Federal Consumer Disclosure Documents
I. Truth-in-Lending Disclosure Documents
§ 12.1Overview of the Truth in Lending Act and Regulation Z
The federal Truth in Lending Act, 15 U.S.C. §§ 1601–1667f, requires a creditor extending consumer credit, including mortgage credit secured by a dwelling, to make meaningful disclosures of actual credit terms that enable the consumer to more readily compare those terms with the terms of competitors and make an informed decision regarding the use and costs of credit. The Act is implemented by Regulation Z (12 C.F.R. pt. 1026), which is an official interpretive rule adopted and published by the BCFP, and the official staff interpretations of Regulation Z (12 C.F.R. pt. 1026, supp. I), which the BCFP staff updates and publishes annually. Reliance on and good-faith compliance with Regulation Z and the official staff interpretations afford creditors protection from civil liability and administrative penalties for failure to comply with disclosure and other requirements imposed on creditors under the Act. See 15 U.S.C. § 1640(f). Closed-end credit, including traditional mortgage loans, is regulated under subpart C of Regulation Z, 12 C.F.R. §§ 1026.17–.24.
Generally, the Act covers any credit transaction in which a creditor offers or extends a consumer credit at or below a threshold amount adjusted on January 1 each year that is primarily for personal, family, or household purposes and for which a finance charge is made in connection with the credit or, by written agreement, the credit is to be repaid in more than four installments. 12 C.F.R. § 1026.3(b). The threshold amount in 2015 was $54,600 and will adjust in tandem with the annual percentage increase in the Consumer Price Index in effect on June 1 of the preceding year. See Official Interpretation to 12 C.F.R. § 1026.3(b), Comment 3(b)-1. As discussed below, the Act also covers most consumer credit transactions secured by real property (or by personal property, such as a mobile home, used or intended to be used as the borrower’s principal dwelling) regardless of the loan amount. For the Act to apply in any case, the creditor must be a person (including a natural person or a corporate or other business organization) who regularly extends credit of this type, which generally means that the person has extended credit more than twenty-five times in the preceding calendar year or more than five times for transactions secured by a dwelling during the preceding or current calendar year, and the consumer must be a natural person. See 15 U.S.C. § 1603.
For the purposes of providing disclosures under the TILA-RESPA Integrated Disclosures Rule (TRID), the rule applies to most closed-end consumer credit transactions secured by real property but does not apply to home equity lines of credit, reverse mortgages, or chattel-dwelling loans such as mobile homes or other dwellings that are not attached to real property. 12 C.F.R. § 1026.19. Loans made by a person or entity not considered to be a creditor are not covered by the rule. 12 C.F.R. § 1026.2(a)(17). Certain transactions, such as down payment assistance loans, have a partial exemption. 12 C.F.R. § 1026.3(h). Construction-only loans and loans secured by vacant land or by twenty-five or more acres are not subject to RESPA but are still subject to the disclosure requirements of TRID. See 12 C.F.R. §§ 1024.5, 1026.19. Credit extended to land trusts or trusts for tax or estate planning purposes is also covered. Official Interpretation to 12 C.F.R. § 1026.3(a), Comment 3(a)-10.
§ 12.1:3Required Consumer Disclosures
Written disclosures must be made for each credit transaction subject to the Act before consummation; must reflect the terms of the actual legal obligation between the parties; and must show the calculated annual percentage rate (APR), finance charge, amount financed, payment schedule, and total of payments and other material disclosures of the cost of credit within permitted tolerances for accuracy. Creditors must disclose information germane to a loan transaction, including the loan details, payment schedule, loan fees, cash to close, service providers, escrows, and relevant state law provisions. All of this information must be provided in a dynamic format, such that the form changes with changes in the loan data and contains only provisions that reflect the terms of the loan transaction. Creditors are further required to ensure that the disclosures are clearly and conspicuously in writing in a form that the consumer can keep. 12 C.F.R. §§ 1026.17, 1026.18.
The initial disclosure is referred to as the loan estimate (LE); the final disclosure is referred to as the closing disclosure (CD). For loan transactions not subject to the new disclosure requirements (home equity lines of credit, reverse mortgages, mortgages secured by mobile homes, mortgages secured by dwellings (other than cooperative units) not attached to real property), the initial and final TIL disclosure statements, good-faith estimate, and HUD-1, as applicable, are still used. 12 C.F.R. § 1026.19(e), (f). The following consumer disclosures, as applicable, are required under the Act and Regulation Z.
Early Disclosures: Creditors must make early disclosures to the consumer within three business days after loan application and at least seven business days before loan closing. See 12 C.F.R. § 1026.19(e)(1)(iii). The disclosures must be made before the consumer pays any fee other than a bona fide and reasonable fee for obtaining credit history. See 12 C.F.R. § 1026.19(e)(2)(i)(B).
Correction Disclosures: Creditors are permitted to provide a revised LE only if there is a “changed circumstance” defined as (1) an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; (2) information specific to the consumer or transaction that the creditor relied on when providing the disclosures that was inaccurate or changed after the disclosures were provided; or (3) new information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures. 12 C.F.R. § 1026.19(e)(3)(iv)(A). Revised CDs must be received no later than three days before loan consummation if the disclosed APR becomes inaccurate, the loan product changes, or a prepayment penalty is added; for any other changes, the creditor must ensure receipt of the revised CD at or before loan consummation. 12 C.F.R. § 1026.19(f)(2)(i). If a subsequent event causes the disclosure of the APR to be inaccurate outside of permitted tolerances, the creditor must make a correction disclosure of the APR and all other changed terms at least three business days before loan consummation. See 12 C.F.R. § 1026.19(a)(2)(ii).
Final Disclosures: Creditors must ensure that the borrower receives a final CD no later than three business days before loan consummation. See 12 C.F.R. § 1026.19(f).
