Truth in Lending Act Interagency Examination Procedures, Schemes and Mind Maps of Finance

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Interagency Consumer Laws and Regulations TILA October 2021 TILA 1 Table of Contents TRUTH IN LENDING ACT 10 FORMAT OF REGULATION Z 16 TRUTH IN LENDING ACT NARRATIVE 18 SUBPART A – GENERAL 18 Purpose of the TILA and Regulation Z 18 Summary of Coverage Considerations – 12 CFR 1026.1 and 1026.2 18 12 CFR 1026.2(a)(27)(i) 19 Exempt Transactions – 12 CFR 1026.3 19 Coverage Considerations under Regulation Z 22 Determination of Finance Charge and Annual Percentage Rate (APR) 23 Finance Charge (Open-End and Closed-End Credit) – 12 CFR 1026.4 23 Accuracy Tolerances (Closed-End Credit) – 12 CFR 1026.18(d) and 1026.23(g) and (h) 23 Calculating the Finance Charge (Closed-End Credit) 25 Prepaid Finance Charges – 12 CFR 1026.18(b)(3) 26 Precomputed Finance Charges 26 Instructions for the Finance Charge Chart 28 Annual Percentage Rate Definition – 12 CFR 1026.22 (Closed-End Credit) 28 SUBPART B – OPEN-END CREDIT 31 Time of Disclosures (Periodic Statements) – 12 CFR 1026.5(b) 31 Subsequent Disclosures (Open-End Credit) – 12 CFR 1026.9 32 Finance Charge (Open-End Credit) – 12 CFR 1026.6(a)(1) & 1026.6(b)(3) 33 Determining the Balance and Computing the Finance Charge 33 Finance Charge Resulting from Two or More Periodic Rates 35 Annual Percentage Rate (Open-End Credit) 35 Determination of APR – 12 CFR 1026.14 35 Change in Terms Notices for Home-Equity Plans Subject to 12 CFR 1026.40 – 12 CFR 1026.9(c) 37 Payments – 12 CFR 1026.10 (Open-End Credit) 37 Timely Settlement of Estates – 12 CFR 1026.11(c) 37 Interagency Consumer Laws and Regulations TILA October 2021 TILA 2 Billing Error Resolution – 12 CFR 1026.13 (Open-End Credit) 38 Minimum Payments – 12 CFR 1026.7(b)(12) 39 Advertising for Open-End Plans – 12 CFR 1026.16 39 SUBPART C – CLOSED-END CREDIT 41 I. Disclosures, Generally 41 A. Timing 41 B. Basis for Disclosures 42 II. Finance Charge, Amount Financed and APRs 43 A. Finance Charge – 12 CFR 1026.18(d), 1026.38(o)(2) 43 B. Amount Financed – 12 CFR 1026.18(b), 1026.18(c), 1026.38(o)(3) 43 C. Payment Schedule – 12 CFR 1026.18(g) 44 D. Annual Percentage Rate (Closed-End Credit) – 12 CFR 1026.22 45 E. Required Deposit – 12 CFR 1026.18(r) 48 III. Transactions with TILA-RESPA Integrated Disclosures – Generally 50 A. Early disclosures (Loan Estimate) – 12 CFR 1026.19(e) 51 B. Final Disclosures (Closing Disclosure) – 12 CFR 1026.19(f) 60 C. Special Information Booklet – 12 CFR 1026.19(g) 64 IV. Construction Loan Disclosures 66 A. Disclosure Methods for Construction Loans – 12 CFR 1026.17(c)(6) 66 B. Delivery of Disclosures – 12 CFR 1026.19(e)(1)(iii) 67 C. Completion of Loan Estimate and Closing Disclosure 67 V. Loans Receiving Non-TILA-RESPA Integrated Disclosures, Generally 68 VI. Variable and Adjustable Rate Transactions – 12 CFR 1026.18(f), 1026.20(c) and (d) 68 A. Closed-end transactions generally 68 B. Adjustable Rate Mortgage Disclosures 69 VII. Refinancings – 12 CFR 1026.20(a) 79 VIII. Escrow Cancellation Disclosures – 12 CFR 1026.20(e) 80 IX. Successors in Interest – 12 CFR 1026.20(f) 82 X. Treatment of Credit Balances – 12 CFR 1026.21 82 XI. Closed-End Advertising – 12 CFR 1026.24 82 SUBPART D – MISCELLANEOUS 84 Record Retention – 12 CFR 1026.25 84 Interagency Consumer Laws and Regulations TILA October 2021 TILA 5 Evaluation of the Consumer’s Ability to Pay – 12 CFR 1026.51 159 Specific Requirements for Underage Consumers – 12 CFR 1026.51(b)(1) 160 Limitations of Fees – 12 CFR 1026.52 161 Limitations on Fees During First Year After Account Opening – 12 CFR 1026.52(a) 161 Limitations on Penalty Fees – 12 CFR 1026.52(b) 161 Payment Allocation – 12 CFR 1026.53 162 Double-Cycle Billing and Partial Grace Period – 12 CFR 1026.54 162 Restrictions on Applying Increased Rates to Existing Balances and Increasing Certain Fees and Charges – 12 CFR 1026.55 163 Fees for Transactions that Exceed the Credit Limit – 12 CFR 1026.56 164 Special Rules for Marketing to Students – 12 CFR 1026.57 165 Online Disclosure of Credit Card Agreements – 12 CFR 1026.58 165 Reevaluation of Rate Increases – 12 CFR 1026.59 166 Hybrid Prepaid-Credit Cards – 12 CFR 1026.61 166 LIABILITY AND DEFENSES 167 Civil Liability – TILA Sections 129B, 129C, 130, and 131 167 Criminal Liability – TILA Section 112 169 Administrative Actions – TILA Section 108 169 Specific Defenses – TILA Section 108 169 Defense Against Civil, Criminal, and Administrative Actions 169 Additional Defenses Against Civil Actions 170 Statute of Limitations – TILA Sections 108, 129, 129B, 129C, 129D, 129E, 129F, 129G, 129H, and 130 171 Rescission Rights (Open-End and Closed-End Credit) – 12 CFR 1026.15 and 1026.23 172 REFERENCES 174 Laws 174 Regulations 174 Guides 174 Interagency Consumer Laws and Regulations TILA October 2021 TILA 6 TRUTH IN LENDING ACT EXAMINATION PROCEDURES 175 Examination Objectives 175 General Procedures 175 Disclosure Forms 176 Closed-End Credit Disclosure Forms Review Procedures 177 Closed-End Credit Disclosure Forms – For Transactions Under 12 CFR 1026.19(e) and (f) 178 Loan Estimate – 12 CFR 1026.37(a) (Page 1 of the Loan Estimate) 178 Loan Terms – 12 CFR 1026.37(b) (Page 1 of the Loan Estimate) 179 Projected Payments – 12 CFR 1026.37(c) (Page 1 of the Loan Estimate) 180 Costs at Closing – 12 CFR 1026.37(d) (Page 1 of the Loan Estimate) 184 Closing Cost Details: Loan Costs – 12 CFR 1026.37(f) (Page 2 of the Loan Estimate) 185 Closing Cost Details: Other Costs – 12 CFR 1026.37(g) (Page 2 of the Loan Estimate) 185 Closing Cost Details: Calculating Cash to Close – 12 CFR 1026.37(h) (Page 2 of the Loan Estimate) 187 Closing Cost Details: Optional Alternative Calculating Cash to Close Table for Transactions without a Seller or for Simultaneous Subordinate Financing – 12 CFR 1026.37(h)(2) (Page 2 of the Loan Estimate) 190 Closing Cost Details: Adjustable Payment (AP) Table – 12 CFR 1026.37(i) (Page 2 of the Loan Estimate) 191 Closing Cost Details: Adjustable Interest Rate (AIR) Table – 12 CFR 1026.37(j) (Page 2 of the Loan Estimate) 192 Additional Information About This Loan: Contact information – 12 CFR 1026.37(k) (Page 3 of the Loan Estimate) 193 Additional Information About This Loan: Comparisons – 12 CFR 1026.37(l) (Page 3 of the Loan Estimate) 194 Additional Information About This Loan: Other Considerations – 12 CFR 1026.37(m) (Page 3 of the Loan Estimate) 194 Additional Information About This Loan: Confirm Receipt – 12 CFR 1026.37(n) (Page 3 of the Loan Estimate) 196 Form of Disclosures – 12 CFR 1026.37(o) 196 Closing Disclosure – 12 CFR 1026.38(a) 198 Closing Information – 12 CFR 1026.38(a)(3) (Page 1 of the Closing Disclosure) 198 Transaction Information – 12 CFR 1026.38(a)(4) (Page 1 of the Closing Disclosure) 199 Loan Information – 12 CFR 1026.38(a)(5) (Page 1 of the Closing Disclosure) 199 Loan Terms – 12 CFR 1026.38(b) (Page 1 of the Closing Disclosure) 200 Projected Payments – 12 CFR 1026.38(c) (Page 1 of the Closing Disclosure) 200 Costs at Closing – 12 CFR 1026.38(d) (Page 1 of the Closing Disclosure) 200 Closing Cost Details: Loan Costs – 12 CFR 1026.38(f) (Page 2 of the Closing Disclosure) 201 Closing Cost Details: Other Costs – 12 CFR 1026.38(g) (Page 2 of the Closing Disclosure) 201 Closing Cost Details: Total Closing Costs – 12 CFR 1026.38(h) (Page 2 of the Closing Disclosure) 202 Calculating Cash to Close – 12 CFR 1026.38(i) (Page 3 of the Closing Disclosure) 203 Alternative Cash to Close Table for Transactions Without a Seller or for Simultaneous Subordinate Financing – 12 CFR 1026.38(e) (Page 3 of the Closing Disclosure) 209 Summaries of Transactions: Borrower’s Transaction – 12 CFR 1026.38(j) (Page 3 of the Closing Disclosure) 212 Summaries of Transactions: Seller’s Transaction – 12 CFR 1026.38(k) (Page 3 of the Closing Disclosure) 215 Payoffs and Payments Table for Transactions Without a Seller or Simultaneous Subordinate Financing Transaction – 12 CFR 1026.38(t)(5)(vii)(B) (Page 3 of the Closing Disclosure) 218 Additional Information About This Loan: Loan Disclosures – 12 CFR 1026.38(l) (Page 4 of the Closing Disclosure) 220 Additional Information About This Loan: Adjustable Payment (AP) Table – 12 CFR 1026.38(m) (Page 4 of the Closing Disclosure) 223 Interagency Consumer Laws and Regulations TILA October 2021 TILA 7 Additional Information About This Loan: Adjustable Interest Rate (AIR) Table – 12 CFR 1026.38(n) (Page 4 of the Closing Disclosure) 223 Loan Calculations – 12 CFR 1026.38(o) (Page 5 of the Closing Disclosure) 224 Other Disclosures – 12 CFR 1026.38(p) (Page 5 of the Closing Disclosure) 224 Questions Notice – 12 CFR 1026.38(q) (Page 5 of the Closing Disclosure) 226 Contact Information – 12 CFR 1026.38(r) (Page 5 of the Closing Disclosure) 226 Confirm Receipt – 12 CFR 1026.38(s) (Page 5 of the Closing Disclosure) 226 Form of Disclosures – 12 CFR 1026.38(t) 226 Construction or Construction-Permanent Loan Disclosures (12 CFR 1026.17(c)(2), (c)(6); .19(e)(1); .37-.38; and Appendix D to Part 1026) 228 Content of Forms Not Subject to 12 CFR 1026.19(e)-(f) – Forms Review and Timing Requirements 235 Content of Forms Not Subject to 12 CFR 1026.19(e)-(f) – General (12 CFR 1026.18) 235 Disclosure of Post-Consummation Events – Rate Adjustments – 12 CFR 1026.20(c)-(d) 241 Escrow Cancellation Notice – 12 CFR 1026.20(e)(1) 244 Successors in Interest – 12 CFR 1026.20(f) 245 High-Cost Mortgages – 12 CFR 1026.32 246 Notice of Transfer – 12 CFR 1026.39 246 Treatment of Credit Balances – 12 CFR 1026.21 248 Open-End Credit Forms Review Procedures 254 Credit and Charge Card Application and Solicitation Disclosures – 12 CFR 1026.60 255 Requirements for Home-Equity Plans – 12 CFR 1026.40 259 Account Opening Initial Disclosures – 12 CFR 1026.6 261 Periodic Statement Disclosures – 12 CFR 1026.7 269 Subsequent Disclosure Requirements – 12 CFR 1026.9 276 Disclosure Requirements for Over-the-Limit Transactions – 12 CFR 1026.56 288 Reverse Mortgage Forms Review Procedures (Both Open- and Closed-End) 289 Timing Requirements 289 Mortgage Loans Secured by Real Property or a Cooperative Unit—Early Disclosures (Loan Estimates) – 12 CFR 1026.19(e) 294 Mortgage Loans Secured by Real Property or a Cooperative Unit—Final Disclosures (Closing Disclosures) – 12 CFR 1026.19(f) 299 Annual Report to the Consumer Financial Protection Bureau – 12 CFR 1026.57(d) 304 The Submission of Agreements to the Consumer Financial Protection Bureau – 12 CFR 1026.58(c) 305 The Posting of Agreements Offered to the Public – 12 CFR 1026.58(d) 308 The Posting of Agreements for “Open” Accounts – 12 CFR 1026.58(e) 309 Advertising (Open- and Closed-End) 310 Transactional Testing 312 Closed-End Credit Transactional Testing Procedures 312 Minimum Standards for Transactions Secured by a Dwelling – 12 CFR 1026.43 314 Refinancing Non-Standard Mortgages – 12 CFR 1026.43(d) 315 Interagency Consumer Laws and Regulations TILA October 2021 TILA 10 Truth in Lending Act1 The Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., was enacted on May 29, 1968, as title I of the Consumer Credit Protection Act (Pub. L. 90-321). TILA, implemented by Regulation Z (12 CFR 1026), became effective July 1, 1969. TILA was first amended in 1970 to prohibit unsolicited credit cards. Additional major amendments to TILA and Regulation Z were made by the Fair Credit Billing Act of 1974, the Consumer Leasing Act of 1976, the Truth in Lending Simplification and Reform Act of 1980, the Fair Credit and Charge Card Disclosure Act of 1988, and the Home Equity Loan Consumer Protection Act of 1988. Regulation Z also was amended to implement Section 1204 of the Competitive Equality Banking Act of 1987, and in 1988, to include adjustable-rate mortgage loan disclosure requirements. All consumer leasing provisions were deleted from Regulation Z in 1981 and transferred to Regulation M (12 CFR 1013). The Home Ownership and Equity Protection Act of 1994 (HOEPA) amended TILA. The law imposed new disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees above a certain percentage or amount. The law also included new disclosure requirements to assist consumers in comparing the costs and other material considerations involved in a reverse mortgage transaction and authorized the Board of Governors of the Federal Reserve System (Board) to prohibit specific acts and practices in connection with mortgage transactions. The TILA amendments of 1995 dealt primarily with tolerances for real estate secured credit. Regulation Z was amended on September 14, 1996, to incorporate changes to TILA. Specifically, the revisions limit lenders’ liability for disclosure errors in real estate secured loans consummated after September 30, 1995. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 further amended TILA. The amendments were made to simplify and improve disclosures related to credit transactions. The Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et seq., was enacted in 2000 and did not require implementing regulations. On November 9, 2007, amendments to Regulation Z and the official commentary were issued to simplify the regulation and provide guidance on the electronic delivery of disclosures consistent with the E-Sign Act. In July 2008, Regulation Z was amended to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices. Specifically, the change applied protections to a newly defined category of “higher-priced mortgage loans” (HPML) that includes 1 These procedures reflect changes to TILA and Regulation Z through May 2018, including applicable provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act, P.L 115-174 (May 24, 2018) that do not require rulemaking to be effective. Interagency Consumer Laws and Regulations TILA October 2021 TILA 11 virtually all closed-end subprime loans secured by a consumer’s principal dwelling. The revisions also applied new protections to mortgage loans secured by a dwelling, regardless of loan price, and required the delivery of early disclosures for more types of transactions. The revisions also banned several advertising practices deemed deceptive or misleading. The Mortgage Disclosure Improvement Act of 2008 (MDIA) broadened and added to the requirements of the Board’s July 2008 final rule by requiring early Truth in Lending disclosures for more types of transactions and by adding a waiting period between the time when disclosures are given and consummation of the transaction. In 2009, Regulation Z was amended to address those provisions. The MDIA also requires disclosure of payment examples if the loan’s interest rate or payments can change, as well as disclosure of a statement that there is no guarantee the consumer will be able to refinance in the future. In 2010, Regulation Z was amended to address these provisions, which became effective on January 30, 2011. In December 2008, the Board adopted two final rules pertaining to open-end (not home-secured) credit. The first rule involved Regulation Z revisions and made comprehensive changes applicable to several disclosures required for: applications and solicitations, new accounts, periodic statements, change in terms notifications, and advertisements. The second was a rule published under the Federal Trade Commission (FTC) Act and was issued jointly with the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA)), which sought to protect consumers from unfair acts or practices with respect to consumer credit card accounts. Before these rules became effective, however, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) amended TILA and established a number of new requirements for open-end consumer credit plans. Several provisions of the Credit CARD Act are similar to provisions in the Board’s December 2008 TILA revisions and the joint FTC Act rule, but other portions of the Credit CARD Act address practices or mandate disclosures that were not addressed in these rules. In light of the Credit CARD Act, the Board, the NCUA, and the OTS withdrew the substantive requirements of the joint FTC Act rule. On July 1, 2010, compliance with the provisions of the Board’s rule that were not impacted by the Credit CARD Act became effective. The Credit CARD Act provisions became effective in three stages. The provisions effective first (August 20, 2009) required creditors to increase the amount of notice consumers receive before the rate on a credit card account is increased or a significant change is made to the account’s terms. These amendments also allowed consumers to reject such increases and changes by informing the creditor before the increase or change goes into effect. The provisions effective next (February 22, 2010) involved rules regarding interest rate increases, over-the-limit transactions, and student cards. Finally, the provisions effective last (August 22, 2010) addressed the reasonableness and proportionality of penalty fees and charges and reevaluation of rate increases. In 2009, Regulation Z was amended following the passage of the Higher Education Opportunity Act (HEOA) by adding disclosure and timing requirements that apply to lenders making private education loans. In 2009, the Helping Families Save Their Homes Act amended TILA to establish a new requirement for notifying consumers of the sale or transfer of their mortgage loans. The Interagency Consumer Laws and Regulations TILA October 2021 TILA 12 purchaser or assignee that acquires the loan must provide the required disclosures no later than 30 days after the date on which it acquired the loan. In 2010, the Board further amended Regulation Z to prohibit payment to a loan originator that is based on the terms or conditions of the loan, other than the amount of credit extended. The amendment applies to mortgage brokers and the companies that employ them, as well as to mortgage loan officers employed by depository institutions and other lenders. In addition, the amendment prohibits a loan