Real Estate Secured - Iowa Bankers Association

Articles

FAQs

Advertising Rules

ARM Loans

Coverage

Disclosures

Modifications

Prohibited Acts & Practices

Referral Fee Prohibition

Rescission

ADVERTISING RULES

Question: If we advertise an interest rate and APR for a fixed-rate, closed-end, home loan product, do we have to make the repayment terms disclosure “clearly and conspicuously” according to Regulation Z’s standards or can we still provide the disclosure in smaller print on the ad?

Answer: If you advertise a fixed interest rate and APR in an ad, you do not need to make the applicable disclosures “clearly and conspicuously.” The “clear and conspicuous” rules requiring disclosures be made with equal prominence and in close proximity to the trigger term are only applicable when a lender’s ad is featuring a promotional rate or promotional payment – meaning a payment or rate that is lower initially and then will increase at some point.

See 1026.24(f) of Regulation Z for the details:

(f) Disclosure of Rates and Payments in Advertisements for Credit Secured by a Dwelling.

(1) Scope. The requirements of this paragraph apply to any advertisement for credit secured by a dwelling, other than television or radio advertisements, including promotional materials accompanying applications.
(2) Disclosure of rates–(i) In general. If an advertisement for credit secured by a dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement shall disclose in a clear and conspicuous manner:

(A) Each simple annual rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin shall be disclosed based on a reasonably current index and margin;
(B) The period of time during which each simple annual rate of interest will apply; and
(C) The annual percentage rate for the loan. If such rate is variable, the annual percentage rate shall comply with the accuracy standards in Sec. Sec. 1026.17(c) and 1026.22.
(ii) Clear and conspicuous requirement. For purposes of paragraph (f)(2)(i) of this section, clearly and conspicuously disclosed means that the required information in paragraphs (f)(2)(i)(A) through (C) shall be disclosed with equal prominence and in close proximity to any advertised rate that triggered the required disclosures. The required information in paragraph (f)(2)(i)(C) may be disclosed with greater prominence than the other information.

The commentary to this same section provides further clarification:

24(f) Disclosure of rates and payments in advertisements for credit secured by a dwelling.

Applicability. The requirements of Sec. 1026.24(f)(2) apply to advertisements for loans where more than one simple annual rate of interest will apply. The requirements of Sec. 1026.24(f)(3)(i)(A) require a clear and conspicuous disclosure of each payment that will apply over the term of the loan…

Question: Our real estate lenders want to start sending daily mortgage rate sheets to the local realtors. Can we disclose just the interest rate on the rate sheet or must we also include the APR (Annual Percentage Rate)?

Answer: It depends upon whether or not the rate sheet would be deemed an “advertisement” under Regulation Z’s advertising rules. According to the Official Staff Commentary to 1026.2(a)(2) – #1 the term “advertisement” does not include “Informational material, for example, interest-rate and loan-term memos, distributed only to business entities.” If your intent is truly that the realtors would use the rate sheets as a reference tool and not distribute the rate sheet to consumers, Regulation Z’s advertising rules would not apply and just the rate could be disclosed on the rate sheet without the APR. If the rate sheet is just meant for realtor use, we recommend you include a statement to that fact on the rate sheet; for example, “For realtor use only; not intended for consumer distribution.”

If however, your intent is to provide the rate sheet to the local realtors and then have the realtors distribute the information to prospective homebuyers, either in their office or perhaps at an open house event, the rate sheet would constitute an “advertisement” and Regulation Z’s advertising rules would apply. So if the rate sheet provided the current interest rate, it must also provide the APR. Also, if the rate sheet made reference to the repayment term (such as “30-year fixed rate” or “5-year ARM”), then the rate sheet must also detail number, timing and amount of payments, at a minimum and include the Equal Housing Lender logo and legend. If the rate being quoted is a variable rate or the product features an initial promotional rate or payment that will change, even more disclosures need to be made. See the IBA’s Closed-end Consumer Loan Advertising Checklist for further details.

ARM LOANS

Question: When our bank receives a mortgage loan application for a fixed rate mortgage product, we typically submit the application to our secondary market investor for underwriting because we sell the loan after closing. When an applicant does not meet the secondary market guidelines, we often make the applicant a counteroffer for an in-house adjustable-rate product. Section 1026.19(b) of Reg. Z states that when the rate may increase after consummation, we must provide the ARM program disclosure and CHARM booklet either with the application or before the consumer pays a non-refundable fee, whichever is earlier. Since the application was initially for a fixed rate product, we did not provide the ARM program and CHARM booklet with the application. When the product type changes during the loan process to an adjustable rate, when should we provide the ARM program disclosure and CHARM booklet?

