Under a recent Regulation Z amendment, we believe that this down payment assistance loan may qualify for an exemption from the LE and CD requirements.

Regulation Z includes an exemption from the LE and CD requirements for certain housing and down payment assistance loans, allowing the use of a more streamlined disclosure (the “TIL disclosure”) instead. To qualify for this exemption, the loan must meet six criteria. The exempt transaction must: (1) be secured by a subordinate lien, (2) provide down payment, closing costs, or other similar assistance (among other qualifying purposes), (3) not require the payment of interest, (4) provide for forgiveness or deferral of the principal, (5) have costs of less than 1% of the amount of credit extended, and (6) comply with the streamlined disclosure requirements in § 1026.18 of Regulation Z. A loan meeting these criteria also is exempt from many of the disclosure requirements in Regulation X.

Here, we know that this transaction meets the first three criteria — the loan is secured by a subordinate lien, it provides down payment assistance, and it does not require interest. The loan also may meet the three remaining criteria. You will need to check the loan documents to see whether it provides for loan forgiveness or deferment (which is the case for at least some IHDA programs). As to the 1% threshold, Regulation Z recently was amended to exclude recording fees from that calculation; in other words, the loan may qualify for the exemption even if the recording fees exceed the 1% threshold (but you will need to check to ensure that other fees do not disqualify the loan).

If the loan meets all of the criteria discussed above, your bank can meet the final criterion by providing a streamlined TIL disclosure — in lieu of providing an LE or CD. 

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.3(h) (The TRID requirements for LEs and CDs “do not apply to a transaction that satisfies all of the following criteria:

  (1) The transaction is secured by a subordinate lien;

  (2) The transaction is for the purpose of: (i) Downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies; . . . .

  (3) The credit contract does not require the payment of interest;

  (4) The credit contract provides that repayment of the amount of credit extended is: (i) Forgiven either incrementally or in whole, at a date certain, and subject only to specified ownership and occupancy conditions, such as a requirement that the consumer maintain the property as the consumer’s principal dwelling for five years; (ii) Deferred for a minimum of 20 years after consummation of the transaction; (iii) Deferred until sale of the property securing the transaction; or (iv) Deferred until the property securing the transaction is no longer the principal dwelling of the consumer;

  (5)        (i) The costs payable by the consumer in connection with the transaction at consummation are limited to: (A) Recording fees; (B) Transfer taxes; (C) A bona fide and reasonable application fee; and (D) A bona fide and reasonable fee for housing counseling services; and 

              (ii) The total of costs payable by the consumer under paragraph (h)(5)(i)(C) and (D) of this section is less than 1 percent of the amount of credit extended; and

  (6) The following disclosures are provided: (i) Disclosures described in § 1026.18 that comply with this part; or (ii) Alternatively, disclosures described in § 1026.19(e) and (f) that comply with this part.”)

• CFPB Final Rule, Amendments to the Federal Mortgage Disclosure Requirements Under Regulation Z, Effective October 10, 2017, 82 Fed. Reg. 37656, 37766 (August 11, 2017) (“Many HFAs have told the Bureau that, due to the increase in both transfer taxes and recording fees in recent years and the small size of many of these housing assistance loans, often less than $5,000, these loans often have upfront costs exceeding the 1-percent threshold. . . . As a result of these additional difficulties, some creditors may be less willing to work with HFAs [housing finance agencies] and other organizations to continue providing these housing assistance loans. As revised, § 1026.3(h)(5) makes explicit that transfer taxes are among the permissible costs for these loans and provides that neither transfer taxes nor recording fees count towards the 1-percent threshold, thus expanding the scope of the partial exemption for the low-cost and deferred or contingent repayment lending envisioned by § 1026.3(h). ”)

• Regulation X, 12 CFR 1024.5(d) (“Sections 1024.6, 1024.7, 1024.8, 1024.10, and 1024.33(a) do not apply to a federally related mortgage loan: . . . (2) That satisfied the criteria in Regulation Z, 12 CFR 1026.3(h).”)

• IHDA Combined Pre-Closing and Closing Document Set (2015) (“The Program will provide down payment assistance in the form of a Forgivable Loan (as hereinafter defined) to the Borrower that is forgivable, incrementally, over a period of time subject to certain conditions. . . .”)