Topic: Truth in Lending Act (TILA)
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Can we set a minimum interest amount required for all loans, which would be charged if a customer pays off a loan without accruing the minimum interest amount? If so, can we set up our system to automatically impose that charge?
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While minimum interest charges are permitted for many loans, such charges could be considered prepayment penalties, which are prohibited for certain types of loans. Consequently, we do not recommend setting up your loan system to automatically impose this charge on all loans, without distinguishing loan types for which this charge is prohibited. In general, there…
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In the application disclosures that we send to applicants for variable rate HELOCs, we disclose the lowest possible APR (an APR “floor”). But after we analyze the applicant’s creditworthiness, sometimes we have to raise the APR floor, resulting in a floor that is higher than the floor disclosed in our application disclosures. The application disclosures do specify that all of the disclosed terms are subject to change. Does it violate Regulation Z to change the final APR from the disclosed APR?
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No, Regulation Z would not prohibit a creditor from offering an APR floor that differs from the APR floor disclosed on the HELOC application disclosures, provided that this term was disclosed as being subject to change — and you have indicated that it was. Because the HELOC application disclosures are provided “at the time an…
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Our understanding of the Regulation Z loan originator compensation rules is that we can pay bonuses based on the amount of new credit extended. If we pay bonuses that are based only on the amount of new credit originated by a particular loan originator, are we subject to the 10% limitation? Does it matter if the bonus is paid out of overall bank profits and not just mortgage loan profits?
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No, we do not believe that bonuses based on a loan originator’s total loan volume are limited to 10% of the loan originator’s total compensation. Regulation Z generally prohibits creditors from compensating a loan officer “based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms…
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We recently received an application for a home purchase loan where the current owner qualifies for senior and veteran property tax exemptions, but the applicant would not. This will be a higher-priced mortgage loan, so we will escrow for property insurance and property tax payments. Due to the current exemptions, the applicant would not have to pay property taxes for a year or more after purchasing the home. Should we state on the initial escrow analysis, Loan Estimate (LE) and Closing Disclosure (CD) that we will require an escrow account for property taxes? Should we list the estimated taxes and amount for prepaid taxes as zero on the LE and CD? We do calculate estimated taxes in order to complete our ability-to-repay analysis, based on a formula provided by our local county assessor’s office.
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Yes, your bank must disclose that an escrow account is required on the CD. Your bank may choose to disclose the estimated future property taxes on page 1 of the LE, but this is not required. Other than that, there is no clear place in the LE, CD or initial escrow analysis to disclose the…
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When refinancing a closed-end mortgage loan, we disclose amounts for property taxes and hazard insurance in the prepaid section of the Loan Estimate. Is that a required disclosure? We will not be collecting amounts for these items at closing; we require them as a condition of the loan, but we know that the borrower has been up to date on them (although we do not escrow for these amounts).
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Based on a conversation we had with a CFPB attorney, we believe that a creditor is not required to disclose property taxes and homeowner’s insurance premiums in this situation. Regulation Z requires the Loan Estimate and Closing Disclosure to itemize “amounts to be paid by the consumer in advance of the first scheduled payment” as…
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We originated a HELOC secured by the borrower’s primary residence. The same borrower also has an unsecured line of credit with us. The borrower recently passed away, and his home is being sold. We know that we can use the proceeds of the sale to pay off the HELOC, but can we also use the sale proceeds to pay off the unsecured line of credit? The unsecured line of credit agreement does not contain any setoff provisions, and the HELOC agreement does not contain a cross-collateralization clause. Also, while we already include cross-collateralization clauses in secured commercial loans, can we add these provisions to all secured consumer loans going forward? Would such a clause permit us to use the collateral to cover future unsecured loans?
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No, we do not believe that you can use the proceeds of the home sale to pay off the unsecured line of credit. However, you may have a right of setoff with respect to accounts or other monies the customer has at your bank. We note, though, that our guidance is based on your reading…
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Do we have to disclose an owner’s title insurance premium on the Loan Estimate, even if we have a copy of the purchase agreement and it states that the seller will pay the premium? If we do need to disclose it, can we include a “Seller Credit” in Section H (Other) with a negative amount to offset the owner’s policy premium? Also, should we disclose the premium amount with or without the “simultaneous issuance” discount?
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Yes, we believe that you should include the owner’s title insurance premium on the Loan Estimate. Regulation Z requires the Loan Estimate to include the owner’s optional title insurance charges under “Other” (assuming that your bank does not require the borrower to purchase owner’s title insurance). It also is appropriate to list the owner’s title…
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We pay a discretionary bonus at yearend to all officers, including our lenders. We accrue the bonus pool all year based on our estimates of the bank’s performance. Our board’s compensation committee approves allocations for each bonus in December each year. The 10% limit on bonuses for lenders has been especially limiting for our less tenured employees who are the most productive lenders. Can you confirm that our bonus payments are subject to the 10% limit?
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Yes, we believe that these loan originator bonuses are subject to the 10% limitation, because the bonuses are pulled from a pool that is based on the bank’s estimated profits (including mortgage-related profits). The 10% limitation on loan originator bonuses is an exception to the general rule, which is that loan originators cannot receive bonuses…
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We are making a higher-priced mortgage loan for the purchase of a mobile home that will not be located in a mobile home park. The borrower is leasing the underlying land, which will not secure the loan. The mobile home will be taxed as real property on the landowner’s tax bill, so the borrower will not owe any property taxes. Are we still required to escrow for taxes? We will be setting up an escrow account for property insurance payments.
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We recommend setting up an escrow account for the borrower, even though the escrow account will not be used to collect funds for property tax payments. Before consummating a higher-priced mortgage loan, the creditor must establish an escrow account “for payment of property taxes and premiums for mortgage-related insurance required by the creditor.” We believe…
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Can we renew, extend, or modify commercial and consumer loans after they have matured?
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Yes, you may modify, renew, or extend a commercial or consumer loan after maturity. We are aware of at least one court decision that has addressed whether a loan can be modified after its maturity date. In the context of a lump-sum payday loan, the Seventh Circuit has found that a loan does not “expire”…