Compliance - Part 3 Flashcards
What is the U.S. code for the Truth in Lending Act (TILA)? [V-1.1 Truth in Lending Act]
The implementing code for the TILA is 15 U.S.C. 1601 et seq.
When was the TILA enacted? [V-1.1 Truth in Lending Act]
The TILA was enacted on May 29, 1968 as title I of the Consumer Credit Protection Act
What act is TILA a part of? [V-1.1 Truth in Lending Act]
TILA was enacted as title I of the Consumer Credit Protection Act
What regulation implements the TILA? [V-1.1 Truth in Lending Act]
The TILA is implemented by Regulation Z (12 CFR 1026)
When did the TILA become effective? [V-1.1 Truth in Lending Act]
The TILA became effective July 1, 1969
Describe some of the amendments made to the TILA/Reg Z. [V-1.1 Truth in Lending Act]
The TILA was first amended in 1970 to prohibit unsolicited credit cards. Additional major amendments to the TILA and Regulation Z were made by the Fair Credit Billing Act of 1974, the Consumer Leasing Act of 1976, the Truth in Lending Simplification and Reform Act of 1980, the Fair Credit and Charge Card Disclosure Act of 1988, and the Home Equity Loan Consumer Protection Act of 1988.
Regulation Z also was amended to implement section 1204 of the Competitive Equality Banking Act of 1987, and in 1988, to include adjustable-rate mortgage loan disclosure requirements. All consumer leasing provisions were deleted from Regulation Z in 1981 and transferred to Regulation M (12 CFR 1013).
The Home Ownership and Equity Protection Act of 1994 (HOEPA) amended the TILA. The law imposed new disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees above a certain percentage or amount. The law also included new disclosure requirements to assist consumers in comparing the costs and other material considerations involved in a reverse mortgage transaction and authorized the Board of Governors of the Federal Reserve System (Board) to prohibit specific acts and practices in connection with mortgage transactions.
The TILA amendments of 1995 dealt primarily with tolerances for real estate secured credit. Regulation Z was amended on September 14, 1996, to incorporate changes to the TILA. Specifically, the revisions limit lenders’ liability for disclosure errors in real estate secured loans consummated after September 30, 1995. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 further amended the TILA. The amendments were made to simplify and improve disclosures related to credit transactions.
The Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et seq., was enacted in 2000 and did not require implementing regulations. On November 9, 2007, amendments to Regulation Z and the official commentary were issued to simplify the regulation and provide guidance on the electronic delivery of disclosures consistent with the E-Sign Act.
In July 2008, Regulation Z was amended to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices. Specifically, the change applied protections to a newly defined category of “higher-priced mortgage loans” (HPML) that includes virtually all closed-end subprime loans secured by a consumer’s principal dwelling. The revisions also applied new protections to mortgage loans secured by a dwelling, regardless of loan price, and required the delivery of early disclosures for more types of transactions. The revisions also banned several advertising practices deemed deceptive or misleading. The Mortgage Disclosure Improvement Act of 2008 (MDIA) broadened and added to the requirements of the Board’s July 2008 final rule by requiring early Truth in Lending disclosures for more types of transactions and by adding a waiting period between the time when disclosures are given and consummation of the transaction. In 2009, Regulation Z was amended to address those provisions. The MDIA also requires disclosure of payment examples if the loan’s interest rate or payments can change, as well as disclosure of a statement that there is no guarantee the consumer will be able to refinance in the future. In 2010, Regulation Z was amended to address these provisions, which became effective on January 30, 2011.
In December 2008, the Board adopted two final rules pertaining to open-end (not home-secured) credit. The first rule involved Regulation Z revisions and made comprehensive changes applicable to several disclosures required for: applications and solicitations, new accounts, periodic statements, change in terms notifications, and advertisements. The second was a rule published under the Federal Trade Commission (FTC) Act and was issued jointly with the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA), which sought to protect consumers from unfair acts or practices with respect to consumer credit card accounts. Before these rules became effective, however, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) amended the TILA and established a number of new requirements for open-end consumer credit plans. Several provisions of the Credit CARD Act are similar to provisions in the Board’s December 2008 TILA revisions and the joint FTC Act rule, but other portions of the Credit CARD Act address practices or mandate disclosures that were not addressed in these rules. In light of the Credit CARD Act, the Board, the NCUA, and the OTS withdrew the substantive requirements of the joint FTC Act rule. On July 1, 2010, compliance with the provisions of the Board’s rule that were not impacted by the Credit CARD Act became effective.
The Credit CARD Act provisions became effective in three stages. The provisions effective first (August 20, 2009) required creditors to increase the amount of notice consumers receive before the rate on a credit card account is increased or a significant change is made to the account’s terms. These amendments also allowed consumers to reject such increases and changes by informing the creditor before the increase or change goes into effect. The provisions effective next (February 22, 2010) involved rules regarding interest rate increases, over-the-limit transactions, and student cards. Finally, the provisions effective last (August 22, 2010) addressed the reasonableness and proportionality of penalty fees and charges and reevaluation of rate increases.
In 2009, Regulation Z was amended following the passage of the Higher Education Opportunity Act (HEOA) by adding disclosure and timing requirements that apply to lenders making private education loans.
In 2009, the Helping Families Save Their Homes Act amended the TILA to establish a new requirement for notifying consumers of the sale or transfer of their mortgage loans. The purchaser or assignee that acquires the loan must provide the required disclosures no later than 30 days after the date on which it acquired the loan.
In 2010, the Board further amended Regulation Z to prohibit payment to a loan originator that is based on the terms or conditions of the loan, other than the amount of credit extended. The amendment applies to mortgage brokers and the companies that employ them, as well as to mortgage loan officers employed by depository institutions and other lenders. In addition, the amendment prohibits a loan originator from directing or “steering” a consumer to a loan that is not in the consumer’s interest to increase the loan originator’s compensation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended the TILA to include several provisions that protect the integrity of the appraisal process when a consumer’s home is securing the loan. The rule also requires that appraisers receive customary and reasonable payments for their services. The appraiser and loan originator compensation requirements had a mandatory compliance date of April 6, 2011.
The Dodd-Frank Act generally granted rulemaking authority under the TILA to the Consumer Financial Protection Bureau (CFPB). Title XIV of the Dodd-Frank Act included a number of amendments to the TILA, and in 2013, the CFPB issued rules to implement them. Prohibitions on mandatory arbitration and waivers of consumer rights, as well as requirements that lengthen the time creditors must maintain an escrow account for higher-priced mortgage loans, were generally effective June 1, 2013. Most of the remaining amendments to Regulation Z were effective in January 2014.2 These amendments include ability-to-repay requirements for mortgage loans, appraisal requirements for higher-priced mortgage loans, a revised and expanded test for high-cost mortgages, as well as additional restrictions on those loans, expanded requirements for servicers of mortgage loans, refined loan originator compensation rules and loan origination qualification standards, and a prohibition on financing credit insurance for mortgage loans. The amendments also established new record retention requirements for certain provisions of the TILA. On October 22, 2014, the CFPB issued a final rule providing an alternative small servicer definition for nonprofit entities and amended the ability-to-repay exemption for nonprofit entities. The final rule also provided a temporary cure mechanism for the points and fees limit that applies to qualified mortgages, with a sunset date of January 10, 2021. The final rule was effective on November 3, 2014, except for one provision that became effective on October 3, 2015. On October 2, 2015, the CFPB revised the definitions of small creditor and rural and underserved areas, which affect the availability of some special provisions and exemptions to Regulation Z’s Ability-to-Repay, high-cost mortgage, and HPML escrow requirements. The final rule was effective January 1, 2016.3 In March 2016, the CFPB issued an interim final rule exercising the expanded authority granted to the CFPB by the Helping Expand Lending Practices in Rural Communities Act to exempt small creditors that operate in rural or underserved areas.4 The interim final rule was effective March 31, 2016.
In 2013, the CFPB also revised several open-end credit provisions in Regulation Z. The CFPB revised the general limitation on the total amount of account fees that a credit card issuer may require a consumer to pay. Effective March 28, 2013, the limit is 25 percent of the credit limit effect when the account is opened and applies only during the first year after account opening. The CFPB also amended Regulation Z to remove the requirement that card issuers consider the consumer’s independent ability to pay for applicants who are 21 or older and to permit issuers to consider income and assets to which such consumers have a reasonable expectation of access. This change was effective May 3, 2013, with a mandatory compliance date of November 4, 2013.
In 2013, the CFPB further amended Regulation Z as well as Regulation X, the regulation implementing the Real Estate Settlement Procedures Act (RESPA), to fulfill the mandate in the Dodd-Frank Act to integrate the mortgage disclosures under TILA and RESPA sections 4 and 5. Regulation Z now contains two new forms required for most closed-end consumer mortgage loans. The Loan Estimate is provided within three business days from application, and the Closing Disclosure is provided to consumers three business days before loan consummation. These disclosures must be used for mortgage loans for which the creditor or mortgage broker receives an application on or after October 3, 2015.5
In 2016, the CFPB amended Regulation Z as well as Regulation E, the regulation implementing the Electronic Fund Transfer Act (EFTA), to extend protections to prepaid accounts. In Regulation E, tailored provisions governing disclosures, limited liability and error resolution, and periodic statements were adopted for prepaid accounts, along with new requirements regarding the posting and submission of prepaid account agreements. In Regulation Z, coverage of the term “credit card” was expanded to include “hybrid prepaid-credit card” as defined in 12 CFR 1026.61. The amendments to Regulation Z further regulate credit features that may be offered in conjunction with prepaid accounts. Together these amendments are known as the “Prepaid Rule.” The Bureau further amended the Prepaid Rule in January 2018 to modify the definition of “business partner,” in addition to making other changes, and extend the effective date of the Prepaid Rule, as amended, to April 1, 2019.
In 2017, the Bureau amended and clarified several provisions of Regulation Z (82 Fed. Reg. 37656) (August 11, 2017),6 including creating tolerances for the Total of Payments disclosure, amending and clarifying the application of the good faith standard under 12 CFR e)(3) and related tolerances, and clarifying disclosure provisions related to construction loans. Mandatory compliance with most provisions of the amended rule began on October 1, 2018. In 2018, the Bureau further amended the rule to address when Closing Disclosures may be used to reset tolerances (83 Fed. Reg. 19159) (May 2, 2018).7 These provisions became effective June 1, 2018. On August 4, 2016, the CFPB issued a final rule to further clarify, revise, and amend provisions of Regulation Z and Regulation X (81 Fed. Reg. 72160) (October 19, 2016).8 The amendments in the final rule are referenced in this document as the “2016 Servicing Rule.” The 2016 Servicing Rule establishes definitions of successor in interest and confirmed successor in interest in 12 CFR 1026.2(a)(27), and provides that a confirmed successor in interest is a “consumer” for purposes of the mortgage servicing provisions in Regulation Z (12 CFR 1026.2(a)(11)).9 The 2016 Servicing Rule also adopts a general definition of delinquency that applies to all of the servicing provisions in Regulation X and the provisions regarding periodic statements for mortgage loans in Regulation Z. Furthermore, the 2016 Servicing Rule clarifies, revises, or amends provisions of Regulation Z relating to:
• Interest rate adjustment notices for adjustable-rate mortgages (ARMs) (12 CFR 1026.20);
• Prompt crediting of mortgage payments and responses to requests for payoff amounts (12 CFR 1026.36(c));
• Periodic statements for mortgage loans 12 CFR 1026.41, including requiring servicers to provide certain consumers in bankruptcy a modified periodic statement or coupon book; and
• Small servicers (12 CFR 1026.41(e)(4)).
The 2016 Servicing Rule took effect on October 19, 2017, except the provisions related to successors in interest and periodic statements for consumers in bankruptcy, which took effect on April 19, 2018.
The CFPB concurrently issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA) to clarify the interaction of the FDCPA and specified mortgage servicing rules in Regulations X and Z. (81 Fed. Reg. 71977) (October 19, 2016).10 This 2016 interpretive rule constitutes an advisory opinion for purposes of the FDCPA and provides safe harbors from liability for servicers acting in compliance with it.
In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)11 amended several provisions of TILA, including: (1) the addition of a new safe-harbor qualified mortgage category for portfolio mortgages of certain insured depository institutions and insured credit unions; (2) modification of the waiting period requirements for high-cost mortgage loan consummation under certain conditions; (3) clarification of “customary and reasonable” as they pertain to fee appraisers who voluntarily donate appraisal services to certain charitable organizations; and (4) student loan protections in the event of bankruptcy or death of the student or non-student obligor. The EGRRCPA also amended TILA to exclude manufactured or modular housing retailers and their employees from loan originator compensation requirements when specific conditions are met, and amended the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) regarding employment transition of certain loan originators. These provisions were generally effective on May 24, 2018, except for the student loan protections, which became effective on November 24, 2018, and the SAFE Act changes, which became effective on November 24, 2019. On November 16, 2019, the Bureau issued an interpretive rule on the SAFE Act changes, with an effective date of November 24, 2019.12
In 2020 and 2021, the Bureau issued four final rules amending the qualified mortgage (also referred to as QM) provisions of Regulation Z. The first final rule extended the January 10, 2021 sunset date of a temporary qualified mortgage definition for certain loans eligible for purchase or guarantee by the Government Sponsored Enterprises (GSEs) until the mandatory compliance date of final amendments to the general qualified mortgage definition.13 The second final rule (the General QM Final Rule) amended the general qualified mortgage definition, primarily by replacing its 43 percent debt-to-income ratio limit with a limit based on the loan’s pricing.14 The third final rule (the Seasoned QM Final Rule) created a new category of qualified mortgages—known as “seasoned qualified mortgages”—for first-lien, fixed-rate covered transactions that have met certain performance requirements over a seasoning period of at least 36 months, are held in portfolio by the originating creditor or first purchaser until the end of the seasoning period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.15 The fourth final rule extended the mandatory compliance date of the General QM Final Rule until October 1, 2022.16 As a result of the fourth final rule, the temporary qualified mortgage definition, commonly known as the GSE Patch, will expire on October 1, 2022 or the date the applicable GSE exits conservatorship, whichever comes first.17
What is the format of Reg Z? [V-1.1 Truth in Lending Act]
The rules creditors must follow differ depending on whether the creditor is offering open-end credit, such as credit cards or home-equity lines, or closed-end credit, such as car loans or mortgages.
What is Subpart A of Reg Z? [V-1.1 Truth in Lending Act]
Subpart A (12 CFR 1026.1 through 1026.4) of the regulation provides general information that applies to open-end and closed-end credit transactions. It sets forth definitions 12 CFR 1026.2 and stipulates which transactions are covered and which are exempt from the regulation (12 CFR 1026.3). It also contains the rules for determining which fees are finance charges (12 CFR 1026.4).
What is Subpart B of Reg Z? [V-1.1 Truth in Lending Act]
Subpart B (12 CFR 1026.5 through 1026.16) relates to open-end credit. It contains rules on account-opening disclosures 12 CFR 1026.6 and periodic statements (12 CFR 1026.7-8). It also describes special rules that apply to credit card transactions, treatment of payments 12 CFR 1026.10 and credit balances 12 CFR 1026.11, procedures for resolving credit billing errors 12 CFR 1026.13, annual percentage rate (APR) calculations 12 CFR 1026.14, rescission rights 12 CFR 1026.15, and advertising (12 CFR 1026.16).
What is Reg Z Part C? [V-1.1 Truth in Lending Act]
Subpart C (12 CFR 1026.17 through 1026.24) relates to closed-end credit. It contains rules on disclosures 12 CFR 1026.17-20, treatment of credit balances 12 CFR 1026.21, annual percentage rate calculations (12 CFR 1026.22), rescission right (12 CFR 1026.23), and advertising (12 CFR12 CFR 1026.24).
What is Reg Z Part D? [V-1.1 Truth in Lending Act]
Subpart D (12 CFR 1026.25 through 1026.30) contain rules on record retention 12 CFR 1026.25, oral disclosures 12 CFR 1026.26, disclosures in languages other than English 12 CFR 1026.27, effect on state laws 12 CFR 1026.28, state exemptions 12 CFR 1026.29, and rate limitations (12 CFR 1026.30).
What is Reg Z Part E? [V-1.1 Truth in Lending Act]
Subpart E (12 CFR 1026.31 through 1026.45) contains special rules for mortgage transactions. The rules require certain disclosures and provide limitations for closed-end credit transactions and open-end credit plans that have rates or fees above specified amounts or certain prepayment penalties (12 CFR 1026.32). Special disclosures are also required, including the total annual loan cost rate, for reverse mortgage transactions (12 CFR 1026.33). The rules also prohibit specific acts and practices in connection with high-cost mortgages, as defined in 12 CFR 1026.32(a), (12 CFR 1026.34); in connection with closed-end higher-priced mortgage loans, as defined in 12 CFR 1026.35(a), (12 CFR 1026.35); and in connection with an extension of credit secured by a dwelling (12 CFR 1026.36). This subpart also sets forth disclosure requirements, effective October 3, 2015, for certain closed-end transactions secured by real property, or a cooperative unit, as required by 12 CFR 1026.19(e) and (f) 12 CFR 1026.37-38, disclosures for mortgage transfers 12 CFR 1026.39, and disclosure requirements for periodic statements for residential mortgage loans (12 CFR 1026.41). In addition, it contains minimum standards for transactions secured by a dwelling, including provisions relating to ability to repay and qualified mortgages (12 CFR 1026.43).This subpart includes the small servicer exemption found in (12 CFR 1026.41(e)(4)).
What is Reg Z Part F? [V-1.1 Truth in Lending Act]
Subpart F (12 CFR 1026.46 through 1026.48) relates to private education loans. It contains rules on disclosures 12 CFR 1026.46, limitations on changes in terms after approval 12 CFR 1026.48, the right to cancel the loan 12 CFR 1026.47, and limitations on co-branding in the marketing of private education loans (12 CFR 1026.48).
What is Reg Z Part F? [V-1.1 Truth in Lending Act]
Subpart G (12 CFR 1026.51 through 1026.61) relates to credit card accounts, including covered separate credit features accessible by hybrid prepaid-credit cards, under an open-end (not home-secured) consumer credit plan (except for 12 CFR 1026.57(c), which applies to all open-end credit plans). This subpart contains rules regarding disclosures provided on or with credit and charge card applications and solicitations (12 CFR 1026.60). It also contains rules regarding hybrid prepaid-credit cards (12 CFR 1026.61). Subpart G contains rules on evaluation of a consumer’s ability to make the required payments under the terms of an account 12 CFR 1026.51, limits the fees that a consumer can be required to pay 12 CFR 1026.52, and contains rules on allocation of payments in excess of the minimum payment (12 CFR 1026.53). It also sets forth certain limitations on the imposition of finance charges as the result of a loss of a grace period 12 CFR 1026.54, and on increases in annual percentage rates, fees, and charges for credit card accounts 12 CFR 1026.55, including the reevaluation of rate increases (12 CFR 1026.59). This subpart prohibits the assessment of fees or charges for over-the-limit transactions unless the consumer affirmatively consents to the creditor’s payment of over-the-limit transactions (12 CFR 1026.56). This subpart also sets forth rules for reporting and marketing of college student open-end credit (12 CFR 1026.57). Finally, it sets forth requirements for the Internet posting of credit card accounts under an open-end (not home-secured) consumer credit plan (12 CFR 1026.58).
Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of official interpretations, special rules for certain kinds of credit plans, model disclosure forms, standards for determining ability to pay, and the rules for computing annual percentage rates in closed-end credit transactions and total-annual-loan-cost rates for reverse mortgage transactions.
Official interpretations of the regulation are published in a commentary. Good faith compliance with the commentary protects creditors from civil liability under the TILA. In addition, the commentary includes more detailed information on disclosures or other actions required of creditors. It is virtually impossible to comply with Regulation Z without reference to and reliance on the commentary.
NOTE: The following narrative does not discuss all the sections of Regulation Z but rather highlights only certain sections of the regulation and the TILA.
Describe the TILA Subpart A. [V-1.1 Truth in Lending Act]
Subpart A – General
This subpart contains general information regarding both open-end and closed-end credit transactions. It sets forth definitions 12 CFR 1026.2 and sets out which transactions are covered and which are exempt from the regulation (12 CFR 1026.3). It also contains the rules for determining which fees are finance charges (12 CFR 1026.4).
What is the purpose of the TILA and Reg Z, according to Subpart A? [V-1.1 Truth in Lending Act]
Purpose of the TILA and Regulation Z
The TILA is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably. Before its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Now, all creditors must use the same credit terminology and expressions of rates. In addition to providing a uniform system for disclosures, the act:
Protects consumers against inaccurate and unfair credit billing and credit card practices;
• Provides ability to repay requirements and other limitations applicable to credit cards;
• Provides consumers with rescission rights;
• Provides for rate caps on certain dwelling-secured loans;
• Imposes limitations on home equity lines of credit (HELOCs) and certain closed-end home mortgages;
• Provides minimum standards for most dwelling-secured loans; and
• Delineates and prohibits unfair or deceptive mortgage lending practices.
The TILA and Regulation Z do not, however, tell financial institutions how much interest they may charge or whether they must grant a consumer a loan.
What are the coverage considerations for Reg Z (12 CFR 1026.1 and 1026.2)? [V-1.1 Truth in Lending Act]
Lenders should carefully consider several factors when
deciding whether a loan is subject to Truth in Lending
disclosures or other Regulation Z requirements. The
coverage considerations under Regulation Z are
addressed in more detail in the commentary to
Regulation Z. For example, broad coverage
considerations are included under 12 CFR 1026.1(c) of
the regulation and relevant definitions appear in (12
CFR1026.2).
The 2016 Servicing Rule adds a definition of successor
in interest. Successor in interest means a person to whom an ownership interest in a dwelling securing a
closed-end consumer credit transaction is transferred
from a consumer, provided that the transfer is:
• A transfer by devise, descent, or operation of law on
the death of a joint tenant or tenant by the entirety;
• A transfer to a relative resulting from the death of the
consumer;
• A transfer where the spouse or children of the
consumer become an owner of the property;
• A transfer resulting from a decree of a dissolution of
marriage, legal separation agreement, or an incidental
property settlement agreement, by which the spouse
of the consumer becomes an owner of the property; or
• A transfer into an inter vivos trust in which the
consumer is and remains a beneficiary and which
does not relate to a transfer of rights of occupancy in
the property.
What are exempt transactions under Reg Z? [V-1.1 Truth in Lending Act]
The following transactions are exempt from Regulation
Z:
• Credit extended primarily for a business,
commercial, or agricultural purpose;
Credit extended to other than a natural person
(including credit to government agencies or
instrumentalities);
NOTE: Credit extended to trusts established for tax
or estate planning purposes or to land trusts is
considered to be extended to a natural person for
purposes of the definition of “consumer” (12 CFR
1026.2(a)(11), Comment 2(a)(11)-3).Credit in
excess of an annually adjusted threshold not
secured by real property or by personal property
used or expected to be used as the principal
dwelling of the consumer;19
• Public utility credit;
• Credit extended by a broker-dealer registered with
the Securities and Exchange Commission (SEC) or
the Commodity Futures Trading Commission
(CFTC), involving securities or commodities
accounts;
• Home fuel budget plans not subject to a finance
charge; and
• Certain student loan programs.
What implications do credit cards have on the application of TILA? [V-1.1 Truth in Lending Act]
However, when a credit card is involved, generally
exempt credit (e.g., business purpose credit) is subject to
the requirements that govern the issuance of credit cards
and liability for their unauthorized use. Credit cards
must not be issued on an unsolicited basis and, if a
credit card is lost or stolen, the cardholder must not be
held liable for more than $50 for the unauthorized use of
the card (Comment 3-1).
What must the creditor consider when determining if credit is for consumer purposes? [V-1.1 Truth in Lending Act]
When determining whether credit is for consumer
purposes, the creditor must evaluate all of the following:
• Any statement obtained from the consumer
describing the purpose of the proceeds.
o For example, a statement that the proceeds will
be used for a vacation trip would indicate a
consumer purpose.
o If the loan has a mixed-purpose (e.g., proceeds
will be used to buy a car that will be used for
personal and business purposes), the lender
must look to the primary purpose of the loan to
decide whether disclosures are necessary. A statement of purpose from the consumer will
help the lender make that decision.
o A checked box indicating that the loan is for a
business purpose, absent any documentation
showing the intended use of the proceeds
could be insufficient evidence that the loan did
not have a consumer purpose.
• The consumer’s primary occupation and how it
relates to the use of the proceeds. The higher the
correlation between the consumer’s occupation and
the property purchased from the loan proceeds, the
greater the likelihood that the loan has a business
purpose. For example, proceeds used to purchase
dental supplies for a dentist would indicate a
business purpose.
• Personal management of the assets purchased from
proceeds. The lower the degree of the borrower’s
personal involvement in the management of the
investment or enterprise purchased by the loan
proceeds, the less likely the loan will have a
business purpose. For example, money borrowed to
purchase stock in an automobile company by an
individual who does not work for that company
would indicate a personal investment and a
consumer purpose.
• The size of the transaction. The larger the size of
the transaction, the more likely the loan will have a
business purpose. For example, if the loan is for a
$5 million real estate transaction, that might
indicate a business purpose.
• The amount of income derived from the property
acquired by the loan proceeds relative to the
borrower’s total income. The lesser the income
derived from the acquired property, the more likely
the loan will have a consumer purpose. For
example, if the borrower has an annual salary of
$100,000 and receives about $500 in annual
dividends from the acquired property, that would
indicate a consumer purpose.
Creditors should consider all five factors before
determining that disclosures are not necessary.
Normally, no one factor by itself is sufficient reason to
determine the applicability of Regulation Z. In any
event, the financial institution may routinely furnish
disclosures to the consumer. Disclosure under such
circumstances does not control whether the transactionis covered but can assure protection to the financial
institution and compliance with the law.
What are coverage considerations under Reg Z (see flow chart) [V-1.1 Truth in Lending Act]
Q: Is the
purpose of
the credit for
personal,
family or
household
use?
A: Regulation Z does not apply, except for the rules of issuance of and
unauthorized use liability for credit cards. (Exempt credit includes
loans with a business or agricultural purpose, and certain student
loans. Credit extended to acquire or improve rental property that is
not owner-occupied is considered business purpose credit.)
Q: Is the
consumer credit
extended to a
consumer?
A: Regulation Z does not apply. (Credit that is extended to a land trust
is deemed to be credit extended to a consumer.)
Q: Is the
consumer
credit
extended by
a creditor?
A: The institution is not a “ creditor” and Regulation Z does not apply
unless at least one of the following tests is met:
- The institution extends consumer credit regularly and
a. The obligation is initially payable to the institution and
b. The obligation is either payable by written agreement in more
than four installments or is subject to a finance charge. - The institution is a card issuer that extends closed-end credit that is
subject to a finance charge or is payable by written agreement in
more than four installments. - The institution is not the card issuer, but it imposes a finance
charge at the time of honoring a credit card.
Q:
How do you calculate the finance charge for closed end credit? [V-1.1 Truth in Lending Act]
Calculating the Finance Charge (Closed-End Credit)
One of the more complex tasks under Regulation Z is determining whether a charge associated with an extension of credit must be included in, or excluded from, the disclosed finance charge. The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the financial institution requires use of the third party. Charges imposed by settlement or closing agents are finance charges if the bank requires the specific service that gave rise to the charge and the charge is not otherwise excluded. The “Finance Charge Tolerances” charts within this document briefly summarize the rules that must be considered under (12 CFR 1026.4).
How do you calculate the finance charge for closed end credit? [V-1.1 Truth in Lending Act]
Calculating the Finance Charge (Closed-End Credit)
One of the more complex tasks under Regulation Z is determining whether a charge associated with an extension of credit must be included in, or excluded from, the disclosed finance charge. The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the financial institution requires use of the third party. Charges imposed by settlement or closing agents are finance charges if the bank requires the specific service that gave rise to the charge and the charge is not otherwise excluded. The “Finance Charge Tolerances” charts within this document briefly summarize the rules that must be considered under (12 CFR 1026.4).
What is a prepaid finance charge? [V-1.1 Truth in Lending Act]
Examples of finance charges frequently prepaid by consumers are borrower’s points, loan origination fees, real estate/construction inspection fees, odd days’ interest (interest attributable to part of the first payment period when that period is longer than a regular payment period), mortgage guarantee insurance fees paid to the Federal Housing Administration (FHA), private mortgage insurance (PMI) paid to such companies as the Mortgage Guaranty Insurance Corporation (MGIC), and, in non-real-estate transactions, credit report fees.
What is a Precomputed finance charge? [V-1.1 Truth in Lending Act]
Precomputed Finance Charges A precomputed finance charge includes, for example, interest added to the note amount that is computed by the add-on, discount, or simple interest methods. If reflected in the face amount of the debt instrument as part of the consumer’s obligation, finance charges that are not viewed as prepaid finance charges are treated as precomputed finance charges that are earned over the life of the loan. Think: interest
What are the instructions for filling out the finance charge chart? [V-1.1 Truth in Lending Act]
The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the creditor requires use of the third party. Charges imposed on the consumer by a settlement agent are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge is not otherwise excluded from the finance charge. Immediately below the finance charge definition, the chart presents five captions applicable to determining whether a loan-related charge is a finance charge.
The first caption is “charges always included.” This category focuses on specific charges given in the regulation or commentary as examples of finance charges.
The second caption, “charges included unless conditions are met,” focuses on charges that must be included in the finance charge unless the creditor meets specific disclosure or other conditions to exclude the charges from the finance charge.
The third caption, “conditions,” focuses on the conditions that need to be met if the charges identified to the left of the conditions are permitted to be excluded from the finance charge. Although most charges under the second caption may be included in the finance charge at the creditor’s option, third-party charges and application fees (listed last under the third caption) must be excluded from the finance charge if the relevant conditions are met. However, inclusion of appraisal and credit report charges as part of the application fee is optional.
The fourth caption, “charges not included,” identifies fees or charges that are not included in the finance charge under conditions identified by the caption. If the credit transaction is secured by real property or the loan is a residential mortgage transaction, the charges identified in the column, if they are bona fide and reasonable in amount, must be excluded from the finance charge. For example, if a consumer loan is secured by a vacant lot or commercial real estate, any appraisal fees connected with the loan must not be included in the finance charge.
The fifth caption, “charges never included,” lists specific charges provided by the regulation as examples of those that automatically are not finance charges (e.g., fees for unanticipated late payments).
What are finance charges that are always included (Caption 1)? [V-1.1 Truth in Lending Act]
-Interest
-Transaction fees
-Loan origination fees consumer points
-Credit guarantee insurance premiums
-Charges imposed on the creditor for purchasing the loan, which are passed on to the consumer
-Discounts for inducing payment by means other than credit
-Mortgage broker fees
-Other examples: Fee for preparing TILA disclosures, real estate construction loan inspection fees, fees for post-consummation tax or flood service policy, required credit life insurance charges
What are finance charges that are included unless conditions are met (Captions 2 & 3)? [V-1.1 Truth in Lending Act]
Charges included unless conditions are met:
-Premiums for credit life, A&H, or loss of income insurance
UNLESS: Insurance not required, disclosures are made, and consumer authorizes
-Debt cancellation fees
UNLESS: Coverage not required, disclosures are made, and consumer authorizes
-Premiums for property or liability insurance
-UNLESS: Consumer selects insurance company and disclosures are made
-Premiums for vendor’s single interest (VSI) insurance
-UNLESS: Insurer waives right of subrogation, consumer selects insurance company, and disclosures are made
-Security interest charges (filing fees), insurance in lieu of filing fees and certain notary fees
-UNLESS: The fee is for lien purposes, prescribed by law, payable to a third public official and is itemized and disclosed
-Charges imposed by third parties
-UNLESS: Use of the third party is not required to obtain loan and creditor does not retain the charge
-Charges imposed by third party closing agents
-UNLESS: Creditor does not require and does not retain the fee for the particular service
-Appraisal and credit report fees (Application fees may include appraisal or credit report fees)
-UNLESS: Charged to all applicants; Application fees, if charged to all applicants, are not finance charges. Application fees may include appraisal or credit report fees.
What are charges that are not included unless conditions are met (for Residential Mortgage transactions and loans secured by real estate) (Caption 4? [V-1.1 Truth in Lending Act]
-Fees for title insurance, title examination, property survey, etc.
-Fees for preparing loan documents, mortgages, and other settlement documents
-Amounts required to be paid into escrow, if not otherwise included in the finance charge
-Notary fees
-Pre-consummation flood and pest inspection fees
-Appraisal and credit report fees
What are charges that are never included [V-1.1 Truth in Lending Act]
-Charges payable in a comparable cash transaction.
-Fees for unanticipated late payments
-Overdraft fees not agreed to in writing
-Seller’s points
-Participation or membership fees
-Discount offered by the seller to induce payment by cash or other means not involving the use of a credit card
-Interest forfeited as a result of interest reduction required by law
-Charges absorbed by the creditor as a cost of doing business
What is the APR? [V-1.1 Truth in Lending Act]
Annual Percentage Rate Definition – 12 CFR 1026.22 (Closed-End Credit)
Credit costs may vary depending on the interest rate, the amount of the loan and other charges, the timing and amounts of advances, and the repayment schedule. The APR, which must be disclosed in nearly all consumer credit transactions, is designed to take into account all relevant factors and to provide a uniform measure for comparing the cost of various credit transactions.
The value of a closed-end credit APR must be disclosed as a single rate only, whether the loan has a single interest rate, a variable interest rate, a discounted variable interest rate, or graduated payments based on separate interest rates (step rates), and it must appear with the segregated disclosures. Segregated disclosures are grouped together and do not contain any
information not directly related to the disclosures required under (12 CFR 1026.18).
Since an APR measures the total cost of credit, including costs such as transaction charges or premiums for credit guarantee insurance, it is not an “interest” rate, as that term is generally used. APR calculations do not rely on definitions of interest in state law and often include charges, such as a commitment fee paid by the consumer, that are not viewed by some state usury statutes as interest. Conversely, an APR might not include a charge, such as a credit report fee in a real property transaction, which some state laws might view as interest for usury purposes. Furthermore, measuring the timing of value received and of payments made, which is essential if APR calculations are to be accurate, must be consistent with parameters under Regulation Z.
