TILA Flashcards
What does TILA mean?
Truth-in-Lending Act
Purpose of TILA?
Promote the informed use of credit by consumers
- Protect consumers by disclosing the costs and terms of credit
- Create uniform standards for stating the cost of credit, thereby encouraging consumers to compare the costs of loans offered by different creditors
- Ensure that advertising for credit is truthful and not misleading
- Provide borrowers with the right to rescind certain types of mortgage transactions
Scope of TILA?
Credit extended for personal, family, or household purposes
Does not apply to any loan for business, commercial, or agricultural purposes
TILA’s regulation?
Regulation Z
TILA applies to ___
All credit transactions which meet the following four conditions:
- The credit is offered to consumers
- The offer or extension of credit is made regularly
- The credit includes a finance charge or a written agreement stating that the loan may be repaid in more than four installments
- The credit is primarily for personal, family, or household purposes
TILA does not apply to ___
- Transactions for business, agricultural, or organizational credit
- Credit in excess of a threshold amount that is adjusted annually (this threshold does not apply to transactions that are secured by real property or a dwelling)
- Public utility credit
- Credit extended by a broker registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission
- Home fuel budget plans
- Student loans made, insured, or guaranteed by the federal government
- Employment-sponsored retirement plans
Define: TILA Creditors
Natural persons or business and financial organizations that do all of the following:
- Regularly extend consumer credit
- Make the credit subject to a finance charge or make the credit payable under the terms of a written agreement that requires repayment in more than four installments
- Receive the initial payments on the debt that the borrower assumes in the lending transaction
Define:
Regularly extends consumer credit
- The credit is secured by a dwelling and was extended more than five times in the preceding calendar year, or
- The credit is secured by a dwelling and, in any 12 month period, the creditor originates more than one credit extension that is a high-cost mortgage regulated under HOEPA, or
- The credit is secured by a dwelling and, in any 12 month period, the creditor originates one or more high-cost mortgages regulated under HOEPA through a mortgage broker
Define: Application
(AKA: TILA Application)
The submission of a financial information by the consumer for the purposes of obtaining an extension of credit:
- Name
- Monthly income
- Social Security Number for purposes of obtaining a credit report
- Property address
- Estimate of the value of the property
- Loan amount sought
Define: CFPB Business day
This term can be defined one of two ways:
- The general definition, as referred to by the
CFPB, means any day on which the creditor’s offices are open to the public for carrying out substantially all business functions. This is the definition that applies to deadlines for providing the Loan Estimate. - The CFPB also provides a more specific definition, defining “business day” to mean all calendar days except Sundays and legal public holidays
Define: TILA Consummation
Generally refers to the date the borrower becomes legally obligated on the loan
Define:
TILA Residential mortgage transaction
A credit transaction (loan or credit sale) that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage, or other equivalent consensual security interest on a dwelling or residential real estate
Advertising: Disclosures required for all advertisements
- If an advertisement contains an interest rate, it must also include the annual percentage rate (APR), using that term.
- If the APR can increase over the term of the loan, that fact must also be disclosed.
Advertising: Closed-end loan trigger terms
- The amount or percentage of any down payment
- The number of payments or period of repayment
- The amount of any payment
- The amount of any finance charge
Required disclosures:
* The amount or percentage of the down payment
* The terms of repayment, and
* The APR
* Whether or not the APR may change during the term of the loan
Advertising: Open-end loan trigger terms
- The finance charge
- Other charges, such as late payment, title, appraisal, and credit report fees
- Taxes imposed on the credit transaction
- Payment terms of the home equity plan
Trigger terms require additional disclosure
Annual percentage Rate (APR)
- The relationship of the total finance charge to the total amount financed
- A measure of the cost of credit, expressed as a yearly rate
APR = ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100
–or the equivalent–
APR = ((Finance charge / Loan amount) / Number of days in loan term)) x 365 x 100
Example
Assume you’re taking out a $2,000 loan and have 180 days to repay it. You agree to pay 6% interest ($120) and your lender is charging you $50 in fees.
- Add the total interest paid over the duration of the loan to any additional fees: $120 + $50 = $170
- Divide by the amount of the loan: $170 / $2,000 = 0.085
- Divide by the total number of days in the loan term: 0.085 / 180 = 0.00047222
- Multiply by 365 to find the annual rate: 0.00047222 ✕ 365 = 0.1723603
- Multiply by 100 to convert the annual rate into a percentage: 0.1723603 ✕ 100% = 17.23%.
What is included in the APR?
