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Basis Points Articles

Basis Points® is a concise, easy-to-read, monthly legal update that you can depend on to provide timely answers to legal questions you face every day. Basis Points addresses complex legal issues from an industry perspective; it also keeps you informed on new legal developments affecting your business.

Basis Points® provides authoritative, reliable information in easy-to-read, plain English. The newsletter provides familiar factual scenarios, identifies the legal issues involved and presents real court resolutions and suggestions on how you might avoid similar legal pitfalls. This practical, useful publication will provide you and your management team with valuable knowledge designed to increase awareness of legal consequences attendant to everyday business decisions.

Basis Points® 2005 Archive
January, 2005	-	TILA Statute of Limitations Tolled for Failure To Provide Loan Documents in Spanish

Basis Points® 2004 Archive
December, 2004	-	Massachusetts Issues Temporary Emergency Regulations Addressing 'Borrower's Interest' Provision in New Law
November, 2004	-	Fannie Mae Revises Policy on Mandatory Arbitration Clauses
Sept/Oct, 2004	-	Second Circuit: 'Mark-Up' of Third-Party Settlement Services States RESPA Claim
August, 2004	-	New Mexico Adopts Regulations Implementing Home Loan Protection Act
July, 2004	-	Massachusetts, Connecticut Amend Mortgage Loan Rate Lock-In Requirements
June, 2004	-	D.C. Adopts Rules Governing Mortgage Lenders and Brokers
May, 2004	-	Federal Reserve Amends Reg. Z & Commentary
April, 2004	-	Agencies Issue Joint Guidance on Unfair or Deceptive Practices
March, 2004	-	TILA Mistakes Can Be 'Netted' for Tolerance Purposes
February, 2004	-	OCC Issues National Bank Preemption Rules
January, 2004	-	Fees Not Expressly Authorized by Iowa Consumer Credit Code Are Permissible But Considered Finance Charges

Basis Points® 2003 Archive
December, 2003	-	Eleventh Circuit Says Single Party Can Violate RESPA by Upcharging Fees
November, 2003	-	Acknowledgement of Receipt Can Be Challenged in Rescindable Transactions
Sept/Oct, 2003	-	Illinois Joins Bandwagon, Enacts Predatory Lending Legislation
August, 2003	-	Arbitrator Decides Whether Arbitration Clause Permits Class-wide Arbitration
July, 2003	-	Arbitration Agreement Prohibiting Punitive Damages Upheld
June, 2003	-	Right to Rescind Extended for Directing Rescission Notice to Husband Only
May, 2003	-	Section 501 Preempts California Restriction On When Interest Can Accrue
April, 2003	-	The Ninth Circuit OKs Volume Based Discounts
March, 2003	-	OCC Says Bank Op Subs Can Export Interest
February, 2003	-	FTC to Mortgage Brokers: You are Subject to New Privacy Rules
January, 2003	-	L.A. Predatory Lending Ordinance

Basis Points® 2002 Archive
December, 2002	-	Proposed Commentary to Regulation Z Would Allow Fast Pay Fees
November, 2002	-	New York Statute: Bad to the Bone
October, 2002	-	OTS Removes Preemption for Prepayment Charges and Late Charges
Aug/Sept, 2002	-	HUD Proposes Radical RESPA Rewrite
July, 2002	-	HMDA Revised to Require Reporting Loans With "Higher Rates"
June, 2002	-	Boulware: How The Fourth Circuit Decided RESPA is Not a Price Control Statute
May, 2002	-	OTS Proposes Repeal of AMTPA
April, 2002	-	Do You Know Your Applications From Your Prequalifications?
March, 2002	-	Massachusetts Division of Banks Declares Prepayment Penalties Unlawful
February, 2002	-	Time to Refresh Your Privacy Policies
January, 2002	-	FRB Expands Loans Subject to Section 32 Limits

Proposed Commentary to Regulation Z Would Allow Fast Pay Fees

The following article is reprinted from Basis Points® , Vol. 1, Issue 12, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Do you offer your customers the option to make payments via an expedited payment service, such as FastPay or other electronic check service? Your life may just get simpler if the Federal Reserve Board (Board) adopts just-published proposed revisions to its Official Staff Commentary to Regulation Z.

The Truth in Lending Act (TILA) is implemented by the Board's Regulation Z (12 CFR part 226). The Board has delegated to officials in the Board's Division of Consumer and Community Affairs authority to issue official staff interpretations of Regulation Z. These interpretations are incorporated in the Commentary (12 CFR part 226 (Supp. I)). The Commentary provides guidance to creditors on how to apply the regulation to specific transactions. Creditors who rely on the Commentary in good faith are generally protected from liability under section 130(f) of TILA. The staff updates the Commentary periodically to address significant new questions that arise.

Open End Credit

The proposal addresses how to disclose FastPay fees, and the circumstances under which a creditor can deliver substitute credit cards to a consumer.

FastPay. Credit card and HELOC servicers increasingly have been making expedited payment services available to consumers. The expedited payment service provides consumers an alternative to mailing a payment that might not reach the card issuer by the due date. To avoid being assessed a late payment fee, the consumer often agrees to pay a lesser charge for the expedited payment service. The service is typically an electronic funds transfer or a draft on the customer's checking account. "Expedited" refers to any form of payment or delivery other than the standard mail service generally made available to the creditor's customers.

For some time now, the industry has been arm wrestling with the Board staff over whether these fees are finance charges. Initially, the staff was adamant that such fees are finance charges. "Finance charge" is defined in TILA as any fee "payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." Suppose that you set up an account and tell the consumer that she may pay by check or electronic/ACH payment so long as the payment is made by the due date. However, if she would like, she could call you and you would arrange for an electronic check to be drawn on her account in the amount of the payment due on the account plus a service charge. Is that a TILA "finance charge?"

In the Proposed Commentary, the staff reverses that position and hold that such fees are not finance charges. According to the staff, a fee charged for expediting a consumer's payment is not "incidental to the extension of credit" if this payment method is not established as the regular payment method for the account. Accordingly, the proposal indicates that an expedited payment charge under these circumstances would not be a finance charge. This appears to be the case even if the creditor retains a portion of the fee. However, the fee would be disclosed as an "other charge" under Section 226.6(b). See new proposed comment 6(b)-1.

In addition, the staff has proposed to revise the "change in terms" provisions of the Commentary to allow creditors to change the amount of this fee without having to go through a change in terms under the Regulation. Normally, if a creditor changes a term of an open end account that was a required disclosure under the account opening rules in Section 226.6, a creditor must give the customer written notice of the change and wait at least 15 days after giving notice to make the change. The staff has proposed to waive that requirement for changes in the expedited payment fees. They argue that, in most cases, the creditor discloses the fee to the consumer before completing the expedited payment transaction. The implication is that advance notice would not be of much/any use to the consumer because the consumer already receives adequate notice at the time she decides to use the expedited service. See proposed new comment 9(c)(2)-1.

The staff has left an open question. It is not at all clear that a creditor could change the amount of the fee on a HELOC account. The HELOC rules impose special, some would say draconian, limitations on when a creditor can change the terms of an account. Except in very limited circumstances, a creditor may change the terms of a HELOC account only if the change will "unequivocally benefit the consumer." You might have a hard time arguing that an increase in a fee will unequivocally benefit your customer. Of course, if the facts are that the consumer will definitely incur a late fee if the service is not used, the fee for the service is less than the late fee, and the service will not be available unless the fee is paid, it seems contrary to the purpose and spirit of TILA to deny the consumer the right to incur the increased expedited fee charge rather than pay a larger amount in late fees.

Expedited delivery fee. The staff has also proposed that a fee imposed to expedite delivery of a replacement credit card not be disclosed as a finance charge or an "other charge." According to the staff, an expedited delivery fee is not "incidental to the extension of credit" where the card is also available to consumers by standard mail service without paying the fee. As a result, it is not a finance charge. In addition, the charge is not an "other charge" under Regulation Z for two reasons. First, it is not a significant part of the credit plan so long as the card is also available without paying the fee. Second, consumers don't incur the fee very often. Consumers request the expedited delivery service only occasionally, such as when a consumer seeks to replace a lost or stolen credit card and requests expedited mailing. See proposed new comment 6(b)-2.

Special rules on delivering credit cards. As a general rule, Section 226.12 of Regulation Z prohibits you from delivering a credit card to a consumer unless the consumer has asked for the card. This restriction was one of the most important of the "credit card rules" when those rules were added to TILA back in the pre-historic times of the early 1970s.

There was a time, if you can imagine it, when cash was king in middle class America. And, when cash was inadequate, you opened a store account (essentially, a revolving retail installment sales account) with each individual merchant where you shopped. At the end of each month, you received separate bills from JC Penney's, Sears, Texaco, and maybe even the local butcher. In many instances, people would walk or drive down to the merchant's billing office to make the monthly payment, often in cash. The merchant maintained paper ledgers where they recorded the amount of each new purchase and payment. They figured payment amounts from accounting tables or, if really fancy, a slide rule. Some merchants handed out membership or ID cards that you would use to identify your account when you made a purchase. If you were rich and you traveled a lot, you might have a Diners Club card in your wallet. But that was really a charge card, payable in full at the end of each month. And it was only accepted by a few upscale merchants in the travel and entertainment business.

