Question & Answer

Question: We have a debate going about when early Truth in Lending disclosures should be given to an applicant for mortgages. Some argue that any application for a loan subject to RESPA is also subject to the early 3-day disclosure rule of Truth in Lending. Others say that not all loans subject to RESPA are subject to the early disclosure rule of Truth in Lending. Which is it?

Answer: You have hit on a situation that confuses a lot of people. The rule in Regulation Z, ?226.19(a), was written when RESPA was limited to first lien purchase transactions. Since then, RESPA coverage has been greatly expanded and confusion has abounded.

The rule in ?226.19(a) is not determined by RESPA coverage. It has two trigger conditions. First, the loan must be a "residential mortgage transaction" ("RMT"). An RMT is defined in ?226.2(a)(24) as "a transaction in which a mortgage?" or similar instrument is "created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling." In plain English, an RMT is a purchase money loan, without regard to lien position.

The second trigger for early disclosures required by ?226.19(a) is that the loan be subject to RESPA. Thus, coverage is triggered by taking a mortgage for a purchase money loan and being subject to RESPA. Now that RESPA is not limited to first liens, all purchase money loans of the consumer's principal dwelling would be subject to early disclosures. However, refinancings not involving the purchase of the principal dwelling would not be subject to TIL early disclosures even though they are subject to RESPA. In spite of the fact that refinancing loans are not subject to early TIL disclosures, many compliance managers choose to instruct lending staff to make the disclosures. It's safer to have a consistent procedure for all mortgage transactions rather than expect lending staff to understand and correctly make these distinctions. Also, "over-compliance" is not illegal.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 15, 10/96