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Module 1: Truth-in-Lending Act and Regulation Z

Unit 1: Truth in lending Act and Regulation Z Review

PAGE 1: MOD1-1_1COVERAGE.CFM (3 MIN)

UNIT 1 LEARNING OBJECTIVES

This unit will teach the student to:

identify the purpose of the Truth-in-Lending Act (TILA) and Regulation Z (Reg Z);

understand and identify the financing events which trigger disclosures required by Reg

Z; and

determine the threshold at which a lender becomes a Reg Z lender.

TILA HISTORY

The Truth-in-Lending Act (TILA) was established in 1968 to provide consumers with information

about the costs of credit. TILA’s goal was to create a better-informed consumer base to force

lenders to provide more stable lending products.

The housing crash and the financial crisis hit the U.S. economy in 2007. At the center of the

maelstrom were the housing and mortgage industries. During the Millennium Boom, the

government mandate to increase homeownership allowed upwards of $2 trillion dollars in

cheap, short-term money to be loaned at enticingly low teaser rates. As a result of this

aggressive lending environment, underwriting guidelines became lax. Exotic loans snared

borrowers who did not fully understand the complicated and often deceptive financial

agreements they were signing.

The resultant crash left the U.S. economy in tatters. It became clear the framework of

consumer protection in place during the boom years, including the TILA, was not enough to

provide discipline to an industry used to writing its own rules.

On July 21, 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act

(Dodd-Frank Act) was signed into law. One of the aims of the Dodd-Frank Act was to better

protect consumers from unfair, abusive and deceptive lending and servicing practices prevalent

during the boom of the early 2000s. The Dodd-Frank Act established the Consumer Financial

Protection Bureau (CFPB) as the central consumer protection authority. Among the laws

assigned to the CFPB was the TILA. Prior to the CFPB’s inception, the Federal Reserve Board of

Governors (The Board) had authority over the TILA. The transfer of authority from the Board to

the CFPB occurred on July 21, 2011.

The Dodd-Frank Act amended the TILA to provide additional consumer protections, particularly

in the realm of loans and lending.

Comprehension check

You must answer this question before you may proceed to the next page.

Which government agency currently has regulatory oversight over the Truth in Lending Act

(TILA)?

The Consumer Financial Protection

The Federal Reserve

The Federal Trade Commission

The Supreme Court

TRANSACTIONS COVERED BY REG Z

Federal disclosures under TILA are designed to give borrowers standardized loan information

for easy comprehension of loan terms and pricing. Regulation Z (Reg Z) implements the TILA

disclosure requirements on federally defined consumer financing. [12 Code of Federal

Regulations §1026.1(c)]

Consumer financing, also called Reg Z financing or personal-use financing, arises out of:

real estate loans, their assumptions or refinance;

personal property loans; and

carryback financing by dealers.

Only individuals are considered consumers under Reg Z. [12 CFR §1026.2(a)(11)]

Reg Z mandates disclosures on a loan transaction or carryback sale only if the loan funds or

carryback notes are:

used primarily to purchase real estate, personal property or services for personal,

family, or household use, called a personal use;

from a lender or carried back by a seller who regularly finances loans or extends credit

on sales; and

repayable with interest, or, if no interest, payable in five or more installments. [12 CFR

§1026.1(c)(1)]

The real estate encumbered by a trust deed to secure a personal-use loan originated by a

lender and controlled by Reg Z includes all types of real estate and is not limited to a borrower’s

owner-occupied property. [Official Interpretation of §1026.2(a)(19)-1]

Consider a borrower who obtains a loan to purchase a recreational boat. The loan is secured by

a trust deed on a rental property they own. Is the loan subject to Reg Z disclosures?

Yes! Since the proceeds from the loan were for the borrower’s personal use, Reg Z applies to

this loan.

However, special disclosure rules do apply to residential mortgage transactions. A residential

mortgage transaction is defined as a transaction in which a mortgage, deed of trust, purchase

money security interest arising under an installment sales contract or equivalent security

interest is created or retained in the consumer’s principal dwelling to finance the acquisition or

initial construction of that dwelling. [12 CFR §1026.2(a)(24)]

For Reg Z purposes, a dwelling is a residential structure that contains one to four units, whether

or not that structure is attached to real property. The term includes individual condominium

units, cooperative units, mobile homes and trailers, if used as a residence. [12 CFR

§1026.2(a)(19)]

Comprehension check


Regulation Z applies to:

a business-purpose loan secured by a principal residence.

a personal-use loan secured by a recreational boat.

a personal-use loan secured by a single family residence.

a personal-use loan secured by an 10-unit apartment building.

PAGE 2: MOD1-1_2CARRYBACK.CFM (3 MIN)

CONTROLLED CARRYBACK NOTES

Most carryback sellers are exempt from Reg Z disclosures since most are not regular financiers.

The typical seller of real estate to a buyer-occupant is a homeowner who rarely sells more than

five properties in any one calendar year, and even fewer structured as carryback sales to assist

borrowers in the purchase of their principal residence.

Carryback sales include land sales contracts and lease-option sales, as well as carryback trust

deed notes, both regular and all-inclusive. [In re Hanley (1990) 111 BR 709]

Real estate dealers, builders and developers carrying back paper on more than five sales of

owner-occupied one-to-four unit residential real estate in any calendar year are extending

regular financing and are targeted by Reg Z.

Also, an investor purchasing carryback paper from sellers who are not regular financiers (five or

fewer sales) is not controlled by Reg Z. The seller is the original payee on the note, not the trust

deed investor who is acquiring the paper by assignment of the note or trust deed.

Editor’s note —The remainder of this material addresses loans by lenders only. However, the

material applies equally to carryback sellers — dealers — who regularly finance sales of single

family residences and duplexes to borrowers.

Comprehension check


A carryback seller who carries back paper on more than ___________ sales of owner-occupied

one-to-four unit residential real estate in any calendar year is targeted by Reg Z.

three

two

four

five

PURCHASE-ASSIST FINANCING, ASSUMPTIONS AND SUBJECT-TO SALES

Before Reg Z controls the origination of any consumer credit (i.e., loan), the real estate or

personal property financed by the loan proceeds must be acquired for personal use. [12 CFR

§1026.2(a)(12)]

Personal-use acquisitions, funded by a loan, include:

a principal residence for the borrower, including condominiums, cooperative units,

mobile homes and trailers, if used as a residence;

a vacation home or second home;

personal property for personal use, such as boats, trailers and recreational vehicles;

services provided on credit for personal use, such as brokerage fees due from a

borrower to acquire a principal residence or second home, or construction/repair on

personal-use property; or

any other real estate or personal property acquired for personal enjoyment rather than

for business, investment or farming.

A mixed-use loan requires Reg Z disclosures when the primary use (specifically defined by case

law as more than half) of the loan proceeds are used to purchase property or services for

personal use. [Bokros v. Associates Finance, Inc. (1984) 607 F.Supp 869]

To advise the lender of any personal use to be made of loan proceeds, a loan purpose

statement from the borrower about their intended use of the loan proceeds should be included

as part of the loan application package the borrower fills out for the lender. The borrower’s

statement will clarify whether the loan requires Reg Z disclosures.

A sale-leaseback of an owner-occupied one- or two-unit residential property with an option

granting repurchase rights to the seller/occupant constitutes a personal-use loan and is subject

to Reg Z. [Long v. Storms (1981) 50 Or.App 39]

Reg Z disclosures on an assumption of a loan by a buyer are triggered primarily by the buyer’s

occupancy of the property as their principal residence.

