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Copyright 2011 Robert M. JaworskiAll Rights Reserved

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MBA Regulatory Compliance ConferenceRenaissance Washington DC Downtown Hotel

Washington, D.C.September 25, 2011

Workshop: Quick Guide to TILA

ByRobert M. Jaworski, Esq.

Reed Smith, LLP

I. OVERVIEW OF TRUTH-IN-LENDING ACT/REGULATION Z

A. Purpose and Scope

The overriding purpose of the Truth-in-Lending Act,1

(TILA), and its implementing regulation, Regulation

Z,2 is to ensure a meaningful disclosure of credit terms so that consumers are better able to "shop" forcredit and to use credit wisely. It generally applies to any loan payable in four or more installments or onwhich a finance charge is imposed to a natural person for personal, family, or household purposes.Special rules apply to loans secured by a lien on a dwelling and by a lien on the borrower's principaldwelling.

In summary, TILA, as amended in 2008 by the Mortgage Disclosure Improvement Act of 2008 (MDIA),3

and Regulation Z attempt to achieve the purposes for which TILA was enacted by:

Establishing uniform definitions for certain credit terms which all lenders are required to use.Developing, through the efforts of the Federal Reserve Board (FRB), model disclosure forms andclauses that, if used appropriately by a lender, will result in the lender being deemed to be incompliance with the Act's disclosure provisions.

Requiring creditors to provide loan disclosures containing specified items of information toborrowers no later than the earlier of consummation or three days after receiving the borrower'swritten application for a closed-end dwelling-secured mortgage loan, and delaying the collectionof any significant fees until after such disclosures have been delivered.Mandating that certain information on this disclosure be grouped together and segregated from allother information required to be disclosed, such as by putting the grouped information in the so-called Federal Box.Providing consumers with an absolute right to rescind certain transactions in which a lien is takenon the borrower's principal dwelling at any time generally up to midnight of the third business dayfollowing consummation.Prohibiting creditors and mortgage brokers from coercing, influencing or otherwise encouragingappraisers to misstate or misrepresent the value of a home that secures a closed-end dwelling-secured loan.

1 15 U.S.C. 1601 et seq.

2 12 C.F.R. 226.1 et seq.

3 The MDIA is contained in Sections 2501 through 2503 of the Housing and Economic Recovery Act of 2008 (HERA), Pub.

L. 110289, enacted on July 30, 2008. The MDIA was amended by the Emergency Economic Stabilization Act of 2008,Pub. L. 110343, enacted on October 3, 2008.


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Imposing rules relating to the servicing of closed-end dwelling-secured loans.Imposing special rules relating to higher priced mortgage loans (HPMLs) and HOEPA loans(Section 32 mortgages).Requires purchasers of mortgage loans secured by the borrowers principal dwelling to notify theborrower of the purchase within 30 daysRegulating the advertising practices of lenders.

Creating a formal procedure that creditors must follow in resolving billing-error disputes with theircustomers.

B. Finance Charge , APR and Amount Financed

The three primary credit terms defined under TILA are finance charge,annual percentage rateor APR,and amount financed.

The finance chargeis defined generally as "the cost of consumer credit as a dollar amount" and includesany charge payable directly or indirectly by the consumer "as an incident to or as a condition of theextension of credit."

Examples of charges that would be considered to be part of the finance charge include interest andanything resembling interest, points or loan or finders' fees, service fees payable on the loan account, anymortgage broker fees paid by the borrower, inspection fees for the staged disbursements of constructionloan proceeds, tax service fees, flood zone life-of-loan monitoring service charges, premiums formortgage insurance protecting the lender against the borrower's default or other credit loss (PMI), credit,life, accident, health or loss of income insurance premiums if required as a condition of obtaining thecredit, and hazard insurance premiums if required to be purchased through the lender.

Examples of charges that would not be considered part of the finance charge include application fees(charged to all applicants), late charges, default charges, sellers' points, the cost of a flood zonecertification required for closing, fees paid to government officials to perfect a security interest, third-partycharges for services not required by the creditor so long as the creditor does not retain any part of thecharge, voluntary credit life, accident, health or loss of income insurance premiums which are disclosedas such, required hazard insurance premiums which are disclosed as being obtainable by the consumerfrom any source, and, with respect particularly to mortgage loans, title examination fees and title

insurance premiums, escrow funds to pay for future taxes and insurance, appraisal and credit report feesand notary fees, and fees for preparing certain mortgage documents.

Tolerances. For closed-end credit secured by real property or a dwelling, a disclosed finance charge isgenerally considered accurate if it is not more than $100 below the actual finance charge. For rescissionpurposes, this tolerance is 1/2 of 1% of the total amount of credit extended, except for refinancings withno cash out (that are not 32 loans), for which the tolerance is 1% of the total amount of creditextended. For extended rescission purposes in connection with a loan in foreclosure, the financecharge tolerance is only $35. Finally, any disclosed finance charge that exceeds the actual financecharge is considered accurate; i.e., overdisclosure of a finance charge is not a violation of TILA.

