce evidence that explicitly indicates it has an internal controls program designed to ensure compliance. The financial institution’s demonstrated commitment to compliance and its adoption of policies and procedures to detect errors before disclosures are furnished to consumers could strengthen its defense.

Answer 300

Statute of Limitations – TILA Sections 108, 129, 129B, 129C, 129D, 129E, 129F, 129G, 129H, and 130 In general, civil actions may be brought within one year after the violation occurred. For private education loans, civil actions may be brought within one year from the date on which the first regular payment of principal and interest is due. After that time, and if allowed by state law, the consumer may still assert the violation as a defense if a financial institution were to bring an action to collect the consumer’s debt. A civil action for a violation of TILA Section 129 (requirements for certain mortgages), 129B (residential mortgage loan origination), or 129C (minimum standards for residential mortgage loans) may be brought three years from the date of the occurrence of the violation (as compared with one year for most other TILA violations) (TILA Section 130(e)). Moreover, TILA provides that when a creditor, assignee, other holder, or anyone acting on such a person’s behalf initiates a foreclosure action on, or any other action to collect the debt in connection with a residential mortgage loan, a consumer may assert a violation of TILA Section 129B(c)(1) or (2) or 129C(a) “as a matter of defense by recoupment or set off” (TILA section 130(k)). There is no time limit on the use of this defense and the amount of recoupment or setoff is limited, with respect to the special statutory damages, to no more than three years of finance charges and fees. Criminal actions and actions brought by regulators, 59 are not subject to the general one-year statute of limitations. Actions brought by a state attorney general to enforce a violation of section 129, 129B, 129C, 129D, 129E, 129F, 129G, or 129H may be brought not later than 3 years after the date on which the violation occurs. However, administrative enforcement actions under the policy guide involving erroneously disclosed APRs and finance charges may be subject to time limitations by the TILA. Those limitations range from the date of the last regulatory examination of the financial institution, to as far back as 1969, depending on when loans were made, when violations were identified, whether the violations were repeat violations, and other factors. There is no time limitation on willful violations intended to mislead the consumer. A general summary of the various time limitations that otherwise apply follows. * For open-end credit, reimbursement applies to violations not older than two years. * For closed-end credit, reimbursement is generally directed for loans with violations occurring since the immediately preceding examination. 59 However, reimbursement required by regulatory action may be limited to the last examination conducted at the institution.

Answer 301

Rescission Rights (Open-End and Closed-End Credit) – 12 CFR 1026.15 and 1026.23 TILA provides that for certain transactions secured by the consumer’s principal dwelling, a consumer has three business days after becoming obligated on the debt to rescind the transaction. The right of rescission allows consumer(s) time to reexamine their credit agreements and cost disclosures and to reconsider whether they want to place their homes at risk by offering them as security for the credit. A higher-priced mortgage loan (whether or not it is a HOEPA loan) having a prepayment penalty that does not conform to the prepayment penalty limitations (12 CFR 1026.32(c) and (d) and 12 CFR 1026.43(g) (subject to certain exclusions)). is also subject to a three-year right of rescission. Transactions exempt from the right of rescission include residential mortgage transactions (12 CFR1026.2(a)(24)) and refinancings or consolidations with the original creditor where no “new money” is advanced. If a transaction is rescindable, consumers must be given a notice explaining that the creditor has a security interest in the consumer’s home, that the consumer may rescind, how the consumer may rescind, the effects of rescission, and the date the rescission period expires. To rescind a transaction, a consumer must notify the creditor in writing by midnight of the third business day after the latest of three events: * Consummation of the transaction; * Delivery of material TILA disclosures; or * Receipt 60 of the required notice of the right to rescind. For purposes of rescission, business day means every calendar day except Sundays and the legal public holidays (12 CFR 1026.2(a)(6)). The term “material disclosures” is defined in 12 CFR1026.23(a)(3) to mean 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 12 CFR1026.32(c) and (d) and 12 CFR 1026.43(g). The creditor may not disburse any monies (except into an escrow account) and may not provide services or materials until the three-day rescission period has elapsed and the creditor is reasonably satisfied that the consumer has not rescinded. If the consumer rescinds the transaction, the creditor must refund all amounts paid by the consumer (even amounts disbursed to third parties) and terminate its security interest in the consumer’s home. A consumer may waive the three-day rescission period and receive immediate access to loan proceeds if the consumer has a “bona fide personal financial emergency.” The consumer must give the creditor a signed and dated waiver statement that describes the emergency, specifically waives the right, and bears the signatures of all consumers entitled to rescind the transaction. The consumer provides the explanation for the bona fide personal financial emergency, but the creditor decides the sufficiency of the emergency. If the required rescission notice or material TILA disclosures are not delivered or if they are inaccurate, the consumer’s right to rescind may be extended from three days after becoming obligated on a loan to up to three years. 60 12 CFR 1026.15(b) and 1026.23(b)(1) were amended to include the electronic delivery of the notice of the right to rescind. If a paper notice of the right to rescind is used, a creditor must deliver two copies of the notice to each consumer entitled to rescind. However, under the final rule on electronic delivery of disclosures if the notice is in electronic form, in accordance with the consumer consent and other applicable provisions of the E-Sign Act, only one copy to each customer is required.

Answer 302

To rescind a transaction, a consumer must notify the creditor in writing by midnight of the third business day after the latest of three events: * Consummation of the transaction; * Delivery of material TILA disclosures; or * Receipt 60 of the required notice of the right to rescind.

Answer 303

Determining Whether TIL Restitution is Required Overview This section provides information that relates to the identification of Truth in Lending violations subject to restitution, restitution calculations, and the determination of appropriate corrective action. Section 108(e)(2) of the Truth in Lending Act (Act) directs that the FDIC shall require “adjustments” (restitution) to consumers for understated annual percentage rates (APR) or finance charges (FC).1 Unless other statutory or regulatory exemptions are met, the FDIC is required to seek restitution and may not waive or grant relief from restitution. If an institution does not voluntarily comply with the law and make restitution, §108(e)(4) of the Act authorizes the FDIC to order institutions to make monetary adjustments to the accounts of consumers where an APR or FC was understated. In general, the FDIC must require restitution when understatement of the cost of borrowing results from a clear and consistent pattern or practice of violations, gross neglect, or a willful violation intended to mislead the consumer. This parallels the restitution requirements of §108(e)(2) of the Act. In such instances, a file search may be requested to detect loans containing specific problems requiring restitution. 1 For the purposes of this Manual, when referring to adjustments under Section 108(e)(2) of the Act, the term “restitution” will be used consistently to refer to all reimbursements, adjustments, or credits paid to consumers in connection with violations of the Act.

Answer 304

Historically, the FDIC has treated a request made by nonmember banks seeking relief from making restitution under the Truth in Lending Act, 15 USC §1601 et seq. (TILA), as an application under its regulations. The Board has delegated authority to the Director of the Division of Depositor and Consumer Protection to grant or deny these requests. The Director may further delegate this authority to the Regional Directors, but only to deny requests where the amount of restitution totals less than $25,000. The TILA grants the enforcement agencies very little discretion to grant relief from restitution for violations. Because of this limited discretion, the FDIC has not been able to grant relief in many instances. Should a nonmember bank wish to pursue a request for relief or reconsideration, the request will be processed within the following time frames: (see this manual section, p.1 right-hand column)

Answer 305

Legal Requirements Section 108(e) of the TILA, which governs enforcement of TILA, provides a very specific framework for requiring agency action on restitution. Once the FDIC determines that a disclosure error involving an inaccurate APR or finance charge has occurred, and that the error has resulted from “gross negligence,” or a “clear and consistent pattern or practice of violations,” the agency shall require an adjustment unless one of four stated exceptions applies, in which case the agency need not require an adjustment. If the exceptions apply, or in cases of similar disclosure errors, an agency may require an adjustment. There are four instances where the FDIC has discretion to waive restitution. Three of these exceptions are straightforward and fact specific: 1. The error involves a fee or charge that would otherwise be excludable in computing the finance charge. 2. The error involved a disclosed amount which was 10 percent or less of the amount that should have been disclosed and either the annual percentage rate (APR) or finance charge was disclosed correctly; or 3. The error involved a total failure to disclose either the APR or finance charge. 4. The fourth exception is the one most frequently cited by an institution in requesting relief. It is the one that is most difficult to meet since it contains four elements, all four of which must be met for the exception to apply. The conditions are that: ° The error resulted from a unique circumstance; ° The disclosure violations are clearly technical and nonsubstantive; ° The disclosure violations do not adversely affect information provided to the consumer; and ° The disclosure violations have not misled or otherwise deceived the consumer.

Answer 306

Under provisions of the Act, a financial institution will generally have no civil or regulatory liability if it takes two affirmative corrective actions. Within 60 days of “discovering” an error (but before institution of a civil action or receipt of a written notice of error from a consumer), the financial institution must both: * Notify the consumer of the error, and * Provide restitution to the consumer for overcharges An error is “discovered” if the institution either identifies the error through its own procedures or if it is disclosed in a written examination report. If the financial institution attempts to correct a disclosure error by merely re-disclosing the required information accurately, without providing restitution to the consumer, correction has not been effected. Consumer restitution is an inseparable part of the correction action.

Answer 307

Procedures for Making a Request If an institution requests relief from restitution, it should do so within 60 days of receipt of the report of examination containing the request to conduct a file search and make restitution to affected customers. The request should be directed to the attention of the Regional Director and shall contain a complete and concise statement of the action requested, all relevant facts, the reasons and analysis relied upon as the basis for such requested action, and all supporting documentation. The Regional Director will notify the institution of the receipt of the request and that pending a final determination; the institution is not required to complete corrective action on the restitution request. If the initial request for relief is denied, the institution may petition the FDIC for reconsideration within 15 days of written receipt of the denial by filing a request for reconsideration with the appropriate Regional Director. The FDIC will acknowledge receipt of reconsideration within 15 days and will provide the applicant with written notification of its determination within 60 days of receipt of the request for reconsideration.

Answer 308

Process for Making Restitution Restitution must be made expeditiously. When lump sum payments to consumers are required to be made, they must be provided to the consumer either by official check or a deposit into an existing unrestricted consumer asset account, such as an unrestricted savings, checking or NOW account. If, however, the loan that triggered restitution is delinquent, in default, or has been charged off, the institution may apply all or part of the restitution to the amount past due, if permissible under law. There have been instances where institution personnel have inappropriately asked consumers to return restitution checks to the institution. This is not permissible. The FDIC views any such attempt to prevent unrestricted access by the consumer to restitution proceeds as a serious breach of fiduciary duty as well as a violation of law and regulation. These violations will be subject to enforcement action including, but not limited to, assessment of civil money penalties, orders to cease and desist, and possible removal/prohibition orders.

Answer 309

Determining Whether a Pattern or Practice Exists The Truth in Lending Act (§108(e)) requires restitution when a disclosure error involving an understated APR or finance charge exceeds the allowed tolerance and results from a “clear and consistent pattern or practice of violations.” The term “pattern or practice” is not defined by the Act, Regulation Z or the Official Staff Commentary to the Regulation, the Interagency Policy Guide, or the FFIEC’s interpretive Questions and Answers. However, the usual interpretation has been that a “pattern or practice” exists where there are more than isolated occurrences involving violations; however, a determination of whether a “pattern or practice” exists will depend on the facts and circumstances of individual situations. Examiners should use the following guidance to determine if a pattern or practice exists for restitution purposes during the review of their initial sample of loans: * If the frequency of a violation represents at least ten percent of the credit transactions sampled that have the same features or that are subject to the same regulatory requirements; and * Within the given category of credit transactions two or more violations of the same type have been identified; then * Examiners should determine if the cause of the violation is other than a random error. This may require the examiner to expand the sample of types of loans with violations to verify if the hypothesis of a particular pattern or practice is correct. In situations involving small samples where the number or percentage of violations noted are within the lower ranges of the minimum frequency requirements, examiners should always review additional files of the same type (if available) to confirm or refute the initial hypothesis. Satisfying any one of the following three criteria will help demonstrate the existence of a pattern OR practice leading to violations discovered during the sampling process: * Conduct grounded in written or unwritten policy, procedure or established practice. * Similar conduct by an institution toward multiple consumers. * Conduct having some common source or cause within the institution’s control. Examiners should note that the minimum number of two violations would satisfy the ten percent minimum frequency requirement only in samples containing fewer than 25 loans. In a sample containing 55 loan transactions, at least six violations would be required to demonstrate a ten percent frequency for consideration of a hypothesis that a pattern or practice may exist. Examiners should be certain that both the number of violations (numerator) and total sample of credit features reviewed (denominator) support their determination. Properly identifying the universe being sampled for the denominator is a key factor in this process. * For example, samples of unsecured installment loans are normally separated from home mortgage loans, but it may be reasonable to combine them when a violation is discovered that involves the same or similar omission of creditinsurance disclosures, even though the types of loans are quite different. A review of two mortgage loans and three unsecured consumer loans, where credit life insurance was financed as part of the transactions, all lacked the affirmative written request for insurance and accompanying initials or signature, thereby reflecting a pattern or practice leading to the violations. * In other cases, some combinations or separations of samples may be impacted by findings concerning the separation of banking functions, such as between employees or between different branch offices of the institution. For example, it is discovered that a new loan officer in the installment loan area has not been disclosing the amount of the premiums for disability insurance to customers, yet the mortgage loan department provides the correct disclosure when offering that insurance to customers. In this situation, it would be more appropriate to separate the samples from both departments because the cause of the error is solely within the installment loan area and confined to one loan officer. * In another example, in a review of 65 consumer loans, errors in credit insurance disclosures were discovered in all six loans involving consumer purchases of credit life insurance; however, no errors were discovered in 59 loans where the consumer did not purchase credit insurance. The frequency of violations in this case is 100 percent (six of six instances) as these were the loans where the disclosures were required to be made but were not made correctly. * Another example would be where violations are found involving private mortgage insurance (PMI). To further test whether this error would constitute a pattern or practice, the examiner should sample additional mortgage loans where the purchase of PMI was required. It would not be appropriate to consider loans where PMI was not a requirement for the loan. In a situation where violations are discovered in some construction loans, it would not be correct to consider all real estate loans as the applicable universe. The universe in that situation should consist of only construction loans to determine whether a particular pattern or practice was the cause of the violation.

Answer 310

Documenting Reimbursable Truth in Lending Violations Truth in Lending reimbursable violations will be included under a separate heading, “Truth in Lending Violations Subject to Restitution,” in the applicable Level 3 and Level 2 Violations pages. The SOURCE System will code these violations as reimbursable. In the text of the violation write-up, the following information will be provided to support the presence of a “pattern or practice” for each type of reimbursable Truth in Lending violation: * Type of loan; * Special characteristics or features, if any; and * Number of loans sampled with reimbursement violations. For violations involving both understated annual percentage rates (APR) and finance charges, the larger of the reimbursable amounts will be identified. In addition to the above information, the examiners will forward to the Regional Office or Field Office the following for each type of reimbursable violation cited (as applicable): * APR calculation printouts; * TRID disclosures; * Contract note; * Commitment letter; * Private mortgage insurance agreements; * Interest rate indices; * Trial balances, loan history, or payment record showing first payment and at least one subsequent payment; * Itemization of amount financed (if separate)/Good Faith Estimate; * Amortization schedule; and * Any other documentation supporting adjustments to the amount financed (e.g., credit insurance application forms, payment or rate change notices, etc.)

Answer 311

Real Estate Settlement Procedures Act (RESPA) Introduction The Real Estate Settlement Procedures Act of 1974 (RESPA) (12 U.S.C. 2601 et seq.) (the Act) became effective on June 20, 1975. The Act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The Act also prohibits specific practices, such as kickbacks, and places limitations upon the use of escrow accounts. The Department of Housing and Urban Development (HUD) originally promulgated Regulation X, which implements RESPA.

Answer 312

Congress has amended RESPA significantly since its enactment. The National Affordable Housing Act of 1990 amended RESPA to require detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing. It also requires disclosures for mortgage escrow accounts at closing and annually thereafter, itemizing the charges to be paid by the borrower and what is paid out of the account by the servicer. In October 1992, Congress amended RESPA to cover subordinate lien loans. Congress, when it enacted the Economic Growth and Regulatory Paperwork Reduction Act of 1996, 1 further amended RESPA to clarify certain definitions, including “controlled business arrangement,” which was changed to “affiliated business arrangement.” The changes also reduced the disclosures under the mortgage servicing provisions of RESPA. In 2008, HUD issued a RESPA Reform Rule (73 Fed. Reg. 68204, November 17, 2008) that included substantive and technical changes to the existing RESPA regulations and different implementation dates for various provisions. Substantive changes included a standard Good Faith Estimate (GFE) form and a revised HUD-1 Settlement Statement that were required as of January 1, 2010. Technical changes, including streamlined mortgage servicing disclosure language, elimination of outdated escrow account provisions, and a provision permitting an “average charge” to be listed on the GFE and HUD-1 Settlement Statement, took effect on January 16, 2009. In addition, HUD clarified that all disclosures required by RESPA are permitted to be provided electronically, in accordance with the Electronic Signatures in Global and National Commerce Act (E-Sign).2 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 (July 10, 2010) (Dodd-Frank Act) granted rule-making authority under RESPA to the Consumer Financial Protection Bureau (CFPB) and, with respect to entities under its jurisdiction, generally granted authority to the CFPB to supervise for and enforce compliance with RESPA and its implementing regulations.3 In December 2011, the CFPB restated HUD’s implementing regulation at 12 CFR Part 1024 (76 Fed. Reg. 78978) (December 20, 2011). Since December 2011, the CFPB has issued a series of final rules amending Regulation X. On January 17, 2013, the CFPB issued a final rule that implemented certain provisions of Title XIV of the Dodd-Frank Act and included substantive and technical changes to the existing regulations. (78 Fed. Reg. 10695) (February 14, 2013). Substantive changes included modifying the servicing transfer notice requirements and implementing new procedures and notice requirements related to borrowers’ error resolution requests and information requests. The amendments also included new provisions related to escrow payments, force-placed insurance, general servicing policies, procedures, and requirements, early intervention, continuity of contact, and loss mitigation. The amendments were effective as of January 10, 2014. Subsequently, on July 10, 2013, September 13, 2013, and October 22, 2014, the CFPB issued final rules to further amend Regulation X ((78 Fed. Reg. 44685) (July 24, 2013), (78 Fed. Reg. 60381) (October 1, 2013), and (79 Fed. Reg. 65299) (November 3, 2014)). The final rules included substantive and technical changes to the existing regulations, including revisions to provisions on the relation to state law of Regulation X’s servicing provisions, to the loss mitigation procedure requirements, and to the requirements relating to notices of error and information requests. On October 15, 2013, the CFPB issued an interim final rule to further amend Regulation X (78 Fed. Reg. 62993) (October 23, 2013) to exempt servicers from the early intervention requirements in certain circumstances. The Regulation X amendments were effective as of January 10, 2014. On December 31, 2013, the CFPB published final rules implementing Sections 1098(2) and 1100A(5) of the DoddFrank Act, which direct the CFPB to publish a single, integrated disclosure for mortgage transactions, which includes mortgage disclosure requirements under the Truth in Lending Act (TILA) and Sections 4 and 5 of RESPA. These amendments are referred to in this document as the “TILARESPA Integrated Disclosure Rule” or “TRID,” and are applicable to covered closed-end mortgage loans for which a creditor or mortgage broker receives an application on or after October 3, 2015. As a result, Regulation Z now houses the integrated forms, timing, and related disclosure requirements for most closed-end consumer mortgage loans. The new integrated disclosures are not used to disclose information about reverse mortgages, home equity lines of credit (HELOCs), chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages must continue to use, as applicable, the GFE, HUD-1 Settlement Statement, and Truth in Lending (TIL) disclosures. On August 4, 2016, the CFPB issued a final rule to further clarify, revise, and amend provisions of Regulation X as well as Regulation Z, the regulation implementing TILA. (81 Fed. Reg. 72160) (October 19, 2016). The amendments in the final rule are referenced in this document as the “2016 Servicing Rule.” The 2016 Servicing Rule establishes a definition of successor in interest and provides that confirmed successors in interest are considered “borrowers” for the purposes of Regulation X’s mortgage servicing provisions. Confirmed successor in interest means a successor in interest once a servicer has confirmed the successor in interest’s identity and ownership interest in a property that secures a mortgage loan subject to Subpart C of Regulation X. The 2016 Servicing Rule also addresses compliance with certain servicing requirements when a person is a debtor in bankruptcy or sends a cease communication request under the Fair Debt Collection Practices Act (FDCPA). Additionally, the 2016 Servicing Rule clarifies, revises, or amends provisions regarding force-placed insurance notices, policy and procedure requirements, early intervention, and loss mitigation requirements under Regulation X’s mortgage servicing provisions; and which loans are considered in determining whether a servicer qualifies as a small servicer, certain periodic statement requirements relating to bankruptcy and charge-off, and prompt crediting requirements under Regulation Z’s mortgage servicing provisions. The 2016 Servicing Rule was effective October 19, 2017, except for the provisions related to successors in interest and periodic statements for borrowers in bankruptcy, which take effect on April 19, 2018. The CFPB concurrently issued an interpretive rule under the FDCPA to clarify the interaction of the FDCPA and specified mortgage servicing rules in Regulations X and Z. (81 Fed. Reg. 71977) (October 19, 2016). 4 This interpretive rule constitutes an advisory opinion for purposes of the FDCPA and provides safe harbors from liability for servicers acting in compliance with it. On October 4, 2017, the CFPB issued an interim final rule amending a provision of the 2016 Servicing Rule relating to the timing for servicers to provide modified written early intervention notices under Regulation X to borrowers who have invoked their cease communication rights under the FDCPA. (82 FR 47953) (October 16, 2017). The interim final rule was effective October 19, 2017. 1 Pub. L. 104-208, Div. A., Title II § 2103 (c), September 30, 1996. 2 15 U.S.C. 7001 et seq. 3 Dodd-Frank Act Secs. 1002(12)(M), 1024(b)-(c), and 1025(b)-(c); 1053; 12 U.S.C. 5481(12)(M), 5514(b)-(c), and 5515 (b)-(c). 4 See Safe Harbors from Liability under the Fair Debt Collection Practices Act for Certain Actions Taken in Compliance with Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) (81 Fed. Reg. 71977) (Oct. 19, 2016) (hereinafter 2016 FDCPA Interpretive Rule). The interpretations contained in this interpretive rule are included in Regulation X comments 30(d)-1 and 39(d)-2; Regulation Z comment 2(a)(11)-4.ii. 4 See Safe Harbors from Liability under the Fair Debt Collection Practices Act for Certain Actions Taken in Compliance with Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) (81 Fed. Reg. 71977) (Oct. 19, 2016) (hereinafter 2016 FDCPA Interpretive Rule). The interpretations contained in this interpretive rule are included in Regulation X comments 30(d)-1 and 39(d)-2; Regulation Z comment 2(a)(11)-4.ii.

Answer 313

The new integrated disclosures are not used to disclose information about reverse mortgages, home equity lines of credit (HELOCs), chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages must continue to use, as applicable, the GFE, HUD-1 Settlement Statement, and Truth in Lending (TIL) disclosures.

Answer 314

Subpart A – General Provisions Coverage – 12 CFR 1024.5(a) RESPA is applicable to all “federally related mortgage loans,” except as provided under 12 CFR 1024.5(b) and 1024.5(d), discussed below. “Federally related mortgage loans” are defined as: Loans (other than temporary loans), including refinancings that satisfy the following two criteria: * First, the loan is secured by a first or subordinate lien on residential real property, located within a state, upon which either: o A one-to-four family structure is located or is to be constructed using proceeds of the loan (including individual units of condominiums and cooperatives); or o A manufactured home is located or is to be constructed using proceeds of the loan. * Second, the loan falls within one of the following categories: o Loans made by a lender,5 creditor, 6 dealer;7 o Loans made or insured by an agency of the federal government; o Loans made in connection with a housing or urban development program administered by an agency of the federal government; o Loans made and intended to be sold by the originating lender or creditor to FNMA, GNMA, or FHLMC (or its successor);8 or o Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation. “Federally related mortgage loans” are also defined to include installment sales contracts, land contracts, or contracts for deeds on otherwise qualifying residential property if the contract is funded in whole or in part by proceeds of a loan made by a lender, specified federal agency, dealer or creditor subject to the regulation. 5 A lender includes financial institutions either regulated by, or whose deposits or accounts are insured by, any agency of the federal government. 6 A creditor is defined in Section 103(g) of the Consumer Credit Protection Act (15 U.S.C. 1602(g)). RESPA covers any creditor that makes or invests in residential real estate loans aggregating more than $1,000,000 per year. 7 “Dealer” is defined in Regulation X to mean a seller, contractor, or supplier of goods or services. Dealer loans are covered by RESPA if the obligations are to be assigned before the first payment is due to any lender or creditor otherwise subject to the regulation.

Answer 315

RESPA is applicable to all “federally related mortgage loans,” except as provided under 12 CFR 1024.5(b) and 1024.5(d), discussed below. “Federally related mortgage loans” are defined as: Exemptions – 12 CFR 1024.5(b) The following transactions are exempt from coverage: * A loan primarily for business, commercial or agricultural purposes (definition identical to Regulation Z, 12 CFR 1026.3(a)(1)). * A temporary loan, such as a construction loan. (The exemption does not apply if the loan is used as, or may be converted to, permanent financing by the same financial institution or is used to finance transfer of title to the first user of the property.) If the lender issues a commitment for permanent financing, it is covered by the regulation. * Any construction loan with a term of two years or more is covered by the regulation, unless it is made to a bona fide contractor. “Bridge” or “swing” loans are not covered by the regulation. * A loan secured by vacant or unimproved property where no proceeds of the loan will be used to construct a oneto-four family residential structure. If the proceeds will be used to locate a manufactured home or construct a structure within two years from the date of settlement, the loan is covered. * An assumption, unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption. * A conversion of a loan to different terms which are consistent with provisions of the original mortgage instrument, as long as a new note is not required, even if the lender charges an additional fee for the conversion. 9 * A bona fide transfer of a loan obligation in the secondary market. (However, the mortgage servicing requirements of Subpart C, 12 CFR 1024.30-41, still apply.) Mortgage broker transactions that are table funded (the loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds) are not secondary market transactions and therefore are covered by RESPA. Similarly, neither the creation of a dealer loan or consumer credit contract, nor the first assignment of such loan or contract to a lender, is a secondary market transaction. 8 FNMA – Federal National Mortgage Association; GNMA - Government National Mortgage Association; FHLMC – Federal Home Loan Mortgage Corporation

Answer 316

Partial Exemptions for Certain Mortgage Loans – 12 CFR 1024.5(d) Most closed-end mortgage loans are exempt from the requirement to provide the GFE, HUD-1 settlement statement, and application servicing disclosure requirements of 12 CFR 1024.6, 1024.7, 1024.8, 1024.10, and 1024.33(a). Instead, these loans are subject to disclosure, timing, and other requirements under TILA and Regulation Z. Specifically, the aforementioned provisions do not apply to a federally related mortgage loan that: * Is subject to the special disclosure (TILA-RESPA Integrated Disclosure) requirements for certain consumer credit transactions secured by real property set forth in Regulation Z, 12 CFR 1026.19(e), (f), and (g); or * Is subject to the partial exemption under 12 CFR 1026.3(h) (i.e., certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation, energy efficiency, or foreclosure avoidance or prevention. (12 CFR 1026.3(h)). NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages). 10 9 12 CFR 1024.5(b)(6). 10 Open-end reverse mortgages receive open-end disclosures, rather than GFEs or HUD-1s.

Answer 317

Use TILA-RESPA Integrated Disclosures (See Regulation Z): * Most closed-end mortgage loans, including: o Construction-only loans o Loans secured by vacant land or by 25 or more acres

Answer 318

Continue to use existing TIL, RESPA Disclosures (as applicable): * HELOCs (subject to disclosure requirements under Regulation Z, 12 CFR 1026.40) * Reverse mortgages (subject to existing TIL and GFE disclosures) * Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA) But note: In both cases, there is a partial exemption from these disclosures under 12 CFR 1026.3(h) for loans secured by subordinate liens and associated with certain housing assistance loan programs for low- and moderate-income persons.

Answer 319

Subpart B – Mortgage Settlement and Escrow Accounts Examiners should note that certain provisions in Subpart B (12 CFR 1024.6, 1024.7, 1024.8, and 1024.10) are applicable only to limited categories of mortgage loans. See the discussion of 12 CFR 1024.5(d) above.

Answer 320

Special Information Booklet – 12 CFR 1024.6 For mortgage loans that are not subject to the TILA-RESPA Integrated Disclosure Rule (see 12 CFR 1026.19(e), (f) and (g)),* a loan originator11 is required to provide the borrower with a copy of the Special Information Booklet at the time a written application is submitted or no later than three business days after the application is received. If the application is denied before the end of the three-business-day period, the loan originator is not required to provide the booklet. If the borrower uses a mortgage broker, the broker rather than the lender, must provide the booklet. The booklet does not need to be provided for refinancing transactions, closed-end subordinate lien mortgage loans and reverse mortgage transactions, or for any other federally related mortgage loan not intended for the purchase of a oneto-four family residential property. (12 CFR 1024.19(g)(1)(iii)). A loan originator that complies with Regulation Z (12 CFR 1026.40) for open-end home equity plans (including providing the brochure entitled “What You Should Know About Home Equity Lines of Credit” or a suitable substitute) is deemed to have complied with this section. NOTE: The Special Information Booklet may also be required under 12 CFR 1026.19(g) for those closed-end mortgage loans subject to the TILA-RESPA Integrated Disclosure Rule. A discussion of those requirements is located in the Regulation Z examination procedures. 11 A “loan originator” is defined as a lender or mortgage broker. 12 CFR 1024.2(b).

Answer 321

Good Faith Estimate (GFE) of Settlement Costs – 12 CFR 1024.7 Standard GFE Required For closed-end reverse mortgages, a loan originator is required to provide a consumer with the standard GFE form that is designed to allow borrowers to shop for a mortgage loan by comparing settlement costs and loan terms. (See GFE form at Appendix C to 12 CFR Part 1024.)

Answer 322

Overview of the Standard GFE The first page of the GFE includes a summary of loan terms and a summary of estimated settlement charges. It also includes information about key dates such as when the interest rate for the loan quoted in the GFE expires and when the estimate for the settlement charges expires. The second page discloses settlement charges as subtotals for 11 categories of costs. The third page provides a table explaining which charges can change at settlement, a tradeoff table showing the relationship between the interest rate and settlement charges, and a shopping chart to compare the costs and terms of loans offered by different originators.

Answer 323

GFE Application Requirements application or information sufficient to complete an * The loan originator must provide the standard GFE to the borrower within three business days of receipt of an application for a mortgage loan. A loan originator is not required to provide a GFE if before the end of the threebusiness-day period, the application is denied or the borrower withdraws the application. * An application can be in writing or electronically submitted, including a written record of an oral application. * A loan originator determines what information it needs to collect from a borrower and which of the collected information it will use in order to issue a GFE. Under the regulations, an “application” includes at least the following six pieces of information: 1) The borrower’s name; 2) The borrower’s gross monthly income; 3) The borrower’s Social Security number (e.g., to enable the loan originator to obtain a credit report); 4) The property address; 5) An estimate of the value of the property; and 6) The mortgage loan amount sought. In addition, a loan originator may require the submission of any other information it deems necessary. A loan originator will be presumed to have relied on such information prior to issuing a GFE and cannot base a revision of a GFE on that information unless it changes or is later found to be inaccurate. * While the loan originator may require the borrower to submit additional information beyond the six pieces of information listed above in order to issue a GFE, it cannot require, as a condition of providing the GFE, the submission of supplemental documentation to verify the information provided by the borrower on the application. However, a loan originator is not prohibited from using its own sources to verify the information provided by the borrower prior to issuing the GFE. The loan originator can require borrowers to provide verification information after the GFE has been issued in order to complete final underwriting. * For dealer loans, the loan originator is responsible for providing the GFE directly or ensuring that the dealer provides the GFE. * For mortgage brokered loans, either the lender or the mortgage broker must provide a GFE within three business days after a mortgage broker receives either an application or information sufficient to complete an application. * The lender is responsible for ascertaining whether the GFE has been provided. If the mortgage broker has provided the GFE to the applicant, the lender is not required to provide an additional GFE. * A loan originator is prohibited from charging a borrower any fee in order to obtain a GFE

Answer 324

GFE Not Required for Open End Lines of Credit – 12 CFR 1024.7(h) A loan originator that complies with Regulation Z (12 CFR 1026.40) for open-end home equity plans is deemed to have complied with 12 CFR 1024.7.

Answer 325

Availability of GFE Terms – 12 CFR 1024.7(c) Regulation X does not establish a minimum period of availability for which the interest rate must be honored. The loan originator must determine the expiration date for the interest rate of the loan stated on the GFE. In contrast, Regulation X requires that the estimated settlement charges and loan terms listed on the GFE be honored by the loan originator for at least 10 business days from the date the GFE is provided. The period of availability for the estimated settlement charges and loan terms as well as the period of availability for the interest rate of the loan stated on the GFE must be listed on the GFE in the “important dates” section of the form. After the expiration date for the interest rate of the loan stated on the GFE, the interest rate and the other rate related charges, including the charge or credit for the interest rate chosen, the adjusted origination charges and the per diem interest can change until the interest rate is locked.

