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Subpart E -Special Rules for Certain Home Mortgage Transactions
General Rules
The requirements and limitations of this subpart are in addition to and not in lieu of those contained in other subparts.
Form of Disclosures
A credit union must make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the member may keep. The required disclosures may be provided electronic form, subject to compliance with the consumer consent and other applicable provisions of the E-Sign Act.
Timing of Disclosure
Disclosures for Certain Closed-End Home Mortgages
The credit union must provide the required disclosures at least three (3) business days prior to consummation of a “Section 32” mortgage transaction (see the next section below).
If the credit union changes any term that makes the disclosures provided before consummation inaccurate, new disclosures must be provided. New disclosures may be provided by telephone if the member initiates the change and if, at consummation:
- The credit union provides new written disclosures; and
- The member and credit union sign a statement that the new disclosures were provided by telephone at least three (3) days prior to consummation.
Member's Waiver of Waiting Period Before Consummation
A member may, after receiving the disclosures, modify or waive the three-day waiting period between delivery of those disclosures and consummation if he/she determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the member must give the credit union a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all the consumers entitled to the waiting period. Printed forms for this purpose are prohibited.
For purposes of this section, “business day” means all calendar days except Sundays and the federal legal holidays.
Basis of Disclosures and Use of Estimates
Disclosures must reflect the terms of the legal obligation between the parties.
If any information necessary for an accurate disclosure is unknown to the credit union, the credit union must make the disclosure based on the best information reasonably available at the time the disclosure is provided, and must state clearly that the disclosure is an estimate.
For a transaction in which a portion of the interest is determined on a per-diem basis and collected at consummation, any disclosure affected by the per-diem interest must be considered accurate if the disclosure is based on the information known to the credit union at the time that the disclosure documents are prepared.
Multiple Creditors; Multiple Consumers
If a transaction involves more than one creditor, only one set of disclosures must be given and the creditors must agree among themselves which creditor must comply. If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. However, if the transaction is rescindable, the disclosures must be made to each consumer who has the right to rescind.
Requirements for Certain Closed-End Home (“Section 32”) Mortgages
Coverage
The requirements of this section apply to a consumer credit transaction that is secured by the member's principal dwelling and in which either:
- APR Test
- APR (as of the date the interest rate for the transaction is set or locked) exceeds the APOR for a comparable transaction on that date by more than:
- 6.5% for first lien generally
- 8.5% for first lien less than $50,000 and secured by personal property
- 8.5% for subordinate lien transaction
- Points and Fees Test
- Exceeds 5% of the total loan amount for a loan greater than $21,549, this figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June1.
- 8% of the total loan amount, or $1,077 for a transaction with a loan amount less than $21,549, these figures shall also be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1.
This section does not apply to the following:
- Reverse mortgages
- Construction loans
- Loans originated and directly financed by a Housing Finance Agency (HFA), as defined in 12 CFR 266.5
- Loans originated under the U.S. Department of Agriculture’s (USDA’s) Rural Development Section 502 Direct Loan Program
For purposes of this subpart, “points and fees” means:
- All finance charges except interest or the time-price differential;
- All compensation paid to mortgage brokers;
- All of the following items paid in a transaction secured by real property unless the charge is reasonable, the credit union receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate: title examination fees, title insurance fees, or abstract of title fees, fees for property survey, fees for preparing the deed, mortgage, and similar documents, notary fees, appraisal fees, credit report fees, and amounts paid into escrow except any amounts held for future taxes; and
- Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (regardless of whether the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the member's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.
Disclosures
In addition to other disclosures required by this part, in a mortgage subject to this section, the credit union must disclose the following in conspicuous type size:
- The following statement: “You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan”;
- The APR;
- The amount of the regular monthly (or other periodic) payment and the amount of any balloon payment;
- For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed;
- The amount borrowed. The total amount the member will borrow, as reflected by the face amount of the note; and where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact must be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed must be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.
Limitations
A mortgage transaction subject to this section may not include the following terms:
- Balloon payments with a term of less than five years (except for a bridge loan connected with the acquisition or construction of a principal dwelling);
- Negative amortization;
- A payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds;
- An increase in the interest rate after default;
- A refund calculated by a method less favorable than the actuarial method for rebates of interest arising from a loan acceleration due to default;
- Prepayment penalties1, unless:
- The penalty will not apply after the two-year period following consummation;
- The penalty will not apply if the source of the prepayment funds is a refinancing by the credit union or its affiliate;
- At consummation, the member's total monthly debt payments (including amounts owed under the mortgage) do not exceed 50% of his/her monthly gross income (as verified); and
- The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.
- A due-on-demand clause, except in the following circumstances:
- There is fraud or material misrepresentation by the member in connection with the loan;
- The member fails to meet the repayment terms of the agreement for any outstanding balance; or
- There is any action or inaction by the member that adversely affects the credit union's security for the loan, or any right of the credit union in such security.