A lender who agrees in writing to the assumption of a loan must make Reg Z disclosures when:

the original buyer and the assuming buyer are both consumers;

the loan is a residential mortgage transaction to the buyer assuming the loan;

the assumption agreement specifically and unequivocally accepts the assuming buyer as

the individual primarily responsible for the debt; and

the assumption agreement is in writing. [12 CFR §1026.20(b); Official Interpretation of

12 CFR §1026.20(b)]

Under Reg Z, an individual may only maintain one principal residence. A second or vacation

home is not considered a principal residence unless the individual buys or builds the new home

and plans to make it their principal residence within one year or upon completion of

construction. [Official Interpretation of §1026.2(a)(24)-3]

Further, a loan has not been assumed and thus is not subject to Reg Z disclosures when the

buyer does not enter into a written agreement with the lender. Without a formal assumption

shifting primary responsibility for the loan to the buyer who occupies the property as their

principal residence, the loan is not subject to Reg Z disclosures.

A loan assumption does not trigger Reg Z disclosures if the conduct of the lender is limited to

only:

approving the buyer’s creditworthiness;

changing its records to reflect the new ownership;

delivering a coupon book to the buyer; or

accepting payments on the loan from the buyer. [Official Interpretation of 12 CFR

§1026.20(b)-3]

The eventual assumption of a loan by a buyer in a subject-to sales transaction, be it a legal or

equitable (land sales contract or lease-option sale) transfer of ownership is not controlled by

Reg Z. Although the initial carryback is a Reg Z transaction, neither the transfer nor the later

assumption requires a Reg Z disclosure. [Official Interpretation of 12 CFR §1026.2(a)(24)-5]

Comprehension check


A mixed-use loan requires Reg Z disclosures when ____________ of the loan proceeds are used

to purchase property or services for personal use.

none

less than half

more than half

exactly one third

PAGE 3: MOD1-1_3REFINANCE.CFM (3 MIN)

REFINANCING AN EXISTING PERSONAL-USE LOAN

A lender who provides financing to fund the payoff of an existing loan is required to make Reg Z

disclosures when the existing loan paid off by the refinancing:

was originated or assumed by the current owner;

funded or was used by the owner to acquire property or services for the owner’s

personal use, such as a second home or family education;

was secured by any real property, whether a first or junior lien; and

was made by any lender or carryback seller.

A refinance may include:

consolidation of several existing loans;

disbursement of new money to the owner; or

a modification or rescheduling of payments under the existing loan. [Official Interpretation of 12 CFR §1026.20(a)-1]

However, modifications which do not trigger Reg Z disclosures include:

the renewal of a single payment obligation with no change in the original terms (i.e., a

balloon payment);

a modification of a note arising from a court proceeding, such as a bankruptcy

reorganization;

the reduction in the annual percentage rate (APR) with a corresponding change in the

payment schedule over the remaining period of amortization;

a change in the payment schedule without a change in the interest rate, due to a

default; or

adding insurance premiums to the loan balance. [12 CFR §1026.20(a)]

Comprehension check


A ___________ triggers Regulation Z disclosures.

balloon payment

cash-out refinance

modification of a note ordered by a bankruptcy court

All of the above.

COUNTING LOANS TO BECOME A REG Z LENDER

A lender must first be classified as a regular financier of Reg Z loans before they are required to

make disclosures and provide the notice of the right to rescind any loan. Determining if a lender

is a regular financier depends on how often during the prior or current year they make

personal-use loans to consumers, called an annual count.

For the lender to be considered a regular financier, the lender must have an annual count of:

over one Section 32 high-cost loan;

over five personal-use loans secured by one-to-four unit residential property, whether

or not owner-occupied; or

over 25 personal-use loans, secured or unsecured, which include any personal-use

equity loans secured by one-to-four residential units. [12 CFR §1026.2(a)(17)(v)]

The number of personal-use loans originated by a lender to bring that lender under Reg Z

disclosure requirements is determined by its lending volume during the preceding calendar

year, and the current calendar year. [Official Interpretation of 12 CFR §1026.2(a)(17)(i)-4]

Consider a lender who, in January 2013, began making personal-use equity or refinance loans,

secured by one-to-four unit residential real estate, whether or not owner-occupied.

In the calendar year 2013, the lender made only five such personal-use loans and was not

subject to Reg Z. None were Section 32 loans which would have independently required

disclosures. Thus, the lender was not a Reg Z lender based on its activity in 2013.

However, in 2014, it originated seven personal-use loans. Consequently, its sixth and seventh

loans in 2014 became subject to Reg Z. It is now required to make Reg Z disclosures on all Reg Z

personal-use loans originated in 2015 since it exceeded five originations secured by one-to-four

unit properties in 2014.

In 2015, the lender funds four personal-use loans secured by any type of real estate. The lender

made Reg Z disclosures on all four loans since its lending volume in 2014 established it as a

regular financier under Reg Z for 2015.

If the lender makes only five loans secured by one-to-four unit residential property (owner-

occupied or not) in the calendar year 2016, must it make Reg Z disclosures on each loan?

No! During the preceding calendar year (2015) it only made four personal-use loans secured by

one-to-four unit properties. Thus, it is not considered a regular financier required to make Reg Z

disclosures on its first five personal-use loans during the following year (2016).

However, if the lender makes more than five loans secured by one-to-four unit residential

property in 2016, it will once again be required to make Reg Z disclosures with every personal-

use real estate loan it funds after the fifth loan — no matter the type of property which is the

security — as well as all personal-use loans made in 2017. The same annual counting applies to

becoming a regular financier when originating more than 25 personal-use loans annually, which

are not secured by real estate (or a mobile home which is the borrower’s principal residence).

[Official Interpretation of 12 CFR §1026.2(a)(17)]

Comprehension check


Which of the following individuals is required to provide Regulation Z disclosures? Assume no personal-use loan were made the prior calendar year.

A lender who makes 20 personal-use loans this calendar year, 6 of which are secured by a one-to-four unit residential property.

A lender who makes 22 personal-use loans this calendar year, 3 of which are secured by a one-to-four unit residential property.

A lender who makes 5 personal-use loans secured by a one-to-four unit residential property this calendar year.

A lender who makes 1 Section 32 loan this calendar year.

Unit 2: Integrated disclosures

MOD4-3_1LOANESTIMATE1.CFM (4 MIN)


In this unit, you’ll learn about:

the purpose, structure and use of the new integrated Loan Estimate form; and

the purpose, structure and use of the new integrated Closing Disclosure.

THE NEW, INTEGRATED LOAN ESTIMATE FORM — GENERAL APPLICABILITY AND

SCOPE

The Consumer Financial Protection Bureau (CFPB) unveiled the final rules for the integrated

Loan Estimate form for consumer mortgages in November of 2013. This new form was created

to be a uniform, clutter-free and user-friendly replacement for the good faith estimate (GFE)

and the initial Truth in Lending disclosure forms provided to consumers during the loan

origination process. The Loan Estimate form replaced these forms on October 3, 2015.

The integrated forms will remove confusing and inconsistent language from both forms, and

make the loan costs easier for the consumer to understand, and the loan originator to explain.

The consolidation of the two forms also means that loan originators will have an easier time

adhering to the strict guidelines of TILA and RESPA.

The three main uses of the Loan Estimate form are:

to allow consumers to locate key information about the loan they have applied for;

to give the consumer a form with which to compare loan options; and

to give the consumer a way to compare initial costs disclosed by the lender with the

actual closing costs on the loan.

The Loan Estimate form is required to be provided by Regulation Z creditors on closed-end

consumer credit transactions secured by real estate, except reverse mortgages. Note that this

definition is broader than is currently found under the good faith estimate rules. Thus, the Loan

Estimate disclosure is also required on:

construction-only loans;

loans secured by vacant land; and

credit extended to trusts for tax or estate planning purposes. [12 CFR §1026.19(e);

Official Interpretation of 12 CFR §1026.3(a)-10]

Mortgage brokers may provide the Loan Estimate on behalf of the creditor. However, the

creditor is ultimately responsible for any Loan Estimate prepared and provided to the

consumer. It is not permissible for the creditor to simply issue a “revised” Loan Estimate to

correct disclosure errors made by the mortgage broker. [12 CFR §1026.19(e)(1)(ii); Official

Interpretation of 12 CFR §1026.19(e)(1)(ii)]

If the mortgage broker provides the Loan Estimate, the mortgage broker must retain the Loan

Estimate form for three years. [Official Interpretation of 12 CFR §10269.19(e)(1)(ii)-1]

Comprehension check


The good faith estimate and the initial Truth in Lending disclosure were merged into the:

Section 32 disclosure.

Loan Estimate form.

Closing Disclosure.

Mortgage call report.

PROHIBITED ACTIVITIES BEFORE DISCLOSURE

No person or entity may charge the consumer any fees until the Loan Estimate has been

provided AND the consumer has indicated they will proceed with the loan covered by the Loan

Estimate.

The only exception to the rule is for bona fide and reasonable fees for pulling the consumer’s

consumer credit report. This prohibition extends to the practice of requiring a check from the

consumer to be held until the consumer is provided the Loan Estimate, or states their intention

of proceeding with the loan. [12 CFR §1026.19(e)(2)(i)]

If the creditor provides a consumer with a written estimate of terms and costs specific to the

consumer before they provide the Loan Estimate form, the written estimate needs to clearly

and conspicuously state at the top of the front of the first page of the estimate in a font size

that is no smaller than 12-point font: “Your actual rate, payment, and costs could be higher. Get

an official Loan Estimate before choosing a loan.” The written estimate of terms or costs must

be visually distinct from the Loan Estimate form. [12 CFR §1026.19(e)(2)(ii)]

Additionally, no person or entity may require the consumer to provide information verifying

information in the loan application until the Loan Estimate has been delivered. [12 CFR

§1026.19(e)(2)(iii)]

DEFINITION OF BUSINESS DAY

For the Loan Estimate, a business day is any day on which the lender’s offices are open to the

public, and carrying out substantially all of its business functions. Note that this is a different

definition than the definition of business day for the Closing Disclosure form. [Official

Interpretation of 12 CFR §1026.19(e)(1)(iii)-1; 12 CFR §1026.2(a)(6)]

DELIVERY

The integrated Loan Estimate form must be delivered or mailed to the consumer within three

business days after the consumer submits a loan application. If the Loan Estimate is not

delivered in person, it’s considered received by the borrower three business days after it’s

placed in the mail. [12 CFR §1026.19(e)(1)(iii),12 CFR §1026.19(e)(1)(iv)]

WHAT IS AN APPLICATION?

Since the delivery of the Loan Estimate form is predicated on the receipt of an application, let’s

discuss what makes up an application.

An application consists of six pieces of information:

the consumer’s name;

the consumer’s income;

the consumer’s social security number, to obtain a credit report;

the property address;

an estimate of the value of the property; and

the mortgage loan amount sought. [12 CFR §1026.2(a)(3)]

The information may be received in written or electronic format. [Official Interpretation of 12

CFR §1026.2(a)(3)-1]

As soon as all six pieces of information are received, the three-business-day countdown to

providing the Loan Estimate form begins. The creditor may collect additional information, but

may not delay delivery of the Loan Estimate form based on any other information than the six

pieces of information above. [Official Interpretation of 12 CFR §1026.2(a)(3)-1]

In verbal, informal guidance given by the CFPB in their webinar on the integrated loan

disclosures, they confirmed that nothing prevents a creditor from strategically gathering

information to control the timing of the Loan Estimate disclosure. However, in all cases, once an

application, as defined, is received, the Loan Estimate form is due within three business days.

The creditor must act in good faith and exercise due diligence to obtain information unknown,

but necessary to completing the Loan Estimate form. Any information which the creditor

cannot reasonably determine may be included, labeled as estimates. [12 CFR §1026.17(c)(2)(i),

Official Interpretation of 12 CFR §1026.17(c)(2)(i)]


TOLERANCES

Generally, creditors are bound by the terms in the Loan Estimate. The integrated disclosure rule

allows variance in charges at three different levels, called tolerances.

Unrestricted variances permitted

These charges may change from the amounts provided in the Loan Estimate:

prepaid interest;

property insurance premiums;

amounts placed into an escrow or impound account;

settlement services for which the borrower is able to shop and chooses a service

provider who is not on a list of service providers provided by the creditor;

charges not required by the creditor and paid to third-party service providers. [12 CFR

§1026.19(e)(3)(iii)]

10% cumulative tolerance

Other charges are subject to a 10% cumulative variance from the amounts entered in the Loan

Estimate. These charges include:

recording fees; and

third-party settlement service provider charges which are not paid to the creditor, or

the creditor’s affiliate and for which the consumer is able to shop, and chooses from a

service provider who is on the list of service providers provided by the creditor. [12 CFR

§1026.19(e)(3)(ii)]

Again, the 10% is cumulative. For instance, if the recording fee amount changes 11% from the

charge recorded in the Loan Estimate, but all third-party settlement service charges under the

10% cumulative tolerance do not change, the estimate is still considered in good faith.

Zero tolerance

The following charges may not change:

fees paid to the creditor, mortgage broker, or an affiliate of either [12 CFR

§1026.19(e)(3)(ii)(B)];

fees paid to an unaffiliated third party settlement service provider if the creditor did not

allow the consumer to shop for the settlement service provider [12 CFR

§1026.19(e)(3)(ii)(C)]; and

transfer taxes. [Official Interpretation of 12 CFR §1026.19(e)(3)(i)-1, -4]

Comprehension check


Under the Loan Estimate form, which fees may change without restriction?

Transfer taxes.

Fees paid to a loan originator.

Recording fees.

Property insurance premiums.

REVISIONS OF THE LOAN ESTIMATE AND CHANGED CIRCUMSTANCES

The charges above may only exceed the allowable thresholds in limited circumstances. In that

case, a revised or corrected Loan Estimate form may be disclosed.

Settlement service charges may vary above the set tolerances only in the case of a changed

circumstance.

Changed circumstances include:

an extraordinary event beyond the control of any interested party, e.g., war or natural

disaster;

an unexpected event specific to the consumer or transaction, e.g., the creditor provides

an estimate of title insurance costs, but the title insurer goes out of business;

a change or inaccuracy in the information the consumer provided, upon which the

creditor relied when preparing the Loan Estimate form, e.g., the consumer indicated

their income was $90,000 but an underwriter determines the income is only $80,000;

and

new information specific to the consumer or transaction, e.g., a boundary claim is filed

against the property, affecting its value. [12 CFR §1026.19(e)(3)(iv)(A)]

Additionally, a revised Loan Estimate may be provided if:

a changed circumstance affects the consumer’s eligibility for the terms applied for, or

the value of the property;

the consumer requests a change to the credit terms;

the interest rate was not locked when the Loan Estimate was provided, and locking the

rate causes the points or lender credits to change;

the consumer indicates the intent to proceed with the transaction more than ten

business days after the Loan Estimate was provided; or

the loan is a new construction loan, and settlement is delayed more than 60 calendar

days, as long as the original Loan Estimate states that the creditor may issue a revised

disclosure 60 days before loan consummation. [12 CFR §1026.19(e)(3)(iv)]

Editor’s note — The day of “loan consummation” is not always the same day as “loan closing.”