Answer 326

Key GFE Form Contents – 12 CFR 1024.7(d) The loan originator must ensure that the required GFE form is completed in accordance with the Instructions set forth in Appendix C of 12 CFR Part 1024.

Answer 327

First Page of GFE * The first page of the GFE discloses identifying information such as the name and address of the “loan originator,” which includes the lender or the mortgage broker originating the loan. The “purpose” section indicates what the GFE is about and directs the borrower to the TIL disclosures and HUD’s website for more information. The borrower is informed that only the borrower can shop for the best loan and that the borrower should compare loan offers using the shopping chart on the third page of the GFE. * The “important dates” section requires the loan originator to state the expiration date for the interest rate for the loan provided in the GFE as well as the expiration date for the estimate of other settlement charges and the loan terms not dependent upon the interest rate. * While the interest rate stated on the GFE is not required to be honored for any specific period of time, the estimate for the other settlement charges and other loan terms must be honored for at least 10 business days from when the GFE is provided. * In addition, the form must state how many calendar days within which the borrower must go to settlement once the interest rate is locked (rate lock period). The form also requires disclosure of how many days prior to settlement the interest rate would have to be locked, if applicable. * The “summary of your loan” section requires disclosure of the initial loan amount; loan term; initial interest rate; initial monthly payment for principal, interest and any mortgage insurance; whether the interest rate can rise, and if so, the maximum rate to which it can rise over the life of the loan, and the period of time after which the interest rate can first change; whether the loan balance can rise if the payments are made on time and if so, the maximum amount to which it can rise over the life of the loan; whether the monthly amount owed for principal, interest and any mortgage insurance can rise even if payments are made on time, and if so, the maximum amount to which the monthly amount owed can ever rise over the life of the loan; whether the loan has a prepayment penalty, and if so, the maximum amount it could be; and whether the loan has a balloon payment, and if so, the amount of such payment and in how many years it will be due. Specific instructions are provided with respect to closed-end reverse mortgages. * The “escrow account information” section requires the loan originator to indicate whether the loan does or does not have an escrow account to pay property taxes or other property related charges. In addition, this section also requires the disclosure of the monthly amount owed for principal, interest and any mortgage insurance. Specific instructions are provided with respect to closedend reverse mortgages. * The bottom of the first page includes subtotals for the adjusted origination charges and charges for all other settlement charges listed on page two, along with the total estimated settlement charges.

Answer 328

Second Page of GFE The second page of the GFE requires disclosure of all settlement charges. It provides for the estimate of total settlement costs in eleven categories discussed below. The adjusted origination charges are disclosed in “Block A” and all other settlement charges are disclosed in “Block B.” The amounts in the blocks are to be added to arrive at the “total estimated settlement charges” which is required to be listed at the bottom of the page. Disclosure of Adjusted Origination Charge (Block A) Block A addresses disclosure of origination charges, which include all lender and mortgage broker charges. The “adjusted origination charge” results from the subtraction of a “credit” from the “origination charge” or the addition of a “charge” to the origination charge. * Block 1 – the origination charges, which include lender processing and underwriting fees and any fees paid to a mortgage broker. Origination Charge Note: This block requires the disclosure of all charges that all loan originators involved in the transaction will receive for originating the loan (excluding any charges for points). A loan originator may not separately charge any additional fees for getting the loan such as application, processing or underwriting fees. The amount in Block 1 is subject to zero tolerance, i.e., the amount cannot change at settlement. * Block 2 – a “credit” or “charge” for the interest rate chosen. Credit or Charge for the Interest Rate Chosen Note: Transaction Involving a Mortgage Broker. For a transaction involving a mortgage broker, 12 Block 2 requires disclosure of a “credit” or charge (points) for the specific interest rate chosen. The credit or charge for the specific interest rate chosen is the net payment to the mortgage broker (i.e., the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate or any other compensation, and in a table funded transaction, the loan amount less the price paid for the loan by the lender.) When the net payment to the mortgage broker from the lender is positive, there is a “credit” to the borrower and it is entered as a negative amount. For example, if the lender pays a yield spread premium to a mortgage broker for the loan set forth in the GFE, the payment must be disclosed as a “credit” to the borrower for the particular interest rate listed on the GFE (reflected on the GFE at Block 2, checkbox 2). The term “yield spread premium” is not featured on the GFE or the HUD-1 Settlement Statement. Points paid by the borrower for the interest rate chosen must be disclosed as a “charge” (reflected on the GFE at Block 2, third checkbox). A loan cannot include both a charge (points) and a credit (yield spread premium). Transaction Not Involving a Mortgage Broker. For a transaction without a mortgage broker, a lender may choose not to separately disclose any credit or charge for the interest rate chosen for the loan in the GFE. If the lender does not include any credit or charge in Block 2, it must check the first checkbox in Block 2 indicating that “The credit or charge for the interest rate you have chosen is included in ‘our origination charge’ above.” Only one of the boxes in Block 2 may be checked, as a credit and charge cannot occur together in the same transaction. Disclosure of Charges for All Other Settlement Services (Block B) Block B is the sum of charges for all settlement services other than the origination charges. * Block 3 – required services by providers selected by the lender such as appraisal and flood certification fees. * Block 4 – title service fees and the cost of lender’s title insurance. * Block 5 – owner’s title insurance. * Block 6 – other required services for which the consumer may shop. * Block 7 – government recording charges. * Block 8 – transfer tax charges. * Block 9 – initial deposit for escrow account. * Block 10 – daily interest charges. * Block 11 – homeowner’s insurance charges. 12 The 2008 RESPA Reform Rule changed the definition of “mortgage broker” to mean a person or entity (not an employee of a lender) that renders origination services and serves as an intermediary between a lender and a borrower in a transaction involving a federally related mortgage loan, including such person or entity that closes the loan in its own name and table funds the transaction. The definition will also apply to a loan correspondent approved under 24 CFR 202.8 for Federal Housing Administration (FHA programs). The definition would also The second page of the GFE requires disclosure of all include an “exclusive agent” who is not an employee of the lender.

Answer 329

Third Page of GFE The third page of the GFE includes the following information: * A tolerance chart identifying the charges that can change at settlement (see discussion on tolerances below); * A trade-off table that requires the loan originator to provide information on the loan described in the GFE and at the loan originator’s option, information about alternative loans (one with lower settlement charges but a higher interest rate and one with a lower interest rate but higher settlement charges); * A shopping chart that allows the consumer to fill in loan terms and settlement charges from other lenders or brokers to use to compare loans; and * Language indicating that some lenders may sell the loan after settlement, but that any fees the lender receives in the future cannot change the borrower’s loan or the settlement charges.

Answer 330

Tolerances on Settlement Costs – 12 CFR 1024.7(e) and (i) The 2008 RESPA Reform Rule established “tolerances” or limits on the amount actual settlement charges can vary at closing from the amounts stated on the GFE. The rule established three categories of settlement charges and each category has different tolerances. If, at settlement, the charges exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement.

Answer 331

Tolerance Categories * Zero tolerance category. This category of fees is subject to a zero tolerance standard. The fees estimated on the GFE may not be exceeded at closing. These fees include: o The loan originator’s own origination charge, including processing and underwriting fees; o The credit or charge for the interest rate chosen (i.e., yield spread premium or discount points) while the interest rate is locked; o The adjusted origination charge while the interest rate is locked; and o State/local property transfer taxes. * Ten percent tolerance category. For this category of fees, while each individual fee may increase or decrease, the sum of the charges at settlement may not be greater than 10 percent above the sum of the amounts included on the GFE. This category includes fees for: o Loan originator required settlement services, where the loan originator selects the third-party settlement service provider; o Loan originator required services, title services, required title insurance and owner’s title insurance when the borrower selects a third-party provider identified by the loan originator; and o Government recording charges. * No tolerance category. The final category of fees is not subject to any tolerance restriction. The amounts charged for the following settlement services included on the GFE can change at settlement and the amount of the change is not limited: o Loan originator required services where the borrower selects his or her own third-party provider; o Title services, lender’s title insurance, and owner’s title insurance when the borrower selects his or her own provider; o Initial escrow deposit; o Daily interest charges; and o Homeowner’s insurance.

Answer 332

Identification of Third-Party Settlement Service Providers When the loan originator permits a borrower to shop for one or more required third-party settlement services and select the settlement service provider for such required services, the loan originator must list in the relevant block on page two of the GFE the settlement service and the estimated charge to be paid to the provider of each required service. In addition, the loan originator must provide the borrower with a written list of settlement service providers for those required services on a separate sheet of paper at the time the GFE is provided.

Answer 333

Binding GFE – 12 CFR 1024.7(f) The loan originator is bound, within the tolerances provided, to the settlement charges and terms listed on the GFE provided to the borrower, unless a new GFE is provided prior to settlement (see discussion below on changed circumstances). This also means that if a lender accepts a GFE issued by a mortgage broker, the lender is subject to the loan terms and settlement charges listed in the GFE, unless a new GFE is issued prior to settlement.

Answer 334

Changed Circumstances – 12 CFR 1024.2(b), 1024.7(f)(1) and (f)(2) Changed circumstances are defined as: * Acts of God, war, disaster, or other emergency; * Information particular to the borrower or transaction that was relied on in providing the GFE that changes or is found to be inaccurate after the GFE has been provided; * New information particular to the borrower or transaction that was not relied on in providing the GFE; or * Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. Changed circumstances do not include the borrower’s name, the borrower’s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided. In addition, market price fluctuations by themselves do not constitute changed circumstances. Changed circumstances affecting settlement costs are those circumstances that result in increased costs for settlement services such that the charges at settlement would exceed the tolerances or limits on those charges established by the regulations. Changed circumstances affecting the loan are those circumstances that affect the borrower’s eligibility for the loan. For example, if underwriting and verification indicate that the borrower is ineligible for the loan provided in the GFE, the loan originator would no longer be bound by the original GFE. In such cases, if a new GFE is to be provided, the loan originator must do so within three business days of receiving information sufficient to establish changed circumstances. The loan originator must document the reason that a new GFE was provided and must retain documentation of any reasons for providing a new GFE for no less than three years after settlement. None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a “changed circumstance” upon which it may offer a revised GFE, unless: it can demonstrate 1) that there was a change in the particular information; 2) that the information was inaccurate; or 3) that it did not rely on that particular information in issuing the GFE. A loan originator has the burden of demonstrating nonreliance on the collected information, but may do so through various means including through a documented record in the underwriting file or an established policy of relying on a more limited set of information in providing GFEs. If a loan originator issues a revised GFE based on information previously collected in issuing the original GFE and “changed circumstances,” it must document the reasons for issuing the revised GFE, such as its nonreliance on such information or the inaccuracy of such information.

Answer 335

Borrower Requested Changes – 12 CFR 1024.7(f)(3) If a borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or the terms of the loan, the loan originator may provide a revised GFE to the borrower. If a revised GFE is provided, the loan originator must do so within three business days of the borrower’s request.

Answer 336

Expiration of Original GFE – 12 CFR 1024.7(f)(4) If a borrower does not express an intent to continue with an application within 10 business days after the GFE is provided, or such longer time provided by the loan originator, the loan originator is no longer bound by the GFE.

Answer 337

Interest Rate Dependent Charges and Terms – 12 CFR 1024.7(f)(5) If the interest rate has not been locked by the borrower, or a locked interest rate has expired, all interest rate-dependent charges on the GFE are subject to change. The charges that may change include the charge or credit for the interest rate chosen, the adjusted origination charges, per diem interest, and loan terms related to the interest rate. However, the loan originator’s origination charge (listed in Block 1 of page 2 of the GFE) is not subject to change, even if the interest rate floats, unless there is another changed circumstance or borrower-requested change. If the borrower later locks the interest rate, a new GFE must be provided showing the revised interest rate dependent charges and terms. All other charges and terms must remain the same as on the original GFE, unless changed circumstances or borrower-requested changes result in increased costs for settlement services or affect the borrower’s eligibility for the specific loan terms identified in the original GFE.

Answer 338

New Home Purchases – 12 CFR 1024.7(f)(6) In transactions involving new home purchases, where settlement is expected to occur more than 60 calendar days from the time a GFE is provided, the loan originator may provide the GFE to the borrower with a clear and conspicuous disclosure stating that at any time up until 60 calendar days prior to closing, the loan originator may issue a revised GFE. If the loan originator does not provide such a disclosure, it cannot issue a revised GFE except as otherwise provided in Regulation X.

Answer 339

Volume-Based Discounts The 2008 RESPA Reform Rule did not formally address the legality of volume-based discounts. However, HUD indicated in the preamble to the rule that discounts negotiated between loan originators and other settlement service providers, where the discount is ultimately passed on to the borrower in full, is not, depending on the circumstances of a particular transaction, a violation of Section 8 of RESPA.13

Answer 340

Uniform Settlement Statement (HUD-1 OR HUD-1A) – 12 CFR 1024.8 For closed-end reverse mortgages, the person conducting the settlement (settlement agent) must provide the borrower with a HUD-1 Settlement Statement at or before settlement that clearly itemizes all charges imposed on the buyer and the seller in connection with the settlement. The 2008 RESPA Reform rule included a revised HUD-1/1A Settlement Statement form that is required as of January 1, 2010. The HUD-1 is used for transactions in which there is a borrower and seller. For transactions in which there is a borrower and no seller (refinancings and subordinate lien loans), the HUD1 may be completed by using the borrower’s side of the settlement statement. Alternatively, the HUD-1A may be used. However, no settlement statement is required for home equity plans subject to TILA and Regulation Z, Appendix A to 12 CFR 1024 contains the instructions for completing the forms.

Answer 341

Key 2008 RESPA Reform Enhancements to the HUD1/1A Settlement Statement While the 2008 RESPA Reform Rule did not include any substantive changes to the first page of the HUD-1/1A form, there were changes to the second page of the form to facilitate comparison between the HUD-1/1A and the GFE. Each designated line on the second page of the revised HUD1/1A includes a reference to the relevant line from the GFE. With respect to disclosure of “no cost” loans where “no cost” refers only to the loan originator’s fees (see Section L, subsection 800 of the HUD-1 form), the amounts shown for the “origination charge” and the “credit or charge for the interest rate chosen” should offset, so that the “adjusted origination charge” is zero. In the case of a “no cost” loan where “no cost” encompasses loan originator and third-party fees, all third-party fees must be itemized and listed in the borrower’s column on the HUD1/1A. These itemized charges must be offset with a negative adjusted origination charge (Line 803) and recorded in the columns. To further facilitate comparability between the forms, the revised HUD-1 includes a third page (second page of the HUD-1A) that allows borrowers to compare the loan terms and settlement charges listed on the GFE with the terms and charges listed on the closing statement. The first half of the third page includes a comparison chart that sets forth the settlement charges from the GFE and the settlement charges from the HUD-1 to allow the borrower to easily determine whether the settlement charges exceed the charges stated on the GFE. If any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded. A borrower will be deemed to have received timely reimbursement if the financial institution delivers or places the payment in the mail within 30 calendar days after settlement. Inadvertent or technical errors on the settlement statement are not deemed to be a violation of Section 4 of RESPA if a revised HUD-1/1A is provided to the borrower within 30 calendar days after settlement. The second half of the third page sets forth the loan terms for the loan received at settlement in a format that reflects the summary of loan terms on the first page of the GFE, but with additional loan related information that would be available at closing. The note at the bottom of the page indicates that the borrower should contact the lender if the borrower has questions about the settlement charges or loan terms listed on the form. 12 CFR 1024.8(b) and the instructions for completing the HUD-1/1A Settlement Statement provide that the loan originator shall transmit sufficient information to the settlement agent to allow the settlement agent to complete the “loan terms” section. The loan originator must provide the information in a format that permits the settlement agent to enter the information in the appropriate spaces on the HUD1/1A, without having to refer to the loan documents.

Answer 342

Average Charge Permitted As of January 16, 2009, an average charge may be stated on the HUD-1/1A if such average charge is computed in accordance with 12 CFR 1024.8(b)(2). All settlement service providers, including loan originators, are permitted to list the average charge for a settlement service on the HUD-1/1A Settlement Statement (and on the GFE) rather than the exact cost for that service. The method of determining the average charge is left up to the settlement service provider. The average charge may be used as the charge for any third-party vendor charge, not for the provider’s own internal charges. The average charge also cannot be used where the charge is based on the loan amount or the value of the property. The average charge may be used for any third-party settlement service, provided that the total amounts received from borrowers for that service for a particular class of transactions do not exceed the total amounts paid to providers of that service for that class of transactions. A class of transactions may be defined based on the period of time, type of loan and geographic area. If an average charge is used in any class of transactions defined by the loan originator, then the loan originator must use the same average charge for every transaction within that class. The average charge must be recalculated at least every six months. A settlement service provider that uses an average charge for a particular service must maintain all documents that were used to calculate the average charge for at least three years after any settlement in which the average charge was used.

Answer 343

Printing and Duplication of the Settlement Statement – 12 CFR 1024.9 Financial institutions have numerous options for layout and format in reproducing the HUD-1 and HUD-1A that do not require prior CFPB approval such as size of pages; tint or color of pages; size and style of type or print; spacing; printing on separate pages, front and back of a single page or on one continuous page; use of multi-copy tear-out sets; printing on rolls for computer purposes; addition of signature lines; and translation into any language. Other changes may be made only with the approval of the CFPB.

Answer 344

One-Day Advance Inspection of the Settlement Statement – 12 CFR 1024.10 For closed-end reverse mortgages, and upon request by the borrower, the HUD-1 or HUD-1A must be completed and made available for inspection during the business day immediately proceeding the day of settlement, setting forth those items known at that time by the person conducting the closing.

Answer 345

Delivery – 12 CFR 1024.10(a) and (b) The completed HUD-1 or HUD-1A must be mailed or delivered to the borrower, the seller (if there is one), the lender (if the lender is not the settlement agent), and/or their agents at or before settlement. However, the borrower may waive the right of delivery by executing a written waiver at or before settlement. The HUD-1 or HUD-1A shall be mailed or delivered as soon as practicable after settlement if the borrower or borrower’s agent does not attend the settlement

Answer 346

Retention – 12 CFR 1024.10(e) A lender must retain each completed HUD-1 or HUD-1A and related documents for five years after settlement, unless the lender disposes of its interest in the mortgage and does not service the mortgage. If the loan is transferred, the lender shall provide a copy of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as part of the transfer. The owner or servicer shall retain the HUD-1 or HUD-1A for the remainder of the five-year period.

Answer 347

Prohibition of Fees for Preparing Federal Disclosures – 12 CFR 1024.12 For loans subject to RESPA, no fee may be charged for preparing the Settlement Statement or the Escrow Account statement or any disclosures required by TILA.

Answer 348

Prohibition Against Kickbacks and Unearned Fees – 12 CFR 1024.14 Any person who gives or accepts a fee, kickback, or thing of value (payments, commissions, gifts, tangible item or special privileges) for the referral of settlement business is in violation of Section 8(a) of RESPA. Any person who gives or accepts any portion, split, or percentage of a charge for real estate settlement services, other than for services actually performed, is in violation of Section 8(b) of RESPA. Appendix B of Regulation X provides guidance on the meaning and coverage of the prohibition against kickbacks and unearned fees. RESPA Section 8(b) is not violated when a single party charges and retains a settlement service fee, and that fee is unearned or excessive.

Answer 349

Penalties and Liabilities Civil and criminal liability is provided for violating the prohibition against kickbacks and unearned fees including: * Civil liability to the parties affected, equal to three times the amount of any charge paid for such settlement service. * The possibility that the costs associated with any court proceeding together with reasonable attorney’s fees could be recovered. * A fine of not more than $10,000 or imprisonment for not more than one year or both.

Answer 350

Affiliated Business Arrangements – 12 CFR 1024.15 If a loan originator (or an associate)14 has either an affiliate relationship or a direct or beneficial ownership interest of more than one percent in a provider of settlement services and the loan originator directly or indirectly refers business to the provider it is an affiliated business arrangement. An affiliated business arrangement is not a violation of Section 8 of RESPA and of 12 CFR 1024.14 of Regulation X if the following conditions are satisfied. Prior to the referral, the person making each referral has provided to each person whose business is referred an Affiliated Business Arrangement Disclosure Statement (Appendix D of Regulation X). This disclosure shall specify the following: * The nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and * The estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate piece of paper either at the time of loan application, or with the GFE, or at the time of the referral. The loan originator may not require the use of such a provider, with the following exceptions: the institution may require a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the institution to represent its interest. The loan originator may only receive a return on ownership or franchise interest or payment otherwise permitted by RESPA. 14 An associate includes a corporation or business entity that controls, is controlled by, or is under common control with the institution; an employer, officer, director, partner, franchisor, or franchisee of the institution; or anyone with an arrangement with the institution that enables the person to refer settlement business and benefit financially from the referrals. 12 U.S.C. 2602(8).

Answer 351

Title Insurance Companies – 12 CFR 1024.16 Sellers that hold legal title to the property being sold are prohibited from requiring borrowers, either directly or indirectly, as a condition to selling the property, to use a particular title insurance company.

Answer 352

Escrow Accounts – 12 CFR 1024.17 On October 26, 1994, HUD issued its final rule changing the accounting method for escrow accounts, which was originally effective April 24, 1995. The final rule established a national standard accounting method, known as aggregate accounting. The final rule also established formats and procedures for initial and annual escrow account statements.

Answer 353

The amount of escrow funds that can be collected at settlement or upon creation of an escrow account is restricted to an amount sufficient to pay charges, such as taxes and insurance, that are attributable to the period from the date such payments were last paid until the initial payment date. Throughout the life of an escrow account, the servicer may charge the borrower a monthly sum equal to one-twelfth of the total annual escrow payments that the servicer reasonably anticipates paying from the account. In addition, the servicer may add an amount to maintain a cushion no greater than one-sixth of the estimated total annual payments from the account. Starting April 19, 2018, a servicer must treat a confirmed successor in interest as a borrower for purposes of 12 CFR 1024.17 and for Subpart C’s provisions.

Answer 354

Escrow Account Analysis – 12 CFR 1024.17(c)(2) and (3) and 12 CFR 1024.17(k) Before establishing an escrow account, a servicer must conduct an analysis to determine the periodic payments and the amount to be deposited. The servicer shall use an escrow disbursement date that is on or before the deadline to avoid a penalty and may make annual lump sum payments to take advantage of a discount.

Answer 355

Transfer of Servicing – 12 CFR 1024.17(e) If the new servicer changes either the monthly payment amount or the accounting method used by the old servicer, then it must provide the borrower with an initial escrow account statement within 60 days of the date of transfer. When the new servicer provides an initial escrow account statement, it shall use the effective date of the transfer of servicing to establish the new escrow account computation year. In addition, if the new servicer retains the monthly payments and accounting method used by the old servicer, then the new servicer may continue to use the same computation year established by the old servicer or it may choose a different one, using a short year statement.

Answer 356

Shortages, Surpluses, and Deficiency Requirements – 12 CFR 1024.17(f) The servicer shall conduct an annual escrow account analysis to determine whether a surplus, shortage, or deficiency exists as defined under 12 CFR 1024.17(b). If the escrow account analysis discloses a surplus, the servicer shall, within 30 days from the date of the analysis, refund the surplus to the borrower if the surplus is greater than or equal to $50. If the surplus is less than $50, the servicer may refund such amount to the borrower, or credit such amount against the next year’s escrow payments. These provisions apply as long as the borrower’s mortgage payment is current at the time of the escrow account analysis. If the escrow account analysis discloses a shortage of less than one month’s escrow payments, then the servicer has three possible courses of action: * The servicer may allow the shortage to exist and do nothing to change it, * The servicer may require the borrower to repay the shortage amount within 30 days, or * The servicer may require the borrower to repay the shortage amount in equal monthly payments over at least a 12-month period. If the shortage is more than or equal to one month’s escrow payment, then the servicer has two possible courses of action: * The servicer may allow the shortage to exist and do nothing to change it, or * The servicer may require the borrower to repay the shortage in equal monthly payments over at least a 12- month period. If the escrow account analysis discloses a deficiency, then the servicer may require the borrower to pay additional monthly deposits to the account to eliminate the deficiency. If the deficiency is less than one month’s escrow account payment, then the servicer; * May allow the deficiency to exist and do nothing to change it, * May require the borrower to repay the deficiency within 30 days, or * May require the borrower to repay the deficiency in two or more equal monthly payments. If the deficiency is greater than or equal to one month’s escrow payment, the servicer may allow the deficiency to exist and do nothing to change it, or require the borrower to repay the deficiency in two or more equal monthly payments. These provisions apply as long as the borrower’s mortgage payment is current at the time of the escrow account analysis. A servicer must notify the borrower at least once during the escrow account computation year if a shortage or deficiency exists in the account.

Answer 357

Initial Escrow Account Statement – 12 CFR 1024.17(g) After analyzing each escrow account, the servicer must submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement for escrow accounts that are established as a condition of the loan. The initial escrow account statement must include the monthly mortgage payment; the portion going to escrow; itemize estimated taxes, insurance premiums, and other charges; the anticipated disbursement dates of those charges; the amount of the cushion; and a trial running balance.

Answer 358

Annual Escrow Account Statement – 12 CFR 1024.17(i) A servicer shall submit to the borrower an annual statement for each escrow account within 30 days of the completion of the computation year. The servicer must conduct an escrow account analysis before submitting an annual escrow account statement to the borrower. The annual escrow account statements must contain the account history; projections for the next year; current mortgage payment and portion going to escrow; amount of past year’s monthly mortgage payment and portion that went into the escrow account; total amount paid into the escrow account during the past year; amount paid from the account for taxes, insurance premiums, and other charges; balance at the end of the period; explanation of how the surplus, shortage, or deficiency is being handled; and, if applicable, the reasons why the estimated low monthly balance was not reached.

Answer 359

Short-Year Statements – 12 CFR 1024.17(i)(4) Short-year statements can be issued to end the escrow account computation year and establish the beginning date of the new computation year. Short-year statements may be provided upon the transfer of servicing and are required upon loan payoff. The statement is due to the borrower within 60 days after receiving the pay-off funds.

Answer 360

Timely Payments – 12 CFR 1024.17(k) The servicer must pay escrow disbursements by the disbursement date. In calculating the disbursement date, the servicer must use a date on or before the deadline to avoid a penalty and may make annual lump sum payments to take advantage of a discount. A servicer may not purchase force placed insurance unless it is unable to disburse funds from the borrower’s escrow account to maintain the borrower’s hazard insurance. A servicer is unable to disburse funds only if the servicer has a reasonable basis to believe that either the borrower’s property is vacant or the borrower’s hazard insurance has terminated for reasons other than non-payment. A servicer is not unable to disburse funds from the borrower’s escrow account solely because the account is deficient. If a servicer advances funds to an escrow account to ensure that the borrower’s hazard insurance premium charges are paid in a timely manner, a servicer may seek repayment from the borrower for the funds the servicer advanced, unless otherwise prohibited by applicable law. Regulation X includes a limited exemption from the restriction on force-placed insurance purchases for small servicers. Subject to the requirements of 12 CFR 1024.37, small servicers may purchase force-placed insurance and charge the borrower for the cost of that insurance if the cost to the borrower is less than the amount the small servicer would need to disburse from the borrower’s escrow account to ensure timely payment of the borrower’s hazard insurance premium charges. An institution qualifies as a small servicer under 12 CFR 1026.41(e)(4)(ii) if: * The institution services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee; * The institution is a Housing Finance Agency, as defined in 24 CFR 266.5 (12 CFR 1026.41(e)(4)(ii)); or * The institution is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. Under 12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5).

Answer 361

An institution qualifies as a small servicer under 12 CFR 1026.41(e)(4)(ii) if: * The institution services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee; * The institution is a Housing Finance Agency, as defined in 24 CFR 266.5 (12 CFR 1026.41(e)(4)(ii)); or * The institution is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. Under 12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5).

Answer 362

List of Homeownership Counseling Organizations – 12 CFR 1024.20 For any application for a federally related mortgage loan, as that term is defined in 12 CFR 1024.2 subject to the exemptions in 12 CFR 1024.5(b) (except for applications for reverse mortgages or timeshare loans), the lender must provide a loan applicant with a clear and conspicuous written list of homeownership counseling services in the loan applicant’s location, no later than three business days after a lender, mortgage broker, or dealer receives an application or information sufficient to complete an application. The list is available on a website maintained by the CFPB, or from data made available by the CFPB or HUD. Lenders must make sure that the list of homeownership counseling services was obtained no earlier than 30 days before they provide it to the applicant. This list may be combined with other disclosures (unless otherwise prohibited by Regulation X or Regulation Z). A mortgage broker or dealer that receives a loan application, or for whom it prepares an application, may provide the list, in which case the lender is not required to provide an additional list, though in all cases the lender remains responsible for ensuring that the list is provided to the applicant. The list may be provided in person, by mail or other means. The list may be provided in electronic form, subject to compliance with the consumer consent and other applicable provisions of E-Sign. If, before the three-day period ends, the lender denies the application or the applicant withdraws it, the lender does not have to provide the list. If the transaction involves more than one lender, the lenders should agree on which of them will provide the list. If there is more than one applicant, the list can go to any one of them that has primary liability on the loan.

Answer 363

Subpart C – Mortgage Servicing Scope – 12 CFR 1024.30 Except as otherwise noted below, the provisions of Subpart C – Mortgage Servicing, 12 CFR 1024.30-41, apply to any mortgage loan, as that term is defined in 12 CFR 1024.31. The procedures set forth in 12 CFR 1024.39 through 1024.41 regarding early intervention, continuity of contact, and loss mitigation only apply to a mortgage loan secured by a property that is the borrower’s principal residence. If a property ceases to be a borrower’s principal residence, the procedures set forth in the early intervention provisions (12 CFR 1024.39), the continuity of contact provisions (12 CFR 1024.40), and the loss mitigation provisions (12 CFR 1024.41) do not apply to the mortgage loan secured by the property. (Comment 30(c)(2)-1). The determination of principal residence status will depend on the specific facts and circumstances regarding the property and applicable state law. For example, a vacant property may still be a borrower’s principal residence. (Comment 30(c)(2)-1). Starting April 19, 2018, a servicer must treat a confirmed successor in interest as a borrower under Subpart C’s provisions and under the escrow account requirements in 12 CFR 1024.17. Further, a servicer that is a debt collector under the FDCPA with respect to a mortgage loan does not violate the FDCPA Section 805(b)’s prohibition on communicating with third parties by communicating with a confirmed successor in interest in compliance with the mortgage servicing rules because “consumer” for purposes of FDCPA Section 805 includes any person who meets the definition in this part of confirmed successor in interest. (Comment 30(d)-1). 15

Answer 364

Definitions – 12 CFR 1024.31 Regulation X, 12 CFR 1024.31 contains definitions that are applicable to Subpart C – Mortgage Servicing, 12 CFR 1024.30-41. Among other definitions, Regulation X provides that “mortgage loan” means “any federally related mortgage loan, as that term is defined in 12 CFR 1024.2 subject to the exemptions in 12 CFR 1024.5(b), but does not include openend lines of credit (home equity plans).” Thus, the term “mortgage loan” includes (but is not limited to) refinancing transactions, whether secured by a senior or subordinate lien. The 2016 Servicing Rule establishes definitions of “successor in interest” and “confirmed successors in interest,” and provides that the latter are considered “borrowers” for the purposes of Regulation X’s mortgage servicing provisions. The 2016 Servicing Rule also adds a new definition of “delinquency.”

Answer 365

Successors in Interest (Effective April 19, 2018) “Successor in interest” means a person to whom an ownership interest in a property securing a mortgage loan if the transfer is: (1) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (2) A transfer to a relative resulting from the death of a borrower; (3) A transfer where the spouse or children of the borrower become an owner of the property; (4) A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or (5) A transfer into an interviews trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property. “Confirmed successor in interest” means a successor in interest once a servicer has confirmed the successor in interest's identity and ownership interest in a property that secures a mortgage loan subject to Subpart C of Regulation X. 15 See also the 2016 FDCPA Interpretive Rule (81 Fed. Reg. 71977, 71979).

Answer 366

Delinquency The definition of “delinquency” applies to the servicing provisions in Subpart C of Regulation X and the provisions regarding periodic statements for mortgage loans in Regulation Z. 16 Under the definition, a borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a payment sufficient to cover principal, interest, and, if applicable, escrow, becomes due and unpaid, and the borrower remains delinquent until such time as no periodic payment is due and unpaid (even if the borrower is afforded a period after the due date to pay before the servicer assesses a late fee). If a servicer applies payments to the oldest outstanding payment, a payment by a delinquent borrower advances the date the borrower’s delinquency began. For example, assume a borrower’s mortgage loan requires borrower to make periodic payments of principal, interest, and escrow by the first of each month. The borrower fails to make a payment on January 1 or on any day in January, and on January 31 the borrower is 30 days delinquent. On February 3, the borrower makes a periodic payment. The servicer applies the payment it received on February 3 to the outstanding January payment. On February 4, the borrower is three days delinquent. (Comment 31-2). Further, if a servicer chooses to accept a payment that is less than the periodic payment due without considering the borrower delinquent for purposes of any provisions in Subpart C, the borrower is not delinquent for any other provisions in the Subpart. (Comment 31-3). 17 16 For purposes of periodic statements for residential mortgage loans under Regulation Z, 12 CFR 1026.41(d)(8), the length of a consumer's delinquency is measured as of the date of the periodic statement or the date of the written notice provided under 12 CFR 1026.41(e)(3)(iv). A consumer's delinquency begins on the date an amount sufficient to cover a periodic payment of principal, interest, and escrow, if applicable, becomes due and unpaid, even if the consumer is afforded a period after the due date to pay before the servicer assesses a late fee. A consumer is delinquent if one or more periodic payments of principal, interest, and escrow, if applicable, are due and unpaid. (Comment 1026.41(d)(8)-1). 17 A creditor is not prevented from exercising a right provided by a mortgage

Answer 367

General Disclosure Requirements – 12 CFR 1024.32 Disclosure Requirements – 12 CFR 1024.32(a) Disclosures required under 12 CFR 1024.30-.41 must be clear and conspicuous, in writing, and in a form that a recipient may keep. The disclosures may be provided in electronic form, subject to consumer consent and the provisions of E-Sign, 18 and a servicer may use commonly accepted or readily understandable abbreviations. Disclosures may be made in a language other than English, provided that they are made in English upon a recipient’s request.

