Truth In Lending


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TILA Seminar Presentation

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Truth In Lending

  1. 1. A. The Truth-in-Lending Act (TILA) was created to guarantee the accurate and meaningful disclosure of the costs of consumer credit. TILA is primarily a disclosure statute creating disclosure requirements. The disclosure premise necessitates having standardized rules as to how the cost is calculated. The amounts calculated as a result of these rules are the most important information a consumer receives in any transaction. B. Generally, TILA applies to everyone that offers or extends credit when four conditions are met:  credit is offered or extended to consumers;  the offer or extension of credit is done regularly (Creditor);  the credit is subject to a finance charge or is payable by written agreement in more than four installments; and  the credit is primarily for personal, family or household purposes.
  2. 2. A. Some Credit transactions are exempt  business/ commercial/ agricultural  public utility  securities or commodities accounts  home fuel budget plans, if no finance charge  certain student loans
  3. 3. A. The rules differ depending on whether credit is “open- end” or “closed-end.” B. The required disclosures for closed-end credit are set forth in 15 U.S.C. § 1638; Reg. Z §§ 226.17 and 226.18
  4. 4. A. The failure to disclose specific information correctly triggers TILA statutory damages remedy;  Total Finance Charge [charges payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or condition of the extension of credit; Exclusions; Tolerance]  Amount Financed  Annual Percentage Rate (APR) [Tolerance is 0.125%]  Payment Schedule  Total of Payments  Payment Schedule  Security Interests  Special Formatting Rules (‘clear & conspicuous,’ reflect legal obligations, and in a form you can keep  Disclosures must be provided timely, in a form the consumer may keep before consummation  Special Disclosures for Variable-Rate Closed-end loans
  5. 5. A. The rules for rescission appear in 15 U.S.C. § 1635; Reg. Z § 226.15 (open-end), § 226.23 (closed-end) B. Application of Rescission  transaction is subject to TILA  a non-purchase money security interest in the consumer’s principal dwelling  applies to non-purchase money security interest, whether 1st or 2nd mortgage, home equity loans, bridge loans, home improvement contracts, and liens arising by operation of law
  6. 6. A. The Legal Implications of TILA Rescission  the impact of a successful TILA rescission include the following: o Voids the security interest o A complete defense to foreclosure o Voids all finance charges and closing costs o Allows the Court to award statutory damages of $2000 to $4000 in a case where the creditor fails to respond to rescission notice B. When Rescission Can Be Exercised  the homeowner has three business days to rescind from the latest of: o Consummation of the transaction o Delivery of proper notice of rescission rights; or o Delivery of all material disclosures correctly made  The three days begin to run when all material disclosures and proper notice of right to rescind is received  As a result, the continuing right to rescind may be extended for up to three-years (3) from consummation  The right of rescission may be terminated sooner upon transfer of the consumer’s interest in the property (including involuntary), or sale
  7. 7. A. How Rescission Works: Theory and Practice  Sending a valid cancellation notice triggers a sequential three-step process  First, the security interest in the property is automatically voided and the consumers obligation to pay finance charges (even if accrued) and other charges is automatically eliminated  Second, the creditor or assignee has twenty-days (20) to refund or credit the account all payments (including any money or property given to a third party) and to take steps to void the security interest  Third, when the creditor performs its “step 2” obligation, the consumer tenders back the balance of money or property or the reasonable value of the property  Courts have equitable authority to modify steps 2 and 3
  8. 8. h Which TILA Violations Give Rise to Extended Rescission Rights The violations that trigger this special remedy include:  Failure to give the rescission notices at all or to give two copies to each co-owner  The rescission notices provided are defective of certain information  A violation of a defined “material” disclosure  Amount Financed  Finance Charge (tolerance accuracy)  APR (tolerance accuracy)  Payment Schedule  Total of Payments
  9. 9. A. The degree of error may fall within the allowable tolerance and may not result in any liability, e.g., the APR tolerance is 1/8% or 0.125 above or below the disclosed APR; the Finance Charge tolerance is $100.00 for an understated disclosed Finance Charge damage claim, and no remedy for an overstated Finance Charge. B. However, for an affirmative action Rescission claim, the Finance Charge tolerance is ½ of 1% of the total credit extended. If a foreclosure is underway, the Finance Charge tolerance for Rescission is $35.00 for an understated Finance Charge disclosure. Rescission is a complete defense to foreclosure. C. Once the Consumer rescinds, the security interest arising by operation of law becomes void automatically. The promissory note is also voided since it is part of the same “transaction,” see i.e., 15 U.S.C. § 1635(b) and Reg. Z § 226.23(d)(1).]
  10. 10. A. The application of a TILA Audit analysis must be a forensic nature and is comprised of four (4) levels. [Forensic: used in or suitable to courts of law or public debate]  Level 1: A thorough mathematical check of the TILA Disclosure Statement or disclosed figures is performed taking the Creditor’s disclosed amounts at face value, properly allocated and legitimate  Level 2: This step is an independent assessment to determine whether the Creditor properly and accurately allocated the components this Debt between the Amount Financed and the Finance Charge figures identified on the TILA Disclosure Statement. The assessment uses the disclosed values on the face of all documents retained at the closing to evaluate how the Creditor arrived at its figures on the TILA Disclosure Statement.
  11. 11.  Level 3: This level of analysis identifies “mystery charges,” requires a factual investigation, a reasonable look behind the papers, a determination of charges that may be specifically excluded from the definition of Finance Charges, and whether charges may be excluded if bona fide and reasonable. Every effort is made to scrutinize charges based upon the value of goods, facilities and settlement services provided, and depend upon the market rate of the service in your geographic region.  A Level 3 analysis also examines whether the Creditor put a charge in the Amount Financed that categorically should be treated as a Finance Charge. If any discrepancy arises, it must be explored to be sure the charge is legitimate and is not a hidden Finance Charge as that term is defined under 15 U.S.C. § 1605(a) and Reg. Z § 226.4(a).  Level 4: This level is a survey of the Rescission Notices and material disclosures. The TILA Disclosure Statement and rescission notices are compared to the Federal Reserve Board model forms for format, content, and legality as mandated under Reg. Z, clear and conspicuous.
  12. 12. Dale Hollis 3610 Alpine Aster San Antonio, Texas 78259 210 – 447 – 7765 Email: