Topic: Truth in Lending Act (TILA)
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If a consumer balloon mortgage is past maturity and we extend the maturity date, increase the fixed interest rate, and charge a small fee, can we consider this a modification instead of a new transaction requiring new disclosures (i.e., a refinancing)? Does it make a difference if the loan is past maturity? We do not want to replace the original loan.
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Yes, we believe you may extend a consumer balloon mortgage, increase the fixed interest rate, and charge a small fee without the transaction being considered a refinancing requiring new disclosures, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer…
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Our bank offers balloon mortgages with initial terms of sixty-one months and amortization terms of twenty years. We typically extend them for one, two, or three years. With interest rates increasing, we may have to substantially increase the interest rates on these extensions, which would increase the loan payments. To keep payments down, we want to re-amortize these loans at amortization terms of twenty years. This would not increase the balloon payment. Would this be a an unfair, deceptive, or abusive act or practice? Would we be violating any laws if we substantially increase the interest rate?
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No, we do not believe that extending, increasing the interest rate of, and re-amortizing your balloon loans would be considered an unfair, deceptive, or abusive act or practice, provided that these changes are clearly and conspicuously disclosed and agreed to by your customers. However, such a modification could be considered a “refinancing” under Regulation Z…
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Are we required to begin distributing the CFPB’s updated HELOC brochure, or can we continue to distribute our backstock of the previous version until we run out?
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Yes, you may continue to distribute any copies you have of the previous version of the HELOC brochure until you run out. The CFPB’s “learn more” webpage provides that “creditors may, at their option, immediately begin using the revised HELOC brochure” or “may use earlier versions of the HELOC brochure until existing supplies are exhausted.”…
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Can we use a change in terms agreement to extend the term and increase the interest rate on a consumer balloon mortgage that is reaching maturity without the transaction being considered a refinancing? The interest rate is currently fixed and will continue to be fixed after the increase. Would the answer change if we extend and increase the interest rate after a consumer home equity line of credit (HELOC) has already matured? If allowed, what must be addressed or disclosed within the change in terms in addition to the new rate?
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Yes, we believe you may extend and increase the fixed interest rate on a consumer balloon mortgage without the transaction being considered a refinancing, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer would change if you extend and…
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Is there an Illinois law requiring a “Net Tangible Benefit Form” when refinancing a mortgage? If so, does this apply only to banks of a certain size? The new software we are using is asking for this.
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Two Illinois laws require, in certain circumstances, an analysis of whether a refinancing would result in a tangible net benefit, which may be why your software requires the completion of a “Net Tangible Benefit Form” when refinancing a mortgage. Both laws apply to all institutions, regardless of size. The Illinois Fairness in Lending Act prohibits…
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If we begin to offer FHA loans through our secondary market correspondent bank — with the correspondent bank funding the loans and closing the loans in its name — would we be considered a broker? We would order the appraisal and title work, pull credit reports, and submit the applications to the correspondent bank, which would make all decisions as to the application. If we are a broker, what compliance considerations do we need to be aware of?
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Yes, we believe you would be considered a mortgage broker in this scenario, which Regulation X defines as “a person (other than an employee of a lender) that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan.” Below is a non-exhaustive…
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Do we need to determine whether a loan will be considered a higher-priced mortgage loan (HPML) when modifying the loan with a change-in-terms agreement? We have a borrower with a balloon note that is maturing soon, and we are trying to determine whether to modify the loan or refinance it. If we refinance the loan, the fees will be higher, and we would require an escrow account as the loan likely would qualify as an HPML.
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No, we do not believe you need to determine whether an existing loan would be considered an HPML when merely modifying, and not refinancing, the loan. However, you are correct that you would need to make this determination if the loan is refinanced — unless an exception applies, as discussed below. The Federal Reserve Board…
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Are there any best practices related to renewing loans that have matured? Do these practices differ if the loan has 1–4 family real estate attached? Also, are there any best practices related to backdating an application date so that it matches the loan maturity date?
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We are not aware of any guidance related to best practices for renewing loans that have matured or backdating an application so that it matches the loan’s maturity date. However, when renewing a loan, you should be aware of how Regulations Z and C distinguish between renewals and refinancings. For consumer credit transactions secured by…
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The Illinois High Risk Home Loan Act states that certain bona fide discount points can be excluded from the points and fees calculation when determining whether a loan meets the definition of “high risk home loan,” provided that any interest rate reduction purchased with the discount points is “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” What does this phrase mean?
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The High Risk Home Loan Act does not elaborate on the meaning of “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” However, the phrase is used in Regulation Z’s Official Interpretations, which do provide further guidance on the meaning of this term. Regulation Z’s Official Interpretations state that to satisfy…
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We want to partner with builders, sellers, and realtors to facilitate buydown subsidies that would temporarily decrease interest rates for our purchase mortgage loan borrowers. How should we disclose a buydown subsidy on the Loan Estimate (LE) and Closing Disclosure (CD)? We do not believe we need to include it on the LE, but it appears that we need to include it as a seller paid fee under Section H of the CD. Also, should we be concerned about potential fair lending violations since the subsidy is coming from a third party who may not offer it consistently to every borrower? Do you have any insight into how regulators view this type of product and what their expectations are?
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We believe a buydown subsidy should be disclosed as a “Seller Credit” in the “Summaries of Transactions” table on the CD. Also, we recommend conducting due diligence on any builders, sellers, and realtors before partnering with them to ensure that they will not be violating fair lending laws when offering the incentive. Regulation Z’s Official…