Answer 368

Additional Information, Disclosures Required by Other Laws – 12 CFR 1024.32(b) Servicers may include additional information in disclosures required under 12 CFR 1024.30-41 or combine these disclosures with any disclosure required by other law unless doing so is expressly prohibited by 12 CFR 1024.30-41, by other applicable law (such as TILA or the Truth in Savings Act), or by the terms of an agreement with a federal or state regulatory agency.

Answer 369

Successors in Interest – 12 CFR 1024.32(c) (Effective April 19, 2018) Under 12 CFR 1024.32(c), servicers have the option to provide a written notice and acknowledgment form to confirmed successors in interest who have not assumed the mortgage loan and are not otherwise liable on it. Among other things, the written notice must explain that the confirmed successor in interest may be entitled to receive certain notices and communications about the mortgage loan if the servicer is not providing them to another confirmed successor in interest or borrower on the account. The notice also must explain that in order to receive such notices and communications, the successor in interest must execute and provide to the servicer the acknowledgment form. Servicers that send this type of notice and acknowledgement form are not required to provide to the confirmed successor in interest any written disclosure required by 12 CFR 1024.17, 1024.33, 1024.34, 1024.37, or 1024.39, or to comply with the live contact requirements in 12 CFR 1024.39(a) with respect to the confirmed successor in interest until the confirmed successor in interest either assumes the mortgage loan or executes the acknowledgment form. Regardless of whether the confirmed successor in interest executes the acknowledgment form, the written notice must state the successor in interest is entitled to submit notices of error under 12 CFR 1024.35, requests for information under 12 CFR 1024.36, and requests for a payoff statement under 12 CFR 1026.36 with respect to the mortgage loan account, and the notice must include a brief explanation of those rights and how to exercise them, including appropriate address information. Furthermore, except as required by 12 CFR 1024.36, a servicer is not required to provide to a confirmed successor in interest any written disclosure required by 12 CFR 1024.17, 1024.33, 1024.34, 1024.37, or 1024.39(b) if the servicer is providing the same specific disclosure to another borrower on the account. A servicer is also not required to comply with the live contact requirements in 12 CFR 1024.39(a) with respect to a confirmed successor in interest if the servicer is complying with those requirements with respect to another borrower on the account. A confirmed successor in interest who does not receive servicing communications because the servicer is providing them to another borrower on the account can request additional information as needed through the request for information process under Regulation X. loan contract to accelerate payment for a breach of that contract. Failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency. (Comment 31-4). 18 15 U.S.C. 7001 et seq.

Answer 370

Mortgage Servicing Transfer Disclosures – 12 CFR 1024.33 The disclosures related to the transfer of mortgage servicing generally are required for any mortgage loan, as that term is defined in 12 CFR 1024.31, except that the servicing disclosure statement required under 12 CFR 1024.33(a) is required only for reverse mortgage transactions.

Answer 371

*Only applicable to reverse mortgagees Servicing Disclosure Statement – 12 CFR 1024.33(a) A lender, mortgage broker who anticipates using table funding, or dealer in a first-lien dealer loan that receives an application for a reverse mortgage transaction is required to provide the servicing disclosure statement to the borrower within three days (excluding legal public holidays, Saturdays, and Sundays) after receipt of the application. The disclosure statement must advise whether the servicing of the mortgage loan may be assigned, sold, or transferred to any other person at any time. A model disclosure statement is set forth in Appendix MS-1. If the institution denies the borrower’s application within the three-day period, it is not required to provide the disclosure statement.

Answer 372

Notices of Transfer of Loan Servicing – 12 CFR 1024.33(b) When any mortgage loan, as that term is defined in 12 CFR 1024.31, is assigned, sold or transferred, the transferor (former servicer) generally must provide a disclosure at least 15 days before the effective date of the transfer. Generally, a transfer of servicing notice from the transferee (new servicer) must be provided not more than 15 days after the effective date of the transfer. Generally, both notices may be combined into one notice if delivered to the borrower at least 15 days before the effective date of the transfer. Notices provided at the time of settlement satisfy the timing requirements. The disclosure must include: * The effective date of the transfer; * The name, address, and toll-free or collect-call telephone number for an employee or department of the transferee servicer that can be contacted by the borrower to obtain answers to servicing transfer inquiries; * The name, address, and toll-free or collect-call telephone number for an employee or department of the transferor servicer that can be contacted by the borrower to obtain answers to servicing transfer inquiries; * The date on which the transferor servicer will cease accepting payments relating to the loan, and the date on which the transferee servicer will begin to accept such payments. The dates must be either the same or consecutive dates; * Whether the transfer will affect the terms or the availability of optional insurance and any action the borrower must take to maintain such coverage; and * A statement that the transfer does not affect the terms or conditions of the mortgage (except as directly related to servicing). Servicers may use the disclosure in Appendix MS-2 to comply with the mortgage servicing transfer disclosure. The following transfers are not considered an assignment, sale, or transfer of mortgage loan servicing for purposes of this requirement if there is no change in the payee, address to which payment must be delivered, account number, or amount of payment due: * Transfers between affiliates; * Transfers resulting from mergers or acquisitions of servicers or subservicers; and * Transfers between master servicers, when the subservicer remains the same. Additionally, the Federal Housing Administration (FHA) is not required to provide a notice of transfer to the borrower where a mortgage insured under the National Housing Act is assigned to FHA.

Answer 373

Borrower Payments During Transfer of Servicing – 12 CFR 1024.33(c) During the 60-day period beginning on the date of transfer, no late fee or other penalty can be imposed on a borrower who has made a timely payment to the transferor servicer (former servicer). Additionally, if the transferor servicer (former servicer) receives any incorrect payments on or after the effective date of the transfer, the transferor servicer must either transfer the payment to the transferee servicer (new servicer) or return the payment and inform the payor of the proper recipient of the payment.

Answer 374

Timely Escrow Payments and Treatment of Escrow Account Balances – 12 CFR 1024.34 Servicers must comply with requirements concerning the treatment of escrow funds, which apply to any mortgage loan, as that term is defined in 12 CFR 1024.31. If the terms of a mortgage loan require the borrower to make payments to the servicer for deposit into an escrow account to pay taxes, insurance premiums, and other charges, the servicer shall make payments from the escrow account in a timely manner. A payment is made in a timely manner if it is made on or before the deadline to avoid a penalty. Generally, the servicer must return any amounts remaining in escrow within the servicer’s control within 20 days (excluding legal public holidays, Saturdays, and Sundays) after the borrower pays the mortgage loan in full, unless the borrower and servicer agree to credit the remaining funds towards an escrow account for certain new mortgage loans. The rule does not prohibit servicers from netting any funds remaining in an escrow account against the outstanding balance of the borrower’s mortgage loan.

Answer 375

Error Resolution Procedures – 12 CFR 1024.35 Servicers must comply with error resolution procedures that are triggered when a borrower submits an error notice to the servicer. The requirements set forth in 12 CFR 1024.35 apply to any mortgage loan, as that term is defined in 12 CFR 1024.31. The CFPB has issued an advisory opinion clarifying that, because borrowers initiate the error resolution process, a servicer’s communications with a borrower regarding an error notice are not subject to the “cease communication” provision of the Fair Debt Collection Practices Act (FDCPA) unless the borrower specifically withdraws the request for action regarding the error.19 19 CFPB Bulletin 2013-12.

Answer 376

Notice of Error – 12 CFR 1024.35(a) An error notice must be in writing and identify the borrower’s name, information that allows the servicer to identify the borrower’s account, and the alleged error. A qualified written request that asserts an error relating to the servicing of a mortgage loan is an error notice, and the servicer must comply with all of the error notice requirements with respect to such qualified written request. The commentary clarifies that a servicer should not rely solely on the borrower’s description of a submission to determine whether it is an error notice, an information request, or both. For example, a borrower may submit a letter titled “Notice of Error” that indicates that the borrower wants to receive the information set forth in an annual escrow account statement and asserts an error for the servicer’s failure to provide that statement. Such a letter could be both an error notice and an information request, and the servicer must evaluate whether the letter fulfills the substantive requirements of an error notice, information request, or both.

Answer 377

Scope of Error Resolution – 12 CFR 1024.35(b) The error resolution procedures apply to the following alleged errors: * Failure to accept a payment that complies with the servicer’s written requirements; * Failure to apply an accepted payment to principal, interest, escrow, or other charges as required by the mortgage loan and applicable law; * Failure to credit a payment to the borrower’s account as of the date the servicer received it, as required by 12 CFR 1026.36(c)(1); * Failure to pay taxes, insurance premiums, or other charges by the due date, as required by 12 CFR 1024.34(a); * Failure to refund an escrow account balance within 20 days (excluding legal public holidays, Saturdays, and Sundays) after the borrower pays the mortgage loan in full, as required by 12 CFR 1024.34(b); * Imposition of a fee or charge without a reasonable basis to do so; * Failure to provide an accurate payoff balance amount upon the borrower’s request, as required by 12 CFR 1026.36(c)(3); * Failure to provide accurate information to a borrower regarding loss mitigation options and foreclosure, as required by 12 CFR 1024.39; * Failure to transfer accurate and timely information relating to servicing to a transferee servicer; * Making the first notice or filing for a judicial or nonjudicial foreclosure process before the time periods allowed by 12 CFR 1024.41(f) and (j); * Moving for foreclosure judgment or order of sale or conducting a foreclosure sale in violation of 12 CFR 1024.41(g) or (j); and * Any other error relating to the servicing of a borrower’s mortgage loan. The commentary gives examples of errors not covered by 12 CFR 1024.35(b), such as errors relating to: (i) the origination of a mortgage loan; (ii) the underwriting of a mortgage loan; (iii) a subsequent sale or securitization of a mortgage loan; and (iv) a determination to sell, assign, or transfer the servicing of a mortgage loan (unless it concerns the failure to transfer accurate and timely information relating to the servicing of the borrower’s mortgage loan account to a transferee servicer).

Answer 378

Contact Information – 12 CFR 1024.35(c) If the servicer establishes an address to which borrowers must send error notices, the servicer must provide written notice of the address to the borrower with specified content. The commentary states that the servicer must also include this address on the following communications: (i) any periodic statement or coupon book required under 12 CFR 1026.41; (ii) any website the servicer maintains in connection with the servicing of the loan; and (iii) any notice required pursuant to 12 CFR 1024.39 (early intervention) or 12 CFR 1024.41 (loss mitigation) that includes contact information for assistance. The servicer must use the same address for receiving information requests under 12 CFR 1024.36(b), and provide written notice to the borrower before changing the address to which the borrower must send error notices.

Answer 379

Acknowledgement of Receipt – 12 CFR 1024.35(d) The servicer generally must provide a written acknowledgment to the borrower within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving the error notice.

Answer 380

Response to an Error Notice – 12 CFR 1024.35(e) A servicer generally has 30 days (excluding legal public holidays, Saturdays, and Sundays) from receipt of the error notice to investigate and respond to the notice, except that a servicer may extend this period by an additional 15 days (excluding legal public holidays, Saturdays, and Sundays) if, prior to the expiration of the original 30-day period, it notifies the borrower in writing of the extension and the reasons for it. A servicer must respond within seven days (excluding legal public holidays, Saturdays, and Sundays) if the alleged error is a failure to provide an accurate payoff balance amount, and a servicer must respond by the earlier of 30 days (excluding legal public holidays, Saturdays, and Sundays) or the date of a foreclosure sale if the error involves either (i) making the first notice or filing for a judicial or non-judicial foreclosure process before the time periods allowed by 12 CFR 1024.41(f) or (j), or (ii) moving for foreclosure judgment or order of sale or conducting a foreclosure sale in violation of 12 CFR 1024.41(g) or (j). In response to the notice of error, the servicer must either correct the error or conduct a reasonable investigation and determine that no error occurred. The servicer must also send a written response to the borrower that accomplishes one of the following: * If the servicer corrects the alleged error. The servicer must advise the borrower of the correction and when the correction took effect, and provide contact information, including phone number, for further assistance; * If the servicer determines that it committed an error or errors different than or in addition to those identified by the borrower. The servicer must correct the error and advise the borrower of the correction and when the correction took effect, and provide contact information, including phone number, for further assistance; or * If the servicer determines after a reasonable investigation that no error occurred. The servicer must state that it determined that no error occurred, the reasons for its determination, and the borrower’s right to request documents relied upon by the servicer in reaching its determination and how the borrower can make such a request, and provide contact information, including phone number, for further assistance. If the borrower requests those documents, the servicer generally must provide them within 15 days (excluding legal public holidays, Saturdays, and Sundays) at no cost to the borrower. The servicer need not provide documents that constitute confidential, proprietary, or privileged information. Furthermore, servicers responding to a notice of error request for documentation may omit location, contact, and personal financial information (other than information about the terms, status, and payment history of the mortgage loan) if: (i) the information pertains to a potential or confirmed successor in interest who is not the requester; or (ii) the requester is a confirmed successor in interest and the information pertains to any borrower who is not the requester. (Effective April 19, 2018). As a part of its investigation of the asserted error, the servicer may request supporting documentation from the borrower, but the servicer must conduct a reasonable investigation even if the borrower does not provide supporting documentation.

Answer 381

Early Correction or Error Asserted Before Foreclosure Sale – 12 CFR 1024.35(f) A servicer is not required to provide the five-day acknowledgement notice (12 CFR 1024.35(d)) or the response notice (12 CFR 1024.35(e)) if either: * The servicer corrects the asserted errors and notifies the borrower of the correction within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving the error notice; or * The servicer receives the error notice seven or fewer days before a foreclosure sale and the asserted error concerns the timing of the foreclosure process under 12 CFR 1024.35(b)(9) or (10). In this instance, the servicer must make a good faith attempt to respond to the borrower, either orally or in writing, and either correct the error or state the reason the servicer has determined that no error occurred.

Answer 382

Requirements Not Applicable – 12 CFR 1024.35(g) A servicer does not need to provide the five-day acknowledgement notice (12 CFR 1024.35(d)), provide the response notice (12 CFR 1024.35(e)), or refrain from providing adverse information to credit reporting agencies for 60 days (12 CFR 1024.35(i)), if the servicer reasonably determines any of the following apply: * Duplicative notice of error. The asserted error is substantially the same as a previously-asserted error for which the servicer complied with the obligation to respond, unless the borrower provides new and material information to support the asserted error. New and material information is information that is reasonably likely to change the servicer’s prior determination about the error; * Overbroad notice of error. The error notice is overbroad if the servicer cannot reasonably determine the specific alleged error. The commentary provides examples of overbroad notices, including those that assert errors regarding substantially all aspects of the mortgage loan (including origination, servicing, and foreclosure), notices that resemble legal pleadings and demand a response to each numbered paragraph, or notices that are not reasonably understandable or contain voluminous tangential information such that a servicer cannot reasonably identify from the notice any error that requires a response. Note that if a servicer concludes an error notice as submitted is overbroad, the servicer must still provide a five-day acknowledgment notice and a subsequent response to the extent the servicer can identify an appropriate error notice within the submission; or * Untimely notice of error. The error notice is sent more than one year after either the mortgage loan was discharged or the servicer receiving the notice of error transferred the mortgage loan to another servicer. For purposes of this provision, a mortgage loan is discharged when both the debt and all corresponding liens have been extinguished or released, as applicable. If a servicer determines that any of these three exceptions apply, it must provide written notice to the borrower within five days (excluding legal public holidays, Saturdays, and Sundays) after making that determination, including the basis relied upon.

Answer 383

Payment Requirements Prohibited – 12 CFR 1024.35(h) A servicer may not charge a fee or require a borrower to make any payments as a condition to responding to an error notice.

Answer 384

Effect on Servicer Remedies – 12 CFR 1024.35(i) In the 60-day period after receiving an error notice, a servicer may not furnish adverse information to any consumer reporting agency regarding any payment that is the subject of the error notice.

Answer 385

Requests for Information – 12 CFR 1024.36 Servicers must follow certain procedures in response to a borrower’s written request for information with respect to the borrower’s mortgage loan. The request must include the borrower’s name, information that allows the servicer to identify the borrower’s account, and the requested information related to the borrower’s mortgage loan. The request can be from the borrower or the borrower’s agent; a servicer may undertake reasonable procedures to determine if an alleged agent has authority from the borrower to act as the borrower’s agent. A qualified written request that requests information relating to the servicing of a mortgage loan is an information request, and the servicer must comply with all of the information request requirements with respect to such a qualified written request. The requirements set forth in 12 CFR 1024.36 apply to any mortgage loan, as that term is defined in 12 CFR 1024.31. The CFPB has issued an advisory opinion clarifying that, because borrowers initiate requests for information, a servicer’s communications with a borrower regarding such a request for information are not subject to the FDCPA’s “cease communication” provision, unless the borrower specifically withdraws the information request. 20

Answer 386

Contact Information – 12 CFR 1024.36(b) If the servicer establishes an address to which borrowers must send information requests, the servicer must provide written notice of the address to the borrower with specified information. The commentary states that the servicer must also include this address on the following communications: (i) any periodic statement or coupon book required under 12 CFR 1026.41; (ii) any website the servicer maintains in connection with the servicing of the loan; and (iii) any notice required pursuant to 12 CFR 1024.39 (early intervention) or 12 CFR 1024.41 (loss mitigation) that includes contact information for assistance. The servicer must use the same address for receiving error notices under 12 CFR 1024.35(b), and provide written notice to the borrower before changing the address to which the borrower must send information requests.

Answer 387

Acknowledgement of Receipt – 12 CFR 1024.36(c) The servicer generally must provide a written acknowledgment to the borrower within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving the information request.

Answer 388

Response to Information Request – 12 CFR 1024.36(d) A servicer generally must respond in writing to an information request within 30 days (excluding legal public holidays, Saturdays, and Sundays) of receipt, except that a servicer may extend this period by an additional 15 days (excluding legal public holidays, Saturdays, and Sundays) if, prior to the expiration of the original 30-day period, it notifies the borrower in writing of the extension and the reasons for it. A servicer must respond within 10 days (excluding legal public holidays, Saturdays, and Sundays) after receiving the request, if the borrower requested the identity or contact information for the owner or assignee of a mortgage loan. The servicer must respond in writing by either: * Providing the requested information and contact information, including phone number, for further assistance; or * Conducting a reasonable search for the information and advising the borrower that the servicer has determined that the requested information is not available to it, the basis for the servicer’s determination, and contact information, including phone number, for further assistance. Information is not available if it is not in the servicer’s control or possession, or the servicer cannot retrieve it in the ordinary course of business through reasonable efforts. The commentary gives examples of when information is or is not available. In its response to a request for information, a servicer may omit location, contact, and personal financial information (other than information about the terms, status, and payment history of the mortgage loan) if: (i) the information pertains to a potential or confirmed successor in interest who is not the requester; or (ii) the requester is a confirmed successor in interest and the information pertains to any borrower who is not the requester. (12 CFR 1024.36(d)(3)). (Effective April 19, 2018).

Answer 389

Early Response – 12 CFR 1024.36(e) The five-day receipt acknowledgement (12 CFR 1024.36(c)) and the response (12 CFR 1024.36(d)) requirements do not apply if the servicer provides the requested information and contact information, including phone number, for further assistance within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving the information request.

Answer 390

Requirement Not Applicable – 12 CFR 1024.36(f) The five-day receipt acknowledgement (12 CFR 1024.36(c)) and the response notice (12 CFR 1024.36(d)) requirements also do not apply if the servicer reasonably determines any of the following exceptions apply: * The information requested is substantially the same information that the borrower previously requested. * The information requested is confidential, proprietary, or privileged. * The information requested is not directly related to the borrower’s mortgage loan account. The commentary provides examples of irrelevant information, including information related to the servicing of mortgage loans other than the borrower’s loan and investor instructions or requirements for servicers regarding the negotiation or approval of loss mitigation options. * The information request is overbroad or unduly burdensome. A request is overbroad if the borrower requests that the servicer provide an unreasonable volume of documents or information. A request is unduly burdensome if a diligent servicer could not respond within the time periods set forth in 12 CFR 1024.36(d)(2) or would incur costs (or have to dedicate resources) that would be unreasonable in light of the circumstances. The commentary provides examples of overbroad or unduly burdensome requests, such as requests that seek documents relating to substantially all aspects of mortgage origination, mortgage servicing, mortgage sale or securitization, and foreclosure, as well as requests that require servicers to provide information in a specific format or seek information that is not reasonably likely to assist the borrower. If an information request as submitted is overbroad or unduly burdensome, the servicer must still provide the five-day acknowledgment of receipt and subsequent response if the servicer can reasonably identify an appropriate information request within the submission. * The information request is sent more than one year after either the mortgage loan was discharged or the servicer receiving the information request transferred the mortgage loan to another servicer. For purposes of this provision, a mortgage loan is discharged when both the debt and all corresponding liens have been extinguished or released, as applicable. If a servicer determines that any of these five exceptions apply, it must provide written notice to the borrower within five days (excluding legal public holidays, Saturdays, and Sundays) after making that determination, including the basis relied on.

Answer 391

Payment Requirement Limitations – 12 CFR 1024.36(g) A servicer generally may not charge a fee, or require a borrower to make any payment that may be owed on a borrower’s account, as a condition of responding to an information request. A servicer may charge for providing a beneficiary notice under applicable state law, if such a fee is not otherwise prohibited by applicable law.

Answer 392

Potential Successors in Interest – 12 CFR 1024.36(i) (Effective April 19, 2018) A servicer must respond to a written request from a person indicating that the person may be a successor in interest if the request includes the name of the transferor borrower from whom the person received an ownership interest and information that enables the servicer to identify the mortgage loan. The response must generally provide a written description of the documents the servicer reasonably requires to confirm the person’s identity and ownership interest in the property as well as contact information, including a telephone number, for further assistance. With respect to the written request, a servicer must treat the potential successor in interest as a borrower for the purposes of 12 CFR1024.36(c) through 1024.36(g). A servicer must respond to such a request not later than the time limits set forth in 12 CFR 1024.36(d)(2) for information requests. Depending on the facts and circumstances of the request, responding promptly may require a servicer to respond more quickly than the time limits established in 12 CFR 1024.36(d)(2). (Comment 36(i)-2). Under 12 CFR 1024.38(b)(1)(vi)(B), a servicer, other than a small servicer, must maintain policies and procedures that are reasonably designed to promptly facilitate communication with potential successors in interest and promptly confirm a potential successor in interest’s identity and ownership interest in the property securing the mortgage loan.

Answer 393

Force-Placed Insurance – 12 CFR 1024.37 Servicers must comply with restrictions on obtaining and assessing charges and fees for force-placed insurance, defined as hazard insurance that a servicer obtains on behalf of the owner or assignee to insure the property securing the mortgage loan (but does not include (i) flood insurance required by the Flood Disaster Protection Act of 1973, (ii) hazard insurance obtained by a borrower but renewed by the borrower’s servicer in accordance with 12 CFR 1024.17(k)(1), (2), or (5), or (iii) hazard insurance obtained by a borrower but renewed by the borrower’s servicer with the borrower’s agreement). The requirements set forth in 12 CFR 1024.37 apply to any mortgage loan, as that term is defined in 12 CFR 1024.31. The CFPB has issued an advisory opinion clarifying that, because the Dodd-Frank Act specifically mandates certain disclosures regarding force-placed insurance without any mention of the FDCPA’s “cease communication” provisions, a servicer acting as a debt collector does not violate the FDCPA’s “cease communication” provision by providing the notices required under 12 CFR 1024.37. 21 21 CFPB Bulletin 2013-12.

Answer 394

Requirements Before Charging For Force-placed Insurance – 12 CFR 1024.37(b), (c), (d) Servicers may not assess charges or fees for force-placed insurance unless the servicer satisfies four requirements. First, the servicer must have a reasonable basis to believe that the borrower has failed to maintain required hazard insurance. The commentary states that information about a borrower’s hazard insurance received by the servicer from the borrower, the borrower’s insurance provider, or the borrower’s insurance agent, may provide a servicer with a reasonable basis. If a servicer receives no such information, the servicer may satisfy the reasonable basis standard if the servicer acts with reasonable diligence to ascertain the borrower’s hazard insurance status and does not receive evidence of hazard insurance. Second, the servicer must mail or deliver an initial written notice to the borrower at least 45 days before assessing a charge or fee related to force-placed insurance. The servicer’s notice must identify the following: * The date of the notice; * The servicer’s name and mailing address; * The borrower’s name and mailing address; * A statement requesting that the borrower provide hazard insurance information for the borrower’s property and identifying the property by its physical address; * A statement that the borrower’s hazard insurance has expired, is expiring, or provides insufficient coverage, as applicable; that the servicer lacks evidence that the borrower has hazard insurance coverage past the expiration date or lacks evidence of sufficient coverage, as applicable; and if applicable, identifies the type of hazard insurance lacking; * A statement that hazard insurance is required on the borrower’s property and that the servicer has purchased or will purchase insurance at the borrower’s expense; * A request that the borrower promptly provide the servicer with insurance information; * A description of the requested insurance information and how the borrower may provide such information, and if applicable, that the requested information must be in writing; * A statement that the insurance coverage the servicer has purchased or will purchase may cost significantly more than, and provide less coverage than, hazard insurance purchased by the borrower; * The servicer’s phone number for borrower inquiries; and * A statement advising that the borrower review additional information provided in the same transmittal (if applicable). The servicer cannot provide any information on the initial notice other than the specific statements listed above and, at the servicer’s option, the loan account number. The servicer, however, can provide additional information on separate pages of paper contained in the same mailing. Certain information must be provided in bold text. Appendix MS3(A) contains a form notice that servicers may use. Third, the servicer must send a reminder notice at least 30 days after the initial notice is mailed or delivered and at least 15 days before the servicer assesses charges or fees. If the servicer has received no hazard insurance information in response to the initial notice described above, the reminder notice must contain the date of the reminder notice and all of the other information provided in the initial notice, as well as (i) advise that it is a second and final notice, and (ii) identify the annual cost of force-placed insurance, or if unknown, a reasonable estimate of that cost. If the servicer has received hazard insurance information but not evidence that sufficient coverage has been in place continuously, the reminder notice must identify the following: * The date of the notice; * The servicer’s name and mailing address; * The borrower’s name and mailing address; * A statement requesting that the borrower provide hazard insurance information for the borrower’s property and that identifies the property by its physical address; * A statement that the insurance coverage the servicer has purchased or will purchase may cost significantly more than, and provide less coverage than, hazard insurance purchased by the borrower; * The servicer’s phone number for borrower inquiries; * A statement advising that the borrower review additional information provided in the same transmittal (if applicable); * A statement that it is the second and final notice; * The annual cost of force-placed insurance, or if unknown, a reasonable estimate of that cost; * A statement that the servicer has received the hazard insurance information that the borrower provided; * A request that the borrower provide the missing information; and * A statement that the borrower will be charged for insurance the servicer purchases during the time period in which the servicer cannot verify coverage. The servicer cannot provide any additional information on the reminder notice other than specific statements listed above and, at the servicer’s option, the loan account number. The servicer, however, can provide additional information on separate pages of paper contained in the same transmittal. Certain information must be provided in bold text. Appendix MS-3 contains sample reminder notices at forms MS-3(B) and MS-3(C). If a servicer receives new information about a borrower’s hazard insurance after the required written notice has been put into production, the servicer is not required to update the notice if the written notice was put into production a reasonable time prior to the servicer delivering the notice to the borrower or placing the notice in the mail. For purposes of 12 CFR 1024.37(d)(5), five days (excluding legal holidays, Saturdays, and Sundays) is a reasonable time. (Comment 37(d)(5)-1). Fourth, by the end of the 15-day period beginning on the date the servicer delivers the reminder notice or places it in the mail, the servicer must not have received evidence that the borrower has had required hazard insurance continuously in place. As evidence, the servicer may require a copy of the borrower’s hazard insurance policy declaration page, the borrower’s insurance certificate, the borrower’s insurance policy, or other similar forms of written confirmation.

Answer 395

Renewing Force-Placed Insurance – 12 CFR 1024.37(e) A servicer must comply with two requirements before assessing charges or fees on a borrower to renew or replace existing force-placed insurance. First, the servicer must provide written notice at least 45 days before assessing a premium charge or fee. This renewal notice must provide the following information: * The date of the renewal notice; * The servicer’s name and mailing address; * The borrower’s name and mailing address; * A request that the borrower update the hazard insurance information and that identifies the property by its physical address; * A statement that the servicer previously purchased forceplaced insurance at the borrower’s expense because the servicer did not have evidence that the borrower had hazard insurance coverage; * A statement that the force-placed insurance is expiring or has expired and that the servicer intends to renew or replace it because hazard insurance is required on the property; * A statement that the insurance coverage the servicer has purchased or will purchase may cost significantly more than, and provide less coverage than, hazard insurance purchased by the borrower, and identifying the annual cost (or if unknown, a reasonable estimate) of forceplaced insurance; * A statement that if the borrower purchases hazard insurance, the borrower should promptly advise the servicer; * A description of the requested insurance information and how the borrower may provide such information, and if applicable, that the requested information must be in writing; * The servicer’s telephone number for borrower inquiries; and * A statement advising the borrower to review additional information provided in the same transmittal (if applicable). The servicer cannot provide any additional information on the renewal notice other than the specific statements listed above, and, at the servicer’s option, the loan account number. The servicer, however, can provide additional information on separate pages of paper contained in the same transmittal. Certain information must be provided in bold text. Appendix MS-3(D) contains a form notice that servicers may use. Second, by the end of the 45-day period beginning on the date the written notice was delivered or placed in the mail, the servicer must not have received evidence demonstrating that the borrower has purchased required hazard insurance coverage. Notwithstanding these two requirements, if not prohibited by state or other applicable law, if the servicer receives evidence that the borrower lacked insurance for some period of time after the existing force-placed insurance expired, the servicer may promptly assess a premium charge or fee related to renewing or replacing the existing force-placed insurance for that period of time. The servicer must mail or deliver the renewal notice before each anniversary of purchasing force-placed insurance, though the servicer need not send the renewal notice more than once per year.

Answer 396

Mailing the Notices – 12 CFR 1024.37(f) If the servicer mails the initial notice, the reminder notice, or the renewal notice, the servicer must use at least first-class mail.

Answer 397

Canceling Force-Placed Insurance – 12 CFR 1024.37(g) If the servicer receives evidence that the borrower has had required hazard insurance coverage in place, then the servicer has 15 days to cancel the force-placed insurance, refund force-placed insurance premium charges and fees for the period of overlapping insurance coverage, and remove all force-placed charges and fees from the borrower’s account for that period.

Answer 398

Limitations on Force-Placed Insurance – 12 CFR 1024.37(h) All charges that a servicer assesses on a borrower related to force-placed insurance must be bona fide and reasonable, except for charges subject to state regulation and charges authorized by the Flood Disaster Protection Act of 1973. A bona fide and reasonable charge is one that is reasonably related to the servicer’s cost of providing the service and is not otherwise prohibited by law.

Answer 399

General Servicing Policies, Procedures, and Requirements – 12 CFR 1024.38 Servicers must maintain policies and procedures reasonably designed to achieve certain servicing-related objectives, and are subject to requirements regarding record retention and the ability to create servicing files. These requirements apply to any mortgage loan, as that term is defined in 12 CFR 1024.31, except that they do not apply to (i) small servicers, (ii) reverse mortgage transactions, as that term is defined in 12 CFR 1024.31, or (iii) mortgage loans for which the servicer is a qualified lender. As noted above, an institution qualifies as a small servicer under 12 CFR 1026.41(e)(4)(ii) if it (a) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee, (b) is a Housing Finance Agency, as defined in 24 CFR 266.5, or (c) is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. 22 The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. As specified in 12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5). Qualified lenders are those defined to be qualified lenders under the Farm Credit Act of 1971 and the Farm Credit Administration’s accompanying regulations set forth at 12 CFR 617.7000 et seq. 23 22 The definition of small servicer is set forth at 12 CFR 1026.41(e)(4)(ii). 23 12 CFR 617.7000 defines a qualified lender as (i) a system institution (except a bank for cooperatives) that extends credit to a farmer, rancher, or producer or harvester of aquatic products for any agricultural or aquatic purpose and other credit needs of the borrower, and (ii) other financing institutions with respect to loans discounted or pledged under section 1.7(b)(1)(B) of the Farm Credit Act.

Answer 400

Reasonable Policies and Procedures – 12 CFR 1024.38(a) Servicers must maintain policies and procedures reasonably designed to meet the objectives identified in 12 CFR 1024.38(b). Servicers may determine the specific policies and procedures they will adopt and the methods for implementing them in light of the size, nature, and scope of the servicers’ operations, including, for example, the volume and aggregate unpaid principal balance of mortgage loans serviced, the credit quality (including the default risk) of the mortgage loans serviced, and the servicer’s history of consumer complaints. “Procedures” refer to the servicer’s actual practices for achieving the objective.

Answer 401

Objectives – 12 CFR 1024.38(b) Servicers are required to maintain policies and procedures that are reasonably designed to achieve the following objectives. I. Accessing and providing timely and accurate information. The servicer’s policies and procedures must be reasonably designed to ensure that the servicer can: a. Provide accurate and timely disclosures to the borrower. b. Investigate, respond to, and make corrections in response to borrowers’ complaints. These policies and procedures must be reasonably designed to ensure that the servicer can promptly obtain information from service providers to facilitate investigation and correction of errors resulting from actions of service providers. c. Provide a borrower with accurate and timely information and documents in response to the borrower’s request for information with respect to the borrower’s mortgage loan. d. Provide owners and assignees of mortgage loans with accurate information and documents about all the mortgage loans that they own. This includes information about a servicer’s evaluations of borrowers for loss mitigation options and a servicer’s loss mitigation agreements with borrowers, including loan modifications. Such information includes, for example: (a) a loan modification’s date, terms, and features; (b) the components of any capitalized arrears; (c) the amount of any servicer advances; and (d) any assumptions regarding the value of property used in evaluating any loss mitigation options. e. Submit documents or filings required for a foreclosure process, including documents or filings required by a court, that reflect accurate and current information and that comply with applicable law. f. 1. Upon notification of a borrower’s death, promptly identify and facilitate communication with the borrower’s successor in interest concerning the secured property. (Effective until April 19, 2018). 2. Upon receiving notice of a borrower’s death or of any transfer of the secured property, promptly facilitate communication with any potential or confirmed successors in interest regarding the property. (Effective April 19, 2018). g. Upon receiving notice of the existence of a potential successor in interest, promptly determine the documents the servicer reasonably requires to confirm the person’s identity and ownership interest in the property (see commentary to 12 CFR 1024.38(b)(1)(vi) for illustrative examples) and promptly provide to the potential successor in interest a description of those documents and how the person may submit a written request under 12 CFR 1024.36(i). (Effective April 19, 2018). h. Upon the receipt of such documents, promptly make a confirmation determination and promptly notify the person, as applicable, that the servicer has confirmed the person’s status, has determined that additional documents are required (and what those documents are), or has determined that the person is not a successor in interest. (Effective April 19, 2018). III. II. Properly evaluating loss mitigation applications. The servicer’s policies and procedures must be reasonably designed to ensure that the servicer can: a. Provide accurate information regarding loss mitigation options available to the borrower from the owner or assignee of the borrower’s loan. b. Identify specifically all loss mitigation options available to a borrower from the owner or assignee of the borrower’s mortgage loan. This includes identifying, with respect to each owner or assignee all of the loss mitigation options the servicer may consider when evaluating a borrower, as well as the criteria the servicer should apply for each option. The policies and procedures should be reasonably designed to address how the servicer will apply any specific thresholds for eligibility for particular loss mitigation options established by an owner or assignee of a mortgage loan (e.g., if the owner requires that a particular option be limited to a certain percentage of loans, then the policies and procedures must be reasonably designed to determine in advance how the servicer will apply that threshold). The policies and procedures must be reasonably designed to ensure that such information is readily accessible to the servicer’s loss mitigation personnel. c. Provide the loss mitigation personnel assigned to the borrower’s mortgage loan with prompt access to all of the documents and information that the borrower submitted in connection with a loss mitigation option. d. Identify the documents and information a borrower must submit to complete a loss mitigation application, and facilitate compliance with the notice required pursuant to 12 CFR 1024.41(b)(2)(i)(B). e. In response to a complete loss mitigation application, properly evaluate the borrower for all eligible loss mitigation options pursuant to any requirements established by the owner or assignee of the mortgage loan, even if those requirements are otherwise beyond the requirements of 12 CFR 1024.41. For example, an owner or assignee may require that the servicer review a loss mitigation application submitted less than 37 days before a foreclosure sale or re-evaluate a borrower who has demonstrated a material change in financial circumstances. f. Promptly identify and obtain documents or information not in the borrower’s control that the servicer requires to determine which loss mitigation options, if any, to offer the borrower in accordance with the requirements of 12 CFR 1024.41(c)(4). III. Facilitating oversight of, and compliance by, service providers. The servicer’s policies and procedures must be reasonably designed to ensure that the servicer can: a. Provide appropriate personnel with access to accurate and current documents and information concerning service providers’ actions. b. Facilitate periodic reviews of service providers. c. Facilitate the sharing of accurate and current information regarding the status of any evaluation of a borrower’s loss mitigation application and any foreclosure proceeding among appropriate servicer personnel, including the loss mitigation personnel assigned the borrower’s mortgage loan, and appropriate service provider personnel, including service provider personnel responsible for handling foreclosure proceedings. o Further a servicer’s policies and procedures must be reasonably designed to ensure that servicer personnel promptly inform service provider personnel handling foreclosure proceedings that the servicer has received a complete loss mitigation application and promptly instruct foreclosure counsel to take any step required by 12 CFR 1024.41(g)— which generally sets forth limitations on moving for judgment or order of sale, or conducting a foreclosure sale—sufficiently timely to avoid violating the prohibition against moving for judgment or order of sale, or conducting a foreclosure sale.(Comment 38(b)(3)(iii)-1). IV. Facilitating transfer of information during servicing transfers. a. Transferor Servicer. The servicer’s policies and procedures must be reasonably designed to ensure that when it transfers a mortgage loan to another servicer, it (i) timely and accurately transfers all information and documents in its possession and control related to a transferred mortgage loan to the transferee servicer, and (ii) transfers the information and documents in a form and manner that ensures their accuracy and that allows the transferee to comply with the terms of the mortgage loan and applicable law. For example, where data is transferred electronically, a transferor servicer must have policies and procedures reasonably designed to ensure that data can be properly and promptly boarded by a transferee servicer’s electronic systems. The information that must be transferred includes information reflecting the current status of discussions with the borrower concerning loss mitigation options, any loss mitigation agreements entered into with the borrower, and analysis the servicer performed with respect to potential recovery from a non-performing mortgage loan. b. Transferee Servicer. The servicer’s policies and procedures must be reasonably designed to ensure that when it receives a mortgage loan from another servicer, it can (i) identify necessary documents or information that may not have been transferred, and (ii) obtain such documentation or information from the transferor servicer. The servicer’s policies and procedures must also be reasonably designed to address obtaining missing information regarding loss mitigation from the transferor servicer before attempting to obtain it from the borrower. For example, if a servicer receives information indicating that a borrower has made payments consistent with a trial or permanent loan modification but the servicer has not received information about the actual modification, the servicer must have policies and procedures reasonably designed to identify whether any such modification agreement exists and to obtain any such agreement from the transferor servicer. V. Informing borrowers of the written error resolution and information request procedures. a. The servicer must have policies and procedures reasonably designed to inform borrowers of the procedures for submitting written error notices under 12 CFR 1024.35 and written information requests under 12 CFR 1024.36. A servicer may comply with these requirements by informing borrowers of these procedures by notice (mailed or delivered electronically) or a website. For example, a servicer may comply with this provision by including a statement in the 12 CFR 1026.41 periodic statement advising borrowers that they have certain rights under federal law related to resolving errors and requesting information, that they may learn more about their rights by contacting the servicer, and directing borrowers to a website. b. A servicer’s policies and procedures also must be reasonably designed to ensure that the servicer provides borrowers who are dissatisfied with the servicer’s response to oral complaints or information requests with information about submitting a written error notice or written information request. c. The commentary addresses the circumstance in which a borrower incorrectly submits an error notice to any address given to the borrower in connection with the submission of a loss mitigation application or continuity of contact. A servicer’s policies and procedures must be reasonably designed to ensure that the servicer informs a borrower of the correct procedures for submitting written error notices under such circumstances, including the correct address. Alternatively, the servicer could redirect the error notice to the correct address.

Answer 402

Standard Requirements – 12 CFR 1024.38(c) Servicers must also retain certain records and maintain particular documents in a manner that facilitates compiling such documents and data into a servicing file.

Answer 403

Record Retention – 12 CFR 1024.38(c)(1) Servicers must retain records that document any actions the servicer took with respect to a borrower’s mortgage loan account until one year after the loan is discharged or the servicer transfers servicing for the mortgage loan. Servicers may use any retention method that reproduces records accurately (such as computer programs) and that ensures that a servicer can access the records easily (such as a contractual right to access records another entity holds).

Answer 404

Servicing File – 12 CFR 1024.38(c)(2) Servicers must maintain the following documents and data in a manner that facilitates compiling such documents and data into a servicing file within five days: a schedule of all credits and debits to the account (including escrow accounts and suspense accounts), a copy of the security instrument establishing the lien securing the mortgage, any notes created by servicer personnel concerning communications with the borrower, a report of the data fields created by the servicer’s electronic systems relating to the borrower’s account (if applicable), and copies of any information or documents provided by the borrower in connection with error notices or loss mitigation. For purposes of this section, a report of data fields relating to a borrower’s account means a report listing the relevant data fields by name, populated with any specific data relating to the borrower’s account. Examples of such data fields include fields used to identify the terms of the borrower’s mortgage loan, the occurrence of automated or manual collection calls, the evaluation of borrower for a loss mitigation option, the owner or assignee of a mortgage loan, and any credit reporting history. These requirements apply only to information created on or after January 10, 2014.

Answer 405

Early Intervention Requirements for Certain Borrowers – 12 CFR 1024.39 Servicers must engage in certain efforts to contact delinquent borrowers. These requirements apply to only those mortgage loans, as that term is defined in 12 CFR 1024.31, that are secured by the borrower’s principal residence. The requirements do not apply to (i) small servicers, (ii) reverse mortgage transactions, as that term is defined in 12 CFR 1024.31, or (iii) mortgage loans for which the servicer is a qualified lender. As noted above, an institution qualifies as a small servicer under 12 CFR 1026.41(e)(4)(iii) if it (a) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee, (b) is a Housing Finance Agency, as defined in 24 CFR 266.5, or (c) is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. As specified in 12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5). Qualified lenders are those defined to be qualified lenders under the Farm Credit Act of 1971 and the Farm Credit Administration’s accompanying regulations set forth at 12 CFR 617.7000 et seq. For purposes of this section, a borrower who is performing under a loss mitigation agreement is not considered delinquent and is not covered by this section.

Answer 406

Live Contact – 12 CFR 1024.39(a) Servicers must make good faith efforts to establish live contact with a borrower no later than the 36th day of delinquency. The servicer’s live contact requirement is continuous so long as the borrower remains delinquent. Under 12 CFR 1024.31, “delinquency” for Subpart C’s provisions means a period of time during which a borrower and a borrower's mortgage loan obligation are delinquent. A borrower and a borrower's mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid. See also the related commentary to 1024.31 for more on the delinquency definition. Borrowers are not delinquent for purposes of early intervention requirements under 12 CFR 1024.39 if they are performing as agreed according to the terms of a loss mitigation plan designed to bring the borrower current on a previously missed payment, but they may be considered delinquent for other purposes under the servicing rules and may also become delinquent for purposes of early intervention requirements if and when they fail to make a payment required under such a plan. The commentary also states that good faith efforts to establish live contact consist of “reasonable steps, under the circumstances,” and these efforts “may include telephoning the borrower on more than one occasion or sending written or electronic communication encouraging the borrower to establish live contact with the servicer.” Promptly after establishing live contact, the servicer must inform the borrower of any loss mitigation options, if appropriate. It is within the servicer’s reasonable discretion to determine whether it is appropriate under the circumstances to inform a borrower of the availability of loss mitigation options. Examples of a servicer making a reasonable determination include a servicer informing a borrower about loss mitigation options after the borrower notifies the servicer during live contact of a material adverse change in financial circumstances that is likely to cause a long-term delinquency for which loss mitigation options may be available, or a servicer not providing information about loss mitigation options to a borrower who has missed a January 1 payment and notified the servicer that the full late payment will be transmitted to the servicer by February 15. If the servicer has established and is maintaining ongoing contact with the borrower under the loss mitigation procedures in 12 CFR 1024.41, including during the borrower’s completion of a loss mitigation application or the servicer’s evaluation of the borrower’s complete loss mitigation application, or if the servicer has sent the borrower a notice pursuant to 12 CFR 1024.41(c)(1)(ii) that the borrower is not eligible for any loss mitigation options, the servicer complies with its live contact requirements under 12 CFR 1024.39(a) and need not otherwise establish or make good faith efforts to establish live contact. A servicer must resume compliance with the live contact requirements for a borrower who becomes delinquent again after curing a prior delinquency. (Comment 39(a)-6).

Answer 407

Written Notice – 12 CFR 1024.39(b) Servicers must send a borrower a written notice within 45 days after the borrower becomes delinquent and again no later than 45 days after each payment due date so long as the borrower remains delinquent. The written notice must encourage the borrower to contact the servicer, provide the servicer’s telephone number and address to access assigned loss mitigation personnel, describe examples of loss mitigation options that may be available (if applicable), provide loss mitigation application instructions or advise how to obtain more information about loss mitigation options such as contacting the servicer (if applicable), and list either the CFPB’s or HUD’s website to access a list of homeownership counselors or counseling organization and HUD’s toll-free number to access homeownership counselors or counseling organizations. Appendix MS-4 contains model clauses at MS-4(A), MS4(B), MS-4(C), and MS-4(D) that servicers subject to the FDCPA can use to comply with a new disclosure requirement for the written notice, as discussed more below. A servicer is not required to provide the written notice under this section to a borrower more than once in any 180-day period. For example, a servicer who provided the written notice to the borrower within 45 days after the borrower became delinquent on January 1 would not be required to send another written notice if the borrower failed to make the February 1 payment. If a borrower is 45 days or more delinquent at the end of any 180–day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 180 days after the provision of the prior written notice. If the borrower is less than 45 days delinquent at the end of that period, a servicer must provide the notice again no later than 45 days after the payment due date for which the borrower remains delinquent. A transferee servicer is required to provide the written notice to the borrower regardless of whether the transferor servicer provided a written notice in the preceding 180-day period. However, a transferee servicer is not required to provide a written notice if the transferor servicer provided one within 45 days of the transfer date. For example, assume a borrower has monthly payments, with a payment due on March 1. The transferor servicer provides the notice required by 12 CFR 1024.39(b) on April 10. The loan is transferred on April 12. Assuming the borrower remains delinquent, the transferee servicer is not required to provide another written notice until 45 days after May 1, the first post-transfer payment due date—i.e., by June 15. (Comment 39(b)(1)-5).

Answer 408

Borrowers in bankruptcy – 12 CFR 1024.39(c)) Partial Exemption Servicers are exempt from complying with the live contact obligations under 12 CFR 1024.39(a) while any borrower on a mortgage loan is a debtor in bankruptcy under title 11 of the United States Code, with regard to that mortgage loan. Servicers are also exempt from providing the written notice under 12 CFR 1024.39(b) while any borrower on a mortgage loan is a debtor in bankruptcy under Title 11 of the United States Code, with regard to that mortgage loan, if no loss mitigation option is available or if any borrower on the mortgage loan has provided a cease communication notice under the FDCPA with respect to that mortgage loan (and the servicer is subject to the FDCPA for that loan). If the above conditions relating to the written notice exemption are not met, and any borrower on the mortgage loan is a debtor in bankruptcy, then the servicer must comply with modified written notice requirements under 12 CFR 1024.39(b): * Content: the notice may not contain a request for payment. * Timing: o If a borrower is delinquent when the borrower becomes a debtor in bankruptcy, the servicer must provide the written notice not later than the 45th day after the borrower files a bankruptcy petition under Title 11 of the United States Code. o However, if the borrower is not delinquent at the time of the bankruptcy petition filing, but subsequently becomes delinquent while a debtor in bankruptcy, the servicer must provide the written notice not later than the 45th day of the borrower’s delinquency. o A servicer must comply with these timing requirements regardless of whether the servicer provided the written notice in the preceding 180-day period. o A servicer is not required to provide the written notice more than once during a single bankruptcy case.

Answer 409

Resuming Compliance A servicer that was exempt from the live contact and written early intervention notice requirements must resume compliance with such requirements after the next payment due date that follows the earliest of the following events: * The bankruptcy case is dismissed, * The bankruptcy case is closed, and * The borrower reaffirms personal liability for the mortgage loan. A servicer is not required to resume compliance with the live contact requirements with respect to a mortgage loan for which the borrower has discharged personal liability pursuant to sections 727, 1141, 1228, or 1328 of Title 11 of the United States Code, but must resume compliance with the written notice requirement if the borrower has made any partial or periodic payment on the mortgage loan after the commencement of the borrower’s bankruptcy case.

Answer 410

Fair Debt Collections Practices Act Partial Exemption – 12 CFR 1024.39(d) If a mortgage servicer is a debt collector under the FDCPA with regard to a borrower’s mortgage loan, 12 CFR 1024.39(d) clarifies the servicer’s early intervention obligations when that borrower has invoked cease communication protections by providing a notification pursuant to Section 805(c) of the FDCPA. For such borrowers invoking their FDCPA cease communication protections, servicers are exempt from the live contact requirements under 12 CFR 1024.39(a). Servicers are also exempt from the written notice requirements under 12 CFR 1024.39(b) when such a borrower on the loan has invoked the FDCPA cease communication protections and either of the following applies: (1) no loss mitigation option is available or (2) any borrower on the mortgage loan is a debtor in bankruptcy under Title 11 of the United States Code. However, servicers are required to comply with modified written notice requirements if the borrower has invoked FDCPA cease communication protections and these conditions are not met (e.g., a loss mitigation option is available or no borrower on that loan is a debtor in bankruptcy): * Content: o The modified written notice must include a statement that the servicer may or intends to invoke its remedy of foreclosure. o The written notice, however, may not contain a request for payment. Servicers subject to the FDCPA can use MS-4(D) to comply with a new disclosure requirement for the written notice. * Timing: o A servicer is prohibited from providing the written notice more than once during any 180-day period. If a borrower is 45 days or more delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 190 days after the provision of the prior written notice. If a borrower is less than 45 days delinquent at the end of any 180-day period after the servicer has provided the written notice, a servicer must provide the written notice again no later than 45 days after the payment due date for which the borrower remains delinquent or 190 days after the provision of the prior written notice, whichever is later.24 Further, such servicers do not violate FDCPA Section 805(c) with respect to the mortgage loan when providing the written early intervention notice required by 12 CFR 1024.39(b)(3), as modified by 12 CFR 1024.39(d)(3), to a borrower who has invoked the cease communication rights.25 Nor does a servicer violate FDCPA Section 805(c) by providing loss mitigation information or assistance in response to a borrower-initiated communication after the borrower has invoked the cease communication rights.26 A servicer subject to the FDCPA, however, must continue to comply with all other applicable provisions of the FDCPA, including restrictions on communications and prohibitions on harassment or abuse, false or misleading representations, and unfair practices.27. 24 See Interim Final Rule, 82 Fed. Reg. 47953, 47957-58 (October 16, 2017). 25 Comment 39(d)-2. See also 2016 FDCPA Interpretive Rule (81 Fed. Reg. 71977, 71979-80). 26 Comment 39(d)-2. See also 2016 FDCPA Interpretive Rule (81 Fed. Reg. 71977, 71980-81). 27 See 15 U.S.C. §§ 1692c through 1692f.

Answer 411

Continuity of Contact – 12 CFR 1024.40 Servicers must maintain policies and procedures to facilitate continuity of contact between the borrower and the servicer. These requirements apply to only those mortgage loans, as that term is defined in 12 CFR 1024.31, that are secured by the borrower’s principal residence. The requirements do not apply to (i) small servicers, (ii) reverse mortgage transactions, as that term is defined in 12 CFR 1024.31, or (iii) mortgage loans for which the servicer is a qualified lender. As noted above, an institution qualifies as a small servicer if it (a) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee, (b) is a Housing Finance Agency, as defined in 24 CFR 266.5, or (c) is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. As specified in12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5). Qualified lenders are those defined to be qualified lenders under the Farm Credit Act of 1971 and the Farm Credit Administration’s accompanying regulations set forth at 12 CFR 617.7000 et seq.

Answer 412

General Continuity of Contact Policies and Procedures – 12 CFR 1024.40(a) Servicers must have policies and procedures that are reasonably designed to assign personnel (one or more persons) to a delinquent borrower at the time the servicer provides the borrower with the written notice required under 12 CFR 1024.39(b), and in any event, not later than the 45th day of the borrower’s delinquency. The assigned personnel should be available by telephone to answer the borrower’s questions and assist the borrower with available loss mitigation options until the borrower makes two consecutive timely payments under a permanent loss mitigation agreement. If the borrower contacts the assigned personnel and does not receive an immediate live response, the servicer must have policies and procedures reasonably designed to ensure the servicer can provide a live response in a timely manner.

Answer 413

Functions of Servicer Personnel – 12 CFR 1024.40(b) The servicer must also maintain policies and procedures reasonably designed to ensure that the assigned personnel can perform certain functions, including: providing the borrower with accurate information about (1) loss mitigation options available to the borrower from the owner or assignee of the borrower’s loan, (2) actions the borrower must take to be evaluated for such options, including the steps the borrower needs to take to submit a complete loss mitigation application and appeal a denial of a loan modification option (if applicable), (3) the status of any loss mitigation application the borrower has submitted, (4) the circumstances under which the servicer may refer the borrower’s account to foreclosure, and (5) any loss mitigation deadlines. The servicer must also have policies and procedures reasonably designed to ensure that assigned personnel are able to (1) timely retrieve a complete record of the borrower’s payment history and all written information the borrower has provided to the servicer (or prior servicers) in connection with a loss mitigation application, (2) provide these documents to other people required to evaluate the borrower for loss mitigation options, if applicable, and (3) provide the borrower with information about submitting an error notice or information request under 12 CFR 1024.35 or 12 CFR 1024.36.

Answer 414

Loss Mitigation Procedures – 12 CFR 1024.41 Servicers must comply with certain loss mitigation procedures. The procedures differ depending on how far in advance of foreclosure a borrower submits a loss mitigation application. Regulation X does not impose a duty on a servicer to provide any borrower with any specific loss mitigation option. The requirements set forth in 12 CFR 1024.41 apply to only those mortgage loans, as that term is defined in 12 CFR 1024.31, that are secured by the borrower’s principal residence. Except as noted below in 12 CFR 1024.41(j), the requirements do not apply to (i) small servicers, (ii) reverse mortgage transactions, as that term is defined in 12 CFR 1024.31, or (iii) mortgage loans for which the servicer is a qualified lender. As noted above, an institution qualifies as a small servicer if it (a) services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the institution (or an affiliate) is the creditor or assignee, (b) is a Housing Finance Agency, as defined in 24 CFR 266.5 or (c) is a nonprofit entity (defined in 12 CFR 1026.41(e)(4)(ii)(C)(1)) that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities (defined in 12 CFR 1026.41(e)(4)(ii)(C)(2)), for all of which the servicer or an associated nonprofit entity is the creditor. The determination as to whether a servicer qualifies as a small servicer is generally made based on the mortgage loans, as that term is used in 12 CFR 1026.41(a)(1), serviced by the servicer and any affiliates as of January 1 for the remainder of that calendar year. However, to determine small servicer status under the nonprofit small servicer definition, a nonprofit servicer should be evaluated based on the mortgage loans serviced by the servicer (and not those serviced by associated nonprofit entities) as of January 1 for the remainder of the calendar year. A servicer that ceases to qualify as a small servicer will have six months from the time it ceases to qualify or until the next January 1, whichever is later, to comply with any requirements from which the servicer is no longer exempt as a small servicer. As specified in12 CFR 1026.41(e)(4)(iii), the following mortgage loans are not considered in determining whether a servicer qualifies as a small servicer: (a) mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees; (b) reverse mortgage transactions; and (c) mortgage loans secured by consumers’ interests in timeshare plans; and (d) certain seller-financed transactions that meet the criteria identified in 12 CFR 1026.36(a)(5). Qualified lenders are those defined to be qualified lenders under the Farm Credit Act of 1971 and the Farm Credit Administration’s accompanying regulations set forth at 12 CFR 617.7000 et seq. The CFPB issued an interpretive rule clarifying, among other things, that when a servicer that is a debt collector under the FDCPA with respect to a borrower’s mortgage loan responds to a borrower-initiated communication concerning loss mitigation after the borrower’s invocation of FDCPA Section 805(c)’s cease communication protections with regard to that loan, the servicer does not violate FDCPA Section 805(c) with respect to such communications as long as the servicer’s response is limited to a discussion of any potentially available loss mitigation option.28 Only if the borrower provides a communication to the servicer specifically withdrawing the request for loss mitigation does the cease communication prohibition apply to communicating about the specific loss mitigation action. 28 See 2016 FDCPA Interpretive Rule (81 Fed. Reg. 71977, 71980-81). See also Comment 39(d)-2.

Answer 415

Receipt of a Loss Mitigation Application – 12 CFR 1024.41(b) A servicer that receives a loss mitigation application at least 45 days before a foreclosure sale must take two steps. First, the servicer must promptly review the application to determine if it is complete. Second, the servicer must notify the borrower in writing within five days (excluding legal public holidays, Saturdays, and Sundays) that, among other things, it has received the application and state whether it is complete or incomplete. A loss mitigation application includes an oral or written request by the borrower where the borrower expresses an interest in applying for a loss mitigation option and provides information a servicer would evaluate in connection with a loss mitigation application. A loss mitigation application is considered expansively and includes any “prequalification” for a loss mitigation option. For example, if a borrower requests that a servicer determine whether the borrower is “prequalified” for a loss mitigation program by evaluating the borrower against preliminary criteria to determine eligibility for a loss mitigation option, the request constitutes a loss mitigation application. A loss mitigation application does not include oral inquiries about loss mitigation options where the borrower does not provide any information that the servicer would use to evaluate an application, including where the borrower requests information only about the application process but does not provide any information to the servicer.

Answer 416

Complete Loss Mitigation Application – 12 CFR 1024.41(b)(1) An application is complete when it contains all the information the servicer requires from the borrower to evaluate an application for loss mitigation options. (12 CFR 1024.41(b)(1)). Upon receiving an application that is not complete, a servicer is generally required to exercise reasonable diligence29 in obtaining documents and information to complete the application. A servicer has flexibility to establish its own application requirements, but, with certain exceptions, a servicer is generally prohibited from offering a loss mitigation based on an evaluation of any information provided by a borrower in connection with an incomplete loss mitigation application. 29 See Comment 41(b)(1)-4 for examples of what constitutes reasonable diligence.

Answer 417

Review of Loss Mitigation Application Submission – 12 CFR 1024.41(b)(2) As stated above, if the servicer receives a loss mitigation application 45 days or more before a foreclosure sale, the servicer must notify the borrower in writing within five days (excluding legal public holidays, Saturdays, and Sundays) that it has received the application and state whether it is complete or incomplete. If the application is incomplete, the notice must advise (i) what additional documents or information are needed, and (ii) a reasonable date by which the borrower must submit them. Generally, 30 days from the date the servicer provides the written notice is a “reasonable date.” (Comment 41(b)(2)(ii)- 1). Furthermore, the reasonable date must be no later than the earliest of: * The date by which any document or information submitted by a borrower will be considered stale or invalid pursuant to any requirements applicable to any loss mitigation option available to the borrower, * The date that is the 120th day of the borrower’s delinquency, * The date that is 90 days before a foreclosure sale, * The date that is 38 days before a foreclosure sale. (Comment 41(b)(2)(ii)-2). A reasonable date, however, must never be less than seven days from the date on which the servicer provides the written notice. (Comment 41(b)(2)(ii)-3). As explained above, servicers must exercise reasonable diligence in obtaining documents and information to complete an incomplete loss mitigation application (e.g., promptly contacting the borrower to obtain missing information or determining whether information exists in the servicer’s files already that may provide the information missing from the borrower’s application). (12 CFR 1024.41(b)(1)). In the course of gathering documents and information from a borrower to complete a loss mitigation application, a servicer may stop collecting documents and information for a particular loss mitigation option after receiving information confirming that, pursuant to any requirements established by the owner or assignee of the borrower’s mortgage loan, the borrower is ineligible for that option. A servicer may not stop collecting documents and information for any loss mitigation option based solely upon the borrower’s stated preference. The servicer, however, may stop collecting documents and information for any loss mitigation option based on the borrower’s stated preference in conjunction with other information, as prescribed by any requirements established by the owner or assignee. A servicer must continue to exercise reasonable diligence to obtain documents and information from the borrower that the servicer requires to evaluate the borrower as to all other loss mitigation options available to the borrower. (Comment 41(b)(1)-1). For example, assume applicable requirements established by the owner or assignee provide that a borrower is not eligible for home retention options if the borrower states a preference for a short sale and provides evidence of another applicable hardship, such as military Permanent Change of Station orders or a specified employment transfer more than 50 miles away. If the borrower indicates a preference for a short sale, the servicer may not stop collecting documents and information pertaining to available home retention options solely because the borrower has indicated the preference. The servicer, however, may stop collecting such documents and information once it receives information confirming that the borrower meets the applicable hardship standards. If a servicer has informed a borrower that the application was complete (or identified particular information needed to complete the application), and the servicer subsequently determines that additional information or corrected documents are required, the servicer must promptly request such information or documents from the borrower and treat the application as complete under 12 CFR 1024.41(f)(2) and (g) until the borrower is given a reasonable opportunity to complete the application

Answer 418

Calculating Time Periods and Determining Protections – 12 CFR 1024.41(b)(3) 12 CFR 1024.41 provides borrowers certain protections depending on whether the servicer received a complete loss mitigation application at least a specified number of days before a foreclosure sale. See, e.g., 12 CFR 1024.41(c)(1) (37 days); 12 CFR 1024.41(e) and (h) (90 days). These time periods are calculated as of the date the servicer receives a complete loss mitigation application. Thus, scheduling or rescheduling a foreclosure sale after the servicer receives the complete loss mitigation application will not affect the borrower’s protections. If no foreclosure sale is scheduled as of the date the servicer receives a complete loss mitigation application, the application is considered received more than 90 days before a foreclosure sale.

Answer 419

Evaluation of a Timely Complete Loss Mitigation Application – 12 CFR 1024.41(c)(1) A servicer that receives a complete loss mitigation application more than 37 days before a foreclosure sale must take two steps within 30 days: * First, the servicer must evaluate the borrower for all loss mitigation options available to the borrower from the owner or investor of the borrower’s mortgage loan. The criteria on which a servicer offers or does not offer a loss mitigation option need not meet any particular standard. Nonetheless, a servicer’s failure to follow requirements imposed by an owner or investor may demonstrate the servicer’s failure to comply with the 12 CFR 1024.38(b)(2)(v) requirement that the servicer must maintain policies and procedures that are reasonably designed to ensure that the servicer can properly evaluate a borrower for all loss mitigation options for which the borrower may be eligible pursuant to any requirements established by the mortgage loan’s owner or assignee; and * Second, the servicer must provide the borrower with a written notice stating which loss mitigation options, if any, the servicer will offer to the borrower. The notice must state the amount of time the borrower has to accept or reject an offered loss mitigation option pursuant to 12 CFR 1024.41(e), and, if applicable, that the borrower has the right to appeal a denial of a loan modification option as well as the time period and any requirements for making an appeal pursuant to 12 CFR 1024.41(h).

