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Truth in Lending: 9.3.4.1 Statutory and Regulatory Ban

The Dodd-Frank Act bans creditors from financing, directly or indirectly, credit insurance and debt cancellation agreements, with an exception for certain unemployment insurance.312 In January 2013, the CFPB issued final amendments to Regulation Z implementing the ban.313 The regulations are effective for applications received on or after January 10, 2014.314 Clarifying amendments to the rules were issued in October 2013.

Truth in Lending: 9.3.8 Arbitration and Restrictions on Court Actions

The Dodd-Frank Act amends TILA by restricting forced arbitration and federal statutory waivers in connection with residential mortgage loans and open-end consumer credit plans secured by the consumer’s principal dwelling.408 The provision prohibits any terms that require arbitration or any other nonjudicial procedure as the method for resolving any controversy.409 The parties can agree to arbitration at any time after a dispute under the transaction arises.

Truth in Lending: 9.4.1 Introduction

On July 30, 2008, the Federal Reserve Board (FRB) announced expanded regulation of most loans secured by the consumer’s principal dwelling originated in most segments of the mortgage market. This rule appeared in a section of Regulation Z.428 It extended to creditors, mortgage brokers, and servicers. The rule addressed abuses related to coerced appraisals and to servicing practices involving dilatory crediting of payments, pyramiding of late fees, and tardy response to requests for payoff statements.

Truth in Lending: 9.4.2.2 Scope

The appraisal independence standards apply to all creditors as well as settlement service providers (“covered persons”)439 extending credit secured by a consumer’s principal dwelling (“covered transactions”)440 who are engaged in the process of “valuation.” Valuation, under the regulations, means “an estimate of the value of the consumer’s principal dwelling in written or electronic form, other than one produced solely by an automated model or system.”

Truth in Lending: 9.4.2.4 Conflicts of Interest

The Dodd-Frank Act broadly prohibits conflicts of interest.458 The implementing regulation sets slightly different rules for employees of creditors or affiliates of creditors depending upon the size of the creditor.459 The purpose gained from the prohibition in the statute seems to be considerably watered down by the permission granted to creditors to use their own employees for the valuation permitted in the regulation.

Truth in Lending: 9.4.2.5 Supervision and Compensation of Appraisers

Creditors and agents are required to compensate “fee appraisers” appropriately.467 A fee appraiser is defined as a “natural person who is a state-licensed or state-certified appraiser and receives a fee for performing an appraisal and who is not an employee of the person engaging the appraiser”468 or the organization that employs state-licensed or state-certified appraisers who are not subject to FIRREA (12 U.S.C.

Truth in Lending: 9.10.1 Introduction

Since October 1, 2009, when an FRB rule became effective, Regulation Z has addressed certain activities of mortgage servicers. The FRB’s rule1135 was issued under its authority to prohibit unfair and deceptive acts and practices in connection with mortgage loans.1136 It applies to loans secured by a principal dwelling and addresses three practices: crediting payments, providing payoff statements, and pyramiding of late fees.

Truth in Lending: 9.10.6.2 Rule Effective January 10, 2014

The Dodd-Frank Act mandates that servicers credit periodic payments on consumer credit transactions secured by a consumer’s principal dwelling as of the date of receipt.1355 Like the FRB rule, there is an exception when a delay in crediting the payment does not result in any charge to the consumer or in the reporting of negative credit information to a consumer reporting agency.1356 Also like the FRB rule, electronic payments are considered received when the servicer receives the payment

Truth in Lending: 9.10.10 Servicer Safe Harbor for Certain Loss Mitigation Plans

The Truth in Lending Act includes a safe harbor for servicers that provide certain loss mitigation plans during a finite time period, shielding the servicers from liability to any particular investor by deeming such actions as meeting the “net present value” requirement in pooling and servicing agreements. Specifically, 15 U.S.C.

Truth in Lending: 9.5.3 Coverage

The rule covers all HPMLs secured by the consumer’s principal dwelling, including purchase loans. The higher-priced mortgage regulation493 applies if the creditor received an application on or after October 1, 2009,494 except for the escrow, appraisal, prepayment, and ability-to-repay provisions.