originator from directing or “steering” a consumer to a loan that is not in the consumer’s interest to increase the loan originator’s compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended TILA to include several provisions that protect the integrity of the appraisal process when a consumer’s home is securing the loan. The rule also requires that appraisers receive customary and reasonable payments for their services. The appraiser and loan originator compensation requirements had a mandatory compliance date of April 6, 2011. The Dodd-Frank Act generally granted rulemaking authority under TILA to the Consumer Financial Protection Bureau (CFPB or Bureau). Title XIV of the Dodd-Frank Act included a number of amendments to TILA, and in 2013, the CFPB issued rules to implement them. Prohibitions on mandatory arbitration and waivers of consumer rights, as well as requirements that lengthen the time creditors must maintain an escrow account for higher-priced mortgage loans, were generally effective June 1, 2013. Most of the remaining amendments to Regulation Z were effective in January 2014.2 These amendments include ability-to-repay requirements for mortgage loans, appraisal requirements for higher-priced mortgage loans, a revised and expanded test for high-cost mortgages, as well as additional restrictions on those loans, expanded requirements for servicers of mortgage loans, refined loan originator compensation rules and loan origination qualification standards, and a prohibition on financing credit insurance for mortgage loans. The amendments also established new record retention requirements for certain provisions of TILA. On October 22, 2014, the CFPB issued a final rule providing an alternative small servicer definition for nonprofit entities and amended the ability-to-repay exemption for nonprofit entities. The final rule also provided a temporary cure mechanism for the points and fees limit that applies to qualified mortgages, with a sunset date of January 10, 2021. The final rule was effective on November 3, 2014, except for one provision that became effective on October 3, 2015. On October 2, 2015, the CFPB revised the definitions of small creditor and rural and underserved areas, which affect the availability of some special provisions and exemptions to Regulation Z’s Ability-to-Repay, high-cost mortgage, and HPML escrow requirements. The final rule was effective January 1, 2016.3 In March 2016, the CFPB issued an interim final rule exercising the expanded authority granted to the Bureau by the Helping Expand Lending Practices 2 The amendment to 12 CFR 1026.35(e) was effective July 24, 2013; the amendments to 12 CFR 1026.35(b)(2)(iii), 1026.36(a), (b), and (j), and commentary to 12 CFR 1026.25(c)(2), 1026.35, and 1026.36(a), (b), (d), and (f) in Supp. I to Part 1026, were effective January 1, 2014. 3 80 FR 59944 (October 2, 2015). Interagency Consumer Laws and Regulations TILA October 2021 TILA 15 unions with under $10 billion in assets; (2) modification of the waiting period requirements for high-cost mortgage loan consummation under certain conditions; (3) clarification of “customary and reasonable” as they pertain to fee appraisers who voluntarily donate appraisal services to certain charitable organizations; and (4) student loan protections in the event of bankruptcy or death of the student or non-student obligor. The EGRRCPA also amended TILA to modify an exemption for manufactured or modular home retailers and their employees from loan originator compensation requirements when specific conditions are met, and amended the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) regarding employment transition of certain loan originators. These provisions were generally effective on May 24, 2018, except for the student loan protections, which became effective on November 24, 2018, and the SAFE Act changes, which became effective on November 24, 2019. On November 16, 2019, the Bureau issued an interpretive rule on the SAFE Act changes, with an effective date of November 24, 2019.12 In 2020 and 2021, the Bureau issued four final rules amending the qualified mortgage (also referred to as QM) provisions of Regulation Z. The first final rule extended the January 10, 2021 sunset date of a temporary qualified mortgage definition for certain loans eligible for purchase or guarantee by the Government Sponsored Enterprises (GSEs) until the mandatory compliance date of final amendments to the general qualified mortgage definition.13 The second final rule (the General QM Final Rule) amended the general qualified mortgage definition, primarily by replacing its 43 percent debt-to-income ratio limit with a limit based on the loan’s pricing.14 The third final rule (the Seasoned QM Final Rule) created a new category of qualified mortgages— known as “seasoned qualified mortgages”—for first-lien, fixed-rate covered transactions that have met certain performance requirements over a seasoning period of at least 36 months, are held in portfolio by the originating creditor or first purchaser until the end of the seasoning period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.15 The fourth final rule extended the mandatory compliance date of the General QM Final Rule until October 1, 2022.16 As a result of the fourth final rule, the temporary qualified mortgage definition, commonly known as the GSE Patch, will expire on October 1, 2022 or the date the applicable GSE exits conservatorship, whichever comes first.17 12 Truth in Lending (Regulation Z); Screening and Training Requirements for Mortgage Loan Originators with Temporary Authority, 84 Fed. Reg. 63791 (November 19, 2019). 13 85 Fed. Reg. 67938 (October 26, 2020). 14 85 Fed. Reg. 86308 (December 29, 2020). 15 85 Fed. Reg. 86402 (December 29, 2020). 16 86 Fed. Reg. 22844 (April 30, 2021). 17 The practical availability of the GSE Patch may be affected by policies or agreements created by parties other than the Bureau, such as the Preferred Stock Purchase Agreements (PSPAs), which include restrictions on GSE purchases that rely on the GSE Patch definition after July 1, 2021. Interagency Consumer Laws and Regulations TILA October 2021 TILA 16 Format of Regulation Z The rules creditors must follow differ depending on whether the creditor is offering open-end credit, such as credit cards or home-equity lines, or closed-end credit, such as car loans or mortgages. Subpart A (12 CFR 1026.1 through 1026.4) of the regulation provides general information that applies to open-end and closed-end credit transactions. It sets forth definitions (12 CFR 1026.2) and stipulates which transactions are covered and which are exempt from the regulation (12 CFR 1026.3). It also contains the rules for determining which fees are finance charges (12 CFR 1026.4). Subpart B (12 CFR 1026.5 through 1026.16) relates to open-end credit. It contains rules on account-opening disclosures (12 CFR 1026.6) and periodic statements (12 CFR 1026.7-8). It also describes special rules that apply to credit card transactions, treatment of payments (12 CFR 1026.10) and credit balances (12 CFR 1026.11), procedures for resolving credit billing errors (12 CFR 1026.13), annual percentage rate (APR) calculations (12 CFR 1026.14), rescission rights (12 CFR 1026.15), and advertising (12 CFR 1026.16). Subpart C (12 CFR 1026.17 through 1026.24) relates to closed-end credit. It contains rules on disclosures (12 CFR 1026.17-20), treatment of credit balances (12 CFR 1026.21), annual percentage rate calculations (12 CFR 1026.22), rescission right (12 CFR 1026.23), and advertising (12 CFR 1026.24). Subpart D (12 CFR 1026.25 through 1026.30) contains rules on record retention (12 CFR 1026.25), oral disclosures (12 CFR 1026.26), disclosures in languages other than English (12 CFR 1026.27), effect on state laws (12 CFR 1026.28), state exemptions (12 CFR 1026.29), and rate limitations (12 CFR 1026.30). Subpart E (12 CFR 1026.31 through 1026.45) contains special rules for mortgage transactions. The rules require certain disclosures and provide limitations for closed-end credit transactions and open-end credit plans that have rates or fees above specified amounts or certain prepayment penalties (12 CFR 1026.32). Special disclosures are also required, including the total annual loan cost rate, for reverse mortgage transactions (12 CFR 1026.33). The rules also prohibit specific acts and practices in connection with high-cost mortgages, as defined in 12 CFR 1026.32(a), (12 CFR 1026.34); in connection with closed-end higher-priced mortgage loans, as defined in 12 CFR 1026.35(a), (12 CFR 1026.35); and in connection with an extension of credit secured by a dwelling (12 CFR 1026.36). This subpart also sets forth disclosure requirements, effective October 3, 2015, for certain closed-end transactions secured by real property, or a cooperative unit, as required by 12 CFR 1026.19(e) and (f), 12 CFR 1026.37-38, disclosures for mortgage transfers (12 CFR 1026.39), and disclosure requirements for periodic statements for residential mortgage loans (12 CFR 1026.41). In addition, it contains minimum standards for transactions secured by a dwelling, including provisions relating to ability to repay and qualified mortgages (12 CFR 1026.43). This subpart includes the small servicer exemption found in 12 CFR 1026.41(e)(4). Interagency Consumer Laws and Regulations TILA October 2021 TILA 17 Subpart F (12 CFR 1026.46 through 1026.48) relates to private education loans. It contains rules on disclosures (12 CFR 1026.46), limitations on changes in terms after approval (12 CFR 1026.48), the right to cancel the loan (12 CFR 1026.47), and limitations on co-branding in the marketing of private education loans (12 CFR 1026.48). Subpart G (12 CFR 1026.51 through 1026.61) relates to credit card accounts, including covered separate credit features accessible by hybrid prepaid-credit cards, under an open-end (not home- secured) consumer credit plan (except for 12 CFR 1026.57(c), which applies to all open-end credit plans). This subpart contains rules regarding disclosures provided on or with credit and charge card applications and solicitations (12 CFR 1026.60). It also contains rules regarding hybrid prepaid- credit cards (12 CFR 1026.61). Subpart G contains rules on evaluation of a consumer’s ability to make the required payments under the terms of an account (12 CFR 1026.51), limits the fees that a consumer can be required to pay (12 CFR 1026.52), and contains rules on allocation of payments in excess of the minimum payment (12 CFR 1026.53). It also sets forth certain limitations on the imposition of finance charges as the result of a loss of a grace period (12 CFR 1026.54), and on increases in annual percentage rates, fees, and charges for credit card accounts (12 CFR 1026.55), including the reevaluation of rate increases (12 CFR 1026.59). This subpart prohibits the assessment of fees or charges for over-the-limit transactions unless the consumer affirmatively consents to the creditor’s payment of over-the-limit transactions (12 CFR 1026.56). This subpart also sets forth rules for reporting and marketing of college student open-end credit (12 CFR 1026.57). Finally, it sets forth requirements for the Internet posting of credit card accounts under an open-end (not home-secured) consumer credit plan (12 CFR 1026.58). Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of official interpretations, special rules for certain kinds of credit plans, model disclosure forms, standards for determining ability to pay, and the rules for computing annual percentage rates in closed-end credit transactions and total-annual-loan-cost rates for reverse mortgage transactions. Official interpretations of the regulation are published in a commentary. Good faith compliance with the commentary protects creditors from civil liability under TILA. In addition, the commentary includes more detailed information on disclosures or other actions required of creditors. It is virtually impossible to comply with Regulation Z without reference to and reliance on the commentary. NOTE: The following narrative does not discuss all the sections of Regulation Z but rather highlights only certain sections of the regulation and TILA. Interagency Consumer Laws and Regulations TILA October 2021 TILA 20 • Credit in excess of an annually adjusted threshold not secured by real property or by personal property used or expected to be used as the principal dwelling of the consumer;19 • Public utility credit; • Credit extended by a broker-dealer registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission, involving securities or commodities accounts; • Home fuel budget plans not subject to a finance charge; and • Certain student loan programs. However, when a credit card is involved, generally exempt credit (e.g., business purpose credit) is subject to the requirements that govern the issuance of credit cards and liability for their unauthorized use. Credit cards must not be issued on an unsolicited basis and, if a credit card is lost or stolen, the cardholder must not be held liable for more than $50 for the unauthorized use of the card (Comment 3-1). When determining whether credit is for consumer purposes, the creditor must evaluate all of the following: • Any statement obtained from the consumer describing the purpose of the proceeds. o For example, a statement that the proceeds will be used for a vacation trip would indicate a consumer purpose. o If the loan has a mixed purpose (e.g., proceeds will be used to buy a car that will be used for personal and business purposes), the lender must look to the primary purpose of the loan to decide whether disclosures are necessary. A statement of purpose from the consumer will help the lender make that decision. o A checked box indicating that the loan is for a business purpose, absent any documentation showing the intended use of the proceeds could be insufficient evidence that the loan did not have a consumer purpose. • The consumer’s primary occupation and how it relates to the use of the proceeds. The higher the correlation between the consumer’s occupation and the property purchased from the loan proceeds, the greater the likelihood that the loan has a business purpose. For example, proceeds used to purchase dental supplies for a dentist would indicate a business purpose. • Personal management of the assets purchased from proceeds. The lower the degree of the borrower’s personal involvement in the management of the investment or enterprise purchased by the loan proceeds, the less likely the loan will have a business purpose. For example, money borrowed to purchase stock in an automobile company by an individual who 19 The Dodd-Frank Act requires that this threshold be adjusted annually by any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For the current threshold, see 12 CFR 1026.3(b)(ii). Interagency Consumer Laws and Regulations TILA October 2021 TILA 21 does not work for that company would indicate a personal investment and a consumer purpose. • The size of the transaction. The larger the size of the transaction, the more likely the loan will have a business purpose. For example, if the loan is for a $5 million real estate transaction, that might indicate a business purpose. • The amount of income derived from the property acquired by the loan proceeds relative to the borrower’s total income. The lesser the income derived from the acquired property, the more likely the loan will have a consumer purpose. For example, if the borrower has an annual salary of $100,000 and receives about $500 in annual dividends from the acquired property, that would indicate a consumer purpose. Creditors must consider all five factors before determining that disclosures are not necessary. Normally, no one factor by itself is sufficient reason to determine the applicability of Regulation Z. In any event, the financial institution may routinely furnish disclosures to the consumer. Disclosure under such circumstances does not control whether the transaction is covered but can assure protection to the financial institution and compliance with the law. Interagency Laws and Regulations TILA October 2021 TILA 22 Coverage Considerations under Regulation Z Interagency Laws and Regulations TILA October 2021 TILA 25 o Right to rescind. After the initiation of foreclosure on the consumer’s principal dwelling that secures the obligation, the consumer can rescind if: • A mortgage broker fee that should have been included in the finance charge was not included; or • The creditor did not provide the properly completed appropriate model form in Appendix H, or a substantially similar notice of rescission. o Tolerance for disclosures. After the initiation of foreclosure on the consumer’s principal dwelling that secures the credit obligation: • The disclosed finance charge is considered accurate if it is understated by no more than $35. • The total of payments for transactions subject to 12 CFR 1026.19(e) and (f) is considered accurate for purposes of this section if it is understated by no more than $35. • The disclosed finance charge and the total of payments (for transactions subject to 12 CFR 1026.19(e) and (f)) are considered accurate if the amount disclosed was greater than the amount required to be disclosed (i.e., the amount disclosed overstated the actual finance charge or total of payments) NOTES: • Normally, the finance charge tolerance for a rescindable transaction is either 0.5 percent of the credit transaction or, for certain refinancings, 1 percent of the credit transaction. However, in the event of a foreclosure, the consumer may exercise the right of rescission if the disclosed finance charge is understated by more than $35. • Tolerances for the total of payments disclosure as discussed in 12 CFR 1026.38(o)(1) are similar to the tolerances applicable to the finance charge. Special tolerances apply