Answer 420

Evaluation of Incomplete Loss Mitigation Application – 12 CFR 1024.41(c)(2)(i)-(iii) With limited exceptions, a servicer may not offer a loss mitigation option based on an evaluation of an incomplete application. I. Offers permitted if not based on an evaluation of an incomplete application. Regulation X does not prohibit a servicer from offering loss mitigation options to a borrower who has not submitted a loss mitigation application. Further, nothing prohibits a servicer from offering a loss mitigation option to a borrower who has submitted an incomplete loss mitigation application where the offer of the loss mitigation option is not based on any evaluation of information submitted by the borrower in connection with such application. II. Reasonable Time Exception. If the servicer has exercised reasonable diligence in obtaining documents and information to complete the application but the application still remains incomplete for a significant period of time without further progress by the borrower, the servicer may evaluate an incomplete application and offer the borrower a loss mitigation option. What qualifies as a significant period of time may depend on the timing of the foreclosure process. For example, 15 days may be a more significant period of time if the borrower is less than 50 days before a foreclosure sale than if the borrower is less than 120 days delinquent. The requirements in 12 CFR 1024.41 do not apply to this evaluation, and it is not considered an evaluation of a complete loss mitigation application for purposes of determining whether a request for a loss mitigation evaluation is duplicative under 12 CFR 1024.41(i). III. Short-Term Loss Mitigation Options Exception. A servicer may offer a short-term payment forbearance program or a short-term repayment plan to a borrower based upon an evaluation of an incomplete loss mitigation application. Promptly after offering a payment forbearance program or a repayment plan, unless the borrower has rejected the offer, the servicer must provide the borrower a written notice stating: * The specific payment terms and duration of the program or plan, * That the servicer offered the program or plan based on an evaluation of an incomplete application, * That other loss mitigation options may be available, and * That the borrower has the option to submit a complete loss mitigation application to receive an evaluation for all loss mitigation options available to the borrower regardless of whether the borrower accepts the program or plan. If the borrower is performing pursuant to the terms of a forbearance program or repayment plan offered under this provision, a servicer may not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process, and it may not move for foreclosure judgment or an order of sale or conduct a foreclosure sale. A servicer may also offer a short-term payment forbearance program in conjunction with a short-term repayment plan. A servicer must comply with the remaining loss mitigation requirements in 12 CFR 1024.41 with respect to the incomplete application, such as the requirement in 12 CFR 1024.41(b)(2) to review the application to determine if it is complete, the requirement in 12 CFR 1024.41(b)(1) to exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application, and the requirement in 12 CFR 1024.41(b)(2)(i)(B) to provide the borrower with written notice that the servicer acknowledges the receipt of the application and has determined that the application is incomplete. (Comment 41(c)(2)(iii)-2). For instance, a servicer must exercise reasonable diligence as clarified in part in Comment 41(b)(1)-4.iii. The comment states that, if a borrower is complying with a short-term payment forbearance program or short-term repayment plan and the borrower does not request further assistance, the servicer may suspend reasonable diligence efforts until near the end of the program or plan. However, if the borrower fails to comply with the short-term loss mitigation option or requests further assistance, the servicer must immediately resume reasonable diligence efforts. Additionally, near the end of a short-term payment forbearance program, and prior to the end of the forbearance period, if the borrower remains delinquent, a servicer must contact the borrower to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. (Comment 41(b)(1)-4.iii). If the borrower completes the loss mitigation application, the servicer must comply with all of the loss mitigation procedure requirements in 12 CFR 1024.41 even if the servicer has offered a short-term payment forbearance program or short-term repayment plan based on an evaluation of an incomplete application. (Comment 41(c)(2)(iii)-3).

Answer 421

Facially Complete Applications – 12 CFR 1024.41(c)(2)(iv) A loss mitigation application is facially complete when (i) the servicer’s initial notice under 12 CFR 1024.41(b) advised the borrower that the application was complete, (ii) the servicer’s initial notice under 12 CFR 1024.41(b) requested additional information from the borrower to complete the application and the borrower submits such additional information, or (iii) the servicer is required to provide the borrower a written notice of a complete application under 12 CFR 1024.41(c)(3)(i). If the servicer later discovers that additional information or corrections to a previously submitted document are required to complete the facially complete application, the servicer must promptly request the missing information or corrected documents and treat the application as complete for purposes of 12 CFR 1024.41(f)(2) and (g) until the borrower is given a reasonable opportunity to complete the application. A reasonable opportunity depends on the particular facts and circumstances, but must provide the borrower sufficient time to gather the necessary information and documents. If the borrower completes the application within this period, the application is considered complete as of the date it was actually complete for purposes of 12 CFR 1024.41(c), and the application is considered complete as of the date it was facially complete for purposes of 12 CFR 1024.41(d), (e), (f)(2), (g), and (h). If the borrower does not complete the application within this period, the application is considered incomplete.

Answer 422

Notice of Complete Application – 12 CFR 1024.41(c)(3) Within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving the borrower’s complete loss mitigation application, the servicer shall provide the borrower a written notice setting forth the following information: * That the loss mitigation application is complete; * The date the servicer received the complete application; * That the servicer expects to complete its evaluation within 30 days of the date it received the complete application; * That the borrower is entitled to certain foreclosure protections because the servicer has received the complete application, and, as applicable, either: o If the servicer has not made the first foreclosure notice or filing required by applicable law, that the servicer cannot make the first notice or filing to commence a foreclosure before evaluating the borrower’s complete application; or o If the servicer has made the first foreclosure notice or filing, that the servicer has begun the foreclosure process and that the servicer cannot conduct a foreclosure sale before evaluating the borrower’s complete application. * That the servicer may need additional information at a later date; and * That the borrower may be entitled to additional protections under state or federal law. A servicer is not required, however, to provide a notice of complete application if: * The servicer has already provided the borrower a notice under 12 CFR 1024.41(b)(2)(i)(B) informing the borrower the application is complete and the servicer has not requested any additional information; * The application was not complete more than 37 days before a foreclosure sale; or * The servicer has already provided the borrower a notice regarding its determination of the borrower’s application under 12 CFR 1024.41(c)(1)(ii).

Answer 423

Information not in the Borrower’s Control – 12 CFR 1024.41(c)(4) If a servicer requires documents or information not in the borrower’s control to determine which loss mitigation options, if any, it will offer to the borrower, the servicer must exercise reasonable diligence in obtaining such documents or information. A servicer must not deny a complete loss mitigation application solely because the servicer lacks required documents or information not in the borrower’s control, unless the servicer has been unable to obtain the documents and information for a significant period of time following the 30-day evaluation period provided under Section 1024.41(c)(1) and is unable to make a determination on the complete application. However, a servicer is permitted to offer a borrower a loss mitigation option, even if the servicer does not obtain the requested documents or information. The servicer lacking third-party information must provide the borrower a written notice under 12 CFR 1024.41(c)(4)(ii)(B) informing the borrower: * That the servicer has not received the third-party documents or information that the servicer requires to determine which loss mitigation options, if any, it will offer to the borrower; * Of the specific documents or information that the servicer lacks; * That the servicer has requested such documents or information; and * That the servicer will complete its evaluation of the borrower for all available loss mitigation options promptly upon receiving the documents or information. If a servicer has exercised reasonable diligence to obtain the third-party information, but the servicer has been unable to do so for a significant period of time and cannot complete its determination without the required documents or information, the servicer may deny the application and provide the borrower with a written notice in accordance with 12 CFR 1024.41(c)(1)(ii). In conjunction with such notice, the servicer must provide a copy of the written notice provided under 12 CFR 1024.41(c)(4)(ii)(B).

Answer 424

Denial of any Loss Mitigation Option – 12 CFR 1024.41(d) If the servicer denies a loss mitigation application for any trial or permanent loan modification option, the notice provided to the borrower must also state the servicer’s specific reason or reasons for denying each trial or permanent loan modification option, and, if applicable, that the borrower was not evaluated on other criteria. Certain disclosures are required when a servicer denies an application for the following reasons or using the following procedures: Investor criteria and use of a waterfall. o If the servicer denies a loan modification option based upon investor criteria, the servicer must identify the owner or assignee of the mortgage loan and the specific criteria that the borrower failed to satisfy. o When an owner or assignee has established an evaluation criteria that sets an order ranking for evaluation of loan modification options (commonly known as a “waterfall”) and a borrower has qualified for a particular loan modification option in the waterfall, it is sufficient for the servicer to inform the borrower, with respect to other loan modification options ranked below any such option offered to a borrower, that the investor’s requirements include the use of such a waterfall and that an offer of a loan modification option necessarily results in a denial for any other loan modification options below the option for which the borrower is eligible in the ranking. * Net present value calculation. If the denial was based upon a net present value calculation, the servicer must disclose the inputs used in the calculation. * Reasons listed. The following applies if the servicer uses a hierarchy of eligibility criteria and, after reaching the first criterion that causes a denial, does not evaluate whether the borrower would have satisfied the remaining criteria. In this instance, the servicer need only (i) provide the specific reason or reasons why the borrower was actually rejected, and (ii) notify the borrower that the borrower was not evaluated on other criteria. A servicer is not required to determine or disclose whether a borrower would have been denied based on other criteria if the servicer did not actually evaluate these additional criteria.

Answer 425

Borrower Response – 12 CFR 1024.41(e) A servicer offering a loss mitigation option must provide the borrower with a minimum period of time to accept or reject the option, depending on when the servicer receives a complete application. If the application was complete 90 days or more before a foreclosure sale, the servicer must give the borrower at least 14 days to decide. If it was complete fewer than 90 but more than 37 days before a foreclosure sale, the servicer must give the borrower at least seven days to decide. A borrower’s failure to respond on time can be treated as a rejection of the loss mitigation options, with two exceptions. First, a borrower who is offered a trial loan modification plan and submits payments that would have been owed under that plan before the deadline for accepting must be given a reasonable time to fulfill any remaining requirements of the servicer for acceptance of the trial loan modification plan. Second, a servicer must give a borrower who has a pending appeal until 14 days after the servicer provides notice of its determination regarding resolution of that appeal to decide whether to accept any offered loss mitigation option.

Answer 426

Prohibition on Foreclosure Referral – 12 CFR 1024.41(f) A servicer cannot make the first foreclosure notice or filing for any judicial or non-judicial process until (i) the borrower is more than 120 days delinquent, (ii) the foreclosure is based on a borrower’s violation of a due-on-sale clause, or (iii) the servicer is joining a superior or subordinate lienholder’s foreclosure action. The commentary states that whether a document qualifies as the first notice or filing depends on the foreclosure process at issue: * Judicial foreclosure. Where foreclosure procedure requires a court action or proceeding, the first notice or filing is the earliest document required to be filed with a court or other judicial body to commence the action or proceeding. Depending on the particular foreclosure process, examples of these documents could be a complaint, petition, order to docket, or notice of hearing; * Non-judicial foreclosure – recording or publication requirement. Where foreclosure procedure does not require an action or court proceeding (such as under a power of sale), the first notice or filing is the earliest document required to be recorded or published to initiate the foreclosure process; or * Non-judicial foreclosure – no recording or publication requirement. Where foreclosure procedure does not require an action or court proceeding, and also does not require any document to be recorded or published, the first notice or filing is the earliest document that establishes, sets, or schedules a date for the foreclosure sale. The commentary further states that a document provided to the borrower but not initially required to be filed, recorded, or published is not considered the first notice or filing on the sole basis that the documents must later be included as an attachment accompanying another document that is required to be filed, recorded, or published to carry out a foreclosure. If a borrower submits a complete loss mitigation application before the 120th day of delinquency or before the servicer makes the first foreclosure notice or filing, then the servicer cannot make the first foreclosure notice or filing unless one of the following occurs: (i) the servicer sends a notice to the borrower stating that the borrower is ineligible for any loss mitigation option and if an appeal is available, either the borrower did not timely appeal, or the appeal has been denied; (ii) the borrower rejects all the offered loss mitigation options; or (iii) the borrower fails to perform under a loss mitigation agreement.

Answer 427

Prohibition on Foreclosure Sale – 12 CFR 1024.41(g) If a borrower submits a complete loss mitigation application after the servicer has made the first foreclosure notice or filing but more than 37 days before a foreclosure sale, the servicer cannot conduct a foreclosure sale or move for foreclosure judgment or order of sale. The servicer must instruct foreclosure counsel promptly not to make a dispositive motion for foreclosure judgment or order of sale; to avoid a ruling on the motion or issuance of an order of sale where such a dispositive motion is pending; and, where a sale is scheduled, to prevent conduct of a foreclosure sale, except as provided below. The servicer may move forward with those specific foreclosure proceedings (or need not instruct foreclosure counsel as provided above) if one of the following occurs: (i) the servicer sends a notice to the borrower stating that the borrower is ineligible for any loss mitigation option and the appeal process is inapplicable, the borrower did not timely appeal, or the appeal has been denied; (ii) the borrower rejects all the offered loss mitigation options; or (iii) the borrower fails to perform under a loss mitigation agreement. A servicer is not relieved of its obligations because foreclosure counsel’s actions or inaction caused a violation. Absent one of the specified circumstances, conduct of the sale violates the regulation, even if a person other than the servicer administers or conducts the foreclosure sale proceedings.

Answer 428

Appeal Process – 12 CFR 1024.41(h) A borrower has the right to appeal a servicer’s denial of a loss mitigation application for any trial or permanent loan modification available to the borrower if the borrower submitted a complete application 90 days or more before a foreclosure sale (or during the pre-foreclosure period set forth in 12 CFR 1024.41(f)). The borrower must commence the appeal within 14 days after the servicer provides the notice stating the servicer’s determination of which loss mitigation options, if any, it will offer to the borrower. Within 30 days of the borrower making the appeal, the servicer must provide a notice to the borrower stating: (i) whether it will offer the borrower a loss mitigation option based on the appeal, and (ii) if applicable, how long the borrower has to accept or reject this loss mitigation option or a previously offered loss mitigation option. If the servicer offers a loss mitigation option after an appeal, the servicer must provide the borrower at least 14 days to decide whether to accept the offered loss mitigation option. The servicer’s personnel who evaluated the borrower’s application cannot also evaluate the appeal, although personnel who supervised the initial evaluation may evaluate the appeal so long as they were not directly involved in the initial evaluation.

Answer 429

Duplicative Requests – 12 CFR 1024.41(i) A servicer must comply with these loss mitigation procedures for a borrower’s loss mitigation application, unless the servicer has previously complied with the loss mitigation requirements for a complete loss mitigation application submitted by the borrower and the borrower has been delinquent at all times since submitting the prior complete application. Thus, for example, if the borrower has previously submitted a complete loss mitigation application and the servicer complied fully with 12 CFR 1024.41 for that application, but the borrower then ceased to be delinquent and later became delinquent again, the servicer is required to again comply with 12 CFR 1024.41 for any subsequent loss mitigation application submitted by the borrower.

Answer 430

The prohibition on foreclosure referral and sale still apply to small servicers Small Servicer Requirements – 12 CFR 1024.41(j) Although small servicers are exempt from most of the policy and-procedure requirements (12 CFR 1024.38), continuity of contact requirements (12 CFR 1024.40), and loss mitigation requirements (12 CFR 1024.41) of Regulation X, certain provisions still apply to them. Small servicers cannot make the first foreclosure notice or filing required by any judicial or non-judicial foreclosure process until (i) the borrower is more than 120 days delinquent, (ii) the foreclosure is based on a borrower’s violation of a due-on-sale clause, or (iii) the servicer is joining a superior or subordinate lienholder’s foreclosure action. If the borrower is performing according to the terms of a loss mitigation agreement, a small servicer also cannot make the first foreclosure notice or filing, move for a foreclosure judgment or order of sale, or conduct a foreclosure sale.

Answer 431

Servicing Transfers – 12 CFR 1024.41(k) When a transferee servicer acquires the servicing of a mortgage loan for which there is a loss mitigation application pending as of the transfer date, it must comply with 12 CFR 1024.41(k), which addresses and clarifies how loss mitigation procedures and timelines apply to these pending loss mitigation applications. A loss mitigation application is considered pending if the application is subject to the loss mitigation rules but was not fully resolved prior to the transfer date. (Comment 41(k)-1). The transfer date is defined for these provisions as the date on which the transferee servicer will begin accepting payments relating to the mortgage loan, as disclosed on the notice of transfer of loan servicing pursuant to 12 CFR 1024.33(b)(4)(iv). Specifically: * Subject to the exceptions below, for loss mitigation applications pending as of the transfer date, a transferee servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer based on the date the transferor servicer received the loss mitigation application; o A transferor servicer must timely transfer, and a transferee servicer must obtain from the transferor servicer, documents and information submitted by a borrower in connection with a loss mitigation application. o Subject to the modifications of timing requirements below, a borrower’s rights and protections under the loss mitigation procedures to which the borrower was entitled to before a transfer continue to apply post-transfer. o In the transfer context, reasonable diligence under 12 CFR 1024.41(b)(1) includes ensuring that a borrower is informed of any changes to the application process, such as a change in address to which the borrower should submit documents and information to complete the application, as well as ensuring that the borrower is informed about which documents and information are necessary to complete the application. * Within 10 days (excluding legal public holidays, Saturdays, and Sundays) of the transfer date, a transferee servicer must provide the borrower an acknowledgement notice under 12 CFR 1024.41(b)(2)(i)(B) if the prior transferor had not provided such notice and the applicable period to provide the notice has not expired as of the transfer date; o If a transferee servicer is required to provide the acknowledgment notice as described above, the transferee servicer is prohibited from making the first foreclosure notice or filing required by applicable law for any judicial or non-judicial foreclosure process until a date that is after the reasonable date disclosed in the acknowledgment notice. o If a borrower submits a complete loss mitigation application to the transferee or transferor servicer 37 or fewer days before the foreclosure sale but on or before the reasonable date disclosed in the acknowledgement notice, the servicer must evaluate the application in accordance with 12 CFR 1024.41(c) and provide a denial notice in accordance with 12 CFR 1024.41(d) (if applicable), and is prohibited from moving for foreclosure judgment or sale in accordance with 12 CFR 1024.41(g). * For a complete application pending as of the transfer date, the transferee servicer must evaluate the application within 30 days of the transfer date; * A transferee servicer must make a determination on appeals pending as of the transfer date if it is able to do so or, if unable to do so, must treat the appeal as a pending complete loss mitigation application; o If the transferee servicer is required to make a determination on an appeal, the servicer must complete the determination and provide the notice required under 12 CFR 1024.41(h)(4) within the later of 30 days of the transfer date or 30 days of the date the borrower made the appeal. * A transfer does not affect a borrower’s ability to accept or reject a pending loss mitigation offer if the time period to accept or reject has not expired as of the transfer date. In this instance, the transferee servicer must allow the borrower to accept or reject the offer during the unexpired balance of the applicable time period.

Answer 432

Loss Mitigation Applications from Potential Successors in Interest (Effective April 19, 2018) If a servicer receives a loss mitigation application from a potential successor in interest before confirming that person's identity and ownership interest in the property, the servicer may, but need not, review and evaluate the loss mitigation application in accordance with the procedures set forth in 12 CFR 1024.41. (Comment 41(b)-1.i). If a servicer receives a loss mitigation application from a potential successor in interest and elects not to review and evaluate the loss mitigation application before confirming that person’s identity and ownership interest in the property, the servicer must preserve the loss mitigation application and all documents submitted in connection with the application. Upon confirmation of the successor in interest’s status, the servicer must review and evaluate the loss mitigation application in accordance with the procedures set forth in 12 CFR 1024.41 if the property is the confirmed successor in interest’s principal residence and the loss mitigation procedures are otherwise applicable. For purposes of 12 CFR 1024.41, the servicer must treat the loss mitigation application as if it had been received on the date that the servicer confirmed the successor in interest’s status. If the loss mitigation application is incomplete at the time of confirmation because documents submitted by the successor in interest became stale or invalid after they were submitted and confirmation is 45 days or more before a foreclosure sale, the servicer must identify the stale or invalid documents that need to be updated in a notice pursuant to 12 CFR 1024.41(b)(2). Comment 41(b)-1.ii.

Answer 433

Homeownership Counseling Act Introduction Section 106(c)(5) of the Housing and Urban Development Act of 1968 (the Act) (12 U.S.C. 1701x (c)(5)) requires that creditors servicing a home loan provide homeownership counseling notification to eligible homeowners.

Answer 434

Statutory Overview Applicability All creditors that service loans secured by a mortgage or lien on a one-family residence (home loans) are subject to the homeownership counseling notification requirements. Home loans include conventional mortgage loans and loans insured by the Department of Housing and Urban Development (HUD). In addition, the original purpose of the loan is not relevant to the notification requirement. Therefore, a mortgage on the primary residence or a commercial or agriculture loan that includes the primary residence as collateral would also be subject to this notification requirement.

Answer 435

Requirements Notice Requirements1 A creditor must provide notification of the availability of homeownership counseling to any eligible homeowner who fails to pay any amount by the due date under the terms of the home loan. 1 The FFIEC Consumer Compliance Task Force has requested clarification from HUD on HUD’s current position regarding notice requirements to first-time homebuyers. These interagency examination procedures are currently limited to determining compliance with the Act’s notice provisions related to delinquent borrowers. However, should a response from HUD to the Task Force indicate that notices to first-time homebuyers should be provided under the Act, the agencies will expand these examination procedures to cover notices to first-time homebuyers.

Answer 436

Eligibility A homeowner is eligible for counseling if: * The loan is secured by the homeowner’s principal residence; * The home loan is not assisted by the Farmers Home Administration; and * The homeowner is, or is expected to be, unable to make payments, correct a home loan delinquency within a reasonable time, or resume full home loan payments due to a reduction in the homeowner’s income because of: ° An involuntary loss of, or reduction in, the homeowner’s employment, the homeowner’s self-employment, or income from the pursuit of the homeowner’s occupation; ° Any similar loss or reduction experienced by any person who contributes to the homeowner’s income; ° A significant reduction in the income of the household due to divorce or death; or ° Under certain circumstances, a significant increase in basic expenses of the homeowner or an immediate family member of the homeowner.

Answer 437

Contents of Notice The notice must: * notify the homeowner of the availability of any homeownership counseling offered by the creditor; * provide either a list of HUD-approved nonprofit homeownership counseling organizations or the toll-free number2 HUD has established through which a list of such organizations may be obtained; * if applicable, notify the homeowner by a statement or notice, written in plain English by the Secretary of Housing and Urban Development, in consultation with the Secretary of Defense and the Secretary of Treasury, explaining the mortgage and foreclosure rights of servicemembers, and the dependents of such servicemembers, under the Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.), including the toll-free military one source number to call if servicemembers, or the dependents of such servicemembers, require further assistance; and * notify the housing or mortgage applicant of the availability of mortgage software systems provided pursuant to subsection (g)(3). 2 The number is 1-800-569-4287.

Answer 438

Timing of Notice The notice must be given to a delinquent homeowner borrower no later than 45 days after the date on which the homeowner becomes delinquent. If, within the 45-day period, the borrower brings the loan current again, no notification is required.

Answer 439

“Creditor” means a person or entity that is servicing a home loan on behalf of itself or another person or entity

Answer 440

“Home loan” means a loan secured by a mortgage or lien on residential property.

Answer 441

“Homeowner” means a person who is obligated under a home loan.

Answer 442

“Residential property” means a 1-family residence, including a 1-family unit in a condominium project, a membership interest and occupancy agreement in a cooperative housing project, and a manufactured home and the lot on which the home is situated.

Answer 443

Homeowners Protection Act Introduction The Homeowners Protection Act of 1998 (the Act) was signed into law on July 29, 1998, and became effective on July 29, 1999. The Act was amended on December 27, 2000, to provide technical corrections and clarification. The Act, also known as the “PMI Cancellation Act,” addresses homeowners’ difficulties in canceling private mortgage insurance (PMI)1 coverage. It establishes provisions for canceling and terminating PMI, establishes disclosure and notification requirements, and requires the return of unearned premiums.

Answer 444

PMI is insurance that protects lenders from the risk of default and foreclosure. PMI allows prospective buyers who cannot, or choose not to, provide significant down payments to obtain mortgage financing at affordable rates. It is used extensively to facilitate “high-ratio” loans (generally, loans in which the loan to value (LTV) ratio exceeds 80 percent). With PMI, the lender can recover costs associated with the resale of foreclosed property, and accrued interest payments or fixed costs, such as taxes or insurance policies, paid prior to resale. Excessive PMI coverage provides little extra protection for a lender and does not benefit the borrower. In some instances, homeowners have experienced problems in canceling PMI. At other times, lenders may have agreed to terminate coverage when the borrower’s equity reached 20 percent, but the policies and procedures used for canceling or terminating PMI coverage varied widely among lenders. Prior to the Act, homeowners had limited recourse when lenders refused to cancel their PMI coverage. Even homeowners in the few states that had laws pertaining to PMI cancellation or termination noted difficulties in canceling or terminating their PMI policies. The Act now protects homeowners by prohibiting life of loan PMI coverage for borrower-paid PMI products and establishing uniform procedures for the cancellation and termination of PMI policies. 1 The Act does not apply to mortgage insurance made available under the National Housing Act, title 38 of the United States Code, or title V of the Housing Act of 1949. This includes mortgage insurance on loans made the Federal Housing Administration and guarantees on mortgage loans made by the Veterans Administration.

Answer 445

Regulation Overview Scope and Effective Date The Act applies primarily to “residential mortgage transactions,” defined as mortgage loan transactions consummated on or after July 29, 1999, to finance the acquisition, initial construction, or refinancing2 of a single-family dwelling that serves as a borrower’s principal residence.3 The Act also includes provisions for annual written disclosures for “residential mortgages,” defined as mortgages, loans or other evidences of a security interest created for a single-family dwelling that is the principal residence of the borrower (12 USC §4901(14) and (15)). A condominium, townhouse, cooperative, or mobile home is considered to be a single-family dwelling covered by the Act. The Act’s requirements vary depending on whether a mortgage is: * A “residential mortgage” or a “residential mortgage transaction”; * Defined as high risk (either by the lender in the case of non-conforming loans, or Fannie Mae and Freddie Mac in the case of conforming loans); * Financed under a fixed or an adjustable rate; or * Covered by borrower-paid private mortgage insurance (BPMI) or lender-paid private mortgage insurance (LPMI).4 2 For purposes to these procedures, “refinancing” means the refinancing of loans any portion of which was to provide financing for the acquisition or initial construction of a single-family dwelling that serves as a borrower’s principal residence. See 15 USC §1601 et seq. and 12 CFR §1026.20. 3 For purposes of these procedures, junior mortgages that provide financing for the acquisition, initial construction or refinancing of a single-family dwelling that serves as a borrower’s principal residence are covered. 4 All sections of these procedures and Handbook apply to BPMI. For LPMI, relevant sections begin under that heading and follow thereafter.

Answer 446

Cancellation and Termination of PMI for Non High Risk Residential Mortgage Transactions Borrower Requested Cancellation A borrower may initiate cancellation of PMI coverage by submitting a written request to the servicer. The servicer must take action to cancel PMI when the cancellation date occurs, which is when the principal balance of the loan reaches (based on actual payments) or is first scheduled to reach 80 percent of the “original value,”5 irrespective of the outstanding balance, based upon the initial amortization schedule (in the case of a If PMI is terminated, the servicer may not require further fixed rate loan) or amortization schedule then in effect (in the payments or premiums of PMI more than 30 days after the case of an adjustable rate loan6 ), or any date thereafter that: termination date or the date following the termination date on * the borrower submits a written cancellation request; * the borrower has a good payment history;7 * the borrower is current;8 and * the borrower satisfies any requirement of the mortgage holder for: (i) evidence of a type established in advance that the value of the property has not declined below the original value; and (ii) certification that the borrower’s equity in the property is not subject to a subordinate lien (12 USC §4902(a)(4)). Once PMI is canceled, the servicer may not require further PMI payments or premiums more than 30 days after the later of: (i) the date on which the written request was received or (ii) the date on which the borrower satisfied the evidence and certification requirements of the mortgage holder described previously (12 USC §4902(e)(1)). 5 “Original value” is defined as the lesser of the sales price of the secured property as reflected in the purchase contract or, the appraised value at the time of loan consummation. In the case of a refinancing, the term means the appraised value relied upon by the lender to approve the refinance transaction. 6 The Act includes as an adjustable rate mortgage, a balloon loan that “contains a conditional right to refinance or modify the unamortized principal at the maturity date.” Therefore, if a balloon loan contains a conditional right to refinance, the initial disclosure for an adjustable rate mortgage would be used even if the interest rate is fixed.

Answer 447

Automatic Termination The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on the date that: * the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule in the case of a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable rate loan, irrespective of the outstanding balance), if the borrower is current; or * if the borrower is not current on that date, on the first day of the first month following the date that the borrower becomes current (12 USC §4902(b)). If PMI is terminated, the servicer may not require further payments or premiums of PMI more than 30 days after the termination date or the date following the termination date on which the borrower becomes current on the payments, which ever is sooner (12 USC §4902(e)(2)). There is no provision in the automatic termination section of the Act, as there is with the borrower-requested PMI cancellation section, that protects the lender against declines in property value or subordinate liens. The automatic termination provisions make no reference to good payment history (as prescribed in the borrower-requested provisions), but state only that the borrower must be current on mortgage payments (12 USC §4902(b)).

Answer 448

Final Termination If PMI coverage on a residential mortgage transaction was not canceled at the borrower’s request or by the automatic termination provision, the servicer must terminate PMI coverage by the first day of the month immediately following the date that is the midpoint of the loan’s amortization period if, on that date, the borrower is current on the payments required by the terms of the mortgage (12 USC §4902(c)). (If the borrower is not current on that date, PMI should be terminated when the borrower does become current.) The midpoint of the amortization period is halfway through the period between the first day of the amortization period established at consummation and ending when the mortgage is scheduled to be amortized. The servicer may not require further payments or premiums of PMI more than 30 days after PMI is terminated (12 USC §4902(e)(3)).

Answer 449

Final Termination If PMI coverage on a residential mortgage transaction was not canceled at the borrower’s request or by the automatic termination provision, the servicer must terminate PMI coverage by the first day of the month immediately following the date that is the midpoint of the loan’s amortization period if, on that date, the borrower is current on the payments required by the terms of the mortgage (12 USC §4902(c)). (If the borrower is not current on that date, PMI should be terminated when the borrower does become current.) The midpoint of the amortization period is halfway through the period between the first day of the amortization period established at consummation and ending when the mortgage is scheduled to be amortized. The servicer may not require further payments or premiums of PMI more than 30 days after PMI is terminated (12 USC §4902(e)(3)).

Answer 450

Loan Modifications If a borrower and mortgage holder agree to modify the terms and conditions of a loan pursuant to a residential mortgage transaction, the cancellation, termination or final termination dates shall be recalculated to reflect the modification (12 USC §4902(d)).

Answer 451

Exclusions The Act’s cancellation and termination provisions do not apply to residential mortgage transactions for which Lender Paid Mortgage Insurance (LPMI) is required (12 USC §4905(b)).

Answer 452

Return of Unearned Premiums The servicer must return all unearned PMI premiums to the borrower within 45 days after cancellation or termination of PMI coverage. Within 30 days after notification by the servicer of cancellation or termination of PMI coverage, a mortgage insurer must return to the servicer any amount of unearned premiums it is holding to permit the servicer to return such premiums to the borrower (12 USC §4902(f)).

Answer 453

Accrued Obligations for Premium Payments The cancellation or termination of PMI does not affect the rights of any lender, servicer or mortgage insurer to enforce any obligation of a borrower for payments of premiums that accrued before the cancellation or termination occurred (12 USC §4902 (h)).

Answer 454

Exceptions to Cancellation and Termination Provisions for High Risk Residential Mortgage Transactions The borrower-requested cancellation at 80 percent LTV and the automatic termination at 78 percent LTV requirements of the Act do not apply to “high risk” loans. However, high-risk loans are subject to final termination and are divided into two categories - conforming (Fannie Mae/Freddie Mac-defined high risk loans) and non-conforming (lender-defined high risk loans) (12 USC §4902(g)(1)).

Answer 455

Conforming Loans (Fannie Mae/Freddie Mac-Defined High Risk Loans) Conforming loans are those loans with an original principal balance not exceeding Freddie Mac’s and Fannie Mae’s conforming loan limits. 9 Fannie Mae and Freddie Mac are authorized under the Act to establish a category of residential mortgage transactions that are not subject to the Act’s requirements for borrower-requested cancellation or automatic termination, because of the high risk associated with them.10 They are however, subject to the final termination provision of the Act. As such, PMI on a conforming high risk loan must be terminated by the first day of the month following the date that is the midpoint of the loan’s initial amortization schedule (in the case of a fixed rate loan) or amortization schedule then in effect (in the case of an adjustable rate loan) if, on that date, the borrower is current on the loan (12 USC § 4902(g)). (If the borrower is not current on that date, PMI should be terminated when the borrower does become current.) 9 This limit was $417,000 in 2015; however, it is reviewed annually and has differing tiers based on geography and number of units. 10 Fannie Mae and Freddie Mac have not defined high-risk loans as of the date of this publication.

Answer 456

Non-Conforming Loans (Lender-Defined High Risk Loans) Non-conforming loans are those residential mortgage transactions that have an original principal balance exceeding Freddie Mac’s and Fannie Mae’s conforming loan limits. Lenderdefined high-risk loans are not subject to the Act’s requirements for borrower-requested cancellation or automatic termination. However, if a residential mortgage transaction is a lender-defined high risk loan, PMI must be terminated on the date on which the principal balance of the mortgage, based solely on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan) for that mortgage and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 77 percent of the original value of the property securing the loan. Like conforming loans that are determined to be high risk by Freddie Mac and Fannie Mae, a residential mortgage transaction that is a lender-defined high-risk loan is subject to the final termination provision of the Act.

Answer 457

Notices The lender must provide written initial disclosures at consummation for all high-risk residential mortgage transactions (as defined by the lender or Fannie Mae or Freddie Mac), that in no case will PMI be required beyond the midpoint of the amortization period of the loan, if the loan is current. More specific notice as to the 77 percent LTV termination standards for lender defined high-risk loans is not required under the Act.

Answer 458

Basic Disclosure and Notice Requirements Applicable to Residential Mortgage Transactions and Residential Mortgages The Act requires the lender in a residential mortgage transaction to provide to the borrower, at the time of consummation, certain disclosures that describe the borrower’s rights for PMI cancellation and termination. A borrower may not be charged for any disclosure required by the Act. Initial disclosures vary, based upon whether the transaction is a fixed rate mortgage, adjustable rate mortgage, or high-risk loan. The Act also requires that the borrower be provided with certain annual and other notices concerning PMI cancellation and termination. Residential mortgages are subject to certain annual disclosure requirements.

