Truth In Lending Act (TILA) - Chapter 16 Flashcards
Regulation Z
The Truth in Lending Act (TILA)
The Truth in Lending Act (TILA, Regulation Z)
TILA’s main focus is to ensure that consumers make informed decisions when applying for and receiving financial credit.
TILA governs people and organizations that regularly provide consumer credit. Forms of consumer credit include mortgages, auto loans, and credit cards. The law requires the delivery of standardized disclosures with information about the terms and costs of financing. TILA also includes advertising standards and prohibitions.
Loans Covered by TILA
- Entities that offer credit to consumers: mortgages are a form of credit and subject to regulation when the homeowner’s dwelling of 1-4 units secures the mortgage debt and is used for personal, family, or household purposes.
- Card issuers that make credit subject to finance charges or make the credit payable under a written agreement that requires repayment in more than four installments.
- Any person who extends consumer credit more than 5 times in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year.
- Any person who originates more than one credit extension subject to the requirements of a high-cost mortgage under HOEPA or one or more such credit extensions through a mortgage broker.2 (HOEPA loans are high-cost loans and we’ll go deeper on HOEPA in a few pages).
TILA Does Not Govern
TILA is NOT responsible for business or commercial credit. This means that if a company wants a loan to
finance its new headquarters or buy some inventory, that type of loan does not fall under the rules of TILA.
The regulations set by TILA do not apply to the following individuals or businesses:
• Those who extend business, agricultural or organizational credit
• Transactions involving credit in excess of $58,300 (for 2021, subject to annual adjustment) if not secured by real property or a dwelling
• Public utility credit that includes any credit that covers services provided via wire, pipe or connected facilities
• Credit extended by a broker registered with the Securities Exchange Commission or the Commodity Futures Trading Commission
• Home fuel budget plans
• Student loans made, insured, or guaranteed by the Higher Education Act of 1965
TILA Simplified
TILA’s purpose is to promote the informed use of consumer credit.
Two of the ways that TILA ensures borrowers can make an educated decision about their loan is through the timing requirements for disclosures, and mandatory waiting periods between disclosure delivery and loan closing. In the case of a refinance on primary residences and reverse mortgages, TILA allows borrowers to cancel the transaction after closing in certain circumstances.
TILA also protects consumers by requiring creditors to advertise to consumers in a truthful way that is not misleading, enabling consumers (through a documented process) to withdraw from credit transactions related to their principal residence and by providing information related to high-cost and higher-priced loans.
TILA Permissible Fees and Finance Charge Requirements
TILA allows the inclusion of many fees or finance charges on a loan transaction. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction (e.g., taxes).
TILA Applicable charges that are always included
Interest, transaction fees, loan origination fees (aka “consumer points”), credit guarantee insurance premiums (mortgage insurance), 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, fees for preparing TILA disclosures, real estate construction loan inspection fees, fees for post-consummation tax or flood service policy, and any required credit life insurance charges. In other words, if the service or fee is necessary for financing to take place it will typically be governed by TILA.
TILA Charges that are not allowed
Include charges payable in a comparable cash transaction (e.g. taxes), fees for unanticipated late payments, overdraft fees not agreed to in writing, seller’s points, membership fees, seller’s discounts, interest forfeited as a result of interest reduction required by law, and charges absorbed by the creditor as a cost of doing business.
Business Day
In general, the Truth in Lending Act defines a business day as a day when the creditor’s offices are open to the public for carrying out the majority of its business functions.
A business day means all calendar days except Sundays and legal public holidays such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
Advertising Requirements
The Truth in Lending Act requires the following when it comes to the advertisement of financing secured by a dwelling:
• Only currently available credit terms may be advertised by the creditor.
• Any disclosures of information made in an advertisement must be clear and conspicuous (the standard for “clear and conspicuous” varies dependent on the delivery method of the advertising, but in general the information should be reasonably understandable and provided in a way that draws attention to its importance).
• If a simple interest rate is advertised it must be stated in conjunction with (and no more prominently than) the annual percentage rate (APR). If the APR can change after consummation, it must be indicated in the advertisement.
• If the down payment, number of payments, amount of any payment, or the amount of any finance charge are provided in the advertisement, these are known as trigger terms. Any of these trigger terms requires that the following then be included in the advertisement:
• The amount or percentage of any down payment needed.
• The terms for repayment for the full term of the loan (e.g., interest rate, length of loan3).
• The annual percentage rate and if the rate may increase after consummation. The phrase “annual percentage rate” must be spelled out in those words.
• If the amount of credit exceeds the fair market value of the dwelling this must be stated in the advertisement. Such advertisement should also state that the consumer should consult a tax advisor for more information regarding tax liability for this particular type of loan.
TILA prohibits the following in advertising:
- Misleading advertising of fixed rates and payments
- Misleading comparisons in advertisements
- Misrepresentations of government endorsements
- Misleading lender’s name
- Misleading statements of debt elimination
- Misleading use of the term “counselor”
- Misleading foreign language advertisements
TILA, Section 19
Mortgage Disclosure Improvement Act (MDIA)
The Mortgage Disclosure Improvement Act (MDIA) requires a 7 business day waiting period between the delivery of the initial disclosures and loan closing. This waiting period may be waived by the borrower in cases of a bona fide emergency. If a change of circumstance occurs, then a revised disclosure must be provided and an additional 3 business days must be added to wait for closing.
