The National Credit Union Administration (NCUA), along with the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (“the Agencies”), released a joint guidance (“the Guidance"), along with an Addendum, to promote sound risk management practices at financial institutions with home equity lending programs, including open-end home equity lines of credit (HELOCs) and closed-end home equity loans (HELs).

The following specific product, risk management, and underwriting risk factors and trends have attracted scrutiny by the Agencies:

• Interest-only features that require no amortization of principal for a protracted period;
• Limited or no documentation of a borrower’s assets, employment and income (known as “low doc” or “no doc” lending);
• Higher loan-to-value (LTV) and debt-to-income (DTI) ratios;
• Lower credit risk scores for underwriting home equity loans;
• Greater use of automated valuation models (AVMs) and other collateral evaluation tools for the development of appraisals and evaluations; and
• An increase in the number of transactions generated through a loan broker or other third party.

Sound practices require fully articulated policies that address marketing, underwriting standards, collateral valuation management, individual account and portfolio management, and servicing.

Credit unions should ensure that risk management practices keep pace with the growth and changing risk profile of home equity portfolios. Management should actively assess a portfolio’s vulnerability to changes in consumers’ ability to pay and the potential for declines in home values. Active portfolio management is especially important for credit unions that project or have already experienced significant growth or concentrations, particularly in higher risk products such as "High-LTV", “low-doc,” or “no-doc,” interest-only, or third-party generated loans.

Credit Risk Management Systems

Product Development and Marketing

In the development of new products and marketing initiatives, management should have a review and approval process that is broad enough to ensure compliance with internal policies and applicable laws and regulations, as well as a risk assessment addressing the credit, interest rate, operational, compliance, reputation and legal risks.

Specifically, risk management staff should be involved with product development, including an evaluation of the targeted population and the product(s) being offered. Material changes in the targeted market, origination source, or pricing could have a significant impact on credit quality and should receive senior management approval.

Management should also have appropriate marketing tools and management information systems (MIS) to measure the performance of various marketing initiatives, including offers to increase a line, extend the interest-only period, or adjust the interest rate or term.

When promoting or describing HELOCs that permit interest-only payments, credit unions should provide members with information designed to help make informed decisions. All communications with members should provide clear and balanced information about the relative benefits and risks of HELOCs with interest-only features, including the risk of potential for increase future payment obligations (such as, among other things, the circumstances in which interest rates reach a contractual limit). This information should be provided at the time a member inquires about such a loan, or when the credit union provides the member with marketing materials for such loans.

Origination and Underwriting

When establishing product offerings and underwriting guidelines, all relevant risk factors should be considered, including the following:

• A borrower’s income and debt levels;
• Credit score (if obtained);
• Credit history;
• Loan size;
• Collateral value (including valuation methodology);
• Lien position; and
• Property type and location.

Properly underwritten home equity loans should include an evaluation of a borrower’s capacity to adequately service the debt. An evaluation of repayment capacity should consider a borrower’s income and debt levels and not just a credit score. How much verification these underwriting factors require will depend upon the individual loan’s credit risk.

As HELOCs do not generally have interest rate caps that limit rate increases, underwriting standards for interest-only and variable rate HELOCs should include an assessment of the borrower’s ability to amortize the fully drawn line over the loan term and to absorb potential interest rate increases.

Closed-end home equity loans need to comply with the Ability to Repay (ATR) requirements under Truth in Lending. The ATR rule requires credit unions to make a reasonable, good-faith determination before or when a covered mortgage loan is consummated, that the member has a reasonable ability to repay the loan. As listed in the Small Entity Compliance Guide, the following eight underwriting factors must be considered:

1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan.
2. Current employment status (if you rely on employment income when assessing the consumer’s ability to repay).
3. Monthly mortgage payment for this loan. You calculate this using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal.
4. Monthly payment on any simultaneous loans secured by the same property.
5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent.
6. Debts, alimony, and child-support obligations.
7. Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income.
8. Credit history.

The rule does not preclude credit unions from considering additional factors, but you must consider at least these eight factors.

1. Credit unions also need to be aware of the Home Ownership Equity Protection Act (HOEPA) rules. The HOEPA rules apply to closed-end home equity loans and HELOCs. In order to determine if a transaction is considered a high-cost mortgage, the credit union will need to conduct the HOEPA coverage tests. There are three separate tests, based on: The transaction’s APR or annual percentage rate.
2. The amount of points and fees paid in connection with the transaction.
3. The prepayment penalties you may charge under the loan or credit agreement.

The limits for these tests are outlined in the Truth in Lending Act (TILA) (1026.32).

If the transactions are considered high-cost mortgages, the credit union will need to comply with the rules in the following sections of TILA (1026.31, 1026.32, 1026.34, which generally include:

• Specific disclosure requirements
• Restriction on transaction terms
• Restriction of fees and practices
• Ability-to-repay requirements
• A pre-loan counseling requirement

Third Party Originations

When using third party originators, credit unions should have strong control systems to ensure the quality of originations and compliance with all applicable laws and regulations, as well as to help prevent fraud.

Brokers generally process applications and underwrite loans to qualify the application for a particular lender. When brokers are used for these purposes, credit unions should retain appropriate oversight of all critical loan-processing activities, such as verification of income and employment and independence in the appraisal and evaluation function.

Correspondents are financial companies that usually close and fund loans in their own name and later sell them to a lender. When the underwriting function is delegated to correspondents, credit unions should have systems and controls to provide assurances that the correspondent is appropriately managed, financially sound, and provides mortgages that meet the credit union’s underwriting guidelines, and complies with applicable consumer protection laws and regulations. A quality control unit or function in the delegating credit union should closely monitor the quality of loans that the correspondent underwrites. Monitoring activity should include post-purchase underwriting reviews and ongoing portfolio performance management activities.