The annual percentage rate or APR is defined as "a measure of the cost of credit, expressed as ayearly rate, that relates the amount and timing of value received from the consumer to the amount and

timing of payments made." It is to be determined using either the actuarial method or the United StatesRule method, and is generally considered accurate for purposes of TILA if it is no more than 1/8th of onepercentage point (for regular transactions) or 1/4 of one percentage point (for irregular transactions)below the true APR (with respect to "regular" transactions). A disclosed APR is also considered accurateif, despite exceeding the one eighth of 1% APR tolerance limit, it is based on an incorrect finance chargethat is within the applicable finance charge tolerance limit.


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The finance charge and APR must be disclosed more conspicuously than any other terms, except thecreditor's identity.

The amount financedis essentially the amount of credit provided to or on behalf of the consumer. It iscalculated by determining the principal loan amount, adding any other amounts that are financed by thecreditor and are not part of the finance charge, and subtracting any prepaid finance charges. Thetolerance rules applicable to the finance charge also apply to the amount financed.

C. Disclosure Requirements for Closed-End Loans

The MDIAamended TILA to require creditors to provide consumers with an estimated TILA disclosure(early TIL) within three business days following receipt of the consumers application for a closed -endloan to be secured by a dwelling. (Previously, an early TIL had only been required in connection withpurchase money transactions.) The early TIL (and any subsequent TIL) must contain specified items ofinformation concerning the loan.

The early TIL (and any subsequent TIL) must be in a format that groups together and segregates themost significant of the required items of information, namely, the finance charge, the APR, the totalamount of payments and the amount financed. This is done, typically, by placing these items in theso-called Federal Box at the top of the page. The early TIL must also include a statement that receipt of

an early-TIL or the signing of an application does not require the consumer to complete the loantransaction.

Effective January 30, 2011, the FRB, under the authority of the MDIA, adopted an interim final ruleamending the requirements in Regulation Z regarding disclosure of the payment schedule on closed-endloans.

4The new disclosures are designed to alert borrowers, up-front, to the risks of payment increases.

Under the interim rule, the creditors disclosures must include a payment summary, in tabular format,stating (1) the initial interest rate and payment amount, (2) for ARM and step-rate loans, the maximuminterest rate and payment amount that could occur during (a) the first 5 years of the loan term and (b) thelife of the loan, and (3) the fact that consumers might be able to avoid increased payments by refinancingtheir loans. In addition, the interim rule requires creditors to disclose certain loan features, such asballoon payments or options to make only minimum payments that will cause the principal amount of theloan to increase.

Model forms have been developed by the FRB to meet the disclosure requirements in Regulation Z, andshould be utilized to the extent possible. They can be found in the Appendices to Regulation Z. Use ofthese model forms in appropriate circumstances will be deemed to constitute compliance with TILAsdisclosure provisions.

The MDIA also amended TILA to require that, for any loan for which an early-TIL must be provided,neither the creditor nor any other person (including a mortgage broker) may impose a fee (other than afee to pay for the consumers credit report) before the early-TIL has been delivered to the consumer. Anearly-TIL that has been mailed to the consumer will be considered to have been delivered to theconsumer three business days after mailing. Closing of such a loan may not occur until at least sevenbusiness days have passed after the early-TIL was sent to the consumer.

If the APR disclosed on the early-TIL becomes inaccurate (outside of the APR tolerance limit), the creditormust provide a corrected disclosure with all changed terms. The consumer must receive the correcteddisclosure no later than three business days before closing. (For this purpose, a business day meansany day except Sundays and federal holidays.) A corrected disclosure that has been mailed to theconsumer will be considered to have been delivered to the consumer three business days after mailing.

4 75 Fed. Reg. 58470 (Sept. 24, 2010); seealso, 75 Fed. Reg. 81836 (Dec. 29, 2010)(clarification).


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Consumers may waive either of these waiting periods to meet a bona fidepersonal financial emergency.To do so, the consumer must give the creditor a dated written statement (not a printed form) thatdescribes the emergency, specifically modifies or waives the waiting period, and is signed by allconsumers who will be primarily liable on the obligation.

D. Disclosure Requirements for Closed-End ARM Loans

Regulation Z requires that, with respect to closed-end adjustable rate mortgage (ARM) loans which havea term greater than one year and which are secured by the consumers principal dwelling, a bookletpublished by the FRB entitled Consumer Handbook on Adjustable-Rate Mortgages and an ARMprogram disclosure must be given to the consumer no later than when the consumer is provided with anapplication form or pays a non-refundable fee, whichever occurs first.

An ARM program disclosure must be given for each variable-rate program in which the consumerexpresses an interest. Each ARM program disclosure must contain specified items of informationconcerning the ARM program. Model ARM program clauses have been developed by the FRB.