Notice of Right of Rescission: If a security interest is or will be retained or acquired in the consumer’s principal dwelling in connection with a mortgage loan, the Act provides the consumer a right to rescind the loan transaction within three business days. The consumer may exercise the right to rescind until midnight of the third business day after loan consummation, delivery of notice of right of rescission, or delivery of the material disclosures, whichever occurs last. Certain loan transactions, including a loan to finance the purchase or initial construction of the consumer’s principal dwelling, are exempt from the right of rescission. See 12 C.F.R. § 1026.23(f). Certain required disclosures, such as the amount of the finance charge, the amount financed, and the APR, are regarded as material disclosures and must be provided to the consumer before the prescribed three-business-day rescission period begins to run. The failure to timely provide these material disclosures within prescribed tolerances for accuracy not only subjects the creditor to substantial liability under the Act for administrative penalties and costs, restitution, and civil damages but may also have the legal effect of extending the rescission period for up to three years after loan closing. See 12 C.F.R. § 1026.23(a)(3). The content and model form of the required rescission notice is set out in 12 C.F.R. § 1026.23(b)(1), (b)(2) and appendix H to Regulation Z.
Variable-Rate Loan Disclosures: Special disclosure requirements apply to variable-rate transactions secured by a principal dwelling under 12 C.F.R. § 1026.19(b), requiring (1) delivery to the consumer at the time of loan application of detailed written adjustable-rate mortgage loan program disclosures and a preprinted disclosure booklet titled Consumer Handbook on Adjustable Rate Mortgages, published by the BCFP, and (2) a loan program disclosure for each variable-rate program for which the consumer expresses an interest, with periodic written disclosures of adjustments made to the interest rate in a variable-rate transaction subject to section 1026.19(b). See 12 C.F.R. § 1026.20(c). Home equity lines of credit and other open-end credit secured by residential dwellings require written disclosures and are subject to substantive rules under subpart B, 12 C.F.R. §§ 1026.5–.13.
Loan Assumption Disclosures: A creditor must provide a consumer new written disclosures when the consumer assumes an existing residential mortgage obligation with the written consent of the creditor and the creditor agrees to accept that consumer as the principal obligor. See 12 C.F.R. § 1026.20(b).
Mortgage Loan Sale Disclosure: Creditors that purchase or accept the sale and assignment of a whole loan secured by a consumer’s principal dwelling on or after May 29, 2009, must provide the borrower obligated under the loan a written notice within thirty days after the sale or assignment containing information identifying the new creditor, the date of transfer of the loan, the location where the transfer of the loan is recorded, and other relevant information about the creditor. 12 C.F.R. § 1026.39.
HOEPA and Higher-Priced Loan Disclosures: Special rules regarding high-rate, high-cost loans (generally referred to as “Section 32,” or Home Ownership and Equity Protection Act (HOEPA) loans) are set out under subpart E, 12 C.F.R. §§ 1026.31, 1026.32, 1026.34. Creditors making HOEPA loans must furnish consumers a written disclosure meeting the requirements of section 1026.32(c) at least three business days before loan consummation and abide by certain substantive terms of that section. Special rules effective October 1, 2009, regarding a new category of higher-priced mortgage loans (HPMLs) are also set out in 12 C.F.R. § 1026.35. The Home Ownership and Equity Protection Act is codified at 15 U.S.C. § 1639.
Reverse Mortgage Loan Disclosures:Creditors making reverse mortgage loans subject to 12 C.F.R. § 1026.33(a) must provide consumers an additional written disclosure of the “total annual loan cost of credit” (generally referred to as the “TALC” disclosure) in content set out in 12 C.F.R. § 1026.33(b) and substantially in the model form found in 12 C.F.R. pt. 1026 app. K(d).
§ 12.1:4Certain Consumer Protection Provisions
Regulation Z contains various substantive provisions intended to protect consumers from certain unfair, deceptive, and abusive practices of originators and servicers of home mortgage loans. See 73 Fed. Reg. 44,522 (July 30, 2008).
Prohibited Deceptive Advertising: Adver-tising rules targeting deceptive and misleading practices apply to all consumer credit transactions secured by dwellings. Advertisements occurring on or after October 1, 2009, that promote mortgage credit secured by a dwelling are regulated by extensive new advertising rules set out in amendments to 12 C.F.R. §§ 1026.16, 1026.24 (open- and closed-end credits, respectively). The rules are intended to ensure that advertisements for credit clearly and conspicuously provide accurate and balanced information about rates, monthly payments, and other loan features and that several deceptive and misleading advertising practices are banned. The advertising regulations apply to any advertisement (including promotional materials accompanying applications) in any medium promoting a credit transaction secured by a dwelling (except radio and television advertisements, to which new alternative regulations apply).
Unfair or deceptive acts and practices in home mortgage advertising are also regulated by a final rule of the Federal Trade Commission (FTC) for business entities under its regulatory jurisdiction, including “nondepository covered persons” such as independent mortgage bankers and brokers. See 76 Fed. Reg. 43,826 (July 22, 2011); 16 C.F.R. pt. 321. The regulations prohibit any misrepresentation in any commercial communication regarding any term or feature of any mortgage credit product and impose certain recordkeeping requirements. Rulemaking authority of the FTC was transferred to the BCFP on July 21, 2011, pursuant to Title X of the Dodd-Frank Act, but the FTC, the BCFP, and any state’s attorney general or other authorized state officer have statutory authority to bring enforcement actions and seek civil penalties under these deceptive advertising regulations.
Prohibited Coercion of Appraisers: Creditors, mortgage brokers, and their affiliates are prohibited from coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of a consumer’s principal dwelling securing a covered loan. Any creditor who knows at or before a loan closing of a violation of these anticoercion regulations is prohibited from extending credit based on such an appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the appraised property. See 12 C.F.R. § 1026.42.
Prohibited Servicing Practices: Mortgage servicers of loans secured by principal dwellings are prohibited from (1) failing to timely credit payments as of the date of receipt, with certain exceptions, (2) imposing a late charge on a consumer in connection with the receipt of a payment when the only delinquency is attributable to a late fee or delinquency charge assessed on an earlier payment (and the current payment is otherwise a full payment made on or before its due date or within an applicable grace period), and (3) failing to provide an accurate payoff statement within a reasonable time after receiving a request for it by a consumer (or a person acting on behalf of a consumer). See 12 C.F.R. § 1026.36(c).
