Reg Z TILA Amendment requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer

The Federal Reserve Board has issued an interim final rule under Regulation Z to implement the recent Truth in Lending Act (TILA) amendment that requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer.

While mostly helpful in foreclosure defense,  the rule leaves open the question of ownership of the loans. Because of the practice of “assignment” of the loans to a special purpose vehicle, the Fed stopped there in its inquiry. If it had taken one step further it would have seen that the indenture to the mortgage backed bond conveyed an ownership interest in the loans supposedly assigned. it also leaves open the problem of whether the loans were accepted into the pool or were time-barred or were defective for failure to meet the requirements of recordation or recordable form set forth in the enabling documents.

The TILA requirement has been in effect since the May 20, 2009, enactment of the Helping Families Save Their Homes Act of 2009. Compliance with the specifics of the new rule is optional until January 19, 2010. As a result, new owners may (but need not) rely on the new rule immediately to ensure they are in compliance with TILA. Violations give rise to liability for statutory damages, including up to $4,000 per violation in individual actions or up to $500,000 in a class action.

The transfer notice requirement applies to all closed-end and open-end consumer-purpose mortgage loans secured by a consumer’s principal residence. It requires any person that acquires more than one mortgage loan in any 12-month period to provide a transfer notice without regard to whether the new owner would otherwise be a “creditor” subject to TILA. Mere servicers of mortgage loans and investors in mortgage-backed securities or other interests in pooled loans do not acquire legal title to loans and are not subject to the new rule. However, trusts or other entities acquiring legal title to the securitized loans are subject to the rule. The notice requirement is triggered by a transfer of the underlying loan, regardless of whether the assignment is recorded. Thus, assignees are not exempt from the duty to provide notice merely because the mortgage (as opposed to the note) is in the name of Mortgage Electronic Registration Systems (MERS), for example.

The new rule does not affect the separate notification requirement under the Real Estate Settlement Procedures Act (RESPA) for servicing transfers on mortgage loans. Accordingly, new owners who acquire both legal title to a mortgage loan and the servicing rights will need to satisfy both the TILA and RESPA notification requirements.

  • The notice must be given on or before the 30th calendar date after the date the new owner acquires the loan, with the acquisition date deemed to be the date that the acquisition is recognized in the new owner’s books and records. In the case of short-term repurchase agreements, the acquirer is not required to give the notice if the transferor has not treated the transfer as a loan sale on its own books and records. However, if a repurchase does not occur, the acquirer must give the notice within 30 days after it recognizes the transfer as an acquisition on its books and records.
  • The notice must be given even where the new and former owners are affiliates, but a combined notice may be sent where one company acquires a loan and subsequently transfers it to another company so long as the content and timing requirements are satisfied as to both entities.
  • The notice must contain the information specified by the new rule, including contact information for any agents used by an owner to receive legal notices and resolve payment issues.
  • The required information also includes a disclosure of the location where ownership of the debt is recorded. If a transfer has not been recorded in the public records at the time the notice is provided, a new owner may satisfy this requirement by stating that fact.

6 Responses

  1. I think anonymous is right but also misses the point. It’s the trust itself that is a covered person, since per the PSA it acquires legal title to the notes and the security instruments. Thus, the trust has not only beneficial interest but legal interest. Thus, it is a covered person and the transfer to it triggers a requirement that it (presumably thru its trustee) provide the required notice to the borrowers. I have not seen any trust do this in any of the cases I am working on.

  2. The information is accurate.

    onewest did not provide the information.

    Class action. Flores v. Onewest Bank FSB

    Settlement sent that verified this action to plaintiff.

  3. I would like to add that accounting is also important under the TILA Amendment. Trusts/trustees have no balance sheet. See below from Fed with repect to accounting for Repurchases.

    “Repurchase agreements. The original creditor or owner of the mortgage loan might sell or transfer legal title to the loan to secure short-term business financing under an agreement where the
    original creditor or owner is also obligated to repurchase the loan within a brief period, typically a month or less. If the original creditor or owner does not recognize such transactions as a sale of
    the loan on its own books and records for accounting purposes, the transfer of the loan in connection with such a repurchase agreement is not covered by Sec. 226.39 and the acquiring party is not required to provide disclosures. However, if the transferor does not repurchase the mortgage loan, the acquiring party must make the disclosures required by Sec. 226.39 within 30 days after the date that the transaction is recognized as an acquisition in its books
    and records.”

    Further, all QSPEs must be brought back onto balance sheet this year.

  4. To Rand

    True, the law is not retroactive, but can be utilized to support definition of a creditor. Investors in pass-throughs are NOT the creditor according the TILA amendment.

  5. Please clarify where in the TILA amendment is the following quote from your post:

    ” trusts or other entities acquiring legal title to the securitized loans are subject to the rule. The notice requirement is triggered by a transfer of the underlying loan, regardless of whether the assignment is recorded. ”

    That is not what I read – I read the following quote:

    “To become a “covered person” subject to Sec. 226.39, a person must become the owner of an existing mortgage loan by acquiring legal title to the debt obligation. Consequently, Sec. 226.39 does not apply to persons who acquire only a beneficial interest in the loan or a
    security interest in the loan, such as when the owner of the debt obligation uses the loan as security to obtain financing and the party providing the financing obtains only a security interest in the loan. Section 226.39 also does not apply to a party that assumes the credit risk without acquiring legal title to the loans. Accordingly, an investor who purchases an interest in a pool of loans (such as
    mortgage-backed securities, pass-through certificates, participation interests, or real estate mortgage investment conduits) but does not directly acquire legal title in the underlying mortgage loan, is not covered by Sec. 226.39.”

    From me – all security investors in REMICs acquired only a “beneficial interest” to a share of “pooled” receivables. And, therefore, according to the Federal Reserve are NOT the creditor (covered person). These investors would only become the creditor if they DIRECTLY acquire legal title to the underlying mortgage loan. This can only be achieved when loans are REMOVED from the security pool and sold directly to a third party.

    With all due respect, you are misinterpreting the Federal Reserve opinion.

  6. Given Trial Judges general disregard for TILA I suspect this is one that will have to be established on appeal. Moreover, since there was not formal statements made that it does apply to loans already in the market banks can make a good faith argument that it does not because that regulation was not in effect when the loan was made and as such the consumer could not rely on it when selecting their lender/loan.

    Bottom line, great news for the future, but don’t put many eggs in that basket as part of your current defense. Always good to check with an attorney as to how it might really apply in your case.

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