Regulation Z prohibits practices in which mortgage brokers and loan originators may receive compensation for referrals or "steering." Buyers typically connect with a real estate agent, who refers them to a specific mortgage lender. The agent receives no compensation for this referral.
Certain types of loans are not subject to Regulation Z, including federal student loans, loans for business, commercial, agricultural, or organizational use, loans above a certain amount, loans for public utility services, and securities or commodities offered by the Securities and Exchange Commission.
Creditors with assets of less than $2.336 billion (including assets of certain affiliates) on December 31, 2021, are exempt from the requirement to establish escrow accounts for higher-priced mortgage loans in 2022 if other provisions of Regulation Z are also met.
Common Violations
A common Regulation Z violation is understating finance charges for closed-end residential mortgage loans by more than the $100 tolerance permitted under Section 18(d).
This includes requiring lenders to provide written information about interest rates, and all fees and finance charges associated with a loan or credit card. Requiring lenders to disclose the maximum interest rate upfront on variable-interest loans backed by the borrower's home.
Regulation Z's Mortgage Loan Originator Rules, among other things, prohibit compensating loan originators based on a term of a mortgage transaction or a proxy for a term of a transaction, prohibit dual compensation, prohibit steering practices that do not benefit a consumer, implement licensing and qualification ...
The regulation covers topics such as:
Credit card disclosures. Periodic statements. Mortgage loan disclosures. Mortgage loan servicing requirements.
Lenders have to provide borrowers a Truth in Lending disclosure statement. It has handy information like the loan amount, the annual percentage rate (APR), finance charges, late fees, prepayment penalties, payment schedule and the total amount you'll pay.
The rule prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended.
Mortgage lending companies, mortgage brokers, and loan officers may be considered loan originators. The rules prohibit dual compensation and steering practices that do not benefit borrowers, as well as prohibit compensating loan originators based on the terms of a mortgage transaction.
Triggering terms need not be stated explicitly; additional disclosures are still required if the term may be readily determined from the advertisement. For example, if the advertisement says “80 percent financing available,” the statement is indicating a 20 percent down payment is required (a triggering term).
Certain types of consumer credit transactions secured by a borrower's principal dwelling are eligible for a three-day right of rescission under Regulation Z. These typically include home equity loans, home equity lines of credit, and refinances with a new lender.
Under Regulation Z, a finance charge does not include a charge imposed by a financial institution for paying items that overdraw an account unless, as is typically the case for overdraft lines of credit, the payment of such items and the imposition of the charge are previously agreed upon in writing.
The TILA-RESPA rule provides consumer protections and limits the amount of any increase in the borrower's cash-to-close amount. Even the slightest change obligates the lender to issue a revised closing disclosure, but certain changes do not trigger a new 3-day waiting period after the new disclosure.
The MLA doesn't apply to all credit, though. Mortgages, home equity loans, lines of credit and certain secured loans, including secured auto loans, are not covered under the MLA.
Some examples of violations are the improper disclosure of the amount financed, finance charge, payment schedule, total of payments, annual percentage rate, and security interest disclosures.
All bridge loans are exempt from various Regulation Z provisions, including the prohibition on balloon payments, ability to repay rule, and appraisal requirement. However, depending on the type of property encumbered by the bridge loan, the 3-Day Cancel Rule may or may not apply.
The regulation requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home-equity plans that are subject to the requirements of § 226.5b and mortgages that are subject to the requirements of § 226.32.
Prohibited Loan Servicer Practices
failing to credit a payment to an account as of the date received; pyramiding late fees; and. failing to provide an accurate loan payoff statement within a reasonable time of receiving a request for such a statement.
RESPA only applies to certain home loans. Reg Z applies to all consumer credit. RESPA is about disclosing fees. Reg Z is about stating key terms (not just fees) and the APR (cost of credit).
Specifically, section 956 of Dodd–Frank requires that the agencies prohibit any type of incentive-based compensation arrangements, or any feature of any such arrangements, that the agencies determine encourage inappropriate risks by a covered financial institution (1) by providing an executive officer, employee, ...
An Anti-Steering Disclosure is required when a licensed mortgage broker originates a loan and will be compensated by the lender. The Anti-Steering Disclosure is not required on retail loan transactions or where the consumer pays the mortgage broker's compensation.
With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer's ability to repay any residential mortgage loan, and loans that meet Regulation Z's requirements for “qualified mortgages” (QMs) obtain certain protections from liability.