Answer: Fortunately, the commentary to Reg. Z addresses this scenario. It states that if the consumer has received disclosures for other programs, or the creditor and consumer decide on a program for which the consumer has not received disclosures, the creditor must provide appropriate disclosures as soon as reasonably possible. So, once the consumer and creditor decide to proceed with the adjustable-rate product, the creditor must provide the ARM program disclosure and CHARM booklet.

Question: Our bank has established an internal base real estate index rate for the purpose of pricing our Adjustable Rate Mortgage loan product. This internal index rate has been in use for many years. The base rate is currently 6.50% and has been in effect for nearly 15 years. An external auditor is asking for historical data on our bank established index rate as well as the formula the bank uses to calculate the index. Has Regulation Z recently changed impacting the bank’s ability to use an internal index for ARM loans?

Answer: No. Regulation Z has not changed. Under § 1026.19(b)(2)(ii), the bank is allowed to use an internal index or set the rate at its discretion. However, when a creditor elects to do so, it must detail it its ARM Program Disclosure:

1. 1. The formula used to calculate the interest rate for their internal index, and/or
  2. State the index and interest rate changes are at the creditor’s discretion.

In regard to historical data on this internal index rate, the bank should be able to provide history of this internal index; specifically the date and amount the internal index changed. Section 1026.19(b)(2) details the contents requirements of the ARM loan program disclosure and that the disclosure must be provided at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier: (ii) The index or formula used in making adjustments, and a source of information about the index or formula.

The Official Staff Commentary then lays out a few more details:

Identification of index or formula. If a creditor ties interest rate changes to a particular index, this fact must be disclosed, along with a source of information about the index. For example, if a creditor uses the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity as its index, the disclosure might read, “Your index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year published weekly in the Wall Street Journal.” If no particular index is used, the creditor must briefly describe the formula used to calculate interest rate changes.
Changes at creditor’s discretion. If interest rate changes are at the creditor’s discretion, this fact must be disclosed. If an index is internally defined, such as by a creditor’s prime rate, the creditor should either briefly describe that index or state that interest rate changes are at the creditor’s discretion.

Question: We have several adjustable rate mortgage loan programs, having similar pricing schedules with the exception of the margin over the base index varying. Are we required to have separate disclosures for each program simply because the margin is unique to each?

Answer: Under Regulation Z section 1026.19(b)(2), a creditor must provide disclosures to the consumer that fully describe each of the creditor’s variable-rate loan programs for each loan program in which the consumer expresses an interest. If, however, a representative value may be given for a loan feature, variable-rate loans that differ as to such features do not constitute separate loan programs. For example, separate programs would not exist based on differences in the amount of a discount or the amount of a margin. Therefore, creditors are able to provide one disclosure for all programs if the only variance is the discount or margin.

Because the disclosures are often prepared well in advance of the consumer’s request for credit, the interest rate and margin identified in the disclosures may be several months old when the disclosures are delivered. Therefore, a statement is required in initial variable rate disclosures alerting consumers to the fact that they should inquire about the current margin value applied to the index and the current interest rate. For example, the disclosure might state, “Ask us for our current interest rate and margin.”

Separate loan programs, however, would exist based on differences in any of the following loan features and therefore, would trigger the need for a separate program disclosure:

The index or other formula used to calculate interest rate adjustments.
The rules relating to changes in the index value, interest rate, payments, and loan balance.
The presence or absence of, and the amount of, rate or payment caps.
The presence of a demand feature.
The possibility of negative amortization.
The possibility of interest rate carryover.
The frequency of interest rate and payment adjustments.
The presence of a discount feature.
In addition, if a loan feature must be taken into account in preparing the disclosures required by §1026.19(b)(2)(viii), variable-rate loans that differ as to that feature constitute separate programs under §1026.19(b)(2).

Question: When are we required to provide the ARM program disclosure and CHARM booklet (that are supposed to be provided at the time the application is provided to the applicant) when a consumer applies online?

Answer: If the application for an adjustable rate mortgage is taken electronically, the ARM program disclosure and CHARM booklet must also be provided electronically on or with the blank application provided to the consumer electronically. The commentary to §1026.19(b) – 2(v) indicates creditors have flexibility in meeting this requirement and provides the following alternatives for delivering the electronic ARM disclosures:

The disclosures could automatically appear on the screen when the application appears;
The disclosures could be located on the same web page as the application if the application contains a clear and conspicuous reference to the location of the disclosures, and indicates that the disclosures contain rate, fee and other cost information;
The disclosures could be available through a link on or with the application, but the applicants cannot be allowed to bypass the disclosures before submitting the application;
Or the disclosures could be located on the application immediately preceding the button that the applicant will click to submit the application.

Whatever method is used, a creditor need not confirm that the consumer has read the disclosures.

Question: We want to start offering our employees a discounted rate on their consumer loans, but we want to be able to increase the rate if they ever leave the bank. In order to retain the option to increase the rate, do we have to write the loan as an adjustable rate note (or ARM loan if dwelling-secured)?

