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Truth In Lending

Old Dog, New Tricks


TILA Newcomer Workshop

Truth In Lending

Consumer Credit Protection Act (1968)


Truth In Lending Act (Title 1)
Regulation Z (1969)

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The Basics

Finance Charge
APR
Tolerance for Accuracy
Rescission
Disclosure
Advertising
HOEPA

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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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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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Any Fee not specifically


excluded from the Finance
Charge in 226.4(c)(7) is, in fact,
a Finance Charge.

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Annual Percentage Rate (APR)

• 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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• 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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• Tolerance for Accuracy (APR)

• Accurate if within .00125 for Regular


Transaction.

• Accurate if within .00250 for Irregular


Transaction.

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• 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

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• TILA’s Disclosures

• Truth In Lending Disclosure


• Adjustable Rate Disclosure
• Right to Cancel Disclosure
• HOEPA Disclosure
• New Disclosures

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• Advertising Guidelines

• FTC’s “How to Advertise Consumer Credit &


Lease Terms”

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

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• 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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• 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

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• Upcoming Regulatory Changes

• TILA will be impacted by two significant regulatory


changes in 2009.

- HERA - the Housing & Economic


Recovery Act of 2008; and,

- New Update to HOEPA

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• HERA – The Housing & Economic
Recovery Act

» Final Rule Still Pending, But Law is to be


effective before the end of July 2009.

» Early Disclosure Requirements – all mortgage


loans subject to TILA.

» New Pre Closing Requirements

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Early Disclosure Requirements

• 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 delivered to the consumer on
the third business day after mailing.

• Cannot close loan until at least Seven (7) business


days after early disclosures have been received.

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• New Pre Closing Disclosures

• If the APR has changed beyond TOLERANCE since the previous


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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• New Pre Closing Disclosures

• The APR Tolerance is different that the test that would be


applied to the TILA Disclosure for purposes of accuracy.

• Disclosure is considered accurate if Finance Charge is


within tolerance.

• Pre Closing redisclosure requirement is only based on


APR accuracy, which has only secondary importance in
consideration of overall accuracy of the disclosure.

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• 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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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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HPML – Higher Priced Mortgage Loan

- Grammatically Incorrect.
- One might surmise that, as superlatives go,
rates for HIGHER Priced loans would be
greater than those for HIGH Priced Loans.
- One would be wrong.

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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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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 Newcomer Workshop
HPML – Higher Priced Mortgage Loan

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

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HPML – Higher Priced Mortgage Loan

• New HOEPA –

» Prime Offer Rate = 4.50%


» APR = 6.50%

» Loan is a HPML because the APR exceeds


the Prime Offer Rate by more than 1.50%.

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HPML – Higher Priced Mortgage Loan

• HPML Restrictions

» Ability to Repay

» Prepayment Penalties

» Escrow Accounts

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• 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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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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• Escrow Accounts (for HPMLs)

» 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 Newcomer Workshop
TILA NEWCOMERS

In a way, we’re all newcomers to this revised TILA.


The game has fundamentally changed, and the
old rules and requirements have been tweaked for
a new paradigm, that may in fact already be Old.

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