The APR is often considered to be the finance charge expressed as a percentage. However, two loans could require the same finance charge and still have different APRs because of differing values of the amount financed or of payment schedules. For example, the APR is 12 percent on a loan with an amount financed of $5,000 and 36 equal monthly payments of $166.07 each. It is 13.26 percent on a loan with an amount financed of $4,500 and 35 equal monthly payments of $152.18 each and final payment of $152.22. In both cases the finance charge is $978.52. The APRs on these example loans are not the same because an APR does not only reflect the finance charge, it relates the amount and timing of value received by the consumer to the amount and timing of payments made
The APR is a function of:
The amount financed, which is not necessarily equivalent to the loan amount. For example, if the consumer must pay at closing a separate 1 percent loan origination fee (prepaid For example, if the consumer must pay at closing a separate 1 percent loan origination fee (prepaid finance charge) on a $100,000 residential mortgage loan, the loan amount is $100,000, but the amount financed
would be $100,000 less the $1,000 loan fee, or $99,000.
The finance charge, which is not necessarily equivalent to the total interest amount (interest is not defined by Regulation Z, but rather by state or other federal law). For example: If the consumer must pay a $25 credit report fee for an auto loan, the fee must be included in the finance charge. The finance charge in that case is the sum of the interest on the loan (i.e., interest generated by the application of a percentage rate against the loan amount) plus the $25 credit report fee.
If the consumer must pay a $25 credit report fee for a home improvement loan secured by real property, the credit report fee must be excluded from the finance charge. The finance charge in that case would be only the interest on the loan.
The payment schedule, which does not necessarily include only principal and interest (P + I) payments. For example: If the consumer borrows $2,500 for a vacation trip at 14 percent simple interest per annum and repays that amount with 25 equal monthly payments beginning one month from consummation of the transaction, the monthly P + I payment will be $115.87, if all months are considered equal, and the amount financed would be $2,500. If the consumer’s payments are increased by $2.00 a month to pay a non-financed $50 loan fee during the life of the loan, the amount financed would remain at $2,500 but the payment schedule would be increased to $117.87 a month, the finance charge would increase by $50, and there would be a corresponding increase in the APR. This would be the case whether or not state law defines the $50 loan fee as interest.
If the loan above has 55 days to the first payment and the consumer prepays interest at consummation ($24.31 to cover the first 25 days), the amount
amount financed would be $2,500.
Although the amount financed has been reduced to reflect the consumer’s reduced use of available funds at consummation, the time interval during which the consumer has use of the $2,475.69, 55 days to the first payment, has not changed. Since the first payment period exceeds the limitations of the regulation’s minor irregularities provisions (See 12 CFR 1026.17(c)(4)), it may not be treated as regular. In calculating the APR, the first payment period must not be reduced by 25 days (i.e., the first payment period may not be treated as one month)
Financial institutions may, if permitted by state or other law,
precompute interest by applying a rate against a loan balance
using a simple interest, add-on, discount or some other method,
and may earn interest using a simple interest accrual system, the
Rule of 78s (if permitted by law) or some other method. Unless
the financial institution’s internal interest earnings and accrual
methods involve a simple interest rate based on a 360-day year
that is applied over actual days (even that is important only for
determining the accuracy of the payment schedule), it is not
relevant in calculating an APR, since an APR is not an interest
rate (as that term is commonly used under state or other law).
Since the APR normally need not rely on the internal accrual
systems of a bank, it always may be computed after the loan
terms have been agreed upon (as long as it is disclosed before
actual consummation of the transaction).
What are special requirements for calculating the finance charge
and APR? [V-1.1 Truth in Lending Act]
Proper calculation of the finance charge and APR are of primary importance. The regulation requires that the terms “finance charge” and “annual percentage rate” be disclosed more
conspicuously than any other required disclosure, subject to limited exceptions. The finance charge and APR, more than any other disclosures, enable consumers to understand the cost of the credit and to comparison shop for credit. A creditor’s failure to
disclose those values accurately can result in significant monetary damages to the creditor, either from a class action lawsuit or from a regulatory agency’s order to reimburse consumers for violations of law.
If an APR or finance charge is disclosed incorrectly, the error is not, in itself, a violation of the regulation if:
• The error resulted from a corresponding error in a calculation
tool used in good faith by the financial institution.
• Upon discovery of the error, the financial institution promptly discontinues use of that calculation tool for disclosure
purposes.
• The financial institution notifies theCFPBin writing of the
error in the calculation tool.
When a financial institution claims a calculation tool was used in
good faith, the financial institution assumes a reasonable degree of
responsibility for ensuring that the tool in question provides the
accuracy required by the regulation (15 U.S.C. 1640 (c)). For
example, the financial institution might verify the results obtained
using the tool by comparing those results to the figures obtained
by using another calculation tool. The financial institution might
also verify that the tool, if it is designed to operate under the
actuarial method, produces figures similar to those provided by
the examples in Appendix J to the regulation. The calculation tool
should be checked for accuracy before it is first used and
periodically thereafter.
What is subpart B of the Regulation? [V-1.1 Truth in Lending Act]
Subpart B – Open-End Credit
Subpart B relates to open-end credit. It contains rules on accountopening disclosures 12 CFR 1026.6 and periodic statements (12
CFR1026.7-.8). It also describes special rules that apply to credit
card transactions, treatment of payments 12 CFR1026.10 and
credit balances 12 CFR1026.11, procedures for resolving credit
billing errors 12 CFR1026.13, annual percentage rate
calculations 12 CFR1026.14, rescission requirements 12 CFR
1026.15 and advertising (12 CFR1026.16).
What are the periodic statement timing requirements for open-end credit? [V-1.1 Truth in Lending Act]
Time of Disclosures (Periodic Statements)
– 12 CFR 1026.5(b)
For credit card accounts under an open-end (not home-secured)
consumer credit plan, creditors must adopt reasonable
procedures designed to ensure that periodic statements are
mailed or delivered at least 21 days prior to the payment due
date disclosed on the periodic statement and that payments are
not treated as late for any purpose if they are received within 21
days after mailing or delivery of the statement. In addition, for
all open-end consumer credit accounts with grace periods,
creditors must adopt reasonable procedures designed to ensure
that periodic statements are mailed or delivered at least 21 days
prior to the date on which a grace period (if any) expires and
that finance charges are not imposed as a result of the loss of a
grace period if a payment is received within 21 days after
mailing or delivery of a statement. For purposes of this
requirement, a “grace period” is defined as a period within
which any credit extended may be repaid without incurring a
finance charge due to a periodic interest rate. For non-credit
card open-end consumer plans without a grace period, creditors
must adopt reasonable policies and procedures designed to
ensure that periodic statements are mailed or delivered at least
14 days prior to the date on which the required minimum
periodic payment is due. Moreover, the creditor must adopt
reasonable policies and procedures to ensure that it does not
treat as late a required minimum periodic payment received by
the creditor within 14 days after it has mailed or delivered the
periodic statement.
What are the subsequent statement statement timing requirements for open-end credit? [V-1.1 Truth in Lending Act]
For open-end, not home-secured credit, the following applies:
Creditors are required to provide consumers with 45 days’
advance written notice of rate increases and other significant
changes to the terms of their credit card account agreements.
The list of “significant changes” includes most fees and other
terms that a consumer should be aware of before use of the
account. Examples of such fees and terms include:
• Penalty fees;
• Transaction fees;
• Fees imposed for the issuance or availability of the open end plan;
• Grace period; and
• Balance computation method.
Changes that do not require advance notice include:
• Reductions of finance charges;
• Termination of account privileges resulting from an
agreement involving a court proceeding;
• Increase in an APR upon expiration of a specified period of
time previously disclosed in writing;
• Increases in variable APRs that change according to an
index not under the card issuer’s control; and
• Rate increases due to the completion of, or failure of a
consumer to comply with, the terms of a workout or
temporary hardship arrangement, if those terms are
disclosed prior to commencement of the arrangement.
A creditor may suspend account privileges, terminate an
account, or lower the credit limit without notice. However, a
creditor that lowers the credit limit may not impose an overlimit fee or penalty rate as a result of exceeding the new credit
limit without a 45-day advance notice that the credit limit has
been reduced.
For significant changes in terms (with the exception of rate
changes, increases in the minimum payment, certain changes in
the balance computation method, and when the change results
from the consumer’s failure to make a required minimum
periodic payment within 60 days after the due date), a creditor
must also provide consumers the right to reject the change. If the
consumer does reject the change prior to the effective date, the
creditor may not apply the change to the account (12 CFR
1026.9(h)(2)(i)).
In addition, when a consumer rejects a change or increase, the
creditor must not:
• Impose a fee or charge, or treat the account as in default
solely as a result of the rejection; or
• Require repayment of the balance on the account using a
method that is less beneficial to the consumer than one of
the following methods: (1) the method of repayment prior
to the rejection; (2) an amortization period of not less than
five years from the date of rejection; or (3) a minimum
periodic payment that includes a percentage of the balance
that is not more than twice the percentage included prior to
the date of rejection.
What are the finance charge requirements for open-end credit? [V-1.1 Truth in Lending Act]
Finance Charge (Open-End Credit) – 12 CFR 1026.6(a)(1)
and 1026.6(b)(3)
Each finance charge imposed must be individually itemized.
The aggregate total amount of the finance charge need not be
disclosed.
How is the balance and finance charge calculated for open-end credit? [V-1.1 Truth in Lending Act]
Determining the Balance and Computing the Finance Charge
There are three common methods to determine the balance to
which the periodic rate is applied:the previous balance method,
the daily balance method, and the average daily balance method,
which are described as follows:
• Previous balance method. The balance on which the
periodic finance charge is computed is based on the balance
outstanding at the start of the billing cycle. The periodic
rate is multiplied by this balance to compute the finance
charge.
• Daily balance method. A daily periodic rate is applied to
either the balance on each day in the cycle or the sum of the
balances on each of the days in the cycle. If a daily periodic
rate is multiplied by the balance on each day in the billing
cycle, the finance charge is the sum of the products. If the
daily periodic rate is multiplied by the sum of all the daily
balances, the result is the finance charge.
• Average daily balance method. The average daily balance
is the sum of the daily balances (either including or
excluding current transactions) divided by the number of
days in the billing cycle. A periodic rate is then multiplied
by the average daily balance to determine the finance
charge. If the periodic rate is a daily one, the product of the
rate multiplied by the average balance is multiplied by the
number of days in the cycle.
In addition to those common methods, financial institutions
have other ways of calculating the balance to which the periodic
rate is applied. By reading the financial institution’s explanation,
the examiner should be able to calculate the balance to which
the periodic rate was applied. In some cases, the examiner may
need to obtain additional information from the financial
institution to verify the explanation disclosed. If the examiner is
unable to understand the disclosed explanation, he or she should
discuss the explanation with management and should remind
management of Regulation Z’s requirement that disclosures be
clear and conspicuous.
When a balance is determined without first deducting all credits
and payments made during the billing cycle, that fact and the
amount of the credits and payments must be disclosed.
If the financial institution uses the daily balance method and
applies a single daily periodic rate, disclosure of the balance to
which the rate was applied may be stated as any of the
following:
A balance for each day in the billing cycle. The daily
periodic rate is multiplied by the balance on each day and
the sum of the products is the finance charge.
• A balance for each day in the billing cycle on which the
balance in the account changes. The finance charge is
figured by the same method as discussed previously, but the
statement shows the balance only for those days on which
the balance changed.
• The sum of the daily balances during the billing cycle. The
balance on which the finance charge is computed is the sum
of all the daily balances in the billing cycle. The daily
periodic rate is multiplied by that balance to determine the
finance charge.
• The average daily balance during the billing cycle. If this is
stated, the financial institution may, at its option, explain
that the average daily balance is or can be multiplied by the
number of days in the billing cycle and the periodic rate
applied to the product to determine the amount of interest.
If the financial institution uses the daily balance method but
applies two or more daily periodic rates, the sum of the daily
balances may not be used. Acceptable ways of disclosing the
balances include:
• A balance for each day in the billing cycle;
• A balance for each day in the billing cycle on which the
balance in the account changes; or
• Two or more average daily balances. If the average daily
balances are stated, the financial institution may, at its
option, explain that interest is or may be determined by 1)
multiplying each of the average daily balances by the
number of days in the billing cycle (or if the daily rate
varied during the cycle, by multiplying the number of days
that the applicable rate was in effect), 2) by multiplying
each of the results by the applicable daily periodic rate, and
3) adding these products together.
In explaining the method used to find the balance on which the
finance charge is computed, the financial institution need not
reveal how it allocates payments or credits. That information may
be disclosed as additional information, but all required
information must be clear and conspicuous.
NOTE: 12 CFR 1026.54 prohibits a credit card issuer from
calculating finance charges based on balances for days in
previous billing cycles as a result of the loss of a grace period
(a practice sometimes referred to as “double-cycle billing”).
Finance Charge Resulting from Two or More Periodic Rates
Some financial institutions use more than one periodic rate in
computing the finance charge. For example, one rate may apply
to balances up to a certain amount and another rate to balances
more than that amount. If two or more periodic rates apply, the
financial institution must disclose all rates and conditions. The
range of balances to which each rate applies also must be
disclosed (12 CFR 1026.6(a)(1)). It is not necessary, however,
to break the finance charge into separate components based on
the different rates
20 If a creditor does not disclose the effective (or quotient method) APR on a
HELOC periodic statement, it must instead disclose the charges (fees and
interest) imposed as provided in 12 CFR 1026.7(a).
When is the disclosed APR on an open-end credit account considered accurate? [V-1.1 Truth in Lending Act]
Annual Percentage Rate (Open-End Credit)
The disclosed APR on an open-end credit account is accurate if
it is within one-eighth of one percentage point of the APR
calculated under Regulation Z.
How is the APR for open-end credit calculated? [V-1.1 Truth in Lending Act]
Determination of APR – 12 CFR 1026.14
The basic method for determining the APR in open-end credit
transactions involves multiplying each periodic rate by the
number of periods in a year. This method is used in all types of
open-end disclosures, including:
• The corresponding APR in the initial disclosures;
• The corresponding APR on periodic statements;
• The APR in early disclosures for credit card accounts;
• The APR in early disclosures for home-equity plans;
• The APR in advertising; and
• The APR in oral disclosures.
The corresponding APR is prospective, and it does not involve
any particular finance charge or periodic balance.
A second method of calculating the APR is the quotient method.
At a creditor’s option, the quotient method may be disclosed on
periodic statements for home-equity plans subject to 12 CFR
1026.40 (home-equity lines of credit or HELOCs).20 The
quotient method reflects the annualized equivalent of the rate
that was actually applied during a cycle. This rate, also known
as the effective APR, will differ from the corresponding APR if
the creditor applies minimum, fixed, or transaction charges to
the account during the cycle (12 CFR1026.14(c)).
Brief Outline for Open-End Credit APR Calculations on
Periodic Statements
NOTE: Assume monthly billing cycles for each of the
calculations below.
I. Basic method for determining the APR in an open-end
credit transaction. This is the corresponding APR (12 CFR
1026.14(b)).
A. Monthly rate x 12 = APR
II. Optional effective APR that may be disclosed on HELOC
periodic statements
A. APR when only periodic rates are imposed (12 CFR
1026.14(c)(1)).
1. Monthly rate x 12 = APR
Or
2. (Total finance charge / sum of the balances) x 12
= APR
B. APR when minimum or fixed charge, but not
transaction charge imposed (12 CFR 1026.14(c)(2)).
1. (Total finance charge / amount of applicable
balance21) x 12 = APR22
C. APR when the finance charge includes a charge related
to a specific transaction (such as a cash advance fee),
even if the total finance charge also includes any other
minimum, fixed, or other charge not calculated using a
periodic rate (12 CFR 1026.14(c)(3)).
1. (Total finance charge / (all balances + other
amounts on which a finance charge was imposed
during the billing cycle without duplication23) x
12 = APR24
D. APR when the finance charge imposed during the
billing cycle includes a minimum or fixed charge that
does not exceed 50 cents for a monthly or longer
billing cycle (or pro rata part of 50 cents for a billing
cycle shorter than monthly) (12 CFR 1026.14(c)(4)).
1. Monthly rate x 12 = APR
E. APR calculation when daily periodic rates are
applicable if only the periodic rate is imposed or when
21 For the following formulas, the APR cannot be determined if the applicable
balance is zero. (12 CFR 1026.14(c)(2))
22 Loan fees, points, or similar finance charges that relate to the opening of the
account must not be included in the calculation of the APR.
23 The sum of the balances may include the average daily balance, adjusted
balance, or previous balance method. When a portion of the finance charge is a minimum or fixed charge but not a transactional
charge is imposed (12 CFR 1026.14(d)).
1. (Total finance charge / average daily balance) x
12 = APR
Or
2. (Total finance charge / sum of daily balances) x
365 = APR
21 For the following formulas, the APR cannot be determined if the applicable
balance is zero. (12 CFR 1026.14(c)(2))
22 Loan fees, points, or similar finance charges that relate to the opening of the
account must not be included in the calculation of the APR.
23 The sum of the balances may include the average daily balance, adjusted
balance, or previous balance method. When a portion of the finance charge is
What are the change in terms notice requirements for home equity plans? [V-1.1 Truth in Lending Act]
Change in Terms Notices for Home Equity Plans Subject to
12 CFR 1026.40 – 12 CFR 1026.9(c)
Servicers are required to provide consumers with 15 days’
advance written notice of a change to any term required to be
disclosed under 12 CFR 1026.6(a) or where the required
minimum periodic payment is increased. Notice is not required
when the change involves a reduction of any component of a
finance charge or other charge or when the change results from
an agreement involving a court proceeding. If the creditor
prohibits additional extensions of credit or reduces the credit
limit in certain circumstances (if permitted by contract), a
written notice must be provided no later than three business days
after the action is taken and must include the specific reasons for
the action. If the creditor requires the consumer to request
reinstatement of credit privileges, the notice also must state that
fact.
What are the timing requirements for open-end credit payment processing? [V-1.1 Truth in Lending Act]
Payments – 12 CFR 1026.10 (Open-End Credit)
Creditors are required to credit a payment to the consumer’s
account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge. If a
creditor fails to credit a payment, as required by 12 CFR
1026.10(a) or (b), in time to avoid the imposition of finance or
other charges, the creditor shall adjust the consumer’s account
so that the charges imposed are credited to the consumer’s
account during the next billing cycle.
If a card issuer makes a material change in the address for
receiving payments or procedures for handling payments, and
such change causes a material delay in the crediting of a
payment to the consumer’s account during the 60–day period
following the date on which such change took effect, the card
issuer may not impose any late fee or finance charge for a late
payment on the credit card account during the 60–day period
following the date on which the change took effect.
What are the procedures surrounding timely settlements of estates? [V-1.1 Truth in Lending Act]
Timely Settlement of Estates – 12 CFR 1026.11(c)
Issuers are required to establish procedures to ensure that any
administrator of an estate can resolve the outstanding credit card balance of a deceased account holder in a timely manner.
If an administrator requests the amount of the balance:
• The issuer is prohibited from imposing additional fees on
the account;
• The issuer is required to disclose the amount of the balance
to the administrator in a timely manner (safe harbor of 30
days); and
• If the balance is paid in full within 30 days after disclosure
of the balance, the issuer must waive or rebate any trailing
or residual interest charges that accrued on the balance
following the disclosure.
What are the requirements surrounding billing error resolutions? [V-1.1 Truth in Lending Act]
Billing Error Resolution – 12 CFR 1026.13 (Open-End
Credit)
A billing error notice is a written notice from a consumer that:
• Is received by a creditor at the address disclosed under 12
CFR 1026.7(a)(9) or (b)(9), as applicable, no later than 60
days after the creditor transmitted the first periodic
statement that reflects the alleged billing error;
• Enables the creditor to identify the consumer’s name and
account number; and
• To the extent possible, indicates the consumer’s belief and
the reasons for the belief that a billing error exists, and the
type, date, and amount of the error.
The creditor shall mail or deliver written acknowledgment to the
consumer within 30 days of receiving a billing error notice,
unless the creditor has complied with the appropriate resolution
procedures of 12 CFR 1026.13(e) and (f), as applicable, within
the 30–day period. Furthermore, the creditor credit must comply
with the appropriate resolution procedures provided by 12 CFR
1026.13(e) and (f), as applicable, within two complete billing
cycles (but in no event later than 90 days) after receiving a
billing error notice.
Until a billing error is resolved, the following rules apply:
• The consumer need not pay (and the creditor may not try to
collect) any portion of any required payment that the
consumer believes is related to the disputed amount
(including related finance or other charges).
• The creditor or its agent is also prohibited from making or
threatening to make an adverse report to any person about
the consumer’s credit standing, or report that an amount or
account is delinquent, because the consumer failed to pay
the disputed amount or related finance or other charges.
• A creditor shall not accelerate any part of the consumer’s
indebtedness or restrict or close a consumer’s account solely because the consumer has exercised in good faith
rights provided by this section.
A creditor is not prohibited, however, from taking action to
collect any undisputed portion of the item or bill; from
deducting any disputed amount and related finance or other
charges from the consumer’s credit limit on the account; or from
reflecting a disputed amount and related finance or other
charges on a periodic statement, provided that the creditor
indicates on or with the periodic statement that payment of any
disputed amount and related finance or other charges is not
required pending the creditor’s compliance with this section.
If a creditor determines that a billing error occurred as asserted,
it must within the applicable time limits:
• Correct the billing error and credit the consumer’s account
with any disputed amount and related finance or other
charges, as applicable; and
• Mail or deliver notification of the correction to the
consumer.
If, after conducting a reasonable investigation, a creditor
determines that no billing error occurred or that a different
billing error occurred from that asserted, the creditor must
within the applicable time limits:
• Mail or deliver to the consumer an explanation that sets
forth the reasons for the creditor’s belief that the billing
error alleged by the consumer is incorrect in whole or in
part;
• Furnish copies of documentary evidence of the consumer’s
indebtedness, if the consumer so requests; and
• If a different billing error occurred, correct the billing error
and credit the consumer’s account with any disputed
amount and related finance or other charges, as applicable.
If a creditor determines that a consumer owes all or part of the
disputed amount and related finance or other charges, determine
whether the credit complied with the requirements provided in
(12 CFR 1026.13(g)).
A creditor that has fully complied with the requirements of 12
CFR 1026.13 has no further responsibilities under this section
(other than as provided in 12 CFR 1026.13(g)(4)) if a consumer
reasserts substantially the same billing error.
NOTE: Special credit card provisions provide additional
protections for consumers, including provisions relating to
unauthorized use (12 CFR 1026.12).
What are the disclosure requirements surrounding minimum payments for open-end credit transactions? [V-1.1 Truth in Lending Act]
Minimum Payments – 12 CFR 1026.7(b)(12)
For credit card accounts under an open-end credit plan, card
issuers generally must disclose on periodic statements an estimate of the amount of time and the total cost (principal and
interest) involved in paying the balance in full by making only
the minimum payments, an estimate of the monthly payment
amount required to pay off the balance in 36 months and the
total cost (principal and interest) of repaying the balance in 36
months. Card issuers also must disclose a minimum payment
warning and an estimate of the total interest that a consumer
would save if that consumer repaid the balance in 36 months,
instead of making minimum payments.
What are the advertising requirements for open-end credit plans? [V-1.1 Truth in Lending Act]
Advertising for Open-End Plans– 12 CFR 1026.16
The regulation requires that loan product advertisements provide
accurate and balanced information, in a clear and conspicuous
manner, about rates, monthly payments, and other loan features.
The advertising rules ban several deceptive or misleading
advertising practices, including representations that a rate or
payment is “fixed” when in fact it can change.
If an advertisement for credit states specific credit terms, it must
state only those terms that actually are or will be arranged or
offered by the creditor. If any finance charges or other charges
are set forth in an advertisement, the advertisement must also
clearly and conspicuously state the following:
• Any minimum, fixed, transaction, activity or similar charge
that is a finance charge under 12 CFR 1026.4 that could be
imposed;
• Any periodic rate that may be applied expressed as an APR
as determined under (12 CFR 1026.14(b)). If the plan
provides for a variable periodic rate, that fact must be
disclosed; and
• Any membership or participation fee that could be
imposed.
If any finance charges or other charge or payment terms are set
forth, affirmatively or negatively, in an advertisement for a
home-equity plan subject to the requirements of 12 CFR
1026.40, the advertisement also must clearly and conspicuously
set forth the following:
• Any loan fee that is a percentage of the credit limit under
the plan and an estimate of any other fees imposed for
opening the plan, stated as a single dollar amount or a
reasonable range;
• Any periodic rate used to compute the finance charge,
expressed as an APR as determined under (12 CFR
1026.14(b)); and
• The maximum APR that may be imposed in a variable-rate
plan.
Regulation Z’s open-end home-equity plan advertising rules
include a clear and conspicuous standard for home-equity plan
advertisements, consistent with the approach taken in the advertising rules for consumer leases under Regulation M.
Commentary provisions clarify how the clear and conspicuous
standard applies to advertisements of home-equity plans with
promotional rates or payments, and to Internet, television, and
oral advertisements of home-equity plans. The regulation allows
alternative disclosures for television and radio advertisements
for home-equity plans. The regulation also requires that
advertisements adequately disclose not only promotional plan
terms, but also the rates or payments that will apply over the
term of the plan.
Regulation Z also contains provisions implementing the
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, which requires disclosure of the tax implications of
certain home-equity plans.
What is Subpart C of the Regulation? [V-1.1 Truth in Lending Act]
Subpart C – Closed-End Credit
Subpart C relates to closed-end credit. It contains rules on
disclosures 12 CFR 1026.17-.20, treatment of credit balances 12
CFR1026.21, annual percentage rate calculations 12 CFR
1026.22, rescission rights 12 CFR 1026.23, and advertising (12
CFR1026.24).
The TILA-RESPA Integrated Disclosures must be given for
most closed-end transactions secured by real property or a
cooperative unit, other than a reverse mortgage subject to 12
CFR1026.33. The TILA-RESPA Integrated Disclosures do not
apply to HELOCs, reverse mortgages, or mortgages secured by
a mobile home or by a dwelling that is not attached to real
property. Truth in Lending disclosures (TIL disclosures) and the
Consumer Handbook on Adjustable Rate Mortgages (CHARM)
booklet must still be provided for certain closed-end loan
transactions.
General disclosure requirements for closed-end credit: What are the timing requirements for closed-end credit? [V-1.1 Truth in Lending Act]
Disclosures, Generally
Timing
Generally, all disclosures provided to consumers must be made
clearly and conspicuously in writing, in a form that the
consumer may keep ((12 CFR 1026.17(a), 1026.37(o),
1026.38(t)). However, the timing of the disclosures may change
depending on the transaction (12 CFR1026.19(a),
1026.19(e)(1)(iii), 1026.19(f)(1)(ii), 1026.19(g)).
Disclosures in connection with non-mortgage closed-end loans
and specified housing assistance loan programs for low- and
moderate-income consumers must be provided before
consummation of the transaction (12 CFR 1026.3).
For most closed-end transactions secured by real property or a
cooperative unit, other than a reverse mortgage subject to 12
CFR 1026.33 (including construction-only loans, loans secured
by vacant land or by 25 or more acres, and credit extended to
certain trusts for tax or estate planning purposes), disclosures
must be provided in accordance with the timing requirements
outlined in 12 CFR1026.19(e), (f) and (g). Generally, a creditor
is required to mail or deliver the Loan Estimate within three business days of receipt of the consumer’s loan application and
to ensure that the consumer receives the Closing Disclosure no
later than three business days before loan consummation (12
CFR1026.19(e)(iii), 1026.19(f)(1)(ii)). If the loan is a purchase
transaction, the special information booklet must also be
provided within three business days of receipt of the consumer’s
application (12 CFR1026.19(g)). The specifics of these
disclosure timing requirements are further discussed below,
including a discussion about revised disclosures.
Mortgage loans not subject to 12 CFR1026.19(e) and (f) (e.g.,
reverse mortgages, and chattel-dwelling loans) have different
disclosure requirements. For reverse mortgages, disclosures
must be delivered or mailed to the consumer no later than the
third business day after a creditor receives the consumer’s
written application (12 CFR 1026.19(a)). For chattel-dwelling
mortgage loans, disclosures must be provided to the consumer
prior to consummation of the loan (12 CFR 1026.17(b)).
Revised disclosures are also required within three business days
of consummation if certain mortgage loan terms change (12
CFR1026.19(a)(2)). For loans like reverse mortgages, the
consumer will receive the Good Faith Estimate (GFE), HUD-1
Settlement Statement (HUD-1), and Truth in Lending
disclosures as required under the applicable sections of both
TILA and RESPA. Consumers receive TIL disclosures for
chattel-dwelling loans that are not secured by land, but the GFE
and the HUD-1 are not required. Finally, certain variable rate
transactions secured by a dwelling have additional disclosure
obligations with specific timing requirements both prior to and
after consummation (see 12 CFR1026.20(c) and (d) below).
General disclosure requirements for closed-end credit: What is the basis for disclosures for closed-end credit? [V-1.1 Truth in Lending Act]
Generally
Disclosures provided for closed-end transactions must reflect
the credit terms to which the parties will be legally bound as of
the outset of the credit transaction. If information required for
the disclosures is unknown, the creditor may provide the
consumer with an estimate, using the best information
reasonably available. The disclosure must be clearly marked as
an estimate.
Variable and Adjustable Rate
If the terms of the legal obligation allow the financial institution,
after consummation of the transaction, to increase the APR, the
financial institution must furnish the consumer with certain
information on variable rates. Variable rate disclosures are not
applicable to rate increases resulting from delinquency, default,
assumption, acceleration, or transfer of the collateral.
Some of the more important transaction-specific variable rate
disclosure requirements follow.
• Disclosures for variable rate loans must be given for the full
term of the transaction and must be based on the terms in
effect at the time of consummation. If the variable rate transaction includes either a seller buydown that is reflected in a contract or a consumer buydown, the disclosed APR should be a composite rate based
on the lower rate for the buy-down period and the rate that
is the basis for the variable rate feature for the remainder of
the term.
• If the initial rate is not determined by the index or formula
used to make later interest rate adjustments, as in a
discounted variable-rate transaction, the disclosed APR
must reflect a composite rate based on the initial rate for as
long as it is applied and, for the remainder of the term, the
rate that would have been applied using the index or
formula at the time of consummation (i.e., the fully indexed
rate).
o If a loan contains a rate or payment cap that would
prevent the initial rate or payment, at the time of the
adjustment, from changing to the fully indexed rate,
the effect of that rate or payment cap needs to be
reflected in the disclosures.
o The index at consummation need not be used if the
contract provides a delay in the implementation of
changes in an index value (e.g., the contract indicates
that future rate changes are based on the index value in
effect for some specified period, such as 45 days
before the change date). Instead, the financial
institution may use any rate from the date of
consummation back to the beginning of the specified
period (e.g., during the previous 45-day period).
• If the initial interest rate is set according to the index or
formula used for later adjustments but is set at a value as of
a date before consummation, disclosures should be based
on the initial interest rate, even though the index may have
changed by the consummation date.
Define the finance charge for closed-end credit transactions [V-1.1 Truth in Lending Act]
Finance Charge – 12 CFR 1026.18(c)
The total amount of the finance charge must be disclosed for all
loans.
In a transaction secured by real property or a dwelling, the
disclosed finance charge and other disclosures affected by the
disclosed finance charge (including the amount financed and the
annual percentage rate) must be treated as accurate if the amount
disclosed as the finance charge (1) is understated by no more
than $100 or (2) is greater than the amount required to be
disclosed.
Define the amount financed for closed-end credit transactions [V-1.1 Truth in Lending Act]
Amount Financed – 12 CFR 1026.18(b), 1026.18(c),
1026.38(o)(3)
Definition
The amount financed is the net amount of credit extended for the consumer’s use. It should not be assumed that the amount
financed under the regulation is equivalent to the note amount,
proceeds, or principal amount of the loan. The amount financed
normally equals the total of payments less the finance charge.
To calculate the amount financed, all amounts and charges
connected with the transaction, either paid separately or
included in the note amount, must first be identified. Any
prepaid, precomputed, or other finance charge must then be
determined.
The amount financed must not include any finance charges. If
finance charges have been included in the obligation (either
prepaid or precomputed), they must be subtracted from the face
amount of the obligation when determining the amount
financed. The resulting value must be reduced further by an
amount equal to any prepaid finance charge paid separately. The
final resulting value is the amount financed.
When calculating the amount financed, finance charges
(whether in the note amount or paid separately) should not be
subtracted more than once from the total amount of an
obligation. Charges not in the note amount and not included in
the finance charge (e.g., an appraisal fee paid separately in cash
on a real estate loan) are not required to be disclosed under
Regulation Z and must not be included in the amount financed.
An itemization of the amount financed is required (except as
provided in 12 CFR 1026.18(c)(2) or (c)(3)), unless the loan is
subject to 12 CFR 1026.19(e) and (f) (i.e., most closed-end
mortgage loans).
How do you calculate the amount financed? [V-1.1 Truth in Lending Act]
Calculating the Amount Financed
A consumer signs a note secured by real property in the amount
of $5,435. The note amount includes $5,000 in proceeds
disbursed to the consumer, $400 in precomputed interest, $25
paid to a credit reporting agency for a credit report, and a $10
service charge. Additionally, the consumer pays a $50 loan fee
separately in cash at consummation. The consumer has no other
debt with the financial institution. The amount financed is
$4,975.
The amount financed may be calculated by first subtracting all
finance charges included in the note amount ($5,435 - $400 -
$10 = $5,025). The $25 credit report fee is not a finance charge
because the loan is secured by real property. The $5,025 is
further reduced by the amount of prepaid finance charges paid
separately, for an amount financed of $5,025 - $50 = $4,975.
