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  • Mortgage Bankers Association 05/04/10 Mortgage Bankers Association
  • Presentation

    1. 1. Truth In Lending Revisiting the Basics
    2. 2. TILA Refresher Workshop <ul><li>Truth In Lending </li></ul><ul><li>Consumer Credit Protection Act (1968) </li></ul><ul><li>Truth In Lending Act (Title 1) </li></ul><ul><li>Regulation Z (1969) </li></ul>
    3. 3. TILA Refresher Workshop <ul><li>The Purpose of TILA </li></ul><ul><ul><li>To Promote the Informed Use of Consumer Credit by Requiring Disclosures about its Terms & Costs. </li></ul></ul><ul><ul><li>Purpose does not include governing charges for Consumer Credit. </li></ul></ul>
    4. 4. TILA Refresher Workshop <ul><li>Revisiting The Basics </li></ul><ul><li>OPEN END v. CLOSED END </li></ul><ul><li>REGULAR v. IRREGULAR TRANSACTION </li></ul><ul><li>FIXED v. VARIABLE INTEREST RATES </li></ul><ul><li>FINANCE CHARGE </li></ul><ul><li>ANNUAL PERCENTAGE RATE (APR) </li></ul><ul><li>ACCURACY TOLERANCE </li></ul><ul><li>RIGHT OF RESCISSION </li></ul><ul><li>THE DISCLOSURES </li></ul><ul><li>ADVERTISING GUIDELINES </li></ul><ul><li>HOEPA & HERA </li></ul>
    5. 5. TILA Refresher Workshop <ul><li>Open End Credit Plans </li></ul><ul><li>- The Creditor Anticipates Repeat Transactions </li></ul><ul><li>- Finance Charge Assessed on Outstanding Balance </li></ul><ul><li>- Renewable Credit Limits Imposed </li></ul><ul><li>Among Mortgages, a Home Equity Line of Credit (HELOC) is an Open End Loan type. </li></ul>
    6. 6. TILA Refresher Workshop <ul><li>Closed End Credit Plans </li></ul><ul><ul><ul><li>Closed End means the loan program will have a definite End Date. </li></ul></ul></ul><ul><ul><ul><li>Any Plan that is not an Open End Plan is by definition a Closed End Plan. </li></ul></ul></ul>
    7. 7. TILA Refresher Workshop <ul><li>Regular v. Irregular Transactions </li></ul><ul><ul><li>An Irregular Transaction is one that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment). </li></ul></ul><ul><ul><li>A Regular Transaction will have a single advance, and regular payment periods and amounts. </li></ul></ul>
    8. 8. TILA Refresher Workshop <ul><li>Fixed v. Variable Rates </li></ul><ul><ul><ul><li>Fixed provides one rate of interest for the life of the loan. </li></ul></ul></ul><ul><ul><ul><li>Variable means the Interest Rate can change over the life of the loan. </li></ul></ul></ul><ul><ul><ul><li>Reg Z provides very specific rules for explaining Variable Rate loans in an effort to keep the consumer informed. </li></ul></ul></ul>
    9. 9. TILA Refresher Workshop <ul><li>Variable Rate Loans </li></ul><ul><ul><ul><li>Terms & Things to Know </li></ul></ul></ul><ul><ul><ul><ul><li>What is the Index Rate? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>What is the Margin? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>What is the Fully Indexed Rate? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>What are Periodic Caps? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>How does a Variable Rate Payment Schedule work? </li></ul></ul></ul></ul>
    10. 10. TILA Refresher Workshop <ul><li>The TILA Disclosure </li></ul><ul><ul><li>A terrific summary for the consumer, showing the long term impact of a mortgage loan. </li></ul></ul><ul><ul><ul><li>Finance Charge </li></ul></ul></ul><ul><ul><ul><li>Annual Percentage Rate (APR) </li></ul></ul></ul><ul><ul><ul><li>Total of Payments </li></ul></ul></ul><ul><ul><ul><li>Payment Schedule </li></ul></ul></ul><ul><ul><ul><li>Various Important Factors </li></ul></ul></ul>
    11. 11. TILA Refresher Workshop <ul><li>Finance Charge </li></ul><ul><ul><li>Section 226.4 </li></ul></ul><ul><ul><li>(a) Definition </li></ul></ul><ul><ul><li>(b) Examples of F/C </li></ul></ul><ul><ul><li>(c) Exclusions from F/C </li></ul></ul><ul><ul><li>(c) (7) Real Estate Exclusions </li></ul></ul>
    12. 12. TILA Refresher Workshop <ul><li>Definition </li></ul><ul><li>The FINANCE CHARGE is the cost of consumer credit expressed as a dollar amount. </li></ul><ul><li>It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. </li></ul><ul><li>It does not include any charge of a type payable in a comparable cash transaction. </li></ul>
    13. 13. TILA Refresher Workshop <ul><li>Any Fee not specifically excluded from the Finance Charge in 226.4(c)(7) is, in fact, a Finance Charge. </li></ul>
    14. 14. TILA Refresher Workshop <ul><li>Prepaid Finance Charges </li></ul><ul><ul><li>Refers to Finance Charges that are paid by the consumer AT or PRIOR TO the closing of the loan. </li></ul></ul><ul><ul><li>Finance Charges assessed on the HUD Settlement Statement are Prepaid Finance Charges. </li></ul></ul>
    15. 15. TILA Refresher Workshop <ul><li>Annual Percentage Rate (APR) </li></ul><ul><li>The cost of Consumer Credit expressed as a percentage. </li></ul><ul><ul><li>Modifies the rate of interest applicable to a loan, considering the effect of non-interest Finance Charges paid by the consumer. </li></ul></ul><ul><ul><li>TILA requires the disclosure of an APR whenever an Interest Rate is referenced, either orally or in writing. </li></ul></ul>
    16. 16. TILA Refresher Workshop <ul><li>Tolerance for Accuracy (Fin. Chg) </li></ul><ul><li>Lender open to civil liability if Finance Charge is understated by $100.00 or more. </li></ul><ul><li>Lender open to Rescission liability if Finance Charge is understated by $35.00 or more. </li></ul><ul><li>No Liability if Finance Charge is Overstated on Disclosure. </li></ul>
    17. 17. TILA Refresher Workshop <ul><li>Tolerance for Accuracy (APR) </li></ul><ul><li>Accurate if within .00125 for Regular Transaction. </li></ul><ul><li>Accurate if within .00250 for Irregular Transaction. </li></ul>
    18. 18. TILA Refresher Workshop <ul><li>Borrower’s Right to Rescind </li></ul><ul><li>Borrower is given 3 Business Days after closing to reconsider the loan and cancel the transaction. </li></ul><ul><li>Applies to </li></ul><ul><ul><li>Refinance & Subordinate Lien Loans </li></ul></ul><ul><ul><li>Owner Occupied Primary Residence </li></ul></ul>
    19. 19. TILA Refresher Workshop <ul><li>Rescission Period </li></ul><ul><ul><li>Three Day Clock Begins Ticking when all of the following have occurred. </li></ul></ul><ul><ul><ul><li>The Note & Mortgage (DOT) have been executed; </li></ul></ul></ul><ul><ul><ul><li>The Consumer has received their Final TILA Disclosure; and, </li></ul></ul></ul><ul><ul><ul><li>The Consumer has received the Notice of Right to Cancel </li></ul></ul></ul>
    20. 20. TILA Refresher Workshop <ul><li>Rescission </li></ul><ul><ul><li>If a consumer rescinds on the transaction, they are entitled to a refund of any fees paid during the transaction. </li></ul></ul>
    21. 21. TILA Refresher Workshop <ul><li>TILA’s Disclosures </li></ul><ul><li>Truth In Lending Disclosure </li></ul><ul><ul><li>Preliminary and Final </li></ul></ul><ul><li>Adjustable Rate Disclosure </li></ul><ul><li>Right to Cancel Disclosure </li></ul><ul><li>HOEPA Disclosure </li></ul><ul><li>New Disclosures </li></ul>