Then Bank of America had a thought. What if we collect all of the merchants in Central California and convince them to accept a universal card that can be used anywhere? We could convince the merchants that they could sell more products if customers were not limited to cash on hand. And the merchants could close out the billing departments that tried to keep pace with in-house credit plan billings and collections. Merchants would only buy into the plan if they could expect a high volume of customers to own and use the new BankAmericard. So, BankAmerica carpet-bombed Central California residents with mailings that included actual credit cards.

Consumers reacted as you might expect. Chaos ensued. Many threw the cards in the garbage. Of those who kept the cards and used them, a significant number maxed out on the credit line and then could not make the payments. Some claimed they did not even realize that the money had to be repaid. The US Mail being what it was, many cards were lost or not delivered. Many of these fell into the hands of people who used them to buy things knowing that someone else was going to get the bill. Bank of America tried to collect from some of these customers even where the charges were fraudulent.

Out of this whirlwind were born two institutions that remain with us to this day. One is the VISA system. (Citicorp matched the process on the East Coast and gave birth to MasterCard). The other is the cardholder protections under the Truth in Lending Act. And, because of that chaotic consumer response to unsolicited cards in the initial BankAmericard trials, one of the cornerstone rules in the new credit card rules prohibited issuers from delivering cards to consumers unless the consumer asked for the card.

Every rule must have an exception. And this rule is no exception. A creditor can deliver new cards to existing cardholders without a specific request from the cardholder. Among other things, this exception has enabled issuers to make frequent changes to that familiar piece of plastic to keep pace with technological advances and to make cards ever easier to use and ever more secure against fraudulent transactions. Today, that familiar piece of plastic is itself undergoing change. Some cards can now be read by flashing them at a reader, rather than swiping them through a machine that reads the old fashioned magnetic stripe on the back of the card. With this new technology (you see it at some gas pumps these days) the "card" can be as small as an inch or two long and hang off your key chain.

Issuers who want to expand the market for this new technology were stymied by the traditional rule against delivering unsolicited cards. They want the ability to deliver the new-fangled card that will be accessible at only a few merchants who have bought in to the leading edge technology, and a traditional card that can be used at all the usual locations. In response, the staff has proposed to amend the Commentary to allow an issuer to deliver multiple replacement cards so long as they all relate to the same account, are subject to the same account terms, and do not increase the consumer's liability for unauthorized use.

Closed End Credit

Payment Schedule Disclosure. The closed-end credit rules require you to describe the number, amounts and timing of scheduled payments. Private mortgage insurance premiums must be part of these calculations if they are part of the monthly payment. Under the Homeowners Protection Act of 1998, you are required to terminate PMI under certain conditions. Apparently, some creditors asked for help determining when the last payment with PMI as a portion happens when you have a portion of the PMI in an escrow account. So, the staff has proposed to revise paragraph 18(g)-5 of the Commentary to add an example. Suppose the PMI must terminate after the 120th scheduled monthly payment and you have collected two months worth of the PMI premiums in the escrow account as a hedge against missed payments. If the legal obligation requires the lender to apply the escrowed payments as the final premium payments, then the payment schedule disclosure would include PMI premiums for only 118 months. On the other hand, if the legal obligation permits the lender to refund the excess amount held in escrow to the borrower, then you would show the borrower making 120 monthly PMI payments in the payments schedule.

HOEPA: How to Select a Treasury Yield. The HOEPA or high cost loan test for mortgage loans requires you to compare the APR on the loan to the yield on Treasury securities with a comparable yield. Currently, the law permits you to use the actual results of Treasury auctions or the Board's "Selected Interest Rates" (statistical release H-15), which is published daily and lists the yield on actively traded issues adjusted to constant maturities. The H-15 is posted on the Board's Internet Web site at: www.federalreserve.gov/releases/h15/update.

The H-15 lists yields for various instruments. Creditors that rely on the H-15 have asked for additional guidance on the appropriate instrument to use when the loan maturity is comparable with more than one instrument. For example, the H-15 lists yields for Treasury bills as well as for actively traded Treasury securities adjusted to constant maturities of 6 months. The proposed comment clarifies that you are supposed to compare to the yield on the Treasury security adjusted to a constant maturity.

In addition, the staff offers an explanation of what to do when the Treasury plays "hide the security." The Department of the Treasury recently ceased auctioning 30-year securities. So, if you have a loan with a 30-year term, what do you use as a comparable Treasury yield? The H-15 currently lists a long-term average of the yields for Treasury securities with terms to maturity of 25 years and over, and refers to Treasury's formula for estimating a 30-year yield. The proposed comment would clarify that you should compare the APR on 30-year loans (and other loans longer than 20 years) with the yield for a 20-year constant maturity, and not with the average long-term yield for maturities over 25 years or an estimate for a 30-year yield.

The proposal eliminates the option to use yields of actual auction results. The staff identified two reasons. First, the longest maturity for auctioned Treasury securities is 10 years, while home-secured loans commonly have terms of 15 years or more. As a result, the maturities don't match up very well. Second, and probably more important, Treasury auctions are held infrequently. The H-15 is updated daily, which affords a more precise determination of the yield for Treasury securities as of the fifteenth day of the month preceding the application, the date mandated by HOEPA. Requiring all creditors to use the H-15 would ensure uniform application of HOEPA by eliminating the possibility that some creditors could use yields from auctions held several months before the loan application, which might differ significantly from the yields updated daily on the H-15. Many creditors already rely on the H-15 rather than actual auction results, and the revision is not expected to significantly affect creditor practices.

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Basis Points® is a concise, easy-to-read, monthly legal update for the mortgage lending industry. Basis Points® addresses complex legal issues from an industry perspective and keeps you informed on new legal developments affecting your business. Written in plain English, Basis Points® provides familiar factual scenarios, identifies the legal issues involved, presents real court resolutions and suggests how you might avoid similar legal pitfalls. Topics featured in Basis Points® include: Predatory Lending; Yield-Spread Premiums; RESPA - Fee Splitting and Up charges; Privacy; RESPA - Joint Venture; Bankruptcy; Fair Lending and Discrimination; and Truth in Lending/ Regulation Z. Basis Points® is published by CounselorLibrary.com, LLC, an affiliate of the Hudson Cook, LLP law firm. The CounselorLibrary.com, LLC is also the publisher of CARLAW®, HouseLaw®, Spot Delivery®, and the Counselor Library Series. For more information, please visit: www.counselorlibrary.com.

New York Statute: Bad to the Bone

The following article is reprinted from Basis Points® , Vol. 1, Issue 11, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

News of the New York high cost loan statute reaches us from Grace Sterrett in Hudson Cook's Albany, NY office. The statute contains much tougher standards than exist under Part 41 of the Banking Department's existing rules. The new law becomes effective 180 days after enactment, or approximately April 1, 2003. Governor Pataki signed the measure into law on October 3, 2002 - the same day it was sent to him by the legislature.

Possible Changes. Many lenders and investors hope the legislature will consider amending the onerous penalty provisions and/or issue clarifying amendments before the effective date, but the prospects for either are generally rated as ranging from unlikely to slim.

Will the Regulators Pitch In? Among other issues, the statute provides that "the superintendent of banks is authorized to promulgate any and all rules and regulations and take any measures to implement this act on its effective date on or before such date." However, in New York legislative parlance, an "authorization" is not the same as a "directive." As a consequence, the Banking Department is not required to implement regulations. Absent such a requirement, the Department may elect to sit this one out and refrain from issuing any regulations. If this happens, the industry will be at a great disadvantage. Without a regulator who can provide implementing rules and guidelines, matters of interpretation will be settled through enforcement actions brought by the attorney general, the superintendent, or a private party. Finally, the new law does not contain a preemption clause, so that other municipalities are free to adopt their own version of an anti-predatory lending law or ordinance.

Recent Changes to Part 41. While the legislative process for enacting this new law was at a stand-still, the Banking Board proceeded to amend its High Cost Mortgage Regulation, known as "Part 41" to:

Prohibit any lender or affiliate from financing single premium credit insurance offered in connection with a high cost loan subject to Part 41;
Provide two alternative sources for lenders to determine the applicable yield on US Treasury securities (vital for calculating the APR "triggers"), and
Enact several other clarifying amendments making the regulation comport with many of the unofficial interpretations provided by the Banking Department since October 1, 2000, the date the regulation initially became effective.

These amendments were published in the New York State Register on October 2, 2002 and are expected to become effective in early November. To find out more information on Part 41, click on the Banking Department's website at www.banking.state.ny.us and look for references to "High Cost Loans." Unless the Banking Department takes some action, Part 41 will be obsolete and replaced by the new statute on its effective date.

Is This New Law Much Different (Worse) Than Part 41?

Penalties - Much Worse. With respect to the penalty and related enforcement provisions, the new act is much tougher than Part 41. The current banking regulations impose requirements on brokers and lenders soliciting and originating Part 41 loans. Those who violate Part 41 are subject to administrative penalties. The Banking Department is authorized to impose administrative sanctions on lenders and brokers. Those penalties could be as severe as canceling a mortgage broker's registration or a mortgage banker's license to do business in New York. However, Part 41 does not create a private cause of action for consumers or affect the rights of assignees in the loan.

The new law provides for actual damages, statutory damage - including forfeiture of all interest on the loan (earned and unearned), fees and closing costs. A court may rescind any loan that violates the new law. The penalty for intentional violations is even more draconian - the court may declare the entire transaction void and mandate a complete refund of all principal and interest to the borrower.