Prohibited Steering and Certain Loan Originator Compensation Practices:Effective for closed-end loans secured by a dwelling for which creditors receive the application on or after April 1, 2011, amendments to 12 C.F.R. § 1026.36 prohibit three certain loan originator compensation practices:
1.Compensation based on loan terms: Mortgage brokers and other loan originators are prohibited from charging or receiving compensation based on any terms and conditions of the loan transaction other than the loan amount. This has the effect of prohibiting creditors from paying so-called yield-spread premiums to mortgage brokers (that is, compensation based on spreads in the interest rate) although paying a fee based on a fixed percentage of the loan amount is authorized. “Compensation,” for purposes of the rule, means all amounts paid to and retained by the mortgage broker or other loan originator from salaries, commissions, annual or periodic bonuses, incentive compensation, or awards of merchandise, services, trips, or similar prizes but does not include fees charged to the consumer that are passed through by the loan originator to third-party providers to pay for services such as a property appraisal and a consumer credit report.
2.Receiving compensation from both creditor and consumer:Mortgage brokers and other loan originators are prohibited from directly receiving compensation from both the creditor, or any other person, and the consumer in the same loan transaction. That is to say, if any loan originator receives compensation directly from a consumer in a loan transaction, neither the creditor nor any other person may provide any compensation to the loan originator, directly or indirectly, in connection with that same loan transaction.
3.Steering consumer to loan not in consumer’s interest for greater compensation: Mortgage brokers and other loan originators are prohibited from steering consumers to consummate a loan not in the consumer’s interest in order to receive greater compensation from the creditor for the loan than for other loan transactions that the loan originator offered or could have offered the consumer and for which the consumer likely could have qualified. “Steering” for this purpose means advising, counseling, or otherwise influencing a consumer to accept and actually consummate a particular loan transaction. “Safe harbor” procedures are set out in the C.F.R. that may be relied on to assure compliance under which the consumer must be presented with various loan options from a significant number of creditors to choose from.
The new rule applies to all loan originators, including mortgage brokers and loan officers employed by mortgage brokers, mortgage bankers, and financial institutions that, for compensation, arrange, negotiate, or otherwise obtain a consumer loan for another person. Managers, administrative staff, and other employees of such loan originators who do not engage in these activities (and whose compensation is not based on where any particular loan is originated) are not considered loan originators. The rule also applies to creditors who close transactions that are table funded (that is, closings in which the creditor named as payee on the promissory note does not actually fund the loan from its own resources or a bona fide warehouse line of credit for which it is obligated, but instead obtains funding by another party who is immediately assigned the loan). 12 C.F.R. § 1026.36(d), (e).
Prohibited Practices Applicable to HOEPA and HPML Loans: Certain consumer protections apply only to so-called high-rate, high-cost loans (“Section 32” or HOEPA loans), which bear interest rates or fees above a certain percentage or amount described in 12 C.F.R. § 1026.32 and a new category of HPMLs, which bear interest rates above standards described in 12 C.F.R. § 1026.35.
1.Prohibited lending without regard to repayment ability: Creditors are prohibited from extending credit for HOEPA loans or HPMLs to any consumer based on the value of the consumer’s collateral without regard to the consumer’s ability as of the date of consummation to repay the loan from sources other than the collateral itself. Creditors are required to verify each borrower’s income and assets relied on in underwriting the loan and are prohibited from relying on stated amounts of income, including expected income, or assets unless the creditor verifies such amounts according to standards set out in the rules. See 12 C.F.R. §§ 1026.34(a)(4), 1026.35.
2.Restrictions on prepayment penalties: HOEPA loans and HPMLs may provide for a prepayment penalty only if (1) the penalty is otherwise permitted by state or other applicable law; (2) the source of prepayment funds is not a refinancing by the same creditor or its affiliate; (3) the prepayment penalty will not apply after the two-year period following loan consummation; and (4) the amount of the periodic payment of principal, interest, or both does not change during the four-year period following loan consummation. HOEPA loans have one additional condition not applicable to HPMLs: the consumer’s total monthly debt payments (including amounts owed under the mortgage loan) may not exceed 50 percent of the consumer’s gross monthly income as of the date of loan consummation and as verified under the standards set out in the regulations. See 12 C.F.R. §§ 1026.32(d)(6), 1026.35.
3.Mandatory escrow accounts:Before consummating a first-lien HPML, the creditor must establish, and thereafter maintain, an escrow account to collect reserves from the consumer for the payment of property taxes and premiums for mortgage-related insurance required by the creditor. The creditor or loan servicer may permit a consumer to cancel the mandatory escrow account if the consumer requests cancellation in a dated written request received by the creditor no earlier than 365 days after loan consummation. Mandatory escrow account regulations apply to covered loans for which applications are received on or after April 1, 2010, or, if such loans are secured by manufactured housing, October 1, 2010. See 12 C.F.R. § 1026.35(b).
This chapter discusses four of the forms designed to comply with the consumer disclosure requirements applicable to closed-end credit under the Truth in Lending Act and Regulation Z. The following forms are the model forms in appendix H of Regulation Z:
•loan estimate (fixed-rate loan) (from app. H-24(B)) (available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-loan-estimate-and-closing-disclosure-forms_v2.0.pdf);
•closing disclosure (fixed-rate loan) (from app. H-25(B)) (available athttps://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-loan-estimate-and-closing-disclosure-forms_v2.0.pdf);
•truth-in-lending (sale) disclosure statement (from app. H-1);
•truth-in-lending (loan) disclosure statement (from app. H-2);
•notice of right of rescission (general) (from app. H, clause H-8) (form 12-1 in this chapter); and
•notice of right of rescission (refinancing) (from app. H, clause H-9) (form 12-2).
The forms may require modification to comply with federal and state consumer laws.