Answer 459

Initial Disclosures for Fixed Rate Residential Mortgage Transactions When PMI is required for non high risk fixed rate mortgages, the lender must provide to the borrower at the time the transaction is consummated: (i) a written initial amortization schedule, and (ii) a written notice that discloses: * The borrower’s right to request cancellation of PMI, and, based on the initial amortization schedule, the date the loan balance is scheduled to reach 80 percent of the original value of the property; * The borrower’s right to request cancellation on an earlier date, if actual payments bring the loan balance to 80 percent of the original value of the property sooner than the date based on the initial amortization schedule; * That PMI will automatically terminate when the LTV ratio reaches 78 percent of the original value of the property and the specific date that is projected to occur (based on the initial amortization schedule); and, * The Act provides for exemptions to the cancellation and automatic termination provisions for high risk mortgages and whether these exemptions apply to the borrower’s loan (12 USC §4903(a)(1)(A)).

Answer 460

Initial Disclosures for Adjustable Rate Residential Mortgage Transactions When PMI is required for non high-risk adjustable rate mortgages, the lender must provide to the borrower at the time the transaction is consummated a written notice that discloses: * The borrower’s right to request cancellation of PMI on (i) the date the loan balance is first scheduled to reach 80 percent of the original value of the property based on the amortization schedule then in effect or (ii) the date the balance actually reaches 80 percent of the original value of the property based on actual payments. The notice must also state that the servicer will notify the borrower when either (i) or (ii) occurs; * That PMI will automatically terminate when the loan balance is first scheduled to reach 78 percent of the original value of the property based on the amortization schedule then in effect. The notice must also state that the borrower will be notified when PMI is terminated (or that termination will occur when the borrower becomes current on payments); and, * That there are exemptions to the cancellation and automatic termination provisions for high-risk mortgages and whether such exemptions apply to the borrower’s loan (12 USC §4903(a)(1)(B)).

Answer 461

Initial Disclosures for High Risk Residential Mortgage Transactions When PMI is required for high risk residential mortgage transactions, the lender must provide to the borrower a written notice stating that PMI will not be required beyond the date that is the midpoint of the loan’s amortization period if, on that date, the borrower is current on the payments as required by the terms of the loan. The lender must provide this notice at consummation. The lender need not provide disclosure of the termination at 77 percent LTV for lender defined high-risk mortgages (12 USC §4903(a)(2)).

Answer 462

Annual Disclosures for Residential Mortgage Transactions For all residential mortgage transactions, including high risk mortgages for which PMI is required, the servicer must provide the borrower with an annual written statement that sets forth the rights of the borrower to PMI cancellation and termination and the address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel PMI (12 USC §4903(a)(3)).

Answer 463

Disclosures for Existing Residential Mortgages When PMI was required for a residential mortgage consummated before July 29, 1999, the servicer must provide to the borrower an annual written statement that: * States that PMI may be canceled with the consent of the lender or in accordance with state law; and * Provides the servicer’s address and telephone number, so that the borrower may contact the servicer to determine whether the borrower may cancel PMI (12 USC §4903(b)).

Answer 464

Notification Upon Cancellation or Termination of PMI Relating to Residential Mortgage Transactions General The servicer must, not later than 30 days after PMI relating to a residential mortgage transaction is canceled or terminated, notify the borrower in writing that:11 * PMI has terminated and the borrower no longer has PMI; and * No further premiums, payments or other fees are due or payable by the borrower in connection with PMI (12 USC §4904(a)). 11 For adjustable rate mortgages, the initial notice to borrowers must state that the servicer will notify the borrower when the cancellation and automatic termination dates are reached (12 USC §4903(a)(1)(B). Servicers should take care that the appropriate notices are made to borrowers when those dates are reached.

Answer 465

Notice of Grounds/Timing If a servicer determines that a borrower in a residential mortgage transaction does not qualify for PMI cancellation or automatic termination, the servicer must provide the borrower with a written notice of the grounds relied on for that determination. If an appraisal was used in making the determination, the servicer must give the appraisal results to the borrower. If a borrower does not qualify for cancellation, the notice must be provided not later than 30 days following the later of: (i) the date the borrower’s request for cancellation is received; or (ii) the date on which the borrower satisfies any evidence and certification requirements of the mortgage holder. If the borrower does not meet the requirements for automatic termination, the notice must be provided not later than 30 days following the scheduled termination date (12 USC §4904(b)).

Answer 466

Borrower paid mortgage insurance (BPMI) means PMI is required for a residential mortgage transaction, the payments for which are made by the borrower.

Answer 467

Lender paid mortgage insurance (LPMI) means PMI that is required for a residential mortgage transaction, the payments for which are made by a person other than the borrower.

Answer 468

Loan commitment means a prospective lender’s written confirmation of its approval, including any applicable closing conditions, of the application of a prospective borrower for a residential mortgage loan (12 USC 4905(a)).

Answer 469

Initial Notice In the case of LPMI required for a residential mortgage transaction, the Act requires that the lender provide a written notice to the borrower not later than the date on which a loan commitment is made. The written notice must advise the borrower of the differences between LPMI and BPMI by notifying the borrower that LPMI: * Differs from BPMI because it cannot be canceled by the borrower or automatically terminated as provided under the Act; * Usually results in a mortgage having a higher interest rate than it would in the case of BPMI; and, * Terminates only when the mortgage is refinanced (as that term is defined in the Truth in Lending Act, 15 U.S..C. §1601 et seq., and Regulation Z, 12 CFR §1026.20), paid off, or otherwise terminated. The notice must also provide: * That LPMI and BPMI have both benefits and disadvantages; * A generic analysis of the costs and benefits of a mortgage in the case of LPMI versus BPMI over a ten-year period, assuming prevailing interest and property appreciation rates; and, * That LPMI may be tax-deductible for federal income taxes, if the borrower itemizes expenses for that purpose (12 USC §4905(c)(1)).

Answer 470

Notice at Termination Date Not later than 30 days after the termination date that would apply in the case of BPMI, the servicer shall provide to the borrower a written notice indicating that the borrower may wish to review financing options that could eliminate the requirement for LPMI in connection with the mortgage (12 USC §4905(c)(2)).

Answer 471

Fees for Disclosures As stated previously, no fee or other cost may be imposed on a borrower for the disclosures or notifications required to be given to a borrower by lenders or servicers under the Act (12 USC §4906).

Answer 472

Civil Liability Liability Dependent upon Type of Action Servicers, lenders and mortgage insurers that violate the Act are liable to borrowers as follows: * Individual Action ° In the case of individual borrowers: — Actual damages (including interest accruing on such damages); — Statutory damages not to exceed $2,000; — Costs of the action, and — Reasonable attorney fees. * Class Action ° In the case of a class action suit against a defendant that is subject to section 10 of the Act, (i.e., regulated by the federal banking agencies, NCUA or the Farm Credit Administration): — Such statutory damages as the court may allow up to the lesser of $500,000 or 1 percent of the liable party’s net worth; — Costs of the action; and — Reasonable attorney fees. ° In the case of a class action suit against a defendant that is not subject to section 10 of the Act, (i.e., not regulated by the federal banking agencies, NCUA, or the Farm Credit Administration): — Actual damages (including interest accruing on such damages); — Statutory damages up to $1,000 per class member but not to exceed the lesser of $500,000; or 1 percent of the liable party’s gross revenues; — Costs of the action; and — Reasonable attorney fees (12 USC §4907(a)).

Answer 473

Statute of Limitations A borrower must bring an action under the Act within two years after the borrower discovers the violation (12 USC §4907(b)).

Answer 474

Mortgage Servicer Liability Limitation A servicer shall not be liable for its failure to comply with the requirements of the Act if the servicer’s failure to comply is due to the mortgage insurer’s or lender’s failure to comply with the Act (12 USC §4907(c)).

Answer 475

Enforcement The Act directs the federal banking agencies to enforce the Act under 12 USC §1818 or any other authority conferred upon the agencies by law. Under the Act the agencies shall: * Notify applicable lenders or servicers of any failure to comply with the Act; * Require the lender or servicer, as applicable, to correct the borrower’s account to reflect the date on which PMI should have been canceled or terminated under the Act; and, * Require the lender or servicer, as applicable, to return unearned PMI premiums to a borrower who paid premiums after the date on which the borrower’s obligation to pay PMI premiums ceased under the Act (12 USC §4909).

Answer 476

For consumers, leasing is an alternative to buying either with cash or on credit. A lease is a contract between a lessor (the property owner) and a lessee (the property user) for the use of property subject to stated terms and limitations for a specified period and at a specified payment.

Answer 477

The Consumer Leasing Act (15 USC 1667 et. seq.) (CLA) was passed in 1976 to assure that meaningful and accurate disclosure of lease terms is provided to consumers before entering into a contract. It applies to consumer leases of personal property. With this information, consumers can more easily compare one lease with another, as well as compare the cost of leasing with the cost of buying on credit or the opportunity cost of paying cash. In addition, the CLA puts limits on balloon payments sometimes due at the end of a lease, and regulates advertising

Answer 478

Originally, the CLA was part of the Truth in Lending Act, and was implemented by Regulation Z. When Regulation Z was revised in 1981, Regulation M was issued, and contained those provisions that govern consumer leases. The Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et seq., was enacted in 2000 and did not require implementing regulations. On November 9, 2007, amendments to Regulation M and the official staff commentary were issued to simplify the regulation and provide guidance on the electronic delivery of disclosures consistent with the E-Sign Act.1 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth in Lending Act and the Consumer Leasing Act to require annual adjustments of the threshold by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Transactions at or below the thresholds are subject to the protections of the regulations. Today a relatively small number of banks engage in consumer leasing. The trend seems to be for leasing to be carried out through specialized bank subsidiaries, vehicle finance companies, other finance companies, or directly by retailers. 1 72 FR 63456, November 9, 2007. These amendments took effect December 10, 2007, with a mandatory compliance date of October 1, 2008.

Answer 479

“Lessee”—A lessee is a natural person who enters in to or is offered a consumer lease.

Answer 480

“Lessor”—A lessor is a natural person or organization who regularly leases, offers to lease, or arranges for the lease of personal property under a consumer lease. A person who leases or offers to lease more than five times in the preceding or current calendar year meets this definition.

Answer 481

“Consumer Lease”—A consumer lease is a contract between a lessor and a lessee: * for the use of personal property by an individual (natural person), * to be used primarily for personal, family, or household purposes, * for a period of more than 4 months (week-to-week and month-to-month leases do not meet this criterion, even though they may be extended beyond 4 months), and * with a total contractual cost of no more than $61,000 effective January 1, 2022 (adjusted annually per CPI). Specifically excluded from coverage are leases that are: * for business, agricultural or made to an organization or government, * for real property, * for personal property which are incidental to the lease of real property, subject to certain conditions, and * for credit sales, as defined in Regulation Z. §1026.2(a)(16). A lease meeting all of these criteria is covered by the CLA and the Consumer Financial Protection Bureau’s Regulation M. If any one of these criteria is not met, for example, if the leased property is used primarily for business purposes or if the total contractual cost exceeds the threshold listed above, the CLA and Regulation M do not apply. This figure is adjusted every year to match changes in the consumer price index for Urban Wage Earners and Clerical Workers. Consumer leases fall into one of two categories: closed end and open end. Since the information required to be disclosed to the consumer will vary with the kind of lease, it is important to note the difference between them. However, to properly understand the difference, realized value and residual value must first be defined.

Answer 482

“Realized Value”—The realized value is the price received by the lessor of the leased property at disposition, the highest offer for disposition of the leased property, or the fair market value of the leased property at the end of the lease term.

Answer 483

“Residual Value”—The residual value is the value of the leased property at the end of the lease, as estimated or assigned at consummation of the lease by the lessor.

Answer 484

“Open-end Lease”—An open-end lease is a lease in which the amount owed at the end of the lease term is based on the difference between the residual value of the leased property and its realized value. The consumer may pay all or part of the difference if the realized value is less than the residual value or he may get a refund if the realized value is greater than the residual value at scheduled termination.

Answer 485

“Closed-end Lease”—A closed-end lease is a lease other than an open-end lease. This type of lease allows the consumer to “walk away” at the end of the contract period, with no further payment obligation—unless the property has been damaged or has sustained abnormal wear and tear.

Answer 486

“Gross Capitalized Cost”—The gross capitalized cost is the amount agreed upon by the lessor and lessee as the value of the leased property, plus any items that are capitalized or amortized during the lease term. These items may include taxes, insurance, service agreements, and any outstanding prior credit or lease balance.

Answer 487

“Capitalized Cost Reduction”—This term means the total amount of any rebate, cash payment, net trade-in allowance, and noncash credit that reduces the gross capitalized cost.

Answer 488

“Adjusted Capitalized Cost”—This is the gross capitalized cost less the capitalized cost reduction and the amount used by the lessor in calculating the base periodic payment.

Answer 489

General Disclosure Requirements (AKA Electronic disclosure requirements) Lessors are required by federal law to provide the consumer with leasing cost information and other disclosures in a format similar to the model disclosure forms found in Appendix A to the regulation. Certain pieces of this information must be kept together and must be segregated from other lease information. All of the information stated must be accurate, clear and conspicuous, and provided in writing in a form that the consumer may keep. The general disclosures required by Part 1013 may be provided to the lessee in electronic form, subject to compliance the E-Sign Act. The E-Sign Act does not mandate that institutions or consumers use or accept electronic records or signatures. It permits institutions to satisfy any statutory or regulatory requirements by providing the information electronically after obtaining the consumer’s affirmative consent. But before consent can be given, consumers must be provided with the following information: * any right or option to have the information provided in paper or non-electronic form; * the right to withdraw the consent to receive information electronically and the consequences, including fees, of doing so; * the scope of the consent (for example, whether the consent applies only to a particular transaction or to identified categories of records that may be provided during the course of the parties’ relationship); * the procedures to withdraw consent and to update information needed to contact the consumer electronically; and * the methods by which a consumer may obtain, upon request, a paper copy of an electronic record after consent has been given to receive the information electronically and whether any fee will charged. The consumer must consent electronically or confirm consent electronically in a manner that “reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent.” After the consent, if an institution changes the hardware or software requirements such that a consumer may be prevented from accessing and retaining information electronically, the institution must notify the consumer of the new requirements and must allow the consumer to withdraw consent without charge. Disclosures are to be provided in the following circumstances. (Advertisement requirements are discussed in the advertising section.) with the consumer consent and other applicable provisions of

Answer 490

Disclosures are to be provided in the following circumstances. (Advertisement requirements are discussed in the advertising section.) Prior to or Due at Lease Signing A dated disclosure must be given to the consumer before signing the lease and must contain all of the information detailed in Section 4 of the regulation. Renegotiations and Extensions New disclosures also must be provided when a consumer renegotiates, or extends a lease, subject to certain exceptions. Multiple Lessors/Lessees In the event of multiple lessors, one lessor on behalf of all the lessors may make the required disclosures. If the lease involves more than one lessee, the required disclosures should be given to any lessee who is primarily liable.

Answer 491

Advertising Advertisements concerning consumer leases must also comply with certain disclosure requirements. All advertisements must be accurate. If an advertisement includes any reference to certain “trigger terms”—the amount of any payment, statement of a capitalized cost reduction (i.e., down payment), or other payment required prior to or at lease signing or delivery, or that no such payment is required—then the ad must also state the following: * that the transaction is for a lease; * the total amount due prior to or at lease signing or delivery; * the number, amounts and due dates or periods of the scheduled payments; * a statement of whether or not a security deposit is required; and * a statement that an extra charge may be imposed at the end of the lease term where the lessee’s liability (if any) is based on the difference between the residual value of the leased property and its realized value at the end of the lease term. (§ 1013.7(d)(2)). An advertisement for an open-end lease also must include a statement that extra charges may be imposed at the end of the lease based on the difference between the residual value and the realized value at the end of the lease term. If lessors give a percentage rate in an advertisement, the rate cannot be more prominent than any of the other required disclosures. They must also include a statement that “this percentage may not measure the overall cost of financing this lease.” The lessor cannot use the term “annual percentage rate,” “annual lease rate,” or any equivalent term. Some fees (license, registration, taxes, and inspection fees) may vary by state or locality. An advertisement may exclude these third-party fees from the disclosure of a periodic payment or total amount due at lease signing or delivery, provided the ad states that these have been excluded. Otherwise, an ad may include these fees in the periodic payment or total amount due, provided it states that the fees are based on a particular state or locality and indicates that the fees may vary. For an advertisement accessed by the consumer in electronic form, the required disclosures may be provided to the consumer in electronic form in the advertisement, without regard to the consumer consent or other provisions of the E-Sign Act. An electronic advertisement (such as an advertisement on an Internet web site) that provides a table or schedule of the required disclosures is considered a single advertisement if the advertisement clearly refers the consumer to the location where the additional required information begins. For example, in an electronic advertisement, a term triggering additional disclosures may be accompanied by a link that directly connects the consumer to the additional disclosures.

Answer 492

Limits on Balloon Payments In order to limit balloon payments that may be required of the consumer, certain sections of the regulation call for reasonable calculations and estimates. These provisions protect the consumer at early termination of a lease, at the end of the lease term, or in delinquency, default, or late payment status.The provisions limit the lessee’s liability at the end of the lease term and set reasonableness standards for wear and use charges, early termination charges, and penalties or fees for delinquency.

Answer 493

Penalties and Liability Criminal and civil liability provisions of the Truth in Lending Act also apply to the CLA. Actions alleging failure to disclose the required information, or otherwise comply with the CLA, must be brought within one year of the termination of the lease agreement.

Answer 494

Record Retention Lessors are required to maintain evidence of compliance with the requirements imposed by Regulation M, other than the advertising requirements under Section 7 of the regulation, for a period of not less than two years after the date of the disclosures are required to be made or an action is required to be taken.

Answer 495

Servicemembers Civil Relief Act of 2003 Introduction The Servicemembers Civil Relief Act of 2003 (SCRA) was signed into law on December 19, 2003, amending and replacing the Soldiers’ and Sailors’ Civil Relief Act of 1940, and is codified at 50 U.S.C. 3901 et seq.1 It was further amended December 10, 2004, by the Veterans Benefits Improvement Act of 2004. The law protects members of the Army, Navy, Air Force, Marine Corps and Coast Guard, including members of the National Guard, as they enter military service (active duty 2), as well as commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration engaged in active service. Some of the benefits accorded servicemembers by the SCRA also extend to servicemembers’ spouses, dependents, and other persons subject to the obligations of servicemembers. Periodically, various laws have extended the availability of certain protections. Major relief provisions of the SCRA include: 1 The SCRA was previously codified and cited as 50 U.S.C. App. 501 et seq. 2 In the case of servicemembers who are members of the Army, Navy, Marine Corps, or Coast Guard, active duty is defined as “ full-time duty in the active military service of the United States. Such term includes fulltime training duty, annual training duty, and attendance, while in the active military service, at a school designated as a service school by law or by the Secretary of the military department concerned. Such term does not include full-time National Guard duty.” 10 U.S.C. § 101(d). Note the term “ military service” under the SCRA also includes National Guard members under a call of duty authorized by the President or the Secretary of Defense for more than 30 consecutive days and servicemembers who are commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration engaged in “active service.” 50 U.S.C. § 3911(2).

Answer 496

Maximum Rate of Interest on Loans, Including Mortgages Upon receiving a written notice and proof of military service3 through (a) written notice and a copy of the servicemember's military orders or any other appropriate indicator of military service, including a certified letter from a commanding officer or (b) independent verification by the creditor, creditors must, for the duration of the servicemember’s military service, reduce the interest 4 rate on debts 5 incurred by the servicemember, or a servicemember and spouse jointly, before entry into military service to no more than 6 percent per year. (This applies to the individual servicemember’s debt or joint debt with a spouse.) Creditors shall not condition the granting of benefits upon the use of a specific form or require that a written notice explicitly request benefits. Creditors shall accept copies of borrowers' military orders as written notice of eligibility for reduced interest rates pursuant to the SCRA via email facsimile, mail, or overnight delivery. Creditors shall also accept borrowers' requests for any form of military deferment or forbearance as written notice of eligibility for reduced interest rates pursuant to the SCRA. Upon receipt of notice, creditors must retroactively reduce the interest rate on servicemember’s debts as of the date on which the servicemember was called to military service, in the case of a reservist or inductee, the day on which the servicemember received his or her orders. 6 Creditors must maintain the interest rate reduction for the duration of the servicemember’s period of military service. 7 Additionally, in the case of a mortgage, trust deed, or other security in the nature of a mortgage, creditors must extend this interest rate reduction for one year after the end of the servicemember’s military service.8 Creditors who reduce the interest rate on the obligations of a servicemember must forgive interest in excess of 6 percent, and recalculate the amortization of the remaining monthly payments to reflect the interest rate change. The reduced interest rate provision applies unless a court finds the ability of the servicemember to pay interest on the debt at a higher interest rate is not materially affected by his or her military service. In such cases, the court may grant a creditor relief from the interest rate limitations of the Act. 3 Section 207 (b)(1) of SCRA was amended by the John S. McCain National Defense Authorization Act for Fiscal Year 2019 signed into law on August 13, 2018, to expand the documentation options for proof of military service status beyond just military orders. 4 “ Interest” is defined in the SCRA to include service and renewal charges or any other fees or charges, except for charges for bona fide insurance. 50 U.S.C. § 3937(d). 5 Section 207 of the SCRA, 50 U.S.C. § 3927, applies to “an obligation or liability . . . incurred by the servicemember, or the servicemember and the servicemember’s spouse jointly, before the service member enters military service.” 6 50 U.S.C. §§ 3917 and 3937 7 Creditors cannot schedule these benefits to terminate automatically at any point prior to the date on which the servicemember leaves the service, nor can creditors require servicemembers to periodically reapply or recertify their eligibility to maintain benefits. 8 The extension of the interest rate reduction for mortgages for an additional one-year period after the end of military service was added by section 2203(b) of Housing and Economic Recovery Act of 2008 (HERA), which was signed into law on July 30, 2008. Pub. L. 110-289.

Answer 497

Residential and Motor Vehicle Purchases and Leases Contracts for the purchase of real or personal property, for which the servicemember has paid a deposit or made a payment before the servicemember enters military service, may not be rescinded or terminated after the servicemember’s entry into military service for a breach of the terms of the contract occurring before or during their military service, or the property repossessed because of the breach without a court order. Termination of certain residential or motor vehicle leases may be made at the option of the lessee servicemember if the servicemember provides to the lessor or the lessor’s agent written notice of the request for termination along with a copy of the military orders. Automobiles leased for personal or business use by the servicemember or his dependent may be terminated by the servicemember, if after the lease is executed, the servicemember enters military service for a period of 180 days or more. Additionally, an automobile lease entered into while the servicemember is on active duty may be terminated by the servicemember if he or she receives military orders for a permanent change of station (PCS) outside the continental United States (this would include a PCS to Hawaii or Alaska) or deployment for a period of 180 days or more. Termination of an automobile lease also includes the return of the automobile to the lessor within 15 days after delivery of the written notice of termination. Termination is permitted of pre-service “residential, professional, agricultural, or similar” leases occupied or intended to be occupied by a servicemember or a dependent as well as those leases executed during military service where the servicemember subsequently receives orders for a PCS or a deployment for a period of 90 days or more.

Answer 498

Foreclosure, Eviction from Bank-Owned Property Real or personal property owned by a servicemember before the servicemember’s military service that secures a mortgage, trust deed, or similar security interest cannot be sold, foreclosed upon, or seized based on a breach of such a secured obligation during the period of military service or one year thereafter without a court order. 9 Additionally, in an action filed during or within one year after a servicemember’s military service, a court may, after a hearing on its own, or shall, upon application by a servicemember, stay a proceeding to enforce an obligation as described above or adjust the debt, when the member’s ability to comply with the obligation is materially affected by reason of the member’s military service.10 A landlord may not evict a servicemember or his or her dependents from certain residences 11 occupied primarily as a residence during a period of military service except by court order. A creditor must notify the homeowner by a statement or notice, written in plain English by the Secretary of Housing and Urban Development, in consultation with the Secretary of Defense and the Secretary of Treasury, explaining the mortgage and foreclosure rights of servicemembers, and the dependents of such servicemembers, under the Servicemembers Civil Relief Act (50 U.S.C. 3901 et seq.), including the toll-free military one source number to call if servicemembers, or the dependents of such servicemembers, require further assistance.

Answer 499

Life Insurance Assigned as Security If a life insurance policy on the life of a servicemember is assigned before military service to secure the payment of an obligation, the assignee of the policy (except the insurer in connection with a policy loan) may not exercise, during the period of the servicemember’s military service or within one year thereafter, any right or option obtained under the assignment, absent compliance with a court order or other specified requirement.

Answer 500

Adverse Action The fact that a servicemember applies for, or receives a stay, postponement, or suspension of his or her obligations or liabilities pursuant to the SCRA may not in itself provide the basis for the following: A determination by a lender or other person that the servicemember is unable to pay the obligation or liability in accordance with its terms; A creditor’s denial or revocation of credit, change in terms of an existing credit arrangement, or refusal to grant credit to the servicemember in substantially the amount or on substantially the terms requested; An adverse report relating to the creditworthiness of the servicemember by or to a consumer reporting agency; A refusal by an insurer to insure the servicemember; An annotation in a servicemember’s record by a creditor or a person engaged in the practice of assembling or evaluating consumer credit information identifying the servicemember as a member of the National Guard or a reserve component; or A change in the terms offered or conditions required for the issuance of insurance.

Answer 501

Relief for Other Obligors Whenever a court grants a stay, postponement, or suspension to a servicemember on an obligation, it may similarly grant a person primarily or secondarily liable such a stay, postponement, or suspension.

Answer 502

Examiners should reference the Military Lending Act examination procedures (Chapter V-13.1 in the Compliance Examination Manual) for consumer credit transactions occurring on or after October 3, 2016, as relevant. For consumer credit transactions occurring prior to these dates, examiners should reference the Talent Amendment examination procedures (Chapter V-12.1 in the Compliance Examination Manual).

Answer 503

Department of Defense (DoD) regulations implementing the consumer protection provisions of the John Warner National Defense Authorization Act for Fiscal Year 20071 contain limitations and requirements for certain types of consumer credit extended to active duty service members and their spouses, children, and other dependents (“covered borrowers”). The regulation covers “payday loans,” “vehicle title loans,” and “tax refund anticipation loans,” as defined by the DoD rule (“covered transactions”), and applies to all persons that meet the definition of creditor in Regulation Z2 who are engaged in the business of extending such credit and their assignees. For covered transactions, the DoD rule limits the amount that a creditor can charge, including interest, fees and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products sold in connection with the transaction. The total charges must be expressed as a total dollar amount and as an annualized rate referred to as the “Military Annual Percentage Rate,” or “MAPR,” which may not exceed 36 percent. The MAPR includes charges that are not included in the finance charge or APR disclosed under the Truth in Lending Act (TILA), and must be separately disclosed for covered transactions. Among other provisions, the DoD rule * provides a safe harbor and model form for creditors to use in connection with identifying covered borrowers; * requires creditors to provide written and oral disclosures in addition to those required by TILA; * prohibits certain loan terms, such as prepayment penalties, mandatory arbitration clauses and unreasonable legal notice requirements; and * restricts loan rollovers and refinancings. Creditors that knowingly violate the rule may be subject to criminal penalties, and a credit agreement that is prohibited under the rule is void from inception. The final rule took effect on October 1, 2007, and applies to covered transactions that are consummated on or after that date.

Answer 504

“Consumer Credit” Consumer Credit means closed-end credit offered or extended to a covered borrower primarily for personal, family, or household purposes for payday loans, vehicle title loans, and tax refund anticipation loans, as defined below. a. Payday loans – Closed-end credit * with a term of 91 days or fewer; * in which the amount financed does not exceed $2,000; and * in which the covered borrower receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously with the receipt of funds * provides a check or other payment instrument to the creditor, who agrees not to deposit or present it for more than one day; or * authorizes the creditor to initiate a debit to the borrower’s deposit account by electronic fund transfer or remotely created check after one or more days. b. Motor vehicle title loans – Closed-end credit * with a term of 181 days or fewer; and * secured by the title to a motor vehicle that has been registered for use on public roads and is owned by the covered borrower (other than a purchase money transaction). c. Tax refund anticipation loans – Closed-end credit in which the covered borrower expressly * grants the creditor the right to receive all or part of the covered borrower’s income tax refund; or * agrees to repay the loan with the proceeds of the covered borrower’s refund.

Answer 505

“Creditor” A Creditor means all persons that meet the definition of creditor under Regulation Z who are engaged in the business of extending consumer credit covered by the rule. NOTE: Instead of including assignees in the definition of “creditor,” the rule specifically refers to assignees in each section of the rule that would apply to an assignee.

Answer 506

“Military Annual Percentage Rate” Military annual percentage rate, or “MAPR,” is the cost of the consumer credit transaction expressed as an annual rate. The MAPR for covered transactions may not exceed 36 percent, unless a lower limit applies. * Calculation of the MAPR. The MAPR shall be calculated based on the costs in this definition but, in all other respects, it shall be calculated and disclosed following the rules used for calculating the APR for closed-end credit under Regulation Z (Truth in Lending, 12 C.F.R. Part 226). Cost Elements. The MAPR includes the following cost elements associated with the extension of a covered transaction if they are financed, deducted from the proceeds of the covered transaction, or otherwise required to be paid as a condition of the credit: ° interest, fees, credit service charges, and credit renewal charges; ° credit insurance premiums, including charges for singlepremium credit insurance, or fees for debt cancellation or debt-suspension agreements; and ° fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction. The MAPR does not include ° fees or charges imposed for actual unanticipated late payments, default, delinquency, or similar occurrence; ° taxes or fees prescribed by law that actually are or will be paid to public officials for determining the existence of, or for perfecting, releasing, or satisfying a security interest; ° any tax levied on security instruments or documents evidencing indebtedness if the payment of such taxes is a requirement for recording the instrument securing the evidence of indebtedness; and ° tax return preparation fees associated with a tax refund anticipation loan, whether the fees are deducted from the loan proceeds NOTE: The DoD’s intent is to ensure the credit products covered by the regulation cannot evade the 36 percent limit by combining low interest rates with high fees associated with origination, membership, administration, or other costs that may not be captured in the TILA definition of the APR. The MAPR includes charges that are not included in the finance charge or APR disclosed under TILA. As a result, the MAPR is required to be separately disclosed and is in addition to the APR disclosures required under TILA for covered transactions. 3 DOD rules also prohibit an institution from imposing an MAPR except as authorized by applicable State or Federal law. Depending on the type of institution, different State or Federal laws may govern the maximum rates and fees that the institution may impose for consumer credit transactions covered by the DOD rules. However, in no instance may such rates and fees exceed the 36 percent MAPR cap specified in the DOD rules.

Answer 507

Military Lending Act Background Examiners should reference the Military Lending Act examination procedures (Chapter V-13.1 in the Compliance Examination Manual) for consumer credit transactions occurring on or after October 3, 2016, as relevant. For consumer credit transactions occurring prior to these dates, examiners should reference the Talent Amendment examination procedures (Chapter V-12.1 in the Compliance Examination Manual). The Military Lending Act1 (MLA), enacted in 2006 and implemented by the Department of Defense (DoD), protects active duty members of the military, their spouses, and their dependents from certain lending practices. These practices could pose risks for service members and their families, and could pose a threat to military readiness and affect service member retention. The DoD regulation2 implementing the MLA contains limitations on and requirements for certain types of consumer credit extended to active duty service members and their spouses, children, and certain other dependents (“covered borrowers”). Subject to certain exceptions, the regulation generally applies to persons who meet the definition of a creditor in Regulation Z and are engaged in the business of extending such credit, as well as their assignees.3

Answer 508

For covered transactions, the MLA and the implementing regulation limit the amount a creditor may charge, including interest, fees, and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products sold in connection with the transaction. The total charge, as expressed through an annualized rate referred to as the Military Annual Percentage Rate (MAPR)4 may not exceed 36 percent.5 The MAPR includes charges that are not included in the finance charge or the annual percentage rate (APR) disclosed under the Truth in Lending Act (TILA). 6 In addition, among other provisions, the MLA, as implemented by DoD: * Provides an optional safe harbor from liability for certain procedures that creditors may use in connection with identifying covered borrowers; * Requires creditors to provide written and oral disclosures in addition to those required by TILA; * Prohibits certain loan terms, such as prepayment penalties, mandatory arbitration clauses, and certain unreasonable notice requirements; and * Restricts loan rollovers, renewals, and refinancings by some types of creditors. Statutory amendments to the MLA in 2013 granted enforcement authority for the MLA’s requirements to the agencies specified in section 108 of TILA.7 These agencies include the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Federal Trade Commission. State regulators also supervise state-chartered institutions for MLA requirements pursuant to authority granted by state law. In July 2015, DoD published revisions to the MLA implementing regulation8 that: * Extend the MLA’s protections to a broader range of credit products; * Modify the MAPR to include certain additional fees and charges; * Alter the provisions of the optional safe harbor available to creditors for identification of covered borrowers; * Modify the disclosures creditors are required to provide to covered borrowers; * Modify the prohibition on rolling over, renewing, or refinancing consumer credit; and * Implement statutory changes, including provisions related to administrative enforcement and civil liability for MLA violations (for knowingly violating the MLA, there is potential for criminal penalties). Previously, the MLA regulation only applied to certain types of credit, namely: narrowly defined payday loans, motor vehicle title loans, and tax refund anticipation loans with particular terms. The current rule defines “consumer credit” subject to the MLA much more broadly, generally paralleling the definition in Regulation Z. Some examples of additional credit products now subject to MLA protections when made to covered borrowers include: * Credit cards; * Deposit advance products; * Overdraft lines of credit (but not traditional overdraft services); 9 and * Certain installment loans (but not installment loans expressly intended to finance the purchase of a vehicle or personal property when the credit is secured by the vehicle or personal property being purchased). Credit agreements that violate the MLA are void from inception. For most products, creditors are required to come into compliance with DoD’s July 2015 rule on October 3, 2016. For credit card accounts, creditors are not required to come into compliance with the rule until October 3, 2017.10 1 10 U.S.C. 987. 2 32 CFR part 232. 3 32 CFR 232.3(i). 4 The MAPR is calculated in accordance with 32 CFR 232.4(c). 5 32 CFR 232.4(b). 6 The MAPR largely parallels the APR, as calculated in accordance with Regulation Z, with some exceptions to ensure that creditors do not have incentives to evade the interest rate cap by shifting fees for the cost of the credit product away from those categories that would be included in the MAPR. Generally, a charge that is excluded as a “finance charge” under Regulation Z also would be excluded from the charges that must be included when calculating the MAPR. Late payment fees and required taxes—i.e., fees that are not directly related to the cost of credit—are examples of items excluded from both the APR and the MAPR. But certain other fees more directly related to the cost of credit are typically included in the MAPR, but not the APR. The most common examples of these fees—application fees and participation fees—have been specifically noted in the regulation as charges that generally must be included in the MAPR, but would not be included in the APR under Regulation Z. 7 National Defense Authorization Act for Fiscal Year 2013, Pub. L. 112-239, section 662(b), 126 Stat. 1786. 8 80 Fed. Reg. 43560.

