MDIA

The MDIA

The federal Mortgage Disclosure Improvement Act (MDIA) went into effect July 30, 2009, affecting all residential mortgage loan applications taken on or after that date. Although the MDIA covers a lot of ground, the area of greatest concern to our clients seems to be the timing of the initial and final TIL disclosures

The MDIA requires Lenders to provide more meaningful disclosure of the true cost of borrowing for the purpose of empowering borrowers to make the right decision for their circumstance. Creditors must provide an “initial” TIL disclosure within three business days of receipt of an application. For purposes of compliance with the MDIA’s three-day rule on the initial TIL, a business day does not include Saturdays if you are not generally open for business on Saturdays. However, for the seven-day rule (more on that later in this column) and for the three-day rule on how many days must pass before a borrower can be charged fees (more on that later in this column, as well), Saturday is counted.

What constitutes an “official application”? When is it an initial inquiry vs. a full application sufficient for you to make a credit decision? What qualifies as a pre-application under RESPA, could be considered a full application under ECOA. The Fair Housing and Home Mortgage Disclosure Acts also offer defining parameters.)

Let’s be clear, no fees (other than for a credit report) may be collected from the borrower either by the lender or by the mortgage broker before the consumer receives the initial TIL. Collecting a post-dated check or a credit card authorization form will likely be frowned upon by auditors and examiners. The intent of MDIA is to allow prospective applicants to comparison shop. Any attempt to force an applicant to accept the Initial TIL without a minimum of 3 full business days to examine the marketplace will be construed as contrary and in violation to the intention of this law.

What about Brokers, and how can Creditors protect themselves? Lenders who accept loans from brokers will likely mitigate risk of violation by providing a disclosure with language such as: “Federal law prohibits the collection of any fees, except a reasonable, bona fide credit report fee, prior to your receipt of the enclosed Truth in Lending disclosure. If you have paid an application, appraisal or other fee (except credit report fee) prior to your receipt of this Truth in Lending disclosure, please write to us and include a copy of the canceled check or charge verification. Please reference the loan number above in your correspondence.”

Auditors will seek to discover whether any there was any correspondence between the creditor and the applicant that might indicate that a fee other than the credit report was charged. Options for the affirmative might include obtaining a waiver of rights and verification that no actual damages were sustained or a rejection of the application. Many lenders report being surprised by how few mortgage brokers know about the new rules. (By the way, MDIA does not affect a mortgage broker’s obligations under RESPA.) Some brokers have asked if they can send out the initial TIL in the name of the creditor. The consensus seems to be that that would not be a wise practice.

If a creditor provides an initial TIL in person to an applicant, that creditor could, as noted earlier, impose a fee beyond a credit report fee at that point. This is not, however, the case with a mortgage broker. The Federal Reserve has confirmed informally that only receipt of a creditor-provided TIL by the prospective borrower allows for the consumer to be charged a fee beyond a credit report fee on that date. This is because TILA imposes disclosure requirements on “creditors,” and mortgage brokers are not creditors.

For purposes of compliance with MDIA, on refinances of a primary residence an initial TIL is considered delivered if it has been delivered to only one (presumably the primary) borrower, but the corrected and final TIL should be delivered to all borrowers who have the right to rescind the loan.

There has been a great deal of discussion about the payment issue. One person asked an industry group: “I am hearing that some lenders are allowing the broker to pay for the appraisal before the applicant receives the creditor’s initial TIL. Is anyone out there allowing this and/or aware of other lenders allowing this?” Some lenders may be prepared to allow this, while others are strictly interpreting the regulation to prohibit the applicant or anyone else from paying a fee other than for a credit report before the three-day period has passed.

Again, some believe it is acceptable for a mortgage broker to order, or have ordered, (subject to the HVCC) an appraisal and even pay for it before the three-day period has passed, but if the prospective borrower decides not to go forward with the loan after reviewing the initial TIL, she or he can be under no obligation to reimburse the broker for the cost of the appraisal. If this is your interpretation, be sure to advise mortgage brokers who are doing this to remove any old language in any documents that makes the prospective borrower liable for any fees incurred, if those fees are incurred prior to the passage of the three day period.

What if a mortgage broker has the applicant sign a credit card authorization for the applicant’s credit card for a fee other than the credit report before the applicant receives the initial TIL from the creditor, but doesn’t run the credit card until AFTER the borrower has received the initial TIL? Is this OK? In this case, there is considered to be an expectation of payment on the part of the applicant, but no actual payment, so have the borrowers paid? While one industry observer said “I don’t see an MDIA issue here so long as payment isn’t collected from the consumer prior to the expiration of the three-day early disclosure period,” others believe the creation of a “perceived commitment,” violates the intent of the law. Regulators find any the practice of promised money, whether via credit card or post dated check, to be a way to circumvent the new timing rules.

The MDIA also now requires that a TIL be provided on refinances, and second/vacation homes and closed-end second mortgages (HELs) regardless of lien position – in other words, all RESPA-covered loans, including non-principal dwellings. (Although most lenders and mortgage brokers have for years - as a standard practice - provided prospective borrowers an initial TIL on these types of loans, until now it has not been mandatory). MDIA does not apply to investment properties, timeshares or HELOCs. However, keep in mind that, since the Truth-in-Lending Act applies to loans involving personal use, if an applicant is borrowing against investment property and intends to use the funds for a personal use, such as college tuition, TILA applies. In this case, it is the use of the loan proceeds that rules, not the property or type of loan.