Regulation Z, a complex set of rules, mandates making certain disclosures at specified times to any person who obtains consumer credit from a creditor. “Consumer credit” means credit offered or extended to a consumer primarily for personal, family, or household purposes. A “creditor” is the person to whom a consumer credit obligation is initially payable. A creditor must give the consumer (the borrower) truth-in-lending disclosures in a consumer credit transaction if the creditor regularly extends consumer credit that is subject to a finance charge or that is payable by written agreement in more than four installments, not including a down payment, and to whom the obligation is initially payable. A person “regularly extends consumer credit” only if credit is extended in the current or preceding calendar year more than twenty-five times for general transactions or more than five times for transactions secured by dwellings. 12 C.F.R. § 1026.2. A credit transaction, other than one secured by real property or personal property used as the principal dwelling of the consumer, is exempt from Regulation Z if the total amount financed in the transaction exceeds the threshold amount. 12 C.F.R. § 1026.3(b).
By these definitions, most entities providing credit for home equity financing transactions or for building or improving homes are subject to the requirements of Regulation Z. Chapter 20 in this manual describes transactions involving mechanic’s liens and suggests which of those transactions require use of these forms.
For a description of home equity financing transactions, see chapter 11.
General requirements for the disclosure statements applicable to closed-end credit are set forth in 12 C.F.R. §§ 1026.17, 1026.18. Among other requirements, the disclosures must be made “clearly and conspicuously in writing, in a form that the consumer may keep.” They must be segregated from other information, and they “shall not contain any information not directly related to the disclosures required under § 1026.18 or § 1026.47.” 12 C.F.R. § 1026.17(a). These disclosures may be provided to the consumer in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act). 15 U.S.C. §§ 7001–7031.
If the creditor is the seller, the (sale) disclosure is used.
Generally, disclosures must be made before the transaction is consummated, but certain transactions involving residential mortgages, mail or telephone orders, or a series of sales have different timing requirements. 12 C.F.R. § 1026.17(b). Disclosures for most residential mortgage transactions, for example, must be given at the time of loan application or delivered or placed in the mail not later than three business days after the creditor receives the consumer’s written loan application. Redisclosure may be required before loan consummation if there is a changed circumstance, if the disclosed annual percentage rate terms change before loan settlement, or if a subsequent event makes disclosed terms inaccurate. 12 C.F.R. §§ 1026.17(f), 1026.19(a).
§ 12.2:2Notices of Right of Rescission
The two notices of right of rescission, forms 12-1 and 12-2 in this chapter, differ only to the extent that one applies to original financing and the other to refinancing. A refinancing involves the satisfaction of one financing transaction with a new financing transaction by the same lender and borrower. 12 C.F.R. § 1026.20(a). In either case the notice provides a cooling-off period of three business days after a person obtains credit involving a lien against the person’s principal dwelling. During this period the homeowner may rescind the transaction.
Regulations governing the right to rescind appear at 12 C.F.R. § 1026.23, and forms 12-1 and 12-2 are drafted in accordance with that section.
Creditors subject to truth-in-lending requirements should provide the appropriate notice of right of rescission, form 12-1 or 12-2, if a transaction creates a lien or other security interest in a consumer’s principal dwelling, except when the transaction finances the acquisition or initial construction of the dwelling. 12 C.F.R. § 1026.23. Typical transactions requiring this form are a refinancing of a residential mortgage transaction by a new creditor, a home equity extension of credit, and a home improvement loan secured by a mechanic’s lien. A consumer’s principal dwelling may be an ordinary residence, a condominium, a cooperative unit, a mobile home, or a trailer. A person may have only one principal dwelling, and it may or may not be attached to real property. See 12 C.F.R. § 1026.2(a)(19).
All persons who have ownership interests in the dwelling used as security and who use it as their principal dwelling may be entitled to rescind the transaction. 12 C.F.R. § 1026.23(a).
Transactions exempt from the right of rescission and this notice requirement are described in 12 C.F.R. § 1026.23(f). A refinancing by the same creditor of an extension of credit already secured by the consumer’s principal dwelling is subject to the right of rescission only to the extent that the new loan amount exceeds the sum of the unpaid principal balance and accrued finance charges of the existing extension of credit and closing costs related to the refinancing transaction. Certain other transactions are also exempt from the right of rescission, including a residential mortgage transaction to finance the acquisition or initial construction of a principal residence. 12 C.F.R. § 1026.23(f).
Regulation Z requires strict compliance, and even minor errors or omissions in drafting truth-in-lending documents may lead to administrative enforcement actions, statutory penalties, and individual and class actions for civil liability against creditors. See 15 U.S.C. § 1640. Accordingly, attorneys should consult Regulation Z itself, especially the sections addressing these forms (12 C.F.R. §§ 1026.17–.24), for aid in drafting the documents. Section 1026.18 establishes contents for the disclosure statements, and section 1026.23 governs the right of rescission. Regulation Z is published in title 12 of the Code of Federal Regulations, part 1026.
The official commentary to Regulation Z offers additional useful information; commentaries are issued periodically by officials in the BCFP, and they are published in several places. One generally accessible source for these interpretations is CCH Incorporated’s Consumer Credit Guide, which may be ordered online at http://business.cch.com/creditRegulation. Another source is available online at https://www.fdic.gov/regulations/laws/rules/6500-100.html.
The disclosure statements must be completed in compliance with 12 C.F.R. § 1026.18. That section provides, among many other requirements, that if the consumer wishes to have an itemization of the amount financed, the itemization must be given in a separate writing.
For the notices of right of rescission, the creditor should observe certain cautions during the three-business-day cooling-off period: other than money in escrow, no funds should be disbursed; no improvements to the property should be made; no service related to the transaction should be provided to the consumer; and no goods or materials for construction should be delivered to the property. If the consumer rescinds the transaction, within twenty calendar days the creditor must return any money or property received from the consumer. 12 C.F.R. § 1026.23(d).
Any disclosure statements required at consummation, including notices of the right of rescission, and other documents related to the transaction should be signed or delivered to the consumer at loan settlement. The creditor must provide each consumer entitled to rescind two copies of the notice of the right to rescind. A consumer may exercise the right to rescind until midnight of the third business day following the last to occur of loan consummation, delivery of the material disclosures, or delivery of the notices of the right of rescission. A consumer may rescind by written notice to the creditor, which is effective when mailed, sent by other means, or delivered to the creditor. The creditor must delay disbursing funds and otherwise performing under the extension of credit until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded. Failure of the creditor to deliver required notices or statements can subject the creditor to statutory penalties and civil liability for damages and have the further legal effect of extending the period during which the consumer may rescind the transaction for up to three years after the date of consummation. 12 C.F.R. § 1026.23(a).
