Truth In Lending

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Truth In Lending

• Revisiting the Basics

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TILA Refresher Workshop

• Truth In Lending
• Consumer Credit Protection Act (1968)
• Truth In Lending Act (Title 1)
• Regulation Z (1969)

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TILA Refresher Workshop

• The Purpose of TILA
• To Promote the Informed Use of Consumer Credit by
  Requiring Disclosures about its Terms Costs.
• Purpose does not include governing charges for
  Consumer Credit.

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TILA Refresher Workshop

• Revisiting The Basics
• OPEN END v. CLOSED END
• REGULAR v. IRREGULAR TRANSACTION
• FIXED v. VARIABLE INTEREST RATES
• FINANCE CHARGE
• ANNUAL PERCENTAGE RATE (APR)
• ACCURACY TOLERANCE
• RIGHT OF RESCISSION
• THE DISCLOSURES
• ADVERTISING GUIDELINES
• HOEPA HERA

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TILA Refresher Workshop

• Open End Credit Plans
• - The Creditor Anticipates Repeat Transactions
• - Finance Charge Assessed on Outstanding
  Balance
• - Renewable Credit Limits Imposed
• Among Mortgages, a Home Equity Line of Credit
  (HELOC) is an Open End Loan type.

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TILA Refresher Workshop

• Closed End Credit Plans
• Closed End means the loan program will have a
  definite End Date.
• Any Plan that is not an Open End Plan is by
  definition a Closed End Plan.

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TILA Refresher Workshop

• Regular v. Irregular Transactions
• An Irregular Transaction is one that includes one
  or more of the following features multiple
  advances, irregular payment periods, or irregular
  payment amounts (other than an irregular first
  period or an irregular first or final payment).
• A Regular Transaction will have a single advance,
  and regular payment periods and amounts.

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TILA Refresher Workshop

• Fixed v. Variable Rates
• Fixed provides one rate of interest for the life
  of the loan.
• Variable means the Interest Rate can change over
  the life of the loan.
• Reg Z provides very specific rules for explaining
  Variable Rate loans in an effort to keep the
  consumer informed.

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TILA Refresher Workshop

• Variable Rate Loans
• Terms Things to Know
• What is the Index Rate?
• What is the Margin?
• What is the Fully Indexed Rate?
• What are Periodic Caps?
• How does a Variable Rate Payment Schedule work?

10
TILA Refresher Workshop

• The TILA Disclosure
• A terrific summary for the consumer, showing the
  long term impact of a mortgage loan.
• Finance Charge
• Annual Percentage Rate (APR)
• Total of Payments
• Payment Schedule
• Various Important Factors

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TILA Refresher Workshop

• Finance Charge
• Section 226.4
• (a) Definition
• (b) Examples of F/C
• (c) Exclusions from F/C
• (c) (7) Real Estate Exclusions

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TILA Refresher Workshop

• Definition
• The FINANCE CHARGE is the cost of consumer
  credit expressed 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.

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TILA Refresher Workshop

• Any Fee not specifically excluded from the
  Finance Charge in 226.4(c)(7) is, in fact, a
  Finance Charge.

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TILA Refresher Workshop

• Prepaid Finance Charges
• Refers to Finance Charges that are paid by the
  consumer AT or PRIOR TO the closing of the loan.
• Finance Charges assessed on the HUD Settlement
  Statement are Prepaid Finance Charges.

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TILA Refresher Workshop

• Annual Percentage Rate (APR)
• The cost of Consumer Credit expressed as a
  percentage.
• Modifies the rate of interest applicable to a
  loan, considering the effect of non-interest
  Finance Charges paid by the consumer.
• TILA requires the disclosure of an APR whenever
  an Interest Rate is referenced, either orally or
  in writing.

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TILA Refresher Workshop

• Tolerance for Accuracy (Fin. Chg)
• Lender open to civil liability if Finance Charge
  is understated by 100.00 or more.
• Lender open to Rescission liability if Finance
  Charge is understated by 35.00 or more.
• No Liability if Finance Charge is Overstated on
  Disclosure.

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TILA Refresher Workshop

• Tolerance for Accuracy (APR)
• Accurate if within .00125 for Regular
  Transaction.
• Accurate if within .00250 for Irregular
  Transaction.

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TILA Refresher Workshop

• Borrowers Right to Rescind
• Borrower is given 3 Business Days after closing
  to reconsider the loan and cancel the
  transaction.
• Applies to
• Refinance Subordinate Lien Loans
• Owner Occupied Primary Residence

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TILA Refresher Workshop

• Rescission Period
• Three Day Clock Begins Ticking when all of the
  following have occurred.
• The Note Mortgage (DOT) have been executed
• The Consumer has received their Final TILA
  Disclosure and,
• The Consumer has received the Notice of Right to
  Cancel

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TILA Refresher Workshop

• Rescission
• If a consumer rescinds on the transaction, they
  are entitled to a refund of any fees paid during
  the transaction.