to the disclosure of the total of payments for purposes of the right of rescission, for transactions subject to 12 CFR 1026.19(e) and (f). (12 CFR 1026.23(g)(1)(ii), (g)(2)(ii)). • See the “Finance Charge Tolerances” charts within these examination procedures for help in determining appropriate finance charge tolerances. Calculating the Finance Charge (Closed-End Credit) One of the more complex tasks under Regulation Z is determining whether a charge associated with an extension of credit must be included in, or excluded from, the disclosed finance charge. The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the financial institution requires use of the third party. Charges imposed by settlement or closing agents are finance charges if the Interagency Laws and Regulations TILA October 2021 TILA 26 bank requires the specific service that gave rise to the charge and the charge is not otherwise excluded. The “Finance Charge” charts within this document briefly summarize the rules that must be considered under (12 CFR 1026.4). Prepaid Finance Charges – 12 CFR 1026.18(b)(3) A prepaid finance charge is any finance charge paid separately to the financial institution or to a third party, in cash or by check before or at closing, settlement, or consummation of a transaction, or withheld from the proceeds of the credit at any time. Prepaid finance charges effectively reduce the amount of funds available for the consumer’s use, usually before or at the time the transaction is consummated. Examples of finance charges frequently prepaid by consumers are borrower’s points, loan origination fees, real estate/construction inspection fees, odd days’ interest (interest attributable to part of the first payment period when that period is longer than a regular payment period), mortgage guarantee insurance fees paid to the Federal Housing Administration (FHA), private mortgage insurance (PMI) paid to such companies as the Mortgage Guaranty Insurance Corporation (MGIC), and, in non-real-estate transactions, credit report fees. Precomputed Finance Charges A precomputed finance charge includes, for example, interest added to the note amount that is computed by the add-on, discount, or simple interest methods. If reflected in the face amount of the debt instrument as part of the consumer’s obligation, finance charges that are not viewed as prepaid finance charges are treated as precomputed finance charges that are earned over the life of the loan. Interagency Laws and Regulations TILA October 2021 TILA 27 Finance Charge Chart FINANCE CHARGE = DOLLAR COST OF CONSUMER CREDIT: It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition of or incident to the extension of credit. CHARGES ALWAYS INCLUDED CHARGES INCLUDED UNLESS CONDITIONS ARE MET CONDITIONS (Any loan) CHARGES NOT INCLUDED IF BONA FIDE AND REASONABLE IN AMOUNT (Residential mortgage transactions and loans secured by real estate) CHARGES NEVER INCLUDED Charges payable in a comparable cash transaction. Fees for unanticipated late payments Overdraft fees not agreed to in writing Seller’s points Participation or membership fees Discount offered by the seller to induce payment by cash or other means not involving the use of a credit card Interest forfeited as a result of interest reduction required by law Charges absorbed by the creditor as a cost of doing business Interest Transaction fees Loan origination fees Consumer points Credit guarantee insurance premiums Charges imposed on the creditor for purchasing the loan, which are passed on to the consumer Discounts for inducing payment by means other than credit Mortgage broker fees Other examples: Fee for preparing TILA disclosures; real estate construction loan inspection fees; fees for post-consummation tax or flood service policy; required credit life insurance charges Premiums for credit life, A&H, or loss of income insurance Debt cancellation fees Premiums for property or liability insurance Premiums for vendor’s single interest (VSI) insurance Security interest charges (filing fees), insurance in lieu of filing fees and certain notary fees Charges imposed by third parties Charges imposed by third-party closing agents Appraisal and credit report fees Insurance not required, disclosures are made, and consumer authorizes Coverage not required, disclosures are made, and consumer authorizes Consumer selects insurance company and disclosures are made Insurer waives right of subrogation, consumer selects insurance company, and disclosures are made The fee is for lien purposes, prescribed by law, payable to a third public official and is itemized and disclosed Use of the third party is not required to obtain loan and creditor does not retain the charge Creditor does not require and does not retain the fee for the particular service Application fees, if charged to all applicants, are not finance charges. Application fees may include appraisal or credit report fees. Fees for title insurance, title examination, property survey, etc. Fees for preparing loan documents, mortgages, and other settlement documents Amounts required to be paid into escrow, if not otherwise included in the finance charge Notary fees Pre-consummation flood and pest inspection fees Appraisal and credit report fees Interagency Consumer Laws and Regulations TILA October 2021 TILA 30 • The payment schedule, which does not necessarily include only principal and interest (P + I) payments. For example: o If the consumer borrows $2,500 for a vacation trip at 14 percent simple interest per annum and repays that amount with 25 equal monthly payments beginning one month from consummation of the transaction, the monthly P + I payment will be $115.87, if all months are considered equal, and the amount financed would be $2,500. If the consumer’s payments are increased by $2 a month to pay a non-financed $50 loan fee during the life of the loan, the amount financed would remain at $2,500, but the payment schedule would be increased to $117.87 a month; the finance charge would increase by $50; and there would be a corresponding increase in the APR. This would be the case whether or not state law defines the $50 loan fee as interest. o If the loan above has 55 days to the first payment and the consumer prepays interest at consummation ($24.31 to cover the first 25 days), the amount financed would be $2,500 - $24.31, or $2,475.69. Although the amount financed has been reduced to reflect the consumer’s reduced use of available funds at consummation, the time interval during which the consumer has use of the $2,475.69, 55 days to the first payment, has not changed. Since the first payment period exceeds the limitations of the regulation’s minor irregularities provisions (See 12 CFR 1026.17(c)(4)), it may not be treated as regular. In calculating the APR, the first payment period must not be reduced by 25 days (i.e., the first payment period may not be treated as one month). Financial institutions may, if permitted by state or other law, precompute interest by applying a rate against a loan balance using a simple interest, add-on, discount or some other method, and may earn interest using a simple interest accrual system, the Rule of 78s (if permitted by law) or some other method. Unless the financial institution’s internal interest earnings and accrual methods involve a simple interest rate based on a 360-day year that is applied over actual days (even that is important only for determining the accuracy of the payment schedule), it is not relevant in calculating an APR, since an APR is not an interest rate (as that term is commonly used under state or other law). Since the APR normally need not rely on the internal accrual systems of a bank, it always may be computed after the loan terms have been agreed upon (as long as it is disclosed before actual consummation of the transaction). Special Requirements for Calculating the Finance Charge and APR Proper calculation of the finance charge and APR are of primary importance. The regulation requires that the terms “finance charge” and “annual percentage rate” be disclosed more conspicuously than any other required disclosure, subject to limited exceptions. The finance charge and APR, more than any other disclosures, enable consumers to understand the cost of the credit and to comparison shop for credit. A creditor’s failure to disclose those values accurately can result in significant monetary damages to the creditor, either from a class action lawsuit or from a regulatory agency’s order to reimburse consumers for violations of law. If an APR or finance charge is disclosed incorrectly, the error is not, in itself, a violation of the regulation if: Interagency Consumer Laws and Regulations TILA October 2021 TILA 31 • The error resulted from a corresponding error in a calculation tool used in good faith by the financial institution. • Upon discovery of the error, the financial institution promptly discontinues use of that calculation tool for disclosure purposes. • The financial institution notifies the CFPB in writing of the error in the calculation tool (12 CFR 1026.22). When a financial institution claims a calculation, tool was used in good faith, the financial institution assumes a reasonable degree of responsibility for ensuring that the tool in question provides the accuracy required by the regulation (15 U.S.C. 1640(c)). For example, the financial institution might verify the results obtained using the tool by comparing those results to the figures obtained by using another calculation tool. The financial institution might also verify that the tool, if it is designed to operate under the actuarial method, produces figures similar to those provided by the examples in Appendix J to the regulation. The calculation tool should be checked for accuracy before it is first used and periodically thereafter. Subpart B – Open-End Credit Subpart B relates to open-end credit. It contains rules on account-opening disclosures 12 CFR 1026.6 and periodic statements (12 CFR 1026.7-.8). It also describes special rules that apply to credit card transactions, treatment of payments 12 CFR 1026.10 and credit balances 12 CFR 1026.11, procedures for resolving credit billing errors 12 CFR 1026.13, annual percentage rate calculations 12 CFR 1026.14, rescission requirements 12 CFR 1026.15 and advertising (12 CFR 1026.16). Time of Disclosures (Periodic Statements) – 12 CFR 1026.5(b) For credit card accounts under an open-end (not home-secured) consumer credit plan, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the payment due date disclosed on the periodic statement and that payments are not treated as late for any purpose if they are received within 21 days after mailing or delivery of the statement. In addition, for all open-end consumer credit accounts with grace periods, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the date on which a grace period (if any) expires and that finance charges are not imposed as a result of the loss of a grace period if a payment is received within 21 days after mailing or delivery of a statement. For purposes of this requirement, a “grace period” is defined as a period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate. For non-credit card open-end consumer plans without a grace period, creditors must adopt reasonable policies and procedures designed to ensure that periodic statements are mailed or delivered at least 14 days prior to the date on which the required minimum periodic payment is due. Moreover, the creditor must adopt reasonable policies and procedures to ensure that it does not treat as late, a required Interagency Consumer Laws and Regulations TILA October 2021 TILA 32 minimum periodic payment received by the creditor within 14 days after it has mailed or delivered the periodic statement. Subsequent Disclosures (Open-End Credit) – 12 CFR 1026.9 For open-end, not home-secured credit, the following applies: Creditors are required to provide consumers with 45 days’ advance written notice of rate increases and other significant changes to the terms of their credit card account agreements. The list of “significant changes” includes most fees and other terms that a consumer should be aware of before use of the account. Examples of such fees and terms include: • Penalty fees, • Transaction fees, • Fees imposed for the issuance or availability of the open-end plan, • Grace period, and • Balance computation method. Changes that do not require advance notice include: • Reductions of finance charges; • Termination of account privileges resulting from an agreement involving a court proceeding; • Increase in an APR upon expiration of a specified period of time previously disclosed in writing; • Increases in variable APRs that change according to an index not under the card issuer’s control; and • Rate increases due to the completion of, or failure of a consumer to comply with, the terms of a workout or temporary hardship arrangement, if those terms are disclosed prior to commencement of the arrangement. A creditor may suspend account privileges, terminate an account, or lower the credit limit without notice. However, a creditor that lowers the credit limit may not impose an over-limit fee or penalty rate as a result of exceeding the new credit limit without a 45-day advance notice that the credit limit has been reduced. For significant changes in terms (with the exception of rate changes, increases in the minimum payment, certain changes in the balance computation method, and when the change results from the consumer’s failure to make a required minimum periodic payment within 60 days after the due date), a creditor must also provide consumers the right to reject the change. If the consumer Interagency Consumer Laws and Regulations TILA October 2021 TILA 35 Finance Charge Resulting from Two or More Periodic Rates Some financial institutions use more than one periodic rate in computing the finance charge. For example, one rate may apply to balances up to a certain amount and another rate to balances more than that amount. If two or more periodic rates apply, the financial institution must disclose all rates and conditions. The range of balances to which each rate applies also must be disclosed (12 CFR 1026.6(a)(1)). It is not necessary, however, to break the finance charge into separate components based on the different rates. Annual Percentage Rate (Open-End Credit) The disclosed APR on an open-end credit account is accurate if it is within one-eighth of one percentage point of the APR calculated under Regulation Z. Determination of APR – 12 CFR 1026.14 The basic method for determining the APR in open-end credit transactions involves multiplying each periodic rate by the number of periods in a year. This method is used in all types of open- end disclosures, including: • The corresponding APR in the initial disclosures, • The corresponding APR on periodic statements, • The APR in early disclosures for credit card accounts, • The APR in early disclosures for home-equity plans, • The APR in advertising, and • The APR in oral disclosures. The corresponding APR is prospective, and it does not involve any particular finance charge or periodic balance. A second method of calculating the APR is the quotient method. At a creditor’s option, the quotient method may be disclosed on periodic statements for home-equity plans subject to 12 CFR 1026.40 (home-equity lines of credit, or HELOCs).20 The quotient method reflects the annualized equivalent of the rate that was actually applied during a cycle. This rate, also known as the effective APR, will differ from the corresponding APR if the creditor applies minimum, fixed, or transaction charges to the account during the cycle (12 CFR 1026.14(c)). 20 If a creditor does not disclose the effective (or quotient method) APR on a HELOC periodic statement, it must instead disclose the charges (fees and interest) imposed as provided in 12 CFR 1026.7(a). Interagency Consumer Laws and Regulations TILA October 2021 TILA 36 Brief Outline for Open-End Credit APR Calculations on Periodic Statements NOTE: Assume monthly billing cycles for each of the calculations below. I. Basic method for determining the APR in an open-end credit transaction. This is the corresponding APR (12 CFR 1026.14(b)). A. Monthly rate x 12 = APR II. Optional effective APR that may be disclosed on HELOC periodic statements. A. APR when only periodic rates are imposed (12 CFR 1026.14(c)(1)). 1. Monthly rate x 12 = APR Or 2. (Total finance charge / sum of the balances) x 12 = APR B. APR when minimum or fixed charge but not transaction charge imposed (12 CFR 1026.14(c)(2)). 1. (Total finance charge / amount of applicable balance21) x 12 = APR22 C. APR when the finance charge includes a charge related to a specific transaction (such as a cash advance fee), even if the total finance charge also includes any other minimum, fixed, or other charge not calculated using a periodic rate (12 CFR 1026.14(c)(3)). 1. (Total finance charge / (all balances + other amounts on which a finance charge was imposed during the billing cycle without duplication 23) x 12 = APR24 D. APR when the finance charge imposed during the billing cycle includes a minimum or fixed charge that does not exceed 50 cents for a monthly or longer billing cycle (or pro rata part of 50 cents for a billing cycle shorter than monthly) (12 CFR 1026.14(c)(4)). 1. Monthly rate x 12 = APR 21 For the following formulas, the APR cannot be determined if the applicable balance is zero. (12 CFR 1026.14(c)(2)) 22 Loan fees, points, or similar finance charges that relate to the opening of the account must not be included in the calculation of the APR. 23 The sum of the balances may include the average daily balance, adjusted balance, or previous balance method. When a portion of the finance charge is determined by application of one or more daily periodic rates, the sum of the balances also means the average of daily balances. See Appendix F to Regulation Z. 24 Cannot be less than the highest periodic rate applied, expressed as an APR. Loan fees, points, or similar finance charges that relate to the opening of the account must not be included in the calculation of the APR. Interagency Consumer Laws and Regulations TILA October 2021 TILA 37 E. APR calculation when daily periodic rates are applicable if only the periodic rate is imposed or when a minimum or fixed charge but not a transactional charge is imposed (12 CFR 1026.14(d)). 1. (Total finance charge / average daily balance) x 12 = APR Or 2. (Total finance charge / sum of daily balances) x 365 = APR Change in Terms Notices for Home-Equity Plans Subject to 12 CFR 1026.40 – 12 CFR 1026.9(c) Servicers are required to provide consumers with 15 days’ advance written notice of a change to any term required to be disclosed under 12 CFR 1026.6(a) or where the required minimum periodic payment is increased. Notice is not required when the change involves a reduction of any component of a finance charge or other charge or when the change results from an agreement involving a court proceeding. If the creditor prohibits additional extensions of credit or reduces the credit limit in certain circumstances (if permitted by contract), a written notice must be provided no later than three business days after the action is taken and must include the specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also must state that fact. Payments – 12 CFR 1026.10 (Open-End Credit) Creditors are required to credit a payment to the consumer’s account as of the date of receipt, except when a delay in crediting does not result in a finance or other charge. If a creditor fails to credit a payment, as required by 12 CFR 1026.10(a) or (b), in time to avoid the imposition of finance or other charges, the creditor shall adjust the consumer’s account so that the charges imposed are credited to the consumer’s account during the next billing cycle. If a card issuer makes a material change in the address for receiving payments or procedures for handling payments, and such change causes a material delay in the crediting of a payment to the consumer’s account during the 60-day period following the date on which such change took effect, the card issuer may not impose any late fee or finance charge for a late payment on the credit card account during the 60-day period following the date on which the change took effect. Timely Settlement of Estates – 12 CFR 1026.11(c) Issuers are required to establish procedures to ensure that any administrator of an estate can resolve the outstanding credit card balance of a deceased account holder in a timely manner. If an administrator requests the amount of the balance: • The issuer is prohibited from imposing additional fees on the account; • The issuer is required to disclose the amount of the balance to the administrator in a timely manner (safe harbor of 30 days); and Interagency Consumer Laws and Regulations TILA October 2021 TILA 40 features. The advertising rules ban several deceptive or misleading advertising practices, including representations that a rate or payment is “fixed” when in fact it can change. If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor. If any finance charges or other charges are set forth in an advertisement, the advertisement must also clearly and conspicuously state the following: • Any minimum, fixed, transaction, activity or similar charge that is a finance charge under 12 CFR 1026.4 that could be imposed; • Any periodic rate that may be applied expressed as an APR as determined under 12 CFR 1026.14(b). If the plan provides for a variable periodic rate, that fact must be disclosed; and • Any membership or participation fee that could be imposed. If any finance charges or other charge or payment terms are set forth, affirmatively or negatively, in an advertisement for a home-equity plan subject to the requirements of 12 CFR 1026.40, the advertisement also must clearly and conspicuously set forth the following: • Any loan fee that is a percentage of the credit limit under the plan and an estimate of any other fees imposed for opening the plan, stated as a single dollar amount or a reasonable range; • Any periodic rate used to compute the finance charge, expressed as an APR as determined under 12 CFR 1026.14(b); and • The maximum APR that may be imposed in a variable-rate plan. Regulation Z’s open-end home-equity plan advertising rules include a clear and conspicuous standard for home-equity plan advertisements, consistent with the approach taken in the advertising rules for consumer leases under Regulation M. Commentary provisions clarify how the clear and conspicuous standard applies to advertisements of home-equity plans with promotional rates or payments, and to Internet, television, and oral advertisements of home- equity plans. The regulation allows alternative disclosures for television and radio advertisements for home-equity plans. The regulation also requires that advertisements adequately disclose not only promotional plan terms, but also the rates or payments that will apply over the term of the plan. Regulation Z also contains provisions implementing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which requires disclosure of the tax implications of certain home-equity plans. Interagency Consumer Laws and Regulations TILA October 2021 TILA 41 Subpart C – Closed-End Credit Subpart C relates to closed-end credit. It contains rules on disclosures (12 CFR 1026.17-.20), treatment of credit balances (12 CFR 1026.21), annual percentage rate calculations (12 CFR 1026.22), rescission rights (12 CFR 1026.23), and advertising (12 CFR 1026.24). The TILA-RESPA Integrated Disclosures must be given for most closed-end transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33. The TILA-RESPA Integrated Disclosures do not apply to HELOCs, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. Truth in Lending disclosures (TIL disclosures) and the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet must still be provided for certain closed-end loan transactions. I. Disclosures, Generally A. Timing Generally, all disclosures provided to consumers must be made clearly and conspicuously in writing, in a form that the consumer may keep (12 CFR 1026.17(a), 1026.37(o), 1026.38(t)). However, the timing of the disclosures may change depending on the transaction (12 CFR 1026.19(a), 1026.19(e)(1)(iii), 1026.19(f)(1)(ii), 1026.19(g)). Disclosures in connection with non-mortgage closed-end loans and specified housing assistance loan programs for low- and moderate-income consumers must be provided before consummation of the transaction (12 CFR 1026.3). For most closed-end transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33 (including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes), disclosures must be provided in accordance with the timing requirements outlined in 12 CFR 1026.19(e), (f) and (g). Generally, a creditor is required to mail or deliver the Loan Estimate within three business days of receipt of the consumer’s loan application and to ensure that the consumer receives the Closing Disclosure no later than three business days before loan consummation (12 CFR 1026.19(e)(iii), 1026.19(f)(1)(ii)). If the loan is a purchase transaction, the special information booklet must also be provided within three business days of receipt of the consumer’s application (12 CFR 1026.19(g)). The specifics of these disclosure timing requirements are further discussed below, including a discussion about revised disclosures. Mortgage loans not subject to 12 CFR 1026.19(e) and (f) (e.g., reverse mortgages, and chattel- dwelling loans) have different disclosure requirements. For reverse mortgages, disclosures must be delivered or mailed to the consumer no later than the third business day after a creditor receives the consumer’s written application (12 CFR 1026.19(a)). For chattel-dwelling mortgage loans, disclosures must be provided to the consumer prior to consummation of the loan (12 CFR 1026.17(b)). Revised disclosures are also required within three business days of consummation if certain mortgage loan terms change (12 CFR 1026.19(a)(2)). For loans like reverse mortgages, Interagency Consumer Laws and Regulations TILA October 2021 TILA 42 the consumer will receive the Good Faith Estimate (GFE), HUD-1 Settlement Statement (HUD- 1), and TIL disclosures as required under the applicable sections of both TILA and RESPA. Consumers receive TIL disclosures for chattel-dwelling loans that are not secured by land, but the GFE and the HUD-1 are not required. Finally, certain variable-rate transactions secured by a dwelling have additional disclosure obligations with specific timing requirements both prior to and after consummation (see 12 CFR 1026.20(c) and (d) below). B. Basis for Disclosures 1. Generally Disclosures provided for closed-end transactions must reflect the credit terms to which the parties will be legally bound as of the outset of the credit transaction. If information required for the disclosures is unknown, the creditor may provide the consumer with an estimate, using the best information reasonably available. The disclosure must be clearly marked as an estimate. Variable and Adjustable Rate If the terms of the legal obligation allow the financial institution, after consummation of the transaction, to increase the APR, the financial institution must furnish the consumer with certain information on variable rates. Variable-rate disclosures are not applicable to rate increases resulting from delinquency, default, assumption, acceleration, or transfer of the collateral. Some of the more important transaction-specific variable-rate disclosure requirements follow. • Disclosures for variable-rate loans must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. • If the variable-rate transaction includes either a seller buy-down that is reflected in a contract or a consumer buy-down, the disclosed APR should be a composite rate based on the lower rate for the buy-down period and the rate that is the basis for the variable-rate feature for the remainder of the term. • If the initial rate is not determined by the index or formula used to make later interest rate adjustments, as in a discounted variable-rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for as long as it is applied and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation (i.e., the fully indexed rate). o If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the adjustment, from changing to the fully indexed rate, the effect of that rate or payment cap needs to be reflected in the disclosures. o The index at consummation need not be used if the contract provides a delay in the implementation of changes in an index value (e.g., the contract indicates that future rate changes are based on the index value in effect for some specified period, such as 45 days before the change date). Instead, the financial institution may use any rate from the date Interagency Consumer Laws and Regulations TILA October 2021 TILA 45 using the longer term of the renewal period or periods. The long-term loan must be disclosed with a variable-rate feature. If there are no renewal conditions or if the financial institution guarantees to renew the obligation in a refinancing, the payment schedule must be disclosed using the shorter balloon payment term. The short-term loan must be disclosed as a fixed-rate loan, unless it contains a variable-rate feature during the initial loan term. D. Annual Percentage Rate (Closed-End Credit) – 12 CFR 1026.22 1. Calculating the Annual Percentage Rate – 12 CFR 1026.22 The APR must be determined under one of the following: • The actuarial method, which is defined by Regulation Z and explained in Appendix J to the regulation. • The U.S. Rule, which is permitted by Regulation Z and briefly explained in Appendix J to the regulation. The U.S. Rule is an accrual method that seems to have first surfaced officially in an early 19th-century U.S. Supreme Court case, Story v. Livingston, 38 U.S. 359 (1839). Whichever method is used by the financial institution, the rate calculated will be accurate if it is able to “amortize” the amount financed while it generates the finance charge under the accrual method selected. Financial institutions also may rely on minor irregularities and accuracy tolerances in the regulation, both of which effectively permit somewhat imprecise, but still legal, APRs to be disclosed. 2. Accuracy Tolerances The disclosed APR on a closed-end transaction is accurate for: • Regular transactions (which include any single advance transaction with equal payments and equal payment periods, or an irregular first payment period and/or a first or last irregular payment), if the disclosed APR is within one-eighth of one percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(2)); • Irregular transactions (which include multiple advance transactions and other transactions not considered regular), if the disclosed APR is within one-quarter of one percentage point of the APR calculated under Regulation Z (12 CFR 1026.22(a)(3)); • Mortgage transactions, if the disclosed APR is within one-eighth of one percentage point for regular transactions or one-quarter of one percentage point for irregular transactions or if: i. The rate results from the disclosed finance charge, and: (A) The disclosed finance charge is considered accurate under 12 CFR 1026.18(d)(1) or 1026.38(o)(2), as applicable; or Interagency Consumer Laws and Regulations TILA October 2021 TILA 46 (B) The disclosed finance charge is calculated incorrectly but is considered accurate for purposes of rescission, under 12 CFR 1026.23(g) or (h), whichever applies (12 CFR 1026.22(a)(4)). ii. The disclosed finance charge is calculated incorrectly but is considered accurate under 12 CFR 1026.18(d)(1) or 1026.38(o)(2), as applicable, or 12 CFR 1026.23 (g) or (h), and either: (A) The finance charge is understated, and the disclosed APR is also understated but is closer to the actual APR than the APR that would be considered accurate under 12 CFR 1026.22(a)(4); or (B) The disclosed finance charge is overstated, and the disclosed APR is also overstated but is closer to the actual APR than the APR that would be considered accurate under (12 CFR 1026.22(a)(4)). For example, in an irregular transaction subject to a tolerance of one-fourth of one percentage point, if the actual APR is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under 12 CFR 1026.22(a)(4), a disclosed APR of 8.65 percent is considered accurate under (12 CFR 1026.22(a)(5)). However, a disclosed APR below 8.50 percent or above 9.25 percent would not be considered accurate. 3. Construction-Only and Construction-Permanent Loans – 12 CFR 1026.17(c) ((6), 12 CFR 1026.37 & .38, and Appendix D Due to the structure of construction-permanent and certain other multiple-advance loans, Regulation Z includes certain optional provisions to help a creditor estimate the components of the APR and finance charge computations for these loans. In many instances, the amount and dates of advances are not predictable with certainty since they depend on the progress of the work. Regulation Z provides that the APR and finance charge for such loans may be estimated for disclosure based on the best information reasonably available at the time of disclosure (12 CFR 1026.17(c)(2)(i)). Further, a creditor has optionality as to whether it discloses the advances separate or together as one transaction in certain circumstances. First, a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction or disclosed as separate transactions (12 CFR 1026.17(c)(6)(i)). Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction (12 CFR 1026.17(c)(6)(ii)). Because construction loans or construction- permanent loans may be disclosed as one transaction, or as multiple transactions, computations can be impacted by this decision. If the actual schedule of advances is not known, the methods set forth in Appendix D may be used to estimate the interest portion of the finance charge and the annual percentage rate and to make disclosures (12 CFR Part 1026 App. D). Interagency Consumer Laws and Regulations TILA October 2021 TILA 47 At its option, the financial institution may rely on the representations of other parties to acquire necessary information (for example, it might look to the consumer for the dates of advances). In addition, if either the amounts or dates of advances are unknown (even if some of them are known), the financial institution may, at its option, use Appendix D to the regulation (and its associated commentary) to make calculations and disclosures. The finance charge and payment schedule obtained through Appendix D may be used with volume one of the Bureau’s APR tables or with any other appropriate computation tool to determine the APR. If the financial institution elects not to use Appendix D, or if Appendix D cannot be applied to a loan (e.g., Appendix D does not apply to a combined construction-permanent loan if the payments for the permanent loan begin during the construction period), the financial institution must make its estimates under 12 CFR 1026.17(c)(2) and calculate the APR using multiple-advance formulas. Interest Reserves In a multiple-advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan amount for that interest payment purpose. If the creditor requires interest reserves for construction loans, Appendix D provides further guidance. Among other things, the amount of interest reserves included in the commitment amount is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D (Comment App. D-5). If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under Appendix D (Comment App. D-5.i). If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures. To reflect the effects of such compounding, the creditor should use the formula in Appendix D (Comment App. D-5.ii). Fees and Charges In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges and points and fees that would not be imposed but for the construction financing. Those amounts must be in disclosures for the construction phase and may not be included in the disclosures for the permanent phase. If a creditor charges separate amounts for the finance charges and points and fees for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges and points and fees must be allocated to permanent financing. Fees and charges that are not used to compute the finance charge or points and fees may be allocated between the transactions in any manner the creditor chooses (Comment 17(c)(6)-5). Interagency Consumer Laws and Regulations TILA October 2021 TILA 50 III. Transactions with TILA-RESPA Integrated Disclosures – Generally On December 31, 2013, the CFPB published a final rule implementing Sections 1098(2) and 1100A(5) of the Dodd-Frank Act, which directed the CFPB to publish a single, integrated disclosure for mortgage loan transactions, which includes mortgage loan disclosure requirements under TILA and Sections 4 and 5 of RESPA. The amendments in the final rule, referred to as the TILA-RESPA Integrated Disclosure Rule, or TRID, are applicable to covered closed-end mortgage loans for which a creditor or mortgage broker received an application on or after October 3, 2015. As a result, Regulation Z now houses the integrated forms, timing, and related disclosure requirements for most closed-end consumer mortgage loans. The integrated disclosures are not used to disclose information about reverse mortgages, HELOCs, chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages use, as applicable, the GFE, HUD-1, and TIL disclosures. Most closed-end mortgage loans are exempt from the requirement to provide the GFE, HUD-1, and servicing disclosure requirements of (12 CFR 1024.6, 1024.7, 1024.8, 1024.10, and 1024.33(a)). Instead, these loans are subject to disclosure, timing, and other requirements under TILA and Regulation Z. Specifically, the provisions mentioned in the first sentence of this paragraph do not apply to the following federally related mortgage loans: • Loans subject to the TILA-RESPA Integrated Disclosure requirements for certain closed-end consumer credit transactions secured by real property or a cooperative unit set forth in 12 CFR 1026.19(e), (f), and (g); or • Certain no-interest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention (12 CFR 1026.3(h)). NOTE: A creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and TIL forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages). Interagency Consumer Laws and Regulations TILA October 2021 TILA 51 Summary of Applicable Disclosure Requirements: Use TILA-RESPA Integrated Disclosures (see Regulation Z): • Most closed-end mortgage loans, including: o Construction-only loans o Loans secured by vacant land or by 25 or more acres Continue to use TIL25 and RESPA disclosures (as applicable): • HELOCs (subject to disclosure requirements under 12 CFR 1026.40) • Reverse mortgages26 (subject to existing TIL and GFE disclosures) • Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA) NOTE: In both cases, there is a partial exemption from these disclosures under 12 CFR 1026.3(h) for loans secured by subordinate liens and associated with certain housing assistance loan programs for low- and moderate-income persons. Creditors making closed-end consumer credit transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to 12 CFR 1026.33, and subject to the provisions of 12 CFR 1026.19(e) and (f), must provide consumers with a Loan Estimate under 12 CFR 1026.37, Closing Disclosure under 12 CFR 1026.38, the special information booklet as required, under 12 CFR 1026.19(g), and, as applicable for ARM transactions, the CHARM booklet. The special information booklet is described in further detail below. A. Early disclosures (Loan Estimate) – 12 CFR 1026.19(e) 12 CFR 1026.19(e) requires the creditor to provide good faith estimates of the Loan Estimate disclosures (see 12 CFR 1026.37 for information on the content, form, and format of the disclosure). The creditor generally must deliver or place in the mail the Loan Estimate no later than three business days after receiving the consumer’s application, and no later than seven business days before consummation (12 CFR 1026.19(e)(1)(i) and (iii)). Generally, the creditor is responsible for ensuring that the Loan Estimate and its delivery meet the rule’s content, delivery, and timing requirements. (See 12 CFR 1026.19(e) and 1026.37.) If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf. If it does so, the mortgage broker must comply with all requirements of 12 CFR 1026.19(e), as well as the three-year record retention 25 See Appendix H-2. 26 An open-end reverse mortgage receives open-end disclosures, not a GFE or HUD-1. Interagency Consumer Laws and Regulations TILA October 2021 TILA 52 requirements in 12 CFR 1026.25(c) (12 CFR 1026.19(e)(1)(ii)). The creditor is expected to maintain communication with mortgage brokers to ensure that the Loan Estimate and its delivery satisfy the rule’s requirements, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(e)(1)(ii); Comment 19(e)(1)(ii) -1 and -2). Timing- Loan Estimate-early disclosures. The Loan Estimate must be delivered or placed in the mail to the consumer no later than the third business day after the creditor or mortgage broker receives the consumer’s application for a mortgage loan (12 CFR 1026.19(e)(1)(iii)(A)). If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail (this applies to electronic delivery as well) (12 CFR 1026.19(e)(1)(iv); Comment 19(e)(1)(iv)-2). Other than for transactions secured by a consumer’s interest in a timeshare plan, the Loan Estimate must be delivered or placed in the mail no later than the seventh business day before consummation (12 CFR 1026.19(e)(1)(iii)(B) and (C)). For purposes of the TILA-RESPA Integrated Disclosures rule, an “application” is defined in 12 CFR 1026.2(a)(3)(ii). For transactions subject to 12 CFR 1026.19(e), (f), or (g), an application consists of the submission of the following 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. This definition of application is similar to the definition under Regulation X (12 CFR 1024.2(b)), except that it does not include the seventh “catch-all” element of that definition, that is, “any other information deemed necessary by the loan originator.” An application may be submitted in written or electronic format and includes a written record of an oral application (Comment 2(a)(3)-1). This definition of application does not prevent a creditor from collecting whatever additional information it deems necessary in connection with the request for the extension of credit. However, once a consumer has submitted27 the six pieces of information discussed above to the creditor for purposes of obtaining an extension of credit, the creditor has an application for 27 When a consumer uses an online application system that allows the information to be saved, the application must be submitted before the Loan Estimate timing requirements are triggered. Interagency Consumer Laws and Regulations TILA October 2021 TILA 55 o The consumer is permitted by the creditor to shop for the third-party service (12 CFR 1026.19(e)(3)(ii)(C); 12 CFR 1026.19(e)(1)(vi); Comment 19(e)(1)(vi)-1 through -7). NOTE: If a creditor has failed to issue the written list of providers or failed to disclose a specific settlement service on the written list, the creditor may still be determined, based on all the relevant facts and circumstances, to have permitted a consumer to shop for purposes of determining good faith (Comment 19(e)(3)(iii)-2). Variances permitted without tolerance limits. Creditors may charge consumers more than the amount disclosed on the Loan Estimate without any tolerance limitation for certain costs or terms, but only if the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor at the time the disclosure was provided. These charges may be paid to the creditor or the creditor’s affiliates as long as the charges are bona fide (12 CFR 1026.19(e)(3)(iii)). These charges are: • Prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve, or similar account (12 CFR 1026.19(e)(3)(iii)(A)-(C)). • Charges paid to third-party service providers for services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditor’s written list of service providers (12 CFR 1026.19(e)(3)(iii)(D); Comment 19(e)(3)(iii)-2). • Property taxes and other charges paid to third-party service providers for services not required by the creditor (12 CFR 1026.19(e)(3)(iii)(E)). List of services for which a consumer may shop. In addition to the Loan Estimate, if the consumer is permitted to shop for a settlement service, the creditor, no later than three business days after receiving the application, must provide the consumer with a written list of settlement services for which the consumer can shop. This list must: • Identify at least one available settlement service provider for each service; and • State that the consumer may choose a different provider of that service (12 CFR 1026.19(e)(1)(vi)(C)).28 NOTE: The use of Model Form H-27 in Appendix H is not required. However, creditors who use that form properly are deemed to be in compliance with 12 CFR 1026.19(e)(1)(vi)(C) (Comment 19(e)(1)(vi)-3). Regardless of whether a creditor provides a revised written list of providers, determining whether the charges for required services were disclosed in good faith will depend on whether the creditor permitted the consumer to shop for those services, 28 The Preamble to the 2017 Amendments explained that creditors may issue a revised written list of providers when a settlement service is added as a result of a reason provided for under 12 CFR 1026.19(e)(3)((iv). (See Preamble, 82 FR 37,677 (Aug. 11, 2017)) Interagency Consumer Laws and Regulations TILA October 2021 TILA 56 and is based on all relevant facts and circumstances (Comments 19(e)(1)(vi)-1 and 19(e)(3)(ii)-6). Refunds within 60 days of consummation. If the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation (12 CFR 1026.19(f)(2)(v)). • For charges subject to zero tolerance, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer (12 CFR 1026.19(e)(3)(i)). • For charges subject to a 10 percent cumulative tolerance, to the extent the total sum of the charges exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, the difference must be refunded to the consumer (12 CFR 1026.19(e)(3)(ii)). Loan Estimate- revisions and corrections. Creditors are generally bound by the original Loan Estimate and must determine the estimate’s good faith by calculating the difference between the estimated charges originally provided and the actual charges paid by the consumer. Creditors may provide a revised Loan Estimate for informational purposes. Regardless of whether a creditor provides a revised Loan Estimate to reset tolerances or for informational purposes only, any disclosures on the revised Loan Estimate disclosure must be based on the best information reasonably available to the creditor at the time the revised disclosures are provided (Comment 19(e)(3)(iv)-1-2, 4-5). For purposes of determining whether the estimates are in good faith, the creditor may use a revised estimate of a charge instead of the amount originally disclosed if the revision is due to one of the specific circumstances set out in 12 CFR 1026.19(e)(3)(iv)(A) through (F). The specific circumstances “(A)” and “(B)” relate to “changed circumstances”, as described below: (A): Changed circumstances – increased settlement charges. Changed circumstances that occur after the Loan Estimate is provided to the consumer that cause estimated settlement charges to increase more than is permitted under the TILA-RESPA Integrated Disclosure rule (12 CFR 1026.19(e)(3)(iv)(A)). • A creditor may provide and use a revised Loan Estimate redisclosing a settlement charge and compare that revised estimate to the amount imposed on the consumer for purposes of determining good faith if changed circumstances cause the estimated charge to increase or, in the case of charges subject to the 10 percent cumulative tolerance under 12 CFR 1026.19(e)(3)(ii), cause the sum of those charges to increase by more than the 10 percent tolerance (12 CFR 1026.19(e)(3)(iv)(A); Comment 19(e)(3)(iv)(A)-1). Examples of changed circumstances affecting settlement costs include (Comment 19(e)(3)(iv)(A)-2): o A natural disaster that damages the property or otherwise results in additional closing costs; o A creditor’s estimate of title insurance is no longer valid because the title insurer goes out of business; or Interagency Consumer Laws and Regulations TILA October 2021 TILA 57 o New information not relied on when the Loan Estimate was provided is discovered, such as a neighbor of the seller filing a claim contesting the property boundary. (B): Changed circumstances – consumer eligibility. Changed circumstances that occur after the Loan Estimate is provided to the consumer that affect the consumer’s eligibility for the terms for which the consumer applied or the value of the security for the loan (12 CFR 1026.19(e)(3)(iv)(B)). For both (A) Changed circumstances – increased settlement charges, and (B) Changed circumstances – consumer eligibility: • A creditor also may provide and use a revised Loan Estimate if a changed circumstance affected the consumer’s creditworthiness or the value of the security for the loan and resulted in the consumer being ineligible for an estimated loan term previously disclosed (12 CFR 1026.19(e)(3)(iv)(B) and Comment 19(e)(3)(iv)(B)-1). This may occur when a changed circumstance causes a change in the consumer’s eligibility for specific loan terms disclosed on the Loan Estimate, which in turn results in increased cost for a settlement service beyond the applicable tolerance threshold (Comment 19(e)(3)(iv)(A)-2). For example: • The creditor relied on the consumer’s representation to the creditor of a $90,000 annual income but underwriting determines that the consumer’s annual income is only $80,000. • There are two co-applicants applying for a mortgage loan and the creditor relied on a combined income when providing the Loan Estimate, but one applicant subsequently becomes unemployed. NOTE on Changed Circumstances: A changed circumstance permitting a revised Loan Estimate under 12 CFR 1026.19(e)(3)(iv)(A) and (B) is: • An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction (12 CFR 1026.19(e)(3)(iv)(A)(1)); • Information specific to the consumer or transaction that the creditor relied upon when providing the original Loan Estimate and that was inaccurate or changed after the disclosures were provided (12 CFR 1026.19(e)(3)(iv)(A)(2)); or • New information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate (12 CFR 1026.19(e)(3)(iv)(A)(3)). (C): Revisions requested by the consumer. The consumer requests revisions to the credit terms or the settlement that cause the estimated charge to increase. For example, a consumer grants a power of attorney authorizing a family member to consummate the transaction on the consumer’s behalf, and the creditor provides revised disclosures reflecting the fee to record the power of attorney (Comment 19(e)(3)(iv)(C)-1). Interagency Consumer Laws and Regulations TILA October 2021 TILA 60 B. Final Disclosures (Closing Disclosure) – 12 CFR 1026.19(f) For loans that require a Loan Estimate (i.e., most closed-end mortgage loans secured by real property or a cooperative unit) and that proceed to closing, creditors must provide a new final disclosure reflecting the actual terms of the transaction; it is called the Closing Disclosure. The form integrates and replaces the HUD-1 and the final TIL disclosure for these transactions. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan (12 CFR 1026.19(f)(1)(ii)). NOTE: If the creditor mails the disclosure six business days prior to consummation, it can assume that it was received three business days after sending (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(iii)). • The Closing Disclosure generally must contain the actual terms and costs of the transaction (12 CFR 1026.19(f)(1)(i)). Creditors may estimate disclosures using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made. However, creditors must act in good faith and use due diligence in obtaining the information. The creditor normally may rely on the representations of other parties in obtaining the information, including, for example, the settlement agent. The creditor is required to provide corrected disclosures containing the actual terms of the transaction at or before consummation (Comments 19(f)(1)(i)-2, -2.i, and -2.ii). • The Closing Disclosure must be in writing and contain the information prescribed in 12 CFR 1026.38. The creditor must disclose only the specific information set forth in 12 CFR 1026.38(a) through (s), as shown in the Bureau’s form in Appendix H-25 (12 CFR 1026.38(t)). • If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms of the transaction and complies with the other requirements of 12 CFR 1026.19(f), including the timing requirements, and requirements for providing corrected disclosures due to subsequent changes (Comment 19(f)(1)(i)-1). • New three-day waiting period. If the creditor provides a corrected disclosure, it must provide the consumer with an additional three-business-day waiting period prior to consummation if the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added to the transaction (12 CFR 1026.19(f)(2)(ii)). “Consummation” occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. The time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable state law (12 CFR 1026.2(a)(13); Comment 2(a)(13)- 1). Timing and Delivery – Closing Disclosure. Generally, the creditor is responsible for ensuring that the consumer receives the Closing Disclosure form no later than three business days before Interagency Consumer Laws and Regulations TILA October 2021 TILA 61 consummation (12 CFR 1026.19(f)(1)(ii)(A); Comment 19(f)(1)(v)-3). The creditor also is responsible for ensuring that the Closing Disclosure meets the content, delivery, and timing requirements (12 CFR 1026.19(f) and 1026.38). For timeshare transactions, the creditor must ensure that the consumer receives the Closing Disclosure no later than consummation (12 CFR 1026.19(f)(1)(ii)(B)). If the Closing Disclosure is provided in person, it is considered received by the consumer on the day it is provided. If it is mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is delivered or placed in the mail (12 CFR 1026.19(f)(1)(iii); Comment 19(f)(1)(ii)-2). However, if the creditor has evidence that the consumer received the Closing Disclosure earlier than three business days after it is mailed or delivered, the creditor may rely on that evidence and consider the Closing Disclosure to be received on that date (Comments 19(f)(1)(iii)-1 and -2). Multiple consumers. In transactions that are not rescindable, the Closing Disclosure may be provided to any consumer with primary liability on the obligation (12 CFR 1026.17(d)). In rescindable transactions, the creditor must provide the Closing Disclosure separately and meet the timing requirements for each consumer who has the right to rescind under TILA (See 12 CFR 1026.23). Settlement agents. Creditors may contract with settlement agents to have the settlement agent provide the Closing Disclosure to consumers on the creditor’s behalf, provided that the settlement agent complies with all relevant requirements of 12 CFR 1026.19(f) (12 CFR 1026.19(f)(1)(v)). Creditors and settlement agents also may agree to divide responsibility with regard to completing the Closing Disclosure, with the settlement agent assuming responsibility to complete some or all of the Closing Disclosure (Comment 19(f)(1)(v)-4). Any such creditor must maintain communication with the settlement agent to ensure that the Closing Disclosure and its delivery satisfy the requirements described above, and the creditor is legally responsible for any errors or defects (12 CFR 1026.19(f)(1)(v); Comment 19(f)(1)(v)-3)). In transactions involving a seller, the settlement agent is required to provide the seller with the Closing Disclosure reflecting the actual terms of the seller’s transaction no later than the day of consummation (12 CFR 1026.19(f)(4)(i) and (ii)). NOTE: “Business day” has a different meaning for purposes of providing the Closing Disclosure than it is for purposes of providing the Loan Estimate after receiving a consumer’s application. For purposes of providing the Closing Disclosure, the term business day means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a) (See 12 CFR 1026.2(a)(6), 1026.19(f)(1)(ii)(A) and (f)(1)(iii)). Three-business-day waiting period. The loan may not be consummated less than three business days after the Closing Disclosure is received by the consumer. If a settlement is scheduled during the waiting period, the creditor generally must postpone settlement, unless the consumer determines that the extension of credit is necessary to meet a bona fide personal financial emergency and waives the waiting period. The written waiver describes the emergency, specifically modifies, or waives the waiting period, and bears the signature of all consumers who Interagency Consumer Laws and Regulations TILA October 2021 TILA 62 are primarily liable on the legal obligation. Pre-printed forms for this purpose are prohibited (12 CFR 1026.19(f)(1)(iv)). Average charges. In general, the amount imposed on the consumer for any settlement service must not exceed the amount the settlement service provider actually received for that service. However, an average charge may be imposed instead of the actual amount received for a particular service, as long as the average charge satisfies the following conditions (12 CFR 1026.19(f)(3)(i)-(ii); Comment 19(f)(3)(i)-1): • The average charge is no more than the average amount paid for that service by or on behalf of all consumers and sellers for a class of transactions; • The creditor or settlement service provider defines the class of transactions based on an appropriate period of time, geographic area, and type of loan; • The creditor or settlement service provider uses the same average charge for every transaction within the defined class; and • The creditor or settlement service provider does not use an average charge: o For any type of insurance; o For any charge based on the loan amount or property value; or o If doing so is otherwise prohibited by law. Closing Disclosures – Revisions and Corrections (12 CFR 1026.19(f)(2)). Creditors must re- disclose terms or costs on the Closing Disclosure if certain changes occur to the transaction after the Closing Disclosure was first provided that cause the disclosures to become inaccurate. There are three categories of changes that require a corrected Closing Disclosure containing all changed terms (12 CFR 1026.19(f)(2)): • 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 new waiting period. If one of the following occurs after delivery of the Closing Disclosure and before consummation, the creditor must provide a corrected Closing Disclosure containing all changed terms and ensure that the consumer receives it no later than three business days before consummation (12 CFR 1026.19(f)(2)(ii); Comment 19(f)(2)(ii)-1). • The disclosed APR becomes inaccurate. If the APR previously disclosed becomes inaccurate, the creditor must provide a corrected Closing Disclosure with the corrected Interagency Consumer Laws and Regulations TILA October 2021 TILA 65 Home Equity Lines of Credit” instead of the special information booklet (12 CFR 1026.19(g)(1)(ii)). • The creditor need not provide the special information booklet if the consumer is applying for a real property-secured consumer credit transaction that does not have the purpose of purchasing a one-to-four family residential property, such as a refinancing, a closed-end loan secured by a subordinate lien, or a reverse mortgage (12 CFR 1026.19(g)(1)( iii)). Creditors must deliver or place in the mail the special information booklet not later than three business days after receiving the consumer’s loan application (12 CFR 1026.19(g)(1)(i)). If the creditor denies the consumer’s application or if the consumer withdraws the application before the end of the three-business-day period, the creditor need not provide the special information booklet (12 CFR 1026.19(g)(1)(i); Comment 19(g)(1)(i)-3). When two or more persons apply together for a loan, the creditor may provide a copy of the special information booklet to just one of them (Comment 19(g)(1)-2). If the consumer uses a mortgage broker, the mortgage broker must provide the special information booklet, and the creditor need not do so (12 CFR 1026.19(g)(1)(i)). Creditors generally are required to use the booklets designed by the CFPB and may make only limited changes to the special information booklet (12 CFR 1026.19(g)(2)). The Bureau may issue revised or alternative versions of the special information booklet from time to time in the future. Creditors should monitor the Federal Register for notice of revisions (Comment 19(g)(1)- 1). Interagency Consumer Laws and Regulations TILA October 2021 TILA 66 IV. Construction Loan Disclosures Creditors are required to comply with the TILA/RESPA Integrated Disclosure requirements for disclosure of construction loans and construction-permanent loans that are closed-end consumer credit transactions secured by real property or a cooperative unit (12 CFR 1026.19(e)(1) and .19(f)(1)). These transactions have two distinct phases. First, the construction phase usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period, with the consumer generally paying only accrued interest until construction is completed. Unless the obligation is paid when construction is completed (i.e., a construction-only loan), it is a construction-permanent loan and the construction period converts to the second phase, the permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. The longstanding provisions of 12 CFR 1026.17(c)(6)(ii) apply to construction and construction-permanent loans, as well as the option to use Appendix D. Appendix D provides an optional method of calculating the annual percentage rate and other disclosures for construction loans in disclosing construction financing (Comment 17(c)(6)-2). While the 2017 TRID amendments provide additional guidance on how a creditor may use Appendix D to disclose construction loans and construction-permanent loans, the 2017 TRID amendments do not require the use of Appendix D or its corresponding official commentary when disclosing the terms of construction loans or construction-permanent loans. Specific regulatory provisions and official commentary applicable to construction loan disclosures are discussed below. A. Disclosure Methods for Construction Loans – 12 CFR 1026.17(c)(6) Regulation Z provides a flexible rule for disclosure of construction loans and construction- permanent loans (12 CFR 1026.17(c)(6)). First, it provides that a series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction (12 CFR 1026.17(c)(6)(i)). This means that for construction-only loans, a creditor may treat all of the advances as a single transaction or disclose each advance as a separate transaction. If these advances are treated as one transaction and the timing and amounts of advances are unknown, creditors must make disclosures based on estimates, based on the best information reasonably available at the time the disclosure is provided to the consumer, as provided in 12 CFR 1026.17(c)(2). Second, when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one or more than one transaction (12 CFR 1026.17(c)(6)(ii)). In addition to disclosure options described above for multiple advance loans, for construction- permanent loans where the permanent phase may be financed by the same creditor, the creditor also has the option to provide either one combined disclosure for both the construction financing and the permanent financing, or separate disclosures for the two phases (12 CFR 1026.17(c)(6)(ii); Comment 17(c)(6)-2). Interagency Consumer Laws and Regulations TILA October 2021 TILA 67 Thus, in a transaction that finances the construction of a dwelling that may be permanently financed by the same creditor, the construction financing phase and the permanent financing phases may be disclosed in one of three ways listed below. • As a single transaction, with one disclosure combining both phases. • As two separate transactions, with one disclosure for each phase. • As more than two transactions, with one disclosure for each advance and one for the permanent financing phase (Comment 17(c)(6)-3). B. Delivery of Disclosures – 12 CFR 1026.19(e)(1)(iii) Regulation Z clarifies the timing requirements for providing the Loan Estimate for construction and construction-permanent loans based on when the creditor receives an application (12 CFR 1026.19(e)(1)(iii)). Comment 19(e)(1)(iii)-5 provides examples of different scenarios, illustrating how the timing requirements would apply. For example, where a creditor receives an application for both the construction and permanent phases of a transaction, the creditor must deliver or place in the mail either a single Loan Estimate (if the phases are treated as one transaction) or two or more Loan Estimates (if the phases are treated separately) within three business days of receiving the application and not later than seven business days before consummation. C. Completion of Loan Estimate and Closing Disclosure Generally, a financial institution will make disclosures for construction loans in the same manner as it discloses terms for non-construction loans, following the guidance of applicable regulations (See 12 CFR 1026.37 and 1026.38). The financial institution may, at its option, use Appendix D to Regulation Z to estimate and disclose the terms of multiple-advance construction and construction-permanent loans (12 CFR Part 1026, App. D). This appendix reflects the approach taken in 12 CFR 1026.17(c)(6)(ii), which permits creditors to provide separate or combined disclosures for the construction period and for the permanent financing, as discussed above. The financial institution may, at its option, use Appendix D to the regulation to assist in estimating and disclosing the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction. Appendix D may also be used in multiple-advance transactions other than construction loans, when the amounts or timing of advances are unknown at consummation (Comment App. D-1). Appendix D and its associated commentary provide additional guidance and clarification on how to complete various portions of the Loan Estimate and Closing Disclosure. Additional guidance and examples are intended to inform the accurate disclosure of information related to Loan Term (Comment App. D. 7.i), Loan Product (Comment App. D 7.ii), Interest Rate (Comment App. D. 7.iii), Increases in Periodic Payment (Comment App. D. 7.iv), Projected Payments Table (Comment App. D. 7.v), Disclosure of Construction Costs (Comment App. D. 7.vi), and Inspection and Handling Fees (Comment App. D. 7.vii). Interagency Consumer Laws and Regulations TILA October 2021 TILA 70 due within the first 210 days after consummation, the creditor must provide the rate change disclosure at consummation. Disclosures required under this section must provide consumers with information related to the timing and nature of the rate change. If the new rate pursuant to the change disclosed is not known and the creditor provides an estimate, the rate must be identified as an estimate. If the creditor is using an estimate, it must be based on the index within 15 business days prior to the date of the disclosure. The calculation is made using the index reported in the source of information that the creditor uses in the explanation of how the interest rate is determined. Disclosures required under 12 CFR 1026.20(d) must also include, among others: • The date of the disclosure. • A statement explaining that the time period that the current rate has been in effect is ending, that the current rate is expiring, and that a change in the rate may result in a change in the required payment; providing the effective date of the change and a schedule of any future changes; and describing any other changes to the loan terms, features, or options taking effect on the same date (including expiration of interest-only or payment-option features). • A table containing the current and new interest rates, the current and new payments, including the date the new payment is due, and for interest-only or negative amortization loans, the amount of the current and new payment allocated to principal, interest, and escrow (if applicable). NOTE: The new payment allocation disclosed is the expected payment allocation for the first payment for which the new interest rate will apply. • An explanation of how the interest rate is determined, including (among other things) an explanation of the index or formula used to determine the new rate and the margin. • Any limitations on the interest rate or payment increase for each scheduled increase and over the life of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments. • An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change. • If the creditor is using an estimated rate or payment, a statement that the actual new interest rate and new payment will be provided to the consumer between two and four months prior to the first payment at the new rate. • For negative amortization loans, creditors must provide a statement indicating that the new payment will not be allocated to pay loan principal and will not reduce the balance of the Interagency Consumer Laws and Regulations TILA October 2021 TILA 71 loan; instead, the payment will only apply to part of the interest, thereby increasing the amount of principal. • A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer. • The telephone number of the creditor, assignee, or servicer for use if the consumer anticipates that he or she may not be able to make the new payments. • A statement providing specified alternatives (which include refinancing, selling the property, loan modification, and forbearance) available if the consumer anticipates not being able to make the new payment. • A website address for either the CFPB’s or the Department of Housing and Urban Development’s (HUD) list of homeownership counselors and counseling organizations, the HUD toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations, and the CFPB’s website address for state housing finance authorities contact information. • For more information pertaining to the required format of the disclosures required under 12 CFR 1026.20(d), please see 12 CFR 1026.20(d)(3) and the model and sample Forms H- 4(D)(3) and (4) in Appendix H. 2. Disclosure of Post-Consummation Events – Rate Adjustments Resulting in Payment Changes – 12 CFR 1026.20(c) Creditors, assignees, or servicers31 (referred to collectively as creditors) of ARMs secured by a consumer’s principal dwelling with a term greater than one year are generally required to provide consumers with disclosures prior to the adjustment of the interest rate on the mortgage,32 if the interest rate change will result in a payment change as follows: • For ARMs where the payment changes along with a rate change, disclosures must be provided to consumers between 60 and 120 days before the first payment at the new amount is due. • For ARMs where the payment changes in connection with a uniformly scheduled interest rate adjustment occurring every 60 days (or more frequently), the disclosures must be provided between 25 and 120 days before the first payment at the new amount is due. 31 Creditors, assignees, and servicers are all subject to the requirements of 12 CFR 1026.20(c). Creditors, assignees, and servicers may decide among themselves which of them will provide the required disclosures. However, establishing a business relationship where one party agrees to provide disclosures on behalf of the other parties does not absolve all other parties from their legal obligations. 32 Exemptions to disclosure requirements are covered in the section titled “Exemptions to the Adjustable Rate Mortgage Disclosure Requirements – 12 CFR 1026.20(c)(1)(ii) and (d)(1)(ii)” below. Interagency Consumer Laws and Regulations TILA October 2021 TILA 72 • For ARMs originated prior to January 10, 2015, in which the contract requires the adjusted interest and payment to be calculated based on an index that is available on a date less than 45 days prior to the adjustment date, disclosures must be provided between 25 and 120 days before the first payment at the new amount is required. • For ARMs where the first adjustment occurs within 60 days of consummation and the new interest rate disclosed at the time was an estimate, the disclosures must be provided as soon as practicable, but no less than 25 days before the first payment at the new amount is due. Disclosures required under 12 CFR 1026.20(c) must contain specific information, which includes, among others: • A statement explaining that the time period during which the consumer’s current rate has been in effect is ending and that the rate and payment will change; when the interest rate will change; dates when additional interest rate adjustments are scheduled to occur; and any other change in loan terms or features that take effect on the same date that the interest rate and payment change, such as an expiration of interest-only treatment or payment-option feature; • A table explaining the current and new interest rates; the current and new payments, including the date the new payment is due; and for interest-only or negative amortizing loans, the amount of the current and new payment allocated to principal, interest, and amounts for escrow (if applicable); • An explanation of how the new interest rate is determined, including (among other things) the index or formula used to determine the new rate and the margin, and any application of previously foregone interest rate increases from past adjustments; • Any limitations on the interest rate and payment increase for each scheduled increase for the duration of the loan. Creditors must also include a statement regarding the extent to which such limitations result in foregone interest rate increases and the earliest date such foregone interest rate increases may apply to future interest rate adjustments; • An explanation of how the new payment is determined, including an explanation of the index or formula used to determine the new rate, including the margin, the expected loan balance on the date of the rate adjustment, and the remaining loan term or any changes to the term caused by the rate change; • For negative amortization loans, creditors must provide a statement indicating that the new payment will not reduce the balance of the loan, rather, the payment will only apply to part of the interest, thereby increasing the amount of principal; and • A statement indicating the circumstances under which any prepayment penalty may be imposed, the time period during which it may be imposed, and a statement that the consumer may contact the servicer for additional information, including the maximum amount of the penalty that may be charged to the consumer. Interagency Consumer Laws and Regulations TILA October 2021 TILA 75 Closed-End Credit: Accuracy and Reimbursement Tolerances for UNDERSTATED FINANCE CHARGES Is the loan secured by real estate or a dwelling? No Yes Is the disclosed FC understated by more than $100 (or $200 if the loan originated before 9/30/95)? No Yes FC violation No violation FC violation No violation FC violation Yes No No Yes Is the disclosed FC understated by more than $10? Is the disclosed FC understated by more than $5? No Yes Is the amount financed greater than $1,000? Is the loan term greater than 10 years? No Yes Is the loan a regular loan? No Yes Is the disclosed FC plus the FC reimbursement tolerance (based on a one-quarter of 1 percentage point APR tolerance) less than the correct FC? Is the disclosed FC plus the FC reimbursement tolerance (based on a one-eighth of 1 percentage point APR tolerance) less than the correct FC? Yes No No Yes No reimbursement Subject to reimbursement Interagency Consumer Laws and Regulations TILA October 2021 TILA 76 Closed-End Credit: Accuracy Tolerances for OVERSTATED FINANCE CHARGES Is the loan secured by real estate or a dwelling? No Yes Is the amount financed greater than $1,000? No Yes Is the disclosed FC less $10 greater than the correct FC? Is the disclosed FC less $5 greater than the correct FC? No Yes No violation FC violation No Yes No violation FC violation No violation Interagency Consumer Laws and Regulations TILA October 2021 TILA 77 Closed-End Credit: Accuracy Tolerances for OVERSTATED APRs APR violation No violation No Yes Was the finance charge disclosure error the cause of the APR disclosure error? APR violation No Yes Is the finance charge disclosed greater than the correct finance charge? Is this a “regular” loan? No Yes Is the disclosed APR greater than the correct APR by more than one-eighth of one percentage point? Is the disclosed APR greater than the correct APR by more than one-quarter of one percentage point? No No No violation Yes Yes Is the loan secured by real estate or a dwelling? Yes No APR violation Interagency Consumer Laws and Regulations TILA October 2021 TILA 80 VIII. Escrow Cancellation Disclosures – 12 CFR 1026.20(e) Escrow Closing Notice. Before cancelling an escrow account, an Escrow Closing Notice must be provided to any consumers for whom an escrow account was established in connection with a closed-end consumer credit transaction secured by a first lien on real property or a dwelling, except for reverse mortgages (12 CFR 1026.20(e)(1)). For this purpose, the term escrow account has the same meaning given to it as under Regulation X, 12 CFR 1024.17(b), and the term servicer has the same meaning given to it as under Regulation X, 12 CFR 1024.2(b). There are two exceptions to the requirement to provide the notice: • Creditors and servicers are not required to provide the notice if the escrow account that is being canceled was established solely in connection with the consumer’s delinquency or default on the underlying debt obligation (Comment 20(e)(1)-2). • Creditors and servicers are not required to provide the notice when the underlying debt obligation for which an escrow account was established is terminated, including by repayment, refinancing, rescission, and foreclosure (Comment 20(e)(1)-3). For loans subject to the Escrow Closing Notice requirement, if the creditor or servicer cancels the escrow account at the consumer’s request, the creditor or servicer must ensure that the consumers receive the notice no later than three business days (i.e., all calendar days except Sundays and the legal public holidays (See 12 CFR 1026.2(a)(6), 1026.19(f)(1)(ii)(A) and (f)(1)(iii)) before the consumer’s escrow account is canceled (12 CFR 1026.20(e)(5)(i)). If the creditor or servicer cancels the escrow account and the cancellation is not at the consumer’s request, the creditor or servicer must ensure that the consumer receives the notice no later than 30 business days before the closure of the consumer’s escrow account (12 CFR 1026.20(e)(5)(ii). If the Escrow Closing Notice is not provided to the consumer in person, the consumer is considered to have received the notice three business days after it is delivered or placed in the mail (12 CFR 1026.20(e)(5)(iii)). The creditor or servicer must disclose (12 CFR 1026.20(e)(1)-(2)): • The date on which the account will be closed; • That an escrow account may also be called an impound or trust account; • The reason that the escrow account will be closed; • That without an escrow account, the consumer must pay all property costs, such as taxes and homeowner’s insurance, directly, possibly in one or two large payments a year; • A table, titled “Cost to you,” that contains an itemization of the amount of any fee the creditor or servicer imposes on the consumer in connection with the closure of the consumer’s escrow account, labeled “Escrow Closing Fee,” and a statement that the fee is for closing the escrow account; • Under the reference “In the future”: Interagency Consumer Laws and Regulations TILA October 2021 TILA 81 o The consequences if the consumer fails to pay property costs, including the actions that a state or local government may take if property taxes are not paid and the actions the creditor or servicer may take if the consumer does not pay some or all property costs, such as adding amounts to the loan balance, adding an escrow account to the loan, or purchasing a property insurance policy on the consumer’s behalf that may be more expensive and provide fewer benefits than a policy that the consumer could obtain directly; o A telephone number that the consumer can use to request additional information about the cancellation of the escrow account; o Whether the creditor or servicer offers the option of keeping the escrow account open and, as applicable, a telephone number the consumer can use to request that the account be kept open; and o Whether there is a cutoff date by which the consumer can request that the account be kept open. The creditor or servicer may also, at its option, disclose (12 CFR 1026.20(e)(3)): • The creditor or servicer’s name or logo; • The consumer’s name, phone number, mailing address, and property address; • The issue date of the notice; • The loan number; or • The consumer’s account number. In addition, the disclosures must: • Contain a required heading that is more conspicuous than and precedes the required disclosures discussed above (12 CFR 1026.20(e)(4)). • Be clear and conspicuous. This standard generally requires that the disclosures in the Escrow Closing Notice be in a reasonably understandable form and readily noticeable to the consumer (Comment 20(e)(2)-1). • Be written in 10-point font, at a minimum (12 CFR 1026.20(e)(4)). • Be grouped together on the front side of a one-page document. The disclosures must be separate from all other materials, with the headings, content, order, and format substantially similar to Model Form H-29 in Appendix H to Regulation Z (12 CFR 1026.20(e)(4)). This requirement, however, does not preclude creditors and servicers from modifying the disclosures to accommodate particular consumer circumstances or transactions not addressed by the form or from adjusting the statement required by 12 CFR 1026.20(e)(2)(ii)(A), Interagency Consumer Laws and Regulations TILA October 2021 TILA 82 concerning consequences if the consumer fails to pay property costs, to the circumstances of the particular consumer (Comment 20(e)(4)-3). IX. Successors in Interest – 12 CFR 1026.20(f) If, upon confirmation, a servicer provides a confirmed successor in interest who is not liable on the mortgage loan obligation with an optional notice and acknowledgment form in accordance with Regulation X, 12 CFR 1024.32(c)(1), the servicer is not required to provide to the confirmed successor in interest any written disclosure required by 12 CFR 1026.20(c) (rate adjustments with corresponding change in payment), 12 CFR 1026.20(d) (initial rate adjustment), and 12 CFR 1026.20(e) (escrow account cancellation notice), unless and until the confirmed successor in interest either assumes the mortgage loan obligation under state law or has provided the servicer an executed acknowledgement form in accordance with Regulation X, 12 CFR 1024.32(c)(1)(iv), and the confirmed successor in interest has not revoked such acknowledgement form. X. Treatment of Credit Balances – 12 CFR 1026.21 When a credit balance in excess of $1 is created in connection with a transaction (through transmittal of funds to a creditor in excess of the total balance due on an account, through rebates of unearned finance charges or insurance premiums, or through amounts otherwise owed to or held for the benefit of a consumer), the creditor is required to: • Credit the amount of the credit balance to the consumer’s account; • Refund any part of the remaining credit balance, upon the written request of the consumer; and • Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than six months, except that no further action is required if the consumer’s current location is not known to the creditor and cannot be traced through the consumer’s last known address or telephone number. XI. Closed-End Advertising – 12 CFR 1026.24 If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor. Disclosures required by this section must be made “clearly and conspicuously.” To meet this standard in general, credit terms need not be printed in a certain type size nor appear in any particular place in the advertisement. For advertisements for credit secured by a dwelling, a clear and conspicuous disclosure means that the required information is disclosed with equal prominence and in close proximity to the advertised rates or payments triggering the required disclosures. Interagency Consumer Laws and Regulations TILA October 2021 TILA 85 must permit the enforcing agency to inspect its relevant records for compliance (12 CFR 1026.25(b)). The record retention period for mortgage loans is generally three years (12 CFR 1026.25(c)). A creditor must retain evidence of compliance with the requirements of 12 CFR 1026.19(e) and (f) for three years after the later of the date of consummation, the date disclosures are required to be made, or the date the action is required to be taken (12 CFR 1026.25(c)(1)(i)). For Closing Disclosures, the record retention period is five years. The creditor must retain completed closing disclosures required by 12 CFR 1026.19(f)(1)(i) or (f)(4)(i), and all documents related to such disclosures, for five years after consummation (12 CFR 1026.25(c)(1)(ii)(A)). If a creditor sells, transfers, or otherwise disposes of its interest in a mortgage loan subject to 12 CFR 1026.19(f) and does not service the mortgage loan, the creditor must provide a copy of the closing disclosures to the owner or servicer of the mortgage, and the new owner or servicer must retain such disclosures for the remainder of the five-year period. For loan originator compensation, creditors and loan originator organizations must retain records-related requirements for mortgage loan originator compensation and the compensation agreement that governs those payments for three years after the date of payment (12 CFR 1026.25(c)(2)). A creditor must retain evidence to show compliance with the minimum standards for loans secured by a dwelling in 12 CFR 1026.43 for three years after consummation of a transaction covered by that section (12 CFR 1026.25(c)(3)). Relationship to State Law – TILA 111 and 12 CFR 1026.28, 1026.29 State laws providing rights, responsibilities, or procedures for consumers or financial institutions for consumer credit contracts may be: • Preempted by federal law, • Not preempted by federal law, or • Substituted in lieu of TILA and Regulation Z requirements. State law provisions are preempted to the extent that they contradict the requirements in the following chapters of TILA and the implementing sections of Regulation Z: • Chapter 1, General Provisions, which contains definitions and acceptable methods for determining finance charges and annual percentage rates. • Chapter 2, Credit Transactions, which contains disclosure requirements, rescission rights, and certain credit card provisions. Interagency Consumer Laws and Regulations TILA October 2021 TILA 86 • Chapter 3, Credit Advertising, which contains consumer credit advertising rules and APR oral disclosure requirements. For example, a state law would be preempted if it required a financial institution to use the terms “nominal annual interest rate” in lieu of “annual percentage rate.” Conversely, state law provisions are generally not preempted under federal law if they call for, without contradicting Chapters 1, 2, or 3 of TILA or the implementing sections of Regulation Z, either of the following: • Disclosure of information not otherwise required. A state law that requires disclosure of the minimum periodic payment for open-end credit, for example, would not be preempted because it does not contradict federal law. • Disclosures more detailed than those required. A state law that requires itemization of the amount financed, for example, would not be preempted, unless it contradicts federal law by requiring the itemization to appear with the disclosure of the amount financed in the segregated closed-end credit disclosures. The relationship between state law and Chapter 4 of TILA (Credit Billing) involves two parts. The first part is concerned with Sections 161 (correction of billing errors) and 162 (regulation of credit reports) of the TILA; the second part addresses the remaining sections of Chapter 4. State law provisions are preempted if they differ from the rights, responsibilities, or procedures contained in Sections 161 or 162. An exception is made, however, for state law that allows a consumer to inquire about an account and requires the bank to respond to such inquiry beyond the time limits provided by federal law. Such a state law would not be preempted for the extra time period. State law provisions are preempted if they result in violations of Sections 163 through 171 of Chapter 4. For example, a state law that allows the card issuer to offset the consumer’s credit- card indebtedness against funds held by the card issuer would be preempted, since it would violate (12 CFR 1026.12(d)). Conversely, a state law that requires periodic statements to be sent more than 14 days before the end of a free-ride period would not be preempted, since no violation of federal law is involved. A financial institution, state, or other interested party may ask the CFPB to determine whether state law contradicts Chapters 1 through 3 of TILA or Regulation Z. The party also may ask if the state law is different from, or would result in violations of, Chapter 4 of TILA and the implementing provisions of Regulation Z. If the Bureau determines that a disclosure required by state law (other than a requirement relating to the finance charge, APR, or the disclosures required under 12 CFR 1026.32 is substantially the same in meaning as a disclosure required under TILA or Regulation Z, generally creditors in that state may make the state disclosure in lieu of the federal disclosure. Interagency Consumer Laws and Regulations TILA October 2021 TILA 87 Subpart E – Special Rules for Certain Home Mortgage Transactions Subpart E contains special rules for mortgage transactions. 12 CFR 1026.32 requires certain disclosures and provides limitations for closed-end credit transactions and open-end credit plans that have rates or fees above specified amounts or certain prepayment penalties. 12 CFR 1026.33 requires special disclosures, including the total annual loan cost rate, for reverse mortgage transactions. 12 CFR 1026.34 prohibits specific acts and practices in connection with high-cost mortgages, as defined in 12 CFR 1026.32(a). 12 CFR 1026.35 provides requirements for higher- priced mortgage loans. 12 CFR 1026.36 prohibits specific acts and practices in connection with an extension of credit secured by a dwelling. 12 CFR 1026.37 and 1026.38 set forth disclosure requirements for certain closed-end transactions secured by real property or cooperative unit, as required by 12 CFR 1026.19(e) and (f). General Rules – 12 CFR 1026.31 The requirements and limitations of this subpart are in addition to, and not in lieu of, those contained in other subparts of Regulation Z. The disclosures for high-cost, reverse mortgage, and higher-priced mortgage transactions must be made clearly and conspicuously in writing, in a form that the consumer may keep and in compliance with specific timing requirements. Requirements for High-Cost Mortgages – 12 CFR 1026.32 The requirements of this section generally apply to a high-cost mortgage, which is a consumer credit transaction secured by the consumer’s principal dwelling (subject to the exemptions discussed below) that meets any one of the following three coverage tests. • The APR will exceed the average prime offer rate (APOR), as defined in 12 CFR 1026.35(a)(2), applicable for a comparable transaction as of the date the interest rate is set by: o More than 6.5 percentage points for first-lien transactions (other than as described below); o More than 8.5 percentage points for first-lien transactions where the dwelling is personal property and the loan amount is less than $50,000; or o More than 8.5 percentage points for subordinate-lien transactions. • The total points and fees (see definition below) for the transaction will exceed: o For transactions with a loan amount of $20,000 or more, 5 percent of the total loan amount, with the loan amount to be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index reported on the preceding June 1; or o For transactions with a loan amount of less than $20,000, the lesser of 8 percent of the total transaction amount or $1,000, with the loan amount to be adjusted annually on Interagency Consumer Laws and Regulations TILA October 2021 TILA 90 o Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either, unless the charge is required to be included under 12 CFR 1026.32(b)(1)(i)(C), (iii), or (v); o Up to two bona fide discount points payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR for a comparable transaction by more than one percentage point; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than one percentage point; or o If no discount points have been excluded above, then up to one bona fide discount point payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR for a comparable transaction by more than two percentage points; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than two percentage points. NOTE: In the case of a closed-end plan, a bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer (12 CFR 1026.32(b)(3)). • All compensation paid directly or indirectly by a consumer or creditor to a loan originator (as defined in 12 CFR 1026.36(a)(1)) that can be attributed to the transaction at the time the interest rate is set unless: o That compensation is paid by a consumer to a mortgage broker, as defined in 12 CFR 1026.36(a)(2), and already has been included in points and fees under 12 CFR 1026.32(b)(1)(i); o That compensation is paid by a mortgage broker, as defined in 12 CFR 1026.36(a)(2), to a loan originator that is an employee of the mortgage broker; o That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or • All items listed in 12 CFR 1026.4(c)(7), other than amounts held for future taxes, unless all of the following conditions are met: o The charge is reasonable, Interagency Consumer Laws and Regulations TILA October 2021 TILA 91 o The creditor receives no direct or indirect compensation in connection with the charge, and o The charge is not paid to an affiliate of the creditor. • Premiums or other charges paid at or before consummation, whether paid in cash or financed, for any credit life, credit disability, credit unemployment, or credit property insurance, or for any other life, accident, health, or loss-of-income insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract. • The maximum prepayment penalty that may be charged or collected under the terms of the mortgage or credit plan. • The total prepayment penalty incurred by the consumer if the consumer refinances an existing mortgage loan, or terminates an existing open-end credit plan in connection with obtaining a new mortgage loan, with a new mortgage transaction extended by the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either. For an open-end credit plan, points and fees mean the following charges that are known at or before account opening (12 CFR 1026.32(b)(2)): • All items included in the finance charge under 12 CFR 1026.4(a) and (b), except that the following items are excluded: o Interest or the time-price differential; o Any premiums or other charges imposed in connection with a federal or state agency program for any guaranty or insurance that protects the creditor against the consumer’s default or other credit loss (i.e., up-front and annual FHA premiums, VA funding fees, and USDA guarantee fees); o Premiums or other charges for any guaranty or insurance that protects creditors against the consumer’s default or other credit loss and is not in connection with a federal or state agency program (i.e., PMI premiums) as follows:  If the premium or other charge is payable after account opening, the entire amount of such premium or other charge; or  If the premium or other charge is payable at or before account opening, the portion of any such premium or other charge that is not in excess of the permissible up-front mortgage insurance premium for FHA loans, but only if the premium or charge is refundable on a pro rata basis and the refund is automatically issued upon the notification of the satisfaction of the underlying mortgage loan. The permissible up- front mortgage insurance premiums for FHA loans are published in HUD Mortgagee Interagency Consumer Laws and Regulations TILA October 2021 TILA 92 Letters, available online at: https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee o Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either, unless the charge is required to be included under 12 CFR 1026.32(b)(2)(i)(C), (iii), or (iv); o Up to two bona fide discount points payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR by more than one percentage point; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than one percentage point; or o If no discount points have been excluded above, then up to one bona fide discount point payable by the consumer in connection with the transaction, provided that the interest rate without any discount does not exceed:  The APOR by more than two percentage points; or  If the transaction is secured by personal property, the average rate for a loan insured under Title I of the National Housing Act by more than two percentage points. NOTE: A bona fide discount point means an amount equal to 1 percent of the credit limit when the account is opened, paid by the consumer, that reduces the interest rate or time- price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer (12 CFR 1026.32(b)(3)(ii)). • All compensation paid directly or indirectly by a consumer or creditor to a loan originator (as defined in 12 CFR 1026.36(a)(1)) that can be attributed to the transaction at the time the interest rate is set unless: o That compensation is paid by a consumer to a mortgage broker, as defined in 12 CFR 1026.36(a)(2), and already has been included in points and fees under 12 CFR 1026.36(b)(2)(i)); or o That compensation is paid by a mortgage broker as defined in 12 CFR 1026.36(a)(2) to a loan originator that is an employee of the mortgage broker; or o That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or o That compensation is paid by a retailer of manufactured homes to its employee. NOTES: Interagency Consumer Laws and Regulations TILA October 2021 TILA 95 High-Cost Mortgage Limitations – 12 CFR 1026.32(d) Certain loan terms, including negative amortization, interest rate increases after default, and prepayment penalties are prohibited for high-cost mortgages. Others, including balloon payments and due-on-demand clauses, are restricted. • Balloon payments, defined as payments that are more than two times a regular periodic payment, are generally prohibited for high-cost mortgages (12 CFR 1026.32(d)(1)(i)). However, balloon payments are allowed in certain limited circumstances. o For closed-end transactions, balloon payments are permitted when (a) the loan has a payment schedule that is adjusted to seasonal or irregular income of the consumer; (b) the loan is a “bridge” loan made in connection with the purchase of a new dwelling and matures in 12 months or less; (c) the creditor is a small creditor operating in a rural or underserved area that meets the criteria set forth in 12 CFR 1026.43(f) for small creditor rural or underserved balloon-payment qualified mortgages; or, (d) until April 1, 2016, the creditor is a small creditor that meets the criteria set forth in 1026.43(e)(6)) for temporary balloon-payment qualified mortgages (12 CFR 1026.32(d)(1)(ii)). o For an open-end credit plan where the terms of the plan provide for a draw period where no payment is required, followed by a repayment period where no further draws may be taken, the initial payment required after conversion to the repayment phase of the credit plan is not considered a “balloon” payment. However, if the terms of an open-end credit plan do not provide for a separate draw period and repayment period, the balloon payment limitation applies (12 CFR 1026.32(d)(1)(iii)). • Acceleration clauses or demand features are limited and may only permit creditors to accelerate and demand repayment of the entire outstanding balance of a high-cost mortgage if: o There is fraud or material misrepresentation by the consumer in connection with the loan (12 CFR 1026.32(d)(8)(i)); o The consumer fails to meet the repayment terms of the agreement for any outstanding balance that results in a default on the loan (12 CFR 1026.32(d)(8)(ii)); or o There is any action (or inaction) by the consumer that adversely affects the rights of the creditor’s security interest for the loan, such as the consumer failing to pay required taxes on the property (12 CFR 1026.32(d)(8)(iii) and Comments 32(d)(8)(iii)-1 and -2). Prohibited Acts or Practices in Connection with High-Cost Mortgages – 12 CFR 1026.34 In addition to the requirements in 12 CFR 1026.32, Regulation Z imposes additional requirements for high-cost mortgages, several of which are discussed below. Interagency Consumer Laws and Regulations TILA October 2021 TILA 96 Refinancing Within One Year – 12 CFR 1026.34(a)(3) A creditor or assignee cannot refinance a consumer’s high-cost mortgage into a second high-cost mortgage within the first year of the origination of the first loan, unless the second high-cost mortgage is in the consumer’s interest. Repayment Ability for High-Cost Mortgages – 12 CFR 1026.34(a)(4) Among other requirements, a creditor extending high-cost mortgage credit subject to 12 CFR 1026.32 must not make such loans without regard to the consumer’s repayment ability as of consummation or account opening as applicable (12 CFR 1026.34(a)(4)). For closed-end credit transactions that are high-cost mortgages, 12 CFR 1026.34(a)(4) requires a creditor to comply with the repayment ability requirements set forth in 12 CFR 1026.43. For open-end credit plans that are high-cost mortgages, a creditor may not open a credit plan for a consumer where credit is or will be extended without regard to the consumer’s repayment ability as of account opening, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, and current obligations, including any mortgage- related obligations. • For the purposes of these open-end requirements, mortgage-related obligations include, among other things, property taxes, premiums and fees for mortgage-related insurance that are required by the creditor, fees and special assessments such as those imposed by a condominium association, and similar expenses required by another credit obligation undertaken prior to or at account opening and secured by the same dwelling that secures the high-cost mortgage transaction (12 CFR 1026.34(a)(4)(i)). • A creditor must also verify both current obligations and the amounts of income or assets that it relies on to determine repayment ability using W-2s, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets (12 CFR 1026.34(a)(4)(ii)). For open-end high-cost mortgages, a presumption of compliance is available, but only if the creditor: • Verifies the consumer’s repayment ability as required under 12 CFR 1026.34(a)(4)(ii)); • Determines the consumer’s repayment ability taking into account current obligations and mortgage-related obligations, using the largest required minimum periodic payment based on the assumptions that: o The consumer borrows the full credit line at account opening with no additional extensions of credit; o The consumer makes only required minimum periodic payments during the draw period and any repayment period; and Interagency Consumer Laws and Regulations TILA October 2021 TILA 97 o If the APR can increase, the maximum APR that is included in the contract applies to the plan at account opening and will apply during the draw and any repayment period (12 CFR 1026.34(a)(4)(iii)(B)). • Assesses the consumer’s repayment ability, taking into account either the ratio of total debts to income or the income the consumer will have after paying current obligations (12 CFR 1026.34(a)(4)(iii)(C)). NOTE: No presumption of compliance will be available for an open-end high-cost mortgage transaction in which the regular periodic payments, when aggregated, do not fully amortize the outstanding principal balance except for transactions with balloon payments permitted under (12 CFR 1026.32(d)(1)(ii)). High-Cost Mortgage Pre-Loan Counseling – 12 CFR 1026.34(a)(5) Creditors that originate high-cost mortgages must receive written certification that the consumer has obtained counseling on the advisability of the mortgage from a counselor approved by HUD, or if permitted by HUD, a state housing finance authority (specific content for the certifications can be found in (12 CFR 1026.34(a)(5)(iv)). Counseling must occur after the consumer receives a good faith estimate or initial TILA disclosure required by 12 CFR 1026.40 (or, for transactions where neither of those disclosures are provided, the disclosures required by (12 CFR 1026.32(c)). Additionally, counseling cannot be provided by a counselor who is employed by, or affiliated with, the creditor. A creditor may pay the fees for counseling but is prohibited from conditioning the payment of fees upon the consummation of the mortgage transaction or, if the consumer withdraws his or her application, upon receipt of the certification. However, a creditor may confirm that a counselor provided counseling to the consumer prior to paying these fees. Finally, a creditor is prohibited from steering a consumer to a particular counselor. Recommended Default – 12 CFR 1026.34(a)(6) Creditors (and mortgage brokers) are prohibited from recommending or encouraging a consumer to default on an existing loan or other debt prior to, and in connection with, the consummation or account opening of a high-cost mortgage that refinances all or any portion of the existing loan or debt. Loan Modification and Deferral Fees – 12 CFR 1026.34(a)(7) Creditors, successors in interest, assignees, or any agents of these parties may not charge a consumer any fee to modify, renew, extend, or amend a high-cost mortgage, or to defer any payment due under the terms of the mortgage. Late Fees – 12 CFR 1026.34(a)(8) Late payment charges for a high-cost mortgage must be permitted by the terms of the loan contract or open-end agreement and may not exceed 4 percent of the amount of the payment that is past due. Late payment charges are permitted only if payment is not received by the end of the