Prohibited Acts or Practices in Connection with “Section 32” Mortgages
A creditor extending a “Section 32” mortgage may not do any of the following:
- Pay a contractor under a home improvement contract from the proceeds of the mortgage, other than:
- By an instrument payable to the member or jointly to the member and the contractor; or
- At the election of the member, through a third-party escrow agent in accordance with terms established in a written agreement signed by the member, the credit union, and the contractor prior to the disbursement.
- Sell or otherwise assign the mortgage without furnishing the following statement to the purchaser or assignee: “Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor.” This disclosure must be prominent on the Note or on a separate piece of paper attached to the Note.
- Refinance any loan subject to Section 32, within one year of having extended credit, to the same borrower into another loan subject to Section 32, unless the refinancing is in the borrower's interest.
- Extend credit to a member based on the value of the member's collateral without regard to his/her repayment ability as of consummation, including the member's current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations (e.g., taxes and insurance). [This requirement does not apply for bridge loans with terms less than 12 months.]
- Structure a closed-end home loan as an open-end loan to evade these requirements.
Verification of Repayment Ability
A credit union must verify the member's repayment ability as follows:
- Verify amounts of income or assets that it relies on to determine repayment ability, including expected income or assets, by the member's Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the member’s income or assets.
- The member’s current obligations using the largest payment of principal and interest scheduled in the first seven (7) years following consummation, and taking into account current obligations and mortgage-related obligations, taking into account at least one of the following:
- The ratio of total debt obligations to income, or
- The income the member will have after paying debt obligations.
Exclusions from Presumption of Compliance
Notwithstanding the previous paragraph, no presumption of compliance is available for a transaction for which:
- The regular periodic payments for the first seven (7) years would cause the principal balance to increase; or
- The term of the loan is less than seven (7) years and the regular periodic payments when aggregated do not fully amortize the outstanding principal balance.
Prohibited Acts or Practices in Connection with “Higher-Priced Mortgage Loans”
Definitions
For purposes of this section, a “higher-priced mortgage loan” is a consumer credit transaction secured by the member'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, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling.
“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 FRB 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 the FRB uses to derive these rates.
The term “higher-priced mortgage loan” does not include a transaction to finance the initial construction of a dwelling, a temporary or “bridge” loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-mortgage transaction, or a home equity line of credit.
The term “jumbo loan” is defined as loans that are not eligible for purchase by Freddie Mac because their original principal obligation is too large (the maximum principal obligation for a mortgage loan to be eligible for purchase in 2011 by Freddie Mac is $417,000 for a single-family property that is not located in a designated ‘high-cost’ area). See http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1028.pdf.
Rules for Higher-Priced Mortgage Loans
Higher-priced mortgage loans are subject to the following restrictions:
- A credit union must determine a member’s repayment ability as of consummation;
- A loan may not include a prepayment penalty unless permitted by law and under the terms of the loan:
- The penalty will not apply after the two-year period following consummation;
- The penalty will not apply if the source of the prepayment funds is a refinancing by the credit union or its affiliate; and
- The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.
- A credit union may not structure a closed-end loan meeting the definition of a “higher-priced mortgage loan” as an open-end loan to evade the requirements of this section.
- An escrow account must be established for taxes and insurance on loans secured by a first lien on a principal dwelling.
Escrow Requirements
Credit unions must establish escrow accounts for taxes and insurance, but may allow borrowers to cancel escrows at least five years after loan consummation. Request for cancellation must be in writing and dated. Credit unions are not required to escrow optional insurance items chosen by consumers and not otherwise required by the creditors.
The regulation neither permits nor prohibits credit unions from imposing escrow cancellation fees (defer to state law on this issue). It also neither permits nor prohibits the payment of interest on escrow accounts.
The RESPA rules apply to the administration of the escrow accounts. Flood insurance premiums must be escrowed if the credit union requires escrow for other obligations such as hazard insurance. Escrows are also required for property taxes for first-lien higher-priced mortgage loans secured by condominium units, unless the condominium’s association maintains and pays for insurance through a master policy.
For manufactured housing, escrows will be required for all covered loans secured by manufactured housing for which creditors receive applications on or after October 1, 2010, regardless of whether state law treats manufactured housing as personal or real property.
“Jumbo Loans”
The threshold for coverage of the escrow requirement for ‘jumbo’ loans is 2.5 percentage points (rather than the 1.5 percentage points generally applicable in excess of the average prime offer rate for a comparable transaction, as of the date the transaction’s rate is set.
Adjustments to the maximum principal obligation that are made by the Federal Housing Finance Agency (FHFA) will apply in determining whether a mortgage loan is a ‘jumbo’ loan subject to the higher APR threshold.
The higher APR threshold applies solely in determining if a ‘jumbo’ loan is subject to the escrow requirement. The determination of whether ‘jumbo’ first-lien loans are subject to the other protections in Regulation Z, such as the ability to repay requirements and the restrictions on prepayment penalties under §1026.35, would continue to be based on the 1.5 percentage point threshold.
When relief is granted from Regulation Z’s escrow requirement, the affected loans could become subject to any state or local laws that prohibit mandatory escrow accounts. As a result, some creditors might need time to make the system changes necessary to comply with state or local laws.