§ 12.4Instructions for Completing Disclosure Statements
Attorneys completing the disclosure statements should follow closely the instructions in 12 C.F.R. § 1026.18 and should also consult the more detailed instructions promulgated by the BCFP (see section 12.2:3 above).
Disclosures not relevant to the transaction may be omitted; for example, the total sale price may be omitted in a loan transaction.
The creditor must be identified at least by name, but this disclosure may appear apart from the other disclosures. When a transaction involves multiple creditors, any one of them may make the disclosures, but the disclosing creditor must be identified. 12 C.F.R. §§ 1026.17(d), 1026.18(a).
The annual percentage rate is determined by methods set forth in 12 C.F.R. § 1026.22. The BCFP provides other useful aids for this calculation, including appendix J of Regulation Z and annual percentage rate tables available from the Board.
“Finance charge” is defined in 12 C.F.R. § 1026.4, which offers several examples and lists certain charges excluded from the finance charge. Calculating this charge is central to the disclosure statements, so it should be done with great care. Generally, any charge payable directly or indirectly by the consumer that is imposed directly or indirectly by the creditor as an incident to or condition of the extension of credit constitutes a finance charge unless the charge is expressly excluded under 12 C.F.R. § 1026.4. Most notable among the exclusions are charges of a type that would be payable in a comparable cash transaction and the “real estate related fees” enumerated in 12 C.F.R. § 1026.4(c)(7).
Section 1026.4 also excludes some insurance premiums under certain conditions. Many creditors find this exclusion highly desirable. Premiums for credit life, accident, health, or loss-of-income insurance may be excluded under the following conditions: the creditor does not require such coverage and discloses that fact; the creditor discloses the premium for the initial term of insurance coverage; and the consumer signs or initials an affirmative written request for the insurance after receiving the required disclosures. Premiums for insurance against loss of or damage to property or against liability arising from the ownership or use of property may be excluded under the following conditions: the coverage may be obtained from a person of the consumer’s choice, and that fact is disclosed; and if it is obtained from or through the creditor, the creditor discloses the premium for the initial term of coverage.
Determination of the amount financed under 12 C.F.R. § 1026.18(b) requires determining the principal loan amount or cash price less any down payment, adding other amounts financed except the finance charge, and subtracting any prepaid finance charge. The creditor may include other items in this amount, such as rebates or loan premiums.
If the consumer wants an itemization of the amount financed or if the creditor prefers to supply one as a matter of course, it must be provided in a separate document at the same time as other disclosures required by section 1026.18. A model for this disclosure appears in appendix H-3 of Regulation Z.
In the late-payment disclosure, the creditor must reveal any charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge. 12 C.F.R. § 1026.18(l). If the creditor merely continues to assess interest at the rate charged before default, that fact need not be disclosed.
For a home equity extension of credit (see chapter 11 in this manual), the description of the security should be inserted as “your home.”
Regulation Z requires that the disclosure statement include an appropriate version of the assumption policy model clause when the transaction involves a residential mortgage. 12 C.F.R. § 1026.18(q). A “residential mortgage transaction” is defined as a transaction in which a “consensual security interest is created or retained in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling.” 12 C.F.R. § 1026.2(a)(24). For this type of transaction, the appropriate form of this model clause (H-6), which can be found at appendix H of Regulation Z, should be added to the disclosure statement.
Appendix H of Regulation Z offers other model clauses that may be suitable for the disclosure statements: variable rate (H-4), demand feature (H-5), and required deposit (H-7).
The truth-in-lending disclosure statements are designed for simple, fixed-interest-rate transactions. If a variable-interest-rate transaction is involved, the disclosure statement forms in this manual must be revised to include variable-interest-rate disclosures. Additionally, if the interest rate on a loan secured by a consumer’s principal dwelling, such as a home equity extension of credit or credit for building or improving a consumer’s home, may increase after funding and the term of the credit exceeds one year, variable-interest-rate disclosures in addition to those contained in the truth-in-lending disclosure statement must be given by the creditor to the borrower at the earlier of the time the borrower either receives the loan application form or pays a nonrefundable fee. See 12 C.F.R. § 1026.19(b). These variable-rate mortgage loan disclosures are extensive and include twelve features of the variable-rate loan program that must be disclosed. The disclosures would thus be unique to any specific loan program offered by a creditor, and it would be impractical for this manual to provide a model variable-rate mortgage loan disclosure form. If a variable-rate credit secured by the consumer’s principal dwelling is desired, the attorney should be sure that the creditor has given appropriate variable-rate disclosures to the borrower.
The other information required in the disclosure statements should be provided in careful accordance with the guidelines of 12 C.F.R. § 1026.18 and the BCFP’s commentary on that section.
§ 12.5Instructions for Completing Notices of Right of Rescission
The attorney should be careful to use the appropriate model form for the notice of right of rescission. The refinancing notice of right of rescission (form 12-2 in this chapter) should be used only for refinancings by the same creditor. See section 12.2:2 above. The general form (form 12-1) should be used in other consumer credit transactions requiring the notice.
The date of the transaction is the date the consumer initially becomes obligated, either by signing a note or retail installment contract (home improvement) or by assuming a contractual obligation, whichever is first.
The creditor’s name and mailing address must be provided.
The date of the end of the rescission period must be stated accurately; it is the third business day following the date of the transaction specified on the form. A definition of “business day” is given in 12 C.F.R. § 1026.2(a)(6).
Finally, the consumer should sign the form to acknowledge its receipt.
For other documents related to mechanic’s lien transactions that may require a disclosure statement and notice of right of rescission, see chapter 20 in this manual.
Regulation Z requires that creditors give consumers the disclosure statements “in a form that the consumer may keep.” 12 C.F.R. § 1026.17(a). Also, the creditor must retain evidence of compliance, such as by keeping a copy of the executed form showing the consumer’s acknowledgment of receiving it, for two years after the date disclosures are required to be made or action is required to be taken. 12 C.F.R. § 1026.25. The form need not be filed or recorded.
