Consumer Compliance Outlook: Third Quarter 2010

Mortgage Disclosure Improvement Act (MDIA): Examples and Explanations

Congress enacted the MDIA, which is implemented through Regulation Z, to ensure that consumers receive good faith estimates of Truth in Lending Act (TILA) disclosures at the beginning of the application process and to provide sufficient time for consumers to review the disclosures before consummation can take place.1 The Third Quarter 2009 issue of Outlook contained an article titled “Mortgage Disclosure Improvement Act of 2008 — Amendments to Regulation Z” that addressed a series of questions that creditors have raised about this law since it became effective on July 30, 2009.2 To further aid creditors in understanding the MDIA’s timing requirements, this article illustrates these requirements for two hypothetical loans. The first example illustrates the MDIA’s timing requirements when a creditor mails the disclosures, and the second example illustrates the requirements when the creditor delivers them in person.

Business days rather than calendar days are used for purposes of the MDIA’s timing requirements. To understand those timing requirements, it is important to understand the two definitions of business days under §226.2(a)(6) of Regulation Z: the general definition, which is “days on which the creditor’s offices are open to the public for carrying on ‘substantially all’ of its business functions”; and a more precise definition, which is “all calendar days except Sundays and specified legal holidays.” Both definitions are relevant to the early disclosures required under the MDIA.

The MDIA contains four primary requirements subject to timing rules:

  1. A creditor must mail or deliver good faith estimates of the TILA disclosures for all dwelling-secured mortgage loans subject to the Real Estate Settlement Procedures Act no later than three business days (general definition) after the day on which the creditor receives a consumer’s application.3
  2. A creditor may not impose a fee (other than for obtaining a consumer’s credit history) before the consumer receives the early disclosures. If a creditor places early disclosures in the mail, the consumer is deemed to receive them three business days (precise definition) after they are mailed, and the creditor may impose the fee after the end of the third business day. The creditor need not rely on this presumption if the consumer actually received the disclosures earlier.4
  3. A creditor must deliver the early disclosures or place them in the mail no later than the seventh business day (precise definition) before consummation. The seven business days run from the date the early disclosures are mailed or delivered in person.5
  4. A creditor must issue revised disclosures if the annual percentage rate (APR) in the initial disclosures becomes inaccurate, as determined under §226.22.6 Consummation may not occur until the third business day (precise definition) after the consumer receives the corrected disclosures. If a creditor places corrected disclosures in the mail, the consumer is deemed to receive them on the third business day (precise definition) after they are mailed.7

EXAMPLE 1 —TIMING REQUIREMENTS FOR MAILED DISCLOSURES

The following example illustrates the rules when TILA early disclosures are mailed and the creditor uses the presumption of receipt. In this particular example, the creditor’s offices are open Monday through Friday and closed on Saturdays and Sundays. The application was received by the creditor on Tuesday, December 1.

Timing for Delivering Application Disclosures

Because the creditor received the application on December 1, it had three business days (general definition) to mail or deliver the early disclosures. In this hypothetical, the early disclosures must be mailed on or before Friday, December 4.

Suppose the facts change, and the application was not received until Wednesday, December 2. In this case, the last day to mail or deliver the early disclosures is Monday, December 7, because the bank is closed on Saturdays, and under the general definition, only days the creditor is open to the public for substantially all of its business functions are counted. Business day 3 is Monday, December 7.

Timing for Assessing Fees

When disclosures are mailed, the creditor cannot begin charging fees (except a fee to obtain the consumer’s credit history, provided it is bona fide and reasonable) until the consumer receives the early disclosures. The creditor may, but need not, rely on the presumption that the consumer receives the early disclosures on the third business day after the mailing date. In our hypothetical, the early disclosures are mailed on December 4. So if the creditor uses the presumption of receipt, the consumer is deemed to have received the early disclosures three business days later (precise definition), which is Tuesday, December 8. Even though the bank is closed on Saturday, that day still counts as a business day under the precise definition of business days. Sunday never counts as a business day under the precise definition. Therefore, if the creditor relies on the presumption of receipt, fees cannot be assessed until after the end of the third business day, pushing the actual date fees can be collected to Wednesday, December 9.

