California TILA Compliance: Navigating the Truth in Lending Act and Regulation Z for Mortgage Servicers

One of the many problems for West Coast mortgage servicers today is California TILA compliance. Truth in Lending Act (“TILA”) laws and Regulation Z can impose substantial penalties on financial institutions that fail to comply with TILA’s myriad disclosure and procedural requirements. Scheer Law Group, LLP (“SLG”) helps banks, lenders, and mortgage servicers understand and comply with TILA laws to reduce risk to the institution.

Whether it’s periodic statements, payoffs, or other regular disclosures, mortgage servicers have continuing compliance obligations under California Regulation Z. Failure to comply can result in enforcement actions, civil liability, and damage to the institution’s reputation.

What Is TILA and Why Does It Matter for Mortgage Servicers?

The Truth in Lending Act was passed in 1968 to ensure lenders and servicers use uniform disclosures when explaining loan terms and costs. Although TILA was designed to regulate consumer lending, it places direct requirements on mortgage servicers as administrators of loans. Consumer Financial Protection Bureau (CFPB) Regulation Z outlines how servicers must comply with TILA.

If a bank services residential mortgage loans in California, TILA requires servicers to send correct periodic statements, provide timely ARM adjustment notices, deliver payoff statements by deadline, and reply to qualified written requests, along with meeting all deadlines and requirements set forth in Regulation Z.

Key TILA Obligations for Mortgage Servicers

Mortgage servicers need to track compliance with several unique TILA/Regulation Z requirements. The most significant include:

• Under 12 C.F.R. § 1026.41, for closed-end residential mortgage loans, mortgage servicers are required to send monthly billing statements that contain certain information in a particular format.
• Servicers must make sure that they provide advance notice of payment and rate changes on adjustable-rate mortgages as required by Regulation Z.
• Mortgage servicers must provide timely and accurate payoff disclosures. Timing issues on these disclosures can directly expose a servicer to TILA liability.
• Both the transferor and transferee in a loan servicing transfer have TILA disclosure obligations as well as Real Estate Settlement Procedures Act disclosure requirements.

The Consumer Financial Protection Bureau regularly reports mortgage servicing-related violations as some of the most frequent violations discovered in its examinations. Servicers located in California should also consider state regulations that add additional requirements to TILA.

Does TILA Apply to Loan Servicers?

Mortgage servicers face various independent compliance obligations under TILA and Regulation Z. One frequent issue in TILA litigation involves whether TILA applies to servicers who were not the original lender, but it does.

TILA’s servicing provisions reach all servicers, regardless of origination. The Dodd-Frank Act notably expanded TILA’s applicability to mortgage servicers by adding explicit servicing requirements and empowering the CFPB to issue rules regarding servicer behavior.

Institutions that purchase servicing portfolios take on those compliance responsibilities and should perform due diligence on acquired exposure.

The Difference Between TILA and Regulation Z

TILA is the federal law enacted by Congress. Regulation Z is the CFPB regulation that implements TILA. Regulation Z includes the operational requirements that institutions must follow. The reason compliance professionals spend most of their time in Regulation Z is that it includes the timelines, requirements, and official interpretations used day-to-day in servicing.

California Regulation Z compliance refers to complying with the federal requirements and any California statutes that layer on similar requirements. The attorneys at SLG are well-versed in both areas of law and provide mortgage servicers with actionable advice that considers all aspects of their responsibility.

Hire a TILA Lawyer to Manage Regulatory Exposure

In a TILA case, there is often more than just that claim on the line. Regulatory examination findings, class action exposure, and reputational risk can arise from systemic failures to comply with TILA.

Recent CFPB enforcement activity has required institutions to pay back hundreds of millions of dollars to consumers for unlawful practices, highlighting the financial risk of noncompliance. SLG counsels mortgage servicers, banks, and financial institutions on TILA issues and litigation in California.

SLG can help servicers by defending them in TILA litigation, preparing for internal audits before regulatory examinations hit, and reviewing policies to verify compliance with Regulation Z. When you hire a TILA lawyer early, financial institutions can potentially suppress compliance issues fairly quickly.

FAQs

What Are the Penalties for TILA Violations for Mortgage Servicers?

Noncompliance with TILA and Regulation Z can subject mortgage servicers to substantial penalties, including liability for statutory damages, actual damages, and attorneys’ fees in individual and class action claims. They can also be subject to CFPB enforcement actions, consent orders, and civil money penalties. Class-wide exposure can be significant for servicers who have systemic issues with disclosures.

What Happens if a Mortgage Servicer Misses TILA Disclosure Deadlines?

If a mortgage servicer misses TILA disclosure deadlines, it can be costly. If periodic statements, payoff figures, and ARM adjustments are incorrect or not timely, mortgage servicers may face liability for statutory damages, actual damages, and attorneys’ fees. Multiple violations also increase the risk of class actions and CFPB enforcement activity. For that reason, monitoring compliance with TILA disclosure deadlines should be the servicer’s priority.

Are Sub-Servicers and Special Servicers Covered by TILA?

TILA’s servicing requirement covers sub-servicers and special servicers who service the loan when it is in default or distress. TILA does not provide any exemptions for different types of servicers. If a company or entity is servicing a residential mortgage loan, then TILA and Regulation Z apply. If an institution sub-services loans to a third party, the sub-servicing agreement should define who is responsible for TILA compliance.

What Is the Difference Between Regulation Z and TILA?

TILA is the statute passed by Congress that sets out what creditors need to disclose when extending credit. Regulation Z is the CFPB’s regulation that implements TILA and provides specific, actionable instructions. Servicers and compliance teams turn to Regulation Z for specific timelines, requirements, and official interpretations of TILA for laying out servicing requirements.

Contact SLG for TILA Compliance Counsel

Mortgage servicing regulations remain complex and burdensome, particularly in California, where institutions are subject to increased oversight from both state and federal regulatory agencies.

Attorneys at SLG have over 50 years of combined experience representing financial institutions on TILA compliance issues, regulatory examinations, and servicing-related litigation in California. Contact Scheer Law Group, LLP to learn how we can help your institution with its compliance program.