Each consumer entitled to rescission must be provided two copies of the notice of right of rescission, one for potential use in canceling the transaction and one for recordkeeping. Each person whose ownership interest in the dwelling is subject to the security interest and who also uses it as his or her principal dwelling should receive two copies of the notice (one copy to each if the notice is provided in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act). As with the disclosure statement, the creditor should also keep a copy of the executed form for two years.
During the three-business-day rescission period provided by the notice, the creditor may accrue finance charges on the amount loaned.
Consumers may waive the right to rescind by providing a signed, dated statement that the loan is necessary to cope with a bona fide personal financial emergency. The waiver form must describe the emergency and specifically waive the right to rescind. Printed or otherwise standard waiver forms generally may not be used for this purpose, and everyone entitled to rescind must sign the waiver. 12 C.F.R. § 1026.23(e).
The borrower may not be charged for the preparation of truth-in-lending documents. If an attorney for the lender prepares truth-in-lending documents, the lender should pay any fee for that service separately and may not charge or pass through to the borrower (as part of loan settlement or closing costs or otherwise) that fee. 12 U.S.C. § 2610.
[Sections 12.8 through 12.10 are reserved for expansion.]
II. RESPA Consumer Disclosure Documents
§ 12.11Overview of the Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act of 1974 (RESPA), 12 U.S.C. §§ 2601–2617, is a federal consumer disclosure and protection statute intended to ensure consumers are provided greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by abusive settlement practices, such as kickbacks or referral fees that tend to increase the costs of settlement services.
RESPA was implemented by Regulation X, 12 C.F.R. pt. 1024, which was an official interpretive rule adopted and published by the Department of Housing and Urban Development (HUD) under its previously congressionally delegated authority to interpret and implement the statute. The Bureau of Consumer Financial Protection (BCFP) has enforcement authority. The BCFP reissued its regulation of these statutes under 12 C.F.R. pt. 1024. Regulation X provides “reliance on rule” protections to lenders and other settlement service providers. No provision of Regulation X imposing liability will apply to any act done or omitted in good-faith compliance with Regulation X or any other official HUD rule, regulation, or interpretation, even if after the act or omission has occurred the rule, regulation, or interpretation is amended, rescinded, or determined by judicial or other means to be invalid for any reason. See 12 U.S.C. § 2617(b).
RESPA applies to all federally related mortgage loans, a term broadly defined by regulation in 12 C.F.R. § 1024.5(a) to include virtually any mortgage loan made by a creditor in the United States that is secured by a lien on a one- to four-family residential dwelling. Certain loans, such as business purpose loans, loans secured by vacant land, and temporary financing, such as a construction loan, with a term of less than two years that is not convertible to permanent financing, are exempt from coverage. See the exemptions at 12 C.F.R. § 1024.5(b).
Generally, RESPA requires that loan originators provide written disclosures to loan applicants and borrowers at various stages of loan origination, settlement, and servicing of a federally related mortgage loan. The rules regulating the form, content, and timing of these required consumer disclosures and certain other key provisions are summarized below.
Loan Estimate: A loan originator, either the lender or the mortgage broker, of a federally related mortgage loan must provide a loan applicant a loan estimate (LE) within three business days after receiving an application (or information sufficient to complete an application). The lender or mortgage broker must provide the LE by hand delivery or by placing the LE in the mail within the three-business-day period. The LE is an estimate of all fees and charges a borrower is likely to incur at loan closing that must be accurate within narrow permitted tolerances; the applicant can comparison shop estimated costs among competing lenders and brokers. “Application,” for this purpose, is defined in 12 C.F.R. § 1024.2(b). The form, content, and timing of a standardized LE disclosure must comply with the requirements of 12 C.F.R. § 1025.7 and appendix C, as amended.
Special Information Booklets: A mortgage lender or mortgage broker must provide loan applicants a preprinted special information booklet within three business days after receiving a loan application (unless the application is declined or withdrawn within that three-day period) consisting as applicable of either Your Home Loan Toolkit—A Step-by-Step Guide (accessible at https://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf), in the case of closed-end credits to purchase a home, or When Your Home is On the Line: What You Should Know about Home Equity Lines of Credit (Consumer Financial Protection Bureau), in the case of open-end credit plans. See 12 C.F.R. §§ 1024.6, 1026.19(g).
Escrow Account Notices: When escrow accounts are established and maintained by the lender to reserve for property tax and insurance premium payments, the lender or loan servicer must provide the borrower an initial escrow account statement at loan settlement (or within forty-five days after settlement), and thereafter the servicer must provide the borrower an annual escrow account statement within thirty days after the end of each account computation year (which need not be a calendar year). The initial notice must itemize the amounts of the required initial deposit to the account to be collected from the borrower at loan settlement, the monthly deposits to be collected from the borrower during the twelve months thereafter, and the amounts and timing of payments from the account for that twelve-month computation year. RESPA, section 10, substantively regulates the maximum amount, including any cushion, that a mortgage lender may require the borrower to reserve in an escrow account and the method of analyzing and accounting for escrow balances, including any surpluses, shortages, and deficiencies that may occur. See 12 C.F.R. § 1024.17. The form and content of the initial and annual escrow account statements must comply with the requirements of sections 1024.17(h) and 1024.17(i), respectively, and the Public Guidance Documents referenced therein.
Loan Servicing Transfer Notices: Mortgage lenders, mortgage brokers who anticipate using table funding (that is, closings in which the note is made payable to the mortgage broker and the loan proceeds are advanced by an investor on contemporaneous assignment of the note and security instrument), and dealers of manufactured homes who anticipate a first-lien dealer loan must provide loan applicants a servicing disclosure statement at the time of application or within three business days after submission of an application that indicates whether the servicing of the loan may be assigned, sold, or transferred at any time while the loan is outstanding. The form, content, and timing of the servicing disclosure statement must generally conform to the model format set out in appendix MS-1 to Regulation X, 12 C.F.R. pt. 1024. See 12 C.F.R. § 1024.33(b). The term servicing generally refers to such contract administration services as collecting scheduled monthly or other periodic payments from the borrower, remitting principal and interest payments to the holder of the loan, disbursing property tax and insurance premium payments from escrow accounts when due, maintaining accounting and business records of account activity, and providing notices and reports required by law or the terms of the mortgage contract. The term servicer generally refers to the entity or other person responsible for performing servicing. These terms are defined in 12 C.F.R. § 1024.2.