Answer: Many financial institutions give their employees a discounted rate on their loans during the period the person is an employee. There are two ways to contract for a rate increase if the employee leaves the bank. Let’s say that the bank’s stated current rate for an auto loan is 6 percent. If an employee applies for the loan, the rate is discounted to 5 ½ percent, as long as the person is an employee in good standing. Your options for providing for the discounted rate are:

Write the loan at a 5 ½ percent rate and include a provision in the note that if the person leaves the employment of the institution, the rate increases to 6 percent.
Or, write the loan at a 6 percent interest rate and then include a rider to the note that says that so long as the person is employed by the institution, the rate will be 5 ½ percent and the payments will be reduced accordingly.

Under the first circumstance, the loan has a variable rate, and the circumstances in which the rate may increase must be disclosed. If the loan is secured by residential real estate, it is an ARM loan, and the institution must create an ARM disclosure. Using the second method, the loan does not have a variable rate and is not an ARM (under the Regulation Z definitions) because the rate cannot increase over the rate initially disclosed.

COVERAGE

Question: I have a customer who is purchasing a duplex and he will be living in one of the units. He will rent out the other unit. Is this is considered a consumer-purpose loan?

Answer: Reg. Z addresses this question in the commentary to §1026.3(a)-4 & 5. If the loan purpose is to acquire a property with 1 to 2 units and the owner expects to occupy the property more than 14 days in the coming year, the loan is considered consumer-purpose and Reg. Z applies. If there are more than two living units in the rental property and the owner will occupy one unit, a loan for the purpose of purchasing the property is considered business-purpose and Reg. Z does not apply.

If the property is not or will not be owner-occupied and credit is extended to acquire, improve or maintain rental property, regardless of the number of units, it is deemed business purpose.

Question: I have an application from a corporate entity for a loan to improve a dwelling. The property where the dwelling is located is owned by a corporation. The dwelling on the property is the primary residence of one of the officers of the corporation. Since the loan is to improve the primary residence of the corporate officers, is it subject to Regulation Z?

Answer: If the borrower for this loan was the corporate officer (a natural person) living in the home, the loan would have be subject to Regulation Z due to the loan purpose being to improve the primary residence of the corporate officer. However, in your scenario, the borrower is the corporate entity, not a natural person. Section 1026.3(a)(2) of Regulation Z, Exempt Transactions, states that extensions of credit other than to natural persons are exempt from Regulation Z. In other words, if the borrower is the corporation, an entity and not a natural person, the loan is exempt from Regulation Z.

It’s important, however, to note there are some consumer purpose loans that are made to entities that may be subject to Regulation Z. Consumer purpose loans made to certain kinds of trusts are considered to be the same as making a loan to a natural person and are subject to Regulation Z. These trusts are established for tax or estate planning purposes. However, in your case, the borrower is a corporation, not a trust.

DISCLOSURES

Question: We have a question regarding adding a collateral interest in a dwelling to an existing loan. We have an existing loan on our books that closed three years ago as a consumer loan (no real estate tied to it at that time — not a TRID loan). Now we are doing an extension of the maturity date and adding a collateral interest in the borrower’s principal dwelling. No new money will be going to the customer. We are not refinancing, just modifying the existing note to extend the maturity date and adding the mortgage as collateral. Does this trigger TRID disclosures? Any other compliance implications?

Answer: The TRID disclosures are triggered when you “make” a closed-end extension of credit secured by real property. In this case, you are NOT making an extension of credit, you are modifying an existing extension of credit so you do not trigger the TRID disclosures.

However, although you are not advancing new funds, you are taking a new collateral interest in the borrower’s principal dwelling for a consumer-purpose loan, so you do trigger rescission.

1026.23(a) Consumer’s right to rescind. (1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. For purposes of this section, the addition to an existing obligation of a security interest in a consumer’s principal dwelling is a transaction. The right of rescission applies only to the addition of the security interest and not the existing obligation. The creditor shall deliver the notice required by paragraph (b) of this section but need not deliver new material disclosures. Delivery of the required notice shall begin the rescission period.

The official staff commentary then explains what disclosures you must provide the consumer:

1. 1. Addition of a security interest. Under §1026.23(a), the addition of a security interest in a consumer’s principal dwelling to an existing obligation is rescindable even if the existing obligation is not satisfied and replaced by a new obligation, and even if the existing obligation was previously exempt under §1026.3(b). The right of rescission applies only to the added security interest, however, and not to the original obligation. In those situations, only the §1026.23(b) notice need be delivered, not new material disclosures; the rescission period will begin to run from the delivery of the notice.

Also, keep in mind you have triggered the flood rules. So you will need to make a determination as to whether the collateral property is located in a special flood hazard area and if it is, provide the Notice of Special Flood Hazards and require flood insurance.