Truth in Lending: 9.5.4.2 Ability to Repay

The creditor must evaluate the consumer’s ability to repay using the same standards set in the revised rules applicable to HOEPA loans.498 As of January 10, 2014, the relevant ability-to-repay requirements can be found in Regulation Z § 1026.43. These rules are discussed at § 9.3.3, supra.

Truth in Lending: 9.5.4.5.2 Exemptions

Even if a loan meets the definition of a higher-priced mortgage loan (HPML), it may qualify for one of several exemptions to the escrow requirement: loans used to finance the initial construction of a home, temporary or bridge loans with a term of twelve months or less, cooperative shares, reverse mortgages, and all forms of open-end credit.507 Insurance premiums need not be included in the escrow amounts if the home is a condominium or the homeowner otherwise belongs to an association that maintains a master insurance policy on the premise

Truth in Lending: 9.5.4.5.3 Escrow account requirements

Under the Dodd-Frank Act, a creditor must establish an escrow account in a federally insured depository institution or credit union and administer it in compliance with the Real Estate Settlement Procedures Act and other laws.522 Any interest required under federal or state law must be paid on the escrow account.523 Required disclosures in connection with the escrow account include:

Truth in Lending: 9.5.4.6.2 Exemptions

The appraisal requirement contains a number of exemptions, including for reverse mortgages,534 qualified mortgages,535 temporary bridge loans,536 construction loans,537 and loans secured by mobile homes, boats, and trailers.538 The exemption for mobile homes does not include manufactured homes,539

Truth in Lending: 9.5.4.6.3 Appraisal requirements

For higher-priced mortgage loans, the rule requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical inspection of the interior of the property.561 The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and to provide consumers with a free copy of any appraisal report.562

Truth in Lending: 9.5.5 Remedies

Significantly, a violation of the prepayment penalty provision (like its HOEPA counterpart) triggers rescission. The definition of “material” disclosure in Regulation Z specifically includes this provision for purposes of rescission.565

Truth in Lending: 9.6.1.1 Introduction

In 1994, Congress amended TILA with the passage of the Home Ownership and Equity Protection Act (HOEPA).569 HOEPA was designed to protect vulnerable consumers from some predatory lending practices by providing additional consumer protections for a class of closed-end, non-purchase-money, relatively expensive home mortgage loans.570 HOEPA’s additional protections include three-day advance Miranda-like disclosures; prohibitions on certain abusive loan terms and creditor practices; increased st

Truth in Lending: 9.6.1.2 Background and Legislative History

In 1993 and 1994, the House and the Senate each held a series of hearings on abusive home lending.590 The record in those hearings details the sordid side of home mortgage lending.591 Numerous witnesses catalogued the hardship, dislocation, and neighborhood destabilization caused by expensive mortgage lending.592 Homeowners from a number of communities traveled to the hearings by overnight bus and surprised legislators by singing spirituals a

Truth in Lending: 9.6.1.3 Major Regulatory Action Since HOEPA’s Effective Date

Following HOEPA’s enactment and as a result of a Congressional directive,599 the Federal Reserve Board held hearings and obtained public comment on a variety of issues relevant to HOEPA in 1997.600 The next year, the FRB and HUD released a Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act.

Truth in Lending: 9.6.1.4 Preemption

Congress recognized that it was regulating high-cost loans only to a limited extent when it enacted HOEPA. State laws in existence before HOEPA and those passed after HOEPA are not preempted, except “to the extent that those [s]tate laws are inconsistent with any provisions of § 1639 . . .

Truth in Lending: 9.6.2.3.1.1 Overview

The 1982 exclusion of “arrangers” from the definition of creditor642 created a loophole which enabled brokers in the business of writing high-cost mortgages to deprive borrowers of both Truth in Lending disclosures and rescission rights. This was done by arranging for loans from individuals or other entities who did not meet the numerical test to be a “creditor” for TILA purposes.643

Truth in Lending: 9.6.2.3.1.2 Pleading requirements and factual development

Pleading requirements may be fairly minimal.647 Nonetheless, practitioners should not ignore the development of factual evidence, where it exists. Many high-cost transactions will appear to be made by a private individual and only careful investigation will reveal the involvement of a broker. Particularly in the foreclosure “rescue” context,648 the operators do not generally portray their transactions as loans or present themselves as lenders or brokers.