Answer 509

Definitions (§ 232.3) Consumer Credit Consumer credit is “credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is: * Subject to a finance charge; or * Payable by a written agreement in more than four installments.” The MLA regulation’s definition of “consumer credit” has been amended to align more closely with the definition of the same term in Regulation Z. It is DoD’s intent that the term as used in the MLA regulation should wherever possible be interpreted consistently with Regulation Z. Notably,

Answer 510

Covered Borrower A covered borrower is a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member of the armed forces or a dependent of a covered member (as defined in 32 CFR 232.3(g)(2) and (g)(3)). Covered members of the armed forces include members of the Army, Navy, Marine Corps, Air Force, or Coast Guard currently serving on active duty pursuant to title 10, title 14, or title 32 of the U.S. Code under a call or order that does not specify a period of 30 days or fewer, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. 101(d)(6). The term dependent refers to a covered member’s: * Spouse; * Children under age 21; * Children under age 23 enrolled full-time at an approved institution of higher learning and dependent on a covered member (or dependent at the time of the member’s or former member’s death) for over one-half of their support; or * Children of any age incapable of self-support due to mental or physical incapacity that occurred while a dependent of the covered member under the preceding two bullets and dependent on a covered member (or dependent at the time of the member’s or former member’s death) for over one-half of their support. Other relationships may also qualify an individual as a dependent of a covered member. Paragraphs (E) and (I) of 10 U.S.C. 1072(2) reference other relationships that qualify individuals as dependents under the MLA. Per 32 CFR 232.2(a)(1), the regulation does not apply to a credit transaction or account relating to a consumer who is not a covered borrower at the time that he or she becomes obligated on a credit transaction or establishes an account for credit. Additionally, the regulation does not apply to a credit transaction or account (which would otherwise be consumer credit) relating to a consumer once the consumer no longer is a covered borrower.

Answer 511

Creditor Except as provided in 32 CFR 232.8(a), (f), and (g), a creditor under the MLA is a person who is: * Engaged in the business of extending consumer credit;12 or * An assignee of a person engaged in the business of extending consumer credit with respect to any consumer credit extended. With respect to 32 CFR 232.8(a) only (relating to limitations on rollovers, renewals, repayments, refinancings, and consolidations), the term creditor means a person engaged in the business of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions. However, pursuant to 232.8(a), the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union. With respect to 32 CFR 232.8(f) only (relating to limitations on the use of a vehicle title as security), the term creditor does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union. With respect to 32 CFR 232.8(g) only (relating to limitations on requiring establishment of an allotment as a condition for extending credit), the term creditor does not include a “military welfare society,” as defined in 10 U.S.C. 1033(b)(2), or a “service relief society,” as defined in 37 U.S.C. 1007(h)(4). 12 For the purposes of this definition, a creditor is engaged in the business of extending consumer credit if the creditor considered by itself and together with its affiliates meets the transaction standard for a “creditor” under Regulation Z with respect to extensions of consumer credit to covered borrowers. 13 The regulation also prohibits an institution from imposing an MAPR except as authorized by applicable Federal or State law. Depending on the type of institution, different Federal or State laws may govern the maximum rates and fees an institution may impose for consumer credit transactions covered by the regulation, but in no instance may such rates and fees exceed the 36-percent MAPR cap contained in the regulation.

Answer 512

Short-Term, Small Amount Loan Under certain circumstances, an application fee for a shortterm, small amount loan may be excluded when calculating the MAPR (see “Terms of Consumer Credit Extended to Covered Borrowers (Calculation of MAPR) (§ 232.4)” for more information about calculating the MAPR). A shortterm, small amount loan is a closed-end loan that is: * Subject to and made in accordance with a Federal law (other than the MLA) that expressly limits the rate of interest that a Federal credit union or an insured depository institution may charge on an extension of credit, provided that the limitation set forth in that law is comparable to a limitation of an annual percentage rate of interest of 36 percent; and * Made in accordance with the requirements, terms, and conditions of a rule, prescribed by the appropriate Federal regulatory agency (or jointly by such agencies), that implements the Federal law described in the paragraph above, provided further that such law or rule contains: o A fixed numerical limit on the maximum maturity term, which term shall not exceed nine months; and o A fixed numerical limit on any application fee that may be charged to a consumer who applies for such closed-end loan.

Answer 513

Terms of Consumer Credit Extended to Covered Borrowers (Calculation of MAPR) (§ 232.4) Types of Fees to Include in MAPR Calculation Under the MLA, a creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit. For credit card accounts, creditors are not required to comply with DoD’s July 2015 rule until October 3, 2017. The following charges included in the MAPR (“charges”) must be included in the calculation of the MAPR for both closed- and open-end credit, as applicable: * Any credit insurance premium or fee, any charge for single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension agreement; * Any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit; and * Except for a bona fide fee (other than a periodic rate) charged to a credit card account, which may be excluded if the bona fide fee is reasonable: o Finance charges associated with the consumer credit; o Any application fee charged to a covered borrower who applies for consumer credit, other than an application fee charged by a Federal credit union or an insured depository institution when making a short-term, small amount loan provided that the application fee is charged to the covered borrower not more than once in any rolling 12-month period (see note below); and o In general, any fee imposed for participation in any plan or arrangement for consumer credit. (See “No Balance During a Billing Cycle” section below for more information on the MAPR calculation rules when there is no balance during a billing cycle for open-end credit). These charges are to be included in the MAPR calculation even if they would be excluded from the calculation of the finance charge under Regulation Z. Note: One application fee charged by a creditor making a short-term, small amount loan can be excluded from the computation of the MAPR under the conditions noted in the definition of a short-term, small amount loan. However, if a creditor charges a second application fee to a covered borrower who applies for a second short-term, small amount loan within a rolling 12-month period, then that second fee (and any subsequent application fees charged during that period) is not eligible for the exclusion and must be included when computing the MAPR for that loan.

Answer 514

Computing the MAPR for Closed-End Credit For closed-end credit, the MAPR shall be calculated following the rules for calculating and disclosing the “Annual Percentage Rate (APR)” for credit transactions under Regulation Z based on the MAPR charges listed above. See Examination Checklist for the types of fees that would be included or excluded from the MAPR calculation.

Answer 515

Computing the MAPR for Open-End Credit Generally, the MAPR for open-end credit should be calculated following the rules for calculating the effective annual percentage rate for a billing cycle as set forth in 12 CFR 1026.14(c) and (d) of Regulation Z14 (as if a creditor must comply with that section) based on the charges listed above. Even if a fee is otherwise eligible to be excluded under 12 CFR 1026.14(c) and (d), the amount of charges related to opening, renewing, or continuing an account must be included in the calculation of the MAPR to the extent those charges are among those in the above “Types of Fees to Include in MAPR Calculation”. No Balance During a Billing Cycle. For open-end credit, if the MAPR cannot be calculated in a billing cycle because there is no balance in the billing cycle, a creditor may not impose any fee or charge during that billing cycle, except that the creditor may impose a fee for participation in any plan or arrangement for that open-end credit so long as the participation fee does not exceed $100.00 annually, regardless of the billing cycle in which the participation fee is imposed. Note: the $100.00-per-year limitation on the amount of the participation fee does not apply to a bona fide participation fee charged to a credit card account consistent with 32 CFR 232.4(d). Creditors may impose fees or charges that are excluded from the calculation of the MAPR during a particular billing cycle where there is no balance during the billing cycle. For example, if a creditor charged a late fee for a late payment in accordance with its credit agreement with the covered borrower and in compliance with Regulation Z, the creditor may charge the fee, regardless of whether there is a balance in the billing cycle, because a late fee is not among the charges that are included in the calculation of the MAPR. Bona Fide Fees Charged to a Credit Card Account, Generally. For consumer credit extended in a credit card account under an open-end (not home-secured) consumer credit plan, a bona fide fee, other than a periodic rate, is not a charge required to be included in the MAPR calculation, provided the fee is both bona fide and reasonable for the type of fee. There is no exclusion for “bona fide fees” on accounts that are not credit card accounts. The exclusion for bona fide fees on credit card accounts does not apply to the following fees: * Any credit insurance premium or fee, including any charge for single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension agreement; or * Any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit. Note: A minimum interest charge on a credit card account that is generally disclosed in an account-opening table can be a bona fide fee excludable from the MAPR calculation if it meets the conditions for exclusion. To assess whether a bona fide fee is “reasonable,” the fee must be compared to fees typically imposed by other creditors for the same or a substantially similar product or service. This comparison is designed to be an “elementary like-kind standard,” as illustrated in the examples below: Example #1: When assessing a bona fide cash advance fee, that fee must be compared to fees charged by other creditors for transactions in which consumers receive extensions of credit in the form of cash or its equivalent. Example #2: When assessing a foreign transaction fee, that fee may not be compared to a cash advance fee because the foreign transaction fee involves the service of exchanging the consumer’s currency (e.g., a reserve currency) for the local currency demanded by a merchant for a good or service, and does not involve the provision of cash to the consumer. It is generally permissible to consider benefits provided by credit card rewards programs in determining whether a fee is reasonable overall. For participation fees, the rule gives additional guidance for determining whether a fee is reasonable: if the amount of the fee reasonably corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account. Example #3: Even if other creditors typically charge $100.00 annually for participation in credit card accounts, a $400.00 fee nevertheless may be reasonable if (relative to other accounts carrying participation fees) the credit made available to the covered borrower is significantly higher or additional services or other benefits are offered under that account Bona Fide Fees Charged to a Credit Card Account, Safe Harbor. The regulation provides a “firm, yet flexibly adaptable” safe harbor standard for a “reasonable” amount of a bona fide fee on a credit card account. A bona fide fee is reasonable if the amount of the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by five or more creditors each of whose U.S. credit cards in force is at least $3 billion in an outstanding balance (or at least $3 billion in loans on U.S. credit card accounts initially extended by the creditor) at any time during the three-year period preceding the time such average is computed. Creditors may use publicly available information regarding credit cards in force and/or fees charged on those credit cards, such as Securities and Exchange Commission filings, Consolidated Reports of Condition and Income, agreements posted on the CFPB’s website (http://www.consumerfinance.gov/creditcards/agreements/), agreements posted on creditors’ own websites, or commercially compiled sources of information. For purposes of choosing creditors for comparison, note that a creditor may meet the $3 billion threshold even if the creditor has sold the credit card loans to a special-purpose vehicle or entered into another arrangement so that securities backed by the loans may be issued. A bona fide fee that is higher than an average amount calculated using the safe harbor standard also may be reasonable depending on other factors relating to the credit card account. A bona fide fee charged by a creditor is not unreasonable solely because other creditors do not charge a fee for the same or a substantially similar product or service. Effect of Charging Fees on Bona Fide Fees. If a creditor imposes a fee or fees that cannot be excluded from the MAPR (see “Types of Fees to Include in MAPR Calculation” ) and imposes a finance charge on a covered borrower, the total amount of the fee(s) and finance charge(s) shall be included in the MAPR. This does not affect whether another type of fee may be excluded as a bona fide fee. However, if a creditor imposes any fee (other than a periodic rate or charges that must be included in the MAPR) that is not a bona fide fee and imposes a finance charge on a covered borrower, the total amount of those fees, including any bona fide fees, and other finance charges shall be included in the MAPR. Example #1: In a credit card account under an open-end (not home-secured) consumer credit plan during a given billing cycle, Creditor A imposes on a covered borrower a fee for a debt cancellation product, a finance charge, and a reasonable bona fide foreign transaction fee. Only the fee for the debt cancellation product and the finance charge must be included when calculating the MAPR. Example #2: In a credit card account under an open-end (not home-secured) consumer credit plan during a given billing cycle, Creditor B imposes on a covered borrower a fee for a debt cancellation product, a finance charge, a reasonable bona fide foreign transaction fee, and a bona fide, but unreasonable cash advance fee. All of the fees— including the foreign transaction fee that otherwise would qualify for the exclusion as a bona fide fee—and the finance charge must be included when calculating the MAPR 14 Sections 1026.14(c) and (d) of Regulation Z provide for the methods of computing the APR under several scenarios, such as: (1) when the finance charge is determined solely by applying one or more periodic rates; (2) when the finance charge during a billing cycle is or includes a fixed or other charge that is not due to application of a periodic rate, other than a charge with respect to a specific transaction; and (3) when the finance charge during a billing cycle is or includes a charge relating to a specific transaction during the billing cycle.

Answer 516

Timing for Computing the MAPR for Open-End Credit Computing. In general, creditors can be reasonably expected to estimate at the outset of a billing cycle whether charges to a covered borrower can produce an MAPR in excess of the 36-percent limit. This is particularly true because the creditor already would know the periodic rate and whether the non-periodic fees are covered by the exclusion for a bona fide fee under 32 CFR 232.4(d). Nevertheless, under certain circumstances, creditors might not know at the outset of a billing cycle whether the borrower’s use of an open-end line of credit will lead to a finance charge that—through a combination of rates and fees—exceeds the 36-percent limit. However, at the end of a billing cycle the creditor would be able to calculate the MAPR and, in that same billing cycle, waive fees or periodic charges, either in whole or in part, in order to comply with the 36-percent limit.

Answer 517

MAPR Calculation Examples The following examples may assist reviewers in calculating the MAPR. Example #1: Closed-End Credit. The MAPR for single advance, single payment transactions, such as some types of deposit advance loans, must be computed in accordance with the rules in Regulation Z, such as by following the instructions described in paragraph (c)(5) of appendix J. Based on the formula provided in paragraph (c)(5) of appendix J, in the case of a single advance, single payment transaction loan extended to a covered borrower for a period of 45 days, and for which the advance is $500.00 and the single payment required consists of the principal amount plus a finance charge of $28.44, for a total payment of $528.44, the MAPR would be 46.14 percent. In this example, the resultant MAPR would exceed the 36- percent rate limit. Example #2: Open-End Credit (General). Suppose a creditor offers a line of credit to a covered borrower primarily for personal, family, or household purposes (commonly referred to as a “personal line of credit”), and permits the borrower to repay on a monthly basis. Upon establishing the personal line of credit, the covered borrower borrows $500.00. The creditor charges a periodic rate of 0.006875 (which corresponds to an annual rate of 8.25 percent), plus a fee of $25.00, charged when the account is established and annually thereafter. Under these circumstances, pursuant to 12 CFR 1026.14(c)(2), the creditor would calculate the MAPR as follows: “dividing the total amount of the finance charge for the billing cycle”—which is $3.44 (corresponding to (0.006875) x ($500)), plus $25.00—“by the amount of the balance to which it is applicable”—$500—and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year”—12 (since the creditor allows the borrower to repay monthly), which is 68.26 percent. In this example, even though the periodic rate (0.006875) would comply with the interest-rate limit under 32 CFR 232.4(b), the resultant MAPR would be in excess of that limit because the amount borrowed is low at the time the annual fee is imposed. Example #3: Open-End Credit (Credit Card). In the case of a credit card account, a creditor likewise would be required to calculate the MAPR using the methods prescribed in 12 CFR 1026.14(c) and (d) of Regulation Z. For example, if a creditor extends credit to a covered borrower through a credit card account and the borrower incurs a finance charge relating to a specific transaction, such as a cash advance transaction, during the billing cycle, then the creditor would calculate the MAPR under the instructions set forth in 12 CFR 1026.14(c)(3). However, in the case of a credit card account the creditor may exclude, pursuant to 32 CFR 232.4(c)(1)(iii) and 232.4(d), any bona fide fee from the finance charges that otherwise must be accounted for; thus, if a charge for the cash advance transaction fits within the exclusion for a bona fide fee under 32 CFR 232.4(d), then that charge would not be included when computing the MAPR for that billing cycle.

Answer 518

Identification of Covered Borrowers (§ 232.5) A creditor is permitted to apply its own method to assess whether a consumer is a covered borrower; however, the regulation provides creditors an optional safe harbor from liability in conclusively determining whether credit is offered or extended to a covered borrower through assessing the status of a consumer by use of either of the following methods: * Verifying the status of a consumer by using information relating to that consumer, if any, obtained directly or indirectly from the DoD’s database, located at https://mla.dmdc.osd.mil/ (or via any URL or direct connection to the database that may be provided by the DoD). Searches require entry of the consumer’s last name, date of birth, and Social Security number. Note: Historic lookbacks are prohibited under the rule. After a consumer has entered into a transaction or established an account, a creditor (including an assignee) may not, directly or indirectly, obtain any information from the DoD database to determine whether a consumer had been a covered borrower as of the date of a transaction or the date an account was established. However, this provision does not prevent creditors from adopting a risk management plan that includes periodically screening credit portfolios for other purposes, such as determining whether there are changes to covered borrower status. OR * Verifying the status of a consumer by using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis, or a reseller of such consumer reports, as those terms are defined in the Fair Credit Reporting Act (FCRA) and any implementing regulations. Note: The consumer reporting agency (CRA) must be a nationwide agency or a reseller of reports from such an agency (as both of those terms are defined by the FCRA); many specialty CRAs may not qualify. A creditor’s one-time determination, by using one of the methods provided in 32 CFR 232.5(b)(2), is permitted and deemed to be conclusive with respect to that transaction or account between the creditor and that consumer, so long as the creditor timely creates and maintains a record of the information obtained, solely at the time that: * The consumer initiates the transaction or 30 days prior to that time; * The consumer applies to establish the account or 30 days prior to that time; or * The creditor develops or processes a firm offer of credit that includes the status of the consumer as a covered borrower, so long as the consumer responds to that offer no later than 60 days after the creditor provides the offer to the consumer. The MLA rule extends the covered borrower check safe harbor to a creditor’s assignee provided that the assignee continues to maintain the original record created by the creditor that initially extended the credit. Neither the MLA nor 32 CFR 232 specify how and for how long creditors are to maintain these records, noting only that the records must be created timely and maintained thereafter. An action by a creditor within an existing account, such as to increase the available credit that a consumer may draw upon, does not alter the status of the creditor’s prior determination for that account. However, in order to benefit from the optional safe harbor provisions, a creditor must use one of the safe harbor methods when extending a new consumer credit product or newly establishing an account for consumer credit, including a new line of consumer credit that might be associated with a pre-existing transactional account held by the borrower (for example, when a consumer applies for an

Answer 519

Mandatory Loan Disclosures (§ 232.6) If a creditor extends consumer credit (including any consumer credit originated or extended through the internet) to a covered borrower, the creditor must provide the covered borrower with certain information before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit: * A statement of the MAPR applicable to the extension of consumer credit; * Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; and * A clear description of the payment obligation of the covered borrower, as applicable. Note that a payment schedule (in the case of closed-end credit) or accountopening disclosure (in the case of open-end credit) provided pursuant to Regulation Z satisfies this requirement. A creditor may satisfy the requirement to provide a statement of the MAPR by describing the charges the creditor may impose, in accordance with the regulation and subject to the terms and conditions of the agreement, relating to the consumer credit to calculate the MAPR. A creditor is not required to describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MAPR that apply to the extension of consumer credit. A creditor may include a statement of the MAPR applicable to the consumer credit in the agreement with the covered borrower involving the consumer credit transaction. The regulation does not require a statement of the MAPR to be included in advertisements. Under 32 CFR 232.6(c)(3), a statement substantially similar to the following model statement may be used to satisfy the requirement to provide a statement of the MAPR: Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account). If a transaction involves more than one creditor, then only one of those creditors must provide the required disclosures. The creditors may agree among themselves which creditor will provide the statement of the MAPR and the clear description of the payment obligation. 15 The statement of the MAPR and the clear description of the payment obligation must be provided in writing in a form the covered borrower can keep. A creditor shall also provide such required information orally.16 A creditor may satisfy the requirement to provide oral disclosures if the creditor provides: * The information to the covered borrower in person; or * A toll-free telephone number in order to deliver the oral disclosures to a covered borrower when the covered borrower contacts the creditor for this purpose. If a creditor elects to provide a toll-free telephone number in order to deliver the oral disclosures, the toll-free telephone number must be included on: * A form the creditor directs the consumer to use to apply for the transaction or account involving consumer credit; or * The written disclosure the creditor provides to the covered borrower. The oral disclosures provided through the toll-free number need only be available for a duration of time reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure. A creditor may orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow. For example, a creditor could generally describe how minimum payments are calculated on open-end credit plans issued by the creditor and then refer the covered borrower to the written materials the borrower will receive in connection with opening the plan. Alternatively, a creditor could choose to generally describe borrowers’ obligations to make a monthly, bi-monthly, or weekly payment as the case may be under the borrowers’ agreements. The requirement of a clear, oral payment obligation disclosure has sufficient breadth that creditors may choose a variety of acceptable oral disclosure compliance strategies. A generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts. If Regulation Z would allow a creditor to provide a required disclosure after the borrower has become obligated on a transaction, as in the case of purchase orders or requests for credit made by mail, telephone, or fax under 12 CFR 1026.17(g), the disclosures required by the MLA may be provided at the time prescribed in Regulation Z. A creditor is required to provide new disclosures for the refinancing or renewal of consumer credit only when the transaction for that credit would be considered a new transaction that requires disclosures under Regulation Z. The statement of the MAPR and the clear description of the payment obligation, as described above, need to be provided to a covered borrower only once for the transaction or the account established for consumer credit with respect to that borrower. 15 32 CFR 232.6(b)(2). 16 32 CFR 232.6(d)(2). 16 32 CFR 232.6(d)(2).

Answer 520

Limitations (§ 232.8) The MLA imposes a number of limitations upon creditors in connection with consumer credit extended to covered borrowers. Rollovers and certain other actions. It is unlawful for a creditor to roll over, renew, repay, refinance, or consolidate any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower. For the purposes of this paragraph, the term “creditor” means a person engaged in the business of deferred presentment transactions or similar payday loan transactions (as described in the relevant law), provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union. Note: This prohibition does not apply to a transaction when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this paragraph because the consumer was not a covered borrower at the time of the original transaction. Terms Relating to Dispute Resolution. A creditor cannot require a covered borrower to: * Waive the covered borrower’s right to legal recourse under any otherwise applicable provision of Federal or State law, including any provision of the Servicemembers Civil Relief Act; 17 * Submit to arbitration or other onerous legal notice provisions in the case of a dispute; or * Give unreasonable notice as a condition for legal action. Payment Terms and Conditions – General. A creditor cannot: * Use the title of a vehicle as security for the obligation involving the consumer credit. Note that for the purposes of this paragraph, the term “creditor” does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union; * Require as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay the obligation (note that for the purposes of this paragraph only, the term “creditor” shall not include a “military welfare society,” as defined in 10 U.S.C. 1033(b)(2), or a “service relief society,” as defined in 37 U.S.C. 1007(h)(4)); or * Prohibit the borrower from prepaying the consumer credit or charge a penalty fee for prepaying all or part of the consumer credit. Payment Terms and Conditions – Account Access. A creditor cannot use a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR not exceeding the 36-percent limit, a creditor may: * Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law; * Require direct deposit of the consumer’s salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or * If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction. This section prohibits a creditor from using the borrower’s account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower. Similarly, a creditor may not use a post-dated check provided at or around the time credit is extended that deprives the borrower of control over payment decisions, as is common in certain payday lending transactions. However, the prohibition on account access does not in any way prevent covered borrowers from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor. Section 232.8(e) also does not prohibit a covered borrower from authorizing automatically recurring payments, provided that such recurring payments comply with other laws, including the Electronic Fund Transfer Act and its implementing regulations, such as 12 CFR 1005.10, as applicable. The prohibition in 32 CFR 232.8(e) also does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower’s checking, savings, or other financial account, provided that it is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation including the 36-percent limitation on the MAPR. Savings Clauses. A creditor may include a proscribed term under section 232.8, such as a mandatory arbitration clause, within a standard written credit agreement with a covered borrower, provided that the agreement includes a contractual “savings” clause limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.

Answer 521

Secure and Fair Enforcement for Mortgage Licensing Act Examination Procedures for Covered Financial Institutions Introduction The Secure and Fair Enforcement for Mortgage Licensing Act of 20081 (SAFE Act) was enacted on July 30, 2008, and mandates a nationwide licensing and registration system for residential mortgage loan originators (MLOs).

Answer 522

The SAFE Act prohibits individuals from engaging in the business of residential mortgage loan origination without first obtaining and maintaining annually: * For individuals employed by a covered financial institution, registration as a mortgage loan originator and a unique identifier (federal registration); or * For all other individuals, a state license and registration as a mortgage loan originator, and a unique identifier (state licensing/registration).3 The SAFE Act requires that federal registration and state licensing/registration be accomplished through the same online registration system, the Nationwide Mortgage Licensing System and Registry (Registry). The objectives of the SAFE Act include aggregating and improving the flow of information to and between regulators; providing increased accountability and tracking of MLOs; enhancing consumer protections; supporting anti-fraud measures; and providing consumers with easily accessible information at no charge regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against MLOs.4 On July 28, 2010, the OCC, Board, FDIC, OTS, NCUA, and FCA (collectively the Agencies) published substantively similar regulations implementing the SAFE Act federal registration requirements for covered institutions and their MLO employees (SAFE Act regulation).5 On July 21, 2011, Title X of the Dodd-Frank Act transferred rulemaking authority for the SAFE Act to the Consumer Financial Protection Bureau (CFPB).6 The CFPB published an interim final rule, which recodified the Agencies’ SAFE Act regulations as a single regulation, Regulation G, at 12 CFR Part 1007, effective December 30, 2011.7 These examination procedures lay out the background and requirements of the SAFE Act and the SAFE Act regulation concerning federal registration. 1 12 USC § 5101-5116, Title V of the Housing and Economic Recovery Act of 2008 (Pub. L. 110–289, 122 Stat. 2654), as amended by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) (Pub. L. No. 111-203, 124 Stat. 1376). 2 More specifically, the SAFE Act required the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA), with the Farm Credit Administration (FCA), and through the Federal Financial Institutions Examination Council (FFIEC), to develop and maintain a federal system for registering MLOs employed by covered financial institutions. 3 The SAFE Act authorized the U.S. Department of Housing and Urban Development (HUD) to monitor and enforce states’ compliance with the statute’s requirements for state licensing and registration. On June 30, 2011, HUD published a final rule setting minimum standards for state licensing and registration. 76 Fed. Reg. 38464 (June 30, 2011). 4 12 USC § 5101 5 75 Fed. Reg. 44656 (July 28, 2010). The interagency Federal Register notice may be found at http://edocket.access.gpo.gov/2010/pdf/2010- 18148.pdf. See also the revised Federal Register Preamble (Aug. 23, 2010), available at http://edocket.access.gpo.gov/2010/pdf/C1-2010-18148.pdf (revising footnote numbering from the original release). 6 On July 21, 2011, pursuant to the Dodd-Frank Act the CFPB assumed: (1) responsibility for developing and maintaining the federal registration system (including rulemaking authority); (2) supervisory and enforcement authority for SAFE Act compliance for entities under the CFPB’s jurisdiction; and (3) HUD’s SAFE Act authority to oversee state compliance with SAFE Act requirements that had previously been under HUD’s authority. Refer to Dodd-Frank Act Sections 1025, 1061 and 1100. In addition, the Dodd-Frank Act merged functions of the OTS into the OCC, FDIC, and Board. 7 See 76 Fed. Reg. 78483 (Dec. 19, 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-19/pdf/2011-31730.pdf. In the preamble to the interim final rule, the CFPB stated that “[t]he interim final rule substantially duplicates the Federal registry agencies’ largely identical coordinated rules as the Bureau’s new Regulation G, 12 CFR part 1007, making only certain nonsubstantive, technical, formatting, and stylistic changes.”

Answer 523

“Annual renewal period” means November 1st through December 31st of each year.

Answer 524

“Administrative or clerical tasks” means the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the residential mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan.

Answer 525

“Covered financial institution” means any national bank, Federal branch and agency of a foreign bank, member bank, insured state nonmember bank (including state-licensed insured branches of foreign banks), savings association, or certain of their subsidiaries; branch or agency of a foreign bank or commercial lending company owned or controlled by a foreign bank; Farm Credit System institution; or federally insured credit union, including certain non-federally insured credit unions.8 8 12 CFR Secs. 1007.101(c), 1007.102.

Answer 526

“Employee” is not defined in the SAFE Act or SAFE Act regulation. However, the original regulation’s preamble explains that the meaning of “employee” under the SAFE Act regulation is consistent with the common law right-to-control test. For example, the results of this test generally determine whether an institution files an Internal Revenue Service Form W-2 or Form 1099 for an individual.9 9 See 75 Fed. Reg. at 44664 for a discussion of the meaning of “employee” as used in the original SAFE Act regulation

Answer 527

“Mortgage loan originator or MLO” means an individual who: (1) takes a residential mortgage loan application and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.10 The term mortgage loan originator does not include: * An individual who performs purely administrative or clerical tasks on behalf of an individual who is an MLO; * An individual who only performs real estate brokerage activities (as defined in 12 USC Section 5102(3)(D)) and is licensed or registered as a real estate broker in accordance with applicable state law, unless the individual is compensated by a lender, a mortgage broker, or other MLO or by any agent of such lender, mortgage broker, or other MLO, and meets the MLO definition; or * An individual or entity solely involved in extensions of credit related to timeshare plans, as that term is defined in 11 USC Section 101(53D). Appendix A to the SAFE Act regulation provides examples of activities of taking a loan application, and offering or negotiating loan terms, that fall within or outside of the definition of MLO for federal registration purposes.

Answer 528

“Registry” means the Nationwide Mortgage Licensing System and Registry, or NMLS, developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for the state licensing and registration of state-licensed MLOs, and through which federal MLO registrations must be accomplished.11 11 See the Nationwide Mortgage and Licensing System and Registry Web site at: http://mortgage.nationwidelicensingsystem.org/fedreg/Pages/default.aspx. System information on federal registration can be found under the Federal Registration tab at that site.

Answer 529

“Registered mortgage loan originator” or “registrant” means any individual who: (1) meets the MLO definition; (2) is an employee of a covered financial institution; (3) is registered pursuant to the regulation with the Registry; and (4) maintains a unique identifier through the Registry

Answer 530

“Residential mortgage loan” means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in Section 103(v) of the Truth in Lending Act, 15 USC Section 1602(v)) or residential real estate upon which is constructed or intended to be constructed a dwelling (including manufactured homes) and includes refinancings, reverse mortgages, home equity lines of credit, and other first and additional lien loans

Answer 531

“Unique identifier” means a number or other identifier that: (1) permanently identifies a registered MLO; (2) is assigned by protocols established by the Registry and the Bureau to facilitate electronic tracking of MLOs, as well as uniform identification of, and public access to, the employment history of and the publicly adjudicated disciplinary and enforcement actions against MLOs; and (3) must not be used for purposes other than those set forth under the SAFE Act.

Answer 532

De Minimis Exception The SAFE Act regulation provides an exception to the MLO registration requirements for any employee of a covered financial institution who has never been registered or licensed through the Registry as an MLO if during the past 12 months the employee acted as an MLO for five or fewer residential mortgage loans. When an institution relies on the de minimis exception in lieu of registration, the MLO employee must register prior to originating the sixth residential mortgage loan within the past 12 months. Covered financial institutions are prohibited from engaging in any acts or practices to evade the registration requirement.

Answer 533

Mortgage Loan Originator (MLO) Registration Requirements Each MLO employed by a covered financial institution must register with the Registry;12 obtain a “unique identifier;” maintain the registration by updating certain information within 30 days of specified changes; and renew the registration each year during the annual renewal period. 12 The SAFE Act rule implementing federal registration took effect on October 1, 2010. It provided a registration period from January 31, 2011, to July 29, 2011, for MLOs who are employees of covered financial institutions to register. After July 29, 2011, those employees must meet the registration requirements before they may originate residential mortgage loans.

