TILA_AC Flashcards
How is Reg Z formatted?
Subpart A,B,C,D,E,F,G
A: Open end and Closed end transactions, definitions and applicability, finance charges
B:Open-end, account opening disclosures, periodic statements, special day rules
C:Closed-end credit, disclosures, treatment of credit balances, APR calculation, rescission rights, advertising.
D: record retention, non English disclosures, exemptions, rate limitations.
E: Mortgage transactions, disclosures, periodic statements, small servicer exemption
F:Private education loans, disclosures, change in terms, right to cancel, marketing
G:Credit Card, disclosures, Ability to repay, finance charges, marketing.
Does TILA tell banks how much interest they may charge or whether they must grant a consumer a loan?
No
T or F:
Open-end = NOT home-secured
TRUE
Examples: credit cards; home equity loans
When did the CFPB further amend Reg 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?
I.e. the TISA-RESPA Integrated Disclosure Rule
2013
What did this 2013 amendment require?
When was TILA-RESPA Integrated Rule effective?
Regulation Z now contains two new forms required for
most closed-end consumer mortgage loans.
The Loan Estimate - provided within 3 business days from application
Closing Disclosure- provided to consumers 3 business days before loan consummation.
Effective= These disclosures must be used for mortgage loans for which the creditor or mortgage broker receives an application on or after October 3, 2015
I. SUBPART A
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 rule for determining which fees are finance charges (12 CFR 1026.4).
N/A
What is the purpose of TILA and Reg 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.
T or F:
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.
TRUE
What is successor of interest?
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.
T or F:
A confirmed successor in interest is NOT a consumer.
FALSE- they are a consumer (once identity/ownership interest is confirmed by bank/servicer)
What transactions are exempt from Regulation Z? (6)
- Credit extended for Business, Commercial or Agricultural purpose
- Credit extended to a non-natural person (gov. agencies);
- Public utility credit;
- Credit extended by a broker-dealer registered with the 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.
Does TILA apply to credit extended to a Trust?
Yes, credit extended to trusts established for tax or real estate planning purposes or to land trusts is considered to be extended to a natural person
T or F:
However, generally exempt credit (i.e. business purpose credit) is subject to the requirements that govern the issuance of credit cards and liability for their unauthorized use. (credit cards cannot be issued on an unsolicited basis and if one is lost or stolen, the cardholder must not be held liable for more than $50 for the unauthorized used of the card).
TRUE
When determining whether credit is for consumer purposes, the creditor must evaluate all of the following? (5)
** consider all 5 factors before determining that disclosures are NOT necessary
** Normally, no ONE factor by itself is sufficient reason to determine the applicability of Reg Z
- Statement describing the purpose of the credit (i.e. statement proceeds used for vacation)
- 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.
T or F:
A checked box indicating the loan is for a business purpose is sufficient to determine the loan does not have a consumer purpose?
False.
Absent of any documentation showing the intended use of the proceeds could be insufficient evidence that the loan did not have a consumer purpose. (could be mixed purpose)
T or F:
A creditor can furnish TILA disclosures to the consumer regardless if the transaction is covered by Reg. Z?
TRUE
In any event, the bank may routinely furnish disclosures to the consumer. Disclosure under such circumstances does not control whether the transaction is covered but can assure protection to the bank and compliance with the law.
What are the four coverage considerations for Reg Z to apply?
Is the purpose of the credit for personal, family or household use? YES–>
Is the consumer credit extended to a consumer? YES–>
Is the consumer credit extended by a creditor? YES –>
Is the loan or Credit plan secured by real property, a coop unit, or a dwelling? –> YES
Then Reg Z Applies!
What must be met under the regulation in order for an entity to be considered a “Creditor”? (3)
- 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.
If the loan or credit plan is NOT secured by real property, a coop unit, or a dwelling - then what question?
If yes to this question- then what?
If no, then what?
Is the amount financed or credit limit at or below the annual threshold limit? –> YES, then Reg Z applies!
If NO–> Reg 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 Reg Z will apply.
What is the definition of a finance charge?
A measure of the cost of the consumer credit represented in dollars and cents
What does the finance charge include?
Any charges or fees payable directly or indirectly by the consumer and imposed directly or indirectly by the bank either as an incident to or as a condition of an extension of consumer credit
What does a finance charge NOT include?
Any charge of a type payable in comparable cash transactions
Example:
-taxes
- title
- license fees
- registration fees
All paid in connection with an auto purchase
What does a finance charge on a loan ALWAYS include?
Any interest charges
For which credit transactions are finance charge accuracy tolerances permitted?
If disclosed finance charges are legally accurate, it would not be subject to reimbursement.
