Topic: Truth in Lending Act (TILA)
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We have a loan application for a second mortgage on the applicant’s personal residence to fund a business expansion. All funds will be used for the business. Does a right of rescission apply in this case? Should we use a Loan Estimate and Closing Disclosure?
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No, the right of rescission does not apply to a loan to expand a business, even if the loan is secured by the borrower’s residence, and you are not required to provide the borrower with a Loan Estimate or Closing Disclosure. An extension of credit primarily for a business purpose is entirely exempt from the…
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What are the retention requirements for deposit and loan rate sheets?
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We recommend retaining deposit and loan rate sheets for at least two years, subject to the exception below. Both Regulation DD and Regulation Z generally require a two-year retention period for required disclosures made in connection with deposit accounts and consumer credit, respectively. However, for a mortgage loan secured by a dwelling that includes prepayment…
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We originated a loan in October 2012 with a three-year balloon payment that recently matured. The loan is secured by an owner-occupied property. We modified the mortgage and note to extend the maturity date for three more years and increased the fixed interest rate. Our procedure is to automatically renew a loan if it is in good standing, and we do not require a new application. We charge a $75 fee to cover the recording costs for the modification and flood certificate. Does this modification trigger any TRID requirements?
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No, we do not believe a loan renewal with an increased fixed interest rate would trigger the TRID disclosures if the original debt is not canceled in connection with the renewal. However, the language that you use in the loan renewal documents must be carefully structured in order to achieve this result. TRID disclosures are…
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We are a two-bank holding company, and we are considering a merger that would change our CRA classification from a small bank to an intermediate small bank. Our total assets would remain under $500 million after the merger. Are there any other regulatory implications besides CRA classification that we should be aware of? We use the FFIEC 051 for our Call Report, and the merger will not result in us crossing the $1 billion asset threshold. Both banks are HMDA reporters, and all of our customer forms and agreements are already identical.
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We are not aware of any other regulatory impact that might result from increasing your bank’s asset size to a level that remains under $500 million. As you noted, your bank will continue to use the FFIEC 051 Call Report for banks with domestic offices only and total assets less than $1 billion. Your bank…
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When we originate a residential construction loan, the loan is structured as an open-end line of credit, typically for a term of six to twelve months, with a fixed interest rate. The borrower makes monthly interest-only payments based on the drawn balance, with a balloon payment due at maturity. When the construction phase is complete, the borrower applies separately for permanent financing. Our loan origination system (LOS) generates our construction loan documents. On the closing disclosure for a construction loan, the field for “Monthly Principal & Interest” automatically fills “NO” in response to the question, “Can this amount increase after closing?” We are concerned this is inaccurate given that the monthly interest payment may vary based on the amount drawn on the loan, even though the interest rate is fixed. We are unable to change the answer to “YES.” Can you provide any insight or guidance on this matter?
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As a preliminary matter, you should confirm that your construction loans are “open-end” transactions under Regulation Z, as the TRID Closing Disclosure is not required for open-end transactions. The requirement to provide a borrower with a Closing Disclosure applies only to loans that are “closed-end consumer credit transaction[s] secured by real property or a cooperative…
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For the right of rescission purposes, are there still four legal holidays that still count as a business day if they fall on Sunday, even if we observe the holiday on a Monday?
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Yes, when calculating the three-business day rescission period, there are four federal holidays that may be counted as business days when observed on the preceding Friday or following Monday. For rescission purposes, “business day” means all calendar days except Sundays and specified legal public holidays. There are four federal legal holidays that occur on a…
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When completing a modification of a matured commercial loan that is secured by a mortgage on a commercial property where the only term changing is an extension of the maturity date, does the borrower need to re-sign all documentation that references the loan’s maturity date? Or does the loan need to be refinanced?
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No, the borrower does not need to re-sign existing documentation for the loan to be modified; however, the borrower should sign a loan modification agreement. To determine whether a subsequent loan transaction constitutes a modification, which can be effected through a modification agreement, or a refinancing, which generally requires a new loan agreement, we think…
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We have a borrower who filed a Chapter 13 bankruptcy petition. The borrower is current on their mortgage loan, and the notice we received indicates that they will maintain the current contractual installment payments due under the loan. As a large servicer, are we still required to send the modified periodic statement for borrowers in bankruptcy, even though our debt is unaffected by the filing? There is no delinquency information to be reported, but the modified statement would contain the important bankruptcy message.
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Yes, we believe your bank must send the modified periodic statements for residential mortgage loans required under Regulation Z for borrowers in bankruptcy, unless certain exemptions apply. Generally, mortgage loan servicers (including creditors and assignees) subject to the large servicer rules are required to send modified periodic statements to debtors in bankruptcy for closed-end consumer…
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We have a customer who owns a five-unit apartment building and currently resides in one of the units. The customer is purchasing a new home to be their principal residence and will use the apartment building as collateral for the new home purchase. Does the right of rescission apply because the apartment building is the customer’s primary residence?
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Yes, we believe the right of rescission would apply in this case. 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 rule for a residential mortgage transaction where a security interest…
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When is it permissible to backdate loan documentation? Are you aware of any potential repercussions when backdating loan documentation of a renewal that occurs after the original loan has matured? Alternatively, are there any repercussions for not backdating loan documentation, resulting in a gap between the maturity date and the renewal date? Are there contract considerations for either?
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Under Illinois law, it is permissible to backdate an agreement — in other words, to use an effective date for an agreement that predates (or postdates) its signing date — provided that the parties’ intention to do this is “clear from the face of the contract.” When renewing a matured loan, you may select an…