Lenders upset over the overlapping disclosure requirements imposed on home equity loans by the Real Estate Settlement Procedures Act may get a reprieve in January when HUD issues its final rule on subordinate liens.
A leaked draft of HUD's final rule obtained by the Mortgage Marketplace revealed the department plans to allow home equity line of credit lenders that comply with Regulation Z. Truth in Lending, to ignore the overlapping Respa Regulation X disclosure requirements.
Respa requires lenders to disclose details on subordinate liens through a special information booklet. good faith estimate and a HUD-1 settlement statement. Lenders, trade groups and even the Federal Reserve contended that because Reg Z has similar requirements, disclosures under Respa's Reg X would be redundant. They also argued that those requirements weren't necessary for refinance transactions, a provision HUD also changed.
In its rule, HUD said "Since [Reg Z's] disclosure materials were so extensive and there has been recent through congressional oversight, commenters urged the appropriateness of deferral to Regulation Z structure. In this final rule, HUD has deferred to Regulation Z requirements for home equity lines of credit [credit plans) for purposes of disclosure only."
The rule would bring more peace of mind than it would any practical benefits. Most lenders haven't been adhering to Respa's Reg X because regulatory agencies had issued a stay on the provision until HUD issued its final ruling. The decision won't effect closed-end, plain-vanilla second mortgages that will continue to face the same disclosure requirements.
The rule will take effect 180 days after publication in the Federal Register, something sources close to HUD say will happen in early January. Other mortgage industry sources, however, said that the process could easily be accelerated and become final before Christmas. Before the rule can become final, however, it must be reviewed by the Office of Management and Budget.
"[Home equity] lenders could consider this a victory," said Neil O'Brien, regulatory counsel for the Philadelphia-based law firm of Blank Rome Comisky & McCauley. "In terms of meaningful savings, the industry-wide loan-by-loan effect win be minimal. Lenders that do large volumes of home equity loans will see the most benefit. They won't have to waste as much time or effort that's duplicative."
John Rasmus, senior federal administrative counsel for the American Bankers Association, agreed, but added that any victory claims are speculative because the rule hadn't been published. However, one mortgage industry source close to HUD said that because the department has gone so far to make the change - and because it makes sense - the possibility of any changes is remote.
HUD also made these changes to the subordinate lien rule:
Refi Transactions: HUD has opted for an exemption that follows Regulation Z standards. In the final rule, if a new loan is created for the same borrower that pays off an existing loan, it constitutes a covered transaction, as would a new loan for an increased amount with the same lender. In these circumstances, the borrower would receive all new disclosures, mandated information and the HUD-1 or the new HUD-1A settlement forms would be used. If the transaction only involves a limited modification of the existing loan with the same borrower, no additional good-faith estimate or HUD settlement disclosures would be needed. If the terms of the original mortgage loan provide for conversion of the loan to a different rate or term at the borrower's option, this is not a refinance transaction, even if the additional fee is required for conversion.
Secondary Market Transactions: The department will require that the initial lender, if known at the time the dealer loan is applied for, be responsible for delivering necessary disclosures at the time the application for the dealer loan is made. In addition, the term "table funding" has been defined as "a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds. A table-funded transaction is not a secondary market transaction." (See related story above.)
Temporary Financing: A clarifying exemption was added that specifies temporary financing - such as a construction loan - does not apply to a loan which is used or may be converted to permanent financing by the same lender or to finance transfer of title to the first user. If a lender has issued a commitment to provide permanent funding under certain conditions, this is evidence that the loan may be converted. Any construction loan for a new or rehabilitated structure, other than a loan to a bona fide builder, is a Respa-covered loan if its term is in excess of two years.