Every person who makes loans to consumers that are secured by real property should know about the Truth in Lending Act and the Homeowner Equity Protection Act. Under these federal statutes, the price for non-compliance could be a heavy one. This article addresses some of the highlights of these provisions.
What Is TILA?
The Truth in Lending Act (“TILA”), enacted in 1968, is a series of federal laws that require lenders (as defined under the statute) to make certain disclosures to consumers about the costs of borrowing money. TILA is set forth in 15 U.S.C. §§1601-1693r. Regulation Z (12 C.F.R. §226) consists of a group of regulations promulgated by the Federal Reserve Board to explain and to effectuate TILA, with corresponding commentaries provide further aid to interpret TILA.
TILA broadly protects consumers who, for example, obtain credit cards and make or provide loans secured by their real property. If a lender violates the provisions of TILA or HOEPA, then the borrower may have a right to rescind the loan, demand return of all interest paid, and may recover reasonable attorney’s fees and costs.
The relevant statutory provisions may be found as follows:
What is the Purpose of TILA?
The purpose of TILA is to provide consumers with informed use of credit and borrowing. TILA covers consumer borrowing, including both residential mortgages and credit cards. While TILA covers typical lenders, it also may cover those who may not consider themselves to be lenders. A basic understanding of TILA is essential for all lenders and creditors.
What is “HOEPA”?
The Homeowners Equity Protection Act (“HOEPA”) was created in 1994 as an amendment to TILA through Regulation Z, Section 32, as an attempt to eliminate so-called predatory lending practices in the subprime lending arena, by requiring additional disclosures to be provided by the lender to the borrower. HOEPA applies to loans where the interest rates and points exceed eight percent (8%) in first mortgages and ten percent (10%) on second mortgages of the yield on Treasury securities on the 15th day of the month immediately preceding the month in which the application is received. See, 15 U.S.C. §1602(aa)(1)(A); Reg. Z, 12 C.F.R. §226.32(a)(i).
A subprime loan is one in which a borrower does not meet conventional loan criteria due to low credit scores, high debt-income ratios, and/or undocumented income. Although subprime loans are becoming very rare, knowledge of HOEPA’s provisions is still important.
The additional disclosures under HOEPA do not replace those under TILA. Under HOEPA, all lenders are required to disclose a variety of information, “not less than 3 business days prior to consummation of the transaction.” 15 U.S.C. §1639(b)(1). The lender must disclose the annual percentage rate (“APR”), whether the APR is fixed or variable, the finance charge, the total amount financed, the itemization of the amount financed, the monthly payment amount, whether the monthly payment may increase, the amount of the maximum monthly payment, the total sales price, the security interest, late payment details, required deposit, assumption policy, whether credit insurance or debt cancellation coverage is provided, and a payment schedule. 15 U.S.C. §1639; Reg. Z, 12 C.F.R. §§226.18, 226.31-226.32.
The HOEPA disclosures must also state:
HOEPA also prohibits certain loan provisions, including: 1) prepayment penalties; 2) default interest rate increases; 3) balloon payments (unless the loan is more than 5 years); 4) negative amortization; 5) prepaid interest payments (permitted if up to two months of payments are escrowed); and 6) due on demand clauses (unless there is fraud or misrepresentation by the borrower, the borrower fails to perform the terms of the loan, fails to meet the financial obligations of the terms of the loan, or there is any action/inaction by the borrower adversely affecting the security interest in the home). 15 U.S.C. §1639(b)-(g).
Civil penalties, along with other damages, are available against non-complying lenders. 15 U.S.C. §1640. Subsequent or assignee lenders are also liable for the prior lender’s non-compliance if the defect is apparent on the face of the documents assigned. 15 U.S.C. §1641. HOEPA also applies to home equity loans and reverse mortgages. 15 U.S.C. §§1647; 1648. Finally, HOEPA applies only to loans consummated after September 30, 1995.
In many ways, HOEPA benefits both the lender and the borrower. Aside from the obvious benefits to the borrower, HOEPA also benefits the lender by providing additional mechanisms for a lender to defend claims by borrowers claiming they did not know what they were getting into when signing on the dotted line.