Timing for Consummation

Under §226.19(a)(2), consummation cannot occur earlier than the seventh business day (precise definition) after the early disclosures are mailed. For purposes of the earliest consummation date, the seven-business- day clock begins to run from the date the early disclosures are mailed or delivered in person. In this example, the early disclosures were mailed on Friday, December 4, and the earliest date of consummation is seven business days after December 4, which is Saturday, December 12. However, the bank is not open on Saturday, so the earliest date of consummation is Monday, December 14. The only day not counted as a business day is Sunday, December 6, because Sunday never counts as a business day under the precise definition.

Timing for Revised Disclosures

In this example, suppose the revised disclosures were mailed on Friday, December 11. If corrected disclosures are mailed and the creditor uses the presumption of receipt, the date of receipt is presumed to be the third business day (precise definition) after Friday, December 11, which is Tuesday, December 15, and the earliest date of consummation would be the third business day (precise definition) after receipt, which is Friday, December 18.

If revised disclosures were required because of an inaccurate APR, but the consumer wanted to keep the consummation date of December 12, the consumer must receive the revised disclosures by Wednesday, December 9, which is three business days (precise definition) before the consummation date of December 12.

EXAMPLE 2 —TIMING REQUIREMENTS FOR DELIVERED DISCLOSURES

This example illustrates the timing requirements when early disclosures are delivered in person. The creditor is open on Saturdays and is closed on Sundays, even though a drive-up window is open for teller transactions but is not open for substantially all of the bank’s business functions. The loan application was received on Thursday, November 19. The creditor delivers a revised disclosure on November 28. The hypothetical also involves the legal holiday of Thanksgiving, Thursday, November 26.

Timing for Delivering Application Disclosures

The creditor has three business days after receiving the loan application on November 19 to deliver the early disclosures, which must be mailed or delivered on or before November 23. The early disclosures were delivered in person on Monday, November 23. The general definition of business days includes Saturdays in this instance because the creditor is open on Saturdays. On Sundays, the creditor is closed except for limited business functions through drive-up windows, which does not satisfy the requirement that a creditor be open for substantially all of its business functions. So Sunday is not counted.

Timing for Assessing Fees

Because the early disclosures are delivered in person on Monday, November 23, the creditor can impose fees on that date after the early disclosures are received.8

Timing for Consummation

The earliest date for consummation is seven business days (precise definition) after the early disclosures are delivered. Because the early disclosures were delivered on Monday, November 23, the earliest date for consummation is Wednesday, December 2. This excludes the legal holiday on Thursday, November 26, and Sunday, November 29, and counts the other intervening days. Only the specific date of the legal holiday is excluded as a business day under the precise definition, even if the creditor is closed on the Friday after Thanksgiving.

For another illustration involving a legal holiday, consider July 4. This year July 4 fell on a Sunday, but the holiday was celebrated on Monday, July 5. July 5 would not count as a business day under the general definition but would count as a business day under the precise definition, even though the bank was closed that day.9

Timing for Revised Disclosures

If revised disclosures are required and the consumer wants to keep the original consummation date, the consumer must receive the revised disclosures at least three business days (precise definition) before consummation. In this hypothetical, the creditor delivered revised disclosures on Saturday, November 28, so consummation can take place on or after Wednesday, December 2.

Conclusion

The examples in this article provide a good tool for understanding the MDIA’s timing requirements and should be used in conjunction with the MDIA Q&A published in the Third Quarter 2009 issue of Outlook. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.

  • * Thanks to Jeff Paul and Bill Beall of the Federal Reserve Bank of Atlanta, who developed a MDIA learning tool that was used extensively in preparing this article.
  • 1 The MDIA applies to closed-end loans secured by a consumer’s dwelling, other than a home equity line of credit or timeshare plan.
  • 2 Consumer Compliance Outlook: Third Quarter 2009
  • 3 §226.19(a)(1)(i) External Link
  • 4 §226.19(a)(1)(ii)
  • 5 §226.19(a)(2)(i)
  • 6 §226.19(a)(2)
  • 7 §226.19(a)(2)(ii). The Board has proposed amending Regulation Z to add an additional requirement that creditors in all cases provide a “final” TILA disclosure that the consumer must receive at least three business days before consummation. The proposal is available at: http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf PDF External Link.
  • 8 In August 2010, the Board solicited comment on a proposed rule that, if adopted, would allow consumers to obtain a refund of the fees for three business days after receiving the disclosures. The Board’s announcement and a copy of the rulemaking proposal are available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100816e.htm External Link.
  • 9 Compare comment 226.2(a)(6)-2.