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TILA Refresher Workshop

• TILAs Disclosures
• Truth In Lending Disclosure
• Preliminary and Final
• Adjustable Rate Disclosure
• Right to Cancel Disclosure
• HOEPA Disclosure
• New Disclosures

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TILA Refresher Workshop

• 2009 - Watershed Year for TILA
• HERA / MDIA Changes (effective July 30, 2009)
• HOEPA Changes (effective October 1, 2009)
• Proposed Future Changes

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TILA Refresher Workshop

• HERA The Housing Economic Recovery Act
• Effective for all new Applications received on or
  after July 30, 2009
• Early Disclosure Requirements on all mortgage
  loans subject to TILA.
• Restrictions on Fee Receipt and Closing Practices
• Pre Closing Disclosure Requirements

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TILA Refresher Workshop

• Early Disclosure Requirements
• Up til now, a Preliminary Truth in Lending
  Disclosure was required only on Purchase
  transactions not Refinances.
• HERA / MDIA Amendments to TILA now require that
  Preliminary or EARLY TILA Disclosures be given in
  all circumstances.

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TILA Refresher Workshop

• Early Disclosure Receipt of Fees
• Before the Consumer can be required to pay any
  fee, they must receive a copy of the Preliminary
  Truth In Lending Disclosure.
• If the Disclosure is delivered by regular mail,
  it will be presumed to have been received by the
  consumer on the third business day after mailing.
• Cannot close loan until at least Seven (7)
  business days after early disclosures have been
  mailed.

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TILA Refresher Workshop

• New Pre Closing Disclosures
• If the APR has changed beyond TOLERANCE since the
  Preliminary or the most recent disclosure, a New
  TILA Disclosure must be delivered to the
  applicant at least three business days prior to
  closing.
• APR Tolerance is affected regardless of whether
  the change is in the form of an Increase or a
  Decrease.

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TILA Refresher Workshop

• New Pre Closing Disclosures
• In reality, nothing has changed in regard to the
  accuracy of the APR or Finance Charge, except the
  timing of its measurement.
• TILA recognizes that the APR is correct, if it is
  within the 1/8 Tolerance variance (1/4 for
  Irregular Transactions.)
• TILA also recognizes that the APR is correct if
  it is a function of the Finance Charge, and the
  Finance Charge is within tolerance.

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TILA Refresher Workshop

• Whats Different ?
• The difference is in the timing.
• Instead of being accurate only AT CLOSING, we
  must now provide a new accurate disclosure in
  advance of closing when loan terms have changed.

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TILA Refresher Workshop

• HOEPA
• Section 32 of Reg Z added in 1994 to address
  abusive lending practices.
• Under HOEPA, a mortgage is considered to be a
  High Cost Loan if it includes terms that exceed
  certain thresholds established for the Points
  Fees and Annual Percentage Rate.

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TILA Refresher Workshop

• New HOEPA Regulations
• Most changes become effective on Oct 1, 2009
• Amends Old Rules Creates New Rules
• Designed to Address Subprime Lending Concerns

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• First there was just plain PRICING.
• Then with HOEPA in 1994, we got HIGH COST
  PRICING.
• Now, HOEPA 2009 brings us HIGHER COST PRICING.

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• Old HOEPA
• If APR for First Lien loan is greater than 8
  points above applicable Treasury Index, then loan
  would be considered to be a High Cost Loan, and
  subject to HOEPA restrictions.

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• Old HOEPA
• Treasury Index 4.50
• APR 12.51
• Loan is a High Cost Loan per HOEPA because the
  APR exceeds the Applicable Index by more than 8
  pts.

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• New HOEPA
• If APR for First Lien Loan is greater than 1.50
  above the Average Prime Offer Rate, then it is a
  Higher Priced Mortgage Loan, and subject to all
  the restrictions implied.

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• New HOEPA
• Avg. Prime Offer Rate 4.50
• APR 6.50
• Loan is a HPML because the APR exceeds the
  Average Prime Offer Rate by more than 1.50.

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TILA Refresher Workshop

• The Average Prime Offer Rate
• Published weekly and is effective from Monday
  thru Sunday. Table found at
• http//www.ffiec.gov/ratespread/newcalc.aspx

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• HPML Restrictions
• Ability to Repay
• Prepayment Penalties
• Escrow Accounts

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TILA Refresher Workshop

• Ability to Repay
• Applies to HPMLs only, but likely to wield a
  broader brush.
• Verify Document Repayment Ability.
• Use Highest Scheduled Payment for first seven
  years of the loan.
• Stated Income loans prohibited
• No Doc loans prohibited.

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TILA Refresher Workshop

• HPML Higher Priced Mortgage Loan
• Prepayment Penalties
• No Prepayment Penalties if monthly payment amount
  can change during the first 4 yrs of the loan.
• No Prepayment Penalties when refinanced by same
  creditor.
• Otherwise, 2 yr maximum Prepay period.

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TILA Refresher Workshop

• Escrow Accounts (for HPMLs)
• Not Effective Until 2010
• Escrow Accounts required for all new loans that
  meet HPML threshold.
• Cannot be waived by borrower.
• Borrower can discontinue after one year.

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TILA Refresher Workshop

• Advertising Guidelines
• FTCs How to Advertise Consumer Credit Lease
  Terms
• Expanded Advertising Directives in October 2009
  Amendments.
• http//www.ftc.gov/bcp/conline/pubs/buspubs/credit
  ad.htm

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TILA Refresher Workshop

• Read the Regs
• TILA (Reg Z) is best understood, ultimately, by
  taking the time to read the regulation and
  commentary.
• http//www.fdic.gov/regulations/laws/rules/6500-14
  00.html