Assignees who seek to foreclose a high-cost home loan, or to take some enforcement action after the loan has been in default for 60 or more days, may be subject to claims under the act in recoupment or defense to payment that the borrower could have asserted against the original lender.

Foreclosure Uncertain. A companion act provides borrowers with a defense to a foreclosure proceeding if anyone violates the act. Lenders will be required to affirm that they have complied with all requirements under Banking Law §595-a (which addresses various compliance procedures ranging from advertising to the making, closing, and funding of mortgage loans with various disclosure and substantive obligations) and the new law, Banking Law §6-1. This may be difficult for any lender to do. It will be virtually impossible for an assignee to do when that assignee has no real factual knowledge of everything that was given (or not given) to the borrower in the course of the solicitation, application and closing process. Due diligence regarding the purchase of loan portfolios does not typically include a total review of each loan transaction for technical and substantive compliance with every New York requirement.

Threshold Triggers. The new law applies to all loans/lines of $300,000 or less (higher limits may apply for 2-4 family dwellings per Fannie Mae thresholds) made for consumer purposes secured by an owner-occupied principal residence. The loan could be purchase money or non-purchase money. The loan could be open or closed-end. Reverse mortgages are not included.

APR Test. A first lien loan is subject to the act if the APR at consummation exceeds the yield on US Treasury Securities with a comparable term to maturity plus eight percentage points. For junior lien loans, the margin is nine percentage points. In either case, you use the Treasury yield in effect on the 15th day of the month preceding the month in which the application is taken. If the initial rate is discounted, then you use the fully indexed rate for this test.

Points and Fees Test. A first lien loan is subject to the act if the points and fees exceed five percent of the total loan amount (six percent if the loan is a purchase money FHA/VA loan).

Special rules apply if the total loan amount is less than $50,000. In this case, the loan is subject to the act if the points and fees exceed the greater of $1,500 or six percent of the total loan amount. However, you are also allowed to charge and exclude from the points and fees test up to two "bona fide loan discount points" if either of the following is true:

The interest rate that would have applied without the discount points is no more than one percentage point over the Treasury yield used for the APR Test, described above, or
The discount points are funded, directly or indirectly, through a grant from a federal, state or local government agency, or a charitable organization registered under Section 501(c)(3) of the Internal Revenue Code.

Definitions. While the New York act steals phrases like "points and fees" and "total loan amount" from the HOEPA rules, the definitions of those terms differ from the definitions under HOEPA. Here are some key definitions under the New York law.

Points and Fees. "Points and fees" are calculated the same as under the HOEPA rules, with one major exception. In New York, the "points and fees" include:

All prepaid finance charges,
All fees excluded from the finance charge under Section 226.4(c)(7) if the fee is paid to the lender or its affiliate,
All credit insurance premiums, paid at closing or financed, that have somehow escaped the definition of prepaid finance charge (i.e., the creditor has complied with the rules under Section 226.4(d)(1) to exclude the premiums from the finance charge), plus
All compensation paid directly or indirectly to a mortgage broker, including a broker who originates loans in its own name through table funded transactions.

The HOEPA rules do not include the last category, fees paid to a mortgage broker that are not finance charges, in the calculation. As a result, you must include things like yield spread premium payments in the New York calculation of points and fees even though those same sums are excluded from the HOEPA calculation.

Total Loan Amount. The "total loan amount" is also dramatically different under New York law. Under New York law, the "total loan amount" equals:

The principal amount minus
Any portion of NY points and fees that are financed.

Under the HOEPA definition, the "total loan amount" is the principal minus all prepaid finance charges (whether financed or not), minus the sum of the following items, provided they are financed (added to the principal):

All fees excluded from the finance charge under Section 226.4(c)(7) if the fee is paid to the lender or its affiliate, plus
All credit insurance premiums, paid at closing or financed, that have somehow escaped the definition of prepaid finance charge (i.e., the creditor has complied with the rules under Section 226.4(d)(1) to exclude the premiums from the finance charge).

So, if you have prepaid finance charges or voluntary credit insurance premiums that are paid out of pocket by the borrower, the NY total loan amount will be less than the HOEPA total loan amount.

Bona Fide Loan Discount Points. Bona fide loan discount points include loan discount points that:

Are knowingly paid by the borrower or funded through any source
For the purpose of reducing the interest rate
And actually reduce the interest rate
By an amount reasonably consistent with established industry norms and practices for secondary market transactions.

The act presumes a point is a bona fide loan discount point if it reduces the interest rate by a minimum of 25 basis points, assuming all other loan terms remain constant. Notwithstanding this presumption, you may want to use a disclosure or agreement where the consumer acknowledges each of the four criteria set forth in the definition.

Limitations and Prohibited Practices. A high-cost home loan is subject to the following limitations:

No Call Provisions. You may not have the right, in it your sole discretion, to accelerate the indebtedness. This does not prohibit you from accelerating the loan in good faith due to borrower's failure to abide by material terms of the loan.
No Balloon Payments. No scheduled payment may be more than twice as large as the average of earlier scheduled payments, unless the balloon payment is due 15 years or more after origination. Exception: This prohibition does not apply to loans where the payment schedule is adjusted to the seasonal or irregular income of the borrower.
No Negative Amortization. The payment schedule may not provide for regular periodic payments that cause the principal balance to increase.
No Increased Interest Rate After Default. (This does not prohibit interest rate changes under a variable rate formula, provided the increase is not triggered by an event of default.)
Limitation On Advance Payments. You may not consolidate and pay in advance from the loan proceeds more than two periodic payments required under the loan terms.
No Modification Or Deferral Fees. You may not charge the borrower any fee to modify, renew, extend or amend (collectively called a "change") a high-cost home loan, or to defer any payment due under a high-cost home loan if:
- After the change the loan is still a high-cost home loan or
- Even if no longer a high-cost home loan, the APR has not been decreased by at least 2 percentage points.
- If you lend "new money" in connection with any "change," you may charge points and fees in connection with any additional proceeds received by the borrower as a result of the "change" (over and above the current principal balance of the existing high-cost home loan), provided that any charges on the additional proceeds reflect your "typical point and fee structure for high-cost home loans."
No Oppressive Mandatory Arbitration Clauses. The loan terms cannot contain any such clause that is unfair, unconscionable, or substantially in derogation of the rights of consumers. Note that this provision is likely preempted by the Federal Arbitration Act.
No Financing Of Single Premium Insurance. You may not finance the cost of single premium credit insurance or related products. Debt cancellation or suspension agreements are included in this category of prohibited credit insurance. Note that premiums calculated and paid on a monthly basis are not considered " financed" by the lender and so are permitted.
No "Loan Flipping." No lender or mortgage broker making or arranging a high-cost home loan may engage in "loan-flipping." This is defined as making a home loan to a borrower who refinances an existing home loan when the new loan does not have a "tangible net benefit" to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan and the borrower's situation. The term " tangible net benefit" is not defined.
No Refinancing of Special Mortgages. Absent documentation by a HUD certified housing counselor or the original lender that the borrower has received counseling regarding the advantages and disadvantages of refinancing, you may not refinance an existing home loan that is a "special mortgage" into a high cost loan. A "special mortgage" is one originated, subsidized or guaranteed by or through a state, tribal, local government or nonprofit organization and which bears a below market interest rate at the time of origination or has non-standard payment terms beneficial to the borrower. The types of non-standard payment terms contemplated here include payments that vary based upon income or where no payments are required under certain conditions.
No Lending Without Due regard To Repayment Ability. You are prohibited from making or arranging a high-cost home loan without due regard to repayment ability. Factors to consider include:
- Current and expected income;
- Current obligations;
- Employment status; and
- Other financial sources.

You may not consider the borrower's equity in the home. Such information must be "… verified by detailed documentation of all sources of income, as and corroborated by independent verification."

You have a "rebuttable presumption" that a loan was made with due regard to repayment ability if you can demonstrate that, at the time the loan was made, the borrower's total monthly debts, including amounts owed under the loan, did not exceed 50% of the borrower's monthly gross income, provided the lender also followed the residual income guidelines established by the Veterans Administration as set forth in 38 C.F.R. § 36.4337(e) and VA Form 26-6393.

No Financing of "points and fees" in excess of 3% of the principal amount of the loan. Note: This 3% limit is of the principal loan amount, not the " Total Loan Amount," which would be a lower number.
No Direct Payment of Home Improvement Contractors. You must make payments from the loan proceeds to a contractor under a home improvement contract by one of the following 3 methods:
- By instrument payable to the borrower only,
- By instrument payable jointly to the borrower and contractor, or
- At the election of the borrower, through a third party escrow agent pursuant to the terms of a written agreement signed by the borrower, the lender and the contractor prior to the disbursement.
No Encouragement Of Default. You may not recommend or encourage default on an existing loan or debt prior to or in connection with the closing or planned closing of a high-cost home loan that refinances all or some portion of that existing loan or debt.
No Payments to Mortgage Brokers, Other Than For Reasonable Value Of Goods, Facilities or Services Actually Provided. No lender or broker may accept or give any "…fee, kickback, thing of value, proportion, split or percentage of charges, other than as payment for goods or facilities that were actually furnished or services that were actually performed." Payments must also be reasonably related to the value of the goods, facilities or services provided.
No Points and Fees By Lender Refinancing A High-Cost Loan Held By It. You may not charge a borrower any points and fees in connection with a high cost loan, if the loan proceeds will be used to refinance an existing high cost home loan held by you or your affiliate.

