Truth in Lending Act

for Mortgage Lending

Presented April 8, 2010

Marjorie A. Corwin, Esquire

Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
233 East Redwood Street
Baltimore, Maryland 21202
410-576-4041
[email protected]

Copyright, 2010
 Residential Mortgage Lending:
A conceptual framework for identifying
applicable laws
FEDERAL LAW STATE LAW
Today’s Presentation

Truth in Lending Act

(15 USC 1601 et seq.)

FRB Regulation Z
(12 CFR Part 226)
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

 Truth in Lending Act

Brief Background
ƒFirst enacted in 1968 to prevent abuses in
consumer credit cost disclosures
ƒOriginally solely a disclosure statute
ƒThrough amendment over the years, now
more than solely disclosure
ƒContains some substantive requirements
prohibitions (particularly for mortgage
ƒContains robust advertising rules
for mortgage lending)
 Truth in Lending Act

Primarily Applies to “Creditors”

Persons (1) who regularly extend credit
(2) to whom the obligation is initially
payable.

Generally does not apply directly to

“Brokers”
Except see new regulations on
prohibitions
 Truth in Lending Act

9Applies to credit offered or extended to a

natural person primarily for personal,
family, or household purposes.

9Does not apply to loans made primarily

for a business, commercial, or agricultural
purposes (even if made to a natural
person).
 Truth in Lending Act

9Generally, TILA does not apply to

consumer credit that exceeds $25,000

9However, this exception from TILA for

“larger loans” does NOT apply if credit is
secured by real property or by consumer’s
principal dwelling
 Truth in Lending Act

Contains different rules depending

upon the type of mortgage loan
 Definition

“Residential Mortgage Transaction”

A transaction in which a mortgage is

taken on the consumer's principal
dwelling to finance the acquisition or
initial construction of that dwelling.

(Read: Purchase Money)

 Definition

“Higher-Priced Mortgage Loan”

• Loan 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:
¾by 1.5% or more for first lien; or
¾by 3.5% or more for subordinate lien.

*“Average prime offer rate” is published by the

Federal Reserve Board.
 Definition

“Higher-Priced Mortgage Loan”

Does not include:
ƒ Transaction to finance the initial construction of
a dwelling;
ƒ Temporary or “bridge” loan with a term of 12
months or less;
ƒ Reverse mortgage; or
ƒ HELOC.
 Definition

“HOEPA or High Rate/High Cost Mortgage Loan

(Section 32)”
Loan that is secured by the consumer's principal dwelling,
and in which either:

• APR will exceed by more than 8% for first-lien loans, or

by more than 10% for subordinate-lien loans, the yield on
Treasury securities having comparable maturity periods to
the loan maturity as of the 15th day of the month
immediately preceding the month in which the application
is received by the creditor; or

• Total “points and fees” paid at or before loan closing will

exceed the greater of 8% of the “total loan amount.”
 Definition

“HOEPA or High Rate/High Cost Mortgage

Loan (Section 32)”

Does not apply to:

ƒ “Residential mortgage transaction;”
ƒ Reverse mortgage; or
ƒ HELOC.
 Definition: Finance Charge

The cost of credit as a dollar amount.

What is “Finance Charge”?

•Any charge payable by the consumer as an
incident to or a condition of the extension of
credit.

(Unless an exclusion applies)

 Definition: Finance Charge

Finance Charge includes

broker fees paid by borrower.

But Finance Charge does not include

broker compensation paid by lender
under a separate agreement between
broker and lender.

(Read: YSP)
Examples: Not Finance Charge

“226.4(c)(7) Charges”

The following fees in a transaction

secured by real property are not
“finance charge,” but only if the fees
are bona fide and reasonable in
amount:
amount
 Examples: Not Finance Charge

“226.4(c)(7) Charges”

• Fees for title examination, abstract of title, title

insurance, property survey, and similar
purposes

• Fees for preparing loan-related documents

• Notary, appraisal, and credit-report fees
• Fees related to any pest infestation or flood
hazard inspections conducted prior to closing
 Special Rule: Closing Agents
Fees charged by a third party that conducts the
loan closing will be finance charges only if the
creditor
(i) Retains a portion of the third-party charge, to
the extent of the portion retained; or

(ii) Requires the imposition of the charge; or

(iii) Requires the particular services for which the

consumer is charged.
Exclusions from Finance Charge

O Characterizing charges as exclusions

from Finance Charge must be done
carefully
O Incorrect characterizations lead to TILA
violations
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

 Closed-End Disclosures

What?

