Viewpoint: No Opt-Out for Mortgage Transfers

The Federal Reserve Board on Monday issued an interim final rule amending Regulation Z. The rule implements part of the Truth in Lending Act (TILA), which became effective in May and established, among other mortgage term disclosures, a new requirement for notifying borrowers of the sale or transfer of their loans no longer than 30 days after the transaction. The rule (available to download here) provides guidance on how purchasers or assignees acquiring mortgage loans should go about complying with this section of the TILA. It also allows a 60-day grace period after the publication of the interim final rule to give affected parties time to comply. Then, on Tuesday, eight federal regulatory agencies released a final model privacy notice form (available to download here) that aims to make it easier for consumers to understand how their information is collected and shared among financial institutions. According to a statement from the Federal Deposit Insurance Corp. (FDIC), the Gramm-Leach-Bliley Act (GLB Act) requires institutions to notify consumers of their information-sharing practices and consumers’ rights to limit or opt out of certain sharing processes. The model form issued by the agencies was developed in response to consumer research and public comments. Institutions that uses the model form obtains “safe harbor” and is considered to satisfy disclosure requirements. Despite the close release dates of the two, these announcements are essentially separate issues. And while they both aim to provide transparency in the financial system, they do nothing to alter the complexity of inherently complicated financial structures. The Fed’s interim final rule enforces a familiar practice within the servicing industry — informing borrowers when loans are bought or transferred for securitization. The FDIC’s model privacy notice form discloses information-sharing procedures to the borrowers and even informs them of certain rights to opt out of those practices. But nowhere do the two go in-hand to limit the reach of complex financial products and give borrowers the authority to opt out of the securitization process. The way the industry operates now, borrowers have no say over whether the loans securing their own personal property are pooled and bundled into structured finance products that aim to make long-term investors millions of dollars. When proposed financial regulatory reform — including regulation of complex financial products — eventually makes its way through Congress, efforts by individual federal agencies to enforce various pieces of disclosure and transparency legislation might soon be superseded by a single reform bill. Write to Diana Golobay.