A written notice of transfer also must be provided to the borrower on the actual assignment, sale, or transfer of servicing by the transferor servicer at least fifteen days before the effective date of the transfer and by the transferee servicer not later than fifteen days after the effective date. A combined written notice of transfer by the transferor and transferee given at loan settlement also satisfies these timing requirements. The notice of transfer must include such information as the effective date of the transfer of servicing; the date on which the transferor servicer will cease accepting payments on the loan and the date the transferee servicer will begin to accept the payments; the names, addresses, and toll-free numbers of the transferor and transferee servicers where inquiries regarding the servicing transfer may be directed; a statement of the borrower’s rights regarding complaint resolution; and other content as set out in appendix MS-2 to Regulation X, 12 C.F.R. pt. 1024. A late fee may not be charged for any misdirected payments by a borrower during the sixty-day period beginning on the effective date of the transfer, and misdirected payments may not be treated as late for credit reporting or other purposes. See 12 C.F.R. § 1024.33(c).
Affiliated Business Arrangement Disclosure Statement: Any mortgage lender, mortgage broker, real estate broker, or other person or entity in a position to refer settlement service business that refers a borrower or other person to an affiliated business to perform a settlement service must provide the borrower or other person to whom the referral is made a written affiliated business arrangement disclosure statement. The disclosure statement must generally be in the format of appendix D to Regulation X, 12 C.F.R. pt. 1024. The statement must describe the nature of the relationship between the person making the referral and the referred settlement service provider, set out the estimated charge or range of charges by the provider for the settlement services, and disclose that the borrower or other person is not required to use the referred service provider and is free to “shop around” for the best services and rates that may be available from other service providers. An affiliated business arrangement exists when a person or entity in a position to refer settlement service business, or an associate of such a person, has an affiliate relationship with, or a direct or beneficial interest of more than 1 percent in, a provider of settlement services and directly or indirectly refers such settlement service business to that provider (or affirmatively influences the selection of that affiliated provider). The disclosure statement must be on a sheet of paper separate from other disclosures and be provided at the time the referral is made. If a lender makes the referral to a borrower, the disclosure may be provided at the time the good-faith estimate disclosure is provided to the borrower. See 12 C.F.R. § 1024.15.
§ 12.11:4Prohibition against Kickbacks and Unearned Fees
RESPA, section 8, prohibits kickbacks, referral fees, and unearned fees in connection with federally related mortgage loans. 12 U.S.C. § 2607. Specifically, section 8, as interpreted by Regulation X, provides that “[n]o person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” 12 C.F.R. § 1024.14(b) (emphasis added). Payment of a fee or other thing of value in consideration of a referral of a settlement service or an agreement to split or pay a portion of a fee charged for the performance of a settlement service with a person referring the business, other than for the reasonable value of services actually performed by the person accepting the payment, is a violation of section 8. A violation implicates both the party giving and the party receiving the unlawful kickback, referral fee, or other thing of value. Moreover, against the weight of judicial authority, the BCFP construes section 8 to prohibit unearned fees even when the fee is not split between two parties, including a charge by any person for which no or nominal services are performed or for which duplicative fees are charged. Section 8 violations are rife with enforcement actions by the BCFP and civil litigation under private rights of action, including class action.
Practitioners are cautioned that section 8 violations are most often inferred from specific facts, and careful analysis of all relevant facts is often required to determine if a violation has occurred. Key elements of the offense are broadly construed. A “referral,” for example, includes any oral or written action directed to the borrower or other person that has the effect of affirmatively influencing the person’s selection of a particular provider of a settlement service for which the person will be charged. 12 C.F.R. § 1024.14(f). An “understanding” need not be written or oral, but may be inferred from a practice, pattern, or course of conduct. 12 C.F.R. § 1024.14(e). Moreover, a “thing of value” does not require a transfer of money and may be any of a number of seemingly unrelated benefits to the party making a referral: discounts, credits, equity adjustments, deferred rents, debt reduction or forgiveness, free promotions and advertising, assumption of business expenses, expense-paid travel and vacations, and any other imaginable benefit. 12 C.F.R. § 1024.14(d).
Section 8, however, expressly permits payment to attorneys, title agents, or other settlement service providers for goods or facilities actually furnished or services actually performed; fee splits between real estate agents and real estate brokers pursuant to cooperative brokerage agreements; and compensation by an employer to its own employees for referrals either to the employer or to an affiliated business. See 12 C.F.R. § 1024.14(g)(1).
Referrals of borrowers or other persons to affiliates to perform settlement services are permitted under strict guidelines for affiliated business arrangements set out in 12 C.F.R. § 1024.15, which requires that written disclosure of the business arrangement is timely made in the form of an affiliated business arrangement disclosure statement described above, that the borrower or other person is not required to use any particular provider of the service, and that the only thing of value that is received from the arrangement is a bona fide return on the ownership interest the referring party may have in the affiliate or a franchise relationship. A prohibited “required use” for this purpose is defined in 12 C.F.R. § 1024.2.
Caution: HUD published an “Advanced Notice of Proposed Rulemaking” in the Federal Register on June 3, 2010, at 75 Fed. Reg. 31,334 to strengthen and clarify the RESPA, section 8, prohibition against the “required use” of affiliated settlement service providers, examining in particular the practice of homebuilders’ conditioning construction discounts or discounted upgrades on the use of the homebuilder’s affiliated mortgage lender.
HUD’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (June 7, 1996), provides guidance on the affiliated business arrangement exemption to section 8 prohibitions against referral fees. According to the policy statement, Congress did not intend this exemption to promote disguised referral fee payments through sham arrangements or shell entities for which there is no bona fide business purpose. By definition, for this exemption to apply, the person or entity receiving the referral must be a bona fide provider of settlement services. If the person or entity is not, considering particular factors enumerated in the policy statement, the arrangement would not qualify for the exemption even if the three safe harbor conditions of 12 C.F.R. § 1024.15 are otherwise met.
