Topic: Truth in Lending Act (TILA)
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We have consumer mortgage loans secured by balloon notes that will be converted to adjustable rate notes prior to maturity. Under Regulation Z, these transactions must be disclosed as refinances. Some of the borrowers have large second mortgages, and we are concerned that these transactions could result in the loss of our priority lien position. The amounts of the loans will not be increasing, and the original mortgages will not be released, but we will be entering into new notes with the borrowers. Under Illinois law, can we replace an original note with a new note without extinguishing the original mortgage lien? Must we record a new mortgage with a new note, or can we record a modification of mortgage instead?
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Yes, a lender may replace an original note with a new note without extinguishing the lender’s original lien — but the facts in each case and the language in the loan documents are crucial. Consequently, irrespective of our general guidance here, we recommend consulting with your bank counsel to determine how these refinancings can be…
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We have a customer who is buying residential property outside of Illinois. Regarding the written list of settlement service providers, can we use the same providers we normally disclose even though the customer cannot use those providers outside of Illinois? Do we need to research providers in the area where the property is located to add to the list?
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We believe you are required to provide the customer with a written list of service providers that includes at least one provider who performs each of the required settlement services where the consumer or property is located. Under Regulation Z, if a creditor allows a borrower to shop for certain settlement services that it requires,…
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We would like to know which title fees may be excluded when conducting a HOEPA points and fees test. We understand that fees not paid directly to the bank or its affiliate are excluded, as well as certain title fees for title examinations and title insurance. However, can we also exclude other title company fees for closings, couriers, date down endorsements, closing protection letters, the Illinois Anti-Predatory Lending Database, etc.?
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Yes, we believe your bank is permitted to exclude the title company’s fees from the HOEPA points and fees calculation — provided that the fees are reasonable and neither your institution, nor an affiliate, receives any direct or indirect compensation in connection with the fees. Regulation Z permits your bank to exclude title-related fees from…
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We received an application for a mortgage loan refinancing. The applicant is the only person listed on the title to the property that will secure the loan, but her boyfriend also lives there. Does the boyfriend have a homestead right in the property? Also, should he be included on the Closing Disclosure and provided a notice of the right of rescission?
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No, the applicant’s boyfriend does not have a homestead right in the property, because he does not have an ownership interest in the property. The Illinois homestead exemption generally applies only to individuals with an ownership interest in their personal residence. Also, the applicant may waive her homestead rights without the boyfriend’s signature, since they…
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Our bank will be funding a real estate loan to pay off a contract for deed between two family members. Our borrower has lived in the subject property for the past eight years as her principal residence. Do we need to wait until the three-day right of rescission period has expired to disburse the loan funds?
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Yes, we believe your bank should wait until the borrower’s right to rescind the transaction has expired before dispersing the loan funds. Regulation Z generally provides a right to rescind a credit transaction when a consumer’s ownership interest in a principal dwelling will be subject to a security interest. There is an exception to this…
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We have a five-year balloon mortgage loan secured by the borrower’s primary residence that has matured. Can we renew this loan, or does it need to be refinanced since the loan has matured?
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Yes, we believe that you may renew a balloon loan after its maturity date without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents is important in order to achieve this result. The Seventh Circuit…
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When providing a written list of settlement service providers to the borrower of a residential loan, do we have to customize the list for each transaction or can we use a generic list for all transactions? For example, if our generic list indicates that a pest inspection is a service that the borrower can shop for and that it is required, but it is not required for a particular transaction, is that a violation? Also, if we list a surveyor in the provider list but do not disclose that service as a service the borrower can shop for in the Loan Estimate under “C. Services You Can Shop For,” is that a violation?
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We recommend against using a generic written list of service providers for all your residential loan transactions. Both examples you provide highlight the potential problems in using a generic list. In your first example, a generic written list of service providers would reference a service — pest inspection — that is not required for the…
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We have home equity lines of credit (HELOCs) maturing this year, and we are allowing the borrowers to renew for another draw period. We will charge modification fees that include charges for a flood determination, a credit report, and document preparation. The borrowers will have the option of paying these fees upfront in cash or by drawing on the HELOC. How should these fees be reflected on the initial periodic statement for each option the borrower may choose? We use the home-secured format for our HELOC periodic statements.
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We believe you are required to disclose these modification fees for the HELOC on the initial periodic statement as charges other than finance charges, whether your customer pays these fees with cash or with funds drawn on the line of credit. Although Regulation Z exempts finance charges that qualify as “start-up fees” from inclusion on…
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We are refinancing a closed-end purchase and home improvement loan, secured by the borrower’s principal dwelling. Does the right of rescission apply?
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No, a right of rescission does not apply to a refinancing by the original creditor for a closed-end loan already secured by the borrower’s principal dwelling — provided that no new money is advanced. However, if new money is advanced, the right of rescission applies to any amount exceeding the original loan’s unpaid principal balance,…
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After a HELOC has matured, can we extend the customer a temporary closed-end loan for a period of twelve months or less, and then modify the temporary loan into a longer-term balloon loan (typically for a term of 3–5 years), thus avoiding the requirement of an ability-to-repay (ATR) analysis?
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While it may be possible to avoid Regulation Z’s ability-to-repay (ATR) requirements when making an initial temporary (“bridge”) loan and subsequently modifying it with a term longer than twelve months, we recommend proceeding with caution. The modification of the bridge loan into a balloon loan must be structured carefully to not be considered a “refinancing,”…