QUESTION
In my experience, this issue comes up a lot. We use document vendors, but we are relying too much on them for accuracy. We found this out the hard way when a regulator found that one of the TILA disclosures was inaccurate and unreasonable.
The idea of accuracy makes sense, but this notion of reasonableness seems pretty subjective to us.
So, we want to know what is considered reasonable in TILA disclosures?
Regulation Z[i] includes several rules regarding disclosures, including the basis on which disclosures must be given, the use of estimates, and the treatment of irregularities.
Here’s a good rule of thumb for you to follow when reviewing a disclosure: it must reflect the terms of the legal obligation between the parties.
For example, suppose a borrower executes an unsecured note that provides for the total debt to be due five years from the date of the loan. In that case, disclosures must be based on the 5-year term, even if the borrower might informally promise to make monthly or quarterly payments of accrued interest. In other words, disclosures must reflect the credit terms to which the parties are legally bound at the outset of the transaction.
Furthermore, under Regulation Z[ii], if any information necessary for an accurate TILA disclosure is unknown to the creditor, the creditor must make the disclosure based on the best information reasonably available and state that the disclosure is an estimate. This provision provides that disclosures may be estimated if the exact information is unknown at the time the disclosures are made. The provision is based on a section of TILA[iii] that authorizes the CFPB to provide by regulation that any portion of the information TILA requires to be disclosed may be given in the form of estimates when the provider of the information is not in a position to know exact information.
Under Regulation Z, a creditor has no liability for an inaccurate disclosure if the necessary information is not reasonably available by the time of consummation. However, even if a disclosure is validly marked as an estimate before consummation, the creditor may still be required to redisclose when more accurate information becomes available by the time of consummation.[iv]
The estimates must be made in good faith, based on the best information reasonably available, and designated as estimates in the segregated disclosures. Under Regulation Z, as to open-end credit[v] and closed-end credit[vi], creditors are required to make disclosures based on the “best information reasonably available” and to state that the disclosure is an estimate when “any information necessary for an accurate disclosure is unknown.”
A case involving a military veteran illustrates the juncture of “best information reasonably available” and when “any information necessary for an accurate disclosure is unknown.” Let’s check it out.
In Pennsylvania, a federal district court recently examined these requirements in light of a lender’s disclosure of property taxes based on an expected exemption for a borrower.[vii] In some states, such as Pennsylvania, a military veteran may be exempted from paying local property taxes under certain circumstances.
Nelson, a retired, 100-percent disabled military veteran, obtained a home mortgage loan from Acre Mortgage. Under a state program, veterans classified as 100-percent disabled could be exempted from paying local property taxes so long as their income fell below a statutory maximum. Although officials made determinations regarding the income-eligibility criteria with the state veterans’ commission, county veterans' offices handled applications for the exemption.
In her loan application, Nelson disclosed a monthly income of $7,086.83, including $1,510 in social security disability benefits, $2,906.83 in non-educational veterans’ benefits, and $2,670 in military pension benefits. She did not disclose any other income, and, at closing, she signed a statement acknowledging the income information to be true and correct.
In conducting its due diligence before closing, Acre Mortgage consulted the county officials to confirm that property taxes could be excluded. Based on Nelson's income information to Acre Mortgage, county officials informed Acre Mortgage that Nelson should be eligible for the property tax exemption. Nelson also had previously spoken with county officials.
One or two days before closing, Acre Mortgage again contacted county officials to confirm Nelson’s eligibility for the tax exemption, and the county informed Acre Mortgage that, based on the income information submitted to the lender, she was eligible, but that the exemption could not be formally granted until Nelson had title to the property. Accordingly, Acre Mortgage excluded property taxes from the loan disclosures and closing documents.
In December 2015, after closing, Nelson applied for the veteran property tax exemption. In February 2016, the state veterans’ commission notified her that she was not eligible for an exemption because she received educational benefits that increased her income above the statutory maximum for eligibility.
Nelson completed a graduate degree program in May 2016 and then no longer received educational veterans’ benefits. Her income fell below the statutory maximum, and in 2017 she was granted the tax-exempt status.
She sued Acre Mortgage, including TILA violations among other claims. She claimed that Acre Mortgage had provided disclosures on the wrong forms (by failing to use the Loan Estimate and Closing Disclosure and instead using Good Faith Estimate and other forms that had preceded the implementation of the Loan Estimate and Closing Disclosure), failed to disclose local property taxes, and failed to make a reasonable and good faith determination of her ability to repay the loan.
The court dismissed her TILA claims. Evidence showed that Nelson had failed to disclose her educational veterans’ benefits as income and further indicated that Acre Mortgage had relied on the representations of both Nelson and county officials regarding her eligibility for the disabled veterans’ property tax exemption. Evidence also showed that Acre Mortgage had acted in good faith and exercised due diligence in seeking to determine whether property taxes could be excluded from her estimated monthly payment and other mortgage loan disclosures.
In addition, evidence showed that Acre Mortgage had based the TILA disclosures on the best information reasonably available at the time the disclosures were provided and had clearly stated that the disclosures were estimates.
Finally, evidence showed that the ability-to-repay determination was based on the best information reasonably available at the time of loan consummation. No reasonable jury could have returned a verdict in favor of Nelson with respect to whether Acre Mortgage had made a reasonable and good faith determination of ability to repay or whether Acre Mortgage had adequately disclosed Nelson’s local property tax obligations or estimated monthly payments.
The court also held that Acre Mortgage had used the proper disclosure forms, as the TRID disclosure forms (viz., Loan Estimate and Closing Disclosure) were not required until after Nelson submitted her loan application.
TRID disclosure requirements took effect for applications received on or after October 3, 2015, but Acre Mortgage received Nelson’s application on September 24, 2015.
Chairman & Managing Director
[i] § 1026.17(c)
[ii] § 1026.17(c)(2)
[iii] TILA § 121(c), 15 U.S.C. § 1631(c)
[iv] As set forth in Regulation Z § 1026.17(f), see “early disclosures when a subsequent event renders them inaccurate.”
[v] §§ 1026.5(c)
[vi] 1026.17(c)(2)
[vii] Nelson v. Acre Mortgage & Finance, Inc., 2020 U.S. Dist. (M.D. Pa. Sept. 25, 2020)