Before entering into third-party relationships, comprehensive due diligence should be performed. Once the relationship is established, credit unions should have adequate audit procedures and controls to verify that third parties are not being paid to generate incomplete or fraudulent mortgage applications, or are not otherwise receiving referral or unearned income or fees prohibited by the Real Estate Settlement Procedures Act (RESPA).

If ongoing credit or documentation problems are discovered, credit unions should take appropriate action against a third party, which could include terminating the relationship.

Collateral Valuation Management

Streamlining the appraisal and evaluation processes, along with underwriting higher LTVs, have increased the importance of strong collateral valuation management policies, procedures and processes. Credit unions should have appropriate policies and procedures that ensure compliance with the NCUA Part 722 and NCUA Letter to Credit Unions 03-CU-17.

Additionally, credit unions should do the following:

• Establish criteria for determining the appropriate valuation method for a particular transaction based on the transaction and loan portfolio risk (higher risk should result in more thorough valuations);
• Determine the extent to which an inspection of the collateral is necessary;
• Ensure than an expected or estimated value of the property is not communicated to an appraiser or individual performing an evaluation;
• Implement policies and controls to prevent “value shopping.” Use of several valuation tools may return different values for the same property. If several different valuation tools are used, credit unions should adhere to a policy for selecting the most reliable method, rather than the highest value; and
• Require sufficient documentation to support the collateral valuation in the appraisal/evaluation.

When AVMs are used to support evaluations or appraisals, credit unions should validate the models on a periodic basis to mitigate the potential valuation uncertainty in the model. The validation’s analysis, assumptions and conclusions should be documented. The validation process should cover properties representative of the geographic area and property type for which the tool is used.

If AVM vendors are used and provide a “confidence score,” credit unions should have an understanding of how the model works as well as what the score means. Credit unions should also establish the confidence levels that are appropriate for the risk in a given transaction or group of transactions.

When tax assessment valuations are used as a basis for the collateral valuation, credit unions should be able to demonstrate and document the correlation between the assessment value and the property’s market value.

Credit unions that are originating closed-end higher-priced mortgage loans (HPMLs) as determined under 1026.35 of TILA, that have first or subordinate liens secured by a member’s principal dwelling need to comply with the TILA HPML Appraisal Rule.  According to the BCFP’s Small Entity Compliance Guide, this will require credit unions to:

• Disclose to consumers within three business days after receiving the consumers’ applications that they are entitled to a free copy of any appraisal the creditor orders and also can hire their own appraiser at their own expense for their own use.
• Obtain a written appraisal performed by certified or licensed appraiser in conformity with the USPAP and Title XI of FIRREA and its implementing regulations.
• Have the appraiser visit the interior of the property and provide a written report.
• Deliver copies of appraisals to applicants no later than three business days before consummation.
• Additional requirements apply in certain cases when a home is being resold within 180 days of its acquisition by the seller above certain price thresholds.

A similar regulation under the Equal Credit Union Opportunity Act (ECOA) Valuations Rule requires credit unions originating closed or open end home equity loans secured by a first lien on a dwelling to the following related to appraisals and/or written valuations outlined in the BCFP’s Small Entity Compliance Guide:

• When the credit union receive an applicant’s application, they have three business days to notify the applicant of the right to receive a copy of appraisals.
• The credit union must promptly share copies of appraisals and other written valuations with the applicant.
• Promptly means promptly upon completion, or at least three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier.
• The applicant can waive the right to receive copies of the appraisal or other written valuations in advance of the closing, but in those cases, the credit union must still deliver the copies at or prior to consummation or account opening.
• If the credit union does not consummate the loan or open the account and the applicant has provided a waiver, the credit union has 30 days after determining that the loan will not consummate or open to send the applicant a copy of the appraisal and other written valuations.

Credit unions cannot charge for copies of appraisals or other written valuations, but can charge the applicant a reasonable fee to reimburse the credit union for the cost of preparing appraisals and other written valuations, unless applicable law prohibits it or otherwise restricts it. The credit union may not upcharge consumers by adding fees to the cost of preparing the appraisal or other written valuations.

Account Management

Credit unions should have risk management techniques that identify higher risk accounts and adverse changes in account risk profiles, in order to enable management to implement timely preventive action (i.e., freezing or reducing lines). Credit unions should also have risk management procedures to evaluate and approve additional credit on an existing line or extending the interest-only period. Account management practices should be appropriate for the size of the portfolio and the risks associated with the types of home equity lending.

Effective account management practices for large or high-risk portfolios include the following:

• Periodically refreshing credit risk scores on all members;
• Using behavioral scoring and analysis of individual borrower characteristics to identify potential problem accounts;
• Periodically assessing utilization rates;
• Periodically assessing payment patterns, including borrowers who make only minimum payments over a period of time, or those who rely on the line to keep payments current;
• Monitoring home values by geographic area; and
• Obtaining updated information on the collateral’s value when significant market factors indicate a potential decline in home values, or when the borrower’s payment performance deteriorates and greater reliance is placed on the collateral.

Credit unions should conduct annual credit reviews of HELOC accounts to determine whether the line of credit should be continued, based on the borrower’s current financial condition.

Authorizations of over-limit home equity lines of credit should be restricted and subject to appropriate policies and controls. Policies and practices should require over-limit borrowers to repay in a timely manner the amount that exceeds established credit limits. Management information systems should be sufficient to enable management to identify, measure, monitor and control the unique risks associated with over-limit accounts.

Portfolio Management

Credit unions should implement an effective portfolio credit risk management process for their home equity portfolios that includes the following:

Policies

Policies must be consistent with safe and sound banking practices and should be reviewed and approved by a credit union’s board of directors at least annually. Before changing policies or underwriting standards, management should assess the potential effect on the credit union’s overall risk profile, which would include the effect on concentrations, profitability, and delinquency and loss rates. The accuracy of these estimates should be tested by comparing them with actual experience.