Question: If the Lender denies a residential real estate application to purchase a home loan, is the Lender required to provide the Home Loan Toolkit to the applicant?

Answer: It depends on the timing of the denial. Lenders are required to give the Home Loan Toolkit within three business days of receiving an application from consumers. The toolkit is designed to be given with the Loan Estimate and is only required for loans where consumers are purchasing a 1-4 family residential property. If the lender denies the consumer’s application for credit before the end of the three-day period, the lender is not required to provide the toolkit or the Loan Estimate. (Sept. 2019)

Question: We are reviewing Regulation Z’s accuracy rules for loan APR (annual percentage rate) calculations. §1026.22(a)(3) says for an “irregular transaction,” the annual percentage rate is considered accurate if it is not more than 1/4 of 1 percentage point above or below the APR determined in accordance with the Regulation Z rule. What is considered an “irregular transaction”?

Answer: An irregular transaction is one that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment). Typically, irregular transactions are more complex transactions that do not call for a single advance and a regular series of equal payments at equal intervals – such as construction loan where advances are made as construction progresses or a transaction in which payments vary to reflect the consumer’s seasonal income. Irregular transactions also include variable rate transactions (such as ARM loans) when the creditor uses an initial interest rate that is not calculated using the index or formula for later rate adjustments. Thus, the APR is a composite rate based on the initial rate for as long as it is charged, and for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. (See OSC to 1026.17(c) – #10(iv)). It does not include however, loans with variable rate feature where the initial interest rate is based on the index plus margin used for later adjustments based on a regular amortization schedule over the life of the loan, even though payments may later change because of the variable rate feature.

Modifications

Question: Our customer is requesting an extension to the maturity date of an existing loan. The bank is willing to extend the maturity date; however, the customer’s interest rate will be increased at the time of extension. Can this be done as a modification, or does the increase in the interest rate automatically trigger new disclosures?

Answer: The maturity extension and interest rate change can be done with a modification agreement and the increase in the interest rate does not automatically trigger new disclosures. 12 CFR 1026.20 provides that new disclosures are triggered in connection with a modification if either:

The interest rate is increased based on a variable-rate feature that was not previously disclosed, or
The creditor adds a variable-rate feature to the obligation.

However, increasing the interest rate alone is not considered adding a variable-rate feature. According to the CFPB’s Examination Manual, the increased interest rate is simply a cost of the modification, similar to a flat fee, so long as the new interest rate remains fixed during the term of the loan. For additional considerations related to loan modifications, see Modify-vs-Refi-When-and-Why-February-2023.

Question: Due to the current low interest rate environment, we have customers asking our bank to lower the rate on their existing loans. If the bank agrees and will only be lowering the interest rate, are we allowed to do this with a modification agreement or are we required to refinance the loan? The bank will not be advancing additional funds. Are new disclosures required?

Answer: Yes, the bank can lower the interest rate with a modification agreement. Regulation Z § 1026.20(a) defines refinancing as an existing obligation that is satisfied and replaced with a new obligation undertaken by the same consumer. A refinance requires new disclosures. So, as long as the original note stays in place, the bank can use a modification agreement to lower the interest rate and not trigger new disclosures. (June 2020)

Question: We have a consumer purpose, closed-end mortgage loan with a balloon that is nearing maturity and needs to be extended. The bank wants to increase the rate. Can we increase the rate with a loan modification agreement or are we required to refinance and provide new disclosures?

Answer: That’s a good question! For closed-end credit, the Official Staff Commentary to 1026.20(a)(2) states that if the rate is increased in such a way that the old obligation is satisfied and replaced, new disclosures must be made. That explanation is nice, but it does not real clearly describe the regulatory requirements when a rate is increased. Additional guidance is found in the CFPB’s exam procedures on page 61, found here. The exam procedures state if the rate increase is not due to a new variable rate feature, new disclosures are not required provided the original debt is not cancelled. Rather, the rate increase is considered to be a cost of the renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. Thus, if a modification agreement is used to extend the maturity date and increase the interest rate, but the original note remains in place, new disclosures are not required.

PROHIBITED ACTS & PRACTICES

Question: Our applicant drives a semi-truck for a living. He has requested credit insurance to be included on his loan since he is not able to get disability insurance through other sources due to his profession. The loan purpose is to refinance a commercial loan that is secured by a mortgage on several buildings, including the applicant’s principal dwelling. Can we sell credit insurance on this loan?

