TILA Quarterly Training

Waiver of Right to Rescind

A borrower can waive the right to rescind in situations in which credit is needed to meet a bona fide financial emergency. The waiver must be dated, in writing, and include a description of the emergency, as well as the signatures of all parties with rescission rights. Mortgage professionals are prohibited from providing any type of pre-printed form for the purposes of waiving rescission rights.

Consequences of Rescission

A borrower's decision to rescind a transaction has the following consequences: The creditor no longer has a security interest in the principal dwelling of the consumer The creditor has 20 calendar days in which to return any money or property paid by the consumer in connection with the transaction The consumer must return any loan funds received to the lender (12 C.F.R. §§1026.15(d); 1026.23(d))

Special Right for Foreclosure

A consumer may exercise the right to rescind after foreclosure proceedings have been brought against his or her principal dwelling if the loan was originated through a mortgage broker and the creditor failed to include the mortgage broker fee in the finance charge, or if the creditor failed to use a Model H form or substantially similar for the rescission notice. A disclosed finance charge and disclosures affected by it are considered accurate if the disclosure is greater than the amount required to be disclosed, or is understated by no more than $35 (12 C.F.R. §1026.23(h)(2)).

CD Average Charges

A creditor or settlement service provider may use an average charge for settlement services when each of the following conditions is met: The charge does not exceed the average amount that consumers or sellers pay for a particular class of transactions The class of transactions are a particular type of loan, occurring within the same geographic area and taking place within a comparable time period The same average charge is used for every transaction within the same class, and No average charge is used for any type of insurance or for any charge based on the loan amount or property value (12 C.F.R. §1026.19(f)(3)(ii)) Documents used to calculate average charges must be kept for at least three years after consummation (Official Interpretations of 12 C.F.R. §1026.19(f)(3)(ii)).

Complying with the ATR Rule

A full exploration of the ATR Rule is beyond the scope of this course. However, this section will briefly review key points. A creditor must consider the following eight factors when evaluating the consumer's ability to repay: Current or reasonably-expected income or assets, other than the value of the dwelling Employment status Monthly payments on the loan, calculated in accordance with the Rule The amount of the consumer's payment(s) on any simultaneous loan(s) Monthly payments for mortgage-related obligations Debt obligations, including alimony and child support Monthly debt-to-income ratio or residual income Credit history (12 C.F.R. §1026.43(c)(2)) The ATR Rule requires verification using reasonably-reliable third-party records (12 C.F.R. §1026.43(c)(3)).

Cont'd

A lender must provide a loan program disclosure for each ARM in which the applicant expresses an interest. Each disclosure must include: A statement that the interest rate, payment, and/or loan term can change Identification of the index or formula used to make adjustments An explanation of how the interest rate and payment will be determined A recommendation that the borrower ask about the current margin value and interest rate If applicable, a statement that:The initial discounted interest rate is lower than the fully-indexed rateNegative amortization may occurThe loan contains a demand feature The frequency of interest rate and payment changes The rules relating to index, interest rate, and payment amount, such as the use of rate and payment caps An explanation of how payment amounts are calculated A statement of the type of information that will be provided in rate change disclosures An indication that disclosure forms are available for other variable-rate loan programs At the option of the creditor, an example based on a $10,000 loan, showing the impact of index values on interest rates, or the maximum interest rate and payment assuming maximum periodic increases under the subject program (12 C.F.R. §1026.19(b)(2)) Appendix H to Regulation Z includes a model disclosure form.

Tolerance for Accuracy of Disclosure

Ability to act under the three-year right to rescind may be based on the accuracy of material disclosures provided in a closed-end transaction. A creditor providing an inaccurate disclosure is considered to have failed to provide the disclosure. If a finance charge is understated by more than one half of 1% (0.5%) of the face amount of the note or $100, it is inaccurate. Other than in a high-cost mortgage, finance charge disclosures are inaccurate if understated by more than 1% of the face amount or $100, whichever is greater

Additional Disclosures

Additional required disclosures include: Payment terms APR Fees associated with use of the plan Fees imposed by third parties to open a plan Negative amortization Transaction requirements, and Tax implications

Accuracy Tolerances for the APR in Closed-End Mortgages

An APR is accurate if it is not more than one eighth of one percentage point (0.125%) above or below the APR when the APR is calculated using the actuarial method (12 C.F.R. §1026.22(a)(2)). If the loan is an irregular loan (i.e., one that allows for multiple advances or irregular payment periods or amounts), the APR is accurate if it is not more than one quarter of one percentage point (0.25%) above or below the APR when the APR is calculated using the actuarial method (12 C.F.R. §1026.22(a)(3)). An error in disclosing the APR is not a violation of Regulation Z if: The error resulted from a faulty calculation tool that the creditor relied on in good faith The creditor stopped using the tool after discovering the error, and The credit sent written notification to the CFPB of the failure of the tool (12 C.F.R. §1026.22(a)(1)) Disclosure of the finance charge in a closed-end transaction must not understate the charge by more than $100. Differences of less than $100 do not impact the accuracy of the disclosure. Overstatements of the finance charge are not considered a violation of the law (12 C.F.R. §1026.18(d)(1)). A mortgage licensee must redisclose the APR to the borrower at least three business days prior to settlement if it varies up or down by more than 0.125% (one eighth of 1%) from the initial disclosure.

Exemptions

An escrow account is not required for: Subordinate lien HPMLs A transaction secured by shares in a cooperative A transaction to finance the initial construction of a dwelling A temporary or bridge loan with a term of 12 months or less Reverse mortgages Open-end credit (e.g., HELOCs) Insurance premiums purchased by the consumer and not required by the creditor

Disclosures for Open-End Loans

An open-end home equity plan is a form of revolving credit that is secured by a mortgage on the borrower's home. Disclosures for home equity plans are due at the time that an application is provided to a consumer (12 C.F.R. §1026.40(b)). If the consumer applies online or via telephone, the disclosures must be delivered within three business days. The consumer may not be required to pay any nonrefundable fees in connection with an application for a home equity plan unless he or she has received the required disclosures and the brochure titled "What You Should Know about Home Equity Lines of Credit." This brochure is available on the CFPB website.[1] The disclosure for an open-end home equity plan must include clear and conspicuous disclosure of the APR and finance charge. However, other disclosures take precedence over information on loan costs (12 C.F.R. §1026.40(a)(2)). These include: A statement advising the consumer to retain a copy of the disclosure An explanation that lending terms described may change and the consumer must submit an application to obtain the specific terms disclosedThis should state the terms subject to change and indicate that if a disclosed term changes (other than a fluctuating index for an ARM), the consumer may elect not to open the plan and to receive a refund of application feesA statement that the creditor will have a security interest in the borrower's home and that default could result in loss of the homeNotice that in certain conditions, the creditor could take adverse actions such as demanding payment of the outstanding balance in a single payment, reducing the credit limit, or prohibiting further extensions of credit

Five siblings have ownership rights to a property. If a refinance transaction affecting the property is subject to rescission, how many of these individuals must submit a rescission notice in order to void the loan?

Any one of the five

The Small Creditor Exemption

Certain small creditors that make more than half of their loans to consumers in areas classified as rural or underserved may be exempt. In order to qualify for this exemption, a small creditor: Cannot originate more than 2,000 first lien covered transactions during the preceding calendar year, including the activities of its affiliates Had less than $2 billionin assets as of the end of the preceding calendar yearThis threshold will adjust annually (12 C.F.R. §1026.35(b)(2)(iii)) Made at least one covered transaction secured by a first lien on a property in a rural or underserved area

Limitations and Prohibitions Related to Home Equity Plans

Creditors are prohibited from: Changing the APR, unless the change is based on an index over which the creditor does not have control Terminating a plan and demanding payment of the entire balance in advance of the original loan term, unless the consumer has:Committed fraudDefaulted on the loan, orTaken or failed to take action that could adversely impact the security for the loan Changing any term, unless the creditor indicated in the initial agreement that it may prohibit extensions of credit or reduce the credit limit during any period in which the maximum APR is reached, and Changing the index and margin, unless the index is no longer available Creditors are permitted to make any of the following changes: Any change to which the consumer has agreed in writing Any change that will clearly benefit the consumer throughout the remainder of the plan An "insignificant" change to loan terms Prohibiting additional extensions of credit or reducing the credit limit during any period when:The value of the dwelling securing the loan decreases significantly below its appraised valueThe creditor does not believe that the consumer can repay the loan, based on a material change in the consumer's financesThe consumer is in default

Criminal Liability

Criminal liability may arise from willful, knowing violations of the law, including: Providing information that is false or inaccurate Failure to make required disclosures Use of charts or tables that the CFPB authorizes for use in determining and disclosing APR in a manner that consistently understates the APR (15 U.S.C. §1611(2)) Penalties for criminal liability may include a fine of up to $5,000, imprisonment for up to one year, or both (15 U.S.C. §1611(3)).

The ATR (ability-to-repay) Rule requires consideration of all of the following factors, except:

Dwelling value

Verification of Information

Examples include: Tax returns transcripts issued by the IRS Copies of federal or state tax returns filed by the consumer Payroll statements Financial institution records Records from the consumer's employer Records from federal, state, or local government agencies Receipts from a check-cashing service or funds transfer service (12 C.F.R. §1026.32(c)(3))

Timing Requirements

Except for ARMs with a term of one year or less, the initial rate/payment change disclosure is due at least 210 and no more than 240 days prior to the due date of the first payment at the adjusted level. If this new payment is due within the first 210 days after consummation, disclosures must be provided at consummation (12 C.F.R. §1026.20(d)). Generally, rate/payment change disclosures are due at least 60 and no more than 120 days prior to the rate change. There are three exceptions to this: Grandfathered ARMs (ARMs originated prior to January 10, 2015, where the adjustment is based on an index available less than 45 days prior to the adjustment date) Frequently-adjusting ARMs ARMs adjusting within 60 days after consummation For these three loan types, rate adjustment notices are due at least 25 and no more than 120 days prior to the rate adjustment.

Exercising the Right to Rescind

For a closed-end loan, any party with an ownership interest can exercise his or her right to rescind until midnight on the third business day after the last of the following occurs: Consummation of the loan Delivery of the notice of the right to rescind Delivery of all required disclosures (12 C.F.R. §1026.23(a)(3)) An open-end loan may be rescinded within three business days after the last of the following occurs: The date the credit plan is opened A security interest is added or increased to secure an existing plan A credit limit on a credit plan is increased Delivery of the notice of the right to rescind Delivery of material disclosures (12 C.F.R. §1026.15(a)(3)) For purposes of determining when the right to rescind expires, "business day" is defined to include any day other than Sundays and legal public holidays (12 C.F.R. §1026.2(a)(6)). After consummation or the opening of an open-end plan, no other activity can occur until the rescission period expires. To exercise the right to rescind, the consumer must give written notice within the rescission period. When multiple parties have rescission rights, any one person may rescind and terminate the transaction. Notice is considered given when mailed, filed for telegraph, or delivered to the creditor's designated place of business (12 C.F.R. §§1026.15(a)(2); 1026.23(a)(2)).

Three Year Extended Right to Rescind

For both closed- and open-end lending transactions, a three-year right to rescind exists if the lender fails to do either of the following: Provide a notice of the right to rescind in compliance with Regulation Z Provide material disclosures as required for a closed-end, open-end, or high-cost mortgage, as applicable The three-year rescission period is measured from the date of the consummation of the lending transaction (12 C.F.R. §§1026.15(a)(3); 1026.23(a)(3)).

Disclosures for Closed-End ARMs

If a borrower applies for an ARM secured by his or her principal dwelling and with a term of more than one year, creditors must provide two additional disclosures. These disclosures are: The Consumer Handbook on Adjustable-Rate Mortgages (CHARM Booklet) A loan program disclosure These are due at application or when a consumer pays a non-refundable fee, whichever occurs first. If an application is not submitted in person, the creditor must provide these disclosures within three business days (12 C.F.R. §1026.19(b)). The Consumer Handbook on Adjustable-Rate Mortgages (CHARM Booklet) addresses the risks associated with nontraditional mortgage products, such as interest-only and payment-option ARMs. The booklet is available online. [1] [1] Consumer Financial Protection Bureau. "Consumer Handbook on Adjustable-Rate Mortgages." http://files.consumerfinance.gov/f/201401_cfpb_booklet_charm.pdf

Special Disclosures for Home Equity Plans with Adjustable Rates

If a home equity plan has an adjustable rate, the disclosure must also include: The fact that the APR may change A statement that the APR does not include costs other than interest The index used for rate adjustments and a source of information on the index A description of how the APR will be determined A statement that the consumer should ask for information about the current index, margin, and APR An indication of how long the initial rate will be effective The frequency of changes in the APR Explanations regarding payment limitations and rate carryovers that may result from interest or payment caps The maximum APR that may be imposed under each payment option An example, using an outstanding balance of $10,000, showing:The minimum periodic payment required with the maximum APRThe earliest date or time at which the maximum rate may be imposed A historical example, using 15 years of index values, showing how payments and loan balances are impacted by index value changes A statement that rate information will be available on every periodic statement (12 C.F.R. §1026.40(d)(12))

Ability to Repay and Qualified Mortgages

In January 2014, the Ability to Repay Rule (ATR Rule) and the Qualified Mortgage Rule (QM Rule) became effective, creating standards for determining borrower repayment ability and establishing a new category of loans known as qualified mortgages.

Class Actions

In a class action, the maximum amount of recovery possible is the lesser of 1% of the creditor's net worth or $1 million. Factors considered in awarding damages in a class action suit include: The amount of actual damages awarded The frequency and persistence of the creditor's compliance failures The resources of the creditor The number of consumers affected by compliance failures The extent to which the compliance failures were intentional Liability does not exist for violations that are unintentional and result from bona fide errors, if these errors occur in spite of procedures put in place to avoid errors (15 U.S.C. §1640(c)). Examples include errors in clerical work, calculation, computer malfunction and programming, and printing.

Permissible Compensation Methods under the Rule

Loan originator compensation may be based on: The loan originator's overall dollar volume (total dollar amount of credit extended or total number of transactions originated) The long-term performance of the originator's loans An hourly pay rate based on the actual number of hours worked Loans made to new customers versus loans to existing customers A payment that is fixed in advance for every loan the originator arranges for the creditor The percentage of the loan originator's applications that close, or The quality of the loan originator's loan files submitted to the creditor (Official Interpretations of 12 C.F.R. §1026.36(d)(1)(2)(i))

Payment Calculations

Monthly payments must be calculated using: The fully-indexed rate or the introductory interest rate for an ARM, whichever is greater Monthly fully-amortizing payments that are substantially equal (12 C.F.R. §1026.43(c)(5)) The fully-indexed rate is calculated by adding together the margin and index in effect at the time of consummation. The ATR Rule allows creditors to consider a consumer's DTI ratio or his or her residual income (12 C.F.R. §1026.43(c)(2)(vii)). Residual income is calculated by subtracting a consumer's total monthly debt obligations from his or her total monthly income.

Notice of the Right to Rescind

Notice to the borrower of the right to rescind is due at closing. Lenders must provide two copies of the notice to each party with an ownership interest in the property securing the loan. If the notice is provided electronically in compliance with the E-Sign Act, only one copy is required for each party (12 C.F.R. §§1026.15(b); 1026.23(b)).

According to TILA, a variation up to what amount is permitted for the annual percentage rate in a regular fixed-rate mortgage transaction?

One eighth of 1%

Post-Consummation Disclosures for Closed-End ARMs

Post-consummation events that trigger additional disclosure requirements for ARMs include: Initial rate change disclosures, which give notice of the actual or estimated amount of the initial rate change (12 C.F.R. §1026.20(d)) Rate/payment change disclosures, which provide notice to the consumer regarding interest rate changes that will result in changes in the amount of periodic payments (12 C.F.R. §1026.20(c)) A disclosure is not required when the transaction involves an adjustable-rate mortgage with a term of one year or less. This generally includes bridge loans, construction loans, and home improvement loans. A disclosure is also not required for the first adjustment of an ARM if the first adjusted payment is due within 210 days after consummation and the initial rate adjustment that was disclosed at consummation was not an estimate (12 C.F.R. §1026.20(c)(1)(ii)).

Qualified Mortgages

Qualified mortgages (QMs) are home loans that are presumed to comply with the requirements of the ATR Rule. There are four types of qualified mortgages: General qualified mortgage Temporary qualified mortgage Small creditor qualified mortgage Balloon payment qualified mortgages A qualified mortgage is a mortgage loan that does not include any of the following: A loan term in excess of 30 years Points and fees that exceed 3% of the loan amount Interest-only payments Negative amortization Balloon payments, other than for balloon payment qualified mortgages made by small creditors There are no minimum down payment or credit score requirements for making a QM.

Content of Rate/Payment Change Disclosures

Rate/payment change disclosures must provide: A statement that the current interest rate is ending and the interest rate and payment amounts are changing The effective date of the impending rate adjustment and a statement of when future adjustments will occur, and A description of other changes that will occur on the date of the rate change, such as expiration of interest-only or payment-option features An explanation of how the interest rate is determined, referencing the index and margin used A description of any limits on interest rate increases (e.g., periodic rate caps, lifetime caps), and how they limit rate increases An explanation of how the new payment is determined Information on negative amortization and prepayment penalties, if applicable This disclosure must include a table that shows: Current and new interest rates Current and new payments and the date on which the first new payment is due, and How much of the payment for interest-only and negative amortization loans will be allocated for principal, interest, taxes, and insuranceWith numerous prohibitions against negative amortization and interest-only loans, the need to make these disclosures should not arise in most transactions

Advertising Prohibitions

Regulation Z includes a list of seven prohibited practices when advertising closed-end credit secured by a dwelling. These include: Misleading advertising of "fixed" rates and payments: use of the word "fixed" in advertisements for stepped-rate or other hybrid loans is prohibited unless there is conspicuous and equally prominent information about variable rates and increasing payments Misleading comparisons in advertisements: comparisons between an advertised mortgage and a hypothetical loan that a consumer may have - for example, "save $300 per month on a $300,000 loan!) - unless the ad includes the requisite disclosures regarding APRs and payments Misrepresentations about government endorsement: statements that lead consumers to the incorrect assumption that a mortgage product is endorsed by the government Misleading use of the current lender's name: some lenders and mortgage brokers make direct solicitations that lead consumers to the incorrect assumption that their own lender is contacting them with information on mortgage products Misleading claims of debt elimination: suggesting, in an advertisement, that a borrower can obtain a waiver of his or her obligations to another creditor. Examples include statements like "Refinance today and wipe your debt clean!" and "Pre-payment penalty waiver." The prohibition also applies when one claims debt elimination, when in fact one debt merely replaces another debt (Official Interpretations of 12 C.F.R. §1026.24(i)) Misleading use of the term "counselor": an advertisement cannot refer to a for-profit lender, mortgage broker, or its employees as a "counselor" Misleading foreign-language advertisements: some advertisements target immigrants who lack fluency in English, advertising favorable lending terms in their first language while providing information on the additional and less-favorable lending terms in English Regulation Z prohibits the use of misleading terms in advertisements for home equity loans, as well as misleading statements regarding tax deductions for interest paid (12 C.F.R. §1026.24(i)).

Congress enacted TILA in order to protect consumers by:

Requiring creditors to comply with uniform standards for stating the cost of credit so that consumers can compare loan products

Right of Rescission

Rescission is a legal remedy that voids a contract between two parties, restoring each to the position held prior to the transaction. TILA includes two provisions that address the right to rescind certain types of mortgage loans: Three-business-day rescission period Three-year rescission period

Tolerance Limits

Some fees disclosed on the Loan Estimate may vary. While TILA recognizes this, creditors are held to a good faith standard, which is detailed at 12 C.F.R. §1026.19(e)(3). Essentially, the good faith standard can be measured by comparing what was disclosed on the Loan Estimate, including a revised one, with what the applicant or consumer actually pays at consummation, or the Closing Disclosure. Should the consumer pay more at closing for a particular fee, then that fee is not disclosed in good faith by the creditor unless it falls within defined tolerance limits under TILA. There are three categories of tolerance limits: Zero Tolerance: creditors have control over and/or have access to the fee amounts and can disclose these fees quite accurately. Therefore, the fees in this category cannot increase from the Loan Estimate to the Closing Disclosure without it being a tolerance violation, unless due to a triggering event allowed under TILA. The fees included in this category are:Fees paid to the creditor, mortgage broker, or affiliate (e.g., origination fees)Fees paid to unaffiliated service providers for required services for which the applicant cannot shop, andTransfer taxes 10% Tolerance: under this category, all fees are added together, and as long as the cumulative total disclosed on the Loan Estimate does not increase by more than 10% from the total disclosed on the Closing Disclosure, there is no violation. The focus is not on individual fees in this category, which may increase by more than 10%. Fees in this category include:All recording fees, andFees for required third-party services when the consumer is allowed to shop for providers and the consumer selects the provider from the creditor's written list of service providers Unlimited Tolerance: fees within this category are not subject to any thresholds, so fees can increase by any amount as long as they are disclosed in good faith by the creditor. Fees include:Prepaid interestProperty insurance premiumsAmounts deposited into the initial escrow accountServices the applicant can shop for but did not select a provider from the creditor's written list of service providers, andServices not required by the creditor The Loan Estimate may be translated into other languages as needed, and the creditor's logo, slogan, business card, or internal administrative information may be added (12 C.F.R. §1026.37(o)(5)).

Advertising Requirements

TILA and Regulation Z provide parameters for advertising mortgage products. These include prohibitions against deceptive and dishonest advertising, as well as requirements for presenting accurate, balanced information about loan terms. This section will review TILA advertising requirements, which vary for closed-end and open-end loans.

Creditors

TILA regulates creditors. A creditor is a natural person, business, or financial organization that does all of the following: Regularly extends consumer credit Makes credit subject to a finance charge, or offers credit payable under the terms of a written agreement that requires repayment in more than four installments A person "regularly extends consumer credit" if he/she/it: Extended credit secured by a dwelling more than five times in the preceding calendar year Engages in more than one extension of credit in a 12-month period that is subject to the provisions of the Home Ownership and Equity Protection Act (HOEPA), or Extends credit for one or more high-cost mortgages originated by a mortgage broker within a 12-month period (12 C.F.R. §1026.2(a)(17)(v)) Throughout this course, the terms "lender" and "creditor" may be used interchangeably.

Loans Regulated By TILA

TILA regulates transactions that involve the extension of credit to individuals for personal, family, or household purposes. Residential mortgage transactions are regulated by TILA when: The borrower's dwelling secures the mortgage debt The homeowner uses the proceeds of the loan for personal, family, or household purposes The credit is offered to consumers The offer or extension of credit is made regularly, and The credit includes a finance charge or a written agreement requiring that the loan be repaid in more than four installments (12 C.F.R. §1026.1(c))

Determining the APR

The APR is typically determined using an APR calculator. Because the APR includes costs of the loan (e.g., the finance charge) in addition to the interest rate, it is higher than the nominal rate quoted to the consumer. Fees included in calculating the APR include many of the same that are used to calculate the finance charge, such as: Discount points and mortgage borrower fees Origination fees Processing fees Underwriting fees Fees that are generally excluded are: Title fees Escrow fees Notary fees Appraisal and credit report fees Document preparation fees For closed-end transactions, the finance charge, amount financed, and total payments all factors go into the computation of the APR for a closed-end loan.

Scope of Rules

The Ability to Repay and Qualified Mortgage Rules apply to most closed-end consumer credit transactions secured by a dwelling, including: First and subordinate lien loans Loans secured by the borrower's principal residence Loans secured by non-owner-occupied residences (i.e., second homes and investment properties) Refinances Closed-end home equity loans The following are excluded: Open-end credit plans, such as HELOCs Reverse mortgage loans Timeshare plans Temporary or bridge loans with terms of 12 months or less A construction phase with a period of 12 months or less as part of a construction-to-permanent loan Extensions of credit by government agencies (12 C.F.R. §1026.43(a))

Closing Disclosure

The Closing Disclosure must be received by the consumer no later than three business days prior to consummation (12 C.F.R. §1026.19(f)(1)(ii)(A)). A consumer may waive this waiting period by providing a written request describing a bona fide financial emergency (12 C.F.R. §102.619(f)(1)(iv)). The law prohibits charging any fee for preparation or delivery of the Closing Disclosure (12 C.F.R. §1026.19(f)(5)). The amount imposed on the consumer for any settlement service may not exceed the amount actually received by the provider for that service (12 C.F.R. §1026.19(f)(3)(i)).

Mortgage Servicing Rules

The Dodd-Frank Act also made recent amendments to both TILA and RESPA regarding servicing of certain residential mortgage loans. These amendments are also collectively referred to as the Mortgage Servicing Rules. These Rules apply to any closed-end consumer credit transaction that is secured by a dwelling (12 C.F.R. §1026.41). More specifically, the TILA Servicing Rules require: Periodic statements for each billing cycle in a covered closed-end transaction Prompt crediting of payments to avoid loss of the home Payoff statements to give consumers more access to information about their loans As these requirements apply largely to the business of loan servicers, they are beyond the scope of this course.

Loan Estimate

The Loan Estimate must be delivered directly to the applicant or placed in the mail: No more than three business days after receipt of a loan application No later than seven business days prior to consummation (12 C.F.R. §1026.19(e)(1)(iii)) A Loan Estimate is not required if, within three days of submission of the application, the application is denied by the creditor or withdrawn by the consumer. The borrower may waive the seven-day waiting period for a bona fide financial emergency using a written request (12 C.F.R. §1026.19(e)(1)(v)). Other than a credit report fee, no fees may be collected before an applicant has received the Loan Estimate and indicated an intent to proceed with the transaction.

Loan Originator Compensation

The Loan Originator Compensation Rule (LO Compensation Rule) clarified and expanded regulations governing loan originator compensation. The Rule was put in place to combat predatory practices like dual compensation, steering consumers toward more expensive products, and other unethical conduct that allowed mortgage loan originators to collect higher compensation at the expense of the borrower. A full discussion of the LO Compensation Rule is beyond the scope of this course, but this section will briefly explore key points. The Rule applies to loan originators, defined as an individual or entity that performs any of the following activities for direct or indirect compensation or gain, or in expectation of compensation or gain: Taking an application Assisting a consumer in applying for credit Negotiating and/or obtaining consumer credit Offering or negotiating credit terms Advertising or communicating to the public an ability or intent to perform any loan origination services This could include an individual loan originator or a loan originator organization. The Rule applies to most closed-end consumer credit transactions secured by a dwelling (12 C.F.R. §1026.36(b)). The Rule defines compensation to include salaries, commissions, and any other financial or similar incentives (12 C.F.R. §1026.36(a)(3)). Prohibited practices addressed by the LO Compensation Rule include: Steering consumers toward more expensive loans Dual compensation (accepting compensation from both the lender and the consumer) The Rule prohibits compensation based on the terms or conditions of a loan (e.g., interest rates, prepayment penalties). The amount of credit extended is not a transaction term if compensation is based on a fixed percentage of the loan amount.

Escrow Requirements under the Truth-in-Lending Act

The TILA Escrow Rule applies to first lien higher-priced mortgage loans (HPMLs), and implements the following three standards for creditors: Maintenance of an escrow account for an HPML for at least five years Clarification of requirements for escrow and property insurance where a governing association is in place Creation of an exemption for certain qualifying small creditors (12 C.F.R. §1026.35(b)(1)) After the five-year period has expired, the consumer may request cancellation of the escrow account if both of the following are true: The loan's unpaid principal balance is less than 80% of the original value of the property securing the debt The consumer is not delinquent or in default on the loan (12 C.F.R. §1026.35(b)(3))

TRID

The TILA-RESPA Integrated Disclosure Rule (TRID Rule), which requires use of the Loan Estimate and Closing Disclosure, is complex and detailed. A full discussion of its nuances is beyond the scope of this course. The CFPB offers a Compliance Guide online for the Rule. This Guide offers a great deal of valuable guidance for compliance, as well as blank model forms for transaction types and further requirements of the Rule, including circumstances when revised disclosures may be required.[1] [1] Consumer Financial Protection Bureau. "TILA-RESPA Integrated Disclosure Rule Small Entity Compliance Guide." https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201710_cfpb_KBYO-Small-Entity-Compliance-Guide_v5.pdf

