Presentation

Truth In Lending

Revisiting the Basics

Subtitle: Click View then Master then Slide Master to edit

Title: Click View then Master then Slide Master to edit2



TILA Refresher Workshop

Truth In Lending

Consumer Credit Protection Act (1968)

Truth In Lending Act (Title 1)

Regulation Z (1969)






• 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.






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






• 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.






• 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.






• 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.






• 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.






• 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?






• 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






Finance Charge

Section 226.4

(a) Definition

(b) Examples of F/C

(c) Exclusions from F/C

(c) (7) Real Estate Exclusions






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.






Any Fee not specifically

excluded from the Finance

Charge in 226.4(c)(7) is, in fact,

a Finance Charge.






• 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.






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.






• 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.






• Tolerance for Accuracy (APR)

• Accurate if within .00125 for Regular

Transaction.

• Accurate if within .00250 for Irregular

Transaction.






• Borrower’s 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






• 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






• Rescission

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






• TILA’s Disclosures

• Truth In Lending Disclosure» Preliminary and Final

• Adjustable Rate Disclosure

• Right to Cancel Disclosure

• HOEPA Disclosure

• New Disclosures





TILA Refresher Workshop• 2009 - Watershed Year for TILA

» HERA / MDIA Changes (effective July 30, 2009)

» HOEPA Changes (effective October 1, 2009)

» Proposed Future Changes






• 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






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.






• 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.






• 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.





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.






• What’s 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.






• 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.






• New HOEPA Regulations

• Most changes become effective on Oct 1, 2009

• Amends Old Rules & Creates New Rules

• Designed to Address Subprime Lending Concerns






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.







• 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.







• 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.







• 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.







• 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%.






• The Average Prime Offer Rate

Published weekly and is effective from

Monday thru Sunday. Table found at:

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







• HPML Restrictions

» Ability to Repay

» Prepayment Penalties

» Escrow Accounts






• 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.







• 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.






• 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.






• Advertising Guidelines

• FTC’s “How to Advertise Consumer Credit

& Lease Terms”

• Expanded Advertising Directives in October

2009 Amendments.

http://www.ftc.gov/bcp/conline/pubs/buspubs/creditad.htm






• 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/6500-1400.html

Documents

Presentation