Answer: Yes, credit insurance can be sold on this loan. There is a prohibition on financing credit insurance premiums on loans secured by a dwelling in Regulation Z, § 1026.36. However, that prohibition applies only to consumer-purpose loans that are subject to Regulation Z. Business purpose loans are not subject to Regulation Z. Thus, since this loan is business purpose, the prohibition on financing credit insurance premiums does not apply. (January 2020)

Referral Fee Prohibition

Question: Our mortgage loan officers are exploring various ways to generate additional loan volume in this rising rate environment. They have two promotional ideas. First, they want to start a “refer a friend program” in which they offer current mortgage loan customers a $250 gift card for every new mortgage loan referral that results in a closed loan. The second idea is to offer a “bonus” to home loan borrowers — such as $500 gift card to local home improvement store or furniture store with every closed home purchase or refinance loan. Are these promotions permitted?

Answer: The “refer a friend” promotion violates Section 8 of RESPA, as implemented by Regulation X §1024.14, which prohibits any settlement service provider, including a lender, from giving a “thing of value” to any person for a referral of a residential mortgage transaction. “Any person” includes consumers. A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing that person in the selection of a settlement service provider. “Thing of value” is broadly defined and includes for example, cash, merchandise, gifts cards, special bank deposits or accounts, special or unusual banking terms, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. As a result, providing cash, gift cards or any other thing of value to a current customer for the referral of new mortgage loan customer violates Section 8 of RESPA.

You can however, provide an incentive to applicants who become new mortgage loan borrowers. Neither Section 8 of RESPA, nor any provision in Regulation Z, prevents a lender from providing an incentive to a new loan customer. Often lenders will provide a closing cost credit to new loan customers, but the new loan customer could also receive a gift card or other merchandise. The terms of the loan incentive should be clearly explained in the lender’s promotional materials, including when the incentive will be provided to the borrower and requirements to earn the incentive, such as minimum loan size. Also, consult with the bank’s IRS tax professional to determine if the incentive value must be reported as miscellaneous income.

Question: Our mortgage loan team is investigating the possibility of using a lead-generation marketing service. Does use of such a service violate Section 8 of RESPA?

Answer: Paying for a “lead” does not violate Section 8; paying for a “referral” does. Let me explain. Section 8 of RESPA prohibits giving or accepting a thing of value for the referral of settlement service business involving a federally-related mortgage loan. In general, a RESPA Section 8(a) violation would occur if: 1) there is the payment or acceptance of a fee, kickback, or thing of value; 2) there is an agreement to refer settlement services; and 3) there is an actual referral. A referral is any action that has the effect of affirmatively influencing a person to select a particular settlement service provider.

In order to distinguish between a lead and a referral, consider whether the person providing the lead/ referral was merely giving information about a potential borrower to your lenders or the person was “affirmatively influencing” a consumer to select your lenders. “Affirmative influence” means recommending, directing or steering a consumer to a certain provider. True leads permissible under RESPA are often lists of customer contacts that are not conditioned on the number of closed transactions resulting from the leads, or any other considerations, such as endorsement of a particular settlement service — in this case, your lender.

In order to reduce the fair lending risk associated with lead agreements, perform due diligence when considering new third-party relationships entered into by the bank that generate leads or identify prospective mortgage borrowers. It is also important to train to senior management and staff responsible for and involved in mortgage lending on the difference between a “lead” and a “referral”. Finally, develop a robust monitoring process for identifying, assessing, documenting any occurrences of suspected violations of Section 8(a) and reporting those risks to senior management. (May 2021)

Rescission

Question: We are doing a mortgage loan for a consumer to pay off a Real Estate Contract to purchase their current principal dwelling. For TRID disclosure purposes, is the Loan Purpose “Purchase” or “Refinance?” Also, is this loan subject to the right of rescission?

Answer: Consumer-purpose, closed-end credit transactions secured by real property where the borrower is a natural person (or trust for estate or tax purposes), are covered by Reg. Z, and subject to TRID disclosure requirements. Under TRID, if any of the loan proceeds are used to purchase real property, the loan purpose is “Purchase.” Because the property is likely still titled in the name of the seller, title will be transferred to the buyer upon payoff of the contract with the loan proceeds, making the TRID loan purpose “Purchase.”

Typically, borrowers do not have a right to rescind a purchase money transaction. The commentary to Reg. Z, 1026.2(a)(24)(5), however, states that the term “Residential Mortgage Transaction” does not include a transaction involving a consumer’s principal dwelling if the consumer has previously purchased and acquired some interest in the dwelling, even though the consumer had not acquired full legal title. An example provided in the commentary is the payoff of a balloon payment due under a land sale contract. In that section, it expressly states that rescission does apply to these transactions. As stated earlier, in the case of contract payoffs, the collateral property is the buyer’s current principal dwelling, and they have been making payments on the property, thus at the very least they have an equitable ownership interest in the property through the payments they have made on the contract, even if they don’t have full legal title to the property. Therefore, in this situation, rescission does apply.

Question: We are refinancing a construction loan we made to a borrower into permanent financing. The home is the borrower’s principal dwelling. The borrower will be getting funds back to reimburse themselves for construction overruns they paid out of pocket. Does rescission apply to these funds?

Answer: Yes, the cash back to the borrower does trigger rescission since the loan is secured by his principal dwelling and an exemption does not apply to the transaction. Section 1026.23(f) of Regulation Z does provide limited exemptions to the right of rescission, below are two:

A residential mortgage transaction (any loan to construct or acquire a principal dwelling)
(2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.

In this scenario the refinancing of the construction loan itself would not trigger rescission; however, the funds being paid to the borrower at closing exceeding the unpaid principal balance of the construction loan, unpaid finance charges and amounts attributed to the cost of the refinance would trigger rescission. The residential mortgage exemption would also not apply in this scenario because the new amounts being advanced are not being used for the initial construction costs of the dwelling but rather being used to replenish borrower’s cash assets. In order to be exempt from rescission, the new funds must be directly used for construction costs to cover materials and payments to contractors.

Question: We are trying to plan ahead for the Juneteenth holiday. June 19 falls on a Sunday this year so the Juneteenth federal holiday will be observed on Monday, June 20. However, our bank will be open on June 20, so is June 20 a business day for us for Regulation Z and CC purposes?

Answer: The answer depends upon which “business day” definition you are referring to. Regulation Z has two definitions and Regulation CC has yet another.

Under Regulation Z, a business day is defined as “A day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions,” which is referred to as the “general business day” definition. This definition applies to the timeframes to deliver certain disclosures such as the Loan Estimate, the Written List of Providers, changed circumstance redisclosure, the ten-day shopping period on the Loan Estimate, and the provision of the Settlement Information Booklet. So, if the bank is open to carry on substantially all its business functions, Monday, June 20 can be counted as a business day under the “general rule” definition. If the bank is not, Monday, June 20, 2022, will not be considered a business day.

But wait, there is more to this analysis. The Official Staff Commentary then provides what is referred to as the “precise rule” definition of business day. (See comment 2 to 1026.2(a)(6).) This comment says, “A more precise rule for what is a business day (all calendar days except Sundays and the Federal legal holidays specified in 5 U.S.C. 6103(a)) applies when the right of rescission, the receipt of disclosures for certain dwelling or real estate-secured mortgage transactions.” This comment then goes on to explain certain Federal legal holidays are identified in 5 U.S.C. 6103(a) by a specific date: New Year’s Day, Jan. 1; Independence Day, July 4; Veterans Day, Nov. 11; and Christmas Day, Dec. 25, and as of last year, Juneteenth, June 19. When one of these holidays falls on a Saturday or Sunday, Federal offices and other entities might observe the holiday on the preceding Friday or following Monday. In cases where the more precise rule applies, the observed holiday is a business day, only the identified date in 5 U.S.C 6103(a) is considered the federal legal holiday. As a result, for rescission purposes, the three-day waiting period from receipt of the Closing Disclosure until consummation and the three-day mailbox rule, Monday, June 20, 2022 is a business day whether or not the bank is open as the precise business day rule is not based on whether or not the bank is open for carrying on substantially all its business functions. The IBA has created a guide to assist banks in determining which business day definition applies the disclosure timing requirements found in Regulation Z, see the Business Day Definition Applicable to Integrated Disclosure Guide.

For deposit purposes, from a Regulation CC perspective related to funds availability and item processing, a business day is defined as any day excluding Saturdays, Sundays and legal holidays. The Official Staff Commentary to the definition of business day then provides additional explanation:

229.2(f) Banking Day and (g) Business Day
1. The EFA Act defines business day as any day excluding Saturdays, Sundays, and legal holidays. Legal holiday, however, is not defined, and the variety of local holidays, together with the practice of some banks to close midweek, makes the EFA Act’s definition difficult to apply. The Board believes that two kinds of business days are relevant. First, when determining the day when funds are deposited or when a bank must perform certain actions (such as returning a check), the focus should be on a day that the bank is actually open for business. Second, when counting days for purposes of determining when funds must be available under the regulation or when notice of nonpayment must be received by the depositary bank, there would be confusion and uncertainty in trying to follow the schedule of a particular bank, and there is less need to identify a day when a particular bank is open. Most banks that act as intermediaries (large correspondents and Federal Reserve Banks) follow the same holiday schedule. Accordingly, the regulation has two definitions: Business day generally follows the standard Federal Reserve Bank holiday schedule (which is followed by most large banks), and banking day is defined to mean that part of a business day on which a bank is open for substantially all of its banking activities.

The Federal Reserve announced if a holiday falls on Saturday, the Federal Reserve will be open the preceding Friday, making it a business day. However, if the holiday falls on Sunday, the Federal Reserve will be closed the following Monday. As a result, even if the bank is open, because the Federal Reserve is closed, June 20, 2022 should not be considered a “business day” for Regulation CC funds availability purposes.