Closed-end credit
T or F:
Finance charge disclosures for open-end credit MUST be accurate since there is no tolerance for finance charge errors.
TRUE- only for closed-end
What are the tolerances for finance charges in closed-end transactions, other than a mortgage?
$5 if the amount financed is less than or equal to $1,000
AND
$10 if the amount financed exceeds $1,000
What is the finance charge tolerance for credit secured by real property or a dwelling (closed-end credit)?
The disclosed finance charge considered accurate if it is not understated by more than $100
Overstatements are not violations
What is the accuracy tolerance for rescission rights after the 3 business day rescission period? (General rule, finance charge, and total of payments)
General rule- one half of 1% tolerance
Finance charge- accurate if not understated by more than 1/2 of 1% of the credit extended or $100 (whichever if greater)
Total of payments for transactions- accurate if understated by no more than 1/2 of 1% of the face amount of the note or $100 (whichever is greater)
**Overstatements are NOT violations (i.e. the amount disclosed overstated the ACTUAL finance charge or total of payments)- considered accurate
What is the accuracy tolerance for rescission rights after the 3 business dat rescission period, for refinances on residential loans at a new bank? (General rule, finance charge, total of payments)
General rule- 1% tolerance, when new loan is made at new bank.
Finance Charge: accurate if not understated by more than 1% of the credit extended or $100, whichever is greater.
Total of Payments for transactions- accurate if not understated by more than 1% of the face amount of the note or $100, whichever is greater.
Overstatements are not violations.
Excludes HCMLs that are new advances or new consolidations.
Right to rescind. After the initiation of foreclosure on the consumer’s principal dwelling that secures the obligation, the consumer can rescind if (2)?
(1) A mortgage broker fee that should have been included in the finance charge was not included; or
(2) The creditor did not provide the properly completed appropriate model form in Appendix H, or a substantially similar notice of rescission.
What are the accuracy tolerances for disclosures after the initiation of foreclosure on a consumer’s principal dwelling that secures the credit obligation? (Finance charge; Total of payments)
Finance Charge- accurate if not understated by more than $35
Total of payments- accurate if not understated by more than $35
*Overstatements are not violations!
T or F:
Charges imposed by third parties are finance charges if the bank requires use of the third party.
TRUE
What is a prepaid finance charge?
Any finance charge paid separately to the bank or to a third-party, in cash or by check before or at closing, settlement, or consummation of a transactions, or withheld from the proceeds of the credit at anytime.
Prepaid finance charges effectively reduce the amount of funds available for the consumer’s use, usually before or at the time the transaction is consummated.
Examples of common prepaid finance charges
-Points
-Loan origination fees
- RE/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),
- FHA mortgage guarantee insurance fees
- PMI
-Credit report fees (non-real estate transactions).
What is 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.
T or F:
The finance charge initially includes any charge that is, or will be, connected with a specific loan.
TRUE
What charges are always included as as a finance charge? (8)
Interest
Transaction fees
Loan origination fees, consumer points
Credit guarantee, insurance premiums
Charges imposed on the creditor for purchasing the loan, which are passed to the consumer.
Discounts for inducing payment by means other than credit.
Mortgage broker fees
Other examples: Fee for preparing TILA disclosures, construction loan inspection fees, post-consummation tax, flood service policy, required credit life insurance charges; tax service fee; life of loan flood monitoring; settlement/closing fees
What charges are never included as a finance charge? (8)
Charges payable in a comparable cash transaction.
Fees for unanticipated late payments.
Overdraft fees not agreed to in writing.
Sellers points.
Participation/membership fees.
Discounts offered by the seller to induce payment by cash or other means not involving the use of a credit card.
Interest forfeited from interest reduction by law.
Charges absorbed by the creditor as a cost of doing business.
What charges are NOT considered finance charges as long as they are a bona fide and reasonable amount? (6)
(residential mortgages & loans secured by real estate)
Fees for title insurance, title examination, property survey.
fees for preparing loan documents, mortgages, and other settlement docs.
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.
T or F:
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.
TRUE
What is the definition of the amount financed?
Formula (normally)?
Is the itemization of the amount financed required for TRID?
Definition: Net amount of credit extended for the consumer’s use.
Amount financed = total of payments - finance charge.
YES- itemization required.
How is amount financed calculated (in the regulation 1026.18(b))?
(1) Determining the principal loan amount or the cash price (subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and are not part of the finance charge ; and
(3) Subtracting any prepaid finance charge.
EXAMPLE:
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.
Bank treats 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.
T or F:
It is assumed that the amount financed equals the note amount, proceeds, or principal amount of the loan.
