Compliance Bulletin

Regulation Z Amendments: Mortgage Disclosures
May 12, 2009

The Federal Reserve Board issued a final rule revising Regulation Z to implement provisions of the Mortgage Disclosure Improvement Act of 2008 (“MDIA”) pertaining to early disclosures on residential mortgage loans. The MDIA, which amends provisions of the Truth in Lending Act, was enacted by Congress on July 30, 2008 as part of the Housing and Economic Recovery Act of 2008. It was then amended on October 3 in connection with the Emergency Economic Stabilization Act of 2008 (“EESA”).


On the same day that MDIA was first enacted on July 30, 2008, the Federal Reserve issued a final rule amending Regulation Z to expand disclosure requirements to loans other than loans to finance the purchase or construction of the consumer’s principal dwelling (“July 2008 Rule”). The rule, originally scheduled to become effective on October 1, 2009, also provides that the disclosure must be given before the consumer pays any fee except for a fee to obtain a credit report [1].

The MDIA broadens the requirements of the July 2008 Rule further and, among other things, adds a waiting period after a disclosure is given (including corrected disclosures) before a transaction is consummated. The amendment to the MDIA made pursuant to EESA makes these changes inapplicable to loans secured by borrowers’ interests in timeshare plans. In this final rule, the Federal Reserve is also advancing the effective date of the July 2008 Rule from October 1, 2009 to July 1, which is also when the MDIA becomes effective [2].

Final Rule

Coverage. When effective, amended § 226.19(a) will read: “In a mortgage transaction subject to [RESPA] that is secured by the consumer’s dwelling, other than a home equity line of credit subject to § 226.5b or mortgage transaction subject to paragraph (a)(5) of this section [timeshares], the creditor shall make good faith estimates of the disclosures required by § 226.18 [closed end credit disclosures] . . ..” The intent of this language change is to extend the closed-end credit disclosure requirement to loans other than those obtained to finance a purchase or initial construction of the consumer’s dwelling, including loans secured by dwellings other than the consumer’s principal dwelling. However, the requirements do not apply to credit extensions that are primarily for business purposes [3]. Disclosure requirements for home equity lines of credit, which the final rule does not revise, are being reviewed by the Federal Reserve.

Timing. A creditor is required to deliver or mail the early disclosures no later than three business days after the creditor receives a consumer’s written application [4]. For purposes of this provision, “business day” means all calendar days except Sundays and the legal public holidays [5]. This definition is made consistent with the definition of “business day” in HUD’s Regulation X promulgated under RESPA, so that the timing requirement coincides with the RESPA requirement for providing good faith estimates. Comment 19(a)(1)(i)-4 has been revised to clarify that if a consumer withdraws an application within three business days after a creditor receives it, the creditor is not required to give the early disclosures.

Pursuant to the July 2008 Rule, the creditor (or any other person) may not impose a fee in connection with the application (other than to obtain a credit history) before the consumer has received the disclosures. If the disclosures are mailed, the consumer is considered to have received them three business days after they are mailed [6].

Waiting periods/corrected disclosures. In addition to the 3-day post-application timing requirement for mailing a disclosure, a waiting period also applies. The disclosure must be placed in the mail not later than the seventh business day before consummation of the transaction, which essentially establishes a floor for when a loan may be closed. If after a disclosure is given the APR subsequently changes beyond the specified tolerance [7], the creditor must redisclose the APR and other changed terms so that consumers receive corrected disclosures not later than the third business day before consummation [8]. Here again, if the corrected disclosures are mailed, the consumer is considered to receive the disclosures three business days after mailing.

A new Comment 19(a)(2)-2 clarifies that where corrected disclosures are required consummation may not occur until both the seven-business-day waiting period and the three-business-day waiting period have expired. See Comment 19(a)(2)-3 for examples. No separate rules or presumptions are provided regarding the delivery of disclosures by overnight courier, electronic transmission, or other means. However, a creditor is permitted to rely on evidence of actual delivery to determine when the three-business-day waiting period begins.

Waiver. A consumer who determines that an extension of credit is needed to meet a bona fide personal financial emergency may shorten or waive the seven business-day waiting period or the three-business-day waiting period after receiving the initial or corrected disclosures. The consumer is required to give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all the consumers who will be primarily liable on the legal obligation. Creditors may not use pre-printed forms for this purpose [9].

Comment 19(a)(3)-1 states that whether the condition of a bona fide personal financial emergency is met is determined by the facts surrounding individual situations, meaning that the creditor exercises the discretion whether to allow the waiver. Comment 19(a)(3)-3 provides an illustration of a waiver. In a transaction where multiple consumers are primarily liable on the legal obligation, a creditor may provide disclosures to one of those consumers rather than to all of them. The Federal Reserve did not adopt, as requested, a comment stating that the existence of a consumer’s waiver insulates a creditor from liability in connection with such waiver. However, the Federal Reserve expects to consider Regulation Z’s modification and waiver rules related to the MDIA, rescission, and HOEPA when it conducts a broader review of regulations for closed end consumer credit.

Notice. The final rule requires that early and corrected disclosures contain a clear and conspicuous notice with the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application [10].”  To facilitate compliance for creditors that use the same form for the initial disclosures and final disclosures, new comment 17(a)(1)-5(xvi) clarifies that creditors may also include this notice on the disclosures provided at consummation and may group the notice together with the disclosures required by § 226.18 (closed-end credit disclosure).

Timeshare transactions. Loans secured by a consumer’s interest in a timeshare plan are subject to different rules. The requirements of § 226.19(a)(1) through (4) (i.e., specific timing requirement, fee limitation, corrected disclosures, waiting period, waiver, and verbatim notice) do not apply to timeshare transactions [11]. As to these transactions Section 226.19(a)(5) states that creditors must make good faith estimates under § 226.18 “before consummation, or shall deliver or place them in the mail not later than three business days after the creditor receives the consumer’s written application, whichever is earlier. If the APR at the time of consummation varies from the disclosed APR by more than 1/8 of 1 percent in a regular transaction or more than 1/4 of 1 percent in an irregular transaction (as defined in § 226.22), the creditor must disclose the changed terms no later than at consummation or settlement [12]. A number of comments are provided [13].

The final rule becomes effective on July 30, 2009 and applies to mortgage transactions for which creditors receive the consumer’s application on or after that date. Comment 1(d)(3)-1 specifies which provisions of the July 2008 Rule become effective on July 30, 2009. They pertain to escrow requirements, high-cost mortgages, and advertisements. This is a link to the final rule:

  1. For a summary of the July 2008 Rule, see CBA’s Regulatory Compliance Bulletins dated July 28, 2008 and August 14, 2008.
  2. The MDIA also makes changes to variable-rate transaction disclosures that are not addressed in this final rule. Those provisions are not scheduled to become effective until January 30, 2011and will be the subject of Federal Reserve regulations yet to be proposed.
  3. See existing Comment 3(a)-3 of Regulation Z, which states that credit extended to acquire, improve, or maintain rental property that is not owner-occupied (that is, in which the owner does not expect to live for more than fourteen days during the coming year) is deemed to be for business purposes.
  4. Comment 19(a)(1)(i)-3 states that the guidelines provided in RESPA and Regulation X on when an application is considered received apply here.
  5. See amended § 226.2(a)(6).
  6. § 226.19(a)(1)(ii).
  7. Comment 19(a)(2)-4 provides guidance on whether a creditor must make corrected disclosures when the APR is changed subsequent to disclosure. The creditor should compare the APR at consummation with the APR in the most recently provided corrected disclosures. Comment 19(a)(2)(ii)-1 provides that corrected disclosures are not required when the APR previously disclosed is considered accurate under the tolerances in § 226.22.
  8. § 226.19(a)(2).
  9. § 226.19(a)(3).
  10. § 226.19(a)(4).
  11. See 11 U.S.C. 101(53D).
  12. § 226.19(a)(5)(iii).
  13. See Comments to 19(a)(5)(ii) and (iii).

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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