Question: Our bank is not open on Saturdays to conduct business. Should we count Saturday as a “business day” for purposes of rescission since our office is not open to the public?

Answer: Reg. Z provides two definitions of the term “business day”. One definition states a business day is a day the creditor’s office is open to the public to carry on substantially all of its business functions. That is the definition you are referring to.

The second definition of “business day” is all calendar days except Sundays and a specific list of federal holidays. This second definition applies to rescission. When counting your three day rescission period, include all calendar days except Sundays and those specific federal legal holidays. So to directly answer your question, you can include Saturdays in your three-day rescission period even though the bank is not open. (February 2021)

Question: Our bank is open on Columbus Day. Can we count Columbus Day as a business day for rescission?

Answer: No. Regulation Z, section 1026.2(a)(6) defines “Business day”. Within that section is a definition of business day that applies to rescission. For rescission, business day includes all calendar days, but it excludes Sundays and several legal public holidays, including Columbus Day. Even if the bank is open on Columbus Day, the bank cannot include Columbus Day as a business day for rescission since the regulation explicitly excludes Columbus Day as a business day. The other federal holidays excluded as a business day for rescission are New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Veterans Day, Thanksgiving Day, and Christmas Day. (January 2020)

Question: We have a borrower that is going to be taking possession of the home he is buying today. However, he will not be actually closing on the loan and gaining an ownership title in the property for two weeks. Our question is, if he is moving in early, is the loan now rescindable?

Answer: That’s a good question! It’s not uncommon for buyers to take possession early. Regulation Z gives the right to rescind to any owner whose principal residence is used as collateral for a consumer-purpose loan and TILA gives rescission rights to any obligor whose principal residence is used as collateral for a consumer-purpose loan. However, don’t forget the blanket exemption in Regulation Z’s rescission rules for “residential mortgage transactions” detailed below. TILA also provides the same exemption.

Official Interpretation
23(f) Exempt Transactions -Residential mortgage transaction. Any transaction to construct or acquire a principal dwelling, whether considered real or personal property, is exempt. (See the commentary to §1026.23(a)). For example, a credit transaction to acquire a mobile home or houseboat to be used as the consumer’s principal dwelling would not be rescindable.

So, since your loan is a purchase transaction (a “residential mortgage transaction”) and only secured by the dwelling being purchased, it is exempt from rescission under both Regulation Z and TILA, even if the borrower moves in before consummation.

Question: We are processing a one-year bridge loan with monthly, interest-only payments in which we are taking a first lien on the home being purchased, and a second lien on the borrower’s existing home which is currently for sale. Is Right of Rescission required on this transaction?

Answer: Generally purchase money transactions, referred to as “residential mortgage transactions”, are exempt from rescission. However, there is a special provision in Regulation Z that makes this loan rescindable. Rescission is required due the collateral interest taken in the borrower’s current principal dwelling. See the commentary to Regulation Z regarding the definition of a “residential mortgage transaction”:

Notwithstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in the consumer’s current principal dwelling (for example, a bridge loan) is subject to the right of rescission regardless of the purpose of that loan. For example, if a consumer whose principal dwelling is currently A builds B and secured by A is subject to the right or rescission. A loan secured by both A and B is, likewise, rescindable. [Commentary to §1026.23(a)(1) – #4]

Question: Is the initial escrow deposit considered “new money” when determining if right of rescission applies?

Answer: The initial escrow deposit is not considered “new money” when determining whether rescission applies. The Official Staff Commentary to Regulation Z §1026.23(f)-4 provides that fees included in § 1026.4(c)(7) are not included because they are attributed solely to the costs of the refinancing. Escrow deposits are fees included in §1026.4(c)(7).

A section of comment #4 to §1026.23(f) addresses the topic of “new money” and reads in part as follows:

New advances. The exemption in § 1026.23(f)(2) applies only to refinancings (including consolidations) by the original creditor… If the refinancing involves a new advance of money, the amount of the new advance is rescindable. In determining whether there is a new advance, a creditor may rely on the amount financed, refinancing costs, and other figures stated in the latest Truth in Lending disclosures provided to the consumer and is not required to use, for example, more precise information that may only become available when the loan is closed. For purposes of the right of rescission, a new advance does not include amounts attributed solely to the costs of the refinancing. These amounts would include §1026.4(c)(7) charges (such as attorneys fees and title examination and insurance fees, if bona fide and reasonable in amount), as well as insurance premiums and other charges that are not finance charges. (Finance charges on the new transaction—points, for example—would not be considered in determining whether there is a new advance of money in a refinancing since finance charges are not part of the amount financed.) To illustrate, if the sum of the outstanding principal balance plus the earned unpaid finance charge is $50,000 and the new amount financed is $51,000, then the refinancing would be exempt if the extra $1,000 is attributed solely to costs financed in connection with the refinancing that are not finance charges…

Question: We are making a loan that is primarily for business purposes, but is secured by an owner’s principal residence. Does rescission apply?