1. TILA “Initial" Disclosure Statement

2. ARM Disclosures (if applicable)
3. HOEPA/Section 32 Mortgage Loan
Disclosure (if applicable)
4. "Final" Truth-in-Lending Disclosure
Statement
5. Notices of Right of Rescission
 Closed-End Disclosures

Who provides disclosures?

•Creditor

(Which technically does not include

broker)
 Closed-End Disclosures

Who gets them?

Primary borrower, but

All borrowers and property owners for
transactions subject to “rescission”
 Closed-End Disclosures

Form?

Disclosures must be clear and conspicuous,

conspicuous
in a written form that the consumer may keep.
keep

If any required information is unknown,

disclosure must be made based on the best
information available and must be identified
as "estimates."
 Closed-End Disclosures

When? (for “initial” disclosure statement and

any applicable ARM disclosure)

For loans subject to RESPA and secured by

any dwelling:
At or within 3 business days after application,
but at least 7 business days before loan
consummation

“Consummation” means the time that a consumer

become contractually obligated on a credit transaction
(usually loan closing).
 Closed-End Disclosures

“Business days” (for 3 days after

application) means days the creditor’s offices
are open to the public for business.
“Business days” (for the 7 days before loan
consummation) means all calendar days
except Sundays and certain identified public
legal holidays (apply the rescission rule).
 Closed-End Disclosures

Limitation on fees:

For loans subject to RESPA and secured by

any dwelling:
No fees other than for a credit history may be
imposed on a consumer before the consumer
has received the “initial” disclosure statement.
Mailed disclosures are considered received 3
business days after mailing.
 Closed-End Disclosures

When? (for corrected “final” disclosure)

For loans subject to RESPA and secured by any
dwelling:
If the initially disclosed APR becomes inaccurate by
more than 1/8th of 1%, creditor must provide a corrected
“final” disclosure statement.
Consumer must receive the corrected “final” disclosure
statement no later than 3 business days before loan
consummation.
Mailed disclosures are considered received 3 business
days after mailing.
 Closed-End Disclosures

When? (for HOEPA disclosure)

At least 3 business days before consummation

(usually loan closing).
 Closed-End Disclosures

When? (for rescission notices)

Normally at consummation (usually loan closing).
 Closed-End Disclosures

Contents: Disclosure Statement

For each closed-end mortgage loan, the creditor shall
disclose the following information as applicable:
• Identity of creditor
• Amount financed
• Written itemization of amount financed (or Good Faith
Estimate as an alternative)
• Annual percentage rate
• Variable rate information (if applicable)
• Number, amounts, and timing of scheduled payments
• Total of payments
• Demand feature disclosure (if applicable)
 Closed-End Disclosures

Contents: Disclosure Statement, continued

For each closed-end mortgage loan, the creditor shall
disclose the following information as applicable:
•Statement indicating whether a prepayment penalty may
be imposed
•Late payment
•Fact that creditor is taking a security interest in certain
property
•Insurance information
•Security interest charges (if applicable)
•Statement referring to other sections of contract
•Assumption policy
•Required deposit information (if applicable)
 Closed-End Disclosures

Contents: Disclosure Statement, continued

For each closed-end mortgage loan, the creditor shall
disclose the following statement as applicable:
“You are not required to complete this agreement
merely because you have received these disclosures or
signed a loan application.”

Practice point: Check your TILA disclosure statement

for this new disclosure requirement.
 Open-End Disclosures

What?

1. “Early" Disclosure
2. Home Equity Brochure
3. “Initial” Disclosure Statement
4. Notices of Right of Rescission
5. Periodic Statement
 Open-End Disclosures

Who provides? Creditor

Who gets them? Borrower
When? At application and
consummation
Form? Clear and Conspicuous
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

 RIGHT OF RESCISSION
The right to rescind arises when a
security interest is or will be
retained or acquired in a
consumer's principal dwelling.
 RIGHT OF RESCISSION

Consumer may exercise a right to rescind until

the later of:
9Midnight of the 3rd business day following
loan consummation
9Delivery of two copies of the right to rescind
9Delivery of a complete and accurate TILA
disclosure statement
If either the rescission notices or the complete
and accurate disclosure statement are not
provide, the consumer has 3 years after loan
consummation to rescind.
 RIGHT OF RESCISSION

If a consumer validly exercises a right to

rescind, the transaction is cancelled and the
consumer is not liable for any amounts paid or
to be paid in connection with the loan.
(Consumer gets money back)
Effect of Rescission
on Fees Paid by
Borrower

(They must be refunded.)

