Reverse Mortgage Disclosures: Timing Requirements

QUESTION

I have a question about the timing of disclosures on reverse mortgages.

We have just gotten into reverse mortgages and are setting up our rules in the loan origination software.

TILA says we are supposed to disclose three business days before consummation. But we are confused about what special disclosures are subject to that rule. 

Also, if we disclose on Friday, what is the consummation day?

And which particular forms are subject to the three-day rule?

What are the timing requirements for disclosures on reverse mortgage loans?

ANSWER

The Truth in Lending Act (TILA)[i] and its implementing Regulation Z[ii] indicate what disclosures are required. My response will pertain to closed-end, reverse mortgages.

In addition to any other disclosures required by TILA and Regulation Z, creditors must provide the following disclosures in a manner substantially similar to the model form provided in Regulation Z’s Appendix K.[iii] 

I will outline them here, along with brief descriptions.

Disclosure Requirements 

Notice 

A statement that the consumer is not obligated to complete the reverse mortgage transaction merely because the consumer has received the required disclosures[iv] or has signed an application for a reverse mortgage loan. 

Total Annual Loan Cost Rates 

A good-faith projection of the total cost of the credit, determined by Regulation Z[v] and expressed as a table of “total annual loan cost rates.” Regulation Z’s Appendix K gives comprehensive instructions on format and mathematical computation. 

Creditors must use the term “total annual loan cost rate”[vi] rather than “annual interest rate,” as used in TILA.[vii] This rule is based on the belief that the term “total annual loan cost rate” is less likely to be confused with the annual percentage rate (APR) and is a more accurate description of the percentage cost of reverse mortgages.  

The table of “total annual cost rates” requires creditors to disclose total annual loan cost rates for not less than three projected appreciation rates (0 percent, 4 percent, and 8 percent) and not less than three credit transaction periods (two years, a period equal to the consumer’s life expectancy, 1.4 times the consumer’s life expectancy), and an optional fourth period equal to half the consumer’s life expectancy.  

This disclosure is, in fact, modeled on the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage program. 

Itemization of Pertinent Information 

An itemization of loan terms, charges, the age of the youngest borrower, and the appraised property value. 

Explanation of Table

An explanation of the table of total annual loan cost rates as provided in the model form.[viii]

Timing of Disclosures 

Regulation Z[ix] requires a creditor to give the reverse mortgage disclosures at least three business days prior to 

(1) consummation of a closed-end credit transaction or 

(2) the first transaction under an open-end credit plan. 

This is a situation in which Regulation Z is more specific than TILA,[x] which does not distinguish between a closed-end and open-end plan. 

Regulation Z[xi] requires the creditor to make the disclosures “clearly and conspicuously” in writing, in a form the consumer may keep. The disclosures may be provided to the consumer in electronic form,[xii] subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act).[xiii] 

The Official Staff Commentary offers additional guidance on the timing of disclosures for reverse mortgages.[xiv] Under Regulation Z, the required disclosures must be given within three “business days” of consummation. The applicable Comment[xv] defines “business day” as “all calendar days except Sundays and the federal legal holidays.[xvi] 

The following are legal public holidays: 

New Year’s Day, January 1; 

Birthday of Martin Luther King, Jr., the third Monday in January; 

Washington’s Birthday, the third Monday in February; 

Memorial Day, the last Monday in May; 

Juneteenth National Independence Day, June 19; 

Independence Day, July 4; 

Labor Day, the first Monday in September; 

Columbus Day, the second Monday in October; 

Veterans Day, November 11; 

Thanksgiving Day, the fourth Thursday in November; and 

Christmas Day, December 25. 

With respect to your question about issuing disclosures on Friday, if disclosures are provided on a Friday, consummation may occur any time on Tuesday, the third business day following receipt of the disclosures.[xvii] 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] TILA § 138(a)

[ii] Regulation Z § 1026.33(b)

[iii] Appendix K, Paragraph (d)(1), Regulation Z

[iv] See§ 1026.33

[v] In accordance with Reg. Z § 1026.33(c)

[vi] § 1026.33(b)(2)

[vii] TILA § 138.

[viii] Appendix K, Paragraph (d), Regulation Z

[ix] § 1026.31(c)(2)

[x] TILA § 138(a)

[xi] § 1026.31(b)

[xii] Idem

[xiii] 15 USC § 7001 et seq. See § 2.08.

[xiv] § 1026.31(c)(2)

[xv] 31(c)(2)-1

[xvi]  5 USC § 6103(a)

[xvii] Op. cit. xv

Payment Shock Notice

QUESTION

Our federal regulator recently advised us to issue a payment shock notice to our borrowers. Actually, we never even knew such a notice existed. What is a payment shock notice? What are the format and procedures?

ANSWER

The Payment Shock Notice is a voluntary notice that a lender or servicer provides to a borrower in order to alert the borrower about the potential increase in the property taxes for a home.

The disclosure is often used in new construction financing. For instance, with a newly constructed home the property taxes for the first year may be based on the unimproved value or only partially on the improved value. If this is the case, there can be a substantial increase in the property taxes once the taxes are fully based on the improved value.

There are Best Practice solutions associated with the Payment Shock Notice, as follows:

• Notify borrowers in advance and provide an opportunity to make voluntary payments ahead of schedule to avoid payment shock.
• Offer consumers extended repayment plans, even beyond those required under the Real Estate Settlement Procedures Act (RESPA), to make up substantial shortages associated with payment shock. [63 Federal Register (1998) 3214, 3233, 3237-3238] 

Many of our clients, both lenders and servicers, implement the foregoing Best Practices – even without a regulatory recommendation to do so.

The Payment Shock Notice can be a relatively simple form, which was adopted as a public guidance document. [See 63 Federal Register (1998) 3214, 3237-3238, Appendix G]

The notice should contain some basic elements, such as advising the borrower of the potential for a substantial increase in bills paid out of the escrow or impound account because of property taxes (or another applicable item) after the first year, as well as a statement that the borrower could elect to voluntarily make higher payments into the account during the first year to help offset the payment shock.

The rule of thumb for a timeline to issue the Payment Shock Notice would be when a lender or servicer anticipates a substantial increase in the bills paid out of the escrow or impound account after the first year. It could be delivered with, or separate from, an initial escrow account statement. 

With respect to the method of delivery, although the Payment Shock Notice is a Best Practice and not specifically required by RESPA, nor is it a mandate under RESPA’s implementing regulation, Regulation X, there is general recognition in Regulation X that ESIGN (Electronic Signatures in Global and National Commerce Act) can be used for RESPA-related documents, as Regulation X provides that ESIGN applies to Regulation X. 

The Payment Shock Notice is a type of notice covered by ESIGN. Consequently, the notice may be provided by facsimile, email or other electronic means if the consumer consents and the other requirements of ESIGN are met. [24 CFR § 3500-23]

Jonathan Foxx
Managing Director
Lenders Compliance Group