E. Disclosure Requirements for HELOCs

At Time of Application

Regulation Z requires that, with respect to open-end home equity line of credit loans (HELOCs), abrochure published by the FRB entitled What You Should Know About Home Equity Lines of Credit anda HELOC plan disclosure must be given to the consumer at the time he/she is provided with an application.The HELOC plan disclosure must contain specified items of information concerning the HELOC plan . Additionalitems of information are required to be disclosed for variable-rate HELOC plans.

Before First Transaction Is Made Under The Plan

Regulation Z also requires that, with respect to HELOCs, a disclosure containing specified items ofinformation be given to consumers before they make their first purchase, receive their first advance orpay any fees under the plan (other than an application or refundable membership fee).

Periodic Statement

Finally, Regulation Z states that, with respect to HELOCs, creditors must mail or deliver to the consumera periodic statement for each billing cycle (in which there is a closing credit or debit balance in excess of$1 or on which a finance charge is imposed), and must do so at least 14 days before the end of any graceperiod within which the new balance or any portion thereof must be paid to avoid additional financecharges. The periodic statement must disclose specified items of information concerning the borrowersHELOC account.

F. Right of Rescission

Lenders are required under TILA and Regulation Z to provide certain borrowers with a separatedocument (Notice of Right to Cancel) stating that a security interest is being taken on the borrower's

principal dwelling as a result of the transaction, that they have a right to rescind the transaction, how theycan exercise the right and when it expires, and what effect rescission would have. Two copies of thedocument must be given to each person whose ownership interest is or will be subject to the securityinterest.

Note that a consumer can generally only have one principal dwellingat a time. A vacation or other homewould not be a principal dwelling. Lenders may not disburse funds until the right of rescission has expiredor unless the consumer waives the right to meet a "bona fide personal financial emergency," in a signedand dated statement (not a printed form) describing the emergency and specifically waiving the right.


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The right of rescission expires at midnight of the third business day (any day excluding Sundays andfederal holidays) following the latest of three events: (1) the giving of the notice of the right to rescind tothe borrower; (2) the giving of the material TILA disclosures; and (3) consummation of the transaction(as defined under state law). If one of these events does not occur, the right to rescind can remain openfor up to three years. (Material disclosures consist of the required disclosures of the APR, the financecharge, the amount financed, the total of payments, the payment schedule, and the disclosures andlimitations referred to in the rules governing Section 32 mortgages and HPMLs.)

When a right of rescission is exercised, the security interest becomes void, the consumer is not liable forany amount, including any finance charge, and, within 20 calendar thereafter, the lender must refund tothe consumer all funds paid to anyone in connection with the transaction. Once the creditor does so, theconsumer is responsible for returning to the creditor any money or property (or its reasonable value, ifreturn of the property is impracticable or inequitable) that has been delivered to him/her.

The right of rescission does not apply to purchase money mortgage loans OR to refinance loans with thesame creditor where there is no "cash out." With respect to cash out refinance loans with the samecreditor, the right of rescission only applies to the cash out.

G. Appraisal Coercion

Regulation Z was amended in 2008 to deal with the problem of lenders, mortgage brokers and othersattempting to influence the independent judgments of appraisers to increase their valuations of propertiesso as to qualify borrowers for the loans for which they have applied (the 2008 Amendments).

5The 2008

Amendments, which became effective on October 1, 2009, prohibit any creditor or mortgage broker, or itsaffiliate, from coercing, influencing or otherwise encouraging an appraiser to misstate or misrepresentthe value of a home that secures a closed-end loan secured by the borrowers principal dwelling. The2008 Amendments also prohibit a creditor who knows there has been a violation of this prohibition inconnection with an appraisal from extending credit based on that appraisal, unless the creditordocuments that it has used reasonable diligence to determine that the appraisal does not materiallymisstate or misrepresent the propertys value.

Examples of actions that violate the prohibition include:

Implying that the appraiser might not be hired, now or in the future, depending on how he/she valuesthe property.Not hiring an appraiser because a previous appraisal came in too low.Telling an appraiser that a minimum value is needed to approve the loan.Refusing to pay an appraiser because the appraisal came in too low.Not paying all or a portion of the appraisers compensation unless the loan closes.

Examples of actions that do not violate the prohibition include:

Asking an appraiser to consider additional information about the property or comparable properties.Requesting an appraiser to provide additional information about the basis for his/her valuation.

Requesting an appraiser to correct factual errors.Obtaining multiple appraisals, provided the creditor chooses the most reliable one rather than thehighest one.Refusing to pay an appraiser for breach of contract or substandard performance.

5 73 Fed. Reg. 44522 (July 30, 2009).


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Taking action permitted or required by federal or state law or agency guidance.

Implementing a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010(Dodd-Frank),

6the FRB, on October 28, 2010, adopted an interim final rule imposing further

requirements and restrictions concerning the process of obtaining appraisals for dwelling secured loans.7

The rule, which became effective on April 1, 2011:

Prohibits coercion and other similar actions that can cause appraisers to base the appraised value ofproperties on factors other than their independent judgment;Prohibits appraisers and appraisal management companies from having financial or other interests inthe properties they are asked to appraise or the credit transactions in connection with which theappraisals are requested;Prohibits creditors from extending credit based on appraisals if they know beforehand of violationsinvolving appraiser coercion or conflicts of interest, unless the creditors determine that the values ofthe properties have not been materially misstated;Requires creditors or settlement service providers having information about appraiser misconduct toreport such suspected misconduct to the appropriate state licensing authorities; and

Requires the payment of reasonable and customary compensation to appraisers who are notemployees of the creditors or appraisal management companies hired by the creditors.

