RSK.IQ Question of the Week 10/9/2017

TILA Disclosures for Assumptions

Issue/Inquiry

The co-borrower on a residential mortgage loan has requested to be released from the obligation. The Bank has agreed to do so, on the condition that another co-signer is added. The terms of the loan are not changing and the Bank is not refinancing it. The transaction will be documented with a restated note or assumption agreement. Is the Bank obligated to make loan disclosures to the co-signer?

Response Summary

The acceptance of a new co-signer to a residential mortgage loan will be considered an assumption under Regulation Z, requiring new disclosures to be given to this consumer.

Response Detail

Under Regulation Z, an assumption occurs when a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction. Before the assumption occurs, the creditor shall make new disclosures to the subsequent consumer, based on the remaining obligation. 12 CFR §1026.20(b).

An assumption under the regulation requires the following three elements:

  • A residential mortgage transaction.
  • An express acceptance of the subsequent consumer by the creditor.
  • A written agreement. Official Interpretations, 1026.20(b) – 1.

The retention of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. Official Interpretations, 1026.20(b) – 4.

In this case, the loan in question is a residential mortgage transaction, there will be an express acceptance by the Bank of a new co-signer who will be a primary obligor, and there will be a written agreement. The transaction, therefore, will be an assumption under the regulatory requirements.

When there has been an assumption, the creditor must make Truth-in-Lending (“TILA”) disclosures to the new co-signer based on the “remaining obligation.” For example:

  • The amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original transaction.
  • If the finance charge is computed from time to time by application of a percentage rate to an unpaid balance, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor, but must include in the finance charge any prepaid finance charge imposed about the assumption.
  • If the creditor requires the assuming consumer to pay any charges as a condition of the assumption, those sums are prepaid finance charges as to that consumer. Official Interpretations, 1026.20(b) – 6.

Since this is a closed-end consumer loan secured by real property, the TILA disclosures provided by the Bank will be those required by the TILA-RESPA Integrated Disclosure rules.

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