Disclosures. The new act requires you to make the following disclosures.

Application Disclosures. At time of application, the lender or broker must deliver, mail, fax or electronically transmit the following notice - in at least 12-point type - to the borrower:

You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department.

This disclosure must be on a separate form. The notice must be accompanied by the list of approved counselors, which is available from the New York Banking Department. If you take the application by telephone, you must provide the disclosure "immediately after receipt of the application by telephone." If you send the notice electronically, you must first obtain written or electronic permission from the borrower.

Pre-Closing Disclosure. You may not make or arrange a high-cost home loan unless the following notice is given in writing to the borrower within 3 days after you determine the loan is a high cost home loan, but no less than 10 days before closing.

CONSUMER CAUTION AND HOME COUNSELING NOTICE

If you obtain this loan, which pursuant to New York State Law is a High-Cost Home Loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.

You should shop around and compare loan rates and fees. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your earnings history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could vary based on which lender or mortgage broker you select. Higher rates and fees may be related to the individual circumstances of a particular consumer's application.

You should consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rate, fees, and provisions of this mortgage loan before you proceed. The enclosed list of counselors is provided by the New York State Banking Department.

You are not required to complete any loan agreement merely because you have received these disclosures or have signed a loan application. If you proceed with this mortgage loan, you should also remember that you may face serious financial risks if you use this loan to pay off credit card debts and other debts in connection with this transaction and then subsequently incur significant new credit card charges or other debts. If you continue to accumulate debt after this loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations.

Property taxes and homeowner's insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services.

Your payments on existing debts contribute to your credit ratings. You should not accept any advice to ignore your regular payments to your existing creditors. Accordingly, it is important that you make regular payments to your existing creditors.

Notice that the form indicates that the list of counselors as provided by the New York Banking Department is "enclosed." However, the act instructs you to deliver the list with the application disclosure, not the pre-closing disclosure.

Mortgage Legend. You must insert a legend in 12-point type on the top of each mortgage that secures a high-cost home loan to indicate to any potential purchaser that the loan is a high cost loan. Unfortunately, the New York act does not provide the legend itself. Until contrary regulatory guidance appears, the following would seem to meet the statutory requirements:

THIS MORTGAGE SECURES A HIGH-COST HOME LOAN SUBJECT TO NEW YORK BANKING LAW §6-1.

Operational Requirements : Annual Reports to Credit Bureaus. Lenders making high-cost home loans are required to report both the favorable and unfavorable payment history of each borrower to a nationally recognized consumer credit bureau at least annually, for as long as lender holds or services the high-cost loan. Surprisingly, this requirement does not appear to apply to loan servicers who did not originate the loan.

Penalties/Remedies. Any person found "by a preponderance of the evidence" to have violated the law is liable to the borrower for the following:

Actual damages - including consequential and incidental damages;
Statutory damages as follows:
- All interest, points and fees and closing costs charged on the loan must be refunded, and any amounts not yet earned must be forfeited. This appears to mean that the borrower is entitled to a cost-free loan. Or
- The greater of: $5,000 per violation or twice the amount of points and fees and closing costs if the violation involves (a) the prohibitions against "loan flipping" or (b) the requirement to verify that the borrower has the "ability to repay" and the lender fails to demonstrate that it verified, by detailed documentation, all sources of the borrower's income and corroborated it with independent verification at the time the loan was made.
Reasonable attorneys' fees
A court may grant injunctive, declaratory or similar relief as the court deems appropriate in an action to enforce compliance with this law
Upon a finding by a court of an intentional violation by the lender of this law or any implementing regulation, the home loan agreement is void and the lender may not "collect, receive, or retain" any principal, interest or other charges. The borrower may also recover any payments made.
If a court finds that a high-cost loan violates any provision of the law, the loan transaction may be rescinded. The remedy of rescission is available as a defense, without time limitation.
The statute expressly provides that the remedies provided for in the statute are not intended to be the exclusive remedies available to a borrower.

Scope Of Penalty-Enforcement Provisions. The act applies to brokers and lenders that arrange for or make high cost mortgage loans, and to any person, who in bad faith attempts to avoid application of the law "by any subterfuge, including but not limited to splitting or dividing any loan transaction into separate parts for the purpose of evading the provisions of this section."

Assignee Liability. If an assignee brings an action to enforce a loan against a borrower who is in default more than 60 days or who is in foreclosure, the borrower may assert any claim under the provisions of this law in recoupment and defense to payment. In addition, as discussed above, the borrower has the right to rescind the loan at any time if he or she discovers that the lender or broker have violated the act.

Who Are The Enforcers? The act can be enforced by the state attorney general, the superintendent of banks, or any party to a high-cost loan.

Opportunity to Correct/Cure Violations? A lender, who, acting in good faith, nevertheless violates a provision of the law, will not be deemed to have violated the law:

Provided within 30 days of the loan closing and prior to the institution of any action under this law, the borrower is notified of the "compliance failure," appropriate restitution is made and at the choice of the borrower, the necessary adjustments are made so that: i) the high-cost home loan complies with the law or ii) the terms of the loan are changed in a manner beneficial to the borrower so that the amended loan is no longer a high cost home loan; or
If the "compliance failure" resulted from a bona fide error, notwithstanding the maintenance of procedures reasonable adopted to avoid such errors, and, within 60 days after the discovery of the violation, but before the commencement of an action under the law or receipt of written notice of the violation, the borrower is notified of the "compliance failure," appropriate restitution is made and at the choice of the borrower, the necessary adjustments are made so that: i) the high-cost home loan complies with the law or ii) the terms of the loan are changed in a manner beneficial to the borrower so that the amended loan is no longer a high cost home loan.

Crystal Ball Readings. At this point it's too early to predict whether Banking Law §6-1 will be launched as is, or whether lenders and investors will be successful in their efforts to have any amendments adopted. In addition to encouraging lawmakers to reconsider the potential chilling impact that some of the sweeping penalty provisions may have on the availability of mortgage credit for higher credit-risk borrowers in New York, it would make sense to have a uniform state law, rather than a patch-work quilt of laws and ordinances on state and local levels - so the addition of a preemption clause should surely be sought. The new law could benefit from a clarification or reconsideration of the use of a "bona fide discount points" to buy down the interest rate. Currently such discount points can only be excluded from the "points & fees" threshold for a conventional loan if the interest rate (which will be bought down by the points) does not exceed by more than 1 percentage point, the yield on United States Treasury Securities having comparable periods of maturity to the loan maturity. Stayed tuned for further developments.

For more information on NY Banking Law § 6-1, feel free to contact Grace Sterrett at (518) 383-9440.

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OTS Removes Preemption for Prepayment Charges and Late Charges

The following article is reprinted from Basis Points® , Vol. 1, Issue 10, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

The OTS has announced that state licensed mortgage creditors will no longer be able to use the Alternative Mortgage Transactions Parity Act (AMTPA) to preempt state limits/restrictions on prepayment or late charges. The preemption will continue to be available until January 1, 2003. The OTS did not address transition rules, but logic says that a prepayment penalty/late fee provision in a loan originated prior to January 1, 2003 that contains a prepayment charge and qualifies for the preemption will continue to be enforceable. However, a prepayment charge or late charge contained in a loan originated on or after January 1, 2003 will be trumped by a state restriction.

AMTPA permits state chartered housing creditors to make, purchase, and enforce alternative mortgage transactions if the creditors comply with regulations governing those transactions issued by federal regulators. AMTPA applies to loans with any alternative payment features that vary from conventional fixed-rate, fixed-term mortgage loans, such as variable rates, balloon payments, or call features. It allows state chartered housing creditors to engage in alternative mortgage transactions notwithstanding "any State constitution, law, or regulation," provided the transactions are made in conformity with regulations issued by one of three federal regulators. Housing creditors, other than state chartered commercial banks and state chartered credit unions, that wish to make an alternative mortgage transaction under the authority of AMTPA, must comply with OTS regulations. State chartered commercial banks and state chartered credit unions must comply with regulations of the Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA), respectively.

AMTPA directed the Federal Home Loan Bank Board (Bank Board), OTS's predecessor agency, OCC, and NCUA to identify, describe, and publish those portions of their regulations that are inappropriate for, and thus inapplicable to, their respective state chartered housing creditors. The identified regulations are enforced by each state housing creditor's applicable state regulator. Currently, OTS's regulation (at 12 CFR § 560.220) identifies the following regulations as appropriate for, and applicable to, state housing creditors:

§ 560.33. This reference permits state housing creditors to impose late charges for any delinquent periodic payment and sets out certain limitations on the assessment of such late charges.
§ 560.34. This reference permits state housing creditors to impose a prepayment penalty and indicates how prepayments must be applied.
§ 560.35. This section addresses adjustments to interest rate, adjustments to the payment and loan balance, and the use of indices.
§ 560.210. This reference requires state housing creditors to provide initial disclosures and adjustment notices for variable rate transactions.

Housing creditors must comply with these requirements to obtain the benefit of AMTPA's preemption of state laws. All other OTS regulations are inappropriate and inapplicable to state housing creditors.

Congress enacted AMTPA in 1982 to stimulate credit in an unusually high interest rate environment by encouraging variable rate mortgages and other creative financing. In hearings before the Senate in 1981, mortgage bankers testified that statutes in 26 states barred state chartered mortgage bankers and lending institutions from originating alternative mortgage loans, or imposed significantly higher restrictions on such loans than applied to federally chartered lenders operating under federal regulations. Congress found that increasingly volatile and dynamic changes in interest rates had seriously impaired the ability of housing creditors to provide consumers with fixed-term, fixed-rate credit secured by interests in real property, and that alternative mortgage transactions were essential to an adequate supply of credit.