Consummation occurs when the consumer becomes contractually obligated to creditor on the

loan. This date varies, according to state law. [12 CFR §1026.2(a)(13); Official Interpretation of

12 CFR §1026.2(a)(13)-1]

Creditors may not issue revisions to a Loan Estimate due to technical errors, miscalculations or

underestimations of charges — whether the creditor is making the disclosure, or a mortgage

broker is making a disclosure on the creditor’s behalf. [12 CFR §1026.19(e)(3)(iv)]

Revised Loan Estimates must be given to the borrower no later than four business days before

consummation, or placed in mail no later than three business days after the creditor receives

information sufficient to justify a revision. [12 CFR §1029.19(e)(4)(i)]

Additionally, seven business days must pass between delivering or mailing the Loan Estimate

(or revised Loan Estimate) before the loan may close. [12 CFR §1029.19(e)(1)(iii)(B)]

If the amounts paid by the borrower at consummation exceed the amounts in the Loan

Estimate or the set tolerances, the excess is to be refunded to the borrower within 60 days of

consummation. [12 CFR §1026.19(f)(2)(v)]


CONTENT - GENERAL

The Loan Estimate form contains a good faith estimate of credit costs and transaction terms,

and must be provided in writing. If any information necessary for an accurate disclosure is

unknown, the creditor must make the disclosure based on the best information reasonably

available at the time the disclosure is provided to the consumer, and use due diligence in

obtaining the information. [12 CFR §1026.19(e)(1)(i); Official Interpretation to 12 CFR

§10269.19(e)(1)(i)-1; 12 CFR §1026.37(o)]

Now we’ll briefly go over the contents of the Loan Estimate disclosure by page. There are a few

variants of the form depending on the transaction terms, but we’ll do a general overview of the

form, with some references to requirements for different types of loans.

To familiarize yourself with the form, download and print a sample of the form here:

[Download Link]

LOAN ESTIMATE – PAGE 1

This page gives a general overview of the loan.

General information

This section discloses identifying information of the consumers, creditors and the loan. It also

discloses the core features of the loan, including loan purpose, sale price or property value of

the property, loan term, product and interest rate. This section must also include the following

statement: “Save this Loan Estimate to compare with your Closing Disclosure." [12 CFR

§1026.37(a)]

All consumers are to be named on the Loan Estimate. If not all names will fit in the space

allotted, a separate sheet is to be attached. [Official Interpretation of 12 CFR §1026.37(a)(5)]

The existence and effect of any rate lock is also disclosed in the General information. [12 CFR

§1026.37(a)(13)]

Loan terms

This section discloses the loan amount, interest rate, the interval of payment (e.g., monthly)

and interval principal and interest payment (e.g., monthly principal and interest payment).

These items must also disclose whether the amounts can increase after consummation. If they

can, additional disclosures are required. [12 CFR §1026.37(b)(1)-(3), (6)]

Additionally, this section discloses whether or not the loan involves a prepayment penalty or

balloon payment. If the loan bears these features, additional disclosures are required. [12 CFR

§1026.37(b)(4)-(5), (7)]

http://www.firsttuesday.us/course/NMLS/N201/Mod4/Module4_LoanEstimateFormSample.pdf

Projected payments

This section discloses the projected interval payments (or range of payments), and itemizes

them by principal and interest, mortgage insurance payment and estimated escrow payments.

Estimated amounts for taxes, insurance and assessments are also included in this section. [12

CFR §1026.37(c)]

Costs at Closing

This section discloses an estimate of total closing costs, and cash needed to close. The total

closing costs are generally itemized according to loan costs, other costs and lender credits. [12

CFR §1026.37(d)]

Loan costs are costs paid by the consumer to the creditor and third-party providers of services

the creditor requires to be obtained by the consumer during origination of the loan. [12 CFR

§1026.37(f)]

Other costs include taxes, governmental recording fees and other payments involved in the real

estate closing process. [12 CFR §1026.37(g)]

Comprehension check


If there are multiple borrowers on a loan, who must be named on the Loan Estimate form?

Only the primary borrower.

Only the primary borrower and their spouse.

The oldest borrower.

All borrowers.


This page discloses closing cost details in four main categories of charges:

a good-faith itemization of the Loan Costs and Other Costs associated with the loan [12

CFR §1026.37(f)-(g)];

a Calculating Cash to Close table to show the consumer how the amount of cash needed

at closing is calculated [12 CFR§ 1026.37(h)];

for transactions with adjustable monthly payments, an Adjustable Payment (AP) Table

with relevant information about how the monthly payments will change [12 CFR

§1026.37(i)]; and

for transactions with adjustable interest rates, an Adjustable Interest Rate (AIR) Table

with relevant information about how the interest rate will change. [12 CFR §1026.37(j)]

The Loan Costs section is broken down into origination charges, services the consumer is able

to shop for and services the consumer is not able to shop for, and totals the loan costs. The

Other Costs section breaks down taxes and other government fees, prepaid items, the initial

escrow payment at closing, other charges, and totals.


This page discloses additional information about the loan, including the contact information of

the creditor, loan officer, mortgage broker or other loan originator, and information about the

appraisal, assumption policies, homeowner’s insurance, late payments, refinancing and

servicing. [12 CFR §1026.37(k), (m)]

This page also contains a breakdown of information used to compare the terms of the loan with

other loans, using three different measurements:

by reviewing the total payments made in principal, interest, mortgage insurance and

loan costs after five years;

by reviewing the APR; and

by reviewing the total interest percentage (TIP). [12 CFR §1026.37(l)]

On this page, the consumer acknowledges receipt of the form — not acceptance of the loan —

by signing and dating the form. [12 CFR §1026.37(n)]

The Loan Estimate form is to be retained by the MLO or lender for three years after loan

consummation. [12 CFR §1026.25(c)]

MOD4-3_4CLOSINGDISC.CFM (4 MIN)

THE CLOSING DISCLOSURE — GENERAL

Just as the Loan Estimate replaced the initial Truth in Lending disclosure and the good faith

estimate, the Closing Disclosure form replaced the final TILA disclosure and the HUD-1

settlement statement.

The Closing Disclosure is to contain the actual terms and costs of the transaction. [12 CFR

§1026.19(f)(1)(i)]

The Closing Disclosure is the partner to the Loan Estimate form, and must be used whenever

the Loan Estimate form is used, e.g., on closed-end mortgages secured by real estate, made by

creditors.

DEFINITION OF BUSINESS DAY

In relation to the Closing Disclosure, a business day is any calendar day except Sunday and legal

public holidays. Note that this is a different definition than the definition of business day for the

Loan Estimate form. [12 CFR §1026.2(a)(6)]; 12 CFR §1026.19(f)(1)(ii)(A)-(iii)]

DELIVERY

The Closing Disclosure is to be provided to the consumer no later than three business days

before loan consummation. [12 CFR §1026.19(f)(1)(ii)]

If the transaction is rescindable, the Closing Disclosure must be provided to each consumer who

has a right to rescind the loan.

In transactions that are not rescindable, the Closing Disclosure needs to be provided to the

consumer with primary liability on the loan (e.g., other than a guarantor or surety). If there is

more than one consumer on the loan, the Closing Disclosure need only to be provided to one

borrower to fulfill this requirement. [12 CFR §1026.17(d)]

If the Closing Disclosure is not delivered in person, it’s considered received by the borrower

three business days after it’s placed in the mail or emailed. [12 CFR §1026.19(f)(1)(iii); Official

Interpretation of 12 CFR §1026.19(f)(1)(ii)-2)]

The Closing Disclosure may be provided by a settlement agent on the creditor’s behalf, or the

responsibility for completing the Closing Disclosure may be split between the settlement agent

and the creditor. The creditor remains responsible for any defects in the Closing Disclosure. [12

CFR §1026.19(f)(1)(v); Official Interpretation of 12 CFR §1026.19(f)(1)(v)-3]

However, the settlement agent is responsible for delivering the Closing Disclosure to the seller,

if the transaction has a seller. The seller must receive the Closing Disclosure on the day of

consummation. [12 CFR §1026.19(f)(4)(i)-(ii)]

Comprehension check


The HUD-1 Settlement Statement and the final Truth in Lending disclosure are integrated in

the:

Section 32 disclosures.

Loan Estimate form.

Closing Disclosure.

Mortgage Call report.

CORRECTED CLOSING DISCLOSURE

Creditors are required to provide a corrected Closing Disclosure if terms or costs change after

the initial Closing Disclosure was provided. There are three categories of changes which require

a corrected Closing Disclosure:

changes that occur before consummation that require a new three-business-day waiting

period [12 CFR §1026.19(f)(2)(ii)];

changes that occur before consummation and do not require a new three-business-day

waiting period [12 CFR § 1026.19(f)(2)(i)]; and

changes that occur after consummation. [12 CFR §1026.19(f)(2)(iii)]

Changes before consummation requiring a new three-business-day waiting period are changes

to the APR or loan product, or the addition of a prepayment penalty. [12 CFR §1026.19(f)(2)(ii)]

All other changes before consummation require a new Closing Disclosure, but do not retrigger

the three-business-day period before consummation. [12 CFR §1026.19(f)(2)(i); Official

Interpretation of 12 CFR §1026.19(f)(2)(i)-1-2]

For changes that occur after consummation, the Closing Disclosure is to be provided to the

consumer no later than 30 calendar days after receiving notification of the change. An example

of such a change would be if the consumer paid more for recording fee than was disclosed in

the Closing Disclosure. [12 CFR §1026.19(f)(2)(iii); Official Interpretation of 12 CFR

§1026.19(f)(2)(iii)-1]

For changes due to non-numerical clerical errors, or to document the correction of an overage

charged above the allowable tolerances, the corrected Closing Disclosure is to be provided with

60 calendar days of loan consummation. [12 CFR §1026.19(f)(2)(iv)-(v)]

The Closing Disclosure is to be retained for five years after loan closing. [12 CFR

§1026.25(c)(1)(ii)]

To familiarize yourself with the form, download and print a sample of the form here:

[Download Link]

CLOSING DISCLOSURE – PAGE 1

http://www.firsttuesday.us/course/NMLS/N201/Mod4/Module4_LoanClosingFormSample.pdf

The first page of the Closing Disclosure is a mirror of the Loan Estimate form. This allows

consumers to compare the initial estimates provided on the Loan Estimate with the final terms

and charges.


The second page discloses the Closing Cost details, and itemizes Loan Costs and Other Costs.

Additional items may be added in the blank lines to disclose the charges. Unused lines for the

pre-printed boilerplate provisions may be removed to make room for the disclosure of

additional items. [Official Interpretation of §1026.38(t)(5)(iv)-1]


The third page discloses the calculation of cash required to close, and provides a summary of

transactions for both the buyer (borrower) and seller, if there is a seller. [12 CFR §1026.38(i)-

(k)]


The fourth page provides disclosures about assumptions, the demand feature, late payments,

negative amortization, partial payments, the granting of security interest in the property and

escrow accounts. If applicable, it also contains the AP and AIR tables. [12 CFR §1026.38(l)-(n)]


Finally, the fifth page provides more disclosures about loan calculations, appraisals, contract

details, liability after foreclosure, refinancing, tax deductions and contact information for the

lender, loan originator and the CFPB. A signature line is also included. [12 CFR §1026.38(o)-(r)]

ADDITIONAL RESOURCES

To read more about the integrated disclosures and rules, visit the CFPB’s TILA-RESPA Integrated

Disclosure rule implementation page at: http://www.consumerfinance.gov/regulatory-

implementation/tila-respa/


Note: this is not the module quiz.

Which of the following statements is true of the Closing Disclosure form?

http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

The Closing Disclosure form is an integration of the final Truth in Lending disclosure and

the HUD-1 Settlement Statement.

The Closing Disclosure form must be provided within three business days after the

consumer submits a mortgage application.

A lender has to retain copies of the Closing Disclosure for three years after loan closing.

Unit 3: Rescission and Reg Z advertising rules

PAGE 1: MOD1-2_3RESCIND.CFM (4 MIN)


This unit will teach the student to:

identify the proper guidelines to follow in connection with a notice of right to rescind; understand the advertising rules set forth by Regulation Z; and identify triggering terms and the disclosures they trigger.

THE RIGHT TO RESCIND

In addition to other disclosures required on a Reg Z-controlled transaction, Reg Z also requires

that a notice of right to rescind be given to borrowers on some loan transactions.

The borrower on a Reg Z loan is entitled to a notice of right to rescind (cancel) the loan

transaction, at no cost or expense to them, if:

the property to be security for the loan is a one-to-four unit residential property which

is presently owned and occupied as the borrower’s principal residence, or personal

property occupied as the borrower’s principal residence; and

the property will be further encumbered to secure an equity loan or refinance, or as

additional or substitute security for an existing Reg Z loan, which funds or funded a

personal use of the borrower, their family, or household. [12 CFR §1026.23(a)(1)]

Loans on which the borrower is not entitled to a notice of right to rescind include:

purchase-assist loans funding the acquisition of a principal residence;

commercial loans funding a trade, business, investment or agricultural operation of the

borrower, even if the loan further encumbers the borrower’s one-to-four unit principal

residence, as these loans are exempt from Reg Z; and

a rate and term refinance of an existing personal-use loan encumbering the principal

residence and extended by the same lender who originally closed the refinanced loan,

called a streamline refinance. [12 CFR §1026.23(f); Official Interpretation of 12 CFR

§1026.23(f)-4]

Note that if the loan (secured by the borrower’s principal residence) is a cash-out refinance by

the same lender who financed the existing loan, the new loan is only rescindable to the extent

that the refinanced principal exceeds the prior principal balance. A variation of the general

notice of right to rescind may be used for same-lender refinances. [12 CFR §1026.23(f)(2);

Appendix H of 12 CFR §1026]

If required, two copies of the notice of right to rescind must be delivered to each borrower with

the right to rescind. If the notice is delivered electronically under the E-Sign Act provisions, only

one copy needs be sent to each borrower. [12 CFR §1026.23(b)(1)]

The notice of right to rescind must disclose:

the lender’s security interest in the borrower’s principal dwelling;

the borrower’s right to rescind the loan;

how to exercise the right to rescind, including a separate form for that purpose which

includes the lender’s address;

the effects of the rescission; and

the date the rescission period expires. [12 CFR §1026.23(b)(1)]

Comprehension check


Which of the following loans triggers the delivery of the notice of right to rescind?

A purchase-money loan secured by the borrower's one-unit principal residence.

A purchase-money loan secured by a single family residence used as an

investment/rental property.

A rate-and-term refinance secured by a single family residence used as a rental

property.

A non-streamline rate-and-term refinance secured by the borrower's single family

principal residence.

HELOCS AND RESCISSION

For open-end loans secured by the borrower’s principal residence, i.e., a home equity line of

credit (HELOC), the transaction which establishes the HELOC may be rescinded by the borrower,

but the subsequent draws under that established HELOC are not subject to rescission. [12 CFR

§1026.15(a)(1)(ii)]

For example, consider a borrower who opens a HELOC of $50,000 secured by their primary

residence. They have the right to rescind the entire HELOC during the applicable rescission

period.

However, suppose that same borrower draws $10,000 out of the HELOC a year after the HELOC

is opened. That $10,000 draw is not a rescindable transaction. [12 CFR §1026.15(a)(1)(ii)]

Subsequent increases in the maximum HELOC amount are rescindable. For example, if the

borrower later requests and is granted a $5,000 increase to the HELOC (for a total maximum

HELOC amount of $55,000), that increase is a rescindable transaction during its applicable

rescission period. [12 CFR §1026.15(a)(1)(i)]

NOTICE OF RIGHT TO RESCIND DELIVERY AND TIMING

A borrower with the right to rescind has until midnight of the third business day following the

latest of:

the signing of loan documents;

the delivery of material disclosures; or

the delivery of the notice of right to rescind. [12 CFR §1026.23(a)(3)(i)]

Material disclosures for this purpose include disclosures regarding the:

APR;

finance charge;

amount financed;

total of payments;

the payment schedule;

Section 32 high-cost mortgage loan disclosures; and

limits on prepayment penalties. [12 CFR §1026.23(a)(3)(ii)]

Like the three- and seven-business-day waiting periods required on the standard Reg Z

disclosure, the three-business-day right to rescind can be waived to meet a bona fide personal

financial emergency. Each borrower who has the right to rescind must sign the waiver. No pre-

printed waiver form can be used. Thus, the waiver must be written to describe the emergency,

be worded as a waiver of the right to rescind, and be signed by all owner-occupants whose

interest in the property will be encumbered. [12 CFR §1026.23(e)]

The lender, the broker, and the escrow involved must not allow the release of any funds to the

borrower until after the three business days have lapsed, unless waived. Delivery of funds to

the borrower before the lapse of the three-business-day period is prohibited. [12 CFR

§1026.23(c)]

Similar to other Reg Z-required disclosures, the three business days begins to run on the first

day after the latest of:

the borrower’s receipt of the notice of right to rescind;

all other Reg Z disclosures having been properly delivered; or

loan documents are signed and returned. [Official Interpretation of 12 CFR

§1026.23(a)(3)]

Waiver aside, the rescission (cancellation) period expires and the loan may fund if none of the

borrowers mailed or otherwise handed a notice of rescission to the lender.

Expiration of the three business days can be tricky because the lender must confirm (be

reasonably satisfied) a mailing of a cancellation by the borrower prior to the midnight hour of

the third day is not still in transit.

Thus, it is imperative for the lender and broker involved to get a written confirmation after the

third day and before funding, signed by all the borrowers who hold the right to rescind, that the

borrowers did not exercise their right to cancel by sending a notice of rescission. To do

otherwise is to act at the peril of the borrower’s rescission.

Delivery of both Reg Z disclosures (one copy to each borrower) and the notice of right of

rescission (two copies to each borrower), is best done by having the borrowers and

encumbered property owners sign each document, acknowledging and dating their receipt.

When they have done so, the three-business-day waiting period begins. Recall that three

business days must pass after delivery of the loan documents and disclosures before a loan may

be consummated.

Editor’s note — For the purposes of Reg Z, midnight is considered the end of the day, and not

the beginning. Staff Commentary contrasting Section 32 disclosure periods with the rescission

period states that, under the three-business-day timeline of Section 32, a loan may close any

time on the third day (Tuesday, in the given example), and indicates that, in contrast, if the

rescission period were used, the loan could not close until midnight of that Tuesday. The logical

conclusion is that, under rescission rules, midnight is interpreted as the end of the day. [Official

Interpretation of 12 CFR §1026.31(c)(1)-1]

Consider a borrower who signs loan documents and receives all material disclosures on

Monday, June 1. The actual timeline would go like this:

Monday, June 1 – Day of disclosure/signing. Rescission begins running on the day after this day.

Tuesday, June 2 – First day of three-day rescission period.

Wednesday, June 3 – Second day of the three-day rescission period.

Thursday, June 4 – Third day of the three-day rescission period. The loan cannot close until all

of Thursday has passed, and it is midnight.

Comprehension check


The borrower's right to rescind lasts until midnight of the _____________ following the later of

the signing of loan documents, material disclosure delivery or the delivery of the notice of right

to rescind.

ninth business day

seventh business day

fifth business day

third business day

PAGE 2: MOD1-2_4RESCIND2.CFM (4 MIN)

RESCISSION, AND FAILURE TO DISCLOSE

If a lender fails to deliver the notice of right of rescission or other material disclosure to the

borrower before the loan closes, the right to rescind will expire on the earliest of:

three years after the consummation of the transaction;

the transfer of the borrower’s interest in the property; and

the sale of the property, which includes a carryback sales transaction or an installment contract sale. [Official Interpretation of 12 CFR §1026.23(a)(3)-3]

The effects of a borrower’s rescission are as follows:

the lender’s security interest in the property is voided;

the lender must return all fees paid to all parties in connection with the loan within 20 calendar days after receiving the notice of rescission; and

the borrower must return any money or property acquired as a result of the loan. [12 CFR §1026.23(d)]

A notice of rescission given by any co-owner of the property who is entitled to rescind cancels

the loan escrow transaction. All this comes at no cost to the borrower when avoiding a

rescindable loan transaction. [12 CFR §1026.23(a)(4)]

Consider a homeowner who obtains a mortgage subject to TILA. Under TILA, the homeowner is

entitled to rescind the mortgage for up to three years after the mortgage is consummated

when the mortgage holder fails to satisfy TILA’s disclosure requirements. Exactly three years

after the mortgage is consummated, the homeowner mails a letter to the mortgage holder

indicating they are invoking their right to rescind the mortgage, alleging the mortgage holder

did not make the proper disclosures. The mortgage holder does not acknowledge the rescission

and denies their failure to make the requisite disclosures in conjunction with the mortgage.

The homeowner seeks a full rescission of the mortgage plus money losses, arguing that their

invocation of the right to rescind the mortgage was timely since it was mailed on the final day

of the three-year rescission period established in TILA.

The mortgage holder seeks to void the homeowner’s right to rescind, claiming the written

notice of rescission, although timely mailed, is invalid since the adequacy of the mortgage

holder’s disclosures is in dispute and therefore the homeowner’s right to rescind first needs to

be decided judicially.

The United States Supreme Court holds that the homeowner’s rescission is valid since it was

mailed within the three-year rescission period established by TILA, and the disputed nature of

the mortgage holder’s disclosure does not require judicial affirmation of the homeowner’s right

to rescind. [Jesinoski v. Countrywide Home Loans, Inc. (2015) 135 US 790]

Should a lender already hold an existing Reg Z personal-use loan which is either unsecured or

secured by property other than the borrower’s residence, and the borrower now agrees to

provide the equity in their personal residence (one-to-four units) as additional or substitute

security, the right of rescission does not affect the pre-existing loan. In the event the borrower

cancels, they are merely terminating their agreement to further encumber their principal

residence, not the note evidencing the pre-existing personal-use loan. [12 CFR §1026.23(a)(1)]

Comprehension check


A borrower who is not timely provided with a notice of right to rescind has _____________

from the date the loan documents are signed to rescind the loan.

one year

three years

seven days

180 days

PENALTIES FOR REG Z DISCLOSURE VIOLATIONS

If a lender fails to timely deliver correctly prepared Reg Z disclosures to a borrower, the

borrower may recover from the lender the total of:

out-of-pocket losses caused by the incorrect or absent disclosure;

twice the amount of the finance charge, limited to $4,000, on a closed-end loan secured

by real property or a dwelling;

court costs and attorney fees; and

all finance charges and fees paid by the borrower to the lender, if the loan is a Section

32 loan. [15 United States Code §1640(a)]

Out-of-pocket losses result when fees are undisclosed or underestimated in the Loan Estimate

and later charged to the borrower. These amounts can be recovered.

The finance charge includes the dollar amount of the interest payable over the life of the loan

and any charge payable in connection with the loan. [12 CFR §1026.4(a)]

The difference between this total finance charge over the life of the loan and the lesser

estimate in Reg Z disclosures is the recoverable loss, subject to limitations. However massive

this amount of interest may be, the interest recovery is limited to $4,000. [15 USC §1640(a)]

For many TILA disclosure violations connected with consumer mortgages, a borrower has three

years from the lender’s Reg Z violations to bring an action to recover damages from a lender.

[15 USC §1640(e)]

Further complicating a money recovery, a lender is not liable for unintentional math errors in

the disclosures. [15 USC §1640(c)]

A lender may also avoid penalties by notifying the borrower and correcting an error in the Reg Z

disclosures within 60 days after discovering the error. However, the correction will not shield

the lender from liability if the borrower first notifies the lender of the error or has previously

commenced legal action against the lender. [15 USC §1640(b)]

A lender who knowingly makes inaccurate disclosures or willfully miscalculates the APR may be

fined up to $5,000 or sentenced to up to a year in jail, or both. [15 USC §1611]

Comprehension check


Failure to provide correctly prepared Regulation Z disclosures to a borrower subjects a lender

to:

the borrower's out-of-pocket costs caused by the incorrect or absent disclosure.

court costs and attorney fees.

up to $4,000 in finance charges, for a non-Section 32 closed-end loan secured by real property or a dwelling.