H. Servicing Requirements

The 2008 Amendments also imposed certain requirements and prohibitions upon servicers of closed-endloans secured by the borrowers principal dwelling. These include:

A prohibition against servicers pyramiding late feesimposing a late fee where a full payment hasbeen made on time but the borrower still owes a prior late fee.A requirement that servicers credit payments as of the date of receipt. If a delay does not result inany charge to the consumer or an adverse report to a consumer reporting agency, it wil l not bedeemed to violate this requirement. Creditors need not accept payments that do not conform to thecreditors written instructions; however, if a servicer accepts such a non-conforming payment, it maycredit it up to 5 days after receipt.

A prohibition against servicers failing to provide payoff quotes within a reasonable time after beingrequested to do so5 days will be considered reasonable.

I. HOEPA Loans (Section 32 Mortgages)

The Home Ownership and Equity Protection Act of 1994 (HOEPA)8

amended TILA to impose someadditional restrictions and limitations upon the making of certain high-rate/high-fee mortgage loans(HOEPA loans or Section 32 mortgages). Regulation Z defines "Section 32 mortgages" as consumercredit transactions that are secured by the consumer's principal dwelling and that are not purchasemoney loans, reverse mortgage transactions or open-end credit plans, and which satisfy either an "APRTest" or a "Points & Fees Test." A mortgage loan satisfies the current "APR Test" if the loan's annualpercentage rate at consummation is more than 8%, for first-lien loans, or 10%, for subordinate-lien loans,above the yield on Treasury securities having comparable periods of maturity. A mortgage loan satisfies

6 P.L. 111-203, 124 Stat. 1376.

7 76 Fed. Reg. 66554 (Oct. 28, 2010); seealso, 75 Fed. Reg. 80675 (Dec. 23, 2010)(technical correction).

8 108 Stat. 2191 (Sept. 23, 1994).


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the "Points and Fees Test" if the total "points and fees" payable by the consumer exceeds the greater of8% of the "total loan amount" or $400 (adjusted annually the figure for 2010 is $579).

With respect to Section 32 loans, Regulation Z:

Requires that a specific pre-closing disclosure be provided to borrowers (no later than 3 days before

closing) detailing the terms of the loan, and informing the borrowers that a lien is being taken againsttheir homes and that they can still back out of the deal.Prohibits non-amortizing payment schedules (balloon payments) on loans having a term of less than5 years (except bridge loans with a term of less than 1 year).Prohibits payment schedules that result in negative amortization.Prohibits paying more than two monthly payments in advance out of the loan proceeds.Prohibits higher default interest rates.Prohibits rebates calculated using any method less favorable to the consumer than the actuarialmethod.Prohibits prepayment penalties unless (i) the penalty will not apply after two years, (ii) the penalty willnot apply if it is being paid by the proceeds of a refinance loan from the same creditor or an affiliate,(iii) the consumers total monthly debt at closing does not exceed 50% of the consumers verifiedmonthly gross income, and (iv) the periodic payment of principal or interest or both will not change

during the first 4 years of the loan term.Prohibits due on demand clauses (except for borrower fraud, payment default and/or borroweraction or inaction that puts the secured property or the lenders right in the secured property at risk).Eliminates holder-in-due-course protections for purchasers and assignees of covered loans, andrequires a specified form of notice to be included on the mortgage essentially warning the assignee ofthis fact.Prohibits payments of loan proceeds to a home improvement contractor by means of a one-partycheck payable to the contractor.Prohibits the creditor or any assignee of the creditor from refinancing the loan within one year unlessthe new loan provides the borrower with a benefit.Prohibits the making of a HOEPA loan based on the collateral without regard to the borrowersverified ability to repay from income and assets other than the collateral (in effect, prohibiting statedincome HOEPA loans).

Prohibits structuring the loan as an open-end loan in order to evade the above requirements.

J. Higher-Priced Mortgage Loans

The 2008 Amendments also created a new category of mortgage loans, called higher-priced mortgageloans (HPMLs), and imposed certain restrictions upon the making of HPMLs.

An HPML is defined as a mortgage loan secured by the borrowers principal dwelling (i) which has anAPR that exceeds by a specified amount a new index named the average prime offer rate that the FRBwill publish, but (ii) which is not a temporary or bridge loan with a term of 12 months or less, a reversemortgage loan, or a home equity line of credit. A first-lien loan will be an HPML if it has an APR that is1.5 percent or more above the average prime offer rate for a comparable transaction, and a subordinatelien loan will be an HPML if it has an APR that exceeds the average prime offer rate for a comparabletransaction by 3.5 percent or more.

Lenders are prohibited from making an HPML:

Based on the collateral without regard to the borrowers verified ability to repay from income andassets other than the collateral (in effect, prohibiting stated income HPMLs).


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Without escrowing for taxes and insurance (for at least 12 months following the loan closing and untilthe borrower asks the lender to cease escrowing).

9

That has a prepayment penalty feature, unless (i) the penalty will not apply after two years, (ii) thepenalty will not apply if it is being paid by the proceeds of a refinance loan from the same creditor oran affiliate, and (iii) the periodic payment of principal or interest or both will not change during the first4 years of the loan term.

That is structured as an open-end loan in order to evade the above requirements.

K. Notification of Sale or Transfer of Mortgage Loan

A provision in the Helping Families Save Their Homes Act of 2009,10

amended TILA to require thatpersons who become the owner of a TILA-covered mortgage loan secured by the borrowers principaldwelling, whether by purchase, assignment or transfer, provide the borrower with written notice of thetransfer. The FRB indicated in an interim rule

11that this notice must be provided within 30 days after the

date the transfer is recognized in the new owners books. Servicers which hold title or take assignmentsof a loan solely for administrative convenience in servicing the loan are exempted from this requirement.Also, persons need not provide this notice for loans which they sell or assign within 30 days afterbecoming the owner.

The notices must include:

The identity, address, telephone number of the new creditor.The date of transfer.Information as to how the borrower can reach an agent or party having authority to act on behalf ofthe new creditor.The location of the place where transfer of ownership of the debt is recorded.Any other relevant information regarding the new creditor.

Subsequently, the FRB adopted a final rule, codified as 12 C.F.R. 226.39.12

While closely tracking theinterim final rule published in November 2009, the final rule: (1) clarifies that the disclosures under 226.39 can be combined with other materials or disclosures, including the transfer of servicing noticesrequired by RESPA, so long as the combined disclosure satisfies the timing and other requirements in 226.39; (2) clarifies that multiple covered persons who jointly acquire the loan in a single transactionmust provide a single disclosure that satisfies the timing requirements for each person; (3) includes anadditional exception for covered persons who acquire only partial interests in a loan, provided the partyauthorized to receive the consumers notice of the right to rescind and to resolve issues concerning theconsumers loan payments does not change as a result of the transfer; and (4) clarifies the information tobe included in the notices under certain circumstances.

9 Pursuant to a final rule that became effective on April 1, 2011, this escrow requirement applies to jumbo loans (loans in

excess of the Fannie/Freddie conforming loan limit) only in cases where the APR is 2.5 percent or more above the average primeoffer rate for a comparable transaction. 76 Fed. Reg. 11319 (March 2, 2011). This change was mandated by Dodd-Frank. At thissame time, the FRB also published a proposed rule that would extend the time during which creditors must maintain mandatoryescrow accounts following loanclosing from 1 year to 5 years (or longer under certain circumstances, such as when the loan isdelinquent or in default). 76 Fed. Reg. 11598 (March 2, 2011). This proposed rule, which has not yet been acted on, would alsoexempt certain creditors that operate in "rural or underserved" counties from the escrow requirement. And it would require that newdisclosures be provided: (i) at least three business days before closing, to explain, as applicable, how the escrow account works orwhat the effects are of not having an escrow account; and (ii) at least three days before an escrow account is closed, to inform theconsumer that the escrow account is being closed and explain the risk of not having an escrow account.

10 Pub. L. 111-22 (May 20, 2009).

11 74 Fed. Reg. 60143 (November 20, 2009).

12 75 Fed. Reg. 58489 (Sept. 24, 2010).


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L. Advertising Restrictions

TILA and Regulation Z govern the advertising practices of residential mortgage lenders and brokers.They provide essentially that creditors may only advertise terms they are prepared to offer and that use ofcertain terms in an advertisement triggers a need to disclose other terms. They also require that requireddisclosures in credit advertisements be clear and conspicuous.

1. Closed-end Credit

If an advertisement for closed-end credit includes a reference to the rate of finance charged, it must beexpressed in terms of the APR. A simple annual rate or periodic rate that is applied to the unpaid balancemay also be stated, but not more conspicuously than the APR.

If an advertisement for closed-end credit secured by a dwelling includes a reference to any one or moreof the following "triggering" terms . . .

The number of payments or period of repayment.The amount of any payment.The amount of any finance charge.

. . . the advertisement must include all of the following items:

The amount or percentage of down payment.The terms of repayment.The APR.Whether the rate may increase after the loan closing.

The 2008 Amendments also require the inclusion of additional specified items of information inadvertisements that disclose potentially misleading interest rates or payments includingadvertisements for closed-end variable-rate loans that promote an initial discounted rate, andadvertisements for home-secured credit that include a simple annual interest rate when more than onesimple annual interest rate will apply during the term of the advertised loan and that this informationmust be disclosed with equal prominence and in close proximity to the advertised rate or payment thattriggered the additional information.

In addition, the 2008 Amendments prohibit the following misleading advertising practices in connectionwith home-secured credit:

Using the word fixed to refer to rates, payments or a loan in an advertisement for variable -rate loansor other loans where the payment will increase unless certain conditions are satisfied.Comparing a consumers current actual or hypothetical rates or payment amounts with the rates orpayment amounts available under the advertised loan unless certain conditions are satisfied. Misrepresenting that a loan is government-endorsed or sponsored.Using the name of the consumers current mortgage lender in an advertisement, such as a direct mailsolicitation, without indicating who is making the advertisement and that such person is not

associated with or acting on behalf of that lender.Making misleading claims that a loan will eliminate debt. Using the term counselor to refer to a for-profit lender or broker.Advertising certain trigger terms or other required disclosures such as an initial discounted rate in aforeign language while providing other trigger terms or required disclosures, such as a fully indexedrate, only in English.

2. Open-end Credit


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If an advertisement for open-end credit includes any of the items required by TILA or Regulation Z to bedisclosed as part of an open-end credit plan, the advertisement must also disclose:

Any minimum, fixed, transaction, activity or similar charge that could be imposed.The APR and, if applicable, that the plan provides for a variable periodic rate.

Any membership or participation fee that could be imposed.

If an advertisement for a home equity line of credit (HELOC) indicates the circumstances under which afinance charge or other charge will be imposed, or explains how the finance charge will be determined, orsets forth payment terms, affirmatively or negatively, the advertisement must also include:

Any loan fee that is a percentage of the credit limit and an estimate of any other fee for opening theplan.The periodic rate used to compute the finance charge, expressed as an APR.With respect to a variable rate plan, the maximum APR that may be imposed.

In addition, the 2008 Amendments require that any advertisement for a variable HELOC which disclosesa discounted initial rate also disclose, with equal prominence and in close proximity to the discounted

rate, the period of time that rate will be in effect and a reasonably current APR state would have been ineffect using the plan index and margin. Also, HELOC advertisements:

Which disclose a minimum periodic payment, must also state, if applicable, and with equalprominence and in close proximity to the minimum periodic payment, that a balloon payment mayresult.Which disclose that interest is or may be tax deductible, may not be misleading in that regard. (If theadvertisement indicates that the credit being offered may exceed the fair market value of the property,the advertisement must indicate that the interest on the portion of the loan that exceeds the fairmarket value is not tax deductible and the consumer should consult a tax advisor for furtherinformation in this regard.)May not refer to a HELOC as free money or the like.Which disclose a promotional rate or a promotional payment must also state, with equalprominence and in close proximity to the promotional rate or payment, (i) how long it will apply, and(ii) in the case of a promotional rate, any APR that will apply under the plan, and (iii) in the case of apromotional payment, the amounts and time periods of any payments that will apply under the plan.

M. Loan Originator Compensation Rule

On September 24, 2010, the FRB adopted a final rule regulating loan originator compensation.13

Thisrule became effective on April 6, 2011 (after a short court-ordered delay of its original April 1, 2011mandatory compliance date). It was adopted by the FRB pursuant to its authority in section 129 of TILAto protect mortgage borrowers from unfair or deceptive lending practices, and was not intendedspecifically to implement the Dodd-Frank amendment to TILA that limits loan originator compensationwhich is discussed later in this summary.

The rule is comprised of three prohibitions. It prohibits: (1) the payment of compensation to a loan

originator (LO) that is based on a loan's terms or conditions (or allowing the LO's compensation to varybased in whole or in part on a factor that serves as a proxy for loan terms or conditions), except theamount of credit extended; (2) the payment of compensation to a LO by both the consumer and a partyother than the consumer for the same loan; and (3) the steering of a consumer by a LO to a loan that

13 75 Fed. Reg. 58509 (Sept. 24, 2010).


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provides the LO with greater compensation as compared to other loans which the LO could have offeredthe consumer, unless the loan is "in the consumer's interest." With regard to the third prohibition, a safeharbor from liability is provided if the consumer is presented with loan options for which the consumerwould likely qualify from a significant number of creditors with which the originator regularly does business(with three being the preferred number) for each general type of loan for which he/she expresses aninterest (e.g., fixed-rate. adjustable-rate, reverse) and which include (a) the loan with the lowest rate, (b)the loan with the lowest dollar amount for origination points or fees and discount points, and (c) the loanwith the lowest rate for which the consumer qualifies that does not allow for negative amortization orinclude a prepayment penalty provision, interest-only payments, a balloon payment within the first 7years, a demand feature, or a shared equity or shared appreciation feature.

An LO is defined in the rule essentially to mean a person who, for compensation or gain, "arranges,negotiates, or otherwise obtains an extension of consumer credit for another person." Individual loanofficers employed by creditors (including banks and non-banks) and individual loan officers employedby mortgage brokers clearly fall within this definition. Mortgage brokerage companies also fall within thisdefinition. However, creditors (except when they act in a particular transaction as a mortgage broker orclose loans using the funds of a table-funding lender) are not considered LOs under the rule.

