Topic: Truth in Lending Act (TILA)
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Our bank does not qualify as a small servicer. Can we charge a fee to mortgage loan borrowers who choose to receive paper periodic statements instead of e-statements?
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We believe such a charge would violate the Real Estate Settlement Procedures Act (RESPA). The RESPA prohibits a servicer from charging a fee for certain mortgage statements, including those required by the Truth in Lending Act (TILA). The TILA requires larger servicers (such as your bank) to provide periodic loan statements for residential mortgage loans.…
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Can we modify or extend a consumer loan after it has matured without changing the interest rate? Can we also do this for residential real estate and commercial loans? Can we backdate the modification agreement to the original maturity date?
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Yes, you may modify or extend a matured consumer, residential real estate, or commercial loan without changing the interest rate (unless some provision in the loan agreement prevents the modification or extension). In addition, the effective date that you choose for the modification or renewal is a business decision for your bank. At least one…
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Due to a technical issue, we failed to send initial rate adjustment notices for some of our adjustable rate mortgage (ARM) loans. We are now sending the initial ARM notices and will not change the payment amount until the 210 day notification period has passed. Are we required to also delay the rate adjustment, even though the date of the rate adjustment was disclosed in our loan agreement?
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Yes, we recommend delaying the rate change as well as the payment adjustments. The initial ARM notice must be provided at least 210 days “before the first payment at the adjusted level is due” (or at the loan consummation, if the first adjustment is scheduled to occur within the first 210 days after consummation). The…
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We issued a Loan Estimate for a mortgage loan secured by a mobile home. We did not disclose any property taxes due at closing, but we just learned today that for mobile homes, the borrower will have to pay property taxes at the closing for the remainder of the year. Do we have to reimburse the borrower for that charge, since we did not disclose it? Also, the estimated title insurance costs were inaccurate – the owner’s title policy cost decreased by $127, but the lender’s policy increased by $130. Do we have to reimburse for $130, or can we offset that amount by the decreased cost of the owner’s policy? We do not permit borrowers to shop for the lender’s title insurance provider.
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We believe that you should reimburse the customer for the increases in both cases, since there have not been any changes that would qualify as a “changed circumstance” permitting you to issue a revised Loan Estimate. Regulation Z does permit lenders to revise the charges disclosed in a Loan Estimate, but only if there is…
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We had a technical issue that caused a failure to send notices of the initial interest rate adjustments for some of our adjustable rate mortgage (ARM) loans. The increased interest rate will correspond with an increased payment. We are now sending the notices, but they will not be timely. What is the best way to rectify this situation? Should we delay changing the customers’ rates and payment amounts?
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Yes, we recommend delaying the rate and payment adjustments until after you have provided customers with the notice required by Regulation Z. Regulation Z requires that ARM borrowers receive advance notice of rate changes, and the notice of an initial rate adjustment must be provided to customers at least 210 days (and no more than…
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I am working on an in-house real estate purchase loan, and the borrower does not want an escrow account. We just pulled a flood report, and the property does require flood insurance. In Illinois, must we escrow the flood insurance (using the FFIEC rate spread calculator, the rate is low enough so that it appears we do not have to escrow taxes and insurance)? Also, if we do have to escrow just for the flood insurance, do we need to send out another Loan Estimate?
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In general, a lender must escrow flood insurance premiums for residential mortgage loans that are made, increased, extended or renewed on or after January 1, 2016. Since your bank is under $1 billion in assets, you might qualify for the small lender exemption from the flood insurance escrow requirement. To qualify for that exemption, you…
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We have a number of balloon loans that will be maturing soon. Can we extend the maturity dates, increase the interest rates and switch from fixed interest rates to variable interest rates without triggering a refinancing (requiring new disclosures, new notes, etc.)? Also, would we have to redo the ability-to-repay analysis for each balloon loan?
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If you are adding a variable rate feature, you will have to treat these transactions as refinancings, requiring all new disclosures under Regulation Z. A refinancing is a transaction in which an existing obligation is satisfied and replaced by a new obligation, and several Illinois courts have clarified what it means to “satisfy and replace”…
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We have a loan processor who gets paid a flat fee amount for each loan application she processes, compiles, and submits to underwriting. She receives this fee regardless of whether the loan ultimately is approved or denied and has no role in deciding whether to approve or deny the loan. Can she order appraisals online through an appraisal management company (AMC)? The employee would have no input in selecting the appraiser and no direct contact with the appraiser. Our bank has less than $250 million in assets.
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Yes, we believe this loan processor may order appraisals through an appraisal management company. The federal Interagency Appraisal and Evaluation Guidelines generally require that an institution’s collateral valuation program be isolated from the influence of its loan production staff (including employees who are compensated based on volume alone, such as your loan processor). However, the…
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We are planning to charge a convenience fee to customers who make loan payments with a credit card. We found that this type of surcharge is prohibited in Oklahoma. Does Illinois prohibit these charges?
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We are not aware of any Illinois law that prohibits so-called convenience fees that are charged for using a credit card to pay for a transaction, including the use of a credit card to make a loan payment. The Illinois Interest Act generally authorizes banks to charge reasonable loan-related fees, provided they are agreed to…
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We discovered an issue with some of our adjustable rate mortgages (ARMs). For some of our ARMs that closed in 2009 and earlier, we provided early disclosures that omitted a lifetime floor for the interest rate. But the promissory notes for the loans do include a floor, which we have enforced. Is this a UDAAP violation? Do we need to reimburse customers?
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We agree that having omitted the interest rate floor in your ARM disclosures creates a range of risks for your bank. Both the present version of Regulation Z and the version in effect in 2009 require lenders to disclose how the interest rate for a variable rate loan will be calculated, including “an explanation of…