FALSE!!!!!
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.
If a consumer pays for a charge separately in cash (this charge is not in the note amount or finance charge), then should it be included in the amount financed for a TRID Loan?
No it should be subtracted from the total of payments and is not required to be disclosed.
What is the amount financed from the example below?
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.
Amount financed= $4,975.
Amount financed= total of payments - finance charges
The amount financed may be calculated by first subtracting all finance charges included in the note amount:
Amount financed = 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, in cash, 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.
What are the finance charges in the below examples?
The APR is 12% on a loan with an amount financed of $5,000 and 36 equal monthly payments of
$166.07 each.
The APR is 13.26% on a loan with an amount financed of $4,500 and 35 equal monthly payments of $152.18 each and a final payment of $152.22.
The finance charge is $978.52 in both cases.
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.
First example:
Amount financed= total of payments- finance charge
5000= (36*166.07)- finance charge –> finance charge= 978.52
Second example:
4,500= ((35*152.18)+152.22) - finance charge –> finance charge = 978.52
Is life-of-loan monitoring considered a finance charge?
What about flood determination fees?
Yes, Life of loan fees are finance charges because fees for services that will be performed periodically during the loan term are finance charges.
Determination fees are not unless a portion of the fee includes life of loan monitoring and if the bank is uncertain how to break out the fee, in which case the entire fee may be treated as a finance charge.
What is the payment schedule?
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.
Any finance charge paid separately before or at
consummation (e.g., odd days’ interest) is not part of the payment schedule, but is a prepaid finance charge that must be reflected as a reduction in the value of the amount financed
What is the annual percentage rate (APR)?
(closed-end credit)
A measure of the cost of credit, expressed as a nominal yearly rate
It relates the amount and timing of value received by the consumer to the amount and timing of payments made.
How should APR be disclosed for closed-end credit?
Must be disclosed as a single rate only (regardless if the loan has a single interest rate, variable rate, or graduated payments) and it must appear with the segregated disclosures (grouped together and don’t contain any info not required under 1026.18).
T or F:
APR is the same thing as the interest rate.
FALSE.
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
What is the APR a function of (3)?
The amount financed (which is not necessarily equivalent to loan amount)
The finance charge (which is not necessarily equivalent to the total interest amount)
The payment schedule (which is not always equal to P+I payments)
When is the credit report fee considered a finance charge?
(1) Consumer pays a $25 credit report fee for an auto loan
(2) Consumer pays a $25 credit report fee for home improvement loan secured by real property
(1) FINANCE CHARGE
(2) NOT A FINANCE CHARGE
T or F:
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.
TRUE
An incorrectly disclosed APR or finance charge would NOT be considered a violation under what circumstances? (3)
- If the error resulted from a corresponding error in a calculation tool used in good faith by the bank.
- If upon discovery of the error, the bank promptly discontinues use of that calculation tool for disclosure purposes.
- The bank notifies the CFPB in writing of the error in the calculation tool.
II. Subpart B- Open-End Credit
Subpart B 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 calculations 12 CFR 1026.14, rescission requirements 12 CFR 1026.15 and advertising (12 CFR 1026.16).
N/A
What is a grace period?
A period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate
For credit card accounts under an open-end (not home-secured) consumer credit plan, when must periodic statements be delivered/mailed?
What about when grace period?
At least 21 days prior to the payment due
date disclosed on the periodic statement
Payments are not treated as late for any purpose if they are received within 21 days after mailing or delivery of the statement
When grace period:
At least 21 days prior to the date that the grace period expires
No finance charges or late fees can be charged if payment is received within the above time periods after mailing/delivering the periodic statements.
For non-credit card open-end consumer plans without grace periods, when must creditors mail/deliver periodic statements?
At least 14 days prior to the date on which the required minimum periodic payment is due
Cannot treat as late a required minimum periodic payment received by the creditor within 14 days after it has mailed or delivered the periodic statement.
For open-end credit, not home-secured credit (credit cards), what “significant changes” in terms require 45-day advance written notice to consumers? (5)
Advanced notice is required for significant changes in terms including:
- Penalty fees
- Transaction fees
- Fees imposed for the issuance or availability of the open-end plan.
- Grace period
- Balance computation method
For open end credit, not home-secured credit (credit cards), which changes do not require advance notice to consumers? (5)
- 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.
Can a customer reject significant changes in terms from open ended, not home-secured credit?
What are the exceptions?
YES!!
For significant changes in terms 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
Exceptions (no option to reject):
- 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
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
How are finance charges disclosed for open-end credit?
Each finance charge must be individually itemized
The aggregate total amount of the finance charge does NOT need to be disclosed.