Creditors may, at their option, elect to continue to use the 1.5 percentage point threshold for ‘jumbo’ loans. This final rule does not apply to open-end home equity credit plans or to loans to finance the initial construction of a dwelling, temporary or ‘bridge’ loans with a term of 12 months or less, or reverse mortgages. This final rule does not require termination of any existing escrow account.
Prohibited Acts or Practices in Connection with Credit Secured by a Consumer's Principal Dwelling
For purposes of this section, the term “mortgage broker” means a person, other than an employee of a credit union, who for compensation or other monetary gain, arranges, negotiates, or obtains an extension of consumer credit for another person.
Misrepresentation of Value of Consumer's Dwelling
Coercion of Appraiser
In connection with a consumer credit transaction secured by a member's principal dwelling, no creditor or mortgage broker, and no affiliate of a creditor or mortgage broker may directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.
Examples of actions that violate this paragraph include the following:
- Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer's principal dwelling;
- Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer's principal dwelling that does not meet or exceed a minimum threshold;
- Telling an appraiser a minimum reported value of a consumer's principal dwelling that is needed to approve the loan;
- Failing to compensate an appraiser because the appraiser does not value a consumer's principal dwelling at or above a certain amount; and
- Conditioning an appraiser's compensation on loan consummation.
Examples of actions that do not violate this paragraph include the following:
- Asking an appraiser to consider additional information about a consumer's principal dwelling or about comparable properties;
- Requesting that an appraiser provide additional information about the basis for a valuation;
- Requesting that an appraiser correct factual errors in a valuation;
- Obtaining multiple appraisals of a consumer's principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
- Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract; and
- Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.
When a credit union knows, at or before loan consummation, of a violation of this section in connection with an appraisal, it may not extend credit based on such appraisal unless the credit union documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling.
Servicing Practices
In connection with a consumer credit transaction secured by a consumer's principal dwelling, no servicer may do the following:
- Fail to credit a payment to the consumer's loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in the reporting of negative information to a consumer reporting agency;
- 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 full payment for the applicable period and is paid on its due date or within any applicable grace period; or
- Fail to provide, within a reasonable time after receiving a request from the consumer or any person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to satisfy the consumer's obligation in full as of a specified date.
If a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt.
This section does not apply to a home equity lines of credit.
Mortgage Transfer Disclosures
Scope
The disclosure requirements of this section apply to any covered person except as otherwise provided in this section. For purposes of this section:
A “covered person” means any “person” that 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 twelve-month period. (For purposes of this section, a servicer of a mortgage loan is not 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.)
“Person”means a natural person or an organization, including a corporation, partnership, proprietorship, association, cooperative, estate, trust, or government unit.
A “mortgage loan” means any consumer credit transaction that is secured by the principal dwelling of a consumer.
Disclosure Required
Any person that becomes a covered person as defined in this section must mail or deliver the disclosures required by this section to the consumer on or before the 30th calendar day following the acquisition date. If there is more than one covered person, only one disclosure must be given and the covered persons shall agree among themselves which covered person shall comply with the requirements.
For purposes of this section, the date that the covered person acquired the mortgage loan is the date of acquisition recognized in the books and records of the acquiring party.
If there is more than one consumer liable on the obligation, a covered person may mail or deliver the disclosures to any consumer who is primarily liable.
Exceptions
A covered person is not subject to the requirements of this section with respect to a particular mortgage loan if:
- The covered person sells or otherwise transfers or assigns legal title to the mortgage loan on or before the 30th calendar day following the date that the covered person acquired the mortgage loan; or
- The mortgage loan is transferred to the covered person in connection with a repurchase agreement and the transferor that is obligated to repurchase the loan continues to recognize the loan as an asset on its own books and records. (However, if the transferor does not repurchase the mortgage loan, the acquiring party must make the required disclosures within 30 days after the date that the transaction is recognized as an acquisition in its books and records.)
Content of Required Disclosures
The disclosures required by this section must identify the loan that was acquired or transferred and state the following:
- The identity, address, and telephone number of the covered person who owns the mortgage loan. If there is more than one covered person, the information required by this paragraph must be provided for each of all.
- The acquisition date recognized by the covered person.
- How to reach an agent or party having authority to act on behalf of the covered person (or persons), which must identify a person(s) authorized to receive legal notices on behalf of the covered person and resolve issues concerning the consumer's payments on the loan.
- The location where transfer of ownership of the debt to the covered person is recorded. However, if the transfer of ownership has not been recorded in public records at the time the disclosure is provided, the covered person must state this fact.
In addition to the above information, a covered person may, at its option, provide any other information regarding the transaction.
[1] Under the Federal Credit Union Act §107(5)(A)(viii), federal credit unions (FCUs) are not permitted to charge prepayment penalties. (However, on a 1st or 2nd mortgage loan, the FCU may require that any partial prepayment (1) be made on the date monthly installments are due and (2) be in the amount of that part of one or more monthly installments which would be applicable to principal.) Return
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