Fall is just around the corner — and with it comes pumpkin spice. Pumpkin spice lattes, pumpkin spice cake, pumpkin spice muffins and pumpkin spice pancakes are sure to please most palates. Even if you don’t like the flavor of pumpkin spice, but enjoy the fragrance, there are pumpkin spice candles. Our Temenos Compliance Advisory Service wants to “spice” up your third quarter by providing Lagniappe, or that “little something extra,” to all of our faithful readers. We will discuss answers to some of the interesting questions we have received on topics such as Higher Priced Mortgage Loan Appraisal rules, Flood rules, Private Flood Insurance requirements and TRID. Grab your latte or pumpkin spice treat, light your candle and settle in as we add some spice to your Compliance program.
Q: Can a borrower waive the right to receive a copy of the appraisal report at least three days prior to closing if the transaction is subject to the Higher Priced Mortgage Loan rules of Regulation Z?
A: No. A consumer may not waive the appraisal notice timing requirement for a loan subject to the HPML rule of Regulation Z. Comment 35(c)(6)(ii)-2 to the Official Interpretations to Regulation Z states:
No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the consumer to waive the requirement that the appraisal copy be provided three business days before consummation, does not apply to higher-priced mortgage loans subject to § 1026.35(c). A consumer of a higher-priced mortgage loan subject to § 1026.35(c) may not waive the timing requirement to receive a copy of the appraisal under § 1026.35(c)(6)(i).”
Q: May a lender close a loan without flood insurance when the collateral includes a non-functioning structure with no value? The structure is shown on the appraisal, but the applicant intends to demolish the structure shortly after the loan closing. The lender will not carve the structure out of the security interest prior to closing. Would demolishing the structure shortly after closing cure any violations for not having flood insurance in place at consummation?
A: If the structure has at least two rigid outside walls, a fully secured roof and is permanently affixed to the ground, it falls within the definition of “building” for NFIP. If the building is located within a Special Flood Hazard Area then flood insurance is required at consummation. It would be a violation of the flood rules to consummate the transaction without flood insurance in place if the building was not carved out of the security instrument. Once the building is demolished, flood insurance is no longer required. It is not possible to cure a flood violation by demolishing the building.
A lender should also consider the detached structure exception. If the collateral is a residence with an additional structure that meets the definition of “detached structure,” then no flood insurance would be required on that detached structure and there would not be a violation.
Flood — Private Insurance Policy
Q: The lender received a private flood insurance policy that includes the compliance aide on the declarations page. Upon review of the policy, the lender determines that it does not meet the definition of “private flood insurance.” May the lender now rely on the compliance aid to determine the policy meets the definition of “private flood insurance”?
A: The compliance aid allows the lender to assume the policy meets the definition of “private flood insurance” without further review. However, if a lender opts to perform additional review and discovers the policy does not meet that definition, then we do not recommend the lender accept the policy without resolving the discrepancy.
Q: Under TRID, what is the “loan product” and in what regulation is it explained?
A: The TRID rules are found in Regulation Z. Specifically, Section 1026.37(a)(10) requires a lender to disclose the loan product on the Loan Estimate. The Loan Product indicates whether the loan is adjustable rate, step rate or fixed rate. Additional loan features must be disclosed, including negative amortization, interest only, step payment, balloon payment and seasonal payment. The loan feature must precede the disclosure of the loan product.
We hope that we spiced up your day and answered some of your questions or confirmed your understanding as we shared some interesting questions and answers this quarter.