All of the above.

PAGE 3: MOD1-3_1TERMS.CFM (3 MIN)

STRAIGHTFORWARD TERMS

Among other things, Regulation Z controls advertising of consumer credit. Other regulations

(notably, Regulation N, the Mortgage Acts and Practices – Advertising rule) share this

responsibility with Regulation Z. [12 CFR §§1014.1 et seq.]

Advertisements include printed advertisements, online advertisements, television

advertisements, radio advertisements and any promotional materials provided with the

application. [12 CFR §1026.2(a)(2)]

Regulation Z requires that, if an advertisement for credit states specific credit terms, it shall

state only those terms that actually are or will be arranged or offered by the lender. For

example, a lender may not advertise a very low annual percentage rate that will not in fact be

available at any time. This doesn’t preclude the lender from promoting new credit programs,

but merely bars the advertising of terms that are not and will not be available. For example, a

lender may advertise terms that will be offered for only a limited period, or terms that will

become available at a future date. [12 CFR §1026.24(a); Official Interpretation of 12 CFR

§1026.24(a)]

All required disclosures are to be made clearly and conspicuously. For loans secured by a

dwelling, this means if an interest rate is advertised, but may change over the life of the loan,

the period of time that the interest rate and the annual percentage rate (APR) apply is to be

disclosed in equal prominence and in close proximity to the advertised interest rate. If the

advertisement is online or televised, the required disclosure of the above items is not be to be

obscured by shading, coloration or anything else which would make it unclear or inconspicuous.

For radio advertisements, the speed of the delivery of information may not be so fast as to

make the disclosure incomprehensible. [12 CFR §1026.24(b);Official Interpretation of 12 CFR

§1026.24(b)]

If an advertisement states a rate of finance charge, it shall state the rate as an “annual

percentage rate,” using that term. If the APR may be increased after consummation, the

advertisement shall state that fact. Specifically for credit secured by a dwelling, the

advertisement shall not state any other rate, except that a simple annual rate that is applied to

an unpaid balance may be stated in conjunction with, but not more conspicuously than, the

annual percentage rate.

For example, in an advertisement for credit secured by a dwelling, a simple annual interest rate

may be shown in the same type size as the annual percentage rate for the advertised credit.

If a teaser rate applies, lenders may advertise that rate, but must also provide the term of its

limited duration. [12 CFR §1026.24(c);Official Interpretation of 12 CFR §1026.24(c)-2, 4]

Comprehension check


Which of the following advertising practices is permissible under Regulation Z?

Advertising a new credit program with very low annual percentage rates (APRs).

Advertising a teaser rate without mentioning the term of its limited duration.

Advertising a teaser rate duration in fine print under the teaser rate.

Advertising the simple interest rate more conspicuously than the APR.

TRIGGERING TERMS

If any of the following terms is used in an advertisement, additional disclosures are required:

the amount or percentage of any down payment;

the number of payments or period of repayment;

the amount of any payment; or

the amount of any finance charge. [12 CFR §1026.24(d)(1)]

These are known as triggering terms. Examples and a brief discussion of each triggering term

follows:

Down payment

The dollar amount of a down payment or a statement of the down payment as a percentage of

the price triggers further disclosures. An example of the down payment as a triggering term

includes statements such as “For as little as 3.5% down!” [Official Interpretation of 12 CFR

§1026.24(d)(1)-1]

Payment period

The number of payments required or the total period of repayment includes such statements as

“30-year mortgage”. It does not include statements such as “monthly payments,” since this

term does not indicate a time period over which a loan may be financed. [Official Interpretation

of 12 CFR §1026.24(d)(1)-2]

Payment amount

The dollar amount of any payment includes statements such as “$500,000 loan for just $1,650

per month.” But statements such as “regular monthly payments” are not deemed to be

statements of the amount of any payment. [Official Interpretation of 12 CFR §1026.24(d)(1)-3]

Finance charge

The dollar amount of the finance charge or any portion of it includes statements such as

“$50,000 mortgages, 2 points to the borrower.” In this example, the $1,000 prepaid finance

charge can be readily determined from the information given. Statements of the APR or

statements that there is no particular charge for credit (such as “no closing costs”) are not

triggering terms. [Official Interpretation of 12 CFR §1026.24(d)(1)-4]

Comprehension check


Which of the following is a triggering term?

The loan amount.

The annual percentage rate (APR).

The percentage of the required down payment.

The use of the term "monthly payment".

PAGE 4: MOD1-3_2DISCTRIG.CFM (4 MIN)

ADDITIONAL DISCLOSURES TRIGGERED

If any of the triggering terms are present in the advertisement, the following additional

disclosures are required in the advertisement:

the amount or percentage of the down payment (e.g. “10% cash required from the

buyer”);

the terms of repayment over the full term of the loan, including any balloon payment;

the “annual percentage rate,” using that term; and

if the rate may be increased after consummation, that fact. [12 CFR §1026.24(d)(2)]

If payments may vary due to the inclusion of mortgage insurance premiums, a lender may meet

the repayment terms disclosure requirement by disclosing:

the number and timing of payments;

the fact that payments do not include amounts for mortgage insurance premiums; and

that the actual payment obligation will be higher. [Official Interpretation of 12 CFR

§1026.24(d)(2)-2(ii)]

In addition to the general requirements above, if an advertisement, other than a television or

radio advertisement, for credit secured by a dwelling, states the amount of any payment, the

advertisement must disclose:

the amount of each payment that will apply over the term of the loan, including any

balloon payment;

in variable-rate transactions, payments that will be determined based on the application

of the sum of an index and margin shall be disclosed based on a reasonably current

index and margin;

the period of time during which each payment will apply; and

in an advertisement for credit secured by a first lien on a dwelling, the fact that the

payments do not include amounts for taxes and insurance premiums, if applicable, and

that the actual payment obligation will be greater. [12 CFR §1026.24(f)(3)]

Examples of credit transactions may be used to make these disclosures. The examples must be

labeled as such and must reflect representative credit terms made available by the lender to

present and prospective customers. [Official Interpretation of 12 CFR §1026.24(d)(2)-5]

Envelopes, banner advertisements and pop-up advertisements are exempt from the full rate

and payment disclosures. [12 CFR §1026.24(f)(4)]

TAX DISCLOSURES

If an advertisement distributed in paper form or online (rather than by radio or television) is for

a loan secured by the consumer's principal dwelling, and the advertisement states that the

advertised extension of credit may exceed the fair market value of the dwelling, the

advertisement shall clearly and conspicuously state that:

the interest on the portion of the credit extension that is greater than the fair market

value of the dwelling is not tax deductible for federal income tax purposes; and

the consumer should consult a tax adviser for further information regarding the

deductibility of interest and charges. [12 CFR §1026.24(h)]

Comprehension check


If a triggering term is used in an advertisement, the _________ must also be disclosed in the

advertisement.

full repayment schedule

escrow term

amount or percentage of the down payment

All of the above.

PROHIBITED PRACTICES

On advertisements for credit secured by a dwelling, the following practices are prohibited.