WHO is a “Lender” Under TILA or HOEPA?
A “lender” under TILA is one who has made five (5) or more loans secured by residential primary residence property within one (1) year. Under HOEPA, a “lender” is one who makes two (2) HOEPA loans (i.e., loans with 8% or more on the interest rate or points than the applicable Treasury security yields on a first mortgage and more than 10% on a second mortgage) in any twelve (12) month period secured by a borrower’s primary residence. Finally, if a person is providing a HOEPA loan and utilizes a mortgage broker, then that person is considered a “lender” under TILA for all purposes, even upon the first loan made.
Does TILA or HOEPA Apply to Reverse Mortgages, Refinancings, or Assumptions?
A “reverse mortgage” is one where a mortgage, deed of trust, or security interest is created in the consumer’s principal dwelling where any principal, interest, or shared appreciation or equity is due and payable, other than in the case of default, only after: 1) the consumer dies; 2) the dwelling is transferred; or 3) the consumer ceases to occupy the dwelling as a principal dwelling.
In addition to all of the disclosures required by TILA, a reverse mortgage loan requires the following additional disclosures: 1) a statement that the consumer is not obligated to complete the reverse mortgage transaction merely because the consumer has received the disclosures; 2) A good-faith projection of the total cost of the credit expressed as a table of “total annual loan cost rates”; 3) itemization of loan terms, charges, the age of the youngest borrower and the appraised property value; 4) projected total cost of credit, including total costs, payments, creditor compensation, and limitations on consumer liability; 5) the assumed annual appreciation rate; and 6) the assumed loan period. Reg. Z, 12 C.F.R. §226.33.
A “refinancing” occurs when an existing loan obligation under TILA is satisfied and/or replaced by a new obligation undertaken by the same consumer. In addition to the required TILA disclosures, a refinancing requires new disclosures to the consumer. For example, the lender must provide disclosures of the new finance charge, any unearned portion of the old finance charge not credited to the existing obligation.
The only exceptions are where: 1) there is a renewal of a single payment obligation with no change in the original terms; 2) there is a reduction in the annual percentage rate with a corresponding change in the payment schedule; 3) there is an agreement involving a court proceeding; 4) there is a change in the payment schedule or collateral requirements as a result of the consumer’s default (unless the rate is increased or the new amount financed exceeds the unpaid balance plus earned finance charge); or 5) there is a renewal of optional insurance purchased by the consumer and added to an existing transaction. 12 C.F.R. §226.20(a).
Finally, an “assumption” occurs when a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction. The lender or creditor must make new disclosures to the subsequent consumer where there is an assumption.
If the finance charge originally imposed on the existing obligation was an add-on or discount finance charge, the creditor need only disclose, in addition to the required disclosures under TILA discussed above: 1) the unpaid balance of the obligation assumed; 2) the total charges imposed by the creditor in connection with the assumption; 3) the annual percentage rate originally imposed; and 4) the payment schedule and total of payments based on the remaining obligation. Reg. Z, 12 C.F.R. §226.20(b).
Are New Disclosures Required For Variable Rate Adjustments?
A “variable-rate adjustment” occurs where the interest rate changes, with or without a corresponding adjustment to the payment. A lender or creditor is required to provide new disclosures to the consumer where there is such an adjustment. At least once each year during which an interest rate adjustment is implemented without an accompanying payment change and at least twenty-five (25), but no more than one-hundred twenty (120) calendar days before payment at a new level is due, the lender or credit must disclose: 1) the current and prior interest rates; 2) the index values upon which the current and prior interest rates are based; 3) the extent to which the creditor has foregone any increase in the interest rate; 4) the contractual effects of the adjustment, including the payment due after the adjustment is made, and a statement of the loan balance; and 5) the payment, if different, that would be required to fully amortize the loan at the new interest rate over the remainder of the loan term. Reg. Z, 12 C.F.R. §226.20(c).
How Does One Determine the Trigger Interest Rate to Determine if a LoanFalls under HOEPA?
In order to identify a HOEPA loan, one must compare the APR of the loan with “the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately proceeding the month in which the application is received by the creditor.” If the spread is 8% on first mortgages or 10% on second mortgages, it is a HOEPA loan.
Lenders may use certain web-sites or calculators to figure out the trigger interest rate in order to know whether or not the loan is a HOEPA loan, where additional disclosures and certain loan provisions are prohibited. One such web-site, for example, is: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml. This web-site describes several Treasury Security yields: 1-month, 3-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year. The applicable yield the lender should use depends on these two factors: 1) the application date; and 2) the term of the loan.
First, the lender or creditor must determine the loan application date (the date that the lender receives the application). For example, if the lender receives an application in January, then the yield to use is the one published on December 15. If the 15th of the preceding month falls on a weekend or a holiday, then the lender or creditor must use the yield for the business day immediately preceding the 15th (i.e., if the preceding Friday were a holiday, then the one immediately preceding Thursday is used).
Second, the lender or creditor must determine the term of the loan. The term of the loan will determine the applicable yield (i.e., the yield closest to the term of the loan is the one to use). For example, if a loan has a 30-year term, then the lender or creditor would use the yield security having a 30-year maturity (for a loan with a 10-year term, the yield would be the one having a 10-year maturity). If a loan’s maturity is halfway between security maturities, the lower yield is used (e.g., a “30 due in 15” balloon loan must use a 15-year maturity period, which falls between the 10-year and 20-year yields so the lower 10-year yield is used). Furthermore, if the term of the loan does not fall exactly halfway between two Treasury constant maturity securities, the yield closest to the loan’s maturity is used (e.g., a loan with a 8-year term will use the yield for the 7-year security, but a loan with a 9-year term will use the yield for the 10-year security).
Finally, if the loan’s maturity is more than 30 years, use the yield for the 30-year constant maturity security. If an application were made on or after June 1, 2009, for example, a HOEPA loan would exist at more than 12.09% for a first mortgage and at more than 14.09% for a second mortgage (based upon a 30-year treasury yield on May 15, 2009 of 4.09%). While these loans may be rare in today’s market, an examination of the additional disclosure requirements and prohibitions is essential.
What Does TILA Require to Place on Their Disclosure Forms?
The TILA Disclosure Form typically has four (4) boxes at the top: 1) the disclosed annual percentage rate; 2) the finance charge; 3) the amount financed; and 4) the total payments. The “APR” is the true interest rate that will be paid by the borrower over the term of the loan, inclusive of fees and costs. A web-site to use to calculate the true APR is: www.occ.treas.gov/aprwin.htm.
In general, the disclosures should have an amortization chart showing all payments of principal and interest for year month of the term of the loan (e.g., 30 year loan has 360 months). The TILA form should also have the number of payments to be made over the term of the loan and the regular payment amount. If the interest rate is fixed, then the payment amounts are the same. If variable, the disclosure form must explain how it changes. If there is a “balloon payment”, then it must also be disclosed. The TILA disclosures must include the total amount financed, the itemization of the amount financed, the monthly payment amount, whether the monthly payment may increase, the amount of the maximum monthly payment, the total sales price, the security interest, late payment details, the required deposit, the assumption policy, whether credit insurance or debt cancellation coverage is provided, and a payment schedule.
Finally, the TILA disclosures must contain accurate calculations of the finance charge and annual percentage rates, up to certain tolerances. The tolerance depends upon what right the borrower is seeking to enforce. For example, if the borrower seeks to rescind the loan transaction and that lender has not instituted foreclosure proceedings, then the tolerance is .005 (0.5%). However, if the lender overstates the finance charge, there is no extended right of rescission. If foreclosure has been commenced, the tolerance is $35. In the case of the APR, the tolerance is .00125 (0.125%). TILA states that if the interest rate is off by 0.125% – either on the plus or minus side, then it violates the tolerance provisions.
If There is a Violation of TILA or HOEPA, What Are the Rights of the Borrower and the Penalties to the Lender?
A borrower generally has a three (3) day right of rescission under 15 U.S.C. §1635(a) to rescind a loan secured by the person’s principal and primary residence, unless the loan: 1) is not intended for personal family purposes; 2) is a residential mortgage transaction (a “purchase money loan”); 3) a refinancing; or 4) a consolidation. 15 U.S.C. §§1602(w); 1635(e).
TILA’s right of rescission is triggered if the lender does not provide the required disclosures and/or fails to properly notify the borrower of the three (3) day right of rescission. The borrower must be clearly informed when the right to cancel expires, how to cancel, and where to cancel. The lender must provide two (2) copies to the borrower: one to give to the lender if the borrower wishes to cancel the loan and the other is for the borrower to keep. If the lender miscounts the days for the three (3) day notice, fails to provide two (2) copies, or leaves blanks, then the notice is defective and the borrower has not received the proper notice.
A borrower also has a three (3) year right of rescission under 15 U.S.C. §1635(f). The relevant provision states:
“An obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first…”
This three (3) year statute of limitation may be tolled where there is a foreclosure.
What is the Process for Rescission?
The rescission process involves three (3) steps, which may be taken without the necessity of filing a lawsuit. A borrower typically has three (3) years to rescind, assuming the homeowner does not sell the home.
First, the borrower should notify the lender in writing that he or she wishes to cancel the loan. Reg. Z, 12 C.F.R. §§226.15(a)(2), 226.23(a)(2). The borrower should send the notice to the lender’s place of business. The borrower’s attorney may also send the notice on his or her behalf. Reg. Z, 12 C.F.R. §§226.2(a)(22)-2. The borrower should ensure that the notice is sent to the lender and not just the loan servicer. A good practice is to send the notice to the lender, the servicer, and any subsequent lenders in the chain of title.
Second, the lender has twenty (20) days from receipt of the notice of cancellation to return to the borrower any money or property provided in connection with the loan. 15 U.S.C. §1635(b); Reg. Z, 12 C.F.R. §§226.15(d)(2), 226.23(d)(2). Once the loan is rescinded, the notice, the security interest, and/or the lien in the property are void by operation of law. Ibid. The lender must also take steps to ensure that the security interest is terminated. Once the lender terminates the security interest and returns any money or property to the borrower, the borrower is then required to return all property and money received from the lender. 15 U.S.C. §1635(b); Reg. Z, 12 C.F.R. §§226.15(d)(3), 226.23(d)(3). There is no statutory time period for completion of this process.
Finally, the amounts of the tenders must be calculated. As a result of the rescission, the lender loses the right to charge interest, fees, and costs on the loan, including costs paid to outside third parties (e.g., title insurance). The amounts of the tenders by the borrower and lender are calculated by determining what the borrower received (e.g., cash out funds to pay debt) less the total payments on the loan. Attorney’s fees are available against the lender for violations, as well as other damages. 15 U.S.C. §1640(a).
Is Court Intervention Required?
TILA enables the courts to enforce its procedures and to modify certain statutory provisions. A borrower may have to file a lawsuit for uncooperative lenders. Additionally, for example, most lenders will not agree to remove their security interest prior to the tenders. Thus, a borrower’s attorney may modify the process by requiring that the lender accept the rescission in writing within twenty (20) days and then work with the lender to determine the tender amount. When this is completed, the lender may then remove the security interest. On some occasions, the borrower may sell the property or refinance to fund the tender. On other occasions, the lender will re-write the loan at a new loan amount. In any case, when the lender submits a payoff demand equal to the tender amount into escrow, the process is complete.
What Other Areas Does TILA Cover?
Credit Advertising (15 U.S.C. §§1661-1665b);
Credit Billing (15 U.S.C.§§1666-1666j);
Consumer Leases (15 U.S.C. §§1667-1667f);
Restrictions on Garnishment (15 U.S.C. §§1671-1677);
Credit Repair Organizations (15 U.S.C. §§1679-1679j);
Credit Reporting Agencies(15 U.S.C. §§1681-1681x);
Equal Credit Opportunity (15 U.S.C. §§1691-1691f);
Debt Collection Practices (15 U.S.C. §§1692-1692p); and
Electronic Fund Transfers (15 U.S.C. §§1693-1693r).
This article is not intended to address all the nuances of these statutes and is not intended to constitute legal advice nor should it be interpreted as such.
Jeffrey B. Simenton, Esq.
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