HUD’s Statement of Policy 1996-3, Rental of Office Space, Lock-outs, and Retaliation, 61 Fed. Reg. 29,264 (June 7, 1996), also addresses the application of section 8 to the practice of settlement service providers (such as mortgage lenders) leasing desks or office space at real estate brokerage offices in anticipation of loan referrals. This practice is permitted only if the general market value of the desk rental or other arrangement is paid by the settlement service provider. The “general market value” for this purpose, which also may include an appropriate portion of the cost for related office services actually provided under the arrangement (such as secretarial service, utilities, telephone, and other office equipment), means the rental amount that a non–settlement service provider (that is, one who would not be renting in anticipation of referrals) would pay for the same amount of space and services in the same or a comparable building.
HUD’s interpretive rule published June 25, 2010, in the Federal Register at 75 Fed. Reg. 36,271 addressed the application of section 8 to payments by home warranty companies to real estate brokers and agents for services performed in connection with home sales transactions in which a home warranty is sold to the purchaser. HUD concluded that a broker or agent may not be compensated by a home warranty company for marketing services directed to particular homebuyers or sellers and deemed any payments by a home warranty company to a broker or agent to be lawful only if services are actually performed by the broker or agent, are not nominal and are necessary and distinct from the primary services performed by the real estate broker or agent in the same transaction, and are services for which there is no duplicative charge. For example, conducting actual inspections of items to be covered by the home warranty to identify preexisting conditions, recording serial numbers of the items, documenting the condition of the items by taking photographs, and preparing a report to the home warranty company of findings may be compensable services. Any payment for compensable services nevertheless must reasonably relate in amount to the value of services actually performed.
Persons violating section 8, on conviction, may be fined not more than $10,000, imprisoned for not more than one year, or both. Any person violating section 8 provisions also is jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for the service. In any private action brought under section 8, the court may award court costs and reasonable attorney’s fees to the prevailing party. See 12 U.S.C. § 2607(d); 12 C.F.R. § 1024.14(a). Violations may also be grounds for disbarment, suspension, or ineligibility of lenders participating in federally insured or guaranteed loan programs or for enforcement actions by federal or state agencies having supervisory authority over lenders. 12 C.F.R. § 1024.14.
§ 12.11:5Prohibition against Required Use of Particular Title Company
RESPA, section 9, provides that no seller of property that will be purchased with the assistance of a federally related mortgage loan may require that, as a condition of selling the property, title insurance covering the property must be purchased by the buyer from any particular title company. 12 U.S.C. § 2608. This provision is thought by some practitioners to be inapplicable to Texas practice, in which the seller customarily purchases and pays the premium for the owner’s title insurance policy. An offer of a discounted package or of discounts or rebates for the purchase of multiple settlement services as an inducement to the buyer to use a particular title company may be permitted without violating this prohibition against a required use. See the definition of “required use” at 12 C.F.R. § 1024.2. Any seller who violates section 9 is liable to the buyer in an amount equal to three times all charges paid for the title insurance. See 12 U.S.C. § 2608; 12 C.F.R. § 1024.14.
§ 12.11:6Prohibition against Charging for Preparation of Regulatory Disclosures
RESPA, section 12, provides that no fee or charge may be imposed or charged by a lender of a federally related mortgage loan, or by the servicer of the loan, for the preparation and distribution to the borrower or other person of a HUD-1 or HUD-1A settlement statement; escrow account notices and statements required by RESPA, section 10; or statements required by the Truth in Lending Act. See 12 U.S.C. § 2610; 12 C.F.R. § 1024.12.
§ 12.11:7Prohibition against Collecting Excessive Escrow Deposits
RESPA, section 10, substantively limits the amounts that a lender of a federally related mortgage loan may require the borrower to deposit in any escrow account established by the lender to ensure timely payment of property taxes, insurance premiums, or other property charges. 12 U.S.C. § 2609. When establishing the account, typically at loan closing, the lender may require an initial deposit equal to the proportion of total annual costs reasonably anticipated to be paid from the account for the period beginning with the date on which the costs were last paid (or the date on which each of the costs would have been paid under the normal lending practices of the lender and local custom) and ending on the due date of the first installment payment under the mortgage loan plus an additional reserve (for unanticipated disbursements) of no more than one-sixth of the total of all such costs to be paid from the escrow account over the ensuing twelve-month period (that is, a two-month cushion). Thereafter, a lender may not require the borrower to deposit in any such escrow account in any month a sum greater than one-twelfth of the total of the estimated taxes, insurance premiums, and other charges that are reasonably anticipated to be paid from the account during the ensuing twelve months plus a cushion of no more than one-sixth of the monthly amount. If a lender conducts an account analysis, however, and determines there is or will be a deficiency in the escrow account, the lender may require the borrower to make additional monthly deposits to the account to avoid or eliminate the deficiency, subject to substantive and procedural rules set out in Regulation X, 12 C.F.R. § 1024.17(f). Violations of section 10 of RESPA are subject to civil penalties set out in 12 U.S.C. § 2609(d).
The amount stated on the HUD-1 or HUD-1A settlement statement for any itemized settlement service must not exceed the amount actually received by the settlement service provider for that service (unless the charge is an average charge in accordance with 12 C.F.R. § 1024.8(b)(2)). Third-party fees disclosed on the good-faith estimate (GFE) may not exceed the estimated amounts to be paid the third-party settlement service providers, and such fees reported on the HUD-1 may not exceed the amounts actually paid to such third parties. Thus, even earned markups that were permitted based on the value of actual services performed by the lender or mortgage broker in connection with services principally performed by third parties now appear to be prohibited.
Bureau of Consumer Financial Protection, TILA-RESPA Integrated Disclosure—Guide to the Loan Estimate and Closing Disclosure Forms, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-loan-estimate-and-closing-disclosure-forms_v2.0.pdf.
Hall, Kenneth F. Mortgage and Consumer Loan and Lease Disclosure Handbook. 2015–2016 ed. Thomson Reuters, 2015.