So, to remain in compliance, creditors should provide the initial TIL within three business days of receipt of an application either from a mortgage broker or directly from a prospective applicant. It is assumed that the prospective borrower has received the TIL on the fourth business day, whether through web delivery, faxing or traditional mail. There is no requirement in the new regulation that a creditor shows proof of receipt, although retaining proof you sent the TIL would certainly be a prudent practice. If the initial TIL is delivered via email or fax or is hand-delivered, a prudent creditor would require proof of receipt such as an email acknowledgement, a signed and dated TIL, or a signed and dated paper acknowledgement.

The MDIA also requires that prospective borrowers be sent the initial TIL at least seven business days before the loan is consummated. (The 7-day clock begins to tick on the date the creditor sends or otherwise delivers it, not the date of borrower receipt.) The consumer may waive both the three-day and seven-day disclosure periods, but only if they have a bona fide personal financial emergency (similar to the current waiver of the ROR on refinances; as with the ROR waiver, it is expected that few creditors will allow a waiver). There has been some discussion as to whether losing an earnest money deposit on a purchase-money transaction because the purchase and sale agreement/contract will expire would be considered a bona fide personal financial emergency, but no consensus has been reached. However, the waiver is no longer effective if the APR disclosure is “out of tolerance” The applicant may, sign another waiver after receiving the corrected TIL. The applicant may not waive the seven-day period until she or he has received the initial TIL and cannot waive the three-day period again until she or he has received the corrected disclosures.

A creditor may re-issue a TIL if there is an increase in the finance charge or a change in the loan program, but this would not necessitate a new three-day waiting period before closing unless the new APR has increased beyond the acceptable tolerance. There has been a great deal of discussion on this “out of tolerance” issue. If the final APR is calculated to be off from the initial TIL by .125% or more on regular transactions or more than .250% on irregular transactions, the consumer must be provided a corrected TIL at least three business days prior to loan closing. But keep in mind that if you mail the corrected TIL, you have to add at least three business days. Why? Because when you mail the TIL, the prospective borrower is considered to have received it three business days after the mailing date (or, to be specific, on the fourth day after you mail it). The applicant must then have an additional three business days to review it. In some cases, if a holiday or Sunday is involved, this could add up to seven, eight or nine calendar days, potentially affecting a lock period or a closing date. Keep in mind that re-disclosure of an APR because it is out of tolerance is not new – creditors have always been required to re-disclose in this case, and usually did so at closing. The difference here, as mandated by the MDIA, is the three-day waiting period before closing can occur.

(By the way, there has been much discussion about whether re-disclosure is necessary if the new APR is .125% or .250% or more lower than the initial disclosure. You should check with your compliance and/or legal department if you find this to be the case. Some creditors are not re-disclosing in such cases, while others, strictly interpreting the new rule, are. In fact, the word that governs this matter in the new rule is “varies,” so over disclosing may not provide the safety it once did.)

Being out of tolerance should be relatively rare. As one industry veteran has pointed out, “most added fees will not increase the APR by 0.125%. On a $100,000 fixed rate loan, an increase of about $1,249 in prepaid finance charges will raise the APR by 0.125%. Hence, borrowers are not likely to receive a revised estimated disclosure due to a new fee or two being imposed prior to closing.”

There has been some discussion within the industry of how to handle broker-originated loans that were originated before the July 30 implementation date of MDIA but which were not delivered to the creditor until after the July 30, 2009 MDIA implementation date. (Remember, brokers are not, for the most part, considered creditors.) This could present a particularly difficult situation; you should discuss it with your compliance and legal departments if it arises.

There has also been much discussion about emailing or hand-delivering re-disclosures if the APR is out of tolerance. For instance, if re-disclosure occurs in person, can closing occur the same day the re-disclosure is given in person? The consensus is that if re-disclosure is necessary, the loan may not close until the third business day after receipt by the applicant, even if the re-disclosure is placed in the applicant’s hands.

Both initial and re-disclosed/final TIL disclosures must now contain the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” MBS/ProClose has added this so-called “No Requirement to Complete Statement” to the TIL disclosure. This language is already required on high-cost-loan disclosures, but it now applies to any extension of credit secured by the dwelling (principal or not) of an applicant.

The new regulation uses the term “consummation” when discussing the waiting periods. Most industry observers consider this to be the date of loan closing rather than, on a refinance, the date of loan funding. TILA defines consummation as the time that a consumer becomes contractually obligated on a credit transaction. Check with your legal/compliance department for its interpretation of the term as pertains to MDIA.

Also, as pertains to the waiting period, if a creditor denies a loan and a broker moves that loan to another creditor/lender after the three-day waiting period has run and fees beyond the credit report have been collected, this would not be a violation of MDIA, since the initial three-day period from time of application has expired.

And, as pertains to email delivery of disclosures, be sure to check with your legal/compliance department to ensure that this is a secure method of delivery that meets the requirements of state and federal privacy laws, including Gramm-Leach-Bliley.

We have also received some questions regarding the implementation date of July 30, 2009. It is true that the implementation date for these changes was initially set for October 1, 2009, but the MDIA moved that up by two months.

This is a new regulation, and there is much that will be hashed out over the coming months and years. We’re dealing with a moving target here. Just know that it is now even more important than ever to track the APR - and the accuracy of the APR – throughout the loan process, from start to finish.

Of course, this should not be construed as legal advice, but as helpful guidance and assistance as your legal and compliance departments finalize your MDIA policies and procedures.