- Interest
- Loan Amount
- Mortgage insurance premiums
- Fees
- Origination fees
- Discount points
- Tax service fees
- Underwriting fees
- Processing fees
- Prepaid/per-diem interest
- Mortgage insurance impounds/reserves
- Warehouse fees
- VA funding fees
- FHA upfront mortgage insurance premium (UFMIP), if an FHA loan
- Buy-down fees
- Flood certification fees
- Closing fees
- Courier fees
Finance charges: What is included?
-
Fees paid to third parties if the creditor requires the use of a particular third party or retains a portion of the third-party charge.
- Loan origination fees
- Mortgage broker fees
-
Charges for optional insurance products (ex, credit life, disability, employment insurance)
- However, if an optional insurance product is voluntarily chosen by a borrower, and this fact is stated in writing, the cost is not included in the finance charge.
- Interest
- Points
Note: NOT included if part of application fees charged to all applicants:
* Appraisal fees
* Credit report fees
Finance charges are a form of compensation to the lender for providing the funds, or extending credit, to a borrower
Define: Finance charges
The costs of obtaining credit paid by the consumer, expressed as a dollar amount
Note: Interest is considered a cost
Define: Prepaid finance charges
Charges
- which are paid separately before or at the time of consummation or
- which are withheld from the proceeds of the loan
Examples:
- Loan origination, discount, and commitment fees
- Any prepaid premium for private mortgage insurance (PMI), FHA upfront mortgage insurance premium (UFMIP), VA funding fee, or USDA guaranty fee
- Underwriting, processing, tax service, and courier fees, if paid to the creditor
- Buy-down funds
- Prepaid interest
- Title insurance fees
- Funds being escrowed for taxes and insurance
- Notary fees
- Appraisal fees
- Termite inspection fees
- Credit report charges
Define: Fees
AKA: * Loan Fees*
Fees = (Finance charges) - Interest
What prepaid finance charges are not included when calculating the APR?
- Title insurance fees
- Funds being escrowed for taxes and insurance
- Notary fees
- Appraisal fees
- Termite inspection fees
- Credit report charges
- Points paid by Seller
What regulates TILA disclosures?
TILA-RESPA Integrated Disclosure Rule
AKA TRID
High-cost loan
Loan which falls under the scope of the Home Ownership and Equity Protection Act (HOEPA)
A loan is a high-cost home loan if the loan’s APR exceeds the average prime offer rate (APOR) for a comparable transaction by more than:
- 6.5 percentage points for a first-lien loan
- 8.5 percentage points for a first-lien loan of less than $50,000 and secured by a dwelling that is personal property (e.g., a manufactured home), or
- 8.5 percentage points for a subordinate lien
A loan is also a high-cost home loan if the transaction’s points and fees will exceed:
- For a loan amount of $26,092 or more: 5% of the total loan amount, or
- For a loan amount of less than $26,092: the lesser of 8% or $1,305
A loan may also be a high-cost home loan if it provides for
* a prepayment penalty more than 36 months after consummation or
* a prepayment penalty that exceeds, in total, more than 2% of the amount prepaid
The $26,092 and $1,305 figures are adjusted annually based on changes in the Consumer Price Index as of the preceding June 1
Note: The average prime offer rate is the APR derived from average interest rates, points, and other pricing terms currently offered to consumers by a representative sample of creditors for transactions that have low-risk pricing characteristics
What does HOEPA mean?
Home Ownership and Equity Protection Act
Requlates high-cost loans
High-cost loan disclosures
Borrowers must receive an additional set of disclosures
Due: 3 days prior to closing
These disclosures include:
- The APR
- The following statement:
- You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.
- The amounts of the regular monthly payment and any balloon payment
- If a variable-rate transaction, a statement that the interest rate and payment amount may increase
- For a closed-end loan, the total amount being borrowed and whether that amount includes finance charges allowed in the calculation of points and fees
NOTE: A creditor may not make a high-cost home loan unless it receives written certification that the borrower has obtained counseling on the advisability of the mortgage loan from a HUD-approved counselor
Terms not permited in a high-cost loan
- Balloon payments, with specific, limited exceptions for seasonal or irregular income
- A payment schedule that:
- Will result in negative amortization, or
- Consolidates more than two periodic payments and pays them in advance from the proceeds
- An increase in the interest rate after default
- Prepayment penalties
- Prepayment penalties are always prohibited for high-cost home loans, even if the penalties do not exceed the HOEPA prepayment penalty threshold. If a loan is identified as high-cost according to any of the three HOEPA thresholds, any prepayment penalty provision included in the loan is prohibited.
Define: Rescission
A legal remedy that voids a contract between two parties and restores both to the position held prior to the transaction
Right of rescission
Borrowers have the right to rescind a transaction in which a security interest is given on their primary residence
The right of rescission may also apply to any new credit granted over and above the unpaid principal balance of the loan being refinanced
Right of rescission does not apply to ___
- A residential mortgage loan used for a purchase transaction
- A refinancing by the same creditor of an extension of credit already secured by the borrower’s primary dwelling
- A transaction in which a state agency is the creditor
Remember: NEVER applies to purchase transactions
How does borrower rescend?
- Provide written notification by mail, telegram, or any other means of written communication
- Notice is considered given when the transmission is mailed or sent by the borrower
All parties to a transaction must receive the required disclosures and rescission notice
When may a borrower rescend?
At any time until midnight on the third business day after the latest of the following occurs:
- Consummation
- Delivery of the notice of the right to rescind
- Delivery of all material disclosures (i.e., APR, finance charge, total of payments, payment schedule, and the high-cost loan disclosure)
If a borrower rescinds a transaction within 20 days of the rescission, they are entitled to a refund of all money or property given to the creditor.
Rescision Business Day: Any day but Sunday or public holidays
Expiration of Rescission Period
If a creditor/lender fails to provide the required disclosures and notice to effectively initiate the three-day period, the borrower’s right to rescind automatically expires at the earliest of the following occurrences:
- Three years from consummation of the transaction
- Transfer of the borrower’s interest in property, or
- Sale of the borrower’s interest in property
If foreclosure proceedings have been commenced and the three years have not lapsed, the borrower can rescind the transaction if:
- Mortgage broker fees that should have been included in the finance charge were not, or
- The rescission notice was not formatted or completed as required under Regulation Z
If a borrower rescinds a transaction, within 20 days of the rescission, they are entitled to a refund of all money or property given to the creditor
Higher-Priced Mortgage Loan
A closed-end consumer credit transaction secured by the borrower’s principal dwelling that has an APR that exceeds the APOR by
- If a first-lien loan eligible for purchase by Freddie Mac (i.e., not exceeding the conforming loan limit), 1.5 percentage points
- If a first-lien jumbo loan, 2.5 percentage points
- If a subordinate-lien loan, 3.5 percentage points
For 2024, the maximum mortgage eligible for purchase by Freddie Mac is $766,550 for a single-family home
What does HPML mean?
Higher-Priced Mortgage Loans
Higher-priced mortgage loan
A closed-end consumer credit transaction secured by the borrower’s principal dwelling that **has an APR that exceeds the APOR **by:
- If a first-lien loan eligible for purchase by Freddie Mac (i.e., not exceeding the conforming loan limit), 1.5 percentage points
- If a first-lien jumbo loan, 2.5 percentage points
- If a subordinate-lien loan, 3.5 percentage points
Max mortgage Freddie Mac purchase is $766,550 for a single-family home
- If a QM, it is not automatically considered to be in compliance with the ATR Rule
- The lender will only have a rebuttable presumption
Requirements for a HPML
- An escrow account for the payment of property taxes and mortgage-related insurance (e.g., hazard insurance, credit-related insurance) must be established
- A creditor must obtain a written appraisal of the property, performed by a licensed or certified appraiser
- A creditor must obtain two written appraisals if:
- The seller acquired the property 90 or fewer days prior to the date of the sale contract and the sale price is 10% (or more) higher than the seller’s acquisition price, or
- The seller acquired the property 91 to 180 days prior to the date of the sale contract and the sale price is 20% (or more) higher than the seller’s acquisition price
What does ATR mean?
Ability to Repay Rule
What does QM Mean?
Qualified Mortgage Rule
(AKA: Final Rule)
Loan Calculations
What is not included in Finance Charge?
- Fees that are payable in a comparable cash transaction, such as taxes
- Seller’s points
- Title insurance fees
- Title examination fees
- Doc prep fees
- Notary fees
- Appraisal fees
- Credit report fees
Regulation Z Special Rule
-
Closing agent charges: fees charged by the closing agent are included in the finance charge if the creditor
- requires these services
- requires a charge for these services
- retains a portion of the charge.
- If the creditor retains a portion of the charges, the finance charge should reflect only the portion of the fee that the creditor keeps.
- Mortgage broker fees: a mortgage broker’s fees are always included in the finance charge, even if the lender does not require the use of the broker’s services and does not retain a portion of the charge.