Answer: The right to rescind does not apply to commercial loans. Per the Official Staff Commentary to Regulation Z §1026.23, even if the loan is to be secured by the consumer’s principal dwelling, if the loan is not covered by Regulation Z (such as a business/commercial purpose loan), then rescission does not apply.

OSC to § 1026.23 – 1. Transactions not covered. Credit extensions that are not subject to the regulation are not covered by §1026.23 even if a customer’s principal dwelling is the collateral securing the credit. For example, the right of rescission does not apply to a business purpose loan, even though the loan is secured by the customer’s principal dwelling.

Question: What are “material disclosures” for rescission purposes?

Answer: Both Regulation Z’s open and closed-end credit rules reference the delivery of “material disclosures” as one of the triggers that starts the three-day rescission waiting period. The regulation says the consumer may exercise his/her right to rescind until midnight of the third business day following consummation, delivery of the rescission notice or delivery of all material disclosures, whichever occurs last.

The closed-end rules indicate in §1026.23(a)(3)(ii) “…the term “material disclosures” means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations referred to in §§ 1026.32(c) and (d) and 1026.43(g).” The annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule are all now found on the Closing Disclosure, so delivery of the Closing Disclosure to all parties with the right to rescind satisfies this requirement.

But what about the reference to “the disclosures and limitations” referred to in §1026.32(c) and (d) and 1026.43(g)? Section 1026.32 provides the requirements for High-Cost Mortgage Loans or HOEPA loans as they are sometimes referred. Thus, the HOEPA disclosure required by §1026.32(c), which warns the borrower they are entering into a high cost mortgage loan and could lose their home should they default, is a material disclosure. This disclosure must be provided three days prior to consummation and is subject to Regulation Z’s accuracy standards. This means if the APR stated on the section 32 is understated beyond Regulation Z’s tolerance limits, the disclosure must be corrected and provided again with another three-day wait to close. (This disclosure could be given at the same the Closing Disclosure is provided three days prior to consummation.)

The limitations referred to in §1026.32(d) and §1026.43(g) are the prohibited practices connected with high-cost mortgage loans such as balloon payments, negative amortization, increased interest rates after default, prepayment penalties, etc., and the reference to 43(g) is the prepayment penalty provisions in the Ability to Repay rules.

The reference to material disclosures in Regulation Z’s open-end rules are found in § 1026.15(a)(3):

“…The term material disclosures means the information that must be provided to satisfy the requirements in §1026.6 with regard to the method of determining the finance charge and the balance upon which a finance charge will be imposed, the annual percentage rate, the amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan, and the payment information described in §1026.40(d)(5)(i) and (ii) that is required under §1026.6(e)(2).” The material disclosures found § 1026.6, 40(d)(5)(I) and (ii) that are required under § 1026.6(e)(2) are all found on the program agreement signed at the time of closing.”

Question: The bank is originating a HELOC for a mother and son as borrowers where the collateral property is the mother and father’s principal residence. Does rescission apply and, if so, who has rescission rights?

Answer: Yes, rescission does apply because you have consumer-purpose transaction in which the bank is either taking or increasing its security interest in a person’s principal dwelling. Answering the question of who has rescission rights, is a little more complex and reveals how the language regarding rescission in Regulation Z and the Truth in Lending Act (TILA) is not 100 percent consistent.

Regulation Z provides rescission rights when a security interest is taken or will be retained in a consumer’s principal dwelling to each consumer whose ownership interest is or will be subject to the security interest. Under Regulation Z, persons with an ownership interest in the principal dwelling securing the loan are given rescission rights; Regulation Z does not require the person with ownership rights be borrowers/obligors on the note.

Regulation Z § 1026.15(a): Consumer’s right to rescind. (1)(i) Except as provided in paragraph (a)(1)(ii) of this section, in a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind: each credit extension made under the plan; the plan when the plan is opened; a security interest when added or increased to secure an existing plan; and the increase when a credit limit on the plan is increased.

TILA, however, provides rescission rights to each “obligor” whose principal dwelling will be subject to the creditor’s security interest. So TILA does not require the borrower/obligor to have an ownership interest in the principal dwelling.

15 US Code 1635 – (a) Disclosure of obligor’s right to rescind
Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section.

Therefore the mother and father have rescission rights because they are both owners and the collateral property is their principal dwelling. The son does not have rescission rights. While he is an obligor, his principal dwelling is not collateral for the loan. First and foremost, rescission is triggered by a collateral interest in a consumer’s principal dwelling.