Apart from references to federal regulations governing alternative mortgage transactions and regulations authorizing federally chartered lenders to engage in alternative mortgage transactions, neither AMTPA nor its legislative history details how the three federal agencies are to decide what laws a lender must comply with in order to avail itself of the preemption. For example, AMTPA and the legislative history do not reference or provide examples of specific types of regulations that the agencies should identify for state housing creditors.

As a result of this inconclusive direction, OTS and the Bank Board have wrestled with the proper scope of the identification of regulations for state housing creditors under AMTPA. At times, the agency has taken a narrow view of AMTPA and its legislative history. For example, the Bank Board initially identified as appropriate and applicable only those regulations that "describe and define" alternative mortgage transactions and did not identify regulations intended for the general supervision of federal savings associations. As a result, the Bank Board declined to identify rules that applied to loans generally (as distinguished from rules that bear directly on the unique features of alternative mortgage loans).

In 1996, however, OTS reviewed its AMTPA authority and identified two general lending rules - the prepayment and late charge provisions at issue in this rulemaking. The apparent rationale, contained in a contemporaneous legal opinion, but not in the rulemaking, was the conclusion that state housing creditors would be "disadvantaged vis-à-vis federal thrifts" if they were required to comply with state laws restricting prepayment penalties and late charges. Even the contemporaneous legal opinion, however, conceded that the state laws on these subjects fell somewhere between laws clearly preempted by AMTPA (state laws barring variable rate mortgage loan transactions) and laws clearly not preempted (state laws governing liens and foreclosures).

NCUA and OCC regulations also reflect various interpretations of the scope of AMTPA. NCUA has interpreted AMTPA to permit it to identify all of its lending regulations as applicable to alternative mortgage transactions by state chartered credit unions. These mortgage regulations address such matters as the term of the loan; requirements governing security instruments, notes, and liens; due-on-sale provisions; and assumptions. NCUA rules specifically preempt state laws addressing certain areas. OCC, on the other hand, has identified as applicable for state commercial banks a narrow band of rules. These rules: define adjustable rate mortgages (ARMs); state that ARMS may be made, sold, purchased, participated in, or otherwise dealt in without regard to any state law limitation on those activities; authorize certain indices; and specifically allow prepayment fees.

As these various approaches illustrate, AMTPA is susceptible to a number of interpretations. Each of the agencies has exercised broad discretion in its identification of appropriate regulations under AMTPA and has struck a different balance depending on its applicable statutory and regulatory scheme. Under the current rules, each of the three agencies has advanced a different interpretation of its responsibilities under AMTPA.

In its notice of proposed rulemaking, OTS reexamined its 1996 interpretation. OTS noted that the purpose of AMTPA was to enable all housing creditors to provide credit through alternative mortgages and to preempt state laws that would prevent that type of credit. OTS found that its regulations governing adjustments to the interest rate, adjustments to the payment and loan balance, the use of indices, initial disclosures, and adjustment notices were essential or intrinsic to the ability of state housing creditors to continue to provide alternative mortgage transactions. To provide parity with federal thrifts, OTS proposed to continue to identify §§ 560.35 and 560.210 for state housing creditors. On the other hand, OTS tentatively noted, upon further reflection, that the prepayment and late fee provisions were not essential or intrinsic to the ability to offer alternative mortgages. Rather, these regulations apply to real estate lending in general and are part of the broader regulatory scheme governing the lending operations of thrifts.

OTS noted that one of the congressional findings underlying AMTPA was that the various federal regulators had adopted regulations authorizing federal institutions to offer alternative mortgages, and that the purpose of AMTPA was to eliminate the discriminatory impact of those regulations. OTS tentatively found that its regulations on prepayments and late fees were not adopted to enable federal thrifts to engage in alternative mortgage financing, but rather to permit federal thrifts to operate safely and soundly under a uniform federal scheme. Therefore, OTS tentatively concluded that these regulations did not offer a basis for claiming discriminatory treatment or were not needed to provide parity with federally chartered institutions. Accordingly, OTS tentatively concluded that there was no basis to distinguish prepayment and late charge provisions from other general lending rules and has elected to delete the two provisions from the list of identified rules for state housing creditors.

For more information, see 12 CFR § 560.220.

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HUD Proposes Radical RESPA Rewrite

The following article is reprinted from Basis Points® , Vol. 1, Issue 9, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Love it or leave it, it is here. HUD's grand design is to fix the mortgage origination process so that borrowers will understand what they are paying and will not feel like they are taken being advantage of. Rather than follow its traditional approach of dealing with narrow, discrete issues, HUD has issued a proposal that, if promulgated in whole, would dramatically remake the mortgage origination process for consumers and trigger major realignments in the way that settlement service providers are selected and compensated.

Background

In 1974, Congress enacted the Real Estate Settlement Procedures Act after finding that "significant reforms in the real estate settlement process are needed to ensure that borrowers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from the unnecessarily high settlement charges that have developed in some areas of the country." RESPA's stated purpose is to "effect certain changes in the settlement process for residential real estate that will result:

In more effective advance disclosure to home buyers and sellers of settlement costs;
In the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services;
In a reduction in the amounts homebuyers are required to place in escrow accounts established to ensure the payment of real estate taxes and insurance; and
In significant reform and modernization of the local record keeping of land title information."

RESPA's requirements apply to transactions involving "settlement services" for "federally related mortgage loans." Under the statute the term "settlement services" includes any service provided in connection with a real estate settlement. The term "federally related mortgage loan" is broadly defined to encompass virtually all purchase money and refinance mortgages secured by one- to four-family residential real property.

RESPA requires HUD to develop and prescribe a standard disclosure form for use in all covered transactions. The form must conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement. RESPA also requires HUD to create a form to disclose a good faith estimate of critical costs that will be sent to the borrower at the time an application is taken. The GFE must state the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement.

Section 8(a) prohibits any person from giving and any person from accepting "any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise," that real estate settlement service business shall be referred to any person. Section 8(b) prohibits anyone from giving or accepting "any portion, split, or percentage of any charge made or received" for the rendering of a real estate settlement service

"other than for services actually performed. Section 8(c) of RESPA provides, in part, that [n]othing in [Section 8] shall be construed as prohibiting * * * (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed." * * * or "(5) such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Secretary . . . ."

The GFE Today

RESPA requires the lender to provide a GFE to all applicants for federally related mortgage loans. The suggested GFE format lists 20 common settlement services and provides spaces for the lender to provide a good faith estimate of the charges related to those services. The instructions indicate that any other possible services and related charges must be added to the form. The GFE provides a place for the "amount of or range" of each charge that the borrower is likely to incur in connection with the settlement. Between the name and amount of each charge is a reference to where the same charge will be disclosed on the HUD-1 or HUD 1-A at settlement. If the lender requires the use of particular settlement service provider(s) and requires the borrower to pay for any portion of such provider's services, the rules require that the GFE state: that the use of the provider is required and that the estimate is based on the selected provider's price; the provider's name, address and telephone number, and the nature of any relationship between the provider and the lender. The GFE does not identify the particular items that the borrower may shop for after he has selected a lender or broker, such as a title or settlement agent, title insurance, and a pest inspector.

The RESPA rules require each settlement service fee to be disclosed on the GFE and HUD-1/1A. According to HUD, this rule has led to "an increasing proliferation of enumerated services by individual settlement service providers (e.g., loan originators, title agents, etc.) and an artificial separation and inflation of the total charges of certain settlement service providers resulting in higher total costs to borrowers than a more consolidated list would provide." For example, the current requirements encourage loan originators to charge for several separate "services" - origination, document preparation, and document review. Similarly, title service providers are required to separate their charges into "abstract," "document preparation," "attorney's fees," and other charges. Neither the GFE nor the HUD-1 specify the total amount of fees that each major recipient receives and retains, including the lender, the broker, and the title agent.

Delivery Rule. The RESPA rules require the loan originator (usually the lender, but could be the broker if the broker is the lender's exclusive agent) to provide the GFE either by delivering it or placing it in the mail to the borrower not later than three business days after a loan application is received or prepared. In practice, some loan originators insist that the borrower complete a full application form and pay a significant fee to cover the costs of an appraisal and credit check before a GFE is provided. Therefore, by the time the borrower receives a GFE he or she has typically already selected a particular loan originator, and paid substantial fees, and is highly unlikely to shop further for another loan originator. In addition, because the GFE is not generally provided until the borrower applies for a loan, the form does not provide borrowers with enough time to focus on and compare the full costs of the originator and other major recipients of fees, nor does it indicate clearly other individual settlement services including title services that the borrower may shop for. As a result, consumers must shop on their own without the aid of a GFE, if they shop at all for mortgage loans.

Mortgage Brokers

At the time RESPA was enacted, single-family mortgages were mainly originated and held by savings and loans, commercial banks, and mortgage bankers. During the 1980s and 1990s, the rise of secondary mortgage market financing resulted in the emergence of new retail entities, notably mortgage brokers, to compete with traditional mortgage originators, lending institutions, and mortgage bankers. Today, mortgage brokers are estimated to originate more than 60% of the nation's mortgages.