Answer 534

Initial Registration Each employee of a federally regulated institution who is an MLO must submit to the Registry the following: * Identifying information, including name, home address, social security number, gender, date of birth, and principal business location; * Financial-services-related employment history for the prior 10 years; * Disclosure of specified criminal, civil judicial, or state, federal, or foreign financial authority regulatory actions against the employee; and * Fingerprints, for purposes of a Federal Bureau of Investigation background check. The employee must attest to the correctness of the information submitted to the Registry; must authorize the Registry and the institution to obtain information related to any administrative, civil, or criminal action to which the employee is a party; and must authorize the Registry to make certain information available to the public.

Answer 535

Maintaining Registration Renewal An MLO must renew his or her registration during the annual renewal period by confirming and updating his or her registration records. This requirement does not apply to an MLO who completed his or her initial registration less than six months prior to the end of the annual renewal period. Any registration that is not renewed during this period will become inactive, and the individual cannot act as an MLO at a covered financial institution until the registration requirements are met. Individuals who fail to update their registrations during this two-month renewal period may renew their registration at any time and need not wait until the start of the next annual renewal period.

Answer 536

Updates to Registration An MLO must update his or her registration within 30 days for specified significant changes, including name changes, employment termination, and reportable changes to legal or regulatory actions.

Answer 537

Previously Registered Employees – Change of Employment The regulations provide streamlined registration requirements for an MLO employee previously registered or licensed through the Registry who maintained this registration or license and who changes employment. Such an employee must update certain information, provide the required attestation and authorizations, and submit new fingerprints unless the employee has fingerprints on file with the Registry that are less than three years old. There is no grace period in this situation. An employee must update his or her Registry record before acting as a loan originator for the new employer.

Answer 538

Previously Registered Employees – Mergers, Acquisitions or Reorganizations A registered or licensed MLO whose employment changes as the result of a merger, acquisition, or reorganization has 60 days from the effective date of a merger, acquisition, or reorganization to update information in the Registry.

Answer 539

Required Covered Financial Institution Information In connection with the registration of one or more MLOs, covered financial institutions must submit certain required information to the Registry, including: contact information; Employer Tax Identification Number; Research Statistics Supervision and Discount (RSSD) number issued by the Board; primary Federal regulator; primary point of contact for the Registry; individuals with authority to enter information into the Registry; and, if a subsidiary of a financial institution, indication of that fact and the RSSD number of the parent institution, as applicable. Once registered, the institution will receive an NMLS identification number for the institution to use in attesting to MLO employment and for other Safe Act related purposes.

Answer 540

Attestation An individual with authority to enter information in the Registry must verify his or her identity and attest that he or she has that authority, that the information is correct, and that the institution will keep the information current.13 13 A covered financial institution may designate one or more individuals to serve as the system administrator(s) who may submit required information to the Registry on behalf of employees, and attest to their authority to submit information, the accuracy of information submitted, and that the institution will keep information current and submit updates on a timely basis. System administrators generally may not be MLOs; however, an institution is exempt from this regulatory requirement if it has 10 or fewer full-time employees and is not a subsidiary.

Answer 541

Registration A covered financial institution must require an MLO employee to register with the Registry, maintain this registration, and obtain a unique identifier. A covered financial institution must also confirm each MLO’s employment status once the MLO submits registration information to the Registry and before the registration is activated. Within 30 days of the date an MLO ceases to be an employee of the institution, the institution must notify the Registry of that fact along with the date the MLO ceased being an employee, so that consumers searching for an MLO in the publicly available consumer access portal will know that the MLO no longer has a relationship with the institution. 13 A covered financial institution may designate one or more individuals to serve as the system administrator(s) who may submit required information to the Registry on behalf of employees, and attest to their authority to submit information, the accuracy of information submitted, and that the institution will keep information current and submit updates on a timely basis. System administrators generally may not be MLOs; however, an institution is exempt from this regulatory requirement if it has 10 or fewer full-time employees and is not a subsidiary

Answer 542

Renewal and Updates A covered financial institution must update the information it submitted to the Registry during the annual registration renewal period and must confirm the registration information provided by MLO employees during this period. A covered financial institution must update the required institution information provided to the Registry within 30 days of any change in such information.

Answer 543

Policies and Procedures Covered financial institutions that employ one or more MLOs must adopt and follow written policies and procedures to carry out their SAFE Act responsibilities.14 The requirement to adopt and follow policies and procedures applies to all covered financial institutions that employ individual MLOs, where MLOs act within the scope of their employment, and regardless of the application of any de minimis exception to their employees. In addition, covered financial institutions must conduct annual independent compliance tests to ensure compliance with the regulation. The policies and procedures must be appropriate to the nature, size, complexity, and scope of the institution’s mortgage lending activities, and apply only to those employees acting within the scope of their employment at the institution. The policies and procedures must: * Establish a process for identifying which employees of covered financial institutions must be registered; * Require that all employees who are MLOs be informed of the registration requirements of the SAFE Act and SAFE Act regulation, and instructed on how to comply; * Establish procedures to comply with the SAFE Act regulation's unique identifier requirements; * Establish reasonable procedures for confirming the adequacy and accuracy of MLO employee registrations, including updates and renewals, by comparisons with its own records; * Establish reasonable procedures and tracking systems for monitoring compliance with registration and renewal requirements and procedures; * Provide for annual independent testing for compliance with the SAFE Act regulation by institution personnel or an outside party; * Provide for appropriate action if an employee fails to comply with the registration requirements of the SAFE Act regulations or the institution’s related policies and procedures, including prohibiting such employees from acting as MLOs or other appropriate disciplinary actions; * Establish a process for reviewing employee criminal history background reports received pursuant to the regulation, taking appropriate action consistent with applicable federal law15 and implementing regulations with respect to the reports, and maintaining records of the reports and actions taken with respect to applicable employees;16 and * Establish procedures designed to ensure that any third party with which the institution has arrangements related to mortgage loan origination has policies and procedures to comply with the SAFE Act and SAFE Act regulation, including appropriate licensing and/or registration of individuals acting as MLOs.17 14 Neither the Registry nor the CFPB screen or approve registrations received from employees of covered financial institutions. 15 Including Section 19 of the Federal Deposit Insurance Act (FDI Act); (12 USC 1829); Section 5.65(d) of the Farm Credit Act of 1971 (12 USC 2277a-14(d)); or Section 206 of the Federal Credit Union Act (12 USC 1786(i)). 16 Section 19 of the FDI Act (12 USC 1829) prohibits, without the prior written consent of the FDIC, insured depository institutions from employing a person who has been convicted of any criminal offense involving dishonesty, breach of trust or money laundering, or has entered into a pretrial diversion or similar program in connection with a prosecution for such offense. See the FDIC Statement of Policy for Section 19 of the FDI Act, 63 Fed. Reg. 66184 (Dec. 1, 1998; amended December 18, 2012), available at: http://www.fdic.gov/regulations/laws/rules/5000- 1300.html. 17 See FFIEC Statement on Risk Management of Outsourced Technology Service (Nov. 28, 2000) for guidance on the assessment, selection, contract review, and monitoring of a third party that provides services to a regulated institution. See also FDIC Guidance for Managing Third-Party Risk (FIL44-08); OCC Bulletin 2001-47, Third-Party Relationships (Nov. 1, 2001); OTS Thrift Bulletin 82a, Third Party Arrangements (Sept. 1, 2004); NCUA Letter to Credit Unions: 01-CU-20, Due Diligence Over Third Party Service Providers (Nov. 2001), 07-CU-13, Supervisory Letter-Evaluating Third Party Relationships (December 2007), 08-CU-09, Evaluating Third Party Relationships Questionnaire (Apr. 2008).

Answer 544

Unique Identifier When an MLO registers with the Registry, he or she receives a unique identifier – a series of numeric characters assigned for the life of the MLO. The unique identifiers allow MLOs to be tracked if they move between state and federal jurisdictions and/or change employers, and help consumers to find certain information about a particular MLO when they search on the Registry’s consumer access portal. The MLO information that is publicly available on the consumer access portal will ultimately include federal and state registrations and licenses held, the MLO’s employment history, and publicly adjudicated disciplinary and enforcement actions, if any. To make sure that consumers have access to an MLO’s unique identifier before committing to a mortgage loan transaction, an MLO must provide the unique identifier upon request (orally or in writing), before acting as an MLO (orally or in writing), and in any initial written communication (paper or electronic) from the MLO to the consumer (such as a commitment letter, good faith estimate, or disclosure statement). MLO unique identifiers may be used on written materials or promotional items distributed by the institution for general use, for example on loan program descriptions, advertisements, business cards, stationery, notepads, and similar materials; the SAFE Act regulation does not prohibit such use. The regulation also requires covered financial institutions to make MLO unique identifiers available to consumers in a practicable way. This could be achieved, for example by: * Directing consumers to a listing of registered MLOs and corresponding unique identifiers on the institution’s Web site; * Posting the information prominently in a publicly accessible place, such as a branch office lobby or lending office reception area; and/or * Establishing a process to ensure that institution personnel provide MLO unique identifiers when requested by consumers from employees other than the MLO.

Answer 545

Relation to Other Laws TILA, GSE and HUD Requirements Title XIV, Section 1402 of the Dodd-Frank Act amended the Truth in Lending Act (TILA) to require: (1) MLOs to include on all loan documents any unique identifier of the MLO provided by the NMLS, and (2) the CFPB to issue implementing regulations requiring covered financial institutions to establish and maintain procedures reasonably designed to assure and monitor compliance with the SAFE Act’s federal registration requirements.18 In 2009, the Federal Housing Finance Agency directed government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to require mortgage loan applications to include the MLO’s unique identifier.19 The GSEs announced that for federally regulated institutions, the unique identifier information is required for all applications on or after July 29, 2011.20 On January 5, 2011, HUD issued a mortgagee letter requiring the collection of NMLS unique identifiers for all individuals and entities participating in the origination of Federal Housing Administration (FHA) loans.21 The mortgagee letter also requires all FHA-approved mortgagees and their employees to comply with the NMLS registration requirements and “entities with jurisdiction over their activities” must register in accordance with the guidance set forth by NMLS. 18 See Pub. L. No. 111-203 (July 21, 2010), available at http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW111publ203.pdf(p. 2139). 19 See the FHFA news release at http://www.fhfa.gov/webfiles/400/LoanOrigIDS11509.pdf 20 See Fannie Mae and Freddie Mac Frequently Asked Questions at https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/pdf/mortgage loandelreqsfaqs.pdf and http://www.freddiemac.com/sell/secmktg/loan_level_faq.html. 21 See Mortgagee Letter 2011-4 at http://portal.hud.gov/hudportal/documents/huddoc?id=11-04ml.pdf 22 These reflect the interagency examination procedures in their entirety.

Answer 546

Protecting Tenants at Foreclosure Act of 2009 Introduction On May 20, 2009, the Helping Families Save Their Homes Act of 2009, Public Law 111-22 was signed into law. Included in the public law is the Protecting Tenants at Foreclosure Act (PTFA) (Division A, Title VII), which provides protections for tenants, including tenants in housing subsidized by Section 8 of the United States Housing Act of 1937, who are living in homes subject to foreclosure. The protections are intended to provide tenants a reasonable amount of notification of the need to find alternative housing. Initially, this title, and any amendments made by this title were to be statutorily repealed on December 31, 2012. Subsequently, Section 1484 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, signed into law July 21, 2010) amended PTFA and extended the PTFA protections to December 31, 2014. Section 1484 of the Dodd-Frank Wall Street Reform and Consumer Protection Act also defined when “date of notice of foreclosure” occurs. Section 1484 provides in relevant part as follows: “the date of a notice of foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provisions in a mortgage, deed of trust, or security deed.” On December 31, 2014, the Act terminated according to the amended sunset date. On May 24, 2018, the Protecting Tenants at Foreclosure Act of 2009 was reinstated through the signing of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. The effective date for compliance was June 23, 2018. The law is self-executing and no agency can issue a regulation or interpretation of the law.

Answer 547

Major provisions of the PTFA include: Foreclosure Covered Mortgages The PTFA covers foreclosure on: a federally-related mortgage loan1; or any dwelling or residential real property after the date of enactment of this title. (June 23, 2018) The protections of this law apply to tenants under a “bona fide” lease or tenancy. A lease or tenancy is “bona fide” only if: 1. the mortgagor or a child, spouse, or parent of the mortgagor under the contract is not the tenant; 2. the lease or tenancy was the product of an arm’s-length transaction; and 3. the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent or the rent is reduced or subsidized due to a federal, state, or local subsidy.

Answer 548

Major provisions of the PTFA include: Foreclosure Covered Mortgages The PTFA covers foreclosure on: a federally-related mortgage loan1; or any dwelling or residential real property after the date of enactment of this title. (June 23, 2018) The protections of this law apply to tenants under a “bona fide” lease or tenancy. A lease or tenancy is “bona fide” only if: 1. the mortgagor or a child, spouse, or parent of the mortgagor under the contract is not the tenant; 2. the lease or tenancy was the product of an arm’s-length transaction; and 3. the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent or the rent is reduced or subsidized due to a federal, state, or local subsidy. 1 A “federally-related mortgage loan has the same meaning as Section 3 of the Real Estate Settlement Procedures Act of 1974 (12 USC 2602). The definition includes any loan secured by a lien on one-to-four family residential real property, including individual units of condominiums and cooperatives.

Answer 549

Responsibilities of Successor in Interest Upon the complete transfer of title to the successor as a result of foreclosure, it is the responsibility of the successor in interest to: Provide Notice to Vacate – Provide tenant(s) Notice to Vacate 90 days before the effective date of such notice in all instances; and Adhere to Tenant Protections – Tenants with bona fide lease agreements entered into prior to the date of notice of foreclosure must be allowed to occupy the premises until the end of the remaining term of the lease. However, a successor in interest may terminate a lease upon date of foreclosure and provide the 90-day Notice to Vacate if: 1. successor in interest plans to occupy the property as their primary residence; or 2. a bona fide lease or tenancy agreement is not in place or is allowed to be terminated at will according to State or local law These provisions do not affect any State or local law that provides longer time periods or other additional protections for tenants.

Answer 550

Small-Dollar Lending Purpose These procedures provide a framework for examiners when reviewing small-dollar loan programs. As with other products and services, it is not mandatory for examiners to review small-dollar loan programs at every financial institution. Whether or not to review a particular smalldollar loan program is determined as a part of the regular scoping process and based on the residual risk of the product and/or service at each institution.

Answer 551

Background There is a broad range of small-dollar lending products in the marketplace. While there are various statutory and regulatory definitions related to small-dollar lending for specific purposes, the FDIC has not adopted a specific definition of small-dollar loans. The examination approaches discussed in these examination procedures are broadly applicable to a range of small-dollar lending products 1 and should be utilized on a risk-focused basis, consistent with the FDIC’s overall approach to consumer compliance examinations, to address how examiners should review institutions that routinely originate small-dollar loans for their customers or as part of third-party relationships. Because these instructions are intended to be applied on a risk-focused basis, it is not anticipated that these will typically be utilized for situations in which an institution makes small-dollar loans infrequently as accommodations for existing customers on an ad hoc basis (as opposed to broadly offering a small-dollar lending product or program). Well-designed small-dollar loan products that exhibit the characteristics described in the Interagency Lending Principles for Offering Responsible Small-Dollar Loans (FIL-58-2020) can provide significant value to customers. Responsibly offered small-dollar loans can play an important role in helping customers meet their ongoing needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, national emergencies, or disaster recoveries. Well-designed small-dollar lending programs can result in successful repayment outcomes that facilitate a customer’s ability to demonstrate positive credit behavior and transition into additional financial products. However, consumer compliance examiners should also be aware of the compliance risks associated with small-dollar loan products. Certain small-dollar loan products may have elevated risk of consumer harm, particularly when they do not exhibit the characteristics described in the Interagency Lending Principles for Offering Responsible Small-Dollar Loans (FIL-58-2020). For example, as with other types of lending products, performance analysis by the FDIC or by the institution finding high charge-off or default rates, or high rates of refinancing or reborrowing associated with a particular loan program, may suggest an elevated risk of consumer harm. Examiners should assess the inherent risks, including those associated with loan product characteristics, such as repayment terms, pricing, and lack of safeguards, that may lead to cycles of debt due to rollovers or reborrowing. As with other products, examiners should also consider the extent to which compliance management system elements, such as policies and procedures, effectively mitigate the risk of consumer harm and violations of applicable laws and regulations. Loan programs that are offered without adequate compliance management practices and controls may present elevated consumer compliance risk and risk of potential consumer harm. 1 There are a variety oftypes of small-dollar loan programs and product structures, which include open-end lines of credit with applicable minimum payments or closed-end loans with shorter-term or longer-term balloon or installment payment structures. For example, both balloon payment loans of several hundred dollars with repayment terms over a number of weeks and longer-term installment loans of thousands of dollars repayable over months, or even years, are often considered to be small-dollar loans. Although aspects of these procedures may be appropriate for various other forms of lending, these examination procedures are not specifically intended to address overdraft programs, credit cards, real estate secured credit, or auto loans.

Answer 552

Applicable Laws and Regulations and Other Supervisory Resources Examiners should continue to reference appropriate chapters in the FDIC Consumer Compliance Examination Manual governing laws and regulations that may be applicable to small-dollar loan programs. Potentially applicable statutes and regulations that may apply to small-dollar programs include the following: * Prohibitions Against Unfair, Deceptive, or Abusive Acts or Practices under Section 5 of the Federal Trade Commission Act (FTC UDAPs) and Section 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (12 U.S.C. § 5536(a)(1)(B)) (Dodd-Frank UDAAPs); * The Truth in Lending Act (TILA) and Regulation Z; * The Military Lending Act (MLA) and its implementing regulations; * The Servicemembers Civil Relief Act (SCRA); * The Electronic Fund Transfer Act (EFTA) and Regulation E; * The Fair Debt Collection Practices Act (FDCPA) and Regulation F; * The Fair Credit Reporting Act (FCRA) and Regulation V; * The Gramm-Leach-Bliley Act (GLBA) and Regulation P; * The Equal Credit Opportunity Act (ECOA) and Regulation B; and * The Community Reinvestment Act (CRA) and its implementing regulations. Additional resources that may be relevant to certain smalldollar loan programs, depending on the facts and circumstances, include, for example, Interagency Lending Principles for Offering Responsible Small-Dollar Loans (FIL-58-2020), FDIC’s Supervisory Policy on Predatory Lending (FIL-6-2007), and Interagency Expanded Guidance for Subprime Lending Programs, (FIL-9-2001). Additional information about these resources, as well as some potentially relevant aspects of these laws and regulations, is included in an Appendix to these examination instructions.

Answer 553

Third-Party Arrangements Financial institutions may have small-dollar loan programs that they administer directly or may enter into arrangements with third parties. In the latter situation, the institution often enters into an agreement in which the third party primarily interacts with the customer. Third-party arrangements, when not properly managed, can increase institutions’ risks, including, for example, transaction, compliance, operational, and legal risks. 2 The use of third parties does not diminish the responsibility of the board of directors and management to ensure that the activity performed on behalf of the institution is conducted in a safe and sound manner that complies with applicable laws and regulations, including those that protect consumers. Third parties involved in small-dollar lending may also be subject to federal and state laws, including requirements regarding licensure and/or the pricing and terms of loans offered through the third party, notwithstanding whether the financial institution is designated as the lender in the transaction. If a third party offering loans as part of a business relationship with an FDIC-supervised institution is found by a court of competent jurisdiction or a federal or state regulatory authority to have engaged in practices that are not compliant with applicable federal or state laws, the institution may face risks for facilitating or participating in the third party’s unlawful activity. 3 2 See Guidance for Managing Third-Party Risk (FIL-44-2008) for additional information about potential risks arising from third-party relationships and information about identifying and managing such risks. 3 Under Section 3(v) of the FDI Act, a bank may be found to have violated a law or regulation if it caused, brought about, participated in, or otherwise aided or abetted a third party in violating such a law or regulation

Answer 554

FTC Rule – Preservation of Claims and Defenses (PCCD) Introduction The purpose of the Federal Trade Commission’s (FTC) 1976 rule concerning the Preservation of Consumers’ Claims and Defenses (16 C.F.R. Part 433), sometimes called the Holder in-Due-Course Rule (Rule), is to ensure that consumer credit contracts used in financing the retail purchase of consumer goods or services specifically preserve the consumer’s rights against the seller. The FTC determined that it constitutes an unfair and deceptive practice for a seller, in the course of financing a consumer purchase of goods or services, to employ procedures which make the consumer’s duty to pay independent of the seller’s duty to fulfill its obligations.

Answer 555

Regulation Overview ***The Holder-in-Due-Course Rule prohibits a seller from taking or receiving a consumer credit contract that does not contain a prescribed notice which preserves the consumer’s claims and defenses in the event that the contract is negotiated or assigned to a third party creditor. In addition, the Rule provides that the seller may not accept the proceeds of a purchase money loan unless the evidence of the loan contains the prescribed notice preserving as against the lender whatever claims and defenses the consumer may have against the seller. Omission of the required notice by the seller, or acceptance by the seller of the proceeds of the purchase money loan where the evidence of the loan does not contain the notice, constitutes an unfair or deceptive practice within the meaning of Section 5 of the Federal Trade Commission Act. ***The Rule does not apply to all credit instruments. The Notice must appear in written obligations defined as “Consumer Credit Contracts” in the Rule. The definition includes any written instrument which, under the Truth in Lending Act and Regulation Z constitutes a consumer credit contract and which is used to “Finance a Sale” or in connection with a “Purchase Money Loan,” as those terms are defined in the Rule. Credit card instruments are specifically exempted from the Rule. Under the Rule, banks which purchase consumer paper containing the notice required of sellers cannot avail themselves of the holder-in-due-course doctrine. Also, banks which make purchase money loans containing the notice will be subject to all claims and defenses which the consumer could assert against the seller. If banks accept consumer paper which fails to contain the notice required of sellers, they may be considered to be a participant in the seller’s violation of the Rule. Banks making purchase money loans must include the prescribed notice in their contracts. The required notice, which follows, must be in at least ten point, bold face, type: (see p. 2 POCD Section of Manual) Exclusions (based on chart on p. 2 of the manual): -Consumer credit involving good or service for commercial use -Consumer credit involving the sale of real property, commodities, or securities -Consumer credit involving the expenditure of more than $54,600 -Agreements that are not contracts -Credit cards -Leases that aren't credit sale agreements under Reg Z

Answer 556

NOTICE Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.

Answer 557

Fair Debt Collection Practices Act Introduction The Fair Debt Collection Practices Act (FDCPA), effective in 1978, was designed to eliminate abusive, deceptive, and unfair debt collection practices. The federal law also protects reputable debt collectors from unfair competition and encourages consistent state action to protect consumers from abuses in debt collection. *The FDCPA applies only to the collection of debt incurred by a consumer primarily for personal, family or household purposes. It does not apply to the collection of corporate debt or to debt for business or agricultural purposes.

Answer 558

Regulation Overview Debt That Is Covered The FDCPA applies only to the collection of debt incurred by a consumer primarily for personal, family or household purposes. It does not apply to the collection of corporate debt or to debt owed for business or agricultural purposes.

Answer 559

Debt Collectors That Are Covered Under FDCPA, a “debt collector” is defined as any person who regularly collects, or attempts to collect, consumer debts for another person or institution or uses some name other than its own when collecting its own consumer debts. That definition would include, for example, an institution that regularly collects debts for an unrelated institution. This includes reciprocal service arrangements where one institution solicits the help of another in collecting a defaulted debt from a customer who has moved.

Answer 560

Debt Collectors That Are Not Covered An institution is not a debt collector under the FDCPA when it collects: * Another’s debts in isolated instances. * Its own debts under its own name. * Debts it originated and then sold but continues to service (for example, mortgage and student loans). * Debts that were not in default when they were obtained. * Debts that were obtained as security for a commercial credit transaction (for example, accounts receivable financing). * Debts incidental to a bona fide fiduciary relationship or escrow arrangement (for example, a debt held in the institution’s trust department or mortgage loan escrow for taxes and insurance). * Debts regularly for other institutions to which it is related by common ownership or corporate control. Debt collectors that are not covered also include: * Officers or employees of an institution who collect debts owed to the institution in the institution’s name. * Legal process servers.

Answer 561

Communications Connected with Debt Collection For communications with a consumer or third party connected with the collection of a debt, the term “consumer” is defined to include the borrower’s spouse, parent (if the borrower is a minor), guardian, executor, or administrator.

Answer 562

When, Where, and With Whom Communication is Permitted Communicating with the Consumer A debt collector may not communicate with a consumer at any unusual time (generally before 8 a.m. or after 9 p.m. in the consumer’s time zone) or at any place that is inconvenient to the consumer, unless the consumer or a court of competent jurisdiction has already given permission for such contacts. A debt collector may not contact the consumer at his or her place of employment if the collector has reason to believe the employer prohibits such communications. If the debt collector knows the consumer has retained an attorney to handle the debt, and can easily ascertain the attorney’s name and address, all contacts must be with that attorney, unless the attorney is unresponsive or agrees to allow direct communication with the consumer

Answer 563

Ceasing Communication with the Consumer When a consumer refuses, in writing, to pay a debt or requests that the debt collector cease further communication, the collector must cease all further communication, except to advise the consumer that: * The collection effort is being stopped. * Certain specified remedies ordinarily invoked may be pursued or, if appropriate, that a specific remedy will be pursued. Mailed notices from the consumer are official when they are received by the debt collector.

Answer 564

The only third parties that a debt collector may contact when trying to collect a debt are: * The consumer. * The consumer’s attorney. * A consumer reporting agency (if permitted by local law). * The creditor. * The creditor’s attorney. * The debt collector’s attorney. The consumer or a court of competent jurisdiction may, however, give the debt collector specific permission to contact other third parties. In addition, a debt collector who is unable to locate a consumer may ask a third party for the consumer’s home address, telephone number and place of employment (location information). The debt collector must give his or her name and state that he or she is confirming or correcting location information about the consumer. Unless specifically asked, the debt collector may not name the collection firm or agency or reveal that the consumer owes any debt. No third party may be contacted more than once unless the collector believes that the information from the first contact was wrong or incomplete and that the third party has since received better information, or unless the third party specifically requests additional contact. Contact with any third party by postcard, letter or telegram is allowed only if the envelope or content of the communication does not indicate the nature of the collector’s business.

Answer 565

Validation of Debts The debt collector must provide the consumer with certain basic information. If that information was not in the initial communication and if the consumer has not paid the debt five days after the initial communication, the following information must be sent to the consumer in written form: * The amount of the debt; * The name of the creditor to whom the debt is owed; * Notice that the consumer has 30 days to dispute the debt before it is assumed to be valid; * Notice that upon such written dispute, the debt collector will send the consumer a verification of the debt or a copy of any judgment; and * Notice that if, within the 30-day period, the consumer makes a written request for the name and address of the original creditor, if it is different from the current creditor, the debt collector will provide that information. If, within the 30-day period, the consumer disputes in writing any portion of the debt or requests the name and address of the original creditor, the collector must stop all collection efforts until he or she mails the consumer a copy of a judgment or verification of the debt, or the name and address of the original creditor, as applicable.

Answer 566

Prohibited Practices Harassing or Abusive Practices (Abusive) *A debt collector in collecting a debt, may not harass, oppress, or abuse any person. Specifically, a debt collector may not: * Use or threaten to use violence or other criminal means to harm the physical person, reputation, or property of any person. * Use obscene, profane, or other language which abuses the hearer or reader. * Publish a list of consumers who allegedly refuse to pay debts, except to a consumer reporting agency or to persons meeting the requirements of sections 603(f) or 604(3) of the Act. *** Advertise a debt for sale to coerce payment. * Annoy, abuse, or harass persons by calling repeatedly their telephone number or allowing their telephones to ring continually. * Make telephone calls without properly identifying oneself, except as allowed to obtain location information.

Answer 567

False or Misleading Representations (Deceptive) A debt collector, in collecting a debt, may not use any false, deceptive, or misleading representation. Specifically, a debt collector may not: * Falsely represent or imply that he or she is vouched for, bonded by, or affiliated with the United States or any state, including the use of any badge, uniform, or similar identification. * Falsely represent the character, amount, or legal status of the debt, or of any services rendered, or compensation he or she may receive for collecting the debt. * Falsely represent or imply that he or she is an attorney or that communications are from an attorney. * Threaten to take any action which is not legal or intended. * Falsely represent or imply that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment or sale of any property or wages of any person, unless such action is lawful and intended by the debt collector or creditor. * Falsely represent or imply that the sale, referral, or other transfer of the debt will cause the consumer to lose a claim or a defense to payment, or become subject to any practice prohibited by the FDCPA. * Falsely represent or imply that the consumer committed a crime or other conduct to disgrace the consumer. * Communicate, or threaten to communicate, false credit information or information which should be known to be false, including not identifying disputed debts as such. * Use or distribute written communications made to look like or falsely represented to be documents authorized, issued, or approved by any court, official, or agency of the United States or any state if it would give a false impression of its source, authorization, or approval. Use any false representation or deceptive means to collect or attempt to collect a debt or to obtain information about a consumer. * Fail to disclose in the initial written communication with the consumer, and the initial oral communication if it precedes the initial written communication, that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. In addition, the debt collector must disclose in subsequent communications that the communication is from a debt collector. (These disclosures do not apply to a formal pleading made in connection with a legal action.) * Falsely represent or imply that accounts have been sold to innocent purchasers. * Falsely represent or imply that documents are legal process. * Use any name other than the true name of the debt collector’s business, company, or organization. * Falsely represent or imply that documents are not legal process or do not require action by the consumer. * Falsely represent or imply that he or she operates or is employed by a consumer reporting agency.

Answer 568

Unfair Practices A debt collector may not use unfair or unconscionable means to collect or attempt to collect a debt. Specifically, a debt collector may not: * Collect any interest, fee, charge or expense incidental to the principal obligation unless it was authorized by the original debt agreement or is otherwise permitted by law. * Accept a check or other instrument postdated by more than five days, unless he or she notifies the consumer, in writing, of any intention to deposit the check or instrument. That notice must be made not more than ten or less than three business days before the date of deposit. * Solicit a postdated check or other postdated payment instrument to use as a threat or to institute criminal prosecution. * Deposit or threaten to deposit a postdated check or other postdated payment instrument before the date on the check or instrument. * Cause communication charges, such as those for collect telephone calls and telegrams, to be made to any person by concealing the true purpose of the communication. * Take or threaten to repossess or disable property when the creditor has no enforceable right to the property or does not intend to do so, or if, under law, the property cannot be taken, repossessed or disabled. * Use a postcard to contact a consumer about a debt. (so third-parties can be contacted by postcard but consumers cannot?)

Answer 569

Multiple Debts If a consumer owes several debts that are being collected by the same debt collector, payments must be applied according to the consumer’s instructions. No payment may be applied to a disputed debt.

Answer 570

Legal Actions by Debt Collectors A debt collector may file a lawsuit to enforce a security interest in real property only in the judicial district in which the real property is located. Other legal actions may be brought only in the judicial district in which the consumer lives or in which the original contract creating the debt was signed.

Answer 571

Furnishing Certain Deceptive Forms No one may design, compile and/or furnish any form which creates the false impression that someone other than the creditor (for example, a debt collector) is participating in the collection of a debt.

Answer 572

Civil Liability A debt collector who fails to comply with any provision of the FDCPA is liable for: * Any actual damages sustained as a result of that failure; * Punitive damages as allowed by the court— ° in an individual action, up to $1,000; or ° in a class action, up to $1,000 for each named plaintiff and an award to be divided among all members of the class of an amount up to $500,000 or 1 percent of the debt collector’s net worth, whichever is less; * Costs and a reasonable attorney’s fee in any such action. In determining punitive damages, the court must consider the nature, frequency and persistency of the violations and the extent to which they were intentional. In a class action, the court must also consider the resources of the debt collector and the number of persons adversely affected.

Answer 573

Defenses A debt collector is not liable for a violation if a preponderance of the evidence shows it was not intentional and was the result of a bona fide error that arose despite procedures reasonably designed to avoid any such error. The collector is also not liable if he or she, in good faith, relied on an advisory opinion of the Federal Trade Commission even if the ruling is later amended, rescinded, or determined to be invalid for any reason.

Answer 574

Jurisdiction and Statute of Limitations Action against debt collectors for violations of the FDCPA may be brought in any appropriate U.S. district court or other court of competent jurisdiction. The consumer has one year from the date on which the violation occurred to start such as action.

Answer 575

Administrative Enforcement The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) are the primary enforcement agency for the FDCPA. The various financial regulatory agencies enforce the FDCPA for the institutions they supervise. The CFPB, as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), may issue substantive rules governing the collection of consumer debts by debt collectors.

Answer 576

Relation to State Law The FDCPA preempts state law only to the extent that a state law is inconsistent with the FDCPA. A state law that is more protective of the consumer is not considered inconsistent with the FDCPA.

Answer 577

Exemption for State Regulation The FTC may exempt certain classes of debt collection practices from the requirements of the FDCPA if the FTC has determined that state laws impose substantially similar requirements and that there is adequate provision for enforcement.

Compliance - Part 3 Flashcards

(601 cards)