N. Enforcement and Liability

Pursuant to Dodd-Frank, enforcement of TILA and Regulation Z against financial institution creditorsother than insured depository institutions with less than $10 billion in assets is placed, effective July 21,2011, with the new Consumer Financial Protection Bureau (CFPB). Enforcement against the remaininginsured depositories is placed with the depository's primary federal regulator.

Administrative enforcement generally takes the form of an order to make an adjustment to the borrower'saccount in an amount equal to the excess of the finance charge or the dollar equivalent of the APRactually paid over the finance charge or the dollar equivalent of the APR disclosed, whichever is less. Nocreditor may be subject to an adjustment order under TILA if, within 60 days after discovering a good faithdisclosure error, the creditor makes the necessary adjustment voluntarily and notifies the borrower of theerror.

In addition, civil liability can attach to a violation of TILA equal to the borrowers actual damages. And, in

an individual action, the borrower may also recover twice the amount of any finance charge but not lessthan $200 or more than $2,000 (or, for closed-end mortgage loans, not less than $400 or more than$4,000). In a class action, the class may also recover an amount permitted by the court but not morethan $500,000 or 1% of the creditors net worth, whichever is less. Successful plaintiffs are also entitledto collect court costs and reasonable attorneys fees.

Criminal liability, in the form of a fine up to $5,000.00 or imprisonment up to one year, or both, can attachto a willful and knowing violation.

II. SIGNIFICANT DODD-FRANK AMENDMENTS TO TILA

A. Summary

Dodd-Frank makes several significant amendments to TILA, including the following:

Adds new definitions to TILA, including: residential mortgage loan, qualified mortgage,mortgage originator, and servicer (Subtitle A).Adds sections 129B and 129C to TILA and amends other sections of TILA for the stated purposeof assuring that consumers receive residential mortgage loans that reasonably reflect their abilityto repay them, are understandable and are not unfair, deceptive or abusive (Subtitles A and B).


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Amends HOEPA to change the definition of a high cost loan and add and/or toughen restrictionsand limitations upon the making of high cost loans (Subtitle C).Amends TILA to place new responsibilities and limitations upon mortgage servicers (Subtitle E).Regulates appraisal activities more closely (Subtitle F).

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B. New TILA Definitions (Section 1401)

A residential mortgage loan is a consumer credit transaction secured by a mortgage or deed of trust on adwelling or a property that includes a dwelling, other than an open-end credit plan.

A qualified mortgage is a mortgage loan (i) that does not allow for negative amortization and is not aballoon loan, (ii) for which the creditor verifies and documents the borrowers income and assets, (iii) thatis underwritten using a fully-amortizing payment schedule (for an ARM loan, based on the maximum ratepermitted during the first 5 years of the loan term) taking into account all applicable taxes, insurance andassessments, (iv) for which total points and fees do not exceed 3% of the total loan amount, and (v) thatcomplies with debt-to-income ratios established by the Federal Reserve Board (FRB).

A mortgage originatoris defined essentially the same as in the S.A.F.E. Act (person who takes anapplication for, offers or negotiates terms of, a residential mortgage loan), except that it also includessomeone who assists a consumer in obtaining or applying to obtain a residential mortgage loan, andexcludes servicers.

A servicer is defined by reference to the definition in RESPA.

C. New TILA Section 129B (Sections 1403-1405)

New TILA section 129B prohibits improper steering, including: (1) the payment to or receipt by amortgage originator of any direct or indirect compensation that varies based on the terms of the loan(other than the amount of the principal); (2) the receipt by a mortgage originator of compensation fromthe consumer (other than for bona fide third party changes) or the lender, but not both; (3) the steering ofa consumer by a mortgage originator to a loan that (a) the consumer lacks a reasonable ability to repay,(b) has predatory characteristics, or (c) is not a qualified mortgage when the consumer qualifies for aqualified mortgage; and (4) abusive or unfair lending practices that promote disparities among

consumers of equal credit worthiness but of different race, ethnicity, gender, or age. Section 129B doesnot limit the compensation that a creditor may receive on the sale of a loan, or incentive payments tomortgage originators based on the number of loans originated within a specified period.

Section 129B also (1) indicates that the term creditor as used in the liability section of TILA (Section130) includes a mortgage originator, (2) provides consumers with a private right of action againstmortgage originators for improper steering, with a limit on damages equal to actual damages or 3 timesthe originators total compensation, whichever is higher, plus court costs and attorneys fees, and (3)authorizes the FRB to adopt regulations relating to mortgage loans that it finds to be abusive, unfair,deceptive, [or] predatory, or that arenecessary or proper to ensure that responsible, affordablemortgage credit remains available to consumers.

D. New TILA Section 129C

1. Ability to Repay (Section 1411-1412)

14 None of these changes become effective until the FRB (or, after July 21, 2011, the CFPB) adopts implementing

regulations and those regulations become effective or, if no regulations have been adopted by then, January 21,2012.


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New section 129C requires creditors to make a reasonable and good faith determination based onverified and documented information that, at closing, the consumer has a reasonable ability to repay theloan according to its terms (using a fully-amortizing payment schedule and taking into account allapplicable taxes, insurance and assessments). It also establishes a rebuttable presumption of ability torepay if the loan is a qualified mortgage as defined above.

Consistent with these requirements in Dodd-Frank, the FRB issued a proposed rule on May 11, 2011,which will have to be adopted by the CFPB. The proposed rule would provide the following four optionsfor complying with the ability-to-repay requirement:

Fulfill the general ability-to-repay standard by considering and verifying specified underwritingfactors, such as the consumer's income or assets.Make a "qualified mortgage" (essentially, a loan that (i) does not have certain features, such asnegative amortization, (ii) imposes fees within specified limits, and (iii) is underwritten using themaximum interest rate in the first five years), thereby giving the creditor special protection fromliability (i.e., either a safe harbor or a rebuttable presumption of compliance, to be determined bythe Consumer Financial Protection Bureau).For creditors operating predominantly in rural or underserved areas, make a balloon-paymentqualified mortgage.

Refinance your own "non-standard mortgage" (a loan with certain risky features) into a moretraditional "standard mortgage" with a lower monthly payment.

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2. New Defenses To Foreclosure (Section 1413)

Section 129C also allows borrowers to assert a violation of the steering prohibitions in Section 129B andthe ability to repay requirements in Section 129C in a foreclosure proceeding as a defense by way ofrecoupment or set off without regard to any limitations period in TILA.

3. Prepayment Penalty Limitations (Section 1414).

Section 129C also prohibits loans that are not qualified mortgages to carry prepayment penalties, and .only allows qualified mortgages that are not ARMs to carry prepayment penalties if: (i) the loans APR

does not exceed the comparable average prime offer rate plus 1.5 percentage points (for a first-lienconforming loan), 2.5 percentage points (for a first-lien jumbo loan), or 3.5 percentage points (for asubordinate-lien loan); (ii) the prepayment penalty is not greater than 3, 2, or 1 percent of the outstandingbalance due if the loan is prepaid, respectively, during the first, second or third years after the closing; (iii)there is no penalty after 3 years; and (iv) the creditor also offers the consumer a loan that does notcontain a prepayment penalty.

The FRBs May 11, 2011 proposed rule would also implement the Dodd-Frank limits on prepayment penalties.

4. Other Prohibition/Limitations (Section 1414)

Section 129C also prohibits creditors of residential mortgage loans and HELOCs from: (1) financingsingle premium credit insurance; (2) including mandatory arbitration clauses in the loan documents; (3)

having payment schedules that allow for negative amortization; (4) making refinance loans that wouldcause the borrower to lose state anti-deficiency protections, without disclosing that effect in advance ofclosing; and (5) making non-qualified mortgages to first-time homebuyers who have not received HUD-approved homeownership counseling.

15 76 Fed Reg. 27390 (May 11, 2011).


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E. Amendments to TILA Section 130 (Section 1416-1417, 1422)

Dodd-Frank amends section 130 of TILA in several regards, including the following:

It increases the maximum damage award that can be made in a class action for violation of TILA

(from $500,000 to $1 million).It allows borrowers to recover enhanced HOEPA damages (sum of all finance charges and feespaid by the borrower) for material violations of the new TILA anti-steering and ability to repayrequirements and to assert such violations in a foreclosure proceeding as a defense byrecoupment or set off, without regard to any limitations period in TILA.It extends the limitations period from 1 year to 3 years for private actions alleging violations ofTILA 129 (HOEPA), or new TILA 129B or 129C.It excludes creditors and assignees from liability if the borrower is convicted of fraud in obtainingthe loan.

F. New TILA Disclosures(Sections 1418-1420)

Dodd-Frank requires that: (1) 6 months prior written notice be given to borrowers facing resets of hybridARMs (consumer credit transactions secured by the consumers principal residence that have a fixed rateof interest for an introductory rate which then resets to an adjustable rate); (2) additional disclosures begiven in connection with closed-end mortgage loans; and (3) monthly statements be provided for allresidential mortgage loans (other than fixed-rate loans for which equivalent information is provided viacoupon books).

G. HOEPA Changes (Section 1431-1433)

Dodd-Frank changes the definition of a HOEPA loan (now labeled a high cost loan[HCL]) by:

including open-end and purchase money loans;lowering the APR threshold (from 8 and 10 percentage points above the applicable index for afirst and a subordinate-lien loan, respectively, to 6-1/2 and 8-1/2 percentage points);changing the applicable index which is used to calculate the threshold (from the yield on Treasurysecurities to the average prime offer rate); lowering the points and fees threshold (from 8% to 5%of the total loan amount);expanding the list of items that count as points and fees; andadding a third category of high cost loans, i.e., loans that carry prepayment penalties that can beimposed after 6 months or that exceed 2% of the amount prepaid).

Dodd-Frank also prohibits balloon payments and late fees in excess of 4% