NATIONAL FINANCE - TRUTH IN LENDING
When does Regulation Z apply?
Applies when credit of $25,000 or less is extended to individuals for personal or household use. When it comes to the finance of housing, Regulation Z always applies. Under RZ the consumer must be informed of all finance charges and the true interest rate before a transaction is completed. The finance charge and the annual percentage rate are the two most important disclosures required. The finance charge disclosure form must include any loan fees, finder fees, service charges, and loan points. The interest rate must be computed as an annual percentage rate, or APR. Regulation Z does not apply to business, commercial, or agricultural transactions.
The Truth in Lending act is implemented through what key regulation?
Regulation Z
Lender Advertising
Regulation Z also provides strict regulation of real estate advertising. Advertisement are required to disclose the credit terms and rate in a certain manner. The purpose of this requirement is to give the consumer a complete and accurate picture of the transaction being offered. Applies to window displays, fliers, billboards, direct mail, Internet, newspaper advertisements, or anything else that is shown to the public. Certain loan terms known as trigger terms will require disclosure. These trigger terms include words such as down payment or interest rate. Any advertisement that mentions an interest rate but omits the annual percentage rate is in violation. General terms such as low down payment, small down payment, FHA financing available, or compare our rates do not require further disclosure. Examples of advertising may be found on the next two pages.
Depreciation/ Effective Age Calculation
The next step is where the estimate of effective age comes in. Say the effective age of a building is ten years. That means it has used up ten years of its economic life. If the building's economic life is 50 years and from the previous calculation you know it depreciates at 2 percent per year, all you do is multiply the effective age by the annual percent of depreciation to get the total depreciation. In the example: 10 years effective age × 2 percent per year depreciation = 20 percent total depreciation The final piece of the formula is multiplying the total percent of depreciation by the reproduction or replacement cost. To continue the example, say your reproduction cost was $100,000. The formula follows as: $100,000 reproduction cost × 20 percent (0.20) = $20,000 total depreciation $100,000 reproduction cost - $20,000 depreciation = $80,000 depreciated cost of improvements
Truth in Lending Act
The primary purpose of the act is to require that creditors provide information to consumers so they can make informed decisions about the use of credit in real estate transactions.
Effective Age
The economic life of a building reflects the number of years it contributes to the value of the land. The effective age is an estimate of how old the building appears to be, given wear and tear, maintenance, and upgrades. For example, say you have two buildings built 40 years ago, and one has been completely upgraded and well maintained but the other has had little done to it. These two buildings will have different effective ages.
Notice of Rescind
Document required by lender informing of a persons right to rescind
Right of Rescission/right to rescind?
When a consumer refinances or takes out a home equity line of credit, the loan is subject to a right of rescission. This gives the consumer the right to cancel the transaction, in writing, by midnight of the third business day after the close of the transaction.
Certain Loan terms/trigger terms
Certain loan terms known as trigger terms will require disclosure. The trigger terms are -the Amount of any payment, such as the monthly mortgage payment. -Dollar amount of the finance charge, that is, the interest rate. -Down payment. -Number of payments. Term of the loan, that is, how long the loan is for. If any trigger terms are mentioned in an ad, then it must also contain the following information: -Annual percentage rate (APR) -Cash price (amount of the loan) -Down payment necessary Number, amount, and due dates of all payments -Total of all payments to be made
Depreciation/ Effective Age Calculation
The calculation presumes that a building deteriorates at an equal rate during its economic life; therefore, if you estimate the economic life of a building to be 50 years, in one year it deteriorates 2 percent of its total value. In effect, it uses up 2 percent of its total economic life. The fraction 1/50 also is 2 percent. So the building depreciates at the rate of 2 percent per year because of physical deterioration. Just in case you get thrown a question with a different total economic life, say 40 years, the calculation would be 1/40. If you divide 1 by 40 you get 2.5 percent. Whatever the total economic life, if you divide the number one by the total economic life, you get the annual percentage that the building depreciates.