    22. 22. TILA Refresher Workshop <ul><li>2009 - Watershed Year for TILA </li></ul><ul><ul><li>HERA / MDIA Changes (effective July 30, 2009) </li></ul></ul><ul><ul><li>HOEPA Changes (effective October 1, 2009) </li></ul></ul><ul><ul><li>Proposed Future Changes </li></ul></ul>
    23. 23. TILA Refresher Workshop <ul><li>HERA – The Housing & Economic Recovery Act </li></ul><ul><ul><li>Effective for all new Applications received on or after July 30, 2009 </li></ul></ul><ul><ul><ul><li>Early Disclosure Requirements on all mortgage loans subject to TILA. </li></ul></ul></ul><ul><ul><ul><li>Restrictions on Fee Receipt and Closing Practices </li></ul></ul></ul><ul><ul><ul><li>Pre Closing Disclosure Requirements </li></ul></ul></ul>
    24. 24. TILA Refresher Workshop <ul><li>Early Disclosure Requirements </li></ul><ul><li>Up til now, a Preliminary Truth in Lending Disclosure was required only on Purchase transactions; not Refinances. </li></ul><ul><li>HERA / MDIA Amendments to TILA now require that Preliminary or EARLY TILA Disclosures be given in all circumstances. </li></ul>
    25. 25. TILA Refresher Workshop <ul><li>Early Disclosure & Receipt of Fees </li></ul><ul><li>Before the Consumer can be required to pay any fee, they must receive a copy of the Preliminary Truth In Lending Disclosure. </li></ul><ul><li>If the Disclosure is delivered by regular mail, it will be presumed to have been received by the consumer on the third business day after mailing. </li></ul><ul><li>Cannot close loan until at least Seven (7) business days after early disclosures have been mailed. </li></ul>
    26. 26. TILA Refresher Workshop <ul><li>New Pre Closing Disclosures </li></ul><ul><li>If the APR has changed beyond TOLERANCE since the Preliminary or the most recent disclosure, a New TILA Disclosure must be delivered to the applicant at least three business days prior to closing. </li></ul><ul><li>APR Tolerance is affected regardless of whether the change is in the form of an Increase or a Decrease. </li></ul>
    27. 27. TILA Refresher Workshop <ul><li>New Pre Closing Disclosures </li></ul><ul><li>In reality, nothing has changed in regard to the accuracy of the APR or Finance Charge, except the timing of its measurement. </li></ul><ul><li>TILA recognizes that the APR is correct, if it is within the 1/8 Tolerance variance (1/4 for Irregular Transactions.) </li></ul><ul><li>TILA also recognizes that the APR is correct if it is a function of the Finance Charge, and the Finance Charge is within tolerance. </li></ul>
    28. 28. TILA Refresher Workshop <ul><li>What’s Different ? </li></ul><ul><ul><li>The difference is in the timing. </li></ul></ul><ul><ul><li>Instead of being accurate only AT CLOSING, we must now provide a new accurate disclosure in advance of closing when loan terms have changed. </li></ul></ul>
    29. 29. TILA Refresher Workshop <ul><li>HOEPA </li></ul><ul><li>Section 32 of Reg Z – added in 1994 to address abusive lending practices. </li></ul><ul><li>Under HOEPA, a mortgage is considered to be a High Cost Loan if it includes terms that exceed certain thresholds established for the Points & Fees and Annual Percentage Rate. </li></ul>
    30. 30. TILA Refresher Workshop <ul><li>New HOEPA Regulations </li></ul><ul><li>Most changes become effective on Oct 1, 2009 </li></ul><ul><li>Amends Old Rules & Creates New Rules </li></ul><ul><li>Designed to Address Subprime Lending Concerns </li></ul>
    31. 31. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>First there was just plain PRICING. </li></ul><ul><li>Then with HOEPA in 1994, we got HIGH COST PRICING. </li></ul><ul><li>Now, HOEPA 2009 brings us HIGHER COST PRICING. </li></ul>
    32. 32. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>Old HOEPA – </li></ul><ul><ul><li>If APR for First Lien loan is greater than 8 points above applicable Treasury Index, then loan would be considered to be a High Cost Loan, and subject to HOEPA restrictions. </li></ul></ul>
    33. 33. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>Old HOEPA – </li></ul><ul><ul><li>Treasury Index = 4.50 % </li></ul></ul><ul><ul><li>APR = 12.51% </li></ul></ul><ul><ul><li>Loan is a High Cost Loan per HOEPA because the APR exceeds the Applicable Index by more than 8 pts. </li></ul></ul>
    34. 34. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>New HOEPA </li></ul><ul><ul><li>If APR for First Lien Loan is greater than 1.50 % above the Average Prime Offer Rate, then it is a Higher Priced Mortgage Loan, and subject to all the restrictions implied. </li></ul></ul>
    35. 35. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>New HOEPA – </li></ul><ul><ul><li>Avg. Prime Offer Rate = 4.50% </li></ul></ul><ul><ul><li>APR = 6.50% </li></ul></ul><ul><ul><li>Loan is a HPML because the APR exceeds the Average Prime Offer Rate by more than 1.50%. </li></ul></ul>
    36. 36. TILA Refresher Workshop <ul><li>The Average Prime Offer Rate </li></ul><ul><li>Published weekly and is effective from Monday thru Sunday. Table found at: </li></ul><ul><li> </li></ul>
    37. 37. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>HPML Restrictions </li></ul><ul><ul><li>Ability to Repay </li></ul></ul><ul><ul><li>Prepayment Penalties </li></ul></ul><ul><ul><li>Escrow Accounts </li></ul></ul>
    38. 38. TILA Refresher Workshop <ul><li>Ability to Repay </li></ul><ul><ul><li>Applies to HPMLs only, but likely to wield a broader brush. </li></ul></ul><ul><ul><li>Verify & Document Repayment Ability. </li></ul></ul><ul><ul><li>Use Highest Scheduled Payment for first seven years of the loan. </li></ul></ul><ul><ul><li>Stated Income loans prohibited </li></ul></ul><ul><ul><li>No Doc loans prohibited. </li></ul></ul>
    39. 39. TILA Refresher Workshop <ul><li>HPML – Higher Priced Mortgage Loan </li></ul><ul><li>Prepayment Penalties </li></ul><ul><ul><li>No Prepayment Penalties if monthly payment amount can change during the first 4 yrs of the loan. </li></ul></ul><ul><ul><li>No Prepayment Penalties when refinanced by same creditor. </li></ul></ul><ul><ul><li>Otherwise, 2 yr maximum Prepay period. </li></ul></ul>
    40. 40. TILA Refresher Workshop <ul><li>Escrow Accounts (for HPMLs) </li></ul><ul><ul><ul><li>Not Effective Until 2010 </li></ul></ul></ul><ul><ul><li>Escrow Accounts required for all new loans that meet HPML threshold. </li></ul></ul><ul><ul><li>Cannot be waived by borrower. </li></ul></ul><ul><ul><li>Borrower can discontinue after one year. </li></ul></ul>
    41. 41. TILA Refresher Workshop <ul><li>Advertising Guidelines </li></ul><ul><li>FTC’s “How to Advertise Consumer Credit & Lease Terms” </li></ul><ul><li>Expanded Advertising Directives in October 2009 Amendments. </li></ul><ul><li> </li></ul>
    42. 42. TILA Refresher Workshop <ul><li>Read the Regs </li></ul><ul><li>TILA (Reg Z) is best understood, ultimately, by taking the time to read the regulation and commentary. </li></ul><ul><li> </li></ul>