QUESTION
We are a mortgage
lender and servicer with a large servicing portfolio. Recently, the CFPB
published a Fact Sheet about the circumstances involving the disclosures of the
LE and the CD for certain transactions. Our interest is in the assumption
transactions. What disclosures are required for these types of transactions? What
is the disclosure process?
ANSWER
The Consumer Financial
Protection Bureau (CFPB) issued a Fact Sheet titled “Are Loan Estimates
and Closing Disclosures Required for Assumptions?” (“Fact Sheet”). The purpose
of the Fact Sheet was to discuss the circumstances under which a Loan Estimate
(LE) and Closing Disclosure (CD) are required under the Truth-in-Lending Act/Real
Estate Settlement Procedures Act (TILA-RESPA) Integrated Disclosure Rule (TRID
Rule) for a specific group of transactions.
The
Fact Sheet may be found on the CFPB’s TILA-RESPA Disclosures webpage.
If
you need guidance in how best to implement the disclosure process, we have an entire
group devoted to mortgage servicing compliance. Contact us for servicing compliance support.
The
Fact Sheet contains a flowchart to help you decide whether the disclosures are
necessary. You may wish to compare this flowchart to your mortgage documents to
ensure that the proper documentation is being prepared, depending on the type
of application received.
The
flowchart is a quick reference that highlights the major questions to be
answered when determining if a LE and CD are required for the assumption
transactions described in the narrative portion of the Fact Sheet.
In
providing an answer to your question, I am going to address the narrative
information offered in the Fact Sheet.
Briefly,
a mortgage assumption is the conveyance of the terms and balance of an existing
mortgage to the purchaser of a financed property, commonly requiring that the
assuming party is qualified under lender or guarantor guidelines. Your
institution may have specific policies and procedures for assumptions as part
of an overall credit policy, and your state may also have certain regulations
regarding assumable mortgages. In terms of the contract, the mortgage note
generally governs the legality of assumptions. However, in terms of the TRID
rule, Regulation Z is the guidepost for disclosures for assumptions. The Fact
Sheet addresses disclosures for specific types of transactions, regardless of
what each institution might call the transaction.
The
Fact Sheet pertains to transactions:
- In which a new consumer is being added or substituted as an obligor on an existing consumer credit transaction;
- That are closed-end consumer credit transactions secured by real property or a cooperative unit; and,
- That are not reverse mortgages subject to 12 CFR 1026.33.
To answer your question about the required disclosures, determine if you have a loan
application that is subject to the TRID Rule, that is, a transaction that is a
closed-end consumer credit transaction secured by real property or a cooperative unit and
that is not a reverse mortgage subject to 12 CFR 1026.33. Then, determine if
the transaction is an assumption as that term is specifically defined in
Regulation Z, 12 CFR 1026.20(b).
Drilling
down further, an assumption under 12 CFR 1026.20(b) occurs when a
creditor expressly agrees in writing to accept a new consumer as a primary obligor on an existing residential mortgage
transaction. Generally, to satisfy this particular definition of assumption, a
transaction must meet the following three elements:
- Include the creditor’s express acceptance of the new consumer as a primary obligor. However, take note, the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption under 12 CFR 1026.20(b).
- Include the creditor’s express acceptance in a written agreement. For a transaction to be an assumption under 12 CFR 1026.20(b), it must include a written agreement, and that written agreement must include the creditor’s express acceptance of the new consumer.
- Be a residential mortgage transaction as to the new consumer. A residential mortgage transaction is a transaction in which a security interest is created or retained in the new consumer’s principal dwelling and which finances the acquisition or initial construction of the new consumer’s principal dwelling. [See 12 CFR 1026.2(a)(24)]
If
the transaction is an assumption under 12 CFR 1026.20(b), the creditor must provide a LE and CD,
unless the transaction is otherwise exempt from these requirements.
Here’s
an example, using the preceding guidelines. Certain housing assistance loans
are otherwise exempt from the requirements to provide a LE and CD. The creditor
must make the disclosures in the LE and CD based on the remaining obligation.
For instance, the amount financed is the remaining principal balance plus any
arrearages or other accrued charges from the original consumer credit
transaction.
Similarly,
in determining the amount of the finance charge and the annual percentage rate
to be disclosed, the creditor should disregard any prepaid finance charges paid
by the original obligor but must include in the finance charge any prepaid
finance charge imposed in connection with the assumption transaction. If the
creditor requires the new consumer to pay any charges as a condition of the
assumption, those sums are prepaid finance charges as to that consumer, unless
exempt from the finance charge under 12
CFR 1026.4.
According to Regulation Z commentary, if a
creditor adds a new consumer to an existing consumer credit
transaction (regardless of whether that event triggers the requirement to
provide a LE and CD), the extension of credit remains a consumer credit
transaction under Regulation Z. Thus, the creditor, assignee, or servicer must
comply with any ongoing obligations pertaining to the consumer credit
transaction, such as servicing-related requirements. Furthermore, even if the
event does not trigger the requirement to provide a LE and CD, it may trigger
other disclosure requirements under TILA or RESPA.
Jonathan Foxx, Ph.D., MBA
Managing Director
Lenders Compliance Group
