Basic Real Estate Regulation Z

1. Basic Real Estate Regulation Z Purchase & Non-Purchase Rules

2. Learning Objectives • Learn about the regulatory requirements of Regulation Z by reviewing the: • Basic rules for Purchase-money real estate transactions and • Basic rescission rules for Non-purchase money real estate transactions • Review the risks when errors occur • Legal • Reputation • Regulatory

3. Introduction • Lifecycle of a Real Estate Loan • Pre-Closing Disclosures • Closing Disclosures • Post-Closing Disclosures • Application procedures are discussed in the Basic B Lecture

4. Pre-Closing - Regulation Z

5. Providing Early Disclosures • When are TIL disclosures required to be provided to borrowers?

6. Providing Early Disclosures • Section 226.17(b) • Before Consummation • This is a general rule that requires the creditor to provide disclosures to the consumer before consummation of the transaction. • Staff Commentary #3 • It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing. • Section 226.19(a) • Within 3 days of Application • A “residential mortgage transaction”has a special timing rule that requires a good faith estimates of the disclosures required by section 226.18 to be provided within three business days of written application or consummation, whichever is earlier • Exception if denied within the three-day period

7. Residential Mortgage Transaction • What is a “residential mortgage transaction?” • A transaction to finance the purchase or construction of the consumer’s principal dwelling • Are early disclosures different from the final disclosure? • Not really, the early disclosure is not based on the legal obligation but is a good faith estimate of the transaction

8. Early Disclosures • Special Rule • Early disclosures can be the final disclosure if the APR at closing does not change by more than tolerance (1/8 of 1 percent regular) • However, most banks automatically provide the final disclosure regardless of this rule

9. Early Disclosure • Which disclosure do you check when two are provided? (early & final) • Both, Maybe • What happens when the early disclosure is incorrect and the final is correct? • The courts would probably rule against the bank if the early is wrong.

10. Early Disclosure • While the early disclosure is not based on the legal obligation, lenders can use the GFE could serve as a proxy for the legal obligation when calculating the early disclosure as the regulation only requires a good faith estimate. • ****Make sure the math is correct.

11. Closing Disclosures - Regulation Z

12. Objectives • Basis for Disclosures • What the TIL Disclosure should Disclose • Calculations • Make sure the numbers right • Learn how to check a disclosure calculation • Preventing Legal, Reputation & Regulatory Risks • Civil Liability • Communication of Errors • Regulatory Enforcement • Internal Reviews • Rescission Rules • Non-Purchase Money Transactions

13. Basis for Disclosures

14. Basis for Disclosures • Legal Obligation • The TIL disclosure shall reflect the terms of the legal obligation (other than the early disclosure) • Unknown Information • If any information is unknown, disclosures shall be based on the best information reasonably available at the time of the disclosure • clearly state the disclosure is an estimate • ARM loans based on today’s rates (do not use estimates) • Construction loans using Appendix D will use estimates

15. Basis for Disclosures • Special Rule – Per Diem Interest • Section 226.17(c)(2)(ii) allows creditors to disclose per diem interest based on information known to the creditor at the time that the disclosure documents are prepared for consummation of the transaction. • In other words, if the loan closing is postponed by a day or two, the pre diem interest on the final disclosure, prepared in advance, would be correct even if the actual charge differs by the time disclosures are provided to the borrower. • The Board notes that creditors should exercise diligence in ascertaining the correct information when preparing disclosures.

16. Basis for Disclosures • The Staff Commentary for Regulation Z includes rules for preparing disclosures with unusual terms • Examples include: • consumer buydowns • wraparound financing • graduated payment mortgages • reverse mortgages • Any lenders making unusual loans??

17. Disclosure Calculations The Note The Payment Schedule The Amount Financed The Finance Charge The APR

18. Calculations • Once the basis for the TIL disclosure is determine, it is time to calculate required information • Compliance Officers should understand this method even if other staff members or outside consultants perform the periodic reviews

19. The Note

20. The Note • Start with the Legal Obligation • Identify the loan amount • The loan amount in the note is used to verify the amount financed on the TIL disclosure • Review the contract terms • Note rate • Terms • Payment amounts • If an ARM note, the specific rate change terms • Index value • Rate caps • Rate margins • Rounding • Are the note terms correct? • Errors are legal issues that must be resolved before a correct TIL disclosure can be developed

21. The Payment Schedule

22. The Payment Schedule • Determine the Payment Schedule • Number of payments • Timing of payments • Use the amounts and time period listed in the note (legal obligation) • Verify the payment calculationNote Example link • Is the math correct? • Does the loan amount • @ the interest rate • @ the # of payments • = the payment amount • If not, you may have a legal problem first

23. The Amount Financed

24. The Amount Financed • Verify the Amount Financed • Principal loan amount (not always the note amt) • Plus any other amounts financed • Minus any prepaid finance charge • This in a independent calculation. You should not rely on the TIL disclosure for this amount. • Again, look at the note it is your starting point

25. The Amount Financed • What documents do you need to calculate the amount financed? • Two Documents • The Note-To verify the loan amount • The HUD-1- To determine the prepaid finance charges

26. The Amount Financed • What is a prepaid finance charge? • Defined in Regulation Z Section - 226.2(a)(23) • It is a finance charge paid separately in cash or by checkbefore or at consummation of a transaction, or withheld from the proceeds of the credit at any time.