Portfolio Objectives and Risk Diversification

Portfolio objectives such as growth targets, utilization, rate of return hurdles, and default and loss expectations should be clearly communicated. For credit unions with large concentrations of HELOCs or HELs, limits should be set and monitored for key portfolio segments (such as geographic area, loan type and higher risk products). When appropriate, consideration should be given to the use of risk mitigation, such as private mortgage insurance, pool insurance or securitization. As the portfolio approaches concentration limits, credit unions should analyze the situation well enough to enable the board and senior management to make a well-informed decision to either raise concentration limits or take a different course of action.

The various risk characteristics of the home equity portfolio need to be understood. To gain this understanding, credit unions should analyze the portfolio by segment using criteria such as product type, credit risk score, DTI, LTV, property type, geographic area, collateral valuation method, lien position, size of credit relative to prior liens, and documentation type (i.e., “low doc” and “no doc”).

Management Information Systems

Adequate credit MIS enables credit unions to segment loan portfolios and accurately assess key risk characteristics and HEL concentrations. The MIS should be periodically assessed to determine the adequacy in light of growth and risk levels. For credit unions with high concentrations of HELOCs and HELs, the MIS should include, at a minimum, the following reports and analysis:

• Production and portfolio trends by product, loan structure, originator channel, credit score, LTV, DTI, lien position, documentation type, market and property type;
• Delinquency and loss distribution trends by product and originator channel with some accompanying analysis of significant underwriting characteristics (i.e., credit score, LTV and DTI);
• Vintage tracking;
• The performance of third-party originators; and
• Market trends by geographic area and property type to identify areas of rapidly appreciating or depreciating housing values.

Policy and Underwriting Exception Systems

Processes for identifying, approving, tracking and analyzing underwriting exceptions should be maintained. Reporting systems that capture and track information on exceptions, both by transaction and relevant portfolio segments, aid the management of a portfolio’s credit risk.

In light of the ability-to-repay rule under the TILA, credit unions needs to make sure their systems and files are documenting the analysis of the required eight underwriting factors previously listed. Credit unions unsure of what documentation is necessary, including the reasonable third party records, should review appendix Q of TILA.

High LTV Monitoring

Credit unions should accurately track the volume of HLTV loans, including HLTV home equity and residential mortgages, and report the aggregate of such loans to the board of directors. The following advice of the Agencies should be followed:

• Loans in excess of the supervisory LTV limits should be identified in the credit union’s records. The aggregate of HLTV one to four family residential loans should not exceed 100% of the credit union’s total capital. Within that limit, HLTV loans for other types of properties should not exceed 30% of capital;
• In calculating the LTV and determining compliance with the supervisory LTVs, credit unions should consider all senior liens. All loans held and secured by the property are reported as an exception if the combined LTV of a loan and all senior liens on an owner-occupied one- to four-family residential property equals or exceeds 90 percent and if there is no additional credit enhancement in the form of either mortgage insurance or readily marketable collateral;
• For the LTV calculation, the loan amount is the legally binding commitment (that is, the entire amount that the credit union is legally committed to lend over the life of the loan); and
• All real estate secured loans in excess of supervisory LTV limits should be aggregated and reported quarterly to the board.

Insurance policies that cover a “pool” of loans can be an efficient and effective credit risk management tool. But if a policy has a coverage limit, the coverage may be exhausted before all loans in the pool mature or pay off. The Agencies will consider pool insurance as a sufficient credit enhancement to remove the HLTV designation in the following circumstances:

• The policy is issued by an acceptable mortgage insurance company;
• It reduces the LTV for each loan to less than 90 percent; and
• It is effective over the life of each loan in the pool.

Credit unions will also need to make a determination if they will underwrite closed-end home equity loans that are not considered “qualified” under the TILA ability-to-repay rule. Credit unions originating qualified mortgages (QMs) will have a safe harbor from liability and will be presumed to have complied with the ATR requirements. There are two types of qualified mortgages available to all credit unions, including the General QM definition and the temporary QM definition, both of which are found in 1026.43 of TILA. If credit unions are determined to be a small creditor (less than $2 billion in assets and together with affiliates originated no more than 500 first lien, closed end mortgages), they will have two additional QM options including the general small creditor QM and the balloon-payment QM, both also listed in 1026.43 of TILA.

Stress Testing for Portfolios

Credit unions with home equity concentrations as well as higher risk portfolios are encouraged to perform sensitivity analyses on key portfolio segments, which identify possible events that could increase risk within a portfolio segment or for the portfolio as a whole. Stress tests that incorporate interest rates increases and declines in home values should be considered.

As these events often occur simultaneously, the Agencies recommend testing for these events together. Markets in key geographic areas should be periodically analyzed. Management should consider developing contingency strategies for scenarios and outcomes that extend credit risk beyond internally established risk tolerances. These contingency plans might include increased monitoring, tightening underwriting, limiting growth, and selling loans or portfolio segments.

Operations, Servicing and Collections

Effective procedures and controls should be maintained for such support functions as perfecting liens, collecting outstanding loan documents, obtaining insurance coverage (including flood insurance), and paying property taxes.

Credit risk management should oversee these support functions to ensure that operational risks are properly controlled.

Lien Recording

Credit unions should take appropriate measures to safeguard their lien position. They should verify the amount and priority of any senior liens prior to closing the loan. This information is necessary to determine the loan's LTV ratio and to assess the credit support of the collateral. Senior liens include first mortgages, outstanding liens for unpaid taxes, outstanding mechanic's liens, and recorded judgments on the borrower.

Problem Loan Workouts and Loss Mitigation Strategies

Credit unions should have established policies and procedures for problem loan workouts and loss mitigation strategies. Policies should, at a minimum, address the following:

• Circumstances and qualifying requirements for various workout programs including extensions, re-ages, modifications, and re-writes. Qualifying criteria should include an analysis of a borrower’s financial capacity to service the debt under the new terms;
• Circumstances and qualifying criteria for loss-mitigating strategies, including foreclosure; and
• Appropriate MIS to track and monitor the effectiveness of workout programs, including tracking the performance of all categories of workout loans. For large portfolios, vintage delinquency and loss tracking also should be included.