The answer is the same whether finance charges included in the
obligation are considered prepaid or precomputed finance
charges.
The financial institution may treat the $10 service charge as an
addition to the loan amount and not as a prepaid finance charge. If
it does, the loan principal would be $5,000. The $5,000 loan
principal does not include either the $400 or the $10 precomputed
finance charge in the note. The loan principal is increased by other amounts that are financed that are not part of the finance charge
(the $25 credit report fee) and reduced by any prepaid finance
charges (the $50 loan fee, not the $10 service charge) to arrive at
the amount financed of $5,000 + $25 - $50 = $4,975.
Conversely, the financial institution may treat the $10 service
charge as a prepaid finance charge. If it does, the loan principal
would be $5,010. The $5,010 loan principal does not include the
$400 precomputed finance charge. The loan principal is
increased by other amounts that are financed that are not part of
the finance charge (the $25 credit report fee) and reduced by any
prepaid finance charges (the $50 loan fee and the $10 service
charge withheld from loan proceeds) to arrive at the same
amount financed of $5,010 + $25 - $50- $10 = $4,975.
What does the payment schedule include and exclude? [V-1.1 Truth in Lending Act]
Payment Schedule – 12 CFR 1026.18(g)
For transactions that are not subject to 12 CFR 1026.19(e) and
(f), the disclosed payment schedule must reflect all components
of the finance charge. It includes all payments scheduled to
repay loan principal, interest on the loan, and any other finance
charge payable by the consumer after consummation of the
transaction.
However, any finance charge paid separately before or at
consummation (e.g., odd days’ interest) is not part of the
payment schedule. It is a prepaid finance charge that must be
reflected as a reduction in the value of the amount financed.
At the creditor’s option, the payment schedule may include amounts
beyond the amount financed and finance charge (e.g., certain
insurance premiums or real estate escrow amounts such as taxes
added to payments). However, when calculating the APR, the
creditor must disregard such amounts.
If the obligation is a renewable balloon payment instrument that
unconditionally obligates the financial institution to renew the
short-term loan at the consumer’s option or to renew the loan
subject to conditions within the consumer’s control, the payment
schedule must be disclosed using the longer term of the renewal
period or periods. The long-term loan must be disclosed with a
variable rate feature.
If there are no renewal conditions or if the financial institution
guarantees to renew the obligation in a refinancing, the payment
schedule must be disclosed using the shorter balloon payment
term. The short-term loan must be disclosed as a fixed rate loan,
unless it contains a variable rate feature during the initial loan
term.
How is the APR calculated for closed-end credit? [V-1.1 Truth in Lending Act]
Annual Percentage Rate (Closed-End Credit) – 12 CFR
1026.22
Calculating the Annual Percentage Rate – 12 CFR 1026.22
The APR must be determined under one of the following:
• The actuarial method, which is defined by Regulation Z and
explained in Appendix J to the regulation. The U.S. Rule, which is permitted by Regulation Z and
briefly explained in Appendix J to the regulation. The U.S.
Rule is an accrual method that seems to have first surfaced
officially in an early 19th-century United States Supreme
Court case, Story v. Livingston, 38 U.S. 359 (1839).
Whichever method is used by the financial institution, the rate
calculated will be accurate if it is able to “amortize” the amount
financed while it generates the finance charge under the accrual
method selected. Financial institutions also may rely on minor
irregularities and accuracy tolerances in the regulation, both of
which effectively permit somewhat imprecise, but still legal,
APRs to be disclosed.
Accuracy Tolerances
The disclosed APR on a closed-end transaction is accurate for:
• Regular transactions (which include any single advance
transaction with equal payments and equal payment
periods, or an irregular first payment period and/or a first or
last irregular payment), if the disclosed APR is within oneeighth of 1 percentage point of the APR calculated under
Regulation Z (12 CFR 1026.22(a)(2)).
• Irregular transactions (which include multiple advance
transactions and other transactions not considered regular),
if the disclosed APRis within one-quarter of 1 percentage
point of the APR calculated under Regulation Z (12 CFR
1026.22(a)(3)).
• Mortgage transactions, if the disclosed APR is within oneeighth of 1 percentage point for regular transactions or onequarter of 1 percentage point for irregular transactions or if:
1) The rate results from the disclosed finance charge, and:
a) The disclosed finance charge is considered accurate
under 12 CFR1026.18(d)(1) or 1026.38(o)(2), as
applicable; or
b) The disclosed finance charge is calculated incorrectly
but is considered accurate for purposes of rescission,
under 12 CFR1026.23(g) or (h), whichever applies
(12 CFR1026.22(a)(4)).
2) The disclosed finance charge is calculated incorrectly but is
considered accurate under 12 CFR 1026.18(d)(1) or
1026.38(o)(2), as applicable, or 12 CFR 1026.23 (g) or (h),
and either:
a) The finance charge is understated, and the disclosed
APR is also understated but is closer to the actual APR
than the APR that would be considered accurate under
12 CFR1026.22(a)(4); or
b) The disclosed finance charge is overstated and the
disclosed APR is also overstated but is closer to the actual APR than the APR that would be considered
accurate under (12 CFR 1026.22(a)(4)).
For example, in an irregular transaction subject to a
tolerance of one-fourth of 1 percentage point, if the actual
APR is 9.00 percent and a $75 omission from the finance
charge corresponds to a rate of 8.50 percent that is
considered accurate under 12 CFR 1026.22(a)(4), a
disclosed APR of 8.65 percent is considered accurate under
(12 CFR1026.22(a)(5)). However, a disclosed APR below
8.50 percent or above 9.25 percent would not be considered
accurate.
What are accuracy tolerances for open-end credit?
Accuracy Tolerances
The disclosed APR on a closed-end transaction is accurate for:
• Regular transactions (which include any single advance
transaction with equal payments and equal payment
periods, or an irregular first payment period and/or a first or
last irregular payment), if the disclosed APR is within oneeighth of 1 percentage point of the APR calculated under
Regulation Z (12 CFR 1026.22(a)(2)).
• Irregular transactions (which include multiple advance
transactions and other transactions not considered regular),
if the disclosed APRis within one-quarter of 1 percentage
point of the APR calculated under Regulation Z (12 CFR
1026.22(a)(3)).
• Mortgage transactions, if the disclosed APR is within oneeighth of 1 percentage point for regular transactions or onequarter of 1 percentage point for irregular transactions or if:
1) The rate results from the disclosed finance charge, and:
a) The disclosed finance charge is considered accurate
under 12 CFR1026.18(d)(1) or 1026.38(o)(2), as
applicable; or
b) The disclosed finance charge is calculated incorrectly
but is considered accurate for purposes of rescission,
under 12 CFR1026.23(g) or (h), whichever applies
(12 CFR1026.22(a)(4)).
2) The disclosed finance charge is calculated incorrectly but is
considered accurate under 12 CFR 1026.18(d)(1) or
1026.38(o)(2), as applicable, or 12 CFR 1026.23 (g) or (h),
and either:
a) The finance charge is understated, and the disclosed
APR is also understated but is closer to the actual APR
than the APR that would be considered accurate under
12 CFR1026.22(a)(4); or
b) The disclosed finance charge is overstated and the
disclosed APR is also overstated but is closer to the actual APR than the APR that would be considered
accurate under (12 CFR 1026.22(a)(4)).
For example, in an irregular transaction subject to a
tolerance of one-fourth of 1 percentage point, if the actual
APR is 9.00 percent and a $75 omission from the finance
charge corresponds to a rate of 8.50 percent that is
considered accurate under 12 CFR 1026.22(a)(4), a
disclosed APR of 8.65 percent is considered accurate under
(12 CFR1026.22(a)(5)). However, a disclosed APR below
8.50 percent or above 9.25 percent would not be considered
accurate.
Construction Only and Construction permanent loans [V-1.1 Truth in Lending Act]
Construction-Only and Construction-Permanent Loans – 12
CFR 1026.17(c)(6), 12 CFR 1026.37-.38, and Appendix D
Due to the structure of construction-permanent and certain other
multiple advance loans, Regulation Z includes certain optional
provisions to help a creditor estimate the components of the
APR and finance charge computations for these loans. In many
instances, the amount and dates of advances are not predictable
with certainty since they depend on the progress of the work.
Regulation Z provides that the APR and finance charge for such
loans may be estimated for disclosure based on the best
information reasonably available at the time of disclosure (12
CFR 1026.17(c)(2)(i)). Further, a creditor has optionality as to
whether it discloses the advances separate or together as one
transaction in certain circumstances. First, a series of advances
under an agreement to extend credit up to a certain amount may
be considered as one transaction or disclosed as separate
transactions (12 CFR 1026.17(c)(6)(i)). Second, when a
multiple-advance loan to finance the construction of a dwelling
may be permanently financed by the same creditor, the
construction phase and the permanent phase may be treated as
either one transaction or more than one transaction (12 CFR
1026.17(c)(6)(ii)). Because construction loans or constructionpermanent loans may be disclosed as one transaction, or as
multiple transactions, computations can be impacted by this
decision.
If the actual schedule of advances is not known, the methods set
forth in Appendix D may be used to estimate the interest portion
of the finance charge and the annual percentage rate and to
make disclosures (12 CFR Part 1026 App. D).
At its option, the financial institution may rely on the
representations of other parties to acquire necessary information
(for example, it might look to the consumer for the dates of
advances). In addition, if either the amounts or dates of
advances are unknown (even if some of them are known), the
financial institution may, at its option, use Appendix D to the
regulation (and its associated commentary) to make calculations
and disclosures. The finance charge and payment schedule
obtained through Appendix D may be used with volume one of
the CFPB’s APR tables or with any other appropriate
computation tool to determine the APR. If the financial
institution elects not to use Appendix D, or if Appendix D
cannot be applied to a loan (e.g., Appendix D does not apply to a combined construction-permanent loan if the payments for the
permanent loan begin during the construction period), the
financial institution must make its estimates under 12 CFR
1026.17(c)(2) and calculate the APR using multiple advance
formulas.
How do interest reserves work on construction to permanent loans [V-1.1 Truth in Lending Act]
Interest Reserves
In a multiple advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan amount for that interest payment purpose.
If the creditor requires interest reserves for construction loans, Appendix D provides further guidance. Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D (Comment App. D-5).
If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under Appendix D (Comment App. D-5.i).
If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures. To reflect the effects of such compounding, the creditor should use the formula in Appendix D (Comment App. D-5.ii).
Is an interest reserve a finance charge? [V-1.1 Truth in Lending Act]
No - Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D
What must be disclosed if the creditor requires the establishment of an interest reserve? [V-1.1 Truth in Lending Act]
If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures.
What must be disclosed in the construction phase of a construction-permanent loan? [V-1.1 Truth in Lending Act]
In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges and points and fees that would not be imposed but for the construction financing. Those amounts must be in disclosures for the construction phase and may not be included in the disclosures for the permanent phase.
What must be disclosed if the bank charges separate fees for the construction vs. the permanent phases of the loan? [V-1.1 Truth in Lending Act]
If a creditor charges separate amounts for the finance charges and points and fees for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges and points and fees must be allocated to permanent financing.
How should fees and charges that are not used to compute the finance charge or are not considered points and fees be disclosed? [V-1.1 Truth in Lending Act]
Fees and charges that are not used to compute the finance charge or points and fees may be allocated between the transactions in any manner the creditor chooses (Comment 17(c)(6)-5).
What are the disclosure requirements for 360-day and 365-day years? [V-1.1 Truth in Lending Act]
Confusion often arises over whether to use the 360-day or 365-day year in computing interest, particularly when the finance charge is computed by applying a daily rate to an unpaid balance. Many single payment loans or loans payable on demand are in this category. There are also loans in this category that call for periodic installment payments. Regulation Z does not require the use of one method of interest computation in preference to another (although state law may). It does, however, permit financial institutions to disregard the fact that months have different numbers of days when calculating and making disclosures. This means financial institutions may base their disclosures on calculation tools that assume all months have an equal number of days, even if their practice is to take account of the variations in months to collect interest.
For example, a financial institution may calculate disclosures using a financial calculator based on a 360-day year with 30-day months, when, in fact, it collects interest by applying a factor of 1/365 of the annual interest rate to actual days.
If financial institutions may disregard the fact that months have different numbers of days when calculating and making disclosures (and base their disclosures on calculation tools that assume all months have an equal number of days, despite their calculations in practice, can violations occur? [V-1.1 Truth in Lending Act]
Yes -Disclosure violations may occur, however, when a financial institution applies a daily interest factor based on a 360-day year to the actual number of days between payments. In those situations, the financial institution must disclose the higher values of the finance charge, the APR, and the payment schedule resulting from this practice.
For example, a 12 percent simple interest rate divided by 360 days results in a daily rate of .033333 percent. If no charges are imposed except interest, and the amount financed is the same as the loan amount, applying the daily rate on a daily basis for a 365-day year on a $10,000 one year, single payment, unsecured loan results in an APR of 12.17 percent (.033333 percent x 365 = 12.17 percent), and a finance charge of $1,216.67. There would be a violation if the APR were disclosed as 12 percent or if the finance charge were disclosed as $1,200 (12 percent x $10,000). *Violations are subject to tolerances rules, however: 1/8 of 1 percent for regular loans and 1/4 of 1 percent for irregular loans
However, if there are no other charges except interest, the application of a 360-day year daily rate over 365 days on a regular loan would not result in an APR in excess of the one eighth of one percentage point APR tolerance unless the nominal interest rate is greater than 9 percent. For irregular loans, with one-quarter of 1 percentage point APR tolerance, the nominal interest rate would have to be greater than 18 percent to exceed the tolerance.
NOTE: Notwithstanding the APR tolerance, a creditor’s disclosures must reflect the terms of the legal obligation between the parties (12 CFR 1026.17(c)(1)), and the APR must be determined in accordance with either the actuarial method or the U.S. Rule method (12 CFR 1026.22(a)(1)). A creditor may not ignore, for disclosure purposes, the effects of applying a 360-day year daily rate over 365 days. (Comment 17(c)(3)-1.ii).
What is a required deposit? [V-1.1 Truth in Lending Act]
Required Deposit – 12 CFR 1026.18(r)
A required deposit, with certain exceptions, is one that the financial institution requires the consumer to maintain as a condition of the specific credit transaction. It can include a compensating balance or a deposit balance that secures the loan. The effect of a required deposit is not reflected in the APR. Also, a required deposit is not a finance charge since it is eventually released to the consumer. A deposit that earns at least 5 percent per year need not be considered a required deposit.
What transactions are TILA-RESPA integrated disclosures generally applicable to? [V-1.1 Truth in Lending Act]
Transactions with TILA-RESPA Integrated Disclosures – Generally
On December 31, 2013, the CFPB published a final rule implementing Sections 1098(2) and 1100A(5) of the Dodd-Frank Act, which directed the CFPB to publish a single, integrated disclosure for mortgage loan transactions, which includes mortgage loan disclosure requirements under TILA and sections 4 and 5 of RESPA. The amendments in the final rule, referred to as the TILA-RESPA Integrated Disclosure Rule or TRID, are applicable to covered closed-end mortgage loans for which a creditor or mortgage broker received an application on or after October 3, 2015. As a result, Regulation Z now houses the integrated forms, timing, and related disclosure requirements for most closed-end consumer mortgage loans.
The integrated disclosures are not used to disclose information about reverse mortgages, HELOCs, chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages use, as applicable, the GFE, HUD-1, and TIL disclosures.
Most closed-end mortgage loans are exempt from the requirement to provide the GFE, HUD-1, and servicing disclosure requirements of (12 CFR 1024.6, 1024.7, 1024.8, 1024.10, and 1024.33(a)). Instead, these loans are subject to disclosure, timing, and other requirements under TILA and Regulation Z. Specifically, the provisions mentioned in the first sentence of this paragraph do not apply to the following federally related mortgage loans:
• Loans subject to the TILA-RESPA Integrated Disclosure requirements for certain closed-end consumer credit transactions secured by real property or a cooperative unit set forth in (12 CFR 1026.19(e), (f), and (g)); or
• Certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention (12 CFR 1026.3(h)).
NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages).
What federally related mortgage loans don’t [the GFE, HUD-1, and servicing disclosure requirements] apply to?
• Loans subject to the TILA-RESPA Integrated Disclosure requirements for certain closed-end consumer credit transactions secured by real property or a cooperative unit set forth in (12 CFR 1026.19(e), (f), and (g)); or
• Certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention (12 CFR 1026.3(h)).
NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages).
For what loans are TRID disclosures given (do TRID disclosures apply to? [V-1.1 Truth in Lending Act]
Use TILA-RESPA Integrated Disclosures (See Regulation Z):
• Most closed-end mortgage loans, including:
o Construction-only loans
o Loans secured by vacant land or by 25 or more acres
For what loans do TIL and RESPA disclosures continue to be given for (continue to be used for/apply to)? [V-1.1 Truth in Lending Act]
Continue to use TIL25 and RESPA disclosures (as applicable):
• HELOCs (subject to disclosure requirements under 12 CFR 1026.40) 26
• Reverse mortgages (subject to existing TIL and GFE disclosures)
• Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA)
NOTE: In both cases, there is a partial exemption from these disclosures under 12 CFR 1026.3(h) for loans
secured by subordinate liens and associated with certain housing assistance loan programs for low- and moderate-
income persons. What is the exception? Are they subject to TRID as described above, or not?
For what transactions must the LE be given? [V-1.1 Truth in Lending Act]
Creditors making closed-end consumer credit transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33, and subject to the provisions of 12 CFR 1026.19(e) and (f), must provide consumers with a Loan Estimate under 12 CFR 1026.37, Closing Disclosure under 12 CFR 1026.38, the special information booklet as required, under 12 CFR 1026.19(g), and, as applicable for ARM transactions, the CHARM booklet. The special information booklet is described in further detail below.
Closed-end consumer credit secured by real property (excludes chattel not attached to real), and excluding reverse mortgages, must provide:
-Loan estimate (LE)
-Closing Disclosure (CD)
-Special information booklet as required
-The Charm Booklet (ARM transactions), as applicable
What the timing requirements for the Loan Estimate? [V-1.1 Truth in Lending Act]
Early disclosures (Loan Estimate) – 12 CFR 1026.19(e)
12 CFR 1026.19(e) requires the creditor to provide good faith estimates of the Loan Estimate disclosures (see 12 CFR 1026.37 for information on the content, form, and format of the disclosure). The creditor generally must deliver or place in the mail the Loan Estimate no later than three business days after receiving the consumer’s application, and no later than seven business days before consummation (12 CFR 1026.19(e)(1)(i) and (iii)).
Generally, the creditor is responsible for ensuring that the Loan Estimate and its delivery meet the rule’s content, delivery, and timing requirements. (See 12 CFR 1026.19(e) and 1026.37.) If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf. If it does so, the mortgage broker must comply with all requirements of 12 CFR 1026.19(e), as well as the three-year record retention requirements in (12 CFR 1026.25(c)) (12 CFR 1026.19(e)(1)(ii)). The creditor is expected to maintain communication with mortgage brokers to ensure that the Loan Estimate and its delivery satisfy the rule’s requirements, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(e)(1)(ii); Comment 19(e)(1)(ii) -1 and -2).
Timing – Loan Estimate – early disclosures
The Loan Estimate must be delivered or placed in the mail to the consumer no later than the third business day after the creditor or mortgage broker receives the consumer’s application for a mortgage loan. (12 CFR 1026.19(e)(1)(iii)(A)). If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail (this applies to electronic delivery as well) (12 CFR 1026.19(e)(1)(iv); Comment 19(e)(1)(iv)-2). Other than for transactions secured by a consumer’s interest in a timeshare plan, the Loan Estimate must be delivered or placed in the mail no later than the seventh business day before consummation (12 CFR 1026.19(e)(1)(iii)(B) and (C)).
What is considered an application? [V-1.1 Truth in Lending Act]
For purposes of the TILA-RESPA Integrated Disclosures rule, an “application” is defined in 12 CFR 1026.2(a)(3)(ii). For transactions subject to 12 CFR 1026.19(e), (f), or (g), an application consists of the submission of the following six pieces of information:
1. Name
2. Income
3. SSN
4. Property Address
5. Property value estimate
6. Mortgage loan amount sought
A - Address ( property)
L - Loan amt
I - Income
E - Estimate of the property value
N - Name
S - SSN
This definition of application is similar to the definition under Regulation X (12 CFR 1024.2(b)), except that it does not include the seventh “catch-all” element of that definition, that is, “any other information deemed necessary by the loan originator.”
An application may be submitted in written or electronic format, and includes a written record of an oral application (Comment 2(a)(3)-1).
This definition of application does not prevent a creditor from collecting whatever additional information it deems necessary in connection with the request for the extension of credit. However, once a consumer has submitted27 the six pieces of information discussed above to the creditor for purposes of obtaining an extension of credit, the creditor has an application for purposes of the requirement for delivery of the Loan Estimate to the consumer and must abide by the three business day timing requirement (Comment 2(a)(3)-1).
If the creditor determines, within the three business day period, that the consumer’s application will not or cannot be approved on the terms requested by the consumer, or if the consumer withdraws the application within that period, the creditor does not have to provide the Loan Estimate. However, if the creditor does not provide the Loan Estimate, it will not have complied with the Loan Estimate requirements if it later consummates the transaction on the terms originally applied for by the consumer. If a consumer amends an application and a creditor determines the amended application may proceed, then the creditor is required to comply with the Loan Estimate requirements, including delivering or mailing a Loan Estimate within three business days of receiving the amended or resubmitted application (Comment 19(e)(1)(iii)-3).
A “business day” for purposes of providing the Loan Estimate is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions (Comment 19(e)(1)(iii)-1, 12 CFR 1026.2(a)(6)).
NOTE: The term “business day” is defined differently for other purposes, including counting days to ensure the consumer receives the Closing Disclosure on time (12 CFR 1026.2(a)(6), 1026.19(e)(1)(iii)(B) and (e)(1)(iv), and 1026.19(f)(1)(ii)(A) and (f)(1)(iii)). For these other purposes, business day means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a) (12 CFR 1026.2(a)(6); Comment 2(a)(6)-2; Comments 19(e)(1)(iii)-1 and 19(f)(1)(ii)-1).
Creditors are required to act in good faith and exercise due diligence in obtaining information necessary to complete the Loan Estimate (Comment 17(c)(2)(i)-1). Normally, creditors may rely on the representations of other parties in obtaining information (12 CFR 1026.17(c)(2)(i)).
NOTE: There may be some information that is not reasonably available to the creditor at the time the Loan Estimate is made. In these instances, except as otherwise provided in 12 CFR 1026.19, 1026.37, and 1026.38, the creditor may use estimates even though it knows that more precise information will be available by the point of consummation. However, new disclosures may be required under 12 CFR 1026.17(f) or 1026.19 (Comment 17(c)(2)(i)-1). When estimated figures are used, they must be designated as such on the Loan Estimate (Comment 17(c)(2)(i)-2).
The consumer may modify or waive the seven business day waiting period after receiving the Loan Estimate if the consumer determines that the mortgage loan is needed to meet a bona fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period (12 CFR 1026.19(e)(1)(v)). Whether a consumer has a bona fide personal financial emergency is determined by the facts surrounding the consumer’s individual situation. One example is the imminent sale of the consumer’s home at foreclosure, where the foreclosure sale will proceed unless loan proceeds are made available to the consumer during the waiting period (12 CFR 1026.19(e)(1)(v); Comment 19(e)(1)(v)-1). To modify or waive the waiting period, the consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and is signed by all consumers primarily liable on the legal obligation (12 CFR 1026.19(e)(1)(v)). The creditor may not provide the consumer with a pre-printed waiver form (12 CFR 1026.19(e)(1)(v)).
What are the good faith requirements and tolerances (loan estimate)? [V-1.1 Truth in Lending Act]
Good faith requirement and tolerances
Creditors are responsible for ensuring that the figures stated in the Loan Estimate are made in good faith and consistent with the best information reasonably available to the creditor at the time they are disclosed (12 CFR 1026.19(e)(3); Comment 19(e)(3)(iii)-1 through -3). Whether or not a Loan Estimate was made in good faith is determined by calculating the difference between the estimated charges originally provided in the Loan Estimate and the actual charges paid by or imposed on the consumer in the Closing Disclosure (12 CFR 1026.19(e)(3)(i) and (ii)). Generally, if the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate, it is not in good faith (12 CFR 1026.19(e)(3)(i)). As as the creditor’s estimate is consistent with the best information reasonably available, and the creditor charges the consumer less than the amount disclosed on the Loan Estimate, the Loan Estimate is considered to be in good faith (12 CFR 1026.19(e)(3)(i)).
27 When a consumer uses an online application system that allows the information to be saved, the application must be submitted before the Loan Estimate timing requirements are triggered.
The general rule is that the estimated closing cost is in good faith if the charge does not exceed the amount disclosed in the Loan Estimate. Unless there is an exception, depending on the specific circumstances, the creditor may not charge more than the amounts disclosed on the Loan Estimate (12 CFR 1026.19(e)(3)(i)). For certain charges, there are different tolerances when charges exceed the amounts disclosed.
Zero tolerance. For charges other than those that are specifically excepted, as noted below, creditors may not charge consumers more than the amount disclosed on the Loan Estimate, other than for changed circumstances that permit a revised Loan Estimate (12 CFR 1026.19(e)(3)(i) and (iv). The zero tolerance charges generally include but are not limited to the following:
• Fees for required services paid to the creditor, mortgage broker, or an affiliate of either (12 CFR 1026.19(e)(3)(i), Comment 19(e)(3)(i)-1(i)-(iii));
• Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third-party service provider for a settlement service or transfer taxes (12 CFR 1026.19(e)(3)(i)), Comment 19(e)(3)(i)-1(iv)-(v)).
10 percent cumulative tolerance. Charges for third-party services and recording fees paid by or imposed on the consumer are grouped together and are subject to a 10 percent cumulative tolerance. This means the creditor may charge the consumer more than the amount disclosed on the Loan Estimate for any of these charges so long as the total sum of the charges does not exceed the sum of all such charges disclosed on the Loan Estimate by more than 10 percent (12 CFR 1026.19(e)(3)(ii)(A)). These charges are:
• Recording fees (Comments 19(e)(3)(ii)-1.ii and -4);
• Charges for required third-party services if:
o The charge is not paid to the creditor or the creditor’s affiliate (12 CFR 1026.19(e)(3)(ii)(B)); and
o The consumer is permitted by the creditor to shop for the third-party service (12 CFR 1026.19(e)(3)(ii)(C); 12 CFR 1026.19(e)(1)(vi); Comment 19(e)(1)(vi)-1 through 7)). NOTE: If a creditor has failed to issue the written list of providers or failed to disclose a specific settlement service on the written list, the creditor may still be determined, based on all the relevant facts and circumstances, to have permitted a consumer to shop for purposes of determining good faith (Comment 19(e)(3)(iii)-2).
Variances permitted without tolerance limits. Creditors may charge consumers more than the amount disclosed on the Loan Estimate without any tolerance limitation for certain costs or terms, but only if the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. These charges may be paid to the creditor or the creditor’s affiliates as long as the charges are bona fide (12 CFR 1026.19(e)(3)(iii)). These charges are:
• Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve or similar account (12 CFR 1026.19(e)(3)(iii)(A)-(C)).
• Charges paid to third-party service providers for services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor’s written list of service providers (12 CFR 1026.19(e)(3)(iii)(D); Comment 19(e)(3)(iii)-2).
• Property taxes and other charges paid to third-party service providers for services not required by the creditor (12 CFR 1026.19(e)(3)(iii)(E)).
List of services for which a consumer may shop. In addition to the Loan Estimate, if the consumer is permitted to shop for a settlement service, the creditor, no later than three business days after receiving the application, must provide the consumer with a written list of settlement services for which the consumer can shop. This list must:
• Identify at least one available settlement service provider for each service; and
• State that the consumer may choose a different provider of that service (12 CFR 1026.19 (e)(1)(vi)(C)).28
NOTE: The use of Model Form H-27 in Appendix H is not required. However, creditors who use that form properly are deemed to be in compliance with 12 CFR 1026.19(e)(1)(vi)(C) (Comment 19(e)(1)(vi)-3).
Regardless of whether a creditor provides a revised written list of providers, determining whether the charges for required services were disclosed in good faith will depend on whether the creditor permitted the consumer to shop for those services, and is based on all relevant facts and circumstances (Comments 19(e)(1)(vi)-1 and 19(e)(3)(ii)-6).
Refunds within 60 days of consummation. If the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)).
• For charges subject to zero tolerance, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer (12 CFR 1026.19(e)(3)(i)).
• For charges subject to a 10 percent cumulative tolerance, to the extent the total sum of the charges exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, the difference must be refunded to the consumer (12 CFR 1026.19(e)(3)(ii)).
28 The Preamble to the 2017 Amendments explained that creditors may issue a revised written list of providers when a settlement service is added as a result of a reason provided for under 12 CFR 1026.19(e)(3)((iv). (See Preamble, 82 FR 37,677 (Aug. 11, 2017))
When must a creditor use a revised loan estimate? [V-1.1 Truth in Lending Act]
Creditors may provide a revised LE for informational purposes (or to reset the LE)
Loan Estimate - Revisions and Corrections
Creditors are generally bound by the original Loan Estimate and must determine the estimate’s good faith by calculating the difference between the estimated charges originally provided and the actual charges paid by the consumer. Creditors may provide a revised Loan Estimate for informational purposes. Regardless of whether a creditor provides a revised Loan Estimate to reset tolerances or for informational purposes only, any disclosures on the revised Loan Estimate disclosure must be based on the best information reasonably available to the creditor at the time the revised disclosures are provided (Comment 19(e)(3)(iv)-1-2, 4-5).
What do creditors compare the LE to? [V-1.1 Truth in Lending Act]
Creditors must determine the LE’s good faith by calculating the difference between the estimated charges originally provided and the actual charges paid by the consumer.
For purposes of determining whether the estimates are in good faith, the creditor may use a revised estimate of a charge instead of the amount originally disclosed (in certain circumstances)
Creditors may provided a revised LE (as described above) for informational purposes or to reset tolerances
To determine if the LE was in good faith, in what circumstances may the creditor compare the CD to a revised LE? [V-1.1 Truth in Lending Act]
For purposes of determining whether the estimates are in good faith, the creditor may use a revised estimate of a charge instead of the amount originally disclosed if the revision is due to one of the specific circumstances set out in 12 CFR 1026.19(e)(3)(iv)(A) through (F). Specific circumstances” (A)” and “(B)” relate to “changed circumstances,” as described below:
What are specific circumstances A and B (as outlined in 12 CFR 1026.19(e)(3)(iv)(A)-F? [V-1.1 Truth in Lending Act]
A and B related to changed circumstances.
(A): Changed circumstances – increased settlement charges. Changed circumstances that occur after the Loan Estimate is provided to the consumer that cause estimated settlement charges to increase more than is permitted under the TILA-RESPA Integrated Disclosure rule (12 CFR 1026.19(e)(3)(iv)(A)).
• A creditor may provide and use a revised Loan Estimate redisclosing a settlement charge and compare that revised estimate to the amount imposed on the consumer for purposes of determining good faith if changed circumstances cause the estimated charge to increase or, in the case of charges subject to the 10 percent cumulative tolerance under 12 CFR 1026.19(e)(3)(ii), cause the sum of those charges to increase by more than the 10 percent tolerance (12 CFR 1026.19(e)(3)(iv)(A); Comment 19(e)(3)(iv)
(A)-1). Examples of changed circumstances affecting settlement costs include (Comment 19(e)(3)(iv)(A)-2):
o A natural disaster that damages the property or otherwise results in additional closing costs;
o A creditor’s estimate of title insurance is no longer valid because the title insurer goes out of business; or
o New information not relied on when the Loan Estimate was provided is discovered, such as a neighbor of the seller filing a claim contesting the property boundary.
(B): Changed circumstances – consumer eligibility. Changed circumstances that occur after the Loan Estimate is provided to the consumer that affect the consumer’s eligibility for the terms for which the consumer applied or the value of the security for the loan (12 CFR 1026.19(e)(3)(iv)(B)).
For both (A) Changed circumstances – increased settlement charges, and (B) Changed circumstances – consumer eligibility:
• A creditor also may provide and use a revised Loan Estimate if a changed circumstance affected the consumer’s creditworthiness or the value of the security for the loan and resulted in the consumer being ineligible for an estimated loan term previously disclosed (12 CFR 1026.19(e)(3)(iv)(B) and Comment 19(e)(3)(iv)(B)-1). This may occur when a changed circumstance causes a change in the consumer’s eligibility for specific loan terms disclosed on the Loan Estimate, which in turn results in increased cost for a settlement service beyond the applicable tolerance threshold (Comment 19(e)(3)(iv)(A)-2). For example:
• The creditor relied on the consumer’s representation to the creditor of a $90,000 annual income but underwriting determines that the consumer’s annual income is only $80,000.
• There are two co-applicants applying for a mortgage loan and the creditor relied on a combined income when providing the Loan Estimate, but one applicant subsequently becomes unemployed.
Note on Changed Circumstances: A changed circumstance permitting a revised Loan Estimate under 12 CFR 1026.19(e)(3)(iv)(A) and (B) is:
• An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction (12 CFR 1026.19(e)(3)(iv)(A)(1));
• Information specific to the consumer or transaction that the creditor relied upon when providing the original Loan Estimate and that was inaccurate or changed after the disclosures were provided (12 CFR 1026.19(e)(3)(iv)(A)(2)); or
• New information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate.
What is specific circumstance C (as outlined in 12 CFR 1026.19(e)(3)(iv)(A)-F? [V-1.1 Truth in Lending Act]
(C): Revisions requested by the consumer. The consumer requests revisions to the credit terms or the settlement that cause the estimated charge to increase. For example, a consumer grants a power of attorney authorizing a family member to consummate the transaction on the consumer’s behalf, and the creditor provides revised disclosures reflecting the fee to record the power of attorney (Comment 19(e)(3)(iv)(C)-1).
