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Mortgage Lending: 10.3.8 HECM for Purchase

The Housing and Economic Recovery Act of 2008 authorized a new reverse mortgage product that allows older consumers to purchase a principal residence with HECM loan proceeds.102 The program was designed to enable older homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs. The details of the HECM for Purchase program are similar in most regards to the traditional HECM program.

Mortgage Lending: 10.4.1 General

Reverse mortgage loans are complex, and a reverse mortgage often is not the homeowner’s best option. To be eligible for a HECM loan, the borrower must obtain adequate counseling by an independent third party that is not associated with the mortgage transaction. There is no federal counseling requirement for private reverse mortgages, though many states now require counseling for all reverse mortgages. In all cases, homeowners should seek counseling from a HUD-certified counselor, preferably in person, as telephone counseling is unlikely to be as effective.

Mortgage Lending: 10.4.2 The HECM Counseling Requirement

To be eligible for a HECM loan, the borrower107 must obtain “adequate counseling” by an independent third party that is neither directly nor indirectly associated with the mortgage transaction.108 Only those counselors approved by HUD may provide HECM counseling to potential reverse mortgage borrowers.109 Lenders are required to provide every potential HECM borrower with a list of national intermediaries, as well as five agencies in the local

Mortgage Lending: 10.5 The Truth in Lending Act Applied to Reverse Mortgages

Reverse mortgages are subject to most of the same substantive and disclosure requirements as other loans covered by the Truth in Lending Act (TILA), with a number of important exceptions.121 Reverse mortgages are excluded from the definition of high-cost loan under the Home Ownership and Equity Protection Act (HOEPA).122 As a result, reverse mortgage lenders are not required to make any of the special HOEPA disclosures and borrowers do not benefit from any of HOEPA’s substantive protections.

Mortgage Lending: 10.7.2 Fraud, Misrepresentation, and Unfair Practices

The counterintuitive nature of reverse mortgages makes it easy to mislead homeowners about their effects and costs. Many people have considerable difficulty appreciating the way that interest on the mortgage compounds and the balance grows. The cash that is actually made available to the borrower will be a small percentage of the value of the home, because there has to be a large equity cushion to cover the interest that will be charged and compounded monthly until the date of the youngest borrower’s expected death.

Mortgage Lending: 10.7.3 Yield Spread Premiums and Steering

The Consumer Financial Protection Bureau (CFPB) has adopted rules to restrict steering in mortgage loan transactions by setting limits on compensation to mortgage “originators”—in-house loan officers and mortgage brokers.150 Under these regulations, loan officers and mortgage brokers may not receive compensation directly from the borrower and as a rebate from the creditor. In addition, creditors may not base loan officer or mortgage broker compensation on any loan term except the amount borrowed.

Mortgage Lending: 10.7.4 Cross-Selling Annuities and Other Investment Products

One of the greatest potential abuses with reverse mortgages comes when the proceeds of a loan are used to buy expensive and complicated insurance policies, annuities, or other financial products.163 Many of these products provide insurance agents with hefty commissions, sometimes as high as fifteen percent. When all the transaction costs of a reverse mortgage are added on top of these commissions and insurer profit, there may be relatively little left for the homeowner, considering the home’s value.

Mortgage Lending: 10.9 Reverse Mortgages in Practice

Reverse mortgages can provide needed cash to older homeowners, allowing them to draw down on the home’s equity for living expenses. This is the traditional use for reverse mortgages and the purpose for which the HECM program was created. Other types of equity sharing products are discussed in § 12.7, infra.

Truth in Lending: 1.5.3.4.2 Open-end credit review

There were five stated goals of the open-end credit review: (1) to improve the effectiveness and usefulness of open-end disclosures; (2) to consider concerns about information overload; (3) to study alternatives for improving the format of disclosures; (4) to improve the substantive protections included in the act, most notably, those addressing inaccurate and unfair credit card and billing practices; and (5) to facilitate creditor compliance and to reduce unnecessary regulatory burden.301

Truth in Lending: 1.5.5 Treatises

Luckily for both the practitioner facing the consumer credit maze for the first time and the experienced practitioner considering some of the more arcane points of credit disclosure, there are some treatises and law review articles on TILA. This treatise is one such reference. It is updated regularly online and new paper editions are published every few years. Truth in Lending has been cited in over a hundred law reviews, journals, and continuing legal education publications, and numerous reported decisions.338

Truth in Lending: 1.3.4.3 The Case for a July 22, 2010 Effective Date

If section 1400(c)(3) refers only to paragraphs (c)(1) and (c)(2) and thus applies only to provisions requiring rulemaking, then Dodd-Frank title XIV provisions not requiring rulemaking go into effect on the Dodd-Frank Act’s default effective date of July 22, 2010.190 The two major arguments against such an interpretation are a number of RESPA cases holding to the contrary with little or no analysis and the statement by Senator Dodd referred to at

Truth in Lending: 1.5.3.4.3 Closed-end credit review

The FRB began its work on the second phase of its review of Regulation Z by suggesting major improvements in the closed-end disclosures for real-estate-secured transactions.309 The FRB noted in its announcement that the practice of recognizing extensive exceptions to the finance charge is seriously flawed and that it creates an incentive for lenders to unbundle the costs of credit and add junk fees.

Truth in Lending: 1.2.13.3 Effective Dates for TILA Amendments

The effective dates of the TILA amendments depend on various factors, such as, whether the statute directs the CFPB to issue regulations. Where the statute is silent on an effective date and Congress did not explicitly require regulations, the amendment takes effect on the date of enactment.148 The presumed date of enactment for federal statutes is the date when the statute is signed into law by the president.149 The president signed S. 2155 into law on May 24, 2018.

Truth in Lending: 1.2.9 The Mortgage Disclosure Improvement Act

In July 2008, Congress amended TILA with the Mortgage Disclosure Improvement Act to require early disclosures for extensions of credit secured by a dwelling.104 Early disclosures, in the same format as the final TILA disclosures, must be provided for all closed-end loans secured by a “dwelling of a consumer,” whether or not a principal dwelling. Disclosures must be delivered three business days after application (the current law for purchase mortgage transactions), but no less than seven business days before closing.

Truth in Lending: 1.5.1 Introduction

One of the complications of handling Truth in Lending Act issues is the number of sources of law. These include TILA itself, the Consumer Financial Protection Bureau’s Regulation Z, which implements the Act, the Official Interpretations of Regulation Z, legislative204 and regulatory205 history, and case law,206 which must be divided into post-Simplification cases and pre-Simplification cases. Finally, there are treatises and law review articles.

Truth in Lending: 1.2.2 Truth in Lending Simplification

Both legal services attorneys on behalf of low-income consumers and a segment of the private bar developed significant TILA practices. Creditors who did not comply with the Act found themselves defendants in thousands of lawsuits filed on the basis of TILA noncompliance and found themselves losing what had previously been routine collection actions because of TILA counterclaims.

Truth in Lending: 1.5.3.3.4 Waiver authority for trial disclosure programs

The Dodd-Frank Act grants the CFPB authority to allow a covered person to conduct a trial program for the purpose of providing trial disclosures to consumers that are designed to improve upon any model form issued by the agency, so long as the program is limited in time and scope and is subject to specified standards and procedures.270 During the limited trial period, the covered person conducting the trial disclosure program is deemed to be in compliance with, or may be exempted from, a requirement of a rule or an enumerated consumer law.

Truth in Lending: 1.2.10 The Helping Families Save Their Homes Act of 2009

The Helping Families Save Their Homes Act of 2009 amended the Truth in Lending Act in two ways. First, it added a requirement that borrowers be notified whenever ownership of their mortgage loan is transferred.110 The new owner or assignee must notify the borrower in writing, within thirty days after the loan is sold or assigned, of its identity, address, telephone number, and the date of transfer and location where the transfer is recorded.

Truth in Lending: 1.4 Outline of the Truth in Lending Act

The Truth in Lending Act is codified at 15 U.S.C. §§ 1601–1666j. It is technically title I of the Consumer Credit Protection Act. TILA is divided into five “parts” (if you are reading the U.S. Code) or “chapters” (if you are reading the pamphlet published by the FRB).195

Truth in Lending: 1.2.4 The Home Ownership and Equity Protection Act of 1994

The next major consumer protection amendment to TILA came with the Home Ownership and Equity Protection Act of 1994 (HOEPA).59 It defines a group of high-rate closed-end mortgage transactions and singles them out for special regulation, including advance disclosure requirements, prohibition of abusive terms, and special liability rules.