While credit unions are encouraged to work with borrowers on a case-by-case basis, workout strategies should not be used to defer losses. Credit unions should ensure that credits in workout programs are evaluated separately for the ALLL, because such credits tend to have higher loss rates than other portfolio segments.

Credit unions are required to comply with the mortgage servicing rules in TILA and RESPA. This rules apply to closed-end credit transaction secured by a dwelling, so they would apply to closed-end home equity loans. Credit unions should ensure their policies and procedures address these new requirements, which includes early intervention with delinquent borrowers, including a requirement to make live contact with the member by the 36th day of their delinquency and written information about loss mitigation options by the 45th day of delinquency. Related to delinquent members, credit unions are also required to have policies and procedures designed to provide delinquent members with access to personnel who can assist them with loss mitigation options. There are also extensive provisions in these rules for loss mitigation. Credit unions may be eligible for a small servicer exemption, which would provide an exemption for many of these servicing requirements. Credit unions should revision RESPA (1024.39. 1024.40 and 1024.41).

Secondary Market Activities

Although such secondary market activities can enhance credit availability and an institution’s profitability, they also pose certain risk management challenges. A credit union’s risk management systems should address the risks of HELOC securitizations.

Portfolio Classifications, Allowance for Loan and Lease Losses and Capital

Credit unions and their examiners have the discretion to classify entire retail portfolios, or segments thereof, when underwriting weaknesses or delinquencies are pervasive and present an excessive level of credit risk. Portfolios of HLTV loans to borrowers who show inadequate capacity to repay the debt within a reasonable time may be subject to classification.

Credit unions should establish appropriate ALLL and hold capital commensurate with the risk of their portfolios. In determining the ALLL adequacy, how the interest-only and draw features of HELOCs during the lines’ revolving period could affect the loss curves for its HELOC portfolio should be considered. Those engaging in programmatic sub-prime home equity lending or institutions that have higher risk products are expected to recognize the elevated risk of the activity when assessing capital and ALLL adequacy.

Return to Top

Billing Error Resolution

Definition of Billing Error

For purposes of this section, the term billing error means:

• A reflection on or with a periodic statement of an extension of credit that is not made to the member or to a person who has actual, implied, or apparent authority to use the member's credit card or open-end credit plan.
   
• A reflection on or with a periodic statement of an extension of credit that is not identified.
   
• A reflection on a periodic statement of the credit union's failure to credit properly a payment or other credit issued to the member's account.
   
• A reflection on a periodic statement of a computational or similar error of an accounting nature that is made by the credit union.
   
• A reflection on a periodic statement of an extension of credit for which the member requests additional clarification, including documentary evidence.
   
• The credit union's failure to mail or deliver a periodic statement to the member's last known address if that address was received by the member, in writing, at least 20 days before the end of the billing cycle for which the statement was required.

Billing Error Notice

A billing error notice is a written notice from a member that:

• Is received by a credit union at the address disclosed, as applicable, no later than 60 days after the credit union transmitted the first periodic statement that reflects the alleged billing error;
   
• Enables the credit union to identify the member's name and account number; and
   
• To the extent possible, indicates the member's belief and the reasons for the belief that a billing error exists, and the type, date, and amount of the error.

Time for Resolution

A credit union must mail or deliver written acknowledgment to the member within 30 days of receiving a billing error notice, unless the credit union has complied with the appropriate resolution procedures, as applicable, within the 30-day period.

A credit union must also comply with the appropriate resolution procedures, as applicable, within 2 complete billing cycles (but in no event later than 90 days) after receiving a billing error notice.

Rules Pending Resolution

Until a billing error is resolved, the following rules apply:

• The member has the right to withhold disputed amount; collection action prohibited. The member need not pay (and the credit union may not try to collect) any portion of any required payment that the member believes is related to the disputed amount (including related finance or other charges).
   
• Adverse credit reports prohibited. Neither a credit union nor its agent may (directly or indirectly) make or threaten to make an adverse report to any person about the member's credit standing, or report that an amount or account is delinquent, because the member failed to pay the disputed amount or related finance or other charges.
   
• Acceleration of debt and restriction of account prohibited. A credit union may not accelerate any part of a member's indebtedness or restrict or close a member's account solely because he/she has exercised in good faith rights provided by this section. A credit union may be subject to the forfeiture penalty under 15 U.S.C. 1666(e) for failure to comply with any of the requirements of this section.
   
• Permitted Credit Union Actions. A credit union may take action to collect any undisputed portion of the item or bill; deduct any disputed amount and related finance or other charges from the member's credit limit on the account; or reflect a disputed amount and related finance or other charges on a periodic statement, provided that the credit union indicates on or with the periodic statement that payment of any disputed amount and related finance or other charges is not required pending the credit union's compliance with this section.

Procedures if Billing Error Occurred as Asserted

If a credit union determines that a billing error occurred as asserted, it must do the following within the time limits of this section:

• Correct the billing error and credit the member's account with any disputed amount and related finance or other charges, as applicable; and
   
• Mail and deliver a correction notice to the member.

Procedures if Different Billing Error or No Billing Error Occurred

If, after conducting a reasonable investigation, a credit union determines that no billing error occurred or that a different billing error occurred from that asserted, it must do the following within the time limits of this section:

• Mail or deliver to the member an explanation that sets forth the reasons for the credit union's belief that the billing error alleged is incorrect in whole or in part;
   
• Furnish copies of documentary evidence of the member's indebtedness, if the member so requests; and
   
• If a different billing error occurred, correct the billing error and credit the member's account with any disputed amount and related finance or other charges, as applicable.

