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Truth in Lending: 9.6.6.8 Timing of Disclosures

The disclosures required for covered loans must be given not less than three business days prior to consummation of the transaction.763 A “business” day is defined as including all calendar days except Sundays and certain listed holidays.764

Truth in Lending: 9.6.6.9 Delivery of Notice; Presumption of Delivery

Although the timing requirements appear straightforward, it is a common practice for predatory lenders to rush the consumer to complete a loan quickly, before the consumer understands the nature of the scam or can obtain advice from a lawyer, friend, or relative. Lenders may be tempted to fudge the date on the notice because complying with this requirement gums up their bureaucratic operation.

Truth in Lending: 9.6.7 Modification or Waiver of the HOEPA Notice

Regulation Z authorizes a modification or waiver of rights when necessary to permit homeowners to meet “bona fide personal financial emergencies.”773 This means the three-day advance look at the prescribed disclosures can be waived in genuine, immediate financial emergencies.

Truth in Lending: 9.6.8 Electronic Disclosures

Regulation Z allows electronic provision of the disclosures that are required for HOEPA loans, but only if the creditor complies with the Electronic Signatures in Global and National Commerce Act (E-Sign).779 Electronic disclosures are addressed in the TILA context at § 4.3, supra, and analyzed more generally in another treatise in this series.

Truth in Lending: 9.6.10.2.1 Introduction

Below we discuss the rules that apply to high-cost mortgages as of January 10, 2014. In the archived version of Chapter 9 available online as companion material to this treatise there are discussions of the prepayment penalty rules that apply to loans made before October 1, 2009 and those that apply as of October 1, 2009 and before January 10, 2014.

Truth in Lending: 9.6.10.2.2 Rules for applications received on or after January 10, 2014

Effective January 10, 2014, prepayment penalties (regardless of duration or amount) are banned from loans that otherwise trigger HOEPA.805 Congress accomplished this result by removing the statutory exceptions to the ban.806 Note that because prepayment penalties are also a trigger for high-cost mortgages after this same effective date,807 if a loan has a prepayment penalty that brings it within the high-cost loan range, the penalty will auto

Truth in Lending: 9.6.10.3 Prohibition of Interest Rate Increases on Default

A covered loan may not include a term that increases the interest rate in the event of a default.808 This prohibition prevents creditors from including provisions in covered loans that make it impossible, or nearly impossible, for a homeowner to cure a default. Similarly, creditors will not be permitted to artificially inflate the amount due on a loan after default to obtain excessive repayment through the foreclosure process.809

Truth in Lending: 9.6.10.4.1 General

Balloon payments are large payments which come due during a loan term, usually at the end of the loan. They pose a problem for consumers who usually do not have the means to make such payments from their income or liquid assets. The problem is compounded if the loan contains a prepayment penalty that penalizes a consumer who refinances before the balloon is due.813 Balloon payment loans have caused special hardship for many consumers, because they are often coupled with a fraudulent oral promise to refinance.

Truth in Lending: 9.6.10.4.2 Rule prior to January 10, 2014

The pre-Dodd-Frank version of HOEPA prohibits balloon payments in covered loans with terms of less than five years.816 Thus, for loans of less than five years, the payments were required to fully amortize the outstanding principal balance. Practitioners were advised to demonstrate to the court the actual amortization schedule and not rely on summary allegations that the payments do not cover all the principal and interest due on the note.817

Truth in Lending: 9.6.10.4.3 Rule for applications received on or after January 10, 2014

The Dodd-Frank Act goes beyond the original version of HOEPA and bans balloon payments entirely, not just in loans of less than five years.825 It also includes its own definition of balloon payment—one that is more than twice as large as the average of the earlier scheduled payments.826 It includes an exception for payment schedules that are adjusted to match a borrower’s seasonal or irregular income.827

Truth in Lending: 9.6.10.5 Prohibition of Negative Amortization

Negative amortization occurs when the payments due each period are insufficient to cover the interest on the loan as it comes due. The balance due therefore goes up as the additional unpaid interest is added to the principal. Since such interest can compound, the ultimate balance can quickly and easily exceed the consumer’s ability to repay.835

Truth in Lending: 9.6.10.6 Limitation on Prepaid Payments

Prepaid payments involve amounts that are withheld from the proceeds of the loan to cover one or more payments that would otherwise be paid over the course of the loan. They have been used by some unscrupulous creditors to disguise the real amount of credit granted and to increase the consumer’s obligation to pay interest. In addition, because the lender retains use of this money, the lender frequently earns interest on that use without crediting those amounts to the account of the borrower.838

Truth in Lending: 9.6.11.1 Introduction

In addition to requiring disclosures and prohibiting certain terms, the pre-Dodd-Frank version of HOEPA addresses three practices in connection with covered loans.

Truth in Lending: 9.6.11.2.1 Introduction

Already at the time of HOEPA’s enactment, lending without regard to the ability to repay was a growing problem.863 Lenders make loans without regard to the borrower’s repayment ability for a variety of reasons, including: the value of the property involved; their eagerness to boost sales of loans and collect up-front points and fees; the fact that many originators sell the loan immediately after the closing, realize their fee income at that time, and need not worry about the loan performance over the long haul; and the need to satisfy inves

Truth in Lending: 9.6.11.4 Notice to Assignee

TILA prohibits a creditor from selling or otherwise assigning a HOEPA loan without a prominent notice of the assignee’s potential liability.892 The Dodd-Frank Act did not change this requirement.

Regulation Z requires that the statement read:

Truth in Lending: 9.6.11.5 Early Refinancings

Repeated refinancings result in ever-increasing principal and a severe reduction in the equity in the home. As long as there is sufficient equity in the home, the homeowner may be targeted by the same or different lenders or brokers. Homeowners are solicited when they get behind on their payments with promises that the new loan will reduce the monthly payment. The refinancing usually provides little or no benefit to the borrower. Each refinancing triggers another round of points and fees that are added to the principal.

Truth in Lending: 9.6.11.7 Recommending Default

The Dodd-Frank Act prohibits a creditor from recommending or encouraging default on an existing loan or other debt prior to and in connection with the closing or planned closing of a HOEPA mortgage that refinances all or any portion of such existing loan or debt.928

Truth in Lending: 9.6.11.8 Financing Points and Fees and Certain Prepayment Penalties

The Dodd-Frank Act amended HOEPA to restrict financing of points and fees as well as certain prepayment penalties.929 Creditors are prohibited from directly or indirectly financing any points and fees in connection with a HOEPA loan. In addition, creditors may not directly or indirectly finance any prepayment fee or penalty payable by the consumer in a refinancing transaction if the creditor or an affiliate of the creditor is the holder of the note being refinanced.