Misleading advertising of “fixed” rates and payments

Using the word “fixed” to refer to rates, payments or the credit transaction in an advertisement

for solely advertising variable-rate transactions or other transactions where the payment will

increase is prohibited, unless:

the phrase “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” appears in

the advertisement before the first use of the word “fixed” and is at least as conspicuous

as any use of the word “fixed” in the advertisement; and

each use of the word “fixed” to refer to a rate or payment is accompanied by an equally

prominent and closely proximate statement of the time period for which the rate or

payment is fixed, and the fact that the rate may vary or the payment may increase after

that period. [12 CFR §1026.24(i)(1)(i)]

Misleading comparisons in advertisements

Making any comparison in an advertisement between actual or hypothetical credit payments or

rates and any payment or simple annual rate that will be available under the advertised product

for a period less than the full term of the loan is prohibited, unless the advertisement includes a

clear and conspicuous comparison to the rate and payment disclosures triggered. [12 CFR

§1026.24(i)(2)]

Misrepresentations about government endorsement

Making any statement in an advertisement that the product offered is a “government loan

program”, “government-supported loan”, or is otherwise endorsed or sponsored by any

federal, state, or local government entity is prohibited, unless the advertisement is for a Federal

Housing Administration (FHA)-insured loan, a Department of Veterans Affairs (VA)-guaranteed

loan, or similar loan program that is, in fact, endorsed or sponsored by a federal, state or local

government entity. [12 CFR §1026.24(i)(3)]

Misleading use of the current lender's name

Using the name of the consumer's current lender in an advertisement that is not sent by or on

behalf of the consumer's current lender is prohibited, unless the advertisement:

discloses with equal prominence the name of the person or creditor making the

advertisement; and

includes a clear and conspicuous statement that the person making the advertisement is

not associated with, or acting on behalf of, the consumer's current lender. [12 CFR

§1026.24(i)(4)]

Misleading claims of debt elimination

Making any misleading claim in an advertisement that the mortgage product offered will

eliminate debt or result in a waiver or forgiveness of a consumer's existing loan terms with, or

obligations to, another creditor, is prohibited. [12 CFR §1026.24(i)(5)]

Misleading use of the term “counselor”

Using the term “counselor” in an advertisement to refer to a for-profit mortgage broker or

mortgage lender, its employees, or persons working for the broker or lender that are involved

in offering, originating or selling mortgages is prohibited. [12 CFR §1026.24(i)(6)]

Misleading foreign-language advertisements

Providing information about some triggering terms or required disclosures, such as an initial

rate or payment, only in a foreign language in an advertisement, but providing information

about other trigger terms or required disclosures, such as information about the fully-indexed

rate or fully amortizing payment, only in English in the same advertisement, is prohibited. [12

CFR §1026.24(i)(7)]

Comprehension check


Which of these advertising practices is permissible under Regulation Z?

Advertising anything in a foreign language.

Using the term "counselor" to refer to the mortgage lender advertising the loan.

Using the term "fixed rate for five years" to describe the initial fixed duration of a 5/1

adjustable rate mortgage.

Using the term "fixed rate" to describe to describe the initial fixed duration of a 5/1

adjustable rate mortgage, with no further clarification of the initial fixed term duration.

Unit 4: TILA Right to Rescind Case Study

PAGE 1: MOD1-CS.CFM (3 MIN)

MARR V. BANK OF AMERICA (7TH CIR. 2011) __ F3D __

TILA requires lenders to provide borrowers with two copies of the borrower’s notice of their

three-day right to rescind if:

the property to be security for the loan is a one-to-four unit residential property which

is presently owned and occupied as the borrower’s principal residence, or personal

property occupied as the borrower’s principal residence; and

the property will be further encumbered to secure an equity loan or refinance, or as

additional or substitute security for an existing Reg Z loan, which funds or funded a

personal use of the borrower, their family, or household. [12 CFR §1026.23(a)(1)]

If the lender fails to provide two copies of the notice to the borrower, the borrower’s right to

rescind of the loan agreement is extended from the original three days, to three years following

the loan closing.

For example, a borrower with an existing mortgage on their one-to-four unit principal residence

was contacted by a loan originator who solicited the borrower to refinance their existing

mortgage. The borrower agreed to refinance the loan with the loan originator through a lender.

The loan originator negotiated with the lender on the borrower’s behalf and originated a new

loan for refinancing the previous lien on the property. At closing, a closing agent hired by the

lender supplied the borrower with various documents to review and sign. The borrower signed

every document they were given, including an acknowledgement that they had been given two

copies of the notice of the right to rescind. According to the borrower, they did not review the

documents at the time of signing, nor did the closing agent review any of the documents with

the borrower before the borrower left the closing agent’s office.

The lender and borrower closed the refinance loan and the borrower retained all documents

they were given during the closing, not considering how many copies of the notice they had

been given or whether the closing process was in accordance with requirements set by TILA.

Two years after the loan closing, the borrower had fully paid back the loan amount. They

reviewed their loan documents and realized they only possessed one copy of the notice of their

right to rescind the loan. The borrower claimed the envelope in which they kept the loan

documents from this refinance had never been touched, except to add other financial

documents. Never at any time had any documents been removed from the envelope, until the

discovery of the singular notice of right to rescind.

At trial, the closing agent did not specifically recall the details of the borrower’s individual

closing, but indicated that her standard practice was to review all documentation with a

borrower and to present two copies of the notice of the right to rescind to the borrower, along

with an explanation of their rights.

The borrower claimed they were entitled to the three-year right to rescind and sought from the

lender reimbursement of their interest payments, statutory damages for failure to rescind and

attorney fees since, due to the sub-standard procedures followed at the loan closing, the

borrower had only received one copy of the notice of right to rescind from the lender to sign.

Editor’s note — Recall that one of the requirements for rescission is that the borrower return

any money or property acquired as a result of the loan. However, since the borrower had

already paid off the loan at the time they brought about this action, the lender had already

received back all of the money acquired on the loan. [12 CFR §1026.23(d)(3)]

The lender claimed the borrower was barred from claiming the extended three-year right to

rescind and thus could not initiate an action to rescind the loan since the borrower’s word was

the only proof they had that they had received only one notice of right to rescind, and further,

the borrower had signed the notice indicating they had received two copies of the notice of the

right to rescind.

The appellate court held that together, the discovery of the singular notice of right to rescind

and the borrower’s statement that the signing of loan documents was not completed according

to the “standard” practice described by the closing agent were enough to rebut the

presumption that the borrower had indeed received two copies of the notice of the right to

rescind. The appellate court remanded the case back to the trial courts with instruction

allowing the borrower to proceed in making their case that they did, indeed, only receive one

notice of the right to rescind.

Comprehension check

You must answer these questions before you may proceed to the next page.

1. Which of the following points does this case illustrate?

The borrower’s signed acknowledgement of their receipt of two notice of right to

rescind notices is enough to defeat their claim they did not receive two notices.

o Feedback: Incorrect. Under TILA, the borrower’s signed acknowledgement

merely creates a rebuttable presumption that the borrower received the notice.

The borrower may still trigger the extended three-year right to rescind and/or

rescission itself by providing sufficient proof of inadequate disclosure.

Delivering merely one written notice of right to rescind fulfills Reg Z requirements.

o Feedback: Incorrect. If the notice is provided in writing, two copies are required.

The courts will side heavily with the borrower when determining whether Reg Z

requirements have been met.

o Feedback: Correct. Existing case law sides heavily with the borrower when

determining whether a borrower’s rebuttal is sufficient to defeat the rebuttable

presumption.

2. If it’s determined only one notice of rescission was delivered to the borrower, what is the

borrower entitled to?

An extended three-year right to rescind which runs from consummation of the loan

transaction.

o Feedback: Correct. The extended right to rescind may also run from the transfer

of the owner’s interest in the property or the sale of the property.

The loan proceeds.

o Feedback: Incorrect. A borrower needs to return the loan proceeds as part of a

rescission. In this case, the borrower had already paid back the loan proceeds, so

there remained nothing left for the lender to recover. However, had a principal

balance still been outstanding, the borrower would have been required to return

the proceeds to the lender as part of the rescission.

An extended right to rescind lasting the life of the loan.

o Feedback: Incorrect. The extended right to rescind period lasts only three years

from the earlier of the consummation of the loan transaction, the transfer of the

owner’s interest in the property or the sale of the property.

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