Creditor's Rights and Duties After Resolution

If a credit union, after complying with all of the requirements of this section, determines that a member owes all or part of the disputed amount and related finance or other charges, the credit union must do the following:

• Promptly notify the member, in writing, of the time when payment is due and the portion of the disputed amount and related finance or other charges that the consumer still owes;
   
• Allow any time period disclosed, as applicable, during which the member can pay the amount due without incurring additional finance or other charges;
   
• Refrain from reporting an amount or account is delinquent because the amount due remains unpaid, if the credit union receives (within the time allowed for payment under this section), further written notice from the member that any portion of the billing error is still in dispute, unless the credit union also:
  
  
  • Promptly reports that the amount or account is in dispute;
     
  • Mails or delivers to the member (at the same time the report is made) a written notice of the name and address of each person to whom the credit union makes a report; and
     
  • Promptly reports any subsequent resolution of the reported delinquency to all persons to whom the credit union has made a report.

A credit union may report an account or amount as delinquent because the amount due remains unpaid after the credit union has allowed any time period disclosed, as applicable, or 10 days (whichever is longer) during which the member can pay the amount.

Reassertion of Billing Error

A credit union that has fully complied with the requirements of this section has no further responsibilities under this section if a member reasserts substantially the same billing error.

Return to Top

Determination of Annual Percentage Rate

The APR is a measure of the cost of credit, expressed as a yearly rate. An APR is considered accurate if it is not more than 1/8th of 1 percentage point above or below the APR determined in accordance with this section. An error in disclosure of the APR or finance charge is not, in itself, considered a violation of this regulation if:

• The error resulted from a corresponding error in a calculation tool used in good faith by the creditor; and
   
• Upon discovery of the error, the credit union promptly discontinues use of that calculation tool for disclosure purposes, and notifies the FRB in writing of the error in the calculation tool.

Where one or more periodic rates may be used to compute the finance charge, the APR(s) to be disclosed must be computed by multiplying each periodic rate by the number of periods in a year.

Return to Top

Right of Rescission

Consumer's Right to Rescind

For the following credit plans in which a security interest is or will be retained or acquired in a member's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind:

• The plan when the plan is opened;
   
• Each credit extension made under the plan;
   
• When a security interest is added or increased to secure an existing plan; and
   
• When a credit limit on the plan is increased.

However, a consumer does not have the right to rescind each credit extension made under the plan if such extension is made in accordance with a previously established credit limit for the plan.

To exercise the right to rescind, the consumer must notify the credit union of the rescission by mail, telegram, or other means of written communication. Notice is considered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the credit union's designated place of business.

A consumer may exercise the right to rescind until midnight of the third (3^rd) business day following the occurrence that gave rise to the right of rescission, delivery of the notice, or delivery of all “material” (i.e., required) disclosures, whichever occurs last. If the required notice and material disclosures are not delivered, the right to rescind shall expire 3 years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.

When more than one consumer has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers.

Notice of Right to Rescind

In any transaction or occurrence subject to rescission, a credit union must deliver two (2) copies of the notice of the right to rescind to each consumer entitled to rescind (one copy to each if the notice is delivered in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act).

The notice must identify the transaction or occurrence and clearly and conspicuously disclose the following:

• The retention or acquisition of a security interest in the consumer's principal dwelling;
   
• The consumer's right to rescind;
   
• How to exercise the right to rescind, with a form for that purpose, designating the address of the credit union's place of business;
   
• The effects of rescission; and
   
• The date the rescission period expires.

Delay of Credit Union’s Performance

Unless a consumer waives the right to rescind, no money may be disbursed other than in escrow, no services may be performed, and no materials may be delivered until after the rescission period has expired and the credit union is reasonably satisfied that the consumer has not rescinded. A credit union does not violate this section if a third party with no knowledge of the event activating the rescission right does not delay in providing materials or services, as long as the debt incurred for those materials or services is not secured by the property subject to rescission.

However, a credit union may disburse advances during the rescission period in a valid escrow arrangement. The credit union may not, however, appoint the consumer as “trustee” or “escrow agent” and distribute funds to the consumer in that capacity during the delay period. A credit union may also do the following, unless otherwise prohibited by state law:

• Prepare the cash advance check;
   
• Perfect the security interest; and/or
   
• Accrue finance charges during the delay period.

Effects of Rescission

When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer is no longer liable for any amount, including any finance charge.

Within 20 calendar days after receipt of a notice of rescission, the credit union must return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

If the credit union has delivered any money or property, the consumer may retain possession until the credit union returns it. At the consumer's option, tender of property may be made at the location of the property or at the consumer's residence. Tender of money must be made at the credit union's designated place of business. If the credit union does not take possession of the money or property within 20 calendar days after the consumer's tender, the consumer may keep it without further obligation.

The procedures outlined above may be modified by court order.

Consumer's Waiver of Right to Rescind

The consumer may modify or waive the right to rescind 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 consumer must give the credit union a dated written statement that describes the emergency, specifically modifies or waives the right to rescind, and bears the signature of all the consumers entitled to rescind. Preprinted forms are prohibited, unless authorized by the FRB.

Exempt Transactions

The right to rescind does not apply to the following:

• A residential mortgage transaction.
   
• A credit plan in which a state agency is a creditor.
   
• A refinancing of an extension of credit by the same creditor where the credit is already secured by the consumer’s dwelling. The right of rescission does apply to any new amount financed that exceeds the unpaid principal balance, any unearned finance charge on the existing debt, and amounts attributed to the costs of the refinancing.
   
• Subsequent advances in a multiple advancing loan as long as the proper disclosures, including the right of rescission if appropriate, were given at the outset of the transaction.
   
• A renewal of option insurance premiums that is not a refinancing subject to new disclosures.
   
• The opening of a business-purpose credit line, even though the loan is secured by the consumer’s principal dwelling.
   

Return to Top

Advertising [link to Advertising Channel]

Closed-End Credit

General Disclosure Requirements

Form of Disclosures

A credit union must make the closed-end disclosures clearly and conspicuously in writing, in a form that the member may keep. The disclosures must be grouped together, segregated from everything else, and may not contain any information not directly related to the disclosures required under §1026.18 (e.g., the credit union’s identity, the variable rate example, insurance or debt cancellation, and certain security interest charges).

The terms “finance charge” and “annual percentage rate,” when required to be disclosed together with a corresponding amount or percentage rate, must be more conspicuous than any other disclosure, except the credit union's identity.

Although no minimum type size is mandated, the disclosures must be legible, whether typewritten, handwritten, or printed by computer.

Time of Disclosures

The credit union must make disclosures before consummation of the transaction.

Basis of Disclosures and Use of Estimates

The 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, it must make the disclosure based on the best information reasonably available at the time the disclosure is provided to the member, 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 for consummation of the transaction.

The credit union may disregard the effects of the following in making calculations and disclosures:

• Payments must be collected in whole cents.
   
• Dates of scheduled payments and advances may be changed because the scheduled date is not a business day.
   
• Months have different numbers of days.
   
• The occurrence of leap year.

Effect of Subsequent Events

If a disclosure becomes inaccurate because of an event that occurs after the credit union delivers the required disclosures, the inaccuracy is not a violation of this regulation, although new disclosures may be required.

Early Disclosures

If disclosures required by this subpart are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the credit union must disclose the following before consummation:

• Any changed term unless the term was based on an estimate and was labeled an estimate; and
   
• All changed terms, if the APR at the time of consummation varies from the APR disclosed earlier by more than 1/8 of 1 percentage point in a regular transaction, or more than 1/4 of 1 percentage point in an irregular transaction (i.e., one that has one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts [other than an irregular first period, or first or final payment]).

Mail or Telephone Orders - Delay in Disclosures

If a credit union receives a request for an extension of credit by mail, telephone, or facsimile machine without face-to-face or direct telephone solicitation, the credit union may delay the disclosures until the due date of the first payment, if the following information for representative amounts or ranges of credit is made available in written form or in electronic form to the member or to the public before the actual purchase order or request:

• The cash price or the principal loan amount;
   
• The total sale price;
   
• The finance charge;
   
• The APR, and if the rate may increase after consummation, the following disclosures:
  
  
  • The circumstances under which the rate may increase.
     
  • Any limitations on the increase.
     
  • The effect of an increase; and
     
• The terms of repayment.

Return to Top

Content of Disclosures

For each transaction, the credit union must disclose the following information as applicable:

• Creditor. The identity of the creditor making the disclosures.
   
• Amount Financed. The “amount financed,” using that term, and a brief description such as the amount of credit provided to you or on your behalf. The amount financed is calculated by:
  
  
  • Determining the principal loan amount or the cash price (subtracting any down payment);
     
  • Adding any other amounts that are financed by the credit union and are not part of the finance charge; and
     
  • Subtracting any prepaid finance charge.
     
• Itemization of Amount Financed. A separate written itemization of the amount financed, including:
  
  
  • The amount of any proceeds distributed directly to the member;
     
  •  The amount credited to the consumer's account with the credit union;
     
  • Any amounts paid to other persons by the credit union on the member's behalf. The credit union must identify those persons (the following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies); and
     
  • The prepaid finance charge.

Note: The credit union need not comply with disclosing the itemized amount financed if the credit union provides a statement that the member has the right to receive a written itemization of the amount financed, together with a space for the member to indicate whether it is desired, and the member does not request it. Additionally, if the transaction is “federally-related” under the Real Estate Settlement Procedures Act (RESPA) and a good faith estimate is provided, the itemization need not be provided.

• Finance Charge. The “finance charge,” using that term, and a brief description such as “the dollar amount the credit will cost you.”
   
• Mortgage 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 APR) must be treated as accurate if the amount disclosed as the finance charge:
   
  • Is understated by no more than $100; or
     
  • Is greater than the amount required to be disclosed.
     
• Annual Percentage Rate. The “annual percentage rate,” using that term, and a brief description such as “the cost of your credit as a yearly rate.”
   
• Variable Rate. If the APR may increase after consummation in a transaction secured by the member's principal dwelling with a term of one year or less, the following disclosures⁽⁵⁾:
   
  • The circumstances under which the rate may increase.
     
  • Any limitations on the increase.
     
  • The effect of an increase.
     
  • An example of the payment terms that would result from an increase.

    If the APR may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures:

    • The fact that the transaction contains a variable-rate feature.
       
    • A statement that variable-rate disclosures have been provided earlier.
       
• Payment Schedule. The number, amounts, and timing of payments scheduled to repay the obligation.
  
  
  • In a demand obligation with no alternate maturity date, the credit union may comply with this paragraph by disclosing the due dates or payment periods of any scheduled interest payments for the first year.
     
  • In a transaction in which a series of payments varies because a finance charge is applied to the unpaid principal balance, the credit union may comply with this paragraph by disclosing the following information:
    
    
    • The dollar amounts of the largest and smallest payments in the series.
       
    • A reference to the variations in the other payments in the series.
       
  • Total of Payments. The “total of payments,” using that term, and a descriptive explanation such as “the amount you will have paid when you have made all scheduled payments.”
     
  • Demand Feature. If the obligation has a demand feature, that fact must be disclosed. When the disclosures are based on an assumed maturity of 1 year, that fact must also be disclosed.
     
• Prepayment.
  
  
  • When an obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not a penalty may be imposed if the obligation is prepaid in full.⁽⁶⁾
     
  • When an obligation includes a finance charge other than the finance charge, a statement indicating whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.
     
• Late payment. Any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.
   
• Security Interest. The fact that the credit union has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type.
   
• Insurance and Debt Cancellation. The items required in order to exclude certain insurance premiums and debt cancellation fees from the finance charge.
   
• Certain Security Interest Charges. Disclosures in order to exclude from the finance charge certain fees prescribed by law or certain premiums for insurance in lieu of perfecting a security interest.
   
• Contract Reference. A statement that the member should refer to the appropriate contract document for information about nonpayment, default, the right to accelerate the maturity of the obligation, and prepayment rebates and penalties. At the credit union's option, the statement may also include a reference to the contract for further information about security interests and, in a residential mortgage transaction, about the credit union's policy regarding assumption of the obligation.
   
• Assumption Policy. In a residential mortgage transaction, a statement whether a subsequent purchaser of the dwelling from the member may be permitted to assume the remaining obligation on its original terms. 

Return to Top

Certain Mortgage and Variable-Rate Transactions

Mortgage Transactions Subject to RESPA

Time of Disclosures

In a mortgage transaction subject to RESPA that is secured by the consumer's dwelling, other than a home equity line of credit, a credit union must make good faith estimates of the required disclosures and deliver or place them in the mail not later than the third (3rd) business day after the credit union receives the member's written application. For purposes of this section, the term “business day” means a day on which the credit union's offices are open to the public for substantially all of its business functions.

Only reasonable and bona fide fees may be imposed in connection with the member's application for a mortgage transaction before the member has received the required disclosures (for example, obtaining a member’s credit history). If the disclosures are mailed, the member is considered to have received them three (3) business days after they are mailed. For purposes of charging fees under this provision, the term “business day” means all calendar days except Sundays and legal public holidays

Waiting Periods for Early Disclosures and Corrected Disclosures

A credit union must deliver or place in the mail the good faith estimates no later than the seventh (7^th) business day before consummation of the transaction. For purposes of the waiting periods, “business day” means all calendar days except Sundays and the legal public holidays.

If the APR becomes inaccurate, the credit union must provide corrected disclosures with all changed terms. The member must receive the corrected disclosures no later than three (3) business days before consummation. If the corrected disclosures are mailed or delivered by means other than delivery in person, the member is deemed to have received the corrected disclosures three (3) business days after they are mailed or delivered.

Consumer's Waiver of Waiting Period Before Consummation

If the member determines that the extension of credit is needed to meet a bona fide personal financial emergency, the member may modify or waive the three-day or the seven-business-day waiting period after receiving the required disclosures. To modify or waive a waiting period, 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 members who are primarily liable on the legal obligation. Printed forms for this purpose are prohibited.

Notice

The following disclosure statement is required: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” 

Certain Variable-Rate Transactions

If the APR may increase after consummation in a transaction secured by the member's principal dwelling with a term greater than one year, the following disclosures must be provided at the time an application form is provided or before the member pays a non-refundable fee, whichever is earlier:

• The booklet titled Consumer Handbook on Adjustable Rate Mortgages available on the Bureau of Consumer Financial Protection website, or a suitable substitute.
• A loan program disclosure for each variable-rate program in which the member expresses an interest. The following disclosures, as applicable, must be provided:
  
  
  • The fact that the interest rate, payment, or term of the loan can change;
     
  • The index or formula used in making adjustments, and a source of information about the index or formula;
     
  • An explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted, such as by the addition of a margin;
     
  • A statement that the member should ask about the current margin value and current interest rate.
     
  • The fact that the interest rate will be discounted, and a statement that the member should ask about the amount of the interest rate discount;
     
  • The frequency of interest rate and payment changes;
     
  • Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover;
     
  • At the option of the credit union, either of the following:
    
    
    • A historical example, based on a $10,000 loan amount, illustrating how payments and the loan balance would have been affected by interest rate changes implemented according to the terms of the loan program disclosure. The example must reflect the most recent 15 years of index values, as well as all significant loan program terms, such as negative amortization, interest rate carryover, interest rate discounts, and interest rate and payment limitations, that would have been affected by the index movement during the period;
       
    • The maximum interest rate and payment for a $10,000 loan originated at the initial interest rate (index value plus margin, adjusted by the amount of any discount or premium) in effect as of an identified month and year for the loan program disclosure assuming the maximum periodic increases in rates and payments under the program; and the initial interest rate and payment for that loan and a statement that the periodic payment may increase or decrease substantially depending on changes in the rate;
       
  • An explanation of how the member may calculate the payments for the loan amount to be borrowed based on either:
     
    • The most recent payment shown in the historical example; or
       
    • The initial interest rate used to calculate the maximum interest rate and payment;
       
  • The fact that the loan program contains a demand feature;
     
  • The type of information that will be provided in notices of adjustments and the timing of such notices; and
     
  • A statement that disclosure forms are available for the credit union's other variable-rate loan programs.

These required disclosures may be delivered or placed in the mail not later than three (3) business days following receipt of a member's application when the application reaches the credit union by telephone, or through an intermediary agent or broker.

Electronic Disclosures

For an application that is accessed by the member in electronic form, the required disclosures may be provided to the member in electronic form on or with the application. Whether disclosures must be in electronic form depends upon the following:

• If a member accesses a home equity credit line application electronically, such as online at a home computer, the credit union must provide the disclosures in electronic form (such as with the application form on its Web site) in order to meet the requirement to provide disclosures in a timely manner on or with the application. If the credit union instead mailed paper disclosures to the member, this requirement would not be met.
   
• In contrast, if a member is physically present in the credit union's office, and accesses a home equity credit line application electronically, such as via a terminal or kiosk (or if the member uses a terminal or kiosk located on the premises of an affiliate or third party that has arranged with the credit union to provide applications to members), the credit union may provide disclosures in either electronic or paper form, provided the credit union complies with the timing, delivery, and retainability requirements of the regulation.
   

Return to Top

Subsequent Disclosure Requirements

Refinancings

A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same member. A refinancing is a new transaction requiring new disclosures to the member. The new finance charge must include any unearned portion of the old finance charge that is not credited to the existing obligation. In any form, the new obligation must completely replace the prior one.

Variable-Rate Adjustments

Unless a variable-rate feature is disclosed, an adjustment to the interest rate with or without a corresponding adjustment to the payment in a variable-rate transaction (for transactions secured by the consumer's principal dwelling with a term greater than one year) is an event requiring new disclosures to the member. At least once each year during which an interest rate adjustment is implemented without an accompanying payment change, and at least 25, but no more than 120, calendar days before a payment at a new level is due, the following disclosures, as applicable, must be delivered or placed in the mail:

• The current and prior interest rates.
   
