As if escrows were not enough, the mortgage industry is still grappling with the effects of the Rodash decision.
The 11th Circuit Court ruled in Rodash v. AIB Mortgage Co. held that a home-equity lender provided inadequate Truth-in-Lending disclosures when it failed to include a delivery charge and the Florida intangibles tax in the finance-charge disclosure and thus provided the borrower with a defective notice of right to cancel.
Ms. Rodash therefore had continuing rights to rescind her loan and seek statutory damages under the act. The Rodash outcome followed a long line of Truth-in-Lending decisions holding lenders strictly liable for disclosure violations.
The Federal Reserve's Regulation Z defines "finance charge" as generally including all charges imposed directly or indirectly by the creditor unless the charge is otherwise excludable under the regulation. The total finance charge is one of the "material" disclosures that must be provided along with the notice of right to rescind.
If a creditor provides accurate material disclosures and notices, consumers have three business days in which to rescind. If the creditor provides inaccurate disclosures or notices, consumers have three years to elect rescission. Under footnote 41 to Regulation Z, the finance-charge disclosure is accurate if it is within $10 of the correct amount.
Since the Rodash decision was issued last March, several class actions have been filed alleging Truth-in-Lending violations and continuing rights to rescind loans based on the exclusion of fees such as the Florida intangibles tax, tax service fees, wire transfer fees, and delivery charges imposed by settlement agents.
The Federal Reserve's proposed Truth-in-Lending Commentary, combined with some state law changes, should render moot the issue of the Florida intangibles tax. However, the proposal would also raise additional concerns for lenders struggling to meet the law's complicated disclosure requirements.
The proposal would exclude from the finance charge fees imposed by third parties such as "independent closing agents" provided that the creditor does not retain the charges or "require" the service. The commentary would, however, leave courts to decide whether a closing agent was truly independent or whether the creditor may have effectively required the service.
This proposal would therefore present lenders with some complicated dilemmas. Should, for example, a lender discontinue issuing closing instructions for fear of losing independence or should it impose greater controls to avoid third-party disclosure violations? What types of controls can and should lenders place on third parties to help prevent errors?
How can lenders better monitor the fees being charged and proactively address potential problems before they arise in court or during regulatory examinations? What training should lenders provide to their staffs, closing agents, and other vendors?
Lenders must regularly scrutinize all of their fees and test their Truth-in-Lending systems, processes, and procedures to ensure proper characterization and disclosure under Regulation Z. Moreover, lenders must review their rescission forms and policies for potential problems. We note that the fatal defect found in Rodash stemmed from a long-standing and widespread practice of including preprinted acknowledgments of nonrescission on the notice of right to cancel.
In summary, it is imperative that lenders and servicers focus carefully on the new escrow rule and the Truth-in-Lending Commentary and make every effort to comply with the letter of the law. Those purchasing loans and servicing must be equally attentive to the liability they may be acquiring.
HUD has vowed to carefully monitor servicers for compliance with the new escrow rule and there is little doubt that other regulators, consumer groups, and the plaintiff bar will be looking for gaps in Respa and Truth- in-Lending compliance. If history is any teacher, one thing seems clear: Even a perceived compliance glitch can have costly consequences.
Mr. Oliver is a partner at KPMG Peat Marwick, Washington, and co- director of its national mortgage finance group. Ms. Albon is manager of the group.