Cont'd

The Truth-in-Lending Act does not apply to: Business, agricultural, or organizational credit Credit in excess of an annually-adjusted threshold amount; the threshold for 2020 is $58,300This threshold does not apply in transactions secured by real or personal property used or expected to be used as the consumer's principal dwelling (such as a mobile home) Extensions of credit involving public utility Credit extended by a broker registered with the Securities Commission Exchange or the Commodity Futures Trading Commission Home fuel budget plans Student loans Employment-sponsored retirement plans (12 C.F.R. §1026.3) TILA applies to both open- and closed-end loans. In a closed-end transaction, all funds are disbursed at closing and repayment occurs within a specified period of time. During the repayment period, the borrower cannot request an increase in the principal amount of the loan. Examples of a closed-end transaction include a mortgage to finance the purchase of a home and a mortgage refinance. In an open-end transaction, the borrower and creditor anticipate repeat transactions based on a limit set by the creditor. The borrower may request cash advances, or an increase in the amount of credit available. Repayment amounts are based on the interest due on the amount withdrawn.

TILA

The Truth-in-Lending-Act (TILA) protects consumers in the financial marketplace by requiring disclosures to help them understand the financial products they are purchasing. The Truth-in-Lending Act and its implementing regulations, known as Regulation Z, have been subject to numerous revisions and amendments. As loan products have changed, so have the disclosures that are intended to alert consumers of the risks associated with them. Congress enacted TILA in 1968 as Title I of the Consumer Credit Protection Act (CCPA) with the goal of protecting consumers in lending and credit transactions by promoting the informed use of credit. The primary purposes of TILA are: To protect consumers by disclosing the costs and terms of credit To create uniform standards for stating the cost of credit To ensure that advertising for credit is truthful and not misleading The Consumer Financial Protection Bureau (CFPB) is the primary federal regulator for mortgage professionals, including depository institutions, non-depository lenders, and mortgage licensees.

A lending transaction has been rescinded by a consumer with cold feet. What happens as a result?

The creditor no longer has security interest in the property and the borrower is refunded any and all charges paid during the loan

Determining Finance Charges

The finance charge is the total of prepaid finance charges plus charges paid over the term of the loan (e.g., interest, mortgage insurance premiums, etc.). The finance charge does include fees paid to third parties if the creditor requires their use as a condition of granting credit (even if the consumer is allowed to choose the provider) or retains a portion of the charge. This is particularly important in mortgage transactions because third-party settlement service providers generate many fees. Closing agent fees are included if the creditor requires these services, requires a charge for these services, or retains a portion of the charge. Only the retained portion is included (12 C.F.R. §1026.4(a)(2)). Mortgage broker fees are always included in the finance charge, even if the lender does not require the use of the broker's services and does not retain a portion of the charge (12 C.F.R. §1026.4(a)(3)). Optional charges, such as those for insurance policies and debt cancellation plans, are generally excluded if the consumer voluntarily purchases and pays monthly premiums for these products after receiving the disclosures that are related to their purchase. If the choice of these products is not voluntary, or if the creditor fails to provide the proper disclosures or to obtain the borrower's agreement to purchase them, the related fees are included in the finance charge.

cont'd

The initial rate/payment change disclosure includes much of the same information, with some differences. The initial disclosure may provide an estimated adjustment instead of an actual rate adjustment. If that is the case, the disclosure should be labeled as an estimate and calculated 15 business days prior to the date of the disclosure. It must be based on the index to be used for later adjustments. Along with the content and table required for other rate/payment change disclosures, the initial rate adjustment disclosure must include: If an estimated rate adjustment is required, a statement that another disclosure stating the actual new rate and payment will be provided two to four months prior to the due date of the first adjusted payment A telephone number for the creditor, assignee, or servicer that the consumer may use to discuss anticipated difficulties with the new payment amount Alternatives should the borrower be unable to make payments at the new adjusted rate (e.g., refinancing, selling the home to pay off the loan, loan modification, etc.) Telephone numbers and websites where the consumer can obtain information from the CFPB and HUD about housing counselors and state housing finance authorities

Advertising Rules for Closed-End Loans

The need to make certain disclosure when advertising closed-end loan products is triggered by the use of particular terms. An advertising requirement that applies specifically to closed-end loans is the requirement to use the term "annual percentage rate" in any advertisement that states a rate of finance. If the rate is subject to an increase after closing on the loan, the advertisement must include this information. If the loan is secured by a dwelling, the advertisement cannot state any other rate other than a simple annual rate or periodic rate that applies to unpaid balances.

Notice of the Right to Rescind

The notice must be separate from other disclosures, and it must clearly and conspicuously disclose the following: The lender's retention or acquisition of a security interest in the borrower's principal dwelling The borrower's right to rescind Instructions on how to exercise the right to rescind, including a form the borrower has the option of using, stating the lender's business address The date that the right of rescission expires A description of the effects of rescission for the consumer For closed-end transactions, creditors must use one of the model forms for rescission found in Appendix H of Regulation Z or a substantially similar notice (12 C.F.R. §1026.23(b)(2)).

Loans Subject to the Right of Rescission

The right to rescind applies to both open- and closed-end loans. The right of rescission is only available for loans that are secured by the consumer's principal dwelling. There is no right to rescind for: A residential mortgage transaction A refinancing or consolidation of credit already secured by the consumer's principal dwelling with the same creditor that made the first loan.The right to rescind may apply to the extent that the new amount financed exceeds the unpaid principal balance, any unpaid earned finance charge on the existing debt, and amounts solely attributed to the costs of refinancing or consolidation A lending transaction with a state agency An advance (other than the initial advance) in a series of advances, such as those made in a multiple-advance loan for the construction of a dwelling, and A renewal of optional insurance products Home equity lines of credit, refinances, and home improvement loans secured by the consumer's principal dwelling are examples of the types of loans that are subject to a right of rescission (12 C.F.R. §§1026.15(f); 1026.23(f)).

Trigger Terms

The trigger terms for closed-end loans are: Amount or percentage of any down payment Number of payments or the period of repayment Payment amounts The finance charge Use of any of these terms requires clear and conspicuous disclosure of the following additional information: The amount or percentage of the down payment The terms of repayment over the full tern of the loan The APR and whether the rate may increase after consummation (12 C.F.R. §1026.24(d)) If an advertisement for a mortgage states a simple rate of interest and more than one will apply over the loan term, the advertisement must disclose the following with equal prominence and in close proximity: Each simple interest rate that will applyFor ARMs, the advertisement must state the rate as determined by adding a current index and a margin The period of time during which each simple annual rate of interest will apply The APR for the loan (12 C.F.R. §1026.24(f)(2)(ii)) The APR may be disclosed with greater prominence than the other information given (12 C.F.R. §1026.24(f)(2)(ii)). If an advertisement states the amount of any payment, the following must also be clearly and conspicuously disclosed with equal prominence and in close proximity: The amount of any payment that will apply during the loan termPayments for ARMs must be based on a current index plus a margin The period of time during which each payment will apply The fact that payments do not include taxes and insurance (this applies only to transactions for first lien mortgages) (12 C.F.R. §1026.23(f)) If an advertisement states that a loan may exceed the fair market value of the dwelling used to secure it, the advertisement must clearly and conspicuously state that: The interest on the portion of the credit extension that is greater than the market value of the property is not deductible, and The consumer should consult a tax adviser regarding the amounts that may be deductible (12 C.F.R. §1026.24(h))

High-Cost Mortgages and Higher-Priced Mortgage Loans

There are additional rules for high-cost mortgages and higher-priced mortgage loans. The rules for high-cost home loans were adopted pursuant to the Home Ownership and Equity Protection Act (HOEPA) to address abuses in the subprime market. Later, the Higher-Priced Mortgage Rule (HPML Rule) would establish another category of loans and apply limitations and requirements to further ensure responsible lending practices. The rules pertaining to high-cost home loans and higher-priced mortgage loans are located in 12 C.F.R. §1026.35.

Advertising Rules for Open-End Credit

Trigger terms for open-end mortgages include references to any of the following: Finance charge Other charges, such as late-payment charges, title, appraisal, and credit reporting fees Taxes imposed on the credit transaction Payment terms of the home equity plan

Which of the following statements offers the most accurate description of the effect of using a trigger term in an advertisement for a loan?

Use of a trigger term requires the clear and conspicuous disclosure of other relevant terms with equal prominence

Penalties for Violations of TILA and Regulation Z

Violations of TILA may lead to civil and criminal liability and penalties. Individual actions for violations may lead to: Actual damages Twice the amount of any finance charge incurred Monetary penalties Costs of bringing an action Attorney's fees For closed-end loans secured by a dwelling, the penalty for a violation of the law is at least $400 and up to $4,000.

Dwelling

a residential structure containing one to four units, whether or not it is attached to real property. This includes condominium units, cooperative units, mobile homes, and trailers, if used as a residence (12 C.F.R. §1026.2(a)(19)).

Trigger Term

a term used in advertising that triggers the requirement to disclose specific information, according to the provisions of the Truth-in-Lending Act.

Consummation

the time at which a consumer becomes contractually obligated in a credit transaction (12 C.F.R. §1026.2(a)(13)).