Mortgage brokers provide retail lending services, including counseling borrowers on loan products, collecting application information, ordering required reports and documents, and otherwise gathering data required to complete the loan package and mortgage transaction. As retailers, brokers also provide the borrower and lender with goods and facilities such as reports, equipment, and office space to carry out retail functions. The amount of work mortgage brokers provide in particular transactions depends, in part, on the level of difficulty involved in qualifying applicants for particular loan programs. Differences in credit ratings, employment status, levels of debt, assets, and experience frequently translate into varying degrees of effort required to originate a loan. Also, mortgage brokers may be required to perform different components of origination services (i.e., underwriting) pursuant to specific agreements with individual wholesale lenders.

Mortgage brokers have various means of obtaining funding for the loans they originate. Some mortgage brokers close mortgage loans in their own name but, at the time of settlement, transfer the loan to a lender that simultaneously advances funds for the loan. Immediately after the loan is consummated, the mortgage broker delivers the loan package to that lender, including the promissory note, mortgage, evidence of insurance, and all rights in the loan that the mortgage broker held. This type of transaction is known in the lending industry, and defined in HUD's regulations, as "table funding."

Mortgage Broker Functions and Direct Compensation. Since the advent of mortgage brokers in the mid-1980s, borrowers have been confused concerning the mortgage broker's functions and fees, - i.e., whether brokers do or do not shop on the borrower's behalf, as well as how they are paid and how much they are paid, and by whom.

Some mortgage brokers promise borrowers that they will act as an agent to shop for the best mortgage loan for the borrower. Other brokers state that they work with a number of funding sources to provide loans, and will arrange a favorable loan with one of them for their borrower. Whether brokers serve as the borrower's agent as a strict legal matter, the fact is that many brokers try to create the impression that they are acting on behalf of the borrower to help the borrower find the best loan to meet the borrower's needs.

Mortgage brokers receive compensation for their services by various methods. A broker may be paid directly by the borrower, indirectly by the lender or wholesale lender who purchases the mortgage loan, or through a combination of both. Brokers may charge borrowers directly at or before settlement for loan origination as well as for other services including the application, document preparation and document review. In some cases, a broker may denominate its fees as an origination fee and other times as "origination points," plus additional fees for named services (e.g., application fees, document preparation fees, processing fee, etc.). Again, HUD's own rules on how to complete the HUD-1 are at fault to a great degree for this "menu of fees" approach. For years, HUD's philosophy was "disclose everything in the greatest detail possible and let the borrower sort it out." Only recently has HUD stepped back to look at the big picture and realized that borrowers have neither the time, the tools, nor the inclination to sort this out.

Indirect Compensation. When a broker receives a payment for compensation from someone other than the borrower, HUD calls this "indirect compensation." Indirect compensation paid by a lender is ordinarily based upon an above market interest rate on the loan. This type of compensation is often referred to as a "yield spread premium" (YSP), though it sometimes shows up under a different label, e.g. "servicing release premium." A YSP can reduce up front settlement costs to a borrower by building these costs into the borrower's interest rate and monthly payments over the life of the borrower's loan. HUD has consistently held that borrowers should have the choice of paying their total settlement costs up-front or using the yield spread premium payment as a credit to pay all or part of these costs. However, consumer advocates assert that, all too frequently, brokers place the borrower in an above par rate loan without the borrower's knowledge, provide the borrower with little or no benefit in the form of reduced up front costs, and use the YSP payment solely or primarily as a means of increasing their total compensation. Brokers, of course, view that same business transaction as an absolute right and argue that it is no different from what a lender does when it obtains an advance commitment to purchase from the secondary market and then builds the borrower's rate and fee combo base on what the lender would like to earn in the transaction.

The Proposed Rule

The Proposed Rule has three main objectives:

Put the borrower in charge of yield spread premiums;
Significantly improve the GFE so that the GFE facilitates shopping for mortgages and prevents brokers or other third parties from adding unexpected charges at settlement; and
Permit guaranteed packages of settlement services and mortgages to be made available to borrowers, to make mortgage shopping easier.

The New GFE. A new format for the GFE is set out in Appendix C to the proposed rule. The "loan originator" must provide the following information in the model format:

Property address;
Loan amount;
Interest rate used to calculate the estimated amounts;
Annual Percentage Rate (APR) for the loan including mortgage insurance;
Monthly payment for principal and interest and mortgage insurance;
Whether the loan is an adjustable rate mortgage;
Whether the loan contains a prepayment penalty clause;
Whether the loan contains a balloon payment;
Functions of the originator; and
The total amount of charges for each category of the following service categories:
- Loan origination,
- Interest rate dependent payment,
- Lender required and selected third party services,
- Title services and title insurance,
- Shoppable lender required third party services,
- Government services,
- Amounts for escrow/reserves, per diem interest, hazard insurance and optional owner's title insurance.

Attachment A-1 of the good faith estimate must indicate the subtotals of the origination charges to the lender and to the mortgage broker, and the subtotals of all the charges and fees for title and for settlement agent services.

Who is the "loan originator?" The GFE must be prepared and delivered by the "loan originator." Generally, this is the lender. However, if a mortgage broker who is not the lender's exclusive agent receives the application, then the broker must provide the GFE. The lender/broker must provide the good faith estimate either by delivering the good faith estimate or by placing it in the mail to the loan applicant, not later than three business days after an application is received or prepared. If the application is denied before the end of the 3-business-day period, the lender/broker need not provide the denied borrower with a good faith estimate.

What fees may the originator charge for the GFE? Neither the lender nor the broker may collect any fee in connection with the application or the good faith estimate beyond that which is necessary to provide the good faith estimate. Note that the rule is not at all clear on what type of fee falls into this category. However, one of the purposes of the new rule is to make it easier for consumers to obtain the GFE so that they can shop between loan originators more competitively. With this in mind, HUD would limit fees paid by the borrower for the GFE, if any, to the amounts necessary for the originator to provide the GFE itself. The fee could not include amounts to defray later appraisal or underwriting costs. While HUD recognizes that there may be costs attendant to obtaining credit information from third parties and evaluating that information manually and/or electronically, it does not believe that preparing/delivering the GFE requires you to undertake a full underwriting and appraisal process. Under the approach HUD takes in the proposal, the GFE is expressly subject to underwriting and appraisal. Therefore, according to HUD, any charge at the time of application should be limited only to those costs that result directly from providing the GFE.

Of course, HUD would also like the rate and terms disclosures to be accurate. It refuses to deal with the hard issue: how does one create an accurate estimate of the rate/loan program that the borrower can rely on for shopping purposes without incurring any cost? Reading between the lines, the answer is that HUD would like the industry to treat the preparation of GFEs as a marketing expense that gets folded into general overhead/cost of doing business rather than a cost that is recovered on a loan-by-loan basis. HUD would like originators to hand out accurate GFEs for no cost to the borrower. HUD would prefer that originators not impose any charge for a GFE, because providing a GFE before the payment of any fee will further facilitate shopping. We shall see how this one turns out.

What is an "application?" An "application" is a request for a federally related mortgage loan that includes very basic credit information such as Social Security number, property address, basic income information, the borrower's information on the house price or a best estimate on the value of the property, and the mortgage loan needed submitted by an applicant in anticipation of a credit decision. It could be oral, written or electronic. If the applicant does not state or identify a specific property, the request is an application for a pre-qualification and not an application for a federally related mortgage loan.

You must describe the loan originator's function. The proposed GFE requires that loan originators describe their services. Note that the proposed form imposes this requirement on both a lender acting as a loan originator and a on broker acting as a loan originator. In fact, the sample language for this disclosure is written so that the borrower will not know whether he or she is dealing with a lender or a broker. Ask yourself why you need a description that is so vague that a reasonable borrower will not even know whether he or she is dealing with a lender or a broker. No, better still. Ask HUD.

According to HUD, the new language will help borrowers avoid confusion about the role that brokers may play. It will disabuse borrowers of the notion that brokers are their agents, automatically shopping for the borrower. According to HUD, this magical disclosure combined with a revised "Settlement Costs and You" booklet will give borrowers the tools to understand that they must rely on themselves to know what is in their best interests instead of relying on the broker. Isn't that a wonderful accomplishment? A four-line disclosure that is so vague you can't even tell whether it comes from a lender or a broker, buried among about 20 pages of other mandatory disclosures (and this is just RESPA, it does not include the myriad other pages of mandatory application disclosures under other federal and state laws), is supposed to protect the borrower from the sales pitch of today's population of mortgage brokers. Who's kidding whom?

The yield spread premium disclosure. Under the new GFE, you would have to show borrowers the effect of alternative interest rates and their effect on monthly payments and cash needed for settlement. The GFE would inform borrowers that they have the options to pay settlement costs:

Through cash payments at settlement;
By borrowing additional funds to pay settlement costs;
By paying settlement costs through a higher interest rate and higher monthly payment; or
By lowering the interest rate and monthly payment by paying discount points.

Under HUD's current rules, the GFE must identify the broker's direct charges while all indirect payments, including yield spread premiums, are disclosed separately as "Paid Outside of Closing" (P.O.C.). The existing disclosure requirements and instructions do not make clear to the borrower the broker's total charges so that the borrower can focus on them, shop among brokers, or negotiate these total costs with the broker. According to HUD, many borrowers conclude incorrectly that such indirect payments have no effect on their loan costs.

Under the proposal, the borrower would instead receive a consolidated figure made up of the sum of total origination charges of the mortgage broker and the lender. This approach of providing total origination charges initially is taken to assist borrowers in comparing total origination charges of brokered loans to loans originated by lenders. At the same time, it ensures that the borrower knows the broker's and lender's charges. For mortgage brokers, these charges include all charges from the borrower that are paid to the mortgage broker for the transaction. For lenders, these charges include all or any portion of direct charges from the borrower that the lender receives for the transaction, other than discount points.

A major provision of this rule is the requirement that in all loans originated by mortgage brokers, any payments from a lender based on a borrower's transaction, other than a payment to the broker for the par value of the loan, including payments based upon an above par interest rate on the loan (including payments formerly denominated as yield spread premium), be reported on the GFE (and the HUD-1/1A Settlement Statement) as a lender payment to the borrower. Additionally, the rule would require that any borrower payments to reduce the interest rate (discount points) in brokered loans must equal the discount points paid to the lender, and be reported as such on the GFE (and HUD-1/1A) as a borrower payment to the lender. These changes would require mortgage brokers to disclose the maximum amount of compensation they could receive from a transaction, by including the amount in the "origination charges" block of the GFE, and indicating the amount of the lender payment to borrower that would be received at the interest rate quoted, if any. Mortgage brokers would be unable to increase their compensation without the borrower's knowledge, by placing the borrower in an above par loan and receiving a payment from the lender (yield spread premiums), or by retaining any part of any borrower payment intended to reduce the loan rate (discount points).

HUD believes that these changes will eliminate virtually all disputes regarding broker compensation in table-funded transactions and intermediary transactions involving yield spread premiums will be resolved. All mortgage broker compensation will be reported as direct compensation in the origination block of the GFE, maximum broker compensation will be clear and brokers will have no incentive to seek out lenders paying the largest yield spread. They will, instead, be motivated to find the best loan product they can for the borrower.

At the same time HUD has not taken away from borrowers the ability to select a higher rate loan in order to pay settlement costs (including, where the borrower so chooses, broker compensation), or to pay additional sums at settlement in order to lower their interest rate and monthly payments.

HUD has long recognized that these financing tools provide flexibility and have value to borrowers in specific circumstances. The Department emphasized this point most recently in Statement of Policy 2001-1. HUD's proposed rule, therefore, preserves these options, but seeks, to the maximum extent possible within the Department's statutory and regulatory framework, to eliminate the possibility of abuse in the application of these financing tools, by ensuring that the full value of selecting either option is known and redounds to the borrower.

Accuracy. The amounts disclosed in the categories of loan origination charges, lender-required and selected third party settlement service provider charges, lender selected title services and title insurance, and governmental fees and charges may not vary from the time the loan originator delivers the GFE to the borrower absent unforeseeable and extraordinary circumstances. The estimates in the good faith estimate must be open to the borrower for a minimum of 30 days from when the document is delivered or mailed to the borrower. Within the 30 days the borrower must agree to go forward and pay the additional money to complete the underwriting process. If the offer expires, the borrower may ask the loan originator to ratify the estimate or request a new one. If the cost at settlement exceeds the estimate reported on the GFE, absent unforeseeable and extraordinary circumstances, the borrower may withdraw the application and receive a full refund of all loan-related fees and charges. The loan originator must document any such circumstances and retain the document for five years after the settlement.

The amounts for lender required third party services must include an estimate of the maximum mortgage insurance premium to be charged upfront to the borrower based upon the borrower's assertion of the value of the property and loan amount needed and indicate that the mortgage insurance premium may decrease or be removed after full underwriting.

The amounts of the categories of borrower-selected title services and title insurance, shoppable lender-required third party services, and reserves/escrow deposits charged to a borrower may not vary at settlement by greater than a tolerance of 10% from the amounts for such categories reported on the good faith estimate, except when a borrower chooses to purchase a more expensive service, absent unforeseeable and extraordinary circumstances.

The amounts of the categories of per diem interest, hazard insurance and optional owner's title insurance must be prepared based upon the originator's knowledge of relevant prices, but are not subject to tolerances.

In mortgage broker loans, the borrower payment to the lender for a lower interest rate must be paid in full to the lender and the lender payment to the borrower for a higher rate must include any lender payments for the transaction other than for the par value of the loan.

Loan originators must include all charges correctly within their prescribed category on the good faith estimate and not include any "mark ups" or "up charges" in their estimates of charges for categories III(C) through (J) of the good faith estimate. The loan originator must include all of its charges in the origination charges and interest rate dependent categories.

No loan originator may be held responsible for charges imposed on the borrower at settlement for shoppable lender required third party services unless the borrower asked where the services could be obtained within the tolerance, used a settlement service provider identified by the originator, and was charged an amount in excess of the tolerance.

The Guaranteed Mortgage Package

Somebody up there in L'Enfant Plaza was smoking something good. How else could they decide that the best way to prohibit kickbacks and referral fees is to legalize them all? Nothing in the proposal is as creative or controversial as the "Guaranteed Mortgage Package" or the "GMP." From its inception, if RESPA has stood for anything, it has stood for the proposition that it is unlawful to pay and unlawful to receive kickbacks, referral fees and unearned payments. HUD has even gone so far as to suggest that you commit a crime under RESPA if you mark up the price of your own services. Now, all of that angst drifts away like smoke on the water, replaced by the new miracle baby, the GMP. It's like the DEA deciding to solve its ongoing battle against the marijuana trafficking problem by declaring it lawful when smoked in groups. Or like our President saying that the best way to preserve the Alaska National Wildlife Refuge is to let the oil companies pump oil out of it. You get the picture.

What is a GMP? It is a guaranteed package of mortgage related settlement services and an interest rate guarantee for a federally related mortgage loan that is offered to a consumer under a Guaranteed Mortgage Package Agreement (GMPA). We'll try to say that again in English a little bit later.

What do you get for a GMP? The people participating in a GMP get a safe harbor from all of the criminal and civil liability that attaches to Section 8 violations. No questions asked. All payments, however structured, regardless of incentive - lawful.

In order to qualify for the safe harbor, you must deliver a guaranteed mortgage package offer to the borrower within 3 days of application or such time as may be reasonable in special cases but prior to the borrower paying any fee. The offer must include the following.

Guaranteed price for origination services. A package of settlement services at a guaranteed price. The borrower has 30 days (or longer if you want to be generous) from the date the offer is delivered or mailed, to accept the offer. The package must include all application, underwriting, origination, appraisal, pest inspection, flood review, tax review, title services, insurance, and governmental charges and any other services the lender requires the borrower to pay for in order to get the loan.
Guaranteed rate and APR. A guaranteed interest rate and Annual Percentage Rate (APR) provided that the interest rate may float or adjust based on movement in a observable and verifiable index or other appropriate measure; and
Written agreement. A written agreement that conforms with the format set out in the rule and that:
- Explains that the guaranteed mortgage package includes necessary settlement services required by the lender and guarantees a package price for these services through settlement provided that the borrower accepts the GMPA within 30 days, or such greater period offered by the packager, from when the document is delivered or mailed to the borrower;
- Commits the packager to provide all settlement services and includes all charges required to complete your mortgage except those specified as other required settlement costs and advises the borrower if the packager anticipates whether a pest inspection, lender's title insurance, credit report, and/or appraisal will be anticipated;
- Identifies and provides estimates for other required settlement costs, such as per diem interest, reserves/escrow, and hazard insurance, and optional owner's title insurance and explains that any required settlement costs not separately itemized and estimated are the responsibility of the packager;
- Identifies and explains any borrower option to utilize payments to or from the lender as a result of the interest rate to pay settlement costs or adjust the interest rate and mortgage payments;
- Identifies any reports such as the pest inspection, lender's title insurance, appraisal or credit report that are available to the borrower at the borrower's request;
- Specifies that the packager will ensure that a mortgage loan is provided as part of the package and that, after acceptance by the borrower and the lender, the lender participating in the package will provide a loan with the same terms as set forth in the agreement;
- Advises the borrower of whether the loan is an adjustable rate mortgage and the terms of the mortgage, whether there is a prepayment penalty and that the borrower can request its terms, whether there is a balloon payment, whether the guaranteed mortgage package price includes an upfront maximum mortgage insurance premium based upon the borrower's assertion of the value of the property and loan amount needed and that the mortgage insurance premium may decrease or be removed after full underwriting; and
- Commits the packager to the terms of the guaranteed mortgage package agreement upon borrower acceptance and payment of any fee, subject only to acceptable final underwriting and property appraisal.

Final thought. Where will all of this take us? It cries out for some one to become the portal for the industry. Who will that be? The lenders? The title companies? Will it turn the settlement business from a bunch of small Mom and Pop businesses to a couple of large conglomerates? No one knows. Least of all HUD. The comment period remains open until October 28, 2002. For more information, look for 67 FR 49134 (July 29, 2002).

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HMDA Revised to Require Reporting Loans With "Higher Rates"

The following article is reprinted from Basis Points® , Vol. 1, Issue 8, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

The Federal Reserve Board has published revisions to its HMDA regulations, found at Regulation C. Those revisions address the following issues:

Reporting loans with "high" margins. You must report loans if the rate exceeds the corresponding Treasury yield by 3 percentage points (3%) for first lien loans or by 5 percentage points (5%) for junior lien loans.

Collect more information on telephone applications. You are required to ask applicants to identify their ethnicity, race, and sex in telephone applications.

