Short Sales and Truth in Lending

Everyone has encountered the Truth in Lending Act (TILA) in some form. Every time we purchase a car or rent-to-own a set of furniture, we see those big, bold-outlined boxes on the loan papers. Those boxes are required by TILA to disclose facts about the costs of obtaining that credit, such as the finance charges and the annual percentage rate (APR) of interest. And by the way, you’ll see that type of paperwork on home purchases as well.

The Truth in Lending Act has seen many changes since it was first passed in 1968 as title I of the Consumer Credit Protection Act, with Regulation Z outlining the terms of TILA. (I’ll write more about Regulation Z another time.) Targeted amendments have addressed the credit card industry, consumer leasing, home equity loans, paperwork reduction, reverse mortgages, and adjustable-rate mortgage (ARM) disclosures.

Most recently, the Housing and Economic Recovery Act of 2008 included an amendment to TILA, also known as the Mortgage Disclosure Improvement Act of 2008 (MDIA). MDIA expands TILA to include properties that are not a homeowner’s principal residence. TILA’s early disclosure requirements now also apply to home equity loans and refinanced mortgage loans. MDIA sets specific time frames between the mortgage loan application, the early disclosures, the corrected disclosures, and the completion of the mortgage loan.

MDIA also allows borrowers to accelerate the whole process in case of a personal financial emergency, such as a foreclosure. If you are in the middle of a deal, the foreclosure auction is scheduled during the required waiting period, and the seller is trying to get a loan to bring the mortgage current, the seller can use the handwritten personal hardship letter (similar to the type of letter used in a short sale package) to ask the lender to waive the requirement and expedite the paperwork.

The section of the Federal Register which describes MDIA includes anonymous testimony from financial institutions and consumer advocacy organizations regarding the wisdom of allowing waivers of the waiting period between the corrected disclosures and the completion of mortgage loans. Apparently, several financial entities had a hot debate about the definition of a “bona fide personal financial emergency” and under what other circumstances the waiver should be allowed or disallowed. Click here to read the exact comments for yourself, and start reading in the middle of page six.

Of course, if the borrower succeeds in refinancing or securing additional funding to satisfy the foreclosing lender, there won’t be a need to complete a short sale - yet. Some of your short sale leads may need to be put on hold because the borrower was able to find a different solution, but you should still know what’s going on with them. The main thing is not that you lost a deal, but the homeowner may be on the road to financial recovery and your time may be freed up to work on other deals. If you are seen as a helpful, knowledgeable professional, they’ll come back to see you if plan A doesn’t work out for them.

Keep in mind that these laws exist to protect borrowers from lenders, not the other way around. The government’s assumption is that lenders know more than the average person about how to work the system.

In reality, the Truth in Lending Act goes both ways. The lender needs to do right by you, but you need to do right by the lender as well. Never submit any information to the lender that you know to be untrue or inaccurate. There are plenty of short sale opportunities in America. You shouldn’t have to fabricate a short sale deal from false information.

There are other federal felonies associated with this. When you negotiate a short sale, don’t let people tell you that it’s okay to coach the homeowner into inventing information to make the hardship letter more of a tear-jerker. Don’t let anyone convince you that it is okay to advise a homeowner to stop making their mortgage payments. Don’t think this isn’t a big deal. These actions are not only wrong, but they can open you up for accusations of mail fraud or wire fraud or any number of other crimes.

Finally, don’t kid yourself about how much information the lender will actually verify before the negotiations go too far. If you let your guard down on being truthful, you will lose the loss mitigator’s trust and your negotiation efforts will be thrown right into the quicksand.

Stay aware of TILA and other laws that may affect your business. You never know when you’re going to need that one piece of information that will make a difference in whether you close a deal.