What is specific circumstance D (as outlined in 12 CFR 1026.19(e)(3)(iv)(A)-F? [V-1.1 Truth in Lending Act]
(D): Rate locks after initial Loan Estimate. If the interest rate for the loan was not locked when the Loan Estimate was provided and, upon being locked at some later time, points or lender credits for the mortgage loan change, the creditor is required to provide a revised disclosure no later than three business days after the interest rate is locked and may use the revised disclosure to compare the points and lender credits charged. The revised disclosure must reflect the revised interest rate as well as any revisions to the points disclosed on the Loan Estimate pursuant to 12 CFR 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms that have changed due to the new interest rate (12 CFR 1026.19(e)(3)(iv)(D); Comment 19(e)(3)(iv)(D)-1). If the interest rate is locked on or after the date on which the creditor provides the Closing Disclosure and the Closing Disclosure is inaccurate as a result, then the creditor must provide the consumer a corrected Closing Disclosure, at or before consummation, reflecting any changed terms (Comment 19(e)(3)(iv)(D)-2).
What is specific circumstance E (as outlined in 12 CFR 1026.19(e)(3)(iv)(A)-F? [V-1.1 Truth in Lending Act]
(E): Expiration of Loan Estimate. If the consumer indicates an intent to proceed with the transaction more than 10 business days (or any additional number of days as extended by the creditor orally or in writing) after the Loan Estimate was delivered or placed in the mail to the consumer, a creditor may use a revised Loan Estimate. No justification is required for the change to the original estimate of a charge other than the lapse of 10 business days or the additional number of days as extended by the creditor (12 CFR 1026.19(e)(3)(iv)(E); Comment 19(e)(3)(iv)(E)-1 and -2).
What is specific circumstance F (as outlined in 12 CFR 1026.19(e)(3)(iv)(A)-F? [V-1.1 Truth in Lending Act]
(F): Construction loans. Creditors also may use a revised Loan Estimate where the transaction involves financing of new construction and the creditor reasonably expects that settlement will occur more than 60 calendar days after the original Loan Estimate has been provided if the original Loan Estimate clearly and conspicuously stated that at any time prior to 60 days before consummation, the creditor may issue revised disclosures (12 CFR 1026.19(e)(4)(i).
NOTE: 12 CFR 1026.19(e)(3) does not include technical errors, miscalculations, or underestimations of charges as reasons for which creditors are permitted to provide revised Loan Estimates.
What are the timing requirements for providing revised loan estimate disclosures? [V-1.1 Truth in Lending Act]
Timing – Loan Estimate – revised disclosures
The general rule is that the creditor must deliver or place in the mail the revised Loan Estimate to the consumer no later than three business days after receiving the information sufficient to establish that one of the reasons for the revision has occurred (12 CFR 1026.19(e)(4)(i); Comment 19(e)(4)(i)-1).
The creditor may not provide a revised Loan Estimate on or after the date the creditor provides the consumer with the Closing Disclosure (12 CFR 1026.19(e)(4)(ii); Comment 19(e)(4)(ii)-1.ii). Instead, the creditor may use the initial or a corrected Closing Disclosure to reset tolerances for purposes of determining good faith provided one of the specific circumstances under the rule is present. Any such revised disclosure must be provided to the consumer within three business days of receiving information sufficient to establish a reason for a revised estimate (12 CFR 1026.19(e)(4)(i).
A creditor may not impose any fee on a consumer until the creditor provides what and the consumer indicates what? [V-1.1 Truth in Lending Act]
Creditor provides LE/consumer indicates intent to proceed
Predisclosure activity
A creditor or other person generally may not impose any fee on a consumer in connection with the consumer’s application for a mortgage transaction until the consumer has received the Loan Estimate and has indicated intent to proceed with the transaction (12 CFR 1026.19(e)(2)(i)(A)) This restriction includes limits on imposing:
• Application fees;
• Appraisal fees;
• Underwriting fees; and
• Other fees imposed on the consumer.
What fee may a creditor impose without giving an LE or receiving an intent to proceed [V-1.1 Truth in Lending Act]
Credit report fee
The only exception to this exclusion is for a bona fide and reasonable fee for obtaining a consumer’s credit report (12 CFR 1026.19(e)(2)(i)(B); Comment 19(e)(2)(i)(A)-1 through -5 and Comment 19(e)(2)(i)(B)-1).
What fee may a creditor charge a consumer even without giving an LE or receiving an intent to proceed? [V-1.1 Truth in Lending Act]
Credit report fee
The only exception to this exclusion is for a bona fide and reasonable fee for obtaining a consumer’s credit report (12 CFR 1026.19(e)(2)(i)(B); Comment 19(e)(2)(i)(A)-1 through -5 and Comment 19(e)(2)(i)(B)-1).
How may a creditor document intent to proceed? [V-1.1 Truth in Lending Act]
Documentation of intent to proceed. To satisfy the record retention requirements of 12 CFR 1026.25, the creditor must document the consumer’s communication of the intent to proceed (12 CFR 1026.19(e)(2)(i)(A)). A consumer indicates intent to proceed with the transaction when the consumer communicates, in any manner, that the consumer chooses to proceed after the Loan Estimate has been delivered, unless a particular manner of communication is required by the creditor (12 CFR 1026.19(e)(2)(i)(A)). This may include:
• Oral communication in person immediately upon delivery of the Loan Estimate; or
• Oral communication over the phone, written communication via email, or signing a pre-printed form after receipt of the Loan Estimate.
A consumer’s silence is not indicative of intent to proceed (Comment 19(e)(2)(i)(A)-2).
May a creditor or other person provide the consumer with estimated terms or costs prior giving the LE? [V-1.1 Truth in Lending Act]
Yes - Written information for consumers before the Loan Estimate is provided (12 CFR 1026.19(e)(2)(ii)). A creditor or other person may provide a consumer with estimated terms or costs prior to the consumer receiving the Loan Estimate, if the person clearly and conspicuously states at the top of the front of the first page of the written estimate and in font size no smaller than 12-point font “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing the loan” (12 CFR 1026.19(e)(2)(ii); Comment 19(e)(2)(ii)-1). In addition, the written estimate may not have headings, content, and format substantially similar to the Loan Estimate or the Closing Disclosure (12 CFR 1026.19(e)(2)(ii); Comment 19(e)(2)(ii)-1).
The CFPB has provided a model of the required statement in form H-26 of Appendix H to Regulation Z.
What is the CD and for what transactions do consumers receive it [V-1.1 Truth in Lending Act]
Final Disclosures (Closing Disclosure) – 12 CFR 1026.19(f)
For loans that require a Loan Estimate (i.e., most closed-end mortgage loans secured by real property or a cooperative unit) and that proceed to closing, creditors must provide a new final disclosure reflecting the actual terms of the transaction; it is called the Closing Disclosure.
The form integrates and replaces the HUD-1 and the final TIL disclosure for these transactions; explore TRID/CD/LE disclosures & applicability more
When is the creditor required to ensure that the consumer receives the CD by? [V-1.1 Truth in Lending Act]
The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan (12 CFR 1026.19(f)(1)(ii)).
NOTE: If the creditor mails the disclosure six business days prior to consummation, it can assume that it was received three business days after sending (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(iii)).
What must the CD include? [V-1.1 Truth in Lending Act]
The Closing Disclosure generally must contain the actual terms and costs of the transaction (12 CFR 1026.19(f)(1)(i)). Creditors may estimate disclosures using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made. However, creditors must act in good faith and use due diligence in obtaining the information. The creditor normally may rely on the representations of other parties in obtaining the information, including, for example, the settlement agent. The creditor is required to provide corrected disclosures containing the actual terms of the transaction at or before consummation (Comments 19(f)(1)(i)-2, -2.i, and -2.ii).
•The Closing Disclosure must be in writing and contain the information prescribed in 12 CFR 1026.38. The creditor must disclose only the specific information set forth in 12 CFR 1026.38(a) through (s), as shown in the CFPB’s form in Appendix H-25 (12 CFR 1026.38(t)).
• If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms of the transaction and complies with the other requirements of 12 CFR 1026.19(f), including the timing requirements, and requirements for providing corrected disclosures due to subsequent changes (Comment 19(f)(1)(i)-1).
• New three-day waiting period. If the creditor provides a corrected disclosure, it must provide the consumer with an additional three-business-day waiting period prior to consummation if the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added to the transaction (12 CFR 1026.19(f)(2)(ii).
“Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law (12 CFR 1026.2(a)(13); Comment 2(a)(13)-1).
When does loan consummation occur? [V-1.1 Truth in Lending Act]
“Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law (12 CFR 1026.2(a)(13); Comment 2(a)(13)-1).
What are the general timing requirements for the CD? [V-1.1 Truth in Lending Act]
Timing and Delivery - Closing Disclosure.
Generally, the creditor is responsible for ensuring that the consumer receives the Closing Disclosure form no later than three business days before consummation (12 CFR 1026.19(f)(1)(ii)(A); Comment 19(f)(1)(v)-3). The creditor also is responsible for ensuring that the Closing Disclosure meets the content, delivery, and timing requirements (12 CFR 1026.19(f) and 1026.38). For timeshare transactions, the creditor must ensure that the consumer receives the Closing Disclosure no later than consummation (12 CFR 1026.19(f)(1)(ii)(B)).
If the Closing Disclosure is provided in person, it is considered received by the consumer on the day it is provided. If it is mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is delivered or placed in the mail (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(ii)-2).
However, if the creditor has evidence that the consumer received the Closing Disclosure earlier than three business days after it is mailed or delivered, the creditor may rely on that evidence and consider the Closing Disclosure to be received on that date (Comments 19(f)(1)(iii)-1 and -2).
What are the delivery requirements for the CD on rescindable and non-rescindable transactions (with multiple consumers)? [V-1.1 Truth in Lending Act]
Multiple consumers. In transactions that are not rescindable, the Closing Disclosure may be provided to any consumer with primary liability on the obligation (12 CFR 1026.17(d)). In rescindable transactions, the creditor must provide the Closing Disclosure separately and meet the timing requirements for each consumer who has the right to rescind under TILA (see 12 CFR 1026.23).
What are the requirements for delivery and completion of the CD for transactions involving settlement agents? [V-1.1 Truth in Lending Act]
Settlement agents. Creditors may contract with settlement agents to have the settlement agent provide the Closing Disclosure to consumers on the creditor’s behalf, provided that the settlement agent complies with all relevant requirements of 12 CFR 1026.19(f) (12 CFR 1026.19(f)(1)(v)). Creditors and settlement agents also may agree to divide responsibility with regard to completing the Closing Disclosure, with the settlement agent assuming responsibility to complete some or all the Closing Disclosure (Comment 19(f)(1)(v)-4). Any such creditor must maintain communication with the settlement agent to ensure that the Closing Disclosure and its delivery satisfy the requirements described above, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(f)(1)(v); Comment 19(f)(1)(v)-3). In transactions involving a seller, the settlement agent is required to provide the seller with the Closing Disclosure reflecting the actual terms of the seller’s transaction no later than the day of consummation (12 CFR 1026.19(f)(4)(i) and (ii)).
NOTE: “Business day” has a different meaning for purposes of providing the Closing Disclosure than it is for purposes of providing the Loan Estimate after receiving a consumer’s application. For purposes of providing the Closing Disclosure, the term business day means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a) (See 12 CFR 1026.2(a)(6), 1026.19(f)(1)(ii)(A) and (f)(1)(iii)).
What is the waiting period between the CD being provided and the loan being consummated? [V-1.1 Truth in Lending Act]
Three-business-day waiting period. The loan may not be consummated less than three business days after the Closing Disclosure is received by the consumer. If a settlement is scheduled during the waiting period, the creditor generally must postpone settlement, unless the consumer determines that the extension of credit is necessary to meet a bona fide personal financial emergency and waives the waiting period. The written waiver describes the emergency, specifically modifies, or waives the waiting period, and bears the signature of all consumers who are primarily liable on the legal obligation. Pre-printed forms for this purpose are prohibited (12 CFR 1026.19(f)(1)(iv)).
How may settlement charges be imposed (disclosed) vs. actually received? [V-1.1 Truth in Lending Act]
Average charges. In general, the amount imposed on the consumer for any settlement service must not exceed the amount the settlement service provider actually received for that service. However, an average charge may be imposed instead of the actual amount received for a particular service, as long as the average charge satisfies the following conditions (12 CFR 1026.19(f)(3)(i)-(ii); Comment 19(f)(3)(i)-1):
• The average charge is no more than the average amount paid for that service by or on behalf of all consumers and sellers for a class of transactions;
The creditor or settlement service provider defines the class of transactions based on an appropriate period of time, geographic area, and type of loan;
• The creditor or settlement service provider uses the same average charge for every transaction within the defined class; and
• The creditor or settlement service provider does not use an average charge:
o For any type of insurance;
o For any charge based on the loan amount or property value; or
o If doing so is otherwise prohibited by law.
What are the three categories of changes that require a corrected CD? [V-1.1 Truth in Lending Act]
Closing Disclosures - Revisions and Corrections (12 CFR 1026.19(f)(2)).
Creditors must re-disclose terms or costs on the Closing Disclosure if certain changes occur to the transaction after the initial Closing Disclosure is provided that cause the disclosures to become inaccurate. There are three categories of changes that require a corrected Closing Disclosure containing all changed terms (12 CFR 1026.19(f)(2)):
• Changes that occur before consummation that require a new three-business-day waiting period (12 CFR 1026.19(f)(2)(ii));
• Changes that occur before consummation and do not require a new three-business-day waiting period; and (12 CFR 1026.19(f)(2)(i));
• Changes that occur after consummation. (12 CFR 1026.19(f)(2)(iii))
What are the changes before consummation that require a new waiting period? [V-1.1 Truth in Lending Act]
Changes before consummation requiring new waiting period. If one of the following occurs after delivery of the Closing Disclosure and before consummation, the creditor must provide a corrected Closing Disclosure containing all changed terms and ensure that the consumer receives it no later than three business days before consummation (12 CFR 1026.19(f)(2)(ii); Comment 19(f)(2)(ii)-1).
• The disclosed APR becomes inaccurate. If the APR previously disclosed becomes inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected APR disclosure and all other terms that have changed. The APR’s accuracy is determined according to 12 CFR 1026.22 (12 CFR 1026.19(f)(2)(ii)(A)). Generally, if the APR and finance charges are overstated because the interest rate has decreased, the APR is considered accurate and no new waiting period is required (12 CFR 1026.22). In addition, in connection with high-cost mortgages, TILA expressly provides there is no waiting period if the creditor extends a second offer of credit with a lower annual percentage rate to the consumer (15 U.S.C. 1639(b)(3)).
• The loan product changes. If the loan product is changed, causing the product description disclosed to become inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected loan product and all other terms that have changed (12 CFR 1026.19(f)(2)(ii)(B)).
• A prepayment penalty is added. If a prepayment penalty is added to the transaction, the creditor must provide a corrected Closing Disclosure with the prepayment penalty provision disclosed and all other terms that have changed (12 CFR 1026.19(f)(2)(ii)(C)).
The consumer may waive this period if the consumer is facing a bona fide personal financial emergency (12 CFR 1026.19(f)(1)(iv)).
What is the waiting period for all other changes (not listed above) requiring a revised CD? [V-1.1 Truth in Lending Act]
Changes before consummation not requiring new waiting period; consumer’s right to inspect. For any other changes before consummation that do not fall under the three categories above (i.e., related to the APR, the loan product, or the addition of a prepayment penalty), the creditor still must provide a corrected Closing Disclosure with any terms or costs that have changed and ensure that the consumer receives it. For these changes, there is no additional three-business-day waiting period required. The creditor must ensure only that the consumer receives the corrected Closing Disclosure at or before consummation (12 CFR 1026.19(f)(2)(i); Comments 19(f)(2)(i)-1 and -2).
However, a consumer has the right to inspect the Closing Disclosure during the business day before consummation (12 CFR 1026.19(f)(2)(i)). If a consumer asks to inspect the Closing Disclosure the business day before consummation, the Closing Disclosure presented to the consumer must reflect any adjustments to the costs or terms that are known to the creditor at the time the consumer inspects it (12 CFR 1026.19(f)(2)(i)).
A creditor may satisfy the obligation to provide the Closing Disclosure by ensuring that a settlement agent that provides a consumer with the disclosures complies with the requirements of 12 CFR 1026.19(f) (12 CFR 1026.19(f)(1)(v); Comment 19(f)(2)(i)-2).
Changes due to events occurring after consummation
When must creditors provided a revised CD in connection to events occurring after consummation? [V-1.1 Truth in Lending Act]
Changes due to events occurring after consummation. Creditors must provide a corrected Closing Disclosure if an event in connection with the settlement occurs during the 30-calendar-day period after consummation that causes the Closing Disclosure to become inaccurate and results in a change to an amount paid by the consumer from what was previously disclosed (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-1).
NOTE: A creditor is not required to provide corrected disclosures under this provision if the only changes that would be required to be disclosed in the corrected disclosure are changes to per-diem interest and any disclosures affected by the change in per-diem interest, even if the amount of per-diem interest actually paid by the consumer differs from the amount disclosed under 12 CFR 1026.38(g)(2) and (o). Nonetheless, if a creditor is providing a corrected disclosure under 12 CFR 1026.19(f)(2)(iii) for reasons other than changes in per-diem interest and the per-diem interest has changed as well, the creditor must disclose in the corrected disclosures under 12 CFR 1026.19(f)(2)(iii) the correct amount of the per-diem interest and provide corrected disclosures for any disclosures that are affected by the change in per-diem interest (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-2).
When a post-consummation event requires a corrected Closing Disclosure, the creditor must deliver or place in the mail a corrected Closing Disclosure not later than 30 calendar days after receiving information sufficient to establish that such an event has occurred. (12 CFR 1026.19(f)(2)(iii); Comment 19(f)(2)(iii)-1) In transactions involving a seller, the settlement agent must provide the seller with a corrected Closing Disclosure if an event occurs within 30 days of consummation that makes the disclosures inaccurate as they relate to the amount actually paid by the seller. The settlement agent must deliver or mail a corrected closing disclosure no later than 30 days from receiving information that establishes the Closing Disclosure is inaccurate and results in a change to an amount actually paid by the seller from what was previously disclosed. (12 CFR 1026.19(f)(4)(ii))
What are clerical errors in the CD and when must revised CDs with clerical errors be provided? [V-1.1 Truth in Lending Act]
Changes due to clerical errors. The creditor must provide a corrected Closing Disclosure to correct non-numerical clerical errors no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(iv)). An error is clerical if it does not affect a numerical disclosure and does not affect the timing, delivery, or other requirements imposed by 12 CFR 1026.19(e) or (f) (Comment 19(f)(2)(iv)-1).
What can a creditor do to cure a tolerance violation? [V-1.1 Truth in Lending Act]
Refunds related to the good faith analysis. The creditor can cure a tolerance violation of 12 CFR 1026.19(e)(3)(i) or (ii) by providing a refund to the consumer and delivering or placing in the mail a corrected Closing Disclosure that reflects the refund no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)).
What is the Special Information Booklet and who does it apply to? [V-1.1 Truth in Lending Act]
Special Information Booklet - 12 CFR 1026.19(g)
Creditors generally must provide a copy of the special information booklet, otherwise known as the home buying information booklet, to consumers who apply for a consumer credit transaction secured by real property or a cooperative unit. For loans using the Loan Estimate and Closing Disclosure forms, creditors provide the “Your Home Loan Toolkit: A Step-by-Step Guide,” designed by the CFPB to replace the “Shopping for Your Home Loan: Settlement Cost Booklet” as the special information booklet. This requirement is not limited to closed-end transactions and applies to most consumer credit transactions secured by real property or a cooperative unit, except in a few circumstances (see below). The special information booklet is required pursuant to Regulation Z (12 CFR 1026.19(g)(1)) as well as Section 5 of RESPA (12 U.S.C. 2604) and 12 CFR 1024.6 of Regulation X. The booklet is published by the CFPB to help consumers applying for federally related mortgage loans understand the nature and cost of real estate settlement services.
What can creditors provide to consumers applying to HELOCs instead of the Special Information Booklet (“Your Home Loan Toolkit: A Step-by-Step Guide”)? [V-1.1 Truth in Lending Act]
If the consumer is applying for a HELOC subject to 12 CFR 1026.40, the creditor (or mortgage broker) can provide a copy of the brochure titled “What You Should Know About Home Equity Lines of Credit” instead of the special information booklet (12 CFR 1026.19(g)(1)(ii)).
When does the creditor need not provide the Special Information Booklet? [V-1.1 Truth in Lending Act]
The creditor need not provide the special information booklet if the consumer is applying for a real property-secured consumer credit transaction that does not have the purpose of purchasing a one-to-four family residential property, such as a refinancing, a closed-end loan secured by a subordinate lien, or a reverse mortgage (12 CFR 1026.19(g)(1)( iii)).
When must creditors provide the Special Information Booklet? [V-1.1 Truth in Lending Act]
Creditors must deliver or place in the mail the special information booklet not later than three business days after receiving the consumer’s loan application (12 CFR 1026.19(g)(1)(i)).
When does the creditor need not provide the Special Information Booklet? [V-1.1 Truth in Lending Act]
If the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three-business-day period, the creditor need not provide the special information booklet (12 CFR 1026.19(g)(1)(i); Comment 19(g)(1)(i)-3).
Who must the creditor provide the Special Information Booklet to? [V-1.1 Truth in Lending Act]
If the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three-business-day period, the creditor need not provide the special information booklet (12 CFR 1026.19(g)(1)(i); Comment 19(g)(1)(i)-3).
Can mortgage brokers provide the Special Information Booklet? [V-1.1 Truth in Lending Act]
If the consumer uses a mortgage broker, the mortgage broker must provide the special information booklet and the creditor need not do so (12 CFR 1026.19(g)(1)(i)).
What should creditors use in Special Information Booklets? [V-1.1 Truth in Lending Act]
Creditors generally are required to use the booklets designed by the CFPB and may make only limited changes to the special information booklet. (12 CFR 1026.19(g)(2)) The CFPB may issue revised or alternative versions of the special information booklet from time to time in the future. Creditors should monitor the Federal Register for notice of revisions (Comment 19(g)(1)-1).
What are coverage considerations under Reg Z (see flow chart) [V-1.1 Truth in Lending Act]
Q: Is the
purpose of
the credit for
personal,
family or
household
use?
A: Regulation Z does not apply, except for the rules of issuance of and
unauthorized use liability for credit cards. (Exempt credit includes
loans with a business or agricultural purpose, and certain student
loans. Credit extended to acquire or improve rental property that is
not owner-occupied is considered business purpose credit.)
Q: Is the
consumer credit
extended to a
consumer?
A: Regulation Z does not apply. (Credit that is extended to a land trust
is deemed to be credit extended to a consumer.)
Q: Is the
consumer
credit
extended by
a creditor?
A: The institution is not a “ creditor” and Regulation Z does not apply
unless at least one of the following tests is met:
- The institution extends consumer credit regularly and
a. The obligation is initially payable to the institution and
b. The obligation is either payable by written agreement in more
than four installments or is subject to a finance charge. - The institution is a card issuer that extends closed-end credit that is
subject to a finance charge or is payable by written agreement in
more than four installments. - The institution is not the card issuer, but it imposes a finance
charge at the time of honoring a credit card.
Q: Is the loan
or Credit plan
secured by real
property, a
coop unit, or a
dwelling?
A: Yes - Regulation Z applies
N: Regulation Z does not apply, but may apply later if the
loan is refinanced for an amount at or below the annual
threshold limit (as annually adjusted). If the principal
dwelling is taken as collateral after consummation,
rescission rights will apply and, in the case of open-end
credit, billing disclosures and other provisions of
Regulation Z will apply.
What is a finance charge? [V-1.1 Truth in Lending Act]
The finance charge is a measure of the cost of consumer credit represented in dollars and cents. Along with APR disclosures, the disclosure of the finance charge is central to the uniform credit cost disclosure envisioned by the TILA
Finance charges include any charges or fees payable directly or indirectly by the consumer and imposed directly or indirectly by the financial institution either as an incident to or as a condition of an extension of consumer credit. The finance charge on a loan always includes any interest charges and often, other charges. Regulation Z includes examples, applicable both to open-end and closed-end credit transactions, of what must, must not, or need not be included in the disclosed finance charge (12 CFR 1026.4(b)).
Describe accuracy requirements under TILA vs. Reg Z. [V-1.1 Truth in Lending Act]
Reg Z = finance charge tolerances for legal accuracy
TILA = finance charge tolerances under Regulatory Agency orders
Regulation Z provides finance charge tolerances for legal accuracy that should not be confused with those provided in the TILA for reimbursement under the regulatory agency orders. As with disclosed APRs, if a disclosed finance charge were legally accurate, it would not be subject to reimbursement.
Under the TILA and Regulation Z, finance charge disclosures for open-end credit must be accurate since there is no tolerance for finance charge errors. However, both the TILA and Regulation Z permit various finance charge accuracy tolerances for closed-end credit.
Tolerances for the finance charge in a closed-end transaction, other than a mortgage loan, are generally $5 if the amount finances is less than or equal to $1,000 and $10 if the amount finances exceeds $1,000. For transactions that are subject to 12 CFR 1026.19(e) and (f) (i.e., transactions subject to the TILA-RESPA Integrated Disclosure Rule), the tolerances applicable to finance charges are also applicable to the total of payments disclosure. Tolerances for certain transactions consummated on or after September 30, 1995, are noted below.
Credit secured by real property or a dwelling:
The disclosed finance charge is considered accurate if it is not understated by more than $100.
Overstatements are not violations.
Rescission rights after the three-business-day rescission period (closed-end credit only 12 CFR 1026.23(g)):
Tolerances for accuracy, General Rule – One-
half of 1 percent tolerance:
The disclosed finance charge is considered accurate if it is not understated by more than one-half of 1 percent of the credit extended or $100, whichever is greater.
The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than one-half of 1 percent of the face amount of the note or $100, whichever is greater.
The disclosed finance charge and the total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments).
Tolerances for accuracy, Refinancings – One percent tolerance, for the initial and subsequent refinancings of residential mortgage transactions when the new loan is made at a different financial institution. (Excludes high-cost mortgage loans subject to 12 CFR 1026.32, transactions in which there are new advances, and new consolidations.):
The disclosed finance charge is considered accurate if it is not understated by more than 1 percent of the credit extended or $100, whichever is greater,
The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater.
The disclosed finance charge and the total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments).
Tolerance for disclosures. After the initiation of foreclosure on the consumer’s principal dwelling that secures the credit obligation:
• The disclosed finance charge is considered accurate if it is understated by no more than $35.
• The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than $35.
• The disclosed finance charge and the total of payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments).
NOTES:
• Normally, the finance charge tolerance for a rescindable transaction is either 0.5 percent of the credit transaction or, for certain refinancings, 1 percent of the credit transaction. However, in the event of a foreclosure, the consumer may exercise the right of rescission if the disclosed finance charge is understated by more than $35.
• Tolerances for the total of payments disclosure as discussed in 12 CFR 1026.38(o)(1) are similar to the tolerances applicable to the finance charge. Special tolerances apply to the disclosure of the total of payments for purposes of the right of rescission, for transactions subject to 12 CFR 1026.19(e) and (f). (12 CFR 1026.23(g)(1)(ii), (g)(2)(ii)).
See the “Finance Charge Tolerances” charts within these examination procedures for help in determining appropriate finance charge tolerances.
What regulations must creditors comply with for disclosure of construction loans and construction-permanent loans that are closed-end consumer credit transactions secured by real property or cooperative units? [V-1.1 Truth in Lending Act]
Creditors are required to comply with TRID for disclosure of construction loans and construction-permanent loans that are closed-end consumer credit transactions secured by real property or a cooperative unit (12 CFR 1026.19(e)(1) and .19(f)(1)). These transactions have two distinct phases. First, the construction phase usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period, with the consumer generally paying only accrued interest until construction is completed. Unless the obligation is paid when construction is completed (i.e., a construction-only loan), it is a construction-permanent loan and the construction period converts to the second phase, the permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. The longstanding provisions of 12 CFR 1026.17(c)(6)(ii) apply to construction and construction-permanent loans, as well as the option to use Appendix D. Appendix D provides an optional method of calculating the annual percentage rate and other disclosures for construction loans in disclosing construction financing (Comment 17(c)(6)-2). While the 2017 TRID amendments provide additional guidance on how a creditor may use Appendix D to disclose construction loans and construction-permanent loans, the 2017 TRID amendments do not require the use of Appendix D or its corresponding official commentary when disclosing the terms of construction loans or construction-permanent loans. Specific regulatory provisions and official commentary applicable to construction loan disclosures are discussed below.
How may a creditor treat multiple advances under a construction only loan? [V-1.1 Truth in Lending Act]
This means that for construction-only loans, a creditor may treat all of the advances as a single transaction or disclose each advance as a separate transaction. If these advances are treated as one transaction and the timing and amounts of advances are unknown, creditors must make disclosures based on estimates, based on the best information reasonably available at the time the disclosure is provided to the consumer, as provided in 12 CFR 1026.17(c)(2).
How may a creditor treat a multiple advance loan that may be permanently financed by the same creditor? [V-1.1 Truth in Lending Act]
Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one or more than one transaction (12 CFR 1026.17(c)(6)(ii)).
In addition to disclosure options described above for multiple advance loans, for construction-permanent loans where the permanent phase may be financed by the same creditor, the creditor also has the option to provide either one combined disclosure for both the construction financing and the permanent financing, or separate disclosures for the two phases (12 CFR 1026.17(c)(6)(ii); Comment 17(c)(6)-2).
In transactions that finance the construction of dwellings that may be permanently financed by the same creditor, in what three ways may the construction financing phase and the permanent financing phases be disclosed? [V-1.1 Truth in Lending Act]
•As a single transaction, with one disclosure combining both phases.
• As two separate transactions, with one disclosure for each phase.
• As more than two transactions, with one disclosure for each advance and one for the permanent financing phase Comment 17(c)(6)-3).
What are the disclosure timing requirements for construction/construction to permanent loans? [V-1.1 Truth in Lending Act]
Regulation Z clarifies the timing requirements for providing the Loan Estimate for construction and construction-permanent loans based on when the creditor receives an application (12 CFR 1026.19(e)(1)(iii)). Comment 19(e)(1)(iii)-5 provides examples of different scenarios, illustrating how the timing requirements would apply. For example, where a creditor receives an application for both the construction and permanent phases of a transaction, the creditor must deliver or place in the mail either a single Loan Estimate (if the phases are treated as one transaction) or two or more Loan Estimates (if the phases are treated separately) within three business days of receiving the application and not later than seven business days before consummation.
When must disclosures be delivered for construction and construction permanent loans? [V-1.1 Truth in Lending Act]
Delivery of Disclosures – 12 CFR 1026.19(e)(1)(iii)
Regulation Z clarifies the timing requirements for providing the Loan Estimate for construction and construction-permanent loans based on when the creditor receives an application (12 CFR 1026.19(e)(1)(iii)). Comment 19(e)(1)(iii)-5 provides examples of different scenarios, illustrating how the timing requirements would apply. For example, where a creditor receives an application for both the construction and permanent phases of a transaction, the creditor must deliver or place in the mail either a single Loan Estimate (if the phases are treated as one transaction) or two or more Loan Estimates (if the phases are treated separately) within three business days of receiving the application and not later than seven business days before consummation.
How must the LE and CD be completed for construction and construction permanent loans? [V-1.1 Truth in Lending Act]
Completion of Loan Estimate and Closing Disclosure
Generally, a financial institution will make disclosures for construction loans in the same manner as it discloses terms for non-construction loans, following the guidance of applicable regulations (See 12 CFR 1026.37 and 1026.38). The financial institution may, at its option, use Appendix D to Regulation Z to estimate and disclose the terms of multiple-advance construction and construction-permanent loans (12 CFR Part 1026, App. D). This appendix reflects the approach taken in 12 CFR 1026.17(c)(6)(ii), which permits creditors to provide separate or combined disclosures for the construction period and for the permanent financing, as discussed above.
The financial institution may, at its option, use Appendix D to the regulation to assist in estimating and disclosing the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction. Appendix D may also be used in multiple-advance transactions other than construction loans, when the amounts or timing of advances is unknown at consummation (Comment App. D-1).
Appendix D and its associated commentary provide additional guidance and clarification on how to complete various portions of the Loan Estimate and Closing Disclosure. Additional guidance and examples are intended to inform the accurate disclosure of information related to Loan Term (Comment App. D. 7.i), Loan Product (Comment App. D 7.ii), Interest Rate (Comment App. D. 7.iii), Increases in Periodic Payment (Comment App. D. 7.iv), Projected Payments Table (Comment App. D. 7.v), Disclosure of Construction Costs (Comment App. D. 7.vi), and Inspection and Handling Fees (Comment App. D. 7.vii).
What must creditors making closed-end loans to consumers not subject to the TILA-RESPA Integrated Disclosures Rule provide the consumer with? [V-1.1 Truth in Lending Act]
Loans Receiving Non-TILA-RESPA Integrated Disclosures, Generally
Creditors making closed-end loans to consumers not subject to the TILA-RESPA Integrated Disclosures Rule (i.e., other than loans where 12 CFR 1026.19(e) and (f) require the Loan Estimate and the Closing Disclosure) must provide the consumer with the Truth in Lending (TIL) disclosure, as outlined in 12 CFR 1026.17 and 1026.18. Creditors engaged in specified housing assistance programs for low- and moderate-income consumers would also provide their consumers with the TIL Disclosure (12 CFR 1026.3(h)).
What provisions must the TIL disclosure include? [V-1.1 Truth in Lending Act]
TIL Disclosure.
The TIL disclosure provided for these loans includes a payment schedule (12 CFR 1026.18(g)). The disclosed payment schedule must reflect all components of the finance charge. It includes all payments scheduled to repay loan principal, interest on the loan, and any other finance charge payable by the consumer after consummation of the transaction.