• The index values upon which the current and prior interest rates are based.
   
• The extent to which the credit union has foregone any increase in the interest rate.
   
• The contractual effects of the adjustment, including the payment due after the adjustment is made, and a statement of the loan balance.
   
• The payment, if different from that disclosed (in the fourth bullet point above), that would be required to fully amortize the loan at the new interest rate over the remainder of the loan term.

Return to Top

Treatment of Credit Balances

When a credit balance in excess of $1 is created in connection with a transaction (through transmittal of funds to a credit union 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 member), the credit union must do the following:

• Credit the amount of the credit balance to the member’s account;
   
• Refund any part of the remaining credit balance upon the written request of the member; and
   
• Make a good faith effort to refund to the member by cash, check, or money order, or credit to a deposit account of the member, any part of the credit balance remaining in the account for more than 6 months, except that no further action is required if the member's current location is not known to the credit union and cannot be traced through the member's last known address or telephone number.

Return to Top

Determination of Annual Percentage Rate

Accuracy of Annual Percentage Rate

The APR is a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the member to the amount and timing of payments made. The APR must be determined in accordance with either the actuarial method or the United States Rule method. Explanations, equations and instructions for determining the APR in accordance with the actuarial method are set forth in Appendix J to the regulation.

An error in disclosure of the APR or finance charge is not, in itself, considered a violation of this regulation if:

• The error resulted from a corresponding error in a calculation tool used in good faith by the credit union; and
   
• Upon discovery of the error, the credit union promptly discontinues use of that calculation tool for disclosure purposes and notifies the FRB in writing of the error in the calculation tool. 

As a general rule, the APR will be considered accurate if it is not more than 1/8 of 1 percentage point above or below the APR determined in accordance with this section.

In an irregular transaction (i.e., one that has one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts [other than an irregular first period, or first or final payment]), the APR will be considered accurate if it is not more than 1/4 of 1 percentage point above or below the APR determined in accordance with this section.

Mortgage Loans

If the APR disclosed in a transaction secured by real property or a dwelling varies from the actual rate determined in accordance with this section, in addition to the tolerances, the disclosed APR will also be considered accurate if:

• The rate results from the disclosed finance charge; and
   
• The disclosed finance charge would be considered accurate under the regulation;

Return to Top

Right of Rescission

See “Right of Rescission” under “Open-End Credit.”

Return to Top

Advertising [link to Advertising Channel]

Subpart D - Miscellaneous

Record Retention

A credit union must retain evidence of compliance with this regulation (other than the advertising requirements) for two (2) years after the date disclosures are required to be made or action is required to be taken.

A credit union must permit NCUA to enforce this regulation by inspecting its relevant records for compliance.

For home equity lines of credit plans, written procedures for compliance with those requirements as well as a sample disclosure form and contract for each home equity program represent adequate evidence of compliance.

Return to Top

Use of APR in Oral Disclosures

Open-End Credit

In an oral response to a member's inquiry about the cost of open-end credit, only the APR(s) may be stated, except that the periodic rate or rates also may be stated. If the APR cannot be determined in advance because there are finance charges other than a periodic rate, the corresponding APR must be stated, and other cost information may be given.

Closed-End Credit

In an oral response to a member's inquiry about the cost of closed-end credit, only the APR(s) may be stated, except that a simple annual rate or periodic rate also may be stated if it is applied to an unpaid balance. If the APR cannot be determined in advance, the APR for a sample transaction shall be stated, and other cost information for the member's specific transaction may be given.

Return to Top

Language of Disclosures

The required disclosures may be made in a language other than English, so long as the disclosures are made available in English upon a member’s request. The requirement for providing English disclosures on request does not apply to advertisements.

Return to Top

Effect on State Laws

Inconsistent Disclosure Requirements

State law requirements that are inconsistent with the requirements of this regulation are generally preempted to the extent of the inconsistency. A state law is inconsistent if it requires a creditor to make disclosures or take actions that contradict the requirements of this regulation.

A credit union, State, or other interested party may request the BCFP to determine whether a State law requirement is inconsistent. After the BCFP determines that a State law is inconsistent, a credit union may not make disclosures using the inconsistent term or form. The procedures under which a request for a determination may be made under this section are set forth in Appendix A.

The Official Staff Commentary to §1026.28 lists the specific state exemptions (Arizona, Florida, Missouri, Mississippi, South Carolina, Indiana and Wisconsin).

Return to Top

State Exemptions

Any State may apply to the BCFP to exempt a class of transactions within the State from the requirements of chapter 2 (Credit transactions) or chapter 4 (Credit billing) of the Truth-in-Lending Act (TILA) and the corresponding provisions of Regulation Z. The BCFP will grant an exemption if it determines that:

• The State law is substantially similar to the Federal law or, in the case of chapter 4, affords the member greater protection than the Federal law; and
   
• There is adequate provision for enforcement.
   

No exemptions will extend to the civil liability provisions of sections 130 and 131 of the Act.

If an exemption has been granted, the disclosures required by the applicable State law (except any additional requirements not imposed by Federal law) will constitute the disclosures required by the TILA.

The procedures under which a State may apply for an exemption under this section are set forth in Appendix B.

The Official Staff Commentary to §1026.29 lists the specific state exemptions (Maine, Connecticut, Massachusetts, Oklahoma and Wyoming).

Return to Top

Limitation on Rates

A credit union must include in any consumer credit contract secured by a dwelling and subject to the TILA and Regulation Z the maximum interest rate that may be imposed during the term of the obligation when:

• In the case of closed-end credit, the APR may increase after consummation, or
   
• In the case of open-end credit, the APR may increase during the plan. 

Return to Top

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.

Return to Top

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 penalties⁽⁷⁾, 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.

Return to Top

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.

Return to Top

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.

Return to Top

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.

Return to Top

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.

Return to Top