One very important requirement of MDIA is the “Intent to Proceed” provision for all closed-end mortgages. This requires that the borrower must provide their intent to proceed with the loan process prior to the charge of any fee (with the exception of the credit report fee). The intent to proceed is not a commitment to the final terms of the loan but is simply an indication that the borrower reviewed the early disclosures provided (specifically the Loan Estimate) and wants to move forward with the process.
If the borrower is seeking an ARM, the delivery of the Consumer Handbook on Adjustable Rate Mortgages (CHARM Booklet) and the Early ARM Disclosure are also required prior to the payment of any non-refundable fee.
TILA Annual Percentage Rate Requirements
TILA has thresholds in place to ensure that, if pricing fluctuates during processing, the resulting change in APR is communicated appropriately to the borrower. The tolerance for the increase in the annual percentage from the early disclosure to the closing disclosure on a TILA-governed transaction is .125% (1/8) on fixed rate mortgages and .25% (1/4) on variable rate (adjustable rate) mortgages (e.g., if the APR listed on the Loan Estimate for a 30- year fixed rate mortgage is 4%, the APR can be no more than 4.125% on the Closing Disclosure).
If allowable circumstances during the loan origination process such as a change in borrower qualification causes the borrower’s rate to change beyond the tolerance, disclosures impacted by the rate change must be re- disclosed to the borrower. These changes are referred to as a change in circumstance. Examples of things that could cause a change in circumstance are a change in the value of the property after the appraisal, or a change in the borrower’s credit score while they are in process.
If at the time of closing it is discovered that the rate listed on the Closing Disclosure is greater than the tolerance compared to the rate listed on the Loan Estimate (or re-disclosed LE), the creditor has 30 days from closing to remedy the error by reducing the interest rate on the loan to remain within the tolerance.
TILA Waiting Period to Close Requirements
TILA requires that the borrower must wait 7 business days from receipt of the initial disclosure (Initial Truth In Lending for open-end mortgages, Loan Estimate for all other mortgages) before the loan can close. This waiting period is designed to provide the borrower an opportunity to evaluate and understand their loan before they sign anything making them contractually obligated for the debt. This waiting period can be waived in the case of a bona fide emergency.
TILA, Section 23
The Right of Rescission
The right of rescission allows consumers who have closed on reverse mortgages or refinance loans on their primary residence to back out of the transaction after closing. This right of rescission only applies to reverse and refinance loans and includes anyone with title (ownership) rights to the home - even if they are not a borrower. Any owner may execute their rescission right to cancel the transaction for any reason. Conditions involving the property must be returned to status quo (normal - as if the loan process never occurred) if the right to rescind is exercised.
The right of rescission is communicated to all owners of the property at closing through the delivery of the Notice of Right to Cancel disclosure (all owners get two copies). The time frame for canceling the transaction is 3 business days from closing. After 3 business days, the loan will be consummated (meaning that the borrower is contractually obligated to the agreement). If all of the owners do not receive the Notice of Right to Cancel, the time frame for rescission becomes 3 years from the date of closing.
Consummation VS. Closing
There is a difference between closing and consummation. Closing is when all parties COMMIT to the loan. Consummation is when the borrower becomes CONTRACTUALLY OBLIGATED to the loan. Even though you would think once someone signs a contract they’re obligated to pay the bill, this isn’t always the case with mortgage loans. TILA’s Right to Rescind allows reverse mortgage and refinance (on a primary home) borrowers to cancel the agreement even after it is signed. With rescission rights, these borrowers have 3 business days from closing to change their mind and cancel the agreement.
In cases where the right to rescind exists, lenders will typically not fund the loan until the 3 business day period passes. Once the loan is funded, the agreement is consummated and the documents are filed with the county.
Waiting until the rescission period passes to fund and record the mortgage allows the lender to avoid hassles in case the borrower has second thoughts. Some state laws include rescission periods for loans other than those covered in the TILA rules, but you can worry about those later when you’re preparing for your state licenses.
TILA, Section 32
Home Ownership Equity Protection Act (HOEPA)
HOEPA provides protections for borrowers receiving high-cost (aka “covered”) loans. HOEPA defines what high-cost loans are and includes numerous provisions to limit the type of loans allowed. A specific disclosure must also be provided to borrowers who seek a high-cost loan. The reason the HOEPA provisions exist is to protect consumers with limited finances or credit challenges from excessive costs when financing their home.
What Is A High-Cost Loan?
There are three main criteria that can be used to determine if a loan is high-cost:
• Total Points And Fees Compared To The Loan Amount
• The Loan’s APR Compared To The APOR
• Prepayment Penalty
Total Points And Fees Compared To The Loan Amount
If the loan is $22,052 or more, the points and fees cannot exceed 5% of the loan amount. As an example, if the loan amount is $50,000 and the total cost of points and fees is $2,500.01 or more, then the loan is considered a high-cost loan. If the loan amount is less than $22, 052 then points and fees cannot exceed 8% of the loan amount or $1,103 (whichever is lower).
The Loan’s APR Compared To The APOR
If the loan’s APR is more than 6.5% above the APOR (average prime offer rate - the average APR for low risk consumers in the current market) on a first lien, 8.5% above the APOR on a first lien for a mobile home, or 8.5% above the APOR on a subordinate lien, the loan is considered high cost.
Prepayment Penalty
If the creditor charges a prepayment penalty beyond 36 months or if any prepayment penalty exceeds 2% of the principal balance, the loan is considered high cost.