However, any finance charge paid separately before or at consummation (e.g., odd days’ interest) is not part of the payment schedule. It is a prepaid finance charge that must be reflected as a reduction in the value of the amount financed.
At the creditor’s option, the payment schedule may include amounts beyond the amount financed and finance charge (e.g., certain insurance premiums or real estate escrow amounts such as taxes added to payments). However, when calculating the APR, the creditor must disregard such amounts.
If the obligation is a renewable balloon payment instrument that unconditionally obligates the financial institution to renew the short-term loan at the consumer’s option or to renew the loan subject to conditions within the consumer’s control, the payment schedule must be disclosed using the longer term of the renewal period or periods. The long-term loan must be disclosed with a variable rate feature.
If there are no renewal conditions or if the financial institution guarantees to renew the obligation in a refinancing, the payment schedule must be disclosed using the shorter balloon payment term. The short-term loan must be disclosed as a fixed rate loan, unless it contains a variable rate feature during the initial loan term.
What are the disclosure requirements for adjustable and variable rates, generally? [V-1.1 Truth in Lending Act]
Variable and Adjustable Rate Transactions; 12 CFR 1026.18(f), 1026.20(c) and (d)
Closed-end transactions generally
If the terms of the legal obligation allow the financial institution, after consummation of the transaction, to increase the APR, the financial institution must furnish the consumer with certain information on variable rates. In addition, variable rate disclosures are not applicable to rate increases resulting from delinquency, default, assumption, acceleration, or transfer of the collateral.
Some of the more important transaction-specific variable rate disclosure requirements follow.
• Disclosures for variable rate loans must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation.
• If the variable rate transaction includes either a seller buy-down that is reflected in a contract or a consumer buy-down, the disclosed APR should be a composite rate based on the lower rate for the buy-down period and the rate that is the basis for the variable rate feature for the remainder of the term.
• If the initial rate is not determined by the index or formula used to make later interest rate adjustments, as in a discounted variable rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for as long as it is applied and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation (i.e., the fully indexed rate).
o If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the adjustment, from changing to the fully indexed rate, the effect of that rate or payment cap needs to be reflected in the disclosures.
o The index at consummation need not be used if the contract provides a delay in the implementation of changes in an index value (e.g., the contract indicates that future rate changes are based on the index value in effect for some specified period, such as 45 days before the change date). Instead, the financial institution may use any rate from the date of consummation back to the beginning of the specified period (e.g., during the previous 45-day period).
• If the initial interest rate is set according to the index or formula used for later adjustments but is set at a value as of a date before consummation, disclosures should be based on the initial interest rate, even though the index may have changed by the consummation date.
When must creditors provide consumers with information pertaining to the ARM’s initial rate change? [V-1.1 Truth in Lending Act]
Adjustable Rate Mortgage Disclosures
Disclosure of Post-Consummation Events - Initial Rate Change for Adjustable Rate Mortgages – 12 CFR 1026.20(d)
Creditors, assignees, or servicers29 (referred to collectively as creditors) of adjustable rate mortgages, or ARMs, secured by the consumer’s principal dwelling and with terms of more than one year are generally required to provide consumers with certain information pertaining to the ARM’s initial rate change.30 This information must be provided in a disclosure that is separate from all other documents, and the disclosure must be provided between 210 and 240 days before the first payment at the adjusted rate is due. If the first payment at a new rate is due within the first 210 days after consummation, the creditor must provide the rate change disclosure at consummation.
Disclosures required under this section must provide consumers with information related to the timing and nature of the rate change. If the new rate pursuant to the change disclosed is not known and the creditor provides an estimate, the rate must be identified as an estimate. If the creditor is using an estimate, it must be based on the index within 15 business days prior to the date of the disclosure. The calculation is made using the index reported in the source of information that the creditor uses in the explanation of how the interest rate is determined.
What must ARM disclosures include? [V-1.1 Truth in Lending Act]
Disclosures required under 12 CFR 1026.20(d) must also include, among others:
• The date of the disclosure.
• A statement explaining that the time period that the current rate has been in effect is ending, that the current rate is expiring, and that a change in the rate may result in a change in the required payment; providing the effective date of the change and a schedule of any future changes; and describing any other changes to the loan terms, features, or options taking effect on the same date (including expiration of interest-only or payment-option features).
• A table containing the current and new interest rates, the current and new payments, including the date the new payment is due, and for interest-only or negative amortization loans, the amount of the current and new payment allocated to principal, interest, and escrow (if applicable).
NOTE: The new payment allocation disclosed is the expected payment allocation for the first payment for which the new interest rate will apply.
• An explanation of how the interest rate is determined, including (among other things) an explanation of the index or formula used to determine the new rate and the margin.
• Any limitations on the interest rate or payment increase for each scheduled increase and over the life of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments.
• An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change.
• If the creditor is using an estimated rate or payment, a statement that the actual new interest rate and new payment will be provided to the consumer between two and four months prior to the first payment at the new rate.
• For negative amortization loans, creditors must provide a statement indicating that the new payment will not be allocated to pay loan principal and will not reduce the balance of the loan; instead, the payment will only apply to part of the interest, thereby increasing the amount of principal.
• A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer.
• The telephone number of the creditor, assignee, or servicer for use if the consumer anticipates that he or she may not be able to make the new payments.
• A statement providing specified alternatives (which include refinancing, selling the property, loan modification, and forbearance) available if the consumer anticipates not being able to make the new payment.
A website address for either the CFPB’s or the Department of Housing and Urban Development’s (HUD) list of homeownership counselors and counseling organizations, the HUD toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations, and the CFPB’s website address for state housing finance authorities contact information.
• For more information pertaining to the required format of the disclosures required under 12 CFR 1026.20(d), please see 12 CFR 1026.20(d)(3) and the model and sample forms H-4(D)(3) and (4) in Appendix H.
When are creditors of ARMs secured by a consumer’s principal dwelling with a term greater than one year required to provide consumers with disclosures prior to the adjustment of the interest rate on the mortgage? [V-1.1 Truth in Lending Act]
Creditors, assignees, or servicers31 (referred to collectively as creditors) of ARMs secured by a consumer’s principal dwelling with a term greater than one year are generally required to provide consumers with disclosures prior to the adjustment of the interest rate on the mortgage,32 if the interest rate change will result in a payment change as follows:
• For ARMs where the payment changes along with a rate change, disclosures must be provided to consumers between 60 and 120 days before the first payment at the new amount is due.
• For ARMs where the payment changes in connection with a uniformly scheduled interest rate adjustment occurring every 60 days (or more frequently), the disclosures must be provided between 25 and 120 days before the first payment at the new amount is due.
• For ARMs originated prior to January 10, 2015, in which the contract requires the adjusted interest and payment to be calculated based on an index that is available on a date less than 45 days prior to the adjustment date, disclosures must be provided between 25 and 120 days before the first payment at the new amount is required.
• For ARMs where the first adjustment occurs within 60 days of consummation and the new interest rate disclosed at the time was an estimate, the disclosures must be provided as soon as practicable, but no less than 25 days before the first payment at the new amount is due.
Disclosures required under 12 CFR 1026.20(c) must contain specific information, which includes, among others:
A statement explaining that the time period during which the consumer’s current rate has been in effect is ending and that the rate and payment will change; when the interest rate will change; dates when additional interest rate adjustments are scheduled to occur; and any other change in loan terms or features that take effect on the same date that the interest rate and payment change, such as an expiration of interest-only treatment or payment-option feature.
• A table explaining the current and new interest rates, the current and new payments, including the date the new payment is due, and for interest-only or negative amortizing loans, the amount of the current and new payment allocated to principal, interest, and amounts for escrow (if applicable).
• An explanation of how the new interest rate is determined, including (among other things) the index or formula used to determine the new rate and the margin, and any application of previously foregone interest rate increases from past adjustments;
• Any limitations on the interest rate and payment increase for each scheduled increase for the duration of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments.
• An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change;
For negative amortization loans, creditors must provide a statement indicating that the new payment will not reduce the balance of the loan, rather, the payment will only apply to part of the interest, thereby increasing the amount of principal; and
• A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer.
For more information pertaining to the required format of the disclosures required under 12 CFR 1026.20(c), please see 12 CFR 1026.20(c)(3) and the model and sample forms H-4(D)(1) and (2) in Appendix H.
What are exemptions to the ARM requirements? [V-1.1 Truth in Lending Act]
Exemptions to the Adjustable Rate Mortgage Disclosure Requirements – 12 CFR 1026.20(c)(1)(ii) and (d)(1)(ii)
Disclosures under 12 CFR 1026.20(c) and (d) are not required for ARMs with a term of one year or less. Likewise, disclosures under 12 CFR 1026.20(c) are not required if the first interest rate and payment adjustment occurs within the first 210 days and the new rate disclosed at consummation pursuant to 12 CFR 1026.20(d) was not an estimate. ARM disclosures for payment changes are exempt under 12 CFR 1026.20(c)(1)(ii)(C) where the servicer is a debt collector under the Fair Debt Collection Practices Act (FDCPA) and a consumer has exercised the right under FDCPA section 805(c) to prohibit debt collector communications regarding the debt.
What are the closed-end credit finance charge accuracy tolerances? [V-1.1 Truth in Lending Act]
See TILA manual page 39
What are the Closed-End Credit: Accuracy and Reimbursement Tolerances for UNDERSTATED FINANCE CHARGES? [V-1.1 Truth in Lending Act]
See TILA manual page 40
What are the Closed-End Credit: Accuracy Tolerances for OVERSTATED FINANCE CHARGES? [V-1.1 Truth in Lending Act]
See manual page 41
What are the Closed-End Credit: Accuracy Tolerances for OVERSTATED APRs? [V-1.1 Truth in Lending Act]
See manual page 42
What are the Closed-End Credit: Accuracy and Reimbursement Tolerances for UNDERSTATED APRs? [V-1.1 Truth in Lending Act]
See manual page 43
What (generally) are the disclosure requirements for refinancings? [V-1.1 Truth in Lending Act]
Refinancings – 12 CFR 1026.20(a)
When an obligation is satisfied and replaced by a new obligation to the original financial institution (or a holder or servicer of the original obligation) and is undertaken by the same consumer, it must be treated as a refinancing for which a complete set of new disclosures must be furnished. A refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the earlier one to be considered a refinancing under the regulation. The finance charge on the new disclosure must include any unearned portion of the old finance charge that is not credited to the existing obligation (12 CFR 1026.20(a)).
What transactions are not considered refinancings even if the existing obligation is satisfied and replaced by a new obligation undertaken by the same consumer? [V-1.1 Truth in Lending Act]
A renewal of an obligation with a single payment of principal and interest or with periodic interest payments and a final payment of principal with no change in the original terms.
• An APR reduction with a corresponding change in the payment schedule.
• An agreement involving a court proceeding.
• Changes in credit terms arising from the consumer’s default or delinquency.
• The renewal of optional insurance purchased by the consumer and added to an existing transaction, if required disclosures were provided for the initial purchase of the insurance.
In what other instances does a new transaction subject to new disclosures result? [V-1.1 Truth in Lending Act]
•Increases the rate based on a variable rate feature that was not previously disclosed; or
• Adds a variable rate feature to the obligation.
If, at the time a loan is renewed, the rate is increased, the increase is not considered a variable rate feature. It is the cost of renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. If the original debt is not canceled in connection with such a renewal, the regulation does not require new disclosures. Also, changing the index of a variable rate transaction to a comparable index is not considered adding a variable rate feature to the obligation.
What are the disclosure requirements for escrow cancellation (generally)? [V-1.1 Truth in Lending Act]
Escrow Closing Notice. Before cancelling an escrow account, an Escrow Closing Notice must be provided to any consumers for whom an escrow account was established in connection with a closed-end consumer credit transaction secured by a first lien on real property or a dwelling, except for reverse mortgages (12 CFR 1026.20(e)(1)). For this purpose, the term escrow account has the same meaning given to it as under Regulation X, 12 CFR 1024.17(b), and the term servicer has the same meaning given to it as under Regulation X, 12 CFR 1024.2(b). There are two exceptions to the requirement to provide the notice:
What are the exceptions to the requirement to provide the escrow closing notice before cancellation? [V-1.1 Truth in Lending Act]
(N/A to reverse mortgages, and):
•Creditors and servicers are not required to provide the notice if the escrow account that is being canceled was established solely in connection with the consumer’s delinquency or default on the underlying debt obligation (Comment 20(e)(1)-2).
• Creditors and servicers are not required to provide the notice when the underlying debt obligation for which an escrow account was established is terminated, including by repayment, refinancing, rescission, and foreclosure (Comment 20(e)(1)-3).
What are the timing requirements for providing the escrow closing notice? [V-1.1 Truth in Lending Act]
For loans subject to the Escrow Closing Notice requirement, if the creditor or servicer cancels the escrow account at the consumer’s request, the creditor or servicer must ensure that the consumers receive the notice no later than three business days (i.e., all calendar days except Sundays and the legal public holidays (See 12 CFR 1026.2(a)(6), 12 CFR 1026.19(f)(1)(ii)(A) and (f)(1)(iii)) before the consumer’s escrow account is canceled (12 CFR 1026.20(e)(5)(i)). If the creditor or servicer cancels the escrow account and the cancellation is not at the consumer’s request, the creditor or servicer must ensure that the consumer receives the notice no later than 30 business days before the closure of the consumer’s escrow account (12 CFR 1026.20(e)(5)(ii). If the Escrow Closing Notice is not provided to the consumer in person, the consumer is considered to have received the notice three business days after it is delivered or placed in the mail (12 CFR 1026.20(e)(5)(iii).
What must the creditor disclose in he escrow closing notice? [V-1.1 Truth in Lending Act]
The creditor or servicer must disclose (12 CFR 1026.20(e)(1)-(2)):
• The date on which the account will be closed;
• That an escrow account may also be called an impound or trust account;
• The reason that the escrow account will be closed;
• That without an escrow account, the consumer must pay all property costs, such as taxes and homeowner’s insurance, directly, possibly in one or two large payments a year;
• A table, titled “Cost to you,” that contains an itemization of the amount of any fee the creditor or servicer imposes on the consumer in connection with the closure of the consumer’s escrow account, labeled “Escrow Closing Fee,” and a statement that the fee is for closing the escrow account;
Under the reference “In the future”:
o The consequences if the consumer fails to pay property costs, including the actions that a state or local government may take if property taxes are not paid and the actions the creditor or servicer may take if the consumer does not pay some or all property costs, such as adding amounts to the loan balance, adding an escrow account to the loan, or purchasing a property insurance policy on the consumer’s behalf that may be more expensive and provide fewer benefits than a policy that the consumer could obtain directly;
o A telephone number that the consumer can use to request additional information about the cancellation of the escrow account;
o Whether the creditor or servicer offers the option of keeping the escrow account open and, as applicable, a telephone number the consumer can use to request that the account be kept open; and
o Whether there is a cutoff date by which the consumer can request that the account be kept open.
The creditor or servicer may also, at its option, disclose (12 CFR 1026.20(e)(3)):
• The creditor or servicer’s name or logo;
• The consumer’s name, phone number, mailing address, and property address;
• The issue date of the notice;
• The loan number; or
• The consumer’s account number.
In addition, the disclosures must:
• Contain a required heading that is more conspicuous than and precedes the required disclosures discussed above (12 CFR 1026.20(e)(4)).
• Be clear and conspicuous. This standard generally requires that the disclosures in the Escrow Closing Notice be in a reasonably understandable form and readily noticeable to the consumer (Comment 20(e)(2)-1).
• Be written in 10-point font, at a minimum (12 CFR 1026.20(e)(4)).
Be grouped together on the front side of a one-page document. The disclosures must be separate from all other materials, with the headings, content, order, and format substantially similar to model form H-29 in Appendix H to Regulation Z (12 CFR 1026.20(e)(4)). This requirement, however, does not preclude creditors and servicers from modifying the disclosures to accommodate particular consumer circumstances or transactions not addressed by the form or from adjusting the statement required by 12 CFR 1026.20(e)(2)(ii)(A), concerning consequences if the consumer fails to pay property costs, to the circumstances of the particular consumer (Comment 20(e)(4)-3).
What are the disclosure requirements for successors in interest? [V-1.1 Truth in Lending Act]
Successors In Interest – 12 CFR 1026.20(f)
If, upon confirmation, a servicer provides a confirmed successor in interest who is not liable on the mortgage loan obligation with an optional notice and acknowledgment form in accordance with Regulation X, 12 CFR 1024.32(c)(1), the servicer is not required to provide to the confirmed successor in interest any written disclosure required by 12 CFR 1026.20(c) (rate adjustments with corresponding change in payment), 12 CFR 1026.20(d) (initial rate adjustment), and 12 CFR 1026.20(e) (escrow account cancellation notice), unless and until the confirmed successor in interest either assumes the mortgage loan obligation under State law or has provided the servicer an executed acknowledgement form in accordance with Regulation X, 12 CFR 1024.32(c)(1)(iv), and the confirmed successor in interest has not revoked such acknowledgement form.
What actions is the creditor required to take when there is a credit balance in connection with a transaction? [V-1.1 Truth in Lending Act]
Treatment of Credit Balances – 12 CFR 1026.21
When a credit balance in excess of $1 is created in connection with a transaction (through transmittal of funds to a creditor in excess of the total balance due on an account, through rebates of unearned finance charges or insurance premiums, or through amounts otherwise owed to or held for the benefit of a consumer), the creditor is required to:
• Credit the amount of the credit balance to the consumer’s account;
• Refund any part of the remaining credit balance, upon the written request of the consumer; and
• Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than 6 months, except that no further action is required if the consumer’s current location is not known to the creditor and cannot be traced through the consumer’s last known address or telephone number.
What are the advertising requirements for closed-end credit (generally)? [V-1.1 Truth in Lending Act]
Closed-end Advertising – 12 CFR 1026.24
If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor.
Disclosures required by this section must be made “clearly and conspicuously.” To meet this standard in general, credit terms need not be printed in a certain type size nor appear in any particular place in the advertisement. For advertisements for credit secured by a dwelling, a clear and conspicuous disclosure means that the required information is disclosed with equal prominence and in close proximity to the advertised rates or payments triggering the required disclosures.
If an advertisement states a rate of finance charge, it must state the rate as an “annual percentage rate,” using that term. If the APR may be increased after consummation, the advertisement must state that fact.
If an advertisement is for credit not secured by a dwelling, the advertisement must not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the APR.
If an advertisement is for credit secured by a dwelling, the advertisement must not state any other rate, except that a simple annual rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the APR. That is, an advertisement for credit secured by a dwelling may not state a periodic rate, other than a simple annual rate, that is applied to an unpaid balance.
What are triggering terms that require additional disclosures, are what are the additional disclosures? [V-1.1 Truth in Lending Act]
“Triggering terms” – The following are triggering terms that require additional disclosures:
• The amount or percentage of any down payment;
• The number of payments or period of repayment;
• The amount of any payment; and
• The amount of any finance charge.
An advertisement stating a triggering term must also state the following terms as applicable:
• The amount or percentage of any down payment;
• The terms of repayment, which reflect the repayment obligations over the full term of the loan, including any balloon payment; and
• The “annual percentage rate,” using that term, and, if the rate may be increased after consummation, that fact.
What are the disclosure requirements for variable rate loans? [V-1.1 Truth in Lending Act]
For any advertisement secured by a dwelling, other than television or radio advertisements, that states a simple annual rate of interest, and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement must state in a clear and conspicuous manner:
• Each simple rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin must be disclosed based on a reasonably current index and margin.
• The period of time during which each simple annual rate of interest will apply.
• The APR for the loan.
The regulation prohibits what seven deceptive or misleading acts or practices in advertisements for closed-end mortgage loans? [V-1.1 Truth in Lending Act]
•Stating that rates or payments for loans are “fixed” when those rates or payments can vary without adequately disclosing that the interest rate or payment amounts are “fixed” only for a limited period of time, rather than for the full term of the loan;
• Making comparisons between actual or hypothetical credit payments or rates and any payment or rate available under the advertised product that are not available for the full term of the loan, with certain exceptions for advertisements for variable rate products;
• Characterizing the products offered as “government loan programs,” “government-supported loans,” or otherwise endorsed or sponsored by a federal or state government entity even though the advertised products are not government-supported or sponsored loans;
• Displaying the name of the consumer’s current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender;
• Making claims of debt elimination if the product advertised would merely replace one debt obligation with another;
• Creating a false impression that the mortgage broker or lender is a “counselor” for the consumer; and
• In foreign-language advertisements, providing certain information, such as a low introductory “teaser” rate, in a foreign language, while providing required disclosures only in English.
What is Subpart D of the TILA? [V-1.1 Truth in Lending Act]
Subpart D – Miscellaneous
Subpart D contains rules on oral disclosures 12 CFR 1026.26, disclosures in languages other than English 12 CFR 1026.27, record retention 12 CFR 1026.25, effect on state laws (12 CFR 1026.28), state exemptions 12 CFR 1026.29, and rate limitations (12 CFR 1026.30).
What are the record retention requirements for Reg Z, generally? [V-1.1 Truth in Lending Act]
Record Retention – 12 CFR 1026.25
As a general rule, the creditor must retain evidence of compliance with Regulation Z (other than advertising requirements under 12 CFR 1026.16 and 12 CFR 1026.24, and other than certain requirements for mortgage loans) for two years after the date disclosures are required to be made or action is required to be taken (12 CFR 1026.25(a)). This includes, for example, evidence that the creditor properly handled adverse credit reports in connection with amounts subject to a billing dispute under 12 CFR 1026.13, and properly handled the refunding of credit balances under 12 CFR 1026.11 and 12 CFR 1026.21. The creditor may retain the evidence by any method that reproduces records accurately (including computer programs) (Comment 25(a)-2). A creditor must permit the enforcing agency to inspect its relevant records for compliance (12 CFR 1026.25(b)).
What are the record retention requirements for mortgage loans? [V-1.1 Truth in Lending Act]
The record retention period for mortgage loans is generally three years (12 CFR 1026.25(c)). A creditor must retain evidence of compliance with the requirements of 12 CFR 1026.19(e) and (f) for three years after the later of the date of consummation, the date disclosures are required to be made, or the date the action is required to be taken (12 CFR 1026.25(c)(1)(i)).
What are the record retention requirements for closing disclosures? [V-1.1 Truth in Lending Act]
For Closing Disclosures, the record retention period is five years. The creditor must retain completed closing disclosures required by 12 CFR 1026.19(f)(1)(i) or (f)(4)(i), and all documents related to such disclosures, for five years after consummation (12 CFR 1026.25(c)(1)(ii)(A)). If a creditor sells, transfers, or otherwise disposes of its interest in a mortgage loan subject to 12 CFR 1026.19(f) and does not service the mortgage loan, the creditor must provide a copy of the closing disclosures to the owner or servicer of the mortgage, and the new owner or servicer must retain such disclosures for the remainder of the five-year period.
What are the record retention requirements for LO compensation? [V-1.1 Truth in Lending Act]
For loan originator compensation, creditors and loan originator organizations must retain records-related requirements for mortgage loan originator compensation and the compensation agreement that governs those payments for three years after the date of payment (12 CFR 1026.25(c)(2)).
What are the record retention requirements to show compliance with the minimum standards for loans secured by a dwelling in 12 CFR 1026.43 [V-1.1 Truth in Lending Act]
A creditor must retain evidence to show compliance with the minimum standards for loans secured by a dwelling in 12 CFR 1026.43 for three years after consummation of a transaction covered by that section (12 CFR 1026.25(c)(3)).
State laws providing rights, responsibilities, or procedures for
consumers or financial institutions for consumer credit contracts
may be what? [V-1.1 Truth in Lending Act]
• Preempted by federal law;
• Not preempted by federal law; or
• Substituted in lieu of the TILA and Regulation Z
requirements.
*Preemption is a legal doctrine that allows a higher level of government to limit or even. eliminate the power of a lower level of government to regulate a specific issue. Under the. Supremacy Clause of the US Constitution, federal law takes precedence over state and. local law.
State law provisions are preempted to the extent that they what? [V-1.1 Truth in Lending Act]
State law provisions are preempted to the extent that they
contradict the requirements in the following chapters of the
TILA and the implementing sections of Regulation Z:
• Chapter 1, “General Provisions,” which contains definitions
and acceptable methods for determining finance charges
and annual percentage rates.
• Chapter 2, “Credit Transactions,” which contains disclosure
requirements, rescission rights, and certain credit card
provisions.
• Chapter 3, “Credit Advertising,” which contains consumer
credit advertising rules and APR oral disclosure
requirements.
For example, a state law would be preempted if it required a
financial institution to use the terms “nominal annual interest
rate” in lieu of “annual percentage rate.”
When are state law provisions are generally not preempted
under federal law? [V-1.1 Truth in Lending Act]
Conversely, state law provisions are generally not preempted
under federal law if they call for, without contradicting chapters
1, 2, or 3 of the TILA or the implementing sections of
Regulation Z, either of the following:
• Disclosure of information not otherwise required. A state
law that requires disclosure of the minimum periodic
payment for open-end credit, for example, would not be
preempted because it does not contradict federal law.
• Disclosures more detailed than those required. A state law
that requires itemization of the amount financed, for
example, would not be preempted, unless it contradicts
federal law by requiring the itemization to appear with the
disclosure of the amount financed in the segregated closedend credit disclosures.
What is the relationship between state law and Chapter 4 of the TILA? (Credit Billing) [V-1.1 Truth in Lending Act]
The relationship between state law and Chapter 4 of the TILA
(Credit Billing) involves two parts. The first part is concerned
with Sections 161 (correction of billing errors) and 162
(regulation of credit reports) of the TILA; the second part
addresses the remaining sections of Chapter 4.
State law provisions are preempted if they differ from the rights,
responsibilities, or procedures contained in Sections 161 or 162.
An exception is made, however, for state law that allows a
consumer to inquire about an account and requires the bank to
respond to such inquiry beyond the time limits provided by
federal law. Such a state law would not be preempted for the
extra time period.
State law provisions are preempted if they result in violations of
Sections 163 through 171 of Chapter 4. For example, a state law
that allows the card issuer to offset the consumer’s credit-card
indebtedness against funds held by the card issuer would be
preempted, since it would violate (12 CFR1026.12(d)).
Conversely, a state law that requires periodic statements to be
sent more than 14 days before the end of a free-ride period
would not be preempted, since no violation of federal law is
involved.
How can a financial institution, state, or other interested party ask the CFPB to determine whether state law contradicts Chapters 1
through 3 of the TILA or Regulation Z or if the state law is different from, or would result in violations of, Chapter 4 of the TILA and the implementing provisions of Regulation Z? [V-1.1 Truth in Lending Act]
A financial institution, state, or other interested party may ask the
CFPB to determine whether state law contradicts Chapters 1
through 3 of the TILA or Regulation Z. The party also may ask if
the state law is different from, or would result in violations of,
Chapter 4 of the TILA and the implementing provisions of
Regulation Z. If the CFPB determines that a disclosure required
by state law (other than a requirement relating to the finance
charge, APR, or the disclosures required under 12 CFR1026.32)
is substantially the same in meaning as a disclosure required
under TILA or Regulation Z, generally creditors in that state may
make the state disclosure in lieu of the federal disclosure.
What is Subpart E of the Regulation? [V-1.1 Truth in Lending Act]
Subpart E – Special Rules for Certain Home Mortgage
Transactions
Subpart E contains special rules for mortgage transactions. 12
CFR1026.32 requires certain disclosures and provides
limitations for closed-end credit transactions and open-end
credit plans that have rates or fees above specified amounts or
certain prepayment penalties. 12 CFR1026.33 requires special
disclosures, including the total annual loan cost rate, for reverse
mortgage transactions. 12 CFR 1026.34 prohibits specific acts
and practices in connection with high-cost mortgages, as defined
in 12 CFR1026.32(a). 12 CFR 1026.35 provides requirements
for higher-priced mortgage loans. 12 CFR 1026.36 prohibits
specific acts and practices in connection with an extension of
credit secured by a dwelling. 12 CFR1026.37 and 12 CFR
1026.38 set forth disclosure requirements for certain closed-end
transactions secured by real property or cooperative unit, as
required by 12 CFR 1026.19(e) and (f).
What are the general rules for certain home mortgage transactions (for subpart E)? [V-1.1 Truth in Lending Act]
General Rules – 12 CFR 1026.31
The requirements and limitations of this subpart are in addition
to, and not in lieu of, those contained in other subparts of
Regulation Z. The disclosures for high-cost, reverse mortgage,
and higher-priced mortgage transactions must be made clearly
and conspicuously in writing, in a form that the consumer may
keep and in compliance with specific timing requirements.
What is a high cost mortgage? [V-1.1 Truth in Lending Act]
Requirements for High-Cost Mortgages – 12 CFR 1026.32
The requirements of this section generally apply to a high-cost
mortgage, which is a consumer credit transaction secured by the
consumer’s principal dwelling (subject to the exemptions
discussed below) that meets any one of the following three
coverage tests.
• The APR will exceed the average prime offer rate (APOR),
as defined in 12 CFR 1026.35(a)(2), applicable for a comparable transaction as of the date the interest rate is set
by:
o More than 6.5 percentage points for first-lien
transactions (other than as described below);
o More than 8.5 percentage points for first-lien
transactions where the dwelling is personal property
and the loan amount is less than $50,000; or
o More than 8.5 percentage points for subordinate-lien
transactions.
The total points and fees (see definition below) for the
transaction will exceed:
o For transactions with a loan amount of $20,000 or more,
5 percent of the total loan amount, with the loan amount
to be adjusted annually on January 1st by the annual
percentage change in the Consumer Price Index reported
on the preceding June 1st; or
o For transactions with a loan amount of less than
$20,000, the lesser of 8 percent of the total transaction
amount or $1,000, with the loan amount to be adjusted
annually on January 1st by the annual percentage
change in the Consumer Price Index reported on the
preceding June 1st.
NOTE: The “total loan amount” (using the face amount of the
note) for closed-end credit is calculated by taking the amount
financed (see 12 CFR 1026.18(b)) and deducting any cost listed
in 12 CFR 1026.32(b)(1)(iii), (iv), or (vi) that is both included in
points and fees and financed by the creditor. The “total loan
amount” for open-end credit is the credit plan limit when the
account is opened.
• The terms of the loan contract or open-end credit agreement
permit the creditor to charge a prepayment penalty (see
definition below) more than 36 months after consummation
or account opening, or prepayment penalties that exceed
more than 2 percent of the amount prepaid (12 CFR
1026.32(a)(1)(iii)).
NOTE: 12 CFR 1026.32(d)(6) prohibits prepayment penalties
for high-cost mortgages. However, if a mortgage loan has a
prepayment penalty that may be imposed more than 36 months
after consummation or account opening or that is greater than 2
percent of the amount prepaid, the loan is a high-cost mortgage
regardless of interest rate or fees. Therefore, the prepayment
penalty coverage test above effectively bans transactions of the
types subject to HOEPA coverage that permit creditors to
What are Exemptions from HOEPA Coverage – 12 CFR 1026.32(a)(2) [V-1.1 Truth in Lending Act]?
Exemptions from HOEPA Coverage – 12 CFR 1026.32(a)(2)
• Reverse mortgage transactions subject to 12 CFR 1026.33;
• A transaction that finances the initial construction of a
dwelling;
• A transaction originated by a Housing Finance Agency,
where the Housing Finance Agency is the creditor for the
transaction; or
• A transaction originated pursuant to the U.S. Department of
Agriculture’s Rural Development Section 502 Direct Loan
Program
How is the APR used to determine whether a mortgage is a high-cost mortgage is calculated? [V-1.1 Truth in Lending Act]?
Determination of APR for High-Cost Mortgages – 12 CFR
1026.32(a)(3)
The APR used to determine whether a mortgage is a high-cost
mortgage is calculated differently from the APR that is used on
TILA disclosures. Specifically, the APR for HOEPA coverage is
based on the following:
• If the APR will not vary during the length of the loan or
credit plan (i.e., for fixed-rate transactions), the interest rate
in effect as of the date the interest rate for the transaction is
set (12 CFR 1026.32(a)(3)(i));
• If the interest rate may vary during the term of the loan or
credit plan in accordance with an index, the interest rate
that results from adding the maximum margin permitted at
any time during the term of the loan or credit plan to the
index rate in effect as of the date the interest rate for the
transaction is set, or to the introductory interest rate,
whichever is greater (12 CFR 1026.32(a)(3)(ii)); or
• If the interest rate may or will vary during the term of the
loan or credit plan other than as described above (i.e., as in
a step-rate transaction), the maximum interest rate that may
be imposed during the life of the loan or credit plan (12
CFR 1026.32(a)(3)(iii)).
For a closed-end (HPML) transaction, how do examiners calculate the points and fees? (12 CFR 1026.32(b)(1)):
For a closed-end transaction, calculate the points and fees by
including the following charges (12 CFR 1026.32(b)(1)):
• All items included in the finance charge under 12 CFR
1026.4(a) and (b), except that the following items are
excluded:
o Interest or the time-price differential
o Any premiums or other charges imposed in connection
with a federal or state agency program for any
guaranty or insurance that protects the creditor against
the consumer’s default or other credit loss (i.e., upfront and annual Federal Housing Administration
(FHA) premiums, U.S. Department of Veterans Affairs
(VA) funding fees, and USDA guarantee fees);
o Premiums or other charges for any guaranty or
insurance that protects creditors against the
consumer’s default or other credit loss and is not in
connection with a federal or state agency program (i.e.,
private mortgage insurance (PMI) premiums) as
follows:
The entire amount of any premiums or other
charges payable after consummation (i.e.,
monthly or annual PMI premiums); or
If the premium or other charge is payable at or
before consummation, the portion of any such
premium or other charge that is not in excess of
the permissible up-front mortgage insurance
premium for FHA loans, but only if the premium
or charge is refundable on a pro rata basis and the
refund is automatically issued upon the
notification of the satisfaction of the underlying
mortgage loan. The permissible up-front mortgage
insurance premiums for FHA loans are published
in HUD Mortgagee Letters, available online at:
http://portal.hud.gov/hudportal/HUD?src=/progra
m_offices/administration/hudclips/letters/mortgag
ee.
o Bona fide third-party charges not retained by the
creditor, loan originator, or an affiliate of either, unless
the charge is required to be included under 12 CFR
1026.32(b)(1)(i)(C), (iii), or (v);
o Up to two bona fide discount points payable by the
consumer in connection with the transaction, provided
that the interest rate without any discount does not
exceed:
The APOR for a comparable transaction by more
than one percentage point; or
If the transaction is secured by personal property,
the average rate for a loan insured under Title I of
the National Housing Act by more than one
percentage point, or
o If no discount points have been excluded above, then
up to one bona fide discount point payable by the
consumer in connection with the transaction, provided
that the interest rate without any discount does not
exceed:
The APOR for a comparable transaction by more
than two percentage points; or
If the transaction is secured by personal property,
the average rate for a loan insured under Title I of
the National Housing Act by more than two
percentage points.
NOTE: In the case of a closed-end plan, a bona fide discount
point means an amount equal to 1 percent of the loan amount
paid by the consumer that reduces the interest rate or time-price
differential applicable to the transaction based on a calculation
that is consistent with established industry practices for
determining the amount of reduction in the interest rate or timeprice differential appropriate for the amount of discount points
paid by the consumer (12 CFR 1026.32(b)(3)).
• All compensation paid directly or indirectly by a consumer
or creditor to a loan originator (as defined in 12 CFR
1026.36(a)(1) that can be attributed to the transaction at the
time the interest rate is set unless:
o That compensation is paid by a consumer to a
mortgage broker, as defined in 12 CFR 1026.36(a)(2),
and already has been included in points and fees under
(12 CFR 1026.32(b)(1)(i));
o That compensation is paid by a mortgage broker, as
defined in 12 CFR 1026.36(a)(2), to a loan originator
that is an employee of the mortgage broker;
o That compensation is paid by a creditor to a loan
originator that is an employee of the creditor; or
• All items listed in 12 CFR 1026.4(c)(7), other than amounts
held for future taxes, unless all of the following conditions
are met:
o The charge is reasonable;
o The creditor receives no direct or indirect
compensation in connection with the charge; and
o The charge is not paid to an affiliate of the creditor.
• Premiums or other charges paid at or before consummation,
whether paid in cash or financed, for any credit life, credit
disability, credit unemployment, or credit property
insurance, or for any other life, accident, health, or loss-ofincome insurance for which the creditor is a beneficiary, or
any payments directly or indirectly for any debt
cancellation or suspension agreement or contract.
• The maximum prepayment penalty that may be charged or
collected under the terms of the mortgage or credit plan.
• The total prepayment penalty incurred by the consumer if
the consumer refinances an existing mortgage loan, orterminates an existing open-end credit plan in connection
with obtaining a new mortgage loan, with a new mortgage
transaction extended by the current holder of the existing
loan, a servicer acting on behalf of the current holder, or an
affiliate of either.
For a open-end (HPML) transaction, how do examiners calculate the points and fees? (12 CFR 1026.32(b)(1)): [V-1.1 Truth in Lending Act]?
For an open-end credit plan, points and fees mean the
following charges that are known at or before account opening
(12 CFR 1026.32(b)(2)):
• All items included in the finance charge under 12 CFR
1026.4(a) and (b), except that the following items are
excluded:
o Interest or the time-price differential;
o Any premiums or other charges imposed in connection
with a federal or state agency program for any
guaranty or insurance that protects the creditor against
the consumer’s default or other credit loss (i.e., upfront and annual FHA premiums, VA funding fees,
and USDA guarantee fees);
o Premiums or other charges for any guaranty or
insurance that protects creditors against the
consumer’s default or other credit loss and is not in
connection with a federal or state agency program (i.e.,
private mortgage insurance (PMI) premiums) as
follows:
If the premium or other charge is payable after
account opening, the entire amount of such premium
or other charge, or
If the premium or other charge is payable at or
before account opening, the portion of any such
premium or other charge that is not in excess of the
permissible up-front mortgage insurance premium
for FHA loans, but only if the premium or charge is
refundable on a pro rata basis and the refund is
automatically issued upon the notification of the
satisfaction of the underlying mortgage loan. The
permissible up-front mortgage insurance premiums
for FHA loans are published in HUD Mortgagee
Letters, available online at:
https://www.hud.gov/program_offices/administratio
n/hudclips/letters/mortgagee
o Bona fide third-party charges not retained by the
creditor, loan originator, or an affiliate of either, unless
the charge is required to be included under 12 CFR
1026.32(b)(2)(i)(C), (iii), or (iv);
o Up to two bona fide discount points payable by the
consumer in connection with the transaction, provided
that the interest rate without any discount does not
exceed:
The APOR by more than one percentage point; or
If the transaction is secured by personal property,
the average rate for a loan insured under Title I of
the National Housing Act by more than one
percentage point, or
o If no discount points have been excluded above, then
up to one bona fide discount point payable by the
consumer in connection with the transaction, provided
that the interest rate without any discount does not
exceed:
The APOR by more than two percentage points; or
If the transaction is secured by personal property,
the average rate for a loan insured under Title I of
the National Housing Act by more than two
percentage points.
NOTE: A bona fide discount point means an amount
equal to 1 percent of the credit limit when the account
is opened, paid by the consumer, that reduces the
interest rate or time-price differential applicable to the
transaction based on a calculation that is consistent
with established industry practices for determining the
amount of reduction in the interest rate or time-price
differential appropriate for the amount of discount
points paid by the consumer (12 CFR
1026.32(b)(3)(ii)).
• All compensation paid directly or indirectly by a consumer
or creditor to a loan originator (as defined in 12 CFR
1026.36(a)(1)) that can be attributed to the transaction at
the time the interest rate is set unless:
o That compensation is paid by a consumer to a
mortgage broker, as defined in 12 CFR 1026.36(a)(2),
and already has been included in points and fees under
(12 CFR1026.33(b)(2)(i)); or
o That compensation is paid by a mortgage broker as
defined in 12 CFR1026.36(a)(2) to a loan originator
that is an employee of the mortgage broker; or
o That compensation is paid by a creditor to a loan
originator that is an employee of the creditor; or
o That compensation is paid by a retailer of
manufactured homes to its employee.
NOTES:
• A person is not a loan originator if the person does not take a
consumer credit application or offer or negotiate credit
terms available from a creditor to that consumer based on
the consumer’s financial characteristics, but the person
performs purely administrative or clerical tasks on behalf of a person who does engage in such activities. For purposes of
12 CFR 1026.36, “credit terms” include rates, fees, or other
costs, and a consumer’s financial characteristics include any
factors that may influence a credit decision, such as debts,
income, assets or credit history (12 CFR 1026.36(a)(6)).
• A retailer of manufactured or modular homes or an
employee of such a retailer who does not receive
compensation or gain for engaging in loan originator
activities in excess of any compensation or gain received in a
comparable cash transaction, and who does not directly
negotiate with the consumer or lender on loan terms, is not a
loan originator, provided the retailer or employee discloses
to the consumer in writing any corporate affiliation with any
creditor. Where the retailer has a corporate affiliation with
any creditor, at least one unaffiliated creditor must also be
disclosed (15 U.S.C. 1602(dd)(2)(C)(ii)).
• All items listed in 12 CFR1026.4(c)(7), other than amounts
held for future taxes, unless all of the following conditions
are met:
o The charge is reasonable;
o The creditor receives no direct or indirect
compensation in connection with the charge; and
o The charge is not paid to an affiliate of the creditor.
• Premiums or other charges paid at or before account
opening for any credit life, credit disability, credit
unemployment, or credit property insurance, or for any
other life, accident, health, or loss-of-income insurance for
which the creditor is a beneficiary, or any payments directly
or indirectly for any debt cancellation or suspension
agreement or contract.
• The maximum prepayment penalty that may be charged or
collected under the terms of the credit plan.
• The total prepayment penalty incurred by the consumer if
the consumer refinances an existing closed-end credit
transaction with an open-end credit plan, or terminates an
existing open-end credit plan in connection with obtaining a
new open-end credit with the current holder of the existing
transaction or plan, a servicer acting on behalf of the
current holder, or an affiliate of either.
In addition to the charges listed above, points and fees for openend credit plans include the following items:
• Fees charged for participation in the credit plan, payable at
or before account opening, as described in 12 CFR
1026.4(c)(4), and
• Any transaction fee that will be charged to draw funds on
the credit line, as described in (12 CFR
1026.32(b)(2)(viii)).
What is a prepayment penalty? [V-1.1 Truth in Lending Act]?
Prepayment Penalty Definition – 12 CFR1026.32(b)(6)
For closed-end credit transactions, a prepayment penalty is a
charge imposed for paying all or part of the transaction’s
principal before the date on which the principal is due, with
limited exceptions.
For open-end credit plans, a prepayment penalty is a charge
imposed by the creditor if the consumer terminates the credit
plan prior to the end of its term.
NOTE: Waived, bona fide third-party charges that are later
imposed if the closed-end transaction is prepaid or the
consumer terminates the open-end credit plan sooner than 36
months after consummation or account opening are not
considered prepayment penalties.
NOTE: For closed-end transactions insured by the Federal
Housing Administration and consummated before January 21,
2015, interest charged consistent with the monthly interest
accrual amortization method is not a prepayment penalty, so
long as the interest is charged consistent with the monthly
interest accrual amortization method used for those loans. (See
Comment 32(b)(6)-1(iv))
What (generally) are the disclosure requirements for HPMLs? [V-1.1 Truth in Lending Act]?
High-Cost Mortgage Disclosures – 12 CFR 1026.32(c)
In addition to the other disclosure requirements of Regulation Z,
high-cost mortgages require certain additional information to be
disclosed in conspicuous type size to consumers before
consummation of the transaction or account opening. These
disclosures include:
• Notice to the consumer using the required language in 12
CFR1026.32(c)(1);
• The annual percentage rate (12 CFR1026.32(c)(2));
• Specified information concerning the regular or minimum
periodic payment and the amount of any balloon payment,
if permitted under the high-cost mortgage limitations in 12
CFR1026.32(d) (12 CFR1026.32(c)(3)).
• For variable-rate transactions, a statement that the interest
and monthly payment may increase, and the amount of the
single maximum monthly payment based on the maximum
interest rate required to be included in the contract (12 CFR
1026.32(c)(4)) and
• The total amount borrowed for closed-end credit
transactions or the credit limit for the plan when the
account is opened for an open-end credit plan (12 CFR
1026.32(c)(5)).
NOTE: For closed-end credit transactions, if the amount
borrowed includes charges to be financed under 12 CFR
1026.34(a)(10), this fact must be stated, grouped together
with the disclosure of amount borrowed. The disclosure of the amount borrowed will be treated as accurate if it is not
more than $100 above or below the amount required to be
disclosed.
What are limitations for HPMLS [V-1.1 Truth in Lending Act]?
High-Cost Mortgage Limitations – 12 CFR 1026.32(d)
Certain loan terms, including negative amortization, interest rate
increases after default, and prepayment penalties are prohibited
for high-cost mortgages. Others, including balloon payments
and due-on-demand clauses, are restricted.
• Balloon payments, defined as payments that are more than
two times a regular periodic payment, are generally
prohibited for high-cost mortgages (12 CFR
1026.32(d)(1)(i)). However, balloon payments are allowed
in certain limited circumstances.
o For closed-end transactions, balloon payments are
permitted when (a) the loan has a payment schedule
that is adjusted to seasonal or irregular income of the
consumer; (b) the loan is a “bridge” loan made in
connection with the purchase of a new dwelling and
matures in 12 months or less; (c) the creditor is a small
creditor operating in a rural or underserved area that
meets the criteria set forth in 12 CFR 1026.43(f) for
small creditor rural or underserved balloon-payment
qualified mortgages; or, (d) until April 1, 2016, the
creditor is a small creditor that meets the criteria set
forth in 1026.43(e)(6)) for temporary balloon-payment
qualified mortgages (12 CFR 1026.32(d)(1)(ii)).
o For an open-end credit plan where the terms of the
plan provide for a draw period where no payment is
required, followed by a repayment period where no
further draws may be taken, the initial payment
required after conversion to the repayment phase of the
credit plan is not considered a “balloon” payment.
However, if the terms of an open-end credit plan do
not provide for a separate draw period and repayment
period, the balloon payment limitation applies (12
CFR1026.32(d)(1)(iii)).
• Acceleration clauses or demand features are limited and
may only permit creditors to accelerate and demand
repayment of the entire outstanding balance of a high-cost
mortgage if:
o There is fraud or material misrepresentation by the
consumer in connection with the loan (12 CFR
1026.32(d)(8)(i));
o The consumer fails to meet the repayment terms of the
agreement for any outstanding balance that results in a
default on the loan (12 CFR 1026.32(d)(8)(ii)); or
o There is any action (or inaction) by the consumer that
adversely affects the rights of the creditor’s security
interest for the loan, such as the consumer failing to pay required taxes on the property (12 CFR
1026.32(d)(8)(iii) and comments 32(d)(8)(iii)-1 and
-2).
What are prohibited Acts or Practices in Connection with High-Cost
Mortgages – 12 CFR 1026.34 [V-1.1 Truth in Lending Act]?
Prohibited Acts or Practices in Connection with High-Cost
Mortgages – 12 CFR 1026.34
In addition to the requirements in 12 CFR 1026.32, Regulation
Z imposes additional requirements for high-cost mortgages,
several of which are discussed below.
Refinancing Within OneYear – 12 CFR1026.34(a)(3)
A creditor or assignee cannot refinance a consumer’s high-cost
mortgage into a second high-cost mortgage within the first year
of the origination of the first loan, unless the second high-cost
mortgage is in the consumer’s interest.
What are considerations for repayment Ability for High-Cost Mortgages [V-1.1 Truth in Lending Act]?
Repayment Ability for High-Cost Mortgages
– 12 CFR1026.34(a)(4)
Among other requirements, a creditor extending high-cost
mortgage credit subject to 12 CFR 1026.32 must not make such
loans without regard to the consumer’s repayment ability as of
consummation or account opening as applicable (12 CFR
1026.34(a)(4)).
For closed-end credit transactions that are high-cost mortgages,
12 CFR1026.34(a)(4) requires a creditor to comply with the
repayment ability requirements set forth in 12 CFR1026.43.
For open-end credit plans that are high-cost mortgages, a
creditor may not open a credit plan for a consumer where credit
is or will be extended without regard to the consumer’s
repayment ability as of account opening, including the
consumer’s current and reasonably expected income,
employment, assets other than the collateral, and current
obligations, including any mortgage-related obligations.
• For the purposes of these open-end requirements,
mortgage-related obligations include, among other things,
property taxes, premiums and fees for mortgage-related
insurance that are required by the creditor, fees and special
assessments such as those imposed by a condominium
association, and similar expenses required by another credit
obligation undertaken prior to or at account opening and
secured by the same dwelling that secures the high-cost
mortgage transaction (12 CFR1026.34(a)(4)(i)).
• A creditor must also verify both current obligations and the
amounts of income or assets that it relies on to determine
repayment ability using W-2s, tax returns, payroll receipts,
financial institution records, or other third-party documents
that provide reasonably reliable evidence of the consumer’s
income or assets (12 CFR 1026.34(a)(4)(ii)).
For open-end high-cost mortgages, a presumption of compliance
is available, but only if the creditor:
Verifies the consumer’s repayment ability as required under
12 CFR1026.34(a)(4)(ii));
• Determines the consumer’s repayment ability taking into
account current obligations and mortgage-related
obligations, using the largest required minimum periodic
payment based on the assumptions that:
o The consumer borrows the full credit line at account
opening with no additional extensions of credit;
o The consumer makes only required minimum periodic
payments during the draw period and any repayment
period; and
o If the APR can increase, the maximum APR that is
included in the contract applies to the plan at account
opening and will apply during the draw and any
repayment period (12 CFR 1026.34(a)(4)(iii)(B)).
• Assesses the consumer’s repayment ability, taking into
account either the ratio of total debts to income or the
income the consumer will have after paying current
obligations (12 CFR1026.34(a)(4)(iii)(C)).
NOTE: No presumption of compliance will be available for an
open-end high-cost mortgage transaction in which the regular
periodic payments, when aggregated, do not fully amortize the
outstanding principal balance except for transactions with
balloon payments permitted under 12 CFR 1026.32(d)(1)(ii).
What are the high-cost mortgage pre-loan counseling requirements? [V-1.1 Truth in Lending Act]?
High-Cost Mortgage Pre-Loan Counseling
– 12 CFR1026.34(a)(5)
Creditors that originate high-cost mortgages must receive
written certification that the consumer has obtained counseling
on the advisability of the mortgage from a counselor approved
by HUD, or if permitted by HUD, a state housing finance
authority (specific content for the certifications can be found in
(12 CFR1026.34(a)(5)(iv)). Counseling must occur after the
consumer receives a good faith estimate or initial TILA
disclosure required by 12 CFR 1026.40 (or, for transactions
where neither of those disclosures are provided, the disclosures
required by (12 CFR 1026.32(c)). Additionally, counseling
cannot be provided by a counselor who is employed by, or
affiliated with, the creditor. A creditor may pay the fees for
counseling but is prohibited from conditioning the payment of
fees upon the consummation of the mortgage transaction or, if
the consumer withdraws his or her application, upon receipt of
the certification. However, a creditor may confirm that a
counselor provided counseling to the consumer prior to paying
these fees. Finally, a creditor is prohibited from steering a
consumer to a particular counselor.
What default activity is prohibited in connection with HPMLs [V-1.1 Truth in Lending Act]?
Recommended Default – 12 CFR1026.34(a)(6)
Creditors (and mortgage brokers) are prohibited from
recommending or encouraging a consumer to default on an existing loan or other debt prior to, and in connection with,
the consummation or account opening of a high-cost
mortgage that refinances all or any portion of the existing
loan or debt.
What modification activity is prohibited in connection with HPMLs [V-1.1 Truth in Lending Act]?
Loan Modification and Deferral Fees
– 12 CFR 1026.34(a)(7)
Creditors, successors in interest, assignees, or any agents of
these parties may not charge a consumer any fee to modify,
renew, extend, or amend a high-cost mortgage, or to defer any
payment due under the terms of the mortgage.
What late fee limitations are there for HPMLs? [V-1.1 Truth in Lending Act]?
Late Fees – 12 CFR 1026.34(a)(8)
Late payment charges for a high-cost mortgage must be
permitted by the terms of the loan contract or open-end
agreement and may not exceed 4 percent of the amount of the
payment that is past due. Late payment charges are permitted
only if payment is not received by the end of the 15-day period
beginning on the day the payment is due or, where interest on
each installment is paid in advance, by the end of the 30-day
period beginning on the day the payment is due.
Creditors are also prohibited from “pyramiding” late fees—that
is, charging late payments if any delinquency is attributable only
to a late payment charge that was imposed due to a previous late
payment, and the payment otherwise is considered a full
payment for the applicable period (and any allowable grace
period). If a consumer fails to make a timely payment by the due
date then subsequently resumes making payments but has not
paid all past due payments, the creditor can continue to impose
late payment charges for the payments outstanding until the
default is cured.
What are the requirements/prohibitions surrounding charging fees for payoff statements [V-1.1 Truth in Lending Act]?
Fees for Payoff Statements – 12 CFR 1026.34(a)(9)
A creditor or servicer may not charge a fee for providing
consumers (or authorized representatives) with a payoff
statement on a high-cost mortgage. Payoff statements must be
provided to consumers within five business days after receiving
the request for a statement. A creditor or servicer may charge a
processing fee to cover the cost of providing the payoff
statement by fax or courier only, provided that such fee may not
exceed an amount that is comparable to fees imposed for similar
services provided in connection with a non-high-cost mortgage
and that a payoff statement be made available to the consumer
by an alternative method without charge. If a creditor charges a
fee for providing a payoff statement by fax or courier, the
creditor must disclose the fee prior to charging the consumer
and must disclose to the consumer that other methods for
providing the payoff statement are available at no cost. Finally,
a creditor is permitted to charge a consumer a reasonable fee for
additional payoff statements during a calendar year in which
four payoff statements have already been provided without
charge other than permitted processing fees.
What is a reverse mortgage [V-1.1 Truth in Lending Act]?
Reverse Mortgages – 12 CFR 1026.33
A reverse mortgage is a non-recourse transaction secured by the
consumer’s principal dwelling thatties repayment (other than upon
default) to the homeowner’s death or permanent move from, or
transfer of the title of, the home. Special disclosure requirements
apply to reverse mortgages.
What are higher-priced mortgage loans [V-1.1 Truth in Lending Act]?
Higher-Priced Mortgage Loans – 12 CFR 1026.35(a)
A mortgage loan subject to 12 CFR 1026.35 (higher-priced
mortgage loan) is a closed-end consumer credit transaction
secured by the consumer’s principal dwelling with an APR that
exceeds the average prime offer rate for a comparable
transaction as of the date the interest rate is set by:
• 1.5 or more percentage points for loans secured by a first
lien on a dwelling where the amount of the principal
obligation at the time of consummation does not exceed the
maximum principal obligation eligible for purchase by
Freddie Mac;
• 2.5 or more percentage points for loans secured by a first
lien on a dwelling, where the amount of the principal
obligation at the time of consummation exceeds the
maximum principal obligation eligible for purchase by
Freddie Mac; or
• 3.5 or more percentage points for loans secured by a
subordinate lien on a dwelling.
What is the APOR [V-1.1 Truth in Lending Act]?
Average prime offer rate means an APR that is derived from
average interest rates, points, and other loan pricing terms
currently offered to consumers by a representative sample of
creditors for mortgage transactions that have low-risk pricing
characteristics. The CFPB publishes average prime offer rates
for a broad range of types of transactions in a table updated at
least weekly, as well as the methodology it uses to derive these
rates. These rates are available on the website of the Federal
Financial Institutions Examination Council (FFIEC).
http://www.ffiec.gov/ratespread/newcalchelp.aspx.
Additionally, creditors extending mortgage loans subject to 12
CFR 1026.43(c) must verify a consumer’s ability to repay as
required by (12 CFR 1026.43(c)).
Finally, the regulation prohibits creditors from structuring a
home-secured loan that does not meet the definition of open-end
credit as an open-end plan to evade these requirements.
What are the escrow requirements surrounding HPMLs [V-1.1 Truth in Lending Act]?
Higher-Priced Mortgage Loans Escrow Requirement
– 12 CFR 1026.35(b)
In general, a creditor may not extend a higher-priced mortgage
loan (including high-cost mortgages that also meet the definition
of a higher-priced mortgage loan), secured by a first lien on a
principal dwelling unless an escrow account is established
before consummation for payment of property taxes and
premiums for mortgage-related insurance required by the creditor.
An escrow account for a higher-priced mortgage loan need not
be established for:
• A transaction secured by shares in a cooperative,
• A transaction to finance the initial construction of a
dwelling,
• A temporary or “bridge” loan with a term of 12 months or
less, or
• A reverse mortgage subject to (12 CFR 1026.33).
There is also a limited exemption that allows creditors to
establish escrow accounts for property taxes only (rather than
for both property taxes and insurance) for loans secured by
dwellings in a “common interest community” under 12 CFR
1026.35(b)(2)(ii), where dwelling ownership requires
participation in a governing association that is obligated to
maintain a master insurance policy insuring all dwellings (12
CFR1026.35(b)(2)(ii)).
What are exemptions to the escrow requirements for HPMLs? [V-1.1 Truth in Lending Act]?
There is also a limited exemption that allows creditors to
establish escrow accounts for property taxes only (rather than
for both property taxes and insurance) for loans secured by
dwellings in a “common interest community” under 12 CFR
1026.35(b)(2)(ii), where dwelling ownership requires
participation in a governing association that is obligated to
maintain a master insurance policy insuring all dwellings (12
CFR1026.35(b)(2)(ii)).
An exemption to the higher-priced mortgage loan escrow
requirement is available for first-lien higher-priced mortgage
loans made by certain creditors that operate in a “rural” or
“underserved” area (12 CFR 1026.35(b)(2)(iii) and its
associated commentary). To make use of this exemption, a
creditor:
1. Must have made, during the preceding calendar year (or if
the application for the transaction was received before April
1 of the current calendar year, during either of the two
preceding calendar years), a covered transaction secured by
a first lien on a property that is located in an area that meets
the definition of either “rural” or “underserved” as set forth
in (12 CFR 1026.35(b)(2)(iv));33
2. Together with its affiliates, must not have extended more
than 2,000 covered transactions (secured by first liens, that were sold, assigned, or otherwise transferred to another
person or subject at the time of consummation to a
commitment to be acquired by another person) in the
preceding calendar year (or if the application for the
transaction was received before April 1 of the current
calendar year, during either of the two preceding calendar
years),
3. Together, with its affiliates that regularly extended34
covered transactions (secured by first liens), must have had
less than $2 billion in total assets 35 as of the preceding
December 31st (or if an application was received before
April 1 of the current year, as of either of the two preceding
December 31sts), and
4. The creditor and its affiliates must not maintain escrow
accounts for any extensions of consumer credit secured by
real property or a dwelling that the creditor or its affiliate
currently services. However, such creditors (and their
affiliates) are permitted to maintain escrow accounts
established to comply with the rule for applications
received on or after April 1, 2010, and before May 1, 2016
without losing the exemption and to offer an escrow
account to accommodate distressed borrowers.
For first-lien higher-priced mortgage loans originated by a
creditor that would not be required to establish an escrow
account based on the above exemption, if that creditor has
obtained a commitment for a higher-priced mortgage loan to be
acquired by another company that is not eligible for the
exemption, an escrow account must be established. Since an
escrow account will be established for this loan, however, note
that if the creditor that has obtained a commitment for the
higher-priced mortgage loan to be acquired by a non-exempt
company would like to remain eligible for the exemption above,
neither the creditor nor its affiliates can service the loan on or
beyond the second periodic payment under the terms of the loan.
33 The regulation defines these two terms in 12 CFR 1026.35(b)(2)(iv)(A) and
(B). A rural area is a county that is neither in a metropolitan statistical area or a
micropolitan statistical area that is adjacent to a metropolitan statistical area; or a
census block that is not in an urban area, as defined by the U.S. Census Bureau
using the latest decennial census of the United States; or a county or a census
block that has been designated as “rural” by the CFPB pursuant to the application
process established in 2016. See Application Process for Designation of Rural
Area under Federal Consumer Financial Law; Procedural Rule, 81 FR 11099
(March 3, 2016). The provisions related to the application process ceased to have
any force or effect on December 4, 2017 (12 CFR 1026.35(b)(2)(iv)(A)(3)). An
underserved area is a county defined by using Home Mortgage Disclosure Act
data for the preceding year to determine whether it is a county in which no more
than two creditors extended covered transactions secured by first liens on
properties in the county five or more times. A property is in a rural or
underserved area for a particular year if it is listed as a rural or underserved
county by the CFPB, is identified as in a rural or underserved area by any
automated tool on the Bureau’s website or is not designated as located in an
urban area in the most recent delineation of urban areas announced by the Census
Bureau by any automated address search tool that the Census Bureau provides on
its public website for that purpose.
34 See Comment 35(b)(2)(iii)-1.iii for discussion of “ regularly extended” as it
applies to affiliates in 12 CFR 1026.35(b)(2)(iii)(C).
35 The asset threshold is adjusted automatically each year, based on the year-toyear change in the average of the Consumer Price Index for Urban Wage Earners
and Clerical Workers.
A creditor or servicer may cancel an escrow account only upon
the earlier of termination of the underlying loan, or a
cancellation request from the consumer five years or later after
consummation. However, a creditor or servicer is not permitted
to cancel an escrow account, even upon request from the
consumer, unless the unpaid principal balance of the higherpriced mortgage loan is less than 80 percent of the original value
of the property securing the loan and the consumer is not
currently delinquent or in default on the loan (12 CFR
1026.35(b)(3)).
What are the appraisal requirements for HPMLs [V-1.1 Truth in Lending Act]?
Higher-Priced Mortgage Loans Appraisal Requirement
– 12 CFR1026.35(c) 36
General Requirements, Exception, and Safe Harbor
A creditor may not extend a higher-priced mortgage loan
without first obtaining a written appraisal of the property to be
mortgaged. The appraisal must be performed by a state-certified
or licensed appraiser (defined in part as an appraiser who
conducts the appraisal in conformity with the Uniform
Standards of Professional Appraisal Practice (USPAP) and the
requirements applicable to appraisers in Title IX of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and its implementing regulations). The appraisal
must include a physical visit of the interior of the dwelling. The
appraisal requirements do not apply to:
What don’t appraisal requirements for HPMLs apply to? [V-1.1 Truth in Lending Act]?
The appraisal
must include a physical visit of the interior of the dwelling. The
appraisal requirements do not apply to:
• Qualified mortgages (QM) under 12 CFR 1026.43 or under
rules on qualified mortgages adopted by HUD, VA, or
USDA, including mortgages that meet the QM criteria for
these rules and are insured, guaranteed, or administered by
those agencies;
• An extension of credit equal to or less than the applicable
threshold amount that is published in the official staff
commentary to the regulation, which is adjusted every year
as applicable to reflect increases in the Consumer Price
Index for Urban Wage Earners and Clerical Workers;37
• A transaction secured by a mobile home, boat, or trailer;
• A transaction to finance the initial construction of a
dwelling;
• A loan with maturity of 12 months or less, if the purpose of
the loan is a “bridge” loan connected with the acquisition of
a dwelling intended to become the consumer’s principal
dwelling;
A cost estimate of the value of the manufactured
home securing the transaction obtained from an
independent cost service provider; or
A valuation, as defined in 12 CFR 1026.42(b)(3),
of the manufactured home performed by a person
who has no direct or indirect interest, financial or
otherwise, in the property or transaction for which
the valuation is performed and has training in
valuing manufactured homes.
o Transactions secured by an existing (used)
manufactured home and land are not exempt from the
appraisal requirement.
A creditor may obtain a safe harbor for compliance with 12 CFR
1026.35(c)(3)(i) by ordering that the appraisal be completed in
conformity with USPAP and the requirements applicable to
appraisers in Title IX of FIRREA and its implementing
regulations, verifying that the appraiser is certified or licensed
through the National Registry; and confirming that the written
appraisal contains the elements listed in Appendix N of
Regulation Z. In addition, the creditor must have no actual
knowledge that the facts or certifications contained in the
appraisal are inaccurate (12 CFR1026.35(c)(3)(ii)).
A reverse mortgage transaction subject to (12 CFR
1026.33(a)).
• A refinancing secured by a first lien, as defined in 12 CFR
1026.20(a) (except that the creditor need not be the original
creditor or a holder or servicer of the original obligation),
provided that the refinancing meets the following criteria:
o The credit risk of the refinancing is retained by the
person who held the credit risk of the existing
obligation and there is no commitment, at
consummation, to transfer the credit risk to another
person; or, the refinancing is insured or guaranteed by
the same Federal government agency that insured or
guaranteed the existing obligation;
o The regular periodic payments under the refinance
loan do not:
Cause the principal balance to increase;
Allow the consumer to defer repayment of
principal; or
Result in a balloon payment, as defined in (12
CFR1026.18(s)(5)(i)).
o The proceeds from the refinancing are used solely to
satisfy the existing obligation and amounts attributed
solely to the costs of the refinancing.
• A transaction secured by a manufactured home under the
following conditions:38
o If the transaction is for a new manufactured home and
land, the exemption shall only apply to the requirement
that the appraiser conduct a physical visit of the
interior of the new manufactured home.
o If the transaction is for a manufactured home and not
land, for which the creditor obtains one of the
following and provides a copy to the consumer no later
than three business days prior to consummation of the
transaction:
For a new manufactured home, the manufacturer’s
invoice for the manufactured home securing the
transaction, provided that the date of manufacture
is no earlier than 18 months prior to the creditor’s
receipt of the consumer’s application for credit;
36 The higher-priced mortgage loans appraisal requirement was adopted pursuant
to an interagency rulemaking conducted by the Board of Governors of the Federal
Reserve System (Board), the CFPB, the Federal Deposit Insurance Corporation
(FDIC), the FHFA, the NCUA, and the Office of the Comptroller of the Currency
(OCC). The Board codified the rule at 12 CFR 226.43, and the OCC codified the
rule at 12 CFR Part 34. There is no substantive difference among these three sets
of rules.
37 From January 1, 2015, through December 31, 2015, the threshold amount was
$25,500. See Comment 35(c)(2)(ii) – 3. Effective January 1, 2022, to December
31, 2022, the threshold is $28,500.
38 Prior to July 18, 2015, appraisal requirements do not apply to transactions
secured in whole or in part by a manufactured home (12 CFR 1026.35(c)(2)).
This section describes how the exemption will work under an amendment to the
rule that takes effect on July 18, 2015.
What are the additional HPML appraisal requirements and exclusions? [V-1.1 Truth in Lending Act]?
Additional Appraisals
The appraisal provisions in 12 CFR1026.35(c) also require
creditors to obtain an additional written appraisal before
extending a higher-priced mortgage loan in two instances:
* First, when the dwelling that is securing the higher-priced
mortgage loan was acquired by the seller 90 or fewer days
prior to the consumer’s agreement to purchase the property
and the price of the property has increased by more than 10
percent.
* Additionally, when the dwelling was acquired by the seller
between 91 and 180 days prior to the consumer’s
agreement to purchase the property, and the price of the
property has increased by more than 20 percent.
A creditor must obtain an additional interior appraisal meeting
the same requirements as the first appraisal (written report by a
certified or licensed appraiser in compliance with USPAP and
FIRREA based upon an interior property visit), unless the
creditor can demonstrate, by exercising reasonable diligence,
that the circumstances necessitating an additional appraisal do
not apply. A creditor can meet the reasonable diligence
requirement if it bases its determination on information
contained in certain written source documents (such as a copy of
the seller’s recorded deed or a copy of a property tax bill) (See
Appendix O of Regulation Z). If, after exercising reasonable
diligence, the creditor is unable to determine whether the
circumstances necessitating an additional appraisal apply, the
creditor must obtain an additional appraisal.
If the creditor is required to obtain an additional written
appraisal, the two required appraisals must be conducted by
different appraisers. Each appraisal obtained must include a
physical visit of the interior of the dwelling. In instances where
two appraisals are required, creditors are allowed to charge for
only one of the two appraisals.
One of the two required written appraisals must contain an
analysis of the difference between the price at which the seller
obtained the property and the price the consumer agreed to pay
to acquire the property, an analysis of changes in market
conditions between when the seller acquired the property and
when the consumer agreed to purchase the property, and a
review of improvements made to the property between the two
dates.
The higher-priced mortgage loan additional appraisal
requirements do not apply to the extension of credit that
finances the acquisition of a property:
* From a local, state, or federal government agency;
* From a person who acquired title to the property through
foreclosure, deed-in-lieu of foreclosure, or other similar
judicial or non-judicial procedures as a result of the
person’s exercise of rights as the holder of a defaulted
mortgage;
* From a nonprofit entity as part of a local, state, or federal
government program permitted to acquire single-family
properties for resale from a person who acquired title
through foreclosure, deed-in-lieu of foreclosure, or other
similar judicial or non-judicial procedures;
* From a person who acquired title to the property by
inheritance or by court order as a result of a dissolution of
marriage, civil union, or domestic partnership, or of
partition of joint or marital assets;
* From an employer or relocation agency in connection with
the relocation of an employee;
* From a servicemember who received a deployment or
permanent change-of-station order after the servicemember
purchased the property;
* Located in a federal disaster area if the requirements of
Title XI of FIRREA have been waived by the federal
financial institutions regulatory agencies for as long as that
waiver would apply; or
* Located in a rural county as defined by the CFPB in 12
CFR1026.35(b)(2)(iv)(A).
What are the disclosure requirements for HPML appraisals? [V-1.1 Truth in Lending Act]?
Application Disclosures and Copy of Appraisal
Finally, creditors must provide consumers who apply for a loan covered by the appraisal requirements in 12 CFR1026.35(c)
with a disclosure providing information relating to appraisals. A creditor must provide consumers with disclosures no later than the third business day after the creditor receives an application
for a higher-priced mortgage loan, or no later than the third business day after the loan requested becomes a higher-priced mortgage loan. Additionally, a creditor must provide, at no cost
to the consumer, a copy of each written appraisal performed in connection with a loan covered by the appraisal requirements in 12 CFR1026.35(c) no later than three business days prior to
consummation or, if the loan will not be consummated, no later than 30 days after the creditor determines that the loan will not
be consummated. 39
What is the definition of an LO under TRID? [V-1.1 Truth in Lending Act]?
Loan Originator – 12 CFR1026.36(a)
The term “loan originator” means a person who, in expectation
of direct or indirect compensation or other monetary gain or for
direct or indirect compensation or other monetary gain,
performs any of the following activities:
* Takes an application, offers, arranges, assists a consumer in
obtaining or applying to obtain, negotiates, or otherwise
obtains or makes an extension of consumer credit for
another person; or
* Through advertising or other means of communication
represents to the public that such person can or will perform
any of these activities.
The term “loan originator” includes an employee, agent, or
contractor of the creditor or loan originator organization if the
employee, agent, or contractor meets this definition. The term
“loan originator” also includes a creditor that engages in loan
origination activities if the creditor does not finance the
transaction at consummation out of the creditor’s own resources,
including by drawing on a bona fide warehouse line of credit or
out of deposits held by the creditor.
The term “loan originator” does not include:
* A person who performs purely administrative or clerical
tasks on behalf of a person who takes applications or offers
or negotiates credit terms;
* A retailer of manufactured or modular homes or an
employee of such a retailer who does not receive
compensation or gain for engaging in loan originator
activities in excess of any compensation or gain received in a comparable cash transaction, and who does not directly
negotiate with the consumer or lender on loan terms
(including rates, fees, and other costs), if such retailer or
employee discloses to the consumer in writing any
corporate affiliation with any creditor. Where the retailer
has a corporate affiliation with any creditor, at least one
unaffiliated creditor must also be disclosed (15 U.S.C.
1602(dd)(2)(C)(ii));
* A person who performs only real estate brokerage activity
and is licensed or registered in accordance with applicable
state law, unless that person is compensated by a creditor or
loan originator for a consumer credit transaction subject to
(12 CFR1026.36);
* A seller financer that meets the criteria established in (12
CFR1026.36(a)(4) or (a)(5)); or
* A servicer, or a servicer’s employees, agents, and
contractors who offer or negotiate the terms of a mortgage
for the purpose of renegotiating, modifying, replacing, or
subordinating principal of an existing mortgage where
consumers are behind in their payments, in default, or have
a reasonable likelihood of becoming delinquent or
defaulting. This exception does not, however, apply to such
persons if they refinance a mortgage or assign a mortgage
to a different consumer.
An “individual loan originator” is a natural person who meets
the definition of “loan originator.” Finally, a “loan originator
organization” is any loan originator that is not an individual
loan originator. A loan originator organization would include
banks, thrifts, finance companies, credit unions and mortgage
brokers.
What is the first type of LO compensation that is prohibited? [V-1.1 Truth in Lending Act]?
Prohibited Loan Originator Compensation: Payments Based
on a Term of a Transaction – 12 CFR1026.36(d)(1)
With limited exceptions, loan originators cannot receive (and no
person can pay directly or indirectly), compensation in
connection with closed-end consumer credit transactions
secured by a dwelling based on a term of a transaction, the terms
of multiple transactions, or the terms of multiple transactions by
multiple individual loan originators. The loan originator
compensation provisions do not apply to open-end home-equity
lines of credit or to credit secured by a consumer’s interest in a
timeshare plan described in 11 U.S.C. 101(53D).
A “term of a transaction” is any right or obligation of the parities to a credit transaction. The amount of credit extended is
not a term of a transaction, provided that such compensation is
based on a fixed percentage of the amount of credit extended
(but may be subject to a minimum or maximum dollar amount).
NOTE: A review of whether compensation, which includes
salaries, commissions, and any financial or similar incentive, is
based on the terms of a transaction requires an objective
analysis. If compensation would have been different if a
transaction term had been different, then the compensation is
prohibited. The regulation does not prevent compensating loan
originators differently on different transactions, provided the
difference is not based on a term of a transaction or on a proxy
for a term of a transaction (a factor that consistently varies with
a term or terms of the transaction over a significant number of
transactions and which the loan originator has the ability to
manipulate).
* An individual loan originator may receive (and a person
may pay):
* Compensation in the form of a contribution to a defined
contribution plan that is a designated tax-advantage plan
unless the contribution is tied to the terms of the
individual’s transaction(s) (12 CFR 1026.36.(d)(1)(iii));
* Compensation in the form of a benefit under a defined
benefit plan that is a designated tax-advantaged plan (12
CFR1026.36(d)(1)(iii));
* Compensation under a non-deferred profits-based
compensation plan provided that:
o The compensation paid to an individual loan originator
is not directly or indirectly based on the terms of the
individual’s transaction(s); and
o Either:
The compensation paid to the individual loan
originator does not exceed 10 percent (in
aggregate) of the individual loan originator’s total
compensation corresponding to the time period
for which the compensation under the nondeferred profits-based compensation plan is paid;
or
The individual loan originator was the loan
originator of 10 or fewer transactions during the
12 months preceding the date that the
compensation was determined (12 CFR
1026.36(d)(1)(iv)).
For more information pertaining to permissible compensation, see the commentary to (12 CFR1026.36(d)).
40 In addition to the requirements listed here, 12 CFR 1026.25(c) imposes specific
record retention requirements for creditors and loan originator organizations that
compensate loan originators.
What is the second type of LO compensation that is prohibited? [V-1.1 Truth in Lending Act]?
Prohibited Loan Originator Compensation:
Dual Compensation – 12 CFR1026.36(d)(2)
Prohibited Loan Originator Compensation:
Dual Compensation – 12 CFR1026.36(d)(2)
Loan originators that receive compensation directly from
consumers in consumer credit transactions secured by a
dwelling (except for open-end home-equity lines of credit or to
loans secured by a consumer’s interest in a timeshare plan)
may not receive additional compensation directly or indirectly
from any other person in connection with that transaction (12
CFR 1026.36(d)(1)(i)(A)(1)). This prohibition includes
compensation received from a third party to the transaction to
pay for some or all of the consumer’s costs (12 CFR
1026.36(d)(1)(i)(B)). Further, a person is prohibited from
compensating a loan originator when that person “knows or
has reason to know” that the consumer has paid compensation
to the loan originator (12 CFR 1026.36(d)(2)(i)(A)(2)).
However, even if a loan originator organization receives
compensation directly from a consumer, the organization can
compensate the individual loan originator, subject to 12 CFR
1026.36(d)(1) (12 CFR 1026.36(d)(2)(i)(C)).
AKA as an LO, you can receive compensation from a consumer, or a consumer and your org, but not from two consumers or a consumer and a third-party
What is the third type of LO compensation that is prohibited? [V-1.1 Truth in Lending Act]?
Prohibition on Steering – 12 CFR 1026.36(e)
Loan originators are prohibited from directing or “steering”
consumers to loans based on the fact that the originator will
receive greater compensation for the loan from the creditor than
in other transactions that the originator offered or could have
offered to the consumer, unless the consummated transaction is
in the consumer’s interest. A loan originator complies with the
prohibition on steering (but not the loan originator compensation
provisions) by obtaining loan options from a significant number
of the creditors with which the loan originator regularly does
business and, for each loan type in which the consumer has
expressed interest, presenting the consumer with loan options
for which the loan originator believes in good faith the
consumer likely qualifies, provided that the presented loan
options include all of the following:
* The loan with the lowest interest rate;
* The loan with the lowest interest rate without certain
enumerated risky features (such as prepayment penalties,
negative amortization, or a balloon payment in the first
seven years); and
* The loan with the lowest total dollar amount of discount
points, origination points or origination fees (or, if two or
more loans have the same total dollar amount of discount
points, origination points or origination fees, the loan with
the lowest interest rate that has the lowest total dollar
40 In addition to the requirements listed here, 12 CFR 1026.25(c) imposes specific
record retention requirements for creditors and loan originator organizations that
compensate loan originators.
amount of discount points, origination points or origination
fees).
The anti-steering provisions do not apply to open-end homeequity lines of credit or to loans secured by a consumer’s
interest in a timeshare plan.
What are the LO qualification requirements? [V-1.1 Truth in Lending Act]?
Loan Originator Qualification Requirements
– 12 CFR1026.36(f)
Individual loan originators and loan originator organizations
must, when required under state or federal law, be registered and
licensed under those laws, including the Safe and Fair
Enforcement for Mortgage Licensing Action of 2008 (SAFE
Act).41 Loan originator organizations other than government
agencies or state housing finance agencies must:
* Comply with all applicable state law requirements for legal
existence and foreign qualification; (12 CFR
1026.36(f)(1)); and
* Ensure that each individual loan originator who works for
the loan originator organization (e.g., an employee, under a
brokerage agreement) is licensed or registered to the extent
that the individual is required to be licensed or registered
under the SAFE Act or excluded from those requirements
because the individual is authorized to act with temporary
authority pursuant to 12 U.S.C. 5117 prior to acting as a
loan originator in a consumer credit transaction secured by
a dwelling (12 CFR1026.36(f)(2)).
The requirements are different for loan originator organizations
whose employees are not required to be licensed and are not
licensed pursuant to 12 CFR1008.103 or state SAFE Act
implementing laws (including employees of depository
institutions and bona fide nonprofits). For their employees hired
on or after January 1, 2014 (or hired before this date but not
subject to any statutory or regulatory background standards at
the time, or for any individual loan originators regardless of
when hired that the organization believes, based on reliable
information do not meet the qualification standards), loan
originator employers must obtain before the individual acts as a
loan originator in a consumer credit transaction secured by a
dwelling:
* A criminal background check through the Nationwide
Mortgage Licensing System and Registry (NMLSR) or, in
the case of an individual loan originator who is not a
registered loan originator under NMLSR, a criminal
background check from a law enforcement agency or
commercial service (12 CFR 1026.36(f)(3)(i)(A));
A credit report from a consumer reporting agency (as
defined in section 603(p) of the Fair Credit Reporting Act)
secured, where applicable, in compliance with section
604(b) of FCRA (12 CFR 1026.36(f)(3)(i)(B)); and
* Information from the NMLSR about any administrative,
civil, or criminal findings by any government jurisdiction
or, in the case of an individual loan originator who is not a
registered loan originator under the NMLSR, such
information from the individual loan originator (12 CFR
1026.36(f)(3)(i)(C)).
Based on the information obtained above and any other
information reasonably available, the loan originator employer
must determine for such an employee prior to allowing the
individual to act as a loan originator in a consumer credit
transaction secured by a dwelling:
* That the individual has not been convicted of, or pleaded
guilty or nolo contendere to, a felony in a domestic or
military court during the preceding seven-year period or, in
the case of a felony involving an act of fraud, dishonesty, a
breach of trust, or money laundering, at any time (12 CFR
1026.36(f)(3)(ii)(A)(1)); and
NOTE: Whether the conviction of a crime is considered a
felony is determined by whether the conviction was
classified as a felony under the law of the jurisdiction
under which the individual is convicted. Additionally, a
loan originator organization may employ an individual
with a felony conviction (or a plea of nolo contendere) as a
loan originator if that individual has received consent from
the FDIC, (or the Board, as applicable) the NCUA, or the
Farm Credit Administration (FCA) under their own
applicable statutory authority (12 CFR 1026.36(f)(3)(iii)).
* Has demonstrated financial responsibility, character, and
general fitness such as to warrant a determination that the
individual loan originator will operate honestly, fairly, and
efficiently.
The loan originator organization must also provide periodic
training to each such employee that covers federal and state
legal requirements that apply to the individual loan originator’s
loan origination activities.
The SAFE Act provides certain loan originators with temporary
authority to act as loan originators while applying for a stateloan originator license (12 U.S.C. 5117). If an individual loan
originator may act as a loan originator with temporary authority
under 12 U.S.C. 5117, the loan originator organization is not
required to comply with the screening and training requirements described in (12 CFR 1026.36(f)(3)). 42
What are the NMLSR documentation requirements? [V-1.1 Truth in Lending Act]?
12 CFR1026.36(g) applies to closed-end consumer credit
transactions secured by a dwelling except a loan that is secured
by a consumer’s interest in a timeshare plan described in (11
U.S.C. 101(53D)). For purposes of 12 CFR1026.36(g), a loan
originator includes all creditors that engage in loan origination
activities, not just those who table fund.
For consumer credit transactions secured by a dwelling, loan
originator organizations must include certain identifying
information on loan documentation provided to consumers.
The loan documents must include the loan originator
organization’s name, NMLSR ID (if applicable), and the name
of the individual loan originator that is primarily responsible
for the origination as it appears in the NMLSR, as well as the
individual’s NMLSR ID. This information is required on credit
applications, the Loan Estimate, the Closing Disclosure, the
note or loan contract, and the documents securing an interest
in the property.
What are the policy/procedure requirements for institutions related to LOs? [V-1.1 Truth in Lending Act]?
Policies and Procedures to Ensure and Monitor Compliance –
12 CFR 1026.36(j)
Depository institutions (including credit unions) must establish and maintain written policies and procedures reasonably designed to ensure and monitor compliance of the depository institution, its employees, and its subsidiaries and their
employees with the requirements of 12 CFR1026.36(d) (prohibited payments to loan originators), 1026.36(e) (prohibition on steering), 1026.36(f) (loan originator qualifications), and 1026.36(g) (name and NMLSR ID on loan documents). The written policies and procedures must be appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the depository and its subsidiaries
(12 CFR1026.36(j)).
What does TIL prohibit related to arbitration? [V-1.1 Truth in Lending Act]?
Prohibition on Mandatory Arbitration or Waivers of Certain Consumer Rights – 12 CFR 1026.36(h)
A contract or other agreement for a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not include
terms that require mandatory arbitration or any other nonjudicial procedure to resolve any controversy arising out of the transaction. Also, a contract or other agreement relating to such
a consumer credit transaction may not be applied or interpreted to bar a consumer from bringing a claim in court under any provision of law for damages or other relief in connection with
an alleged violation of any federal law. However, a creditor and a consumer could agree, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.
What are the TIL prohibitions related to the prohibition on financing credit insurance? [V-1.1 Truth in Lending Act]?
Prohibition on Financing Credit Insurance
– 12 CFR1026.36(i)
Creditors are prohibited from “financing” (i.e., providing a consumer the right to defer payment beyond the monthly period in which the premium or fee is due), either directly or indirectly,
premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a
home equity line of credit secured by the consumer’s principal dwelling). This prohibition includes financing fees for credit
life, credit disability, credit unemployment, credit property insurance, or any other accident, loss-of-income, life, or health insurance or payment for debt cancellation or suspension. This prohibition does not apply to credit unemployment insurance
where the premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the premiums, and the premiums are paid under a separate insurance
contract and not to an affiliate of the creditor. This prohibition also does not apply to credit insurance where premiums or fees are “calculated” and paid in full “on a monthly basis” (i.e., determined mathematically by multiplying a rate by the actual monthly outstanding balance).
What are the TIL prohibitions related to negative amortizing mortgages? [V-1.1 Truth in Lending Act]?
Negative Amortization Counseling – 12 CFR1026.36(k) A creditor may not extend a negative amortizing mortgage loan
to a first-time borrower in connection with a closed-end transaction secured by a dwelling, other than a reverse mortgage
or a transaction secured by a timeshare, unless the creditor receives documentation that the consumer has obtained homeownership counseling from a HUD-certified or approved
counselor. Additionally, a creditor extending a negative amortizing mortgage loan to a first-time borrower may not steer, direct, or require the consumer to use a particular counselor.
What in general are the required and prohibited loan servicing practices under TIL (i.e. periodic payment processing and processing under loan mods)? [V-1.1 Truth in Lending Act]?
Loan Servicing Practices
Servicers of mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of
the date of receipt and provide a payoff statement within a reasonable time, not to exceed seven business days of a written request.
Payment Processing – 12 CFR 1026.36(c)(1)
For a closed-end consumer credit transaction secured by a consumer’s principal dwelling, a loan servicer:
* Cannot fail to credit a periodic payment to the consumer’s loan account as of the date of receipt, except in instances where the delay will not result in a charge to the consumer or in the reporting of negative information to a consumer
reporting agency. NOTE: For the purposes of 12 CFR 1026.36(c) a periodic payment is “an amount sufficient to cover principal, interest, and escrow for any given billing cycle.” If the consumer owes late fees, other fees, or non escrow payments but makes a full periodic payment, the servicer
must credit the periodic payment as of the date of receipt.
* Cannot retain a partial payment (any amount less than a periodic payment) in a suspense or unapplied payment account without disclosing to the consumer in the periodic statement (if required) the total amount(s) held in the
suspense account and applying the payment to the balance upon accumulation of sufficient funds to equal a periodic payment. If a servicer has provided written requirements for accepting
payments in writing but then accepts payments that do not conform to the written requirements, the servicer must credit the payment as of five days after receipt. If a loan contract has not been permanently modified but the consumer has agreed to a temporary loss mitigation program, a
periodic payment under 12 CFR 1026.36(c)(1)(i) is the amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle under the loan contract, regardless of the payment due under the temporary loss mitigation program (Comment .36(c)(1)(i)-4). If a loan contract has been permanently modified, a periodic payment under 12 CFR 1026.36(c)(1)(i) is an amount sufficient to cover principal,
interest, and escrow (if applicable) for a given billing cycle under the modified loan contract (Comment .36(c)(1)(i)-5).
What are the prohibitions related to pyramiding late fees? [V-1.1 Truth in Lending Act]?
Pyramiding of Late Fees – 12 CFR 1026.36(c)(2)
In connection with a closed-end consumer credit transaction secured by a consumer’s principal dwelling, a servicer may not impose on the consumer any late fee or delinquency charge in
connection with a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier payment, and the payment is otherwise a periodic
payment for the applicable period and is received on its due date or within any applicable courtesy period.
What are the requirements are providing payoff statements? [V-1.1 Truth in Lending Act]?
Providing Payoff Statements – 12 CFR 1026.36(c)(3)
For consumer credit transactions secured by a consumer’s dwelling, including home equity lines of credit under 12 CFR 1026.40(a), a creditor, assignee, or servicer may not fail to provide, within a reasonable time but no more than seven business days, after receiving a written request from the consumer or person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to pay the consumer’s obligation in full as of a specific
date.
NOTE: For purposes of 12 CFR 1026.36(c)(3), when a creditor, assignee, or servicer is not able to provide the statement within seven business days because a loan is in bankruptcy or foreclosure, because the loan is a reverse mortgage or shared
appreciation mortgage, or because of natural disasters or similar circumstances, the payoff statement must be provided within a reasonable time.
What are the general purposes and timing requirements surrounding the LE and CD? [V-1.1 Truth in Lending Act]?
TILA-RESPA Integrated Disclosures – 12 CFR 1026.37 and 12 CFR 1026.38
For most closed-end consumer mortgages, creditors must provide two disclosures, the Loan Estimate and the Closing Disclosure, to consumers for mortgage applications received on or after October 3, 2015. The Loan Estimate is a three-page form that provides disclosures to help consumers understand the key features, costs, and risks of the mortgage loan for which they are applying. This form must be delivered or placed in the mail no later than three business days after the creditor receives a consumer’s mortgage loan application. The Closing Disclosure is a five-page form that helps consumers understand all of the
costs of the transaction. This form generally must be received by the consumer at least three business days before consummation. Both forms use similar language and design to make it easier for consumers to locate key information, such as the interest rate, monthly payments, and costs to close the loan.
What does the LE replace? [V-1.1 Truth in Lending Act]?
The LE replaces the GFE
The Loan Estimate form replaces the Good Faith Estimate designed by HUD under RESPA, and the “early” Truth in Lending disclosure designed by the Board under TILA. The regulation and the Official Interpretations contain detailed instructions as to how each line on the Loan Estimate form should be completed. There are sample forms for different types of loan products. The Loan Estimate form also incorporates new disclosures required by Congress under the Dodd-Frank Act.
What does the CD replace? [V-1.1 Truth in Lending Act]?
The Closing Disclosure form replaces the HUD-1 for loan closing, which was designed by HUD under RESPA. The Closing Disclosure form also replaces the revised Truth in Lending disclosure designed by the Board under TILA. The rule
and the Official Interpretations contain detailed instructions as to how each line on the Closing Disclosure form should be completed. The Closing Disclosure form contains additional new disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction. Refer to CFPB’s TILA-RESPA Guide to Forms for a detailed, step-by-step walkthrough for completing the Loan Estimate and the Closing Disclosure.
What is the general purpose of the LE, and what form must be used to disclose it? [V-1.1 Truth in Lending Act]?
Loan Estimate – Content of Disclosures for Certain
Mortgage Transactions – 12 CFR 1026.37
Loan Estimate form required (12 CFR1026.37(o))
The Loan Estimate generally must provide consumers with a good faith estimate of credit costs and transaction terms and satisfy timing and delivery requirements set forth in the rule. For any transactions subject to 12 CFR1026.19(e) that are
federally related mortgage loans subject to RESPA (which will include most mortgages), creditors must use form H-24, set forth in Appendix H (12 CFR 1026.37(o)(3)(i)). (See also 12 CFR 1024.2(b) for definition of federally related mortgage loan).
For other loans subject to 12 CFR1026.19(e) that are not federally related mortgage loans, the disclosures must be made with headings, content, and format substantially similar to form H-24 (12 CFR 1026.37(o)(3)(ii)). The disclosures may be provided to the consumer in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. 7001 et seq.) (12 CFR1026.37(o)(3)(iii))
What information is required on the LE form [V-1.1 Truth in Lending Act]?
Information required on the Loan Estimate form. Most disclosures on the Loan Estimate form are required to be labeled using specific nomenclature, headings, and formatting. For example, the regulation requires that the form disclose the contract sale price, labeled “Sale Price” (or if there is no seller, the estimated value of the property, labeled “Prop. Value”). Further, in some instances, the regulation directs lines on the
disclosure to be left blank where there is no charge (See, e.g., 12 CFR1026.37(g)(2)(v)) or sets forth the maximum number of items that may be disclosed (See, e.g., 12 CFR 1026.37(g)(3)(v)). See the regulation, Form H-24, and the Regulation Z procedures for specific obligations regarding each
required disclosure.
What are the rounding requirements under TRID? [V-1.1 Truth in Lending Act]?
Rounding. Dollar amounts must be rounded to the nearest whole dollar where noted in the regulation, including adjustments after consummation for loan amount, interest rate, and periodic payment; and details about prepayment penalties and balloon payments, minimum and maximum amounts for principal and interest payments and range of payments, maximum mortgage insurance premiums, escrows, taxes and insurance and assessments, closing costs (loan costs and other costs), cash to close, and adjustable payment and comparisons (12 CFR1026.37(o)(4)(i)(A)). The amount for prepaid interest paid per day and the monthly amounts required to be disclosed for escrows of homeowner’s insurance, mortgage insurance, or property taxes must not be rounded (12 CFR 1026.37(o)(4)(i)(A)). The loan amount (the total amount the consumer will borrow, as reflected by the face amount of the note) must not be rounded, and if the amount is a whole number, must be truncated at the decimal point (12 CFR 1026.37(o)(4)(i)(B)). If an amount is required to be rounded but is composed of other
amounts that are not required or permitted to be rounded, the unrounded amounts should be used to calculate the total, and the final sum should be rounded. Conversely, if an amount is required to be rounded and is composed of rounded amounts, the rounded amounts should be used to calculate the total (Comment 37(o)(4)-2).
Percentage amounts must be rounded where noted in the regulation to three decimal places, but trailing zeros to the right of the decimal place must be dropped (e.g., 2.49999 percent APR is
disclosed as 2.5 percent, and 7.005 percent APR is disclosed as 7.005 percent). The items rounded include the interest rate, adjustments after consummation (to the loan amount, interest rate,
or periodic payment), points itemized under origination charges, prepaid interest rate, adjustable interest rate, annual percentage rate, and total interest percentage or TIP (12 CFR
1026.37(o)(4)(ii); Comment 37(o)(4)(ii)-1).
What information is required on page 1 of the LE? [V-1.1 Truth in Lending Act]?
Page 1: General information, loan terms, projected
payments, and costs at closing
Page 1 of the Loan Estimate discloses general information about the creditor, the applicant(s), and the loan. It also includes a Loan Terms table with descriptions of applicable information
about the loan, a Projected Payments table, a summary Costs at Closing table, and a link for consumers to obtain more information about loans secured by real property or cooperative
unit at a website maintained by the CFPB (12 CFR 1026.37(a)-
(e)).
What information is required on page 1 under “General Information” section of the LE? [V-1.1 Truth in Lending Act]?
General information. Page 1 of the Loan Estimate requires the title “Loan Estimate” and the statement “Save this Loan Estimate to compare with your Closing Disclosure” (12 CFR
1026.37(a)(1), (2)). The top of page 1 also requires the name and address of the creditor (12 CFR 1026.37(a)(3)). A logo can be used for, and a slogan included along with, the creditor’s name and address, so long as the logo or slogan does not cause this information to exceed the space provided on Form H-24 for that information (12 CFR1026.37(o)(5)(iii)). If there are multiple creditors, only the name of the creditor completing the Loan Estimate should be used (Comment 37(a)(3)-1). If a mortgage broker is completing the Loan Estimate, the mortgage
broker should make a good faith effort to disclose the name and address of the creditor as required by 12 CFR1026.19(e)(1)(i). However, if the name of the creditor is not yet known, this space may be left blank (Comment 37(a)(3)-2). Below the creditor information, the form requires the date that
the creditor mails or delivers the disclosures to the consumer; the name and mailing address of the consumer(s) applying for the credit; the address, including the zip code, of the property
that secures or will secure the transaction, or if the address is unavailable, the location of such property, including a zip code; and the contract sale price (or if there is no seller, the estimated value of the property) (12 CFR1026.37(a)(4)-(6)).
On the top right side of the first page, the form requires the loan term to maturity (stated in years or months, or both, as applicable); and loan purpose (purchase, refinance, construction
or home equity loan) (12 CFR 1026.37(a)(8)-(9)). This section of the form also requires the product type (adjustable rate, step rate, or fixed rate) and, preceding the type, any features that may
change the periodic payment, including negative amortization, interest only, step payment, balloon payment, or seasonal payment features, as applicable. If the product has an adjustable
or step rate, or a feature that may change the periodic payment, the product disclosure must also be preceded by a disclosure of
the duration of any introductory rate or payment period, and the first adjustment period, as applicable (12 CFR1026.37(a)(10).
This section of the form also requires the loan type (conventional, FHA, VA, or other), and loan ID number (12 CFR1026.37(a)(11)-(12)). Further, there must be a statement of whether the interest rate is locked for a specific time, and if so, the date and time when that period ends. The form must also
include a statement that the interest rate, any points, and any lender credits may change unless the interest rate has been locked, and the date and time (including the applicable time zone) at which estimated closing costs expire (12 CFR
1026.37(a)(13)).
What information is required on page 1 under “Loan Terms” section of the LE? [V-1.1 Truth in Lending Act]?
Loan Terms table
The Loan Terms table follows the general information requirements on page 1 of the Loan Estimate. For the Loan Terms table, the creditor must disclose the loan amount (the total amount the consumer will borrow, as reflected by the face
amount of the note), interest rate applicable to the transaction at consummation, and specified principal and interest payments.
(12 CFR1026.37(b)(1)-(3)) For each such element, the disclosure must answer the question, either affirmatively or negatively, whether the amount can increase after consummation. If the amount can increase, the loan must disclose additional information (12 CFR 1026.37(b)(6)). The
Loan Terms table must also include information about prepayment penalties and balloon payments.
What information is required on page 1 under “Loan Amount” section of the LE? [V-1.1 Truth in Lending Act]?
Loan amount. The loan amount is disclosed in accordance with the face amount of the note. If the loan amount may increase
after consummation, the disclosure must include the maximum principal balance for the transaction and the due date of the last payment that may cause the principal balance to increase. The
disclosure must also indicate whether the maximum principal balance is potential or is scheduled to occur under the terms of the legal obligation (12 CFR 1026.37(b)(6)(1); 12 CFR
1026.37(b)(6)(i)).
What information is required on page 1 under “Interest Rate” section of the LE? [V-1.1 Truth in Lending Act]?
Interest rate. If it is an adjustable rate transaction where the interest rate at consummation is not known, the disclosed rate is the fully indexed rate (which means the index value and margin
at the time of consummation) (12 CFR1026.37(b)(2)). If the interest may increase after consummation, the creditor must disclose the frequency of interest rate adjustments, the date when the interest rate may first adjust, the maximum interest rate, and the first date when the interest rate can reach the maximum interest rate, followed by a reference to the adjustable
rate table required by 12 CFR1026.37(j) in the Closing Cost Details section of the Loan Estimate. If the loan term may increase based on an interest rate adjustment, that fact must be included, as well as the maximum possible loan term determined in accordance with 12 CFR 1026.37(a)(8) (12 CFR 1026.37(b)(6)(ii)).
What information is required on page 1 under “Principal and Interest Payment” section of the LE? [V-1.1 Truth in Lending Act]?
Principal and interest payment. The creditor must disclose the initial periodic payment that will be due under the terms of the legal obligation, immediately preceded by the applicable unit period, and a statement referring to the payment amount that includes any mortgage insurance and escrow payments that are required to be disclosed in the Projected Payments table (12 CFR 1026.37(b)(3)). If the monthly principal and interest
payment can increase after closing, the creditor must also disclose: the scheduled frequency of adjustments to the periodic principal and interest payment; the due date of the first adjusted
principal and interest payment; the maximum possible periodic principal and interest payment; and the date when the periodic principal and interest payment may first equal the maximum
principal and interest payment (12 CFR 1026.37(b)(6)(iii)). If any adjustments to the principal and interest payment are not the result of a change to the interest rate, the creditor must reference
the adjustable payment table disclosure required by 12 CFR 1026.37(i). If there is a period during which only interest is required to be paid, the disclosure must also state that fact and the due date of the last periodic payment of such period (12 CFR 1026.37(b)(6)(iii)).
What information is required on page 1 under “Prepayment Penalties and balloon payments” section of the LE? [V-1.1 Truth in Lending Act]?
Prepayment penalties and balloon payments. The Loan Terms table must also state affirmatively or negatively whether the transaction includes a prepayment penalty (for these purposes, a charge imposed for paying all or part of a transaction’s principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction’s principal sooner
than 36 months after consummation) or a balloon payment (for these purposes, a payment that is more than two times a regular periodic payment) (12 CFR1026.37(b)(4) and (5))
What information is required on page 1 under “Projected Payments Table” section of the LE? [V-1.1 Truth in Lending Act]?
Projected Payments table.
The Projected Payments table is located directly below the Loan Terms table on page 1 of the Loan Estimate. The Projected Payments table shows estimates of the periodic payments that the consumer will make over the life of the loan. Creditors must disclose estimates of the following periodic payment amounts in the Projected Payments table: periodic principal and interest (or
range of periodic payments); mortgage insurance; estimated escrow; and estimated total monthly payment (12 CFR 1026.37(c)(2)). Creditors must also disclose estimated taxes, insurance, and assessments, even if not paid with escrow funds
(and whether these items will be paid with funds from the consumer’s escrow account) (12 CFR 1026.37(c)(4)). Generally, the creditor will show in one column the initial periodic payment (or range of payments if required). Depending on the features of the loan, subsequent periodic payments also may be required to be disclosed. However, no more than four separate periodic payments or ranges of payments may be disclosed, beginning with the initial periodic payment. Events that require disclosure of separate periodic payments or ranges
include: changes to the periodic principal and interest payment; a scheduled balloon payment; an automatic termination of mortgage insurance or its equivalent; and the anniversary of the
due date of the initial periodic payment or range of payments that immediately follows the occurrence of multiple events that change the periodic principal and interest. The regulation
addresses how to disclose these events when the event occurs after the third separate periodic payment or range of payments disclosed (12 CFR1026.37(c)(1)). Each separate payment or range of payments must be itemized
according to the regulation, including the amount payable for principal and interest. The regulation provides instructions for itemizing payments that include an interest-only payment, payments on loans with an adjustable interest rate, and payments on a loan that has both an adjustable interest rate and a negative amortization feature. Additionally, the regulation requires that
each separate periodic payment or range of payments itemizes the maximum amount payable for mortgage insurance premiums corresponding to the principal and interest payment and the
amount payable into escrow (with a statement that the amount disclosed can increase over time and a calculation of the total monthly payment) (12 CFR1026.37(c)(2)). Below the estimated total monthly payment, the Projected Payments table discloses estimated taxes, insurance, and
assessments. These are stated as a monthly amount and include a statement that the amount may increase over time. The creditor provides these estimates even if there will be no escrow
account established for these costs. The table also requires a statement of whether the amount disclosed includes payments for property taxes or other amounts; a description of any such other amounts; and an indication of whether such amounts will be paid by the creditor using escrow account funds. The table also includes a statement that the consumer must separately pay the taxes, insurance, and assessments that are not paid by the creditor using escrow account funds; and a reference to the information disclosed under the subheading on the Loan Estimate titled “Initial Escrow Payment at Closing” (12 CFR
1026.37(c)(4)). The creditor estimates property taxes and homeowner’s insurance using the taxable assessed value of the real property or
cooperative unit securing the transaction after consummation, including the value of any improvements on the property or to be constructed on the property, if known, whether or not such construction will be financed from the proceeds of the transaction, for property taxes; and the replacement costs of the property during the initial year after the transaction, for premiums or other charges for insurance against loss of or damage to property identified in 12 CFR1026.4(b)(8) (12 CFR 1026.37(c)(5)).
What information is required on page 1 under “Costs at Closing Table” section of the LE? [V-1.1 Truth in Lending Act]?
Costs at Closing table.
This table, located at the bottom of page 1, provides disclosures on estimated Closing Costs and estimated Cash to Close (12 CFR1026.37(d)(1)). These disclosures offer the consumer a high-level summary of estimated closing costs and cash required to close (including closing costs) and reference the more detailed itemizations found on page 2 of the Loan Estimate (12 CFR1026.37(d)(1)(i)(E) and 1026.37(d)(1)(ii)(B)). Items that are disclosed include an estimate of Total Closing
Costs, as well as the key inputs making up this total: Loan Costs, Other Costs, and Lender Credits (and the fact that total closing costs include these amounts) (12 CFR 1026.37(d)(1)(i)). These disclosures also provide a high-level summary of the estimated amount of cash required to close, which is also itemized more specifically on page 2 of the Loan Estimate (12 CFR1026.37(d)(1)(ii)). The regulation provides an optional alternative Cash to Close table for transactions that do not involve a seller or for simultaneous subordinate financing. The creditor may alternatively disclose, using the label “Cash to Close,” the cash to or from the consumer (pursuant to 12 CFR 1026.37(h)(2)(iv)), a statement of whether the disclosed estimated amount is due from or to the consumer, and a statement referring the consumer to the alternative Calculating Cash to Close table for transactions without a seller or for simultaneous subordinate financing (pursuant to 12 CFR 1026.37(h)(2)) (12 CFR 1026.37(d)(2)).
What are the sections on page 1 of the LE? [V-1.1 Truth in Lending Act]?
-General information
-Loan Terms Table
-Loan Amount
-Interest Rate
-Principal and Interest Payment
-Prepayment Penalties and Balloon Payments
-Projected Payments Table
-Costs at Closing Table
What information is required on page 2 of the LE? [V-1.1 Truth in Lending Act]?
Page 2: Closing cost details
Describe what information is required on page 2 of the LE? [V-1.1 Truth in Lending Act]?
Page 2: Closing cost details
Page 2 of the Loan Estimate contains a good faith itemization of
the “Loan Costs” and “Other Costs” associated with the loan (12
CFR1026.37(f) and (g)). Generally, Loan Costs are those costs
paid by the consumer to the creditor and third-party providers of
services that the creditor requires to be obtained by the
consumer during the origination of the loan (12 CFR
1026.37(f)). Other Costs include taxes, governmental recording
fees, and certain other payments involved in the real estate
closing process (12 CFR1026.37(g)). Page 2 also includes an
itemized “Calculating Cash to Close” table to show the
consumer how the amount of cash needed at closing is
calculated (12 CFR1026.37(h)). In addition, for transactions
with adjustable monthly payments not based on changes to the
interest rate, or if the transaction is a seasonal payment product
(as described in 12 CFR 1026.37(a)(10)(ii)(E)), page 2 must
include an Adjustable Payment (AP) table with relevant
information about how the monthly payments will change (12
CFR1026.37(i)). Further, for transactions with adjustable
interest rates, page 2 must include an Adjustable Interest Rate
(AIR) table with relevant information about how the interest rate
will change (12 CFR1026.37(j)).
If state law requires additional disclosures, those additional disclosures may be made on a document whose pages are
separate from, and not presented as part of, the Loan Estimate
(Comments 37(f)(6)-1 and 37(g)(8)-1).
Describe what information is contained on the Loan Costs Table on page 2 of the LE? [V-1.1 Truth in Lending Act]?
Loan Costs table. This table includes all loan costs associated
with the transaction, broken down into an itemization of three
types of costs:
* (1) Origination charges that the consumer will pay to each
creditor and loan originator for originating and extending
credit (including separate itemization for points paid to the
creditor to reduce the interest rate as both a percentage of
the amount of credit extended and dollar amount) (up to 13
line items); the following items should be itemized
separately in the Origination Charges subheading:
o Compensation paid directly by a consumer to a loan
originator that is not also the creditor (Comments
37(f)(1)-2 and -5); or
o Any charge imposed to pay for a loan level pricing
adjustment assessed on the creditor that is passed on to
the consumer as a cost at consummation and not as an
adjustment to the interest rate (Comment 37(f)(1)-5).
* (2) Services the consumer cannot shop for (items provided by
persons other than the creditor or mortgage broker that the
consumer cannot shop for and will pay for at settlement,
such as appraisal fees and credit report fees) (up to 13 line
items); and
* (3) Services the consumer can shop for (such as a pest
inspection fee, survey fee, or closing agent fee) (up to 14
line items) (12 CFR 1026.37(f)(2) and (3)).
Regarding origination fees, only charges paid directly by the
consumer to compensate a loan originator are included in the
itemization. Compensation of a loan originator paid indirectly
by the creditor through the interest rate is not itemized (but is
itemized on the Closing Disclosure; see below) (Comment
37(f)(1)-2).
NOTE: Items that are a component of title insurance must
include the introductory description of “Title -” (12 CFR
1026.37(f)(2)(i) and (g)(4)(i)).
NOTE: The disclosure of “lender credits,” as identified in 12
CFR 1026.37(g)(6)(ii), is required by 12 CFR 1026.19(e)(1)(i).
“Lender credits,” as identified in 12 CFR 1026.37(g)(6)(ii),
represents the sum of non-specific lender credits and specific
lender credits. Non-specific lender credits are generalized
payments from the creditor to the consumer that do not pay for a
particular fee on the disclosures provided pursuant to 12 CFR
1026.19(e)(1). Specific lender credits are specific payments,
such as a credit, rebate, or reimbursement, from a creditor to
the consumer to pay for a specific fee. Non-specific lender
credits and specific lender credits are negative charges to the
consumer (Comment 19(e)(3)(i) -5).
The sum of these amounts must be disclosed as Total Loan
Costs. The regulation includes a required order and terminology
for each item (12 CFR 1026.37(f)(1)-(5)). If the creditor does
not have enough lines for each subheading, it must disclose the
remaining items as an aggregate number (12 CFR
1026.37(f)(6)(i)). An addendum is not permitted for origination
charges or charges the consumer cannot shop for that exceed the
maximum number of lines but is permitted for services the
consumer can shop for, provided the creditor appropriately
references the addendum (12 CFR 1026.37(f)(6)(ii)).
Describe what information is included in the Other Costs Table on page 2 of the LE? [V-1.1 Truth in Lending Act]?
Other Costs table. The Other Costs table captures costs
established by government action, determined by standard
calculations applied to ongoing fixed costs, or based on an
obligation incurred by the consumer independently of any
requirement imposed by the creditor (Comment 37(g)-1). The
table includes:
Taxes and other governmental fees (recording fees and
other taxes, and transfer taxes paid by the consumer,
separately itemized);
* Prepaids (amounts paid by the consumer before the first
scheduled payment, such as homeowner’s insurance
premiums, mortgage insurance premiums, prepaid interest,
and property taxes, plus up to 3 additional line items);
* Initial escrow payment at closing (items that the consumer
will be expected to place into a reserve or escrow account
at consummation to be applied to recurring periodic
charges; these include homeowner’s insurance, mortgage
insurance, and property taxes, plus up to 5 additional line
items); and
* Other amounts the consumer is likely to pay (such as real
estate agent commissions, up to five line items) (12 CFR
1026.37(g)(1)-(4), Comment 37(g)(4)-4).
NOTE: Items that disclose any premiums paid for separate
insurance, warranty, guarantee, or event-coverage products not
required by the creditor must include the parenthetical
description (optional) at the end of the label (12 CFR
1026.37(g)(4)(ii)).
As with Loan Costs, the regulation includes a required order,
terminology, and specific information regarding each Other
Costs line item, such as the applicable time period covered by
the amount paid at consummation and the total amount to be
paid. Items that disclose any premiums paid for separate
insurance, warranty, guarantee, or event-coverage products not
required by the creditor must include the parenthetical
description (optional) at the end of the label (12 CFR
1026.37(g)(4)(ii)). An addendum is not permitted; if the creditor
does not have enough lines for each subheading, it must disclose
the remaining items as an aggregate number (12 CFR
1026.37(g)(8)). The sum of these amounts must be disclosed as
a line item as Total Other Costs (12 CFR 1026.37(g)(5)). Below
this total, the sum of Total Loan Costs and Total Other Costs, less any lender credits (separately itemized), must be disclosed
as a line item as Total Closing Costs (12 CFR1026.37(g)(6)).
How are Total Closing Costs calculated (as disclosed on page 2 of the LE) [V-1.1 Truth in Lending Act]?
Total loan costs (left side of page) + Total other costs (right side of page) - lender credits = total closing costs
What is the Calculating Costs to Close Table on page 2 of the LE [V-1.1 Truth in Lending Act]?
Calculating Cash to Close table. The Calculating Cash toClose
table shows the consumer how the amount of cash needed at
closing is calculated (12 CFR1026.37(h)(1)). The creditor must
itemize the total amount of cash or other funds that the
consumer must provide at consummation. The itemization
includes:
What does the itemization include in the Calculating Costs to Close Table on page 2 of the LE [V-1.1 Truth in Lending Act]?
Calculating Cash to Close table. The Calculating Cash toClose
table shows the consumer how the amount of cash needed at
closing is calculated (12 CFR1026.37(h)(1)). The creditor must
itemize the total amount of cash or other funds that the
consumer must provide at consummation. The itemization
includes:
* Total closing costs. The amount disclosed under 12 CFR
1026.37(g)(6), labeled “Total Closing Costs” (12 CFR
1026.37(h)(1)(i));
* Closing costs to be financed. The amount of any closing
costs to be paid out of loan proceeds, disclosed as a
negative number, labeled “Closing Costs Financed (Paid
from your Loan Amount)” (12 CFR1026.37(h)(1)(ii));
Note: The formula for calculating the amount of closing
costs financed can be found in (Comment 37(h)(1)(ii)(1).
* Down payment and other funds from the borrower, labeled
“Down Payment/Funds from Borrower.” The formula for
determining this disclosure depends on the type of purchase
transaction (12 CFR1026.37(h)(1)(iii)). (For a nonpurchase transaction, use the Funds from Borrower formula
in 12 CFR 1026.37(h)(1)(v) as provided for in (12 CFR
1026.37(h)(1)(iii)(B)).
* Deposit, labeled “Deposit.” In a purchase transaction as
defined in 12 CFR 1026.37(a)(9)(i), the amount that is paid
to the seller or held in trust or escrow by an attorney or
other party under the terms of the agreement for the sale of
the property, disclosed as a negative number; in all other
transactions, the amount of zero dollars (12 CFR
1026.37(h)(1)(iv));
* Funds for the borrower, labeled “Funds for Borrower.” The
formula for calculating the disclosure is set forth in (12
CFR1026.37(h)(1)(v));
* Seller credits, labeled “Seller Credits.” The amount the
seller will pay for total loan costs and total other costs, to
the extent known, disclosed as a negative number (12 CFR
1026.37(h)(1)(vi).
* Adjustments and other credits, labeled “Adjustments and
Other Credits.” Determined in accordance with (12 CFR
1026.37(h)(1)(vii)); and
* Estimated Cash to Close, labeled “Cash to Close.” The sum
of the amounts disclosed under 12 CFR 1026.37(h)(1)(i) to
(vii) (12 CFR 1026.37(h)(1)(viii)).
What is disclosed under Calculating Costs to Close on p.2 of the LE for transactions without a seller or for simultaneous transactions? [V-1.1 Truth in Lending Act]?
For transactions without a seller or for simultaneous
subordinate financing transactions, the creditor can use the
optional alternative table and provide, under the heading Closing Cost Details, the total amount of cash or other funds
that must be provided by the consumer at consummation with an
itemization of the following component amounts (12 CFR
1026.37(h)(2)):
* Loan amount. The amount disclosed under 12 CFR
1026.37(b)(1)), labeled “Loan Amount” (12 CFR
1026.37(h)(2)(i));
* Total closing costs. The amount disclosed under 12 CFR
1026.37(g)(6), disclosed as a negative number if the
amount is a positive number and disclosed as a positive
number if the amount is a negative number, and labeled
“Total Closing Costs” (12 CFR1026.37(h)(2)(ii));
* Payoffs and payments. The total amount of payoffs and
payments to third parties not otherwise disclosed under 12
CFR1026.37(f) and (g), labeled “Total Payoffs and
Payments” (12 CFR 1026.37(h)(2)(iii));
* Cash to or from consumer. The amount of cash or other
funds due from or to the consumer and a statement of
whether the disclosed estimated amount is due from or to
the consumer, calculated by the sum of the loan amount,
total closing costs and payoffs and payments under 12 CFR
1026.37(h)(2)(i)-(iii)), labeled “Cash to Close” (12 CFR
1026.37(h)(2)(iv));
* Closing costs financed. The sum of the amounts disclosed
under 12 CFR1026.37(h)(2)(i) and (iii) (loan amount and
payoffs and payments) but only to the extent that the sum is
greater than zero and less than the total closing costs (12
CFR1026.37(g)(6)), labeled “Closing Costs Financed (Paid
from your Loan Amount)” (12 CFR1026.37(h)(2)(v)).
What is the AP table, as disclosed on p. 2 of the LE? [V-1.1 Truth in Lending Act]?
Adjustable Payment (AP) table.
This table is for transactions with adjustable monthly payments
for reasons other than adjustments to the interest rate, or if the
transaction is a seasonal payment product. The table provides
consumers with relevant information about how the monthly
payments will change. If the transaction does not contain such
terms, the table may not be on the Loan Estimate (12 CFR
1026.37(i); Comment 37(i)-1).
What questions does the AP table on p. 2 of the LE require answers to [V-1.1 Truth in Lending Act]?
The AP table requires answers to the following questions:
* Whether there are interest-only payments and, if so, the
period during which the interest-only payment would apply
(12 CFR1026.37(i)(1));
* Whether the amount of any periodic payment can be
selected by the consumer as an optional payment and, if so,
the period during which the consumer can select optional
payments (12 CFR1026.37(i)(2));
Whether the loan is a step payment product and, if so, the
period during which the regular periodic payments are
scheduled to increase (12 CFR 1026.37(i)(3));
* Whether the loan is a seasonal payment product and, if so,
the period during which the periodic payments are not
scheduled (12 CFR 1026.37(i)(4)); and
* A subheading of monthly principal and interest payments,
with specified information about the first payment change
and amount; frequency of subsequent changes; and
maximum periodic payment that may occur during the loan
term (and first date the maximum is possible) (12 CFR
1026.37(i)(5).
What is the AIR table, as disclosed on p. 2 of the LE? [V-1.1 Truth in Lending Act]?
Adjustable Interest Rate (AIR) table.
For transactions with adjustable interest rates, an Adjustable
Interest Rate (AIR) table provides consumers with relevant
information about how the interest rate will change (12 CFR
1026.37(j)). The adjustable interest rate table must be completed
if the interest rate may increase after consummation. However,
if the legal obligation does not permit the interest rate to adjust
after consummation, this table is not permitted to appear on the
Loan Estimate (12 CFR1026.37(j)(1); Comment 37(j)-1)).
What information does the AIR table include, as disclosed on p. 2 of the LE? [V-1.1 Truth in Lending Act]?
The AIR table includes the following information (12 CFR
1026.37(j)):
* For non-step-rate products, the index upon which
adjustments to the interest rate will be based and the margin
that is added to the index to determine the interest rate (12
CFR1026.37(j)(1));
* For step-rate products, the maximum amount of any
adjustments to the interest rate that are scheduled and
predetermined (12 CFR 1026.37(j)(2));
* The initial interest rate at consummation (12 CFR
1026.37(j)(3));
* The minimum/maximum interest rate for the loan, after any
introductory period expires (12 CFR 1026.37(j)(4));
* The frequency of adjustments (first and subsequent
adjustments) (12 CFR 1026.37(j)(5)); and
* Any limits on interest rate changes (12 CFR1026.37(j)(6))
What information is included on p. 3 of the LE [V-1.1 Truth in Lending Act]?
Page 3: Additional information about the loan
Page 3 of the Loan Estimate contains contact information, a
Comparisons table, an Other Considerations table, and, if
desired, a Signature Statement for the consumer to sign to
acknowledge receipt (See 12 CFR 1026.37(k), (l), (m), and (n)).
What Contact Information is included on p. 3 of the LE [V-1.1 Truth in Lending Act]?
Contact information
The top of page 3 includes the name and NMLSR or License ID
number for the creditor and mortgage broker, if any; and name
and NMLSR or License ID of individual loan officer who is the
primary contact for the consumer, along with that person’s email
address and phone number (12 CFR 1026.37(k)).
What is the purpose of the Comparison’s Table on p. 3 of the LE [V-1.1 Truth in Lending Act]?
The Comparisons table follows the contact information and
allows consumers to compare loans. Each of these disclosures
must be accompanied by a specified descriptive statement (12
CFR 1026.37(l)).
What information is included in the Comparison’s Table on p. 3 of the LE [V-1.1 Truth in Lending Act]?
The creditor must provide the:
* Total dollar amount of principal, interest, mortgage
insurance, and loan costs scheduled to be paid through the
end of the 60th month after the due date of the first periodic
payment;
* Total dollar amount of principal scheduled to be paid
through the end of the 60th month after the due date of the
first periodic payment;
* Annual percentage rate using that term and the abbreviation
“APR” and expressed as a percentage; and
* Total interest percentage that the consumer will pay over
the life of the loan, expressed as a percentage of the amount
of credit extended, using the term “Total Interest
Percentage” and the abbreviation “TIP.”
How do you calculate the TIP, as disclosed in the Comparison’s Table on p. 3 of the LE [V-1.1 Truth in Lending Act]?
The TIP calculation is the same for the Loan Estimate and for
the Closing Disclosure: total interest (including prepaid interest)
that the consumer will pay over the life of the loan is divided by
the loan amount to arrive at the total interest percentage (TIP)
12 CFR 1026.37(l)(3); 12 CFR 1026.38(o)(5). The TIP is
computed assuming that the consumer makes each monthly
payment in full and on time and does not make any
overpayments 15 U.S.C. 1638(a)(19); 12 CFR 1026.37(l)(3);
Comment 37(l)(3)-1.
To calculate the TIP for fixed rate loans add the sum of interest
payments for the full term of the loan to the amount of prepaid
interest and divide that total by the loan amount. To calculate
the TIP for a variable-rate loan, compute the amount of interest
that the consumer will pay according to the terms of the loan. If
the loan has an index and margin, use the index existing at
consummation (12 CFR 1026.37(b)(2); Comment 17(c)(1)-10).
For Adjustable Rate products under 12 CFR
1026.37(a)(10)(i)(A), compute the TIP in accordance with
comment 17(c)(1)-10 (Comment 37(l)(3)-2). Comment 17(c)(1)-
10 provides guidance and examples for adjustable mortgages
with discounted and premium variable-rate terms. Where the
initial rate is not based upon the index or formula used for later
interest rate adjustments, the disclosures should reflect a
composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate
that would have been applied using the index or formula at the
time of consummation. The rate at consummation need not be
used if a contract provides for a delay in the implementation of
changes in an index value. For example, if the contract specifies
that rate changes are based on the index value in effect 45 days
before the change date, creditors may use any index value in
effect during the 45 day period before consummation in
calculating a composite annual percentage rate (Comment
17(c)(1)-10). For step-rate products under 12 CFR
1026.37(a)(10)(i)(B), compute the TIP in accordance with 12
CFR 1026.17(c)(1) and its associated commentary (Comment
37(l)(3)-2). For loans that have a negative amortization feature
under 12 CFR1026.37(a)(10)(ii)(A), compute the TIP using the
scheduled payment, even if it is a negatively amortizing
payment amount, until the consumer must begin making fully
amortizing payments under the terms of the legal obligation
(Comment 37(l)(3)-3).
NOTE: Prepaid interest that is paid by someone other than the
consumer is not included in the calculation. Further, if prepaid
interest was disclosed as a negative number on the Loan
Estimate or the Closing Disclosure, the negative value is used in
the TIP calculation (Comment 37(l)(3)-1).
What information is included in Other Considerations section on p. 3 of the LE [V-1.1 Truth in Lending Act]?
Other Considerations
Below the Comparisons table is a section regarding “other
considerations” about the loan. This section includes disclosures
on appraisals, assumptions, whether homeowner’s insurance is
required, applicable late payment fees, a warning about
refinancing, whether the creditor intends to service the loan or
transfer servicing, liability after foreclosure. The section also
provides for an optional, clear and conspicuous statement, if
applicable, that the creditor may issue a revised Loan Estimate
any time prior to 60 days before consummation pursuant to 12
CFR 1026.19(e)(3)(iv)(F) for transactions involving new
construction where the creditor reasonably expects that
settlement will occur more than 60 days after the provision of
the Loan Estimate (12 CFR 1026.37(m)).
The consumer is not required to sign the Loan Estimate. If the
creditor adds a signature statement on page 3 of the Loan
Estimate to confirm receipt by the consumer, it must use the
model form language. If the creditor chooses not to use the
confirm receipt table, it must include a statement that “You do
not have to accept this loan because you have received this form
or signed a loan application” (12 CFR 1026.37(n)).
What are the closing disclosure (CD requirements) [V-1.1 Truth in Lending Act]?
Closing Disclosure form required – 12 CFR1026.38(t)(3)(i)
The Closing Disclosure generally must contain the actual terms
and costs of the transaction and must satisfy timing and delivery
requirements set forth in the rule.
For any loans subject to 12 CFR1026.19(f) that are federally
related mortgage loans subject to RESPA (which will include
most mortgages), creditors must use form H-25, set forth in
Appendix H (12 CFR1026.38(t)(3)(i) (See also 12 CFR
1024.2(b) for definition of federally related mortgage loan).
For other loans subject to 12 CFR1026.19(f) that are not
federally related mortgage loans, the disclosures must contain
the exact same information and be made with headings, content,
and format substantially similar to form H-25 (12 CFR
1026.38(t)(3)(ii)).
What information is required on the closing disclosure (CD requirements) [V-1.1 Truth in Lending Act]?
Information required on the Closing Disclosure. As with the
Loan Estimate, most disclosures on the Closing Disclosure form
are required to be labeled using specific nomenclature, headings,
and formatting. Similarly, in some instances, the regulation
directs lines on the disclosure to be left blank where there is no
charge or sets forth the maximum number of items that may be
disclosed. See the regulation, Form H-25, and the Regulation Z
procedures for specific obligations regarding each required
disclosure.
What are the rounding requirements for the closing disclosure (CD requirements) [V-1.1 Truth in Lending Act]?
Rounding. Dollar amounts generally must not be rounded
except where noted in the regulation (12 CFR1026.38(t)(4)(i)).
If an amount must be rounded but is composed of other amounts
that are not required or permitted to be rounded, the unrounded
amounts should be used to calculate the total, and the final sum
should be rounded. Conversely, if an amount is required to be
rounded and is composed of rounded amounts, the rounded
amounts should be used to calculate the total (Comment
38(t)(4)-2). Percentage amounts should not be rounded and are
disclosed up to three decimals, as needed, except where noted in
the regulation. If a percentage amount is a whole number, only
the whole number should be disclosed, with no decimals (12
CFR1026.38(t)(4)(ii)).
What information is required on p.1 of the CD [V-1.1 Truth in Lending Act]?
Page 1: General information, loan terms, projected
payments, and costs at closing
General information, the Loan Terms table, the Projected
Payments table, and the Costs at Closing table are disclosed on
the first page of the Closing Disclosure (12 CFR 1026.38(a), (b),
(c), and (d)). These disclosures mirror the disclosures in the
Loan Estimate, and there is a required statement to compare the
document with the Loan Estimate (12 CFR1026.38(a)(2)).
Page 1 of the Closing Disclosure is similar, but not identical, to
the Loan Estimate. Page 1 of the Closing Disclosure provides
general closing, transaction, and loan information. It also
includes a Loan Terms table with descriptions of applicable
information about the loan, a Projected Payments table, and a
summary Costs at Closing table (12 CFR1026.38(a)-(d)).
What is the general information required on p.1 of the CD [V-1.1 Truth in Lending Act]?
General information
The top of page 1 of the Closing Disclosure requires the title
“Closing Disclosure” and a specified statement to compare the
disclosure with the Loan Estimate (12 CFR 1026.38(a)(1) and (2)). The top of page 1 also requires general closing, transaction,
and loan information.
Closing information includes the date that the Closing
Disclosure was delivered to the consumer, closing date (i.e., the
date of consummation), the disbursement date, settlement agent
conducting the closing, file number assigned by the settlement
agent, property address or location, and sale price (or appraised
property value if there is no seller) (12 CFR 1026.38(a)(3)). For
transactions without a seller for which the creditor has not
obtained an appraisal, the creditor may disclose the estimated
value of the property, using the estimate provided by the
consumer at application or the estimate the creditor used to
determine approval of the credit transaction (Comment
38(a)(3)(vii)-1).
Transaction information includes the borrower’s name and
mailing address, the seller’s name and mailing address, and the
name of the creditor making the disclosure (12 CFR
1026.38(a)(4)).
Loan information includes the loan term, purpose, product, loan
type, loan ID number (using the same number as on the Loan
Estimate), and mortgage insurance case number (MIC #), if
required by the creditor (12 CFR 1026.38(a)(5)). Other than the
MIC #, this information is determined by the same definitions
for those items on the Loan Estimate, updated to reflect the
terms of the legal obligation at consummation (Comment
38(a)(5)-1).
What information is required in the loan terms table on p.1 of the CD [V-1.1 Truth in Lending Act]?
Loan Terms table
The Loan Terms table is located under the above-described
general information disclosures. The information for this table is
the same as that required in the Loan Estimate under 12 CFR
1026.37(b), updated to reflect the terms of the legal obligation at
consummation (12 CFR1026.38(b)).
What information is required in the projected payments table on p.1 of the CD [V-1.1 Truth in Lending Act]?
Projected Payments table
The Projected Payments table is located directly below the Loan
Terms table on page 1 of the Closing Disclosure. The
information for this table is generally the same as that required
in the Loan Estimate under 12 CFR 1026.37(c)(1) through (4),
updated to reflect the terms of the legal obligation at
consummation (other than the reference to closing cost details
required by 12 CFR 1026.37(c)(4)(vi)). The estimated escrow
payments disclosed on the Closing Disclosure for transactions
subject to RESPA are determined under the escrow account
analysis described in Regulation X, 12 CFR 1024.17. For
transactions not subject to RESPA, estimated escrow payments
may be determined under the escrow account analysis described
in Regulation X, 12 CFR 1024.17 or in the manner set forth in
12 CFR1026.37(c)(5). There is also a required reference to the
detailed escrow account disclosures on page 4 of the Closing
Disclosure (12 CFR 1026.38(c)).
What information is required in the Closing Costs table on p.1 of the CD [V-1.1 Truth in Lending Act]?
Costs at Closing table
This table, located at the bottom of page 1, provides disclosures
on Closing Costs and Cash to Close (12 CFR1026.38(d)). These
disclosures offer the consumer a high-level summary of closing
costs and reference the more detailed itemizations found on
pages 2 and 3 of the Closing Disclosure (12 CFR
1026.38(d)(1)(i)(E) and 1026.38(d)(1)(ii)(B)).
Items that are disclosed on the Cash at Closing table include
Total Closing Costs, as well as the key inputs making up this
total: Loan Costs and Other Costs, less Lender Credits (and the
fact that total closing costs include these amounts) (12 CFR
1026.38(d)(1)(i)). The table also discloses Cash Required to
Close (12 CFR1026.38(d)(1)(ii)). For transactions without a
seller or simultaneous subordinate financing transactions, the
creditor must use the alternative Calculating Cash to Close table
when the alternative costs at closing table was used on the Loan
Estimate (12 CFR 1026.38(d)(2)).
What information is included on p. 2 of the CD? [V-1.1 Truth in Lending Act]?
Page 2: Closing Cost Details; Loan costs and other costs
Page 2 of the Closing Disclosure contains an itemization of the
“Loan Costs” and “Other Costs” associated with the loan (12
CFR1026.38(f), (g), and (h)). In each case, the amounts paid by
the consumer, seller, and others are separately disclosed. For
items paid by the consumer or seller, amounts that are paid at
closing are disclosed in a column separately from amounts paid
before closing (12 CFR 1026.38(f).
The number of items in the Loan Costs and Other Costs tables
can be expanded and deleted to accommodate the disclosure of
additional line items and to keep the Loan Costs and Other
Costs tables on page 2 of the Closing Disclosure (12 CFR
1026.38(t)(5)(iv)(A); Comment 38(t)(5)(iv)-2). However, items
that are required to be disclosed even if they are not charged to
the consumer (such as Points in the Origination Charges
subheading) cannot be deleted (Comment 38(t)(5)(iv)-1).
Further, the Loan Costs and Other Costs tables can be disclosed
on two separate pages of the Closing Disclosure but only if the
page cannot accommodate all of the costs required to be
disclosed on one page (12 CFR 1026.38(t)(5)(iv)(B); Comment
38(t)(5)(iv)-2). When used, these pages are numbered page 2a
and 2b (Comment 38(t)(5)(iv)-3). For an example of this
permissible change to the Closing Disclosure, see form H-25(H)
of Appendix H to Regulation Z.
What information is included on the Loan Costs Table on p. 2 of the CD? [V-1.1 Truth in Lending Act]?
Loan Costs table
All loan costs associated with the transaction are listed in a table
under the heading “Loan Costs,” with the items and amounts
listed under four subheadings:
(A) * Origination charges;
(B) * Services borrower did not shop for;
(C) Services borrower did shop for; and
(D) * Total loan costs (12 CFR1026.38(f)(1) through (f)(5)).
Items should generally be the same as disclosed on the Loan
Estimate, updated to reflect the terms of the legal obligation at
consummation, except as discussed below (12 CFR1026.38(f)).
What information is included in the Origination Charges section (A) of the Loan Costs Table on p. 2 of the CD? [V-1.1 Truth in Lending Act]?
Origination Charges. All loan originator compensation is
disclosed as an origination charge, including compensation from
the creditor to a third-party loan originator (which was not
disclosed on the Loan Estimate). Compensation from the
consumer to a third-party loan originator is designated as
Borrower-Paid at Closing or before closing on the Closing
Disclosure (12 CFR 1026.38(f)(1); Comment 38(f)(1)-2).
Compensation from the creditor to a third-party loan originator
is designated as Paid by Others on the Closing Disclosure
(Comment 38(f)(1)-2). This line item must also disclose the
name of the loan originator ultimately receiving the payment (12
CFR1026.38(f)(1)). A designation of “(L)” can be listed with
the amount to indicate that the creditor pays the compensation at
consummation. This is the same as the amount of third-party
compensation included in points and fees for purposes of
determining the consumer’s ability to repay the loan.
Compensation to individual loan originators is not calculated or
disclosed on the Closing Disclosure (Comment 38(f)(1)-3).
What information is included in the Services the consumer did or did not shop for sections (B) or (C) of the Loan Costs Table on p. 2 of the CD? [V-1.1 Truth in Lending Act]?
Services the consumer did or did not shop for. The following are
disclosed under “Services Borrower Did Not Shop For,”
regardless of where it was located on the Loan Estimate:
* Items that the consumer could have shopped for but did not.
* When a consumer chooses a provider that is on the written
list of providers for a service on the Loan Estimate (12 CFR
1026.38(f)(2)).
Items are re-alphabetized when an item is added to or removed
from a particular subheading.
The amounts that are designated as Borrower-Paid at or before
closing are subtotaled as Total Loan Costs (Borrower-Paid) (12
CFR1026.38(f)(5)). Amounts designated as Seller-Paid or Paid
by Others are not included in this subtotal (rather, they are
included elsewhere in the Closing Cost Subtotal) (Comment
38(f)(5)-1; 12 CFR 1026.38(h)(2)).