27. The Amount Financed • You must know what charges are finance charges before can identify what charges are prepaid when determining the amount financed • HUD 1 is the document to review

28. The Finance Charge What is it?

29. The Finance Charge • A Finance Charge is a specific charge listed in Section 226.4 • Includes exemptions • Special rules • Don’t be fooled • This section does not list every charge possible. • This is the Regulation Z conundrum

30. The Finance Charge • Third Party Charges - 226.4(a)(1) • Paid to someone other than creditor • Creditor requires use of third party, or • Retains a portion of charge • Example - PMI

31. The Finance Charge • Closing Agent Charges - 226.4(a)(2) • Fees charged by third parties to conduct loan closing • Creditor requires service or • Retains a portion of the charge • Can be exempt if part of a lump-sum closing fee and represents only a small portion of the total

32. The Finance Charge • Mortgage Brokers Fees - 226.4(a)(3) • Always considered a finance charge • Even if creditor does not require use of the broker or retain a portion of the charge

33. The Finance Charge • Listed Charges - 226.4(b) • points • origination fees • appraisal • credit report • Regulation Z does not list all possible charges or have the same name for each charge

34. The Finance Charge • Excluded Amounts - 226.4(c) • Application fee • if charged to all applicants • Sellers points • Charges not paid by the borrower • Real estate related fees -4(c)(7) • Most important section

35. The Finance Charge • Excluded Amounts - 226.4(c) • Real estate related fees -4(c)(7) • (i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes. • (ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents. • (iii) Notary and credit-report fees. • (iv) Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations. • (v) Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.

36. Verify the Amount Financed • Review a copy of the HUD-1 • Know which amounts paid by the borrower are finance charges • Those that are paid at or before closing are “prepaid finance charges”

37. Note Amount should include all amounts financed along with proceeds Subtract HUD-1 Prepaid finance charges $100,000 Note Amount -1,500 PPFC 98,500 Amount Financed Make sure you add the PPFC back in the finance charge Example

38. Verify the APR

39. Verify the APR • Independent Calculations • Amount Financed • Payment Schedule • Once the amounts are independently verified, you are ready to verify the disclosed APR using an independent calculation method

40. Verify the APR • The OCC’s APR windows program is currently used by most examiners to verify TIL disclosure calculations • Excellent tool for bank compliance officers for internal review checks

41. APR Rules Special rules for real estate loans

42. APR Calculation Rules • Section 226.22 of Regulation Z contains rules for APR calculations along with the specific mathematical calculation in Appendix J • Special Mortgage Rules • The $100 rule • Found in section 226.22(a)(4) • The Additional Tolerance Rule • Found in Section 226.22(a)(5)

43. APR Calculation Rules • The $100 Rule • If the annual percentage rate disclosed in a transaction secured by real property or a dwelling varies from the actual rate determined in accordance with Appendix J of Regulation Z, in addition to the tolerances applicable under paragraphs (a)(2) – [1/8%] and (3)- [1/4%] of this section, the disclosed annual percentage rate shall also be considered accurate if— • (i) the rate results from the disclosed finance charge; and • (ii) • (A) the disclosed finance charge would be considered accurate under section 226.18(d)(1) [is understated by no more than $100]; or • (B) for purposes of rescission, if the disclosed finance charge would be considered accurate under section 226.23(g) or (h), whichever applies.

44. APR Calculation Rules • The Additional Tolerance Rule • In a transaction secured by real property or a dwelling, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, if the disclosed finance charge is calculated incorrectly but is considered accurate under section 226.18(d)(1) or section 226.23(g) or (h), the disclosed annual percentage rate shall be considered accurate— • (i) if the disclosed finance charge is understated, and the disclosed annual percentage rate is also understated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section; • (ii) if the disclosed finance charge is overstated, and the disclosed annual percentage rate is also overstated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section.

45. APR Calculation Rules • Example: • $75.00 understatement • $100 • ____________________________ • 8.40 8.50 8.65 8.875 9.00 9.125 • Assume: • $75 understatement • .125% Tolerance • 9.00% Correct APR

46. The TIL Disclosure Review

47. Regulation Z • Disclosure Review • In addition to verifying the calculations for the APR and finance charge, you should review the TIL disclosure form for compliance with other required disclosure information outlined in Section 226.18 • Review key terms that have special real estate significance

48. Regulation Z • Disclosure Review - 226.18 • Amount financed • Know what a prepaid finance charge is • Itemization of amount financed • footnote 40 – Good faith estimate can be a substitute • Finance Charge • Know how the $100 rule applies

49. Regulation Z • Disclosure Review - 226.18 • Variable Rate • If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures: • (i) The fact that the transaction contains a variable-rate feature. • (ii) A statement that variable-rate disclosures have been provided earlier.

50. Regulation Z • Disclosure Review - 226.18 • Security Interest • Spreader clause & Rescission • Security Interest Charges • “filing fees and taxes,” and all funds disbursed for such purposes may be aggregated in a single disclosure. • This disclosure may appear, at the creditor's option, apart from the other required disclosures. • The inclusion of this information on a statement required under the Real Estate Settlement Procedures Act is sufficient disclosure for purposes of Truth in Lending.