November 17, 2021

IRS Changes to Form 4506-C Requirements, Annual Reg. Z Adjustments, Acting Comptroller’s remarks on LIBOR cessation and replacement, and more!

Read more below!

November 17, 2021

IRS Changes to Form 4506-C Requirements

On August 9, 2021, the IRS released a memo detailing changes to requirements of who must complete a 4506-C. Beginning January 1, 2022, the IRS requires each borrower to complete a separate 4506-C for each tax form requested. Some investors and tax servicers have communicated earlier mandatory compliance dates. Starting November 10, 2021, the Additional Docs & Conditions screen of the PPDocs order form will allow the user to indicate whether they want a 4506-C for the W-2, 1040, or another tax form included in the closing document package. When there is more than one borrower, then each borrower will have a separate 4506-C for the W-2 forms, although there may still be a combined 4506-C for the 1040 in cases where the borrowers file for their taxes jointly.

When “4506-C - Other” is chosen on the Additional Docs screen, there must be one tax form number entered in the IRS Details area of the Borrower screen. Please note that only the relevant tax years should be entered in the IRS Details, and there should be only one option selected on the 4506-C. A sample is provided below.

FTC Updates Data Security Safeguards for Mortgage Brokers

On October 27, 2021, the Federal Trade Commission announced a newly updated rule that strengthens the data security safeguards that financial institutions are required to put in place to protect their customers’ financial information. The FTC’s updated Safeguards Rule requires non-banking financial institutions, such as mortgage brokers, motor vehicle dealers, and payday lenders, to develop, implement, and maintain a comprehensive security system to keep their customers’ information safe.

Annual Reg. Z Adjustments

The CFPB issued a final rule on October 25, 2021, amending the regulation text and official interpretations for Regulation Z, which implements the Truth in Lending Act (TILA). The CFPB must calculate annually the dollar amounts for several provisions in Regulation Z; this final rule revises, as applicable, the dollar amounts for provisions implementing TILA and amendments to TILA.

Note: PPDocs will make all necessary adjustments to the system to ensure continued compliance with TILA.

Acting Comptroller’s remarks on LIBOR cessation and replacement

On October 26, 2021, Comptroller of the Currency, Michael J. Hsu, discussed the LIBOR transition to replacement rates at the Alternative Reference Rates Committee Symposium. He highlighted the importance of a smooth transition and the effects complacency can have on a bank’s operations, safety, and soundness.

State and Federal Financial Institution Regulators Issue Joint Statement on LIBOR Transition

On October 20, 2021, five federal financial institution regulatory agencies, in conjunction with the state bank and state credit union regulators, jointly issued a statement to emphasize the expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR. Additionally, this statement includes clarification about new LIBOR contracts, considerations when assessing appropriateness of alternative reference rates, and expectations for fallback language.

Frequently Asked Question

Question: The title commitment contains a statement that “maintenance charge is not subordinated to purchase money and/or improvement liens,” and the Homeowners Association (HOA) will not sign a subordination agreement. Does that put the HOA in a first lien position?

Answer: Yes, the law around enforcement of HOA liens changed in 2012 (Texas Property Code, Section 209.0091), but not with respect to lien priority. Many HOA Covenants, Conditions & Restrictions (CC&Rs) will contain provisions which indicate that any HOA assessment lien is subordinate to a third-party lender’s purchase money lien, but that is likely not be the case if the title commitment includes this exception.

If the HOA assessment lien is not subordinated to the lender’s lien per the CC&Rs, and the HOA will not agree to subordinate its lien, then the lender will not be in first lien position in the event the HOA files an assessment lien. When selling to FNMA, Texas lenders used to be able to rely on the “60-day letter” and the subsequently enacted Texas 60-day notice statute for HOA liens. Now, based on guidance received from FNMA by a client in 2015, our understanding is that FNMA requires actual subordination of the HOA lien and will no longer allow the 60-day letter to serve as a variance to their requirements surrounding lien priority.

If the HOA lien is not subordinated and title retains the exception, then the title exception and the likely deletions from the T-17 and/or T-19 endorsements may cause the loan to be ineligible for sale to most investors.

For a portfolio loan, the risks are not as great. A Texas HOA is required by law to provide the lender with 60-days notice and a right to cure before proceeding with foreclosure proceedings against the property. In addition, a Texas HOA must then obtain a court order before foreclosing. Accordingly, the lender should receive notice and have an opportunity to cure any delinquent HOA assessments well before any foreclosure sale takes place.