Lien position. You are required to report lien position on all loans, except loans that you purchase.

Definition of "Manufactured Home." The definition of manufactured home has been clarified to track the federal building code for factory-built housing established by the Department of Housing and Urban Development ("HUD"). As a general rule, this definition captures homes that do not require much assembly after they leave the factory.

Background

The Home Mortgage Disclosure Act ("HMDA") has three purposes. One is to provide the public and government officials with data that will help show whether lenders are serving the housing needs of the neighborhoods and communities in which they are located. A second purpose is to help public officials target public investment to promote private investment where it is needed. A third purpose is to provide data that assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

HMDA requires lenders to collect, report, and publicly disclose data about originations and purchases of loans secured by residential real property and of home improvement loans. Lenders must also report data about applications that did not result in originations.

HMDA requires that lenders report data about:

Each application or loan, including
- The application date;
- The action taken and the date of that action;
- The loan amount; the loan type and purpose; and,
- If the loan is sold, the type of purchaser;
Each applicant or borrower, including ethnicity, race, sex, and income; and
Each property, including location and occupancy status.

Lenders report this information to their supervisory agencies and must make it available to the public.

This past winter, the Board approved amendments to Regulation C after a comprehensive review of the regulation. Among other things, the new rule requires lenders to report the spread between the APR on loans and the yield on Treasury securities with comparable maturity periods, if the spread meets or exceeds certain thresholds specified by the Board. The Board asked for comments concerning whether the "threshold" should be.

Rate Spread Information

The Board has adopted the proposed thresholds of 3 and 5 percentage points for first- and subordinate-lien loans, respectively. The thresholds are intended to ensure, to the extent possible, that pricing data for higher-cost loans are collected and disclosed without capturing data on "prime loans." The data available to the Board when it proposed the thresholds indicated that these thresholds would exclude the vast majority of prime loans and include the vast majority of other loans. In January 2002, the Board adopted the requirement to report the spread only for loans over specific thresholds in order to adjust pricing data for changes in market conditions over time, focus on higher-cost loans, and limit reporting burden (because fewer loans would be subject to the reporting requirement). The data supplied by commenters tended to confirm the data available to the Board indicating that the proposed thresholds would avoid capturing the vast majority of prime loans while capturing the vast majority of other loans.

The Board had solicited comment on the appropriate thresholds before finalizing them. Information on the following specific issues and questions was also solicited:

Whether the rule for determining coverage under the Home Ownership and Equity Protection Act (HOEPA) should be used to determine whether rate spread information must be reported under HMDA - specifically, whether the 15th day of the month preceding the month in which the application for the loan was received should be used for determining the APR spread.

The proportion of loan originations (by number of loans) reported under HMDA that would fall above and below various thresholds, segregated by risk class (for example, A, A-minus, and B) and lien status.

Circumstances or special credit products that might be particularly subject to misclassification, as loans associated with a higher credit risk than prime loans, should the proposed thresholds be implemented. For example, are there product lines in which loans with very little credit risk nonetheless have high APRs? Alternatively, are there product lines in which loans with relatively high credit risk nonetheless have low APRs?

Is the 2-percentage point difference between the proposed thresholds for first- and subordinate-lien loans appropriate?

Some industry commenters supported the thresholds of 3 and 5 percentage points, although they objected to reporting any pricing data. These commenters stated that, based on their experience, the tentative thresholds would exclude nearly all prime loans from the pricing-data reporting. Nearly all industry commenters - whether or not they supported thresholds of 3 and 5 percentage points - indicated that a 2-percentage point difference between thresholds is appropriate.

Many industry commenters argued that the proposed thresholds were too low, based on a belief that the thresholds would capture a significant number of prime loans. Some commenters stated that the proposed thresholds would include loans that they believe are not higher-priced loans, for example, short-term loans with balloon payments, loans involving manufactured homes, and FHA-insured and VA-guaranteed loans. These commenters did not, however, provide data to support their views. Industry commenters also expressed concern that stigma would attach to loans that meet the pricing thresholds and that "responsible" lenders may be driven out of the subprime industry.

Some commenters urged the Board to adopt the thresholds for HOEPA coverage (8 percentage points (8%) for first-lien loans and 10 percentage points (10%) for subordinate-lien loans) for reporting pricing information under HMDA. Others suggested thresholds of 5 percentage points (5%) and 7 percentage points (7%) for first- and subordinate-lien loans, respectively, so as to capture only what they believe to be higher-priced loans.

In addition to commenting on the proposed thresholds, many industry commenters urged the Board to reverse its decision to require lenders to report pricing information under HMDA. Some stated that, in the alternative, the Board should allow lenders the option of reporting the APR on a loan and having the Board calculate the spread. They said that reporting the spread would be more burdensome than reporting the APR, because lenders do not track the yield on Treasury securities and may have difficulty obtaining the correct information to use in calculating the spread. Commenters were concerned that lenders could make inadvertent errors in calculating the spread and, if the errors were pervasive, could incur the costs of resubmission of HMDA data or civil money penalties.

A few industry commenters urged the Board not to use the yield on Treasury securities for calculating the spread. They suggested that lenders be permitted to use other indices for calculating the spread, such as the LIBOR (London Inter-Bank Offered Rate) index, that they said play a more direct role in their pricing.

Still others - community groups, researchers, and state, local, and tribal officials - urged the Board to require pricing information on all loans reported under HMDA, and not just those that meet or exceed certain thresholds. These commenters believed that requiring pricing information only on higher-priced loans would allow discrimination and other abusive lending practices to go undetected in the prime market. Some of these commenters also argued that the APR, and not the spread, should be reported to facilitate fair lending enforcement. Some community groups, while preferring pricing information on all loans, stated that the thresholds of 3 and 5 percentage points were appropriate.

At the end of the day, the Board believed that the thresholds would not result in misclassification of the products mentioned by some commenters - for example, FHA-insured loans, VA-guaranteed loans and manufactured home loans. While the spread on many manufactured home loans may exceed the thresholds, these loans tend to have elevated credit risk and are generally not considered prime loans. The thresholds should exclude most FHA-insured loans and VA-guaranteed loans. Moreover, Regulation C requires lenders to distinguish FHA and VA loans from other loan types in their HMDA/LARs; and under the final rules, lenders are also required to distinguish loans for manufactured homes from loans for site-built homes. Thus, even if these loans are misclassified as higher-priced loans, data users can treat these loans as distinct product lines in their analyses.

The Board will take steps to minimize any difficulties lenders may have in calculating the spread and also to minimize the risk of errors. These steps include publishing the applicable Treasury yields for common maturity periods on the FFIEC's Internet web site, in addition to making the information available by fax upon request. Lenders will be required to use only the rates published by the Board - and not the H-15 or the Treasury auction results, which lenders may use for HOEPA purposes - to ensure consistent and accurate calculations for HMDA data collection and reporting. An interactive tool could also be available on the FFIEC Web site to calculate the rate spread for a loan, based on information supplied by the lender.

What date do you use to select the Treasury index?

The final regulation approved in January set an "application date" rule for determining whether the rate spread must be reported. That is, lenders would compare the APR on a loan at consummation with the yield on Treasury securities of comparable maturity as of the 15th day of the month preceding the month in which the loan application was received. This is the rule used to determine HOEPA coverage. The Board solicited comment on whether HOEPA's application date rule is appropriate in calculating the spread for HMDA purposes.

Many industry commenters, including the banking trade associations, supported use of the application date for identifying the applicable Treasury security yield. They noted that adopting the HOEPA rule would ease compliance burdens, as lenders whose loans are covered by HOEPA are already familiar with this rule. Other industry commenters suggested that the "lock date," or date that the lender sets the interest rate for the loan, would result in a more accurate determination of whether a loan was a prime loan or a higher-priced loan. A small number of industry commenters suggested using the date of origination or consummation.

Under the final rule, you must pick the index value that is published on the 15th-of-the-month prior to the date the final rate is set. For example, if the lender sets the interest rate for the final time before the loan closing on September 3, 2004, the relevant date for use of the Board's table is August 15, 2004. If the lender sets the rate for the final time before closing on September 17, 2004, the relevant date is September 15, 2004. If the rate is set on September 15, 2004, the relevant date is September 15, 2004. These instructions have been incorporated into Appendix A to Regulation C.

According to the Board's way of thinking, the date the final rate is set more accurately reflects the lender's pricing decision than a date related to the date of application or to the date of consummation. A date related to the date of application or consummation might reflect a different rate environment than existed when the final interest rate was established, and could result in inaccurate and misleading data for periods when interest rates are volatile.

Using the date the final rate is set may impose an additional burden on some lenders, as many lenders do not systematically track the date the interest rate is set or locked. In contrast, using the HOEPA rule (a date measured from the application date) may impose fewer burdens on lenders that currently make HOEPA loans or routinely monitor their loans for HOEPA coverage (although it does not pose that advantage for lenders that do not make HOEPA loans); and the dates of application and consummation also may be less burdensome because these dates are already collected and reported under HMDA. On balance, however, the Board believes that the benefits of increasing the accuracy of pricing information by selecting the date the final interest rate is set outweigh the compliance burdens associated with the requirement.

When you must comply

Lenders generally must comply with the revised rules for all applications upon which final action is taken on and after January 1, 2004. The Board plans to issue guidance later this year to alleviate the burden on lenders to "look back" at all applications taken in 2003 but acted on in 2004. For example, the Board could establish that for applicat