 RIGHT OF RESCISSION

The right only applies to principal dwellings.

(A vacation or second home is not a principal
dwelling.)
Only a natural person who has an ownership
interest in and is a resident of the dwelling has the
right to rescind.
(A nonresident co-owner of the property would not
be entitled to receive notification or to exercise the
right of rescission.)
 RIGHT OF RESCISSION

Simple rule: consider each person

who is required to sign the
mortgage or deed of trust as a
grantor to be a consumer entitled to
rescind.
 RIGHT OF RESCISSION

• Must deliver 2 copies of the rescission

notice along with 1 copy of the TILA
disclosure statement to each consumer
whose principal residence is collateral
for the loan
 RIGHT OF RESCISSION

• Borrower must be able to keep two

copies of the rescission notice
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

Additional Consumer Protections
under TILA

Home Ownership Equity Protection Act

(HOEPA, enacted 1994)

FRB Regulation Z, Section 32

(12 CFR 226.32)
 HOEPA/Section 32

HOEPA applies only to certain types of loan:

• Non-Purchase Money,
• Closed-End,
• Consumer Credit, and
• Secured by Borrower's Principal Dwelling
 HOEPA/Section 32

HOEPA applies only if the loan meets

either one of two tests:

Test #1: Annual Percentage Rate

Test #2: Fees and Charges

 HOEPA/Section 32

"Points and Fees" means:

1. All items required to be disclosed as
finance charge less regularly accruing
and per diem interest; plus

2. Premiums and other charges for

credit insurances or debt-cancellation
coverage paid at or before closing; plus
 HOEPA/Section 32

3. All items normally excluded from

finance charge under 226.4(c)(7) if:

a. the charge is not reasonable; or

b. the creditor receives, directly or
indirectly, compensation in connection with
the charge; or
c. the charge is paid to an “affiliate” of
the creditor; plus
 HOEPA/Section 32

4. All compensation paid to mortgage

brokers.
 HOEPA/Section 32

If HOEPA applies, the creditor has three

additional types of obligations:

ƒ Disclosure Requirements
ƒ Limitations on Loan Terms
ƒ Prohibitions on Lender Practices
 Truth in Lending Act

New Regulations
Published July 30, 2008, effective October 1, 2009
9New Category: “Higher-Priced” Mortgage
Loans

9Does not apply to: initial construction loan;

temporary bridge loan; reverse mortgage
loan; or HELOC
 Higher-Priced Mortgage Loans

New Category: “Higher-Priced” Mortgage

Loans
(“Section 35”)

Applies to:

Consumer credit secured by consumer’s

principal dwelling where APR at time rate is
locked exceeds “index plus margin”
 Higher-Priced Mortgage Loans

¾Determined based on APR at time of

interest rate lock
¾Index: “Average Prime Offer Rate” (to be
based on Freddie Mac’s Primary Mortgage Market Survey)

(http://www.ffiec.gov/ratespread/newcalc.aspx)

¾First Liens: 1.5% above weekly index

¾Second Liens: 3.5% above weekly index
 Higher-Priced Mortgage Loan

If loan is a “higher-priced” mortgage loan,

then:

¾Must consider borrower’s ability to repay

¾Requires third-party documentation verifying
income and assets relied upon
¾Limitations on prepayment fees
¾Requires escrows for taxes and insurance
(escrow provisions had delayed effective date until April 1,
2010)
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

 Truth in Lending Act
Expanded Advertising Requirements
ƒTILA has always contained general advertising
requirements for all types of credit.
ƒEffective October 1, 2009, there are big changes
regarding the advertising of loans secured by
dwellings.
ƒNew advertising needs careful consideration.
 New Advertising Rules
The new rules are in addition to the
general TILA rules for advertising.
There are two types of new rules:

¾New Advertising Disclosures

¾New Prohibitions Regarding Advertising

 New Advertising Rules
Disclosures
Certain disclosures concerning rates and
payment terms must be disclosed
“clearly and conspicuously.”
In this context, clearly and conspicuously
disclosed means that the required
information must be disclosed with
equal prominence and in close
proximity to any advertised rate that
triggered the required disclosures.
 New Advertising Rules

Examples
Equal prominence: same type size
In close proximity to: immediately
next to or directly above or below,
without any intervening text or
graphical displays (not in footnotes)
 Advertising Credit
Secured by Dwelling

If advertisement concerns a loan to be

secured by a consumer’s dwelling, and
the advertising states a simple annual
interest rate or states a payment amount,
significantly different disclosures are now
required.
 New Advertising Rules

New rules do not apply to envelopes

or electronic advertisement or to
television or radio advertisement.
 New Advertising Rules
Special Rule for Principal Dwelling
• If credit for loan secured by consumer's
principal dwelling may exceed the fair
market value of dwelling, ad must clearly
and conspicuously state:
¾Certain interest is not tax deductible; and
¾Consumer should consult a tax adviser.
 Prohibited Acts or Practices
(“UDAP”) in Advertisements for
Closed-End Credit Secured by a
Dwelling
 UDAP: Closed-End Credit
Secured by Dwelling

• Certain acts or practices are prohibited in

advertisements for closed-end credit
secured by a dwelling.

• Unfair Acts or Practices Rule was

promulgated under authority making
violation a “high liability” concern.
 UDAP: Closed-End Credit
Secured by Dwelling

▼Misleading advertising of the word “fixed”

referring to rates, payments, or the credit
transaction
▼Misleading comparisons between
payments or rates and any payment or
rate that will be available under the
advertised product for a period less than
the full term of the loan
 UDAP: Closed-End Credit
Secured by Dwelling

▼Misrepresentations about government

endorsement or sponsorship
▼Misleading use of name of the
consumer's current lender
▼Misleading claims of debt elimination
▼Misleading use the term “counselor”
▼Misleading use of foreign language
 TILA: Today’s Presentation

¾ Overview and Key TILA Terms

¾ Disclosure Requirements

¾ Right of Rescission

¾ High Rate/Cost and Higher Priced Loans

¾ Advertising Rules

¾ New Appraisal/Servicing Prohibitions

 Truth in Lending Act
For the first time, beginning October 1,
2009, Regulation Z contains a section that
addresses prohibited practices in
connection with closed-end credit secured
by a consumer’s principal dwelling.
12 CFR 226.36
 Truth in Lending Act
The statute prohibiting practices in
connection with closed-end credit secured
by a consumer’s principal dwelling was
promulgated under authority making
violation a “high liability” concern.
 Truth in Lending Act
Appraisal Prohibitions
In connection with a loan secured by a
consumer’s principal dwelling, no creditor
or broker may coerce, influence, or
otherwise encourage an appraiser to
misstate or misrepresent the value of the
dwelling.
 Truth in Lending Act
Servicing Practices
For the first time TILA addresses
substantive loan servicing practices in
connection with loans secured by a
consumer’s principal dwelling.
 Servicing Practices
Crediting Payments
The servicer shall not:
• Fail to credit a payment as of the date of
receipt, except when delay in crediting does
not result in any charge to the consumer or
in the reporting of negative information to a
consumer reporting agency.
 Servicing Practices
Crediting Payments
• Exception: If servicer specifies in writing
payment requirements for borrower to
follow, but accepts a payment that does not
conform to the requirements, servicer has
up to 5 days after receipt to credit the
payment.
 Servicing Practices
Late Fees
The servicer shall not:
• Impose any late fee in connection with a
payment when the only delinquency is
attributable to late fees assessed on an
earlier payment, and the payment is
otherwise a full payment for the applicable
period and is paid on its due date or within
any applicable grace period.
 Servicing Practices
Payment Information (Payoffs)
The servicer shall not:
• Fail to provide, within a reasonable time
after receiving a request from the consumer
or any person acting on behalf of the
consumer, an accurate statement of the
total outstanding balance required to satisfy
the consumer's obligation in full as of a
specified date.
QUESTIONS?
 Thank you!
For more information:
Marjorie A. Corwin, Esquire
Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC
233 East Redwood Street
Baltimore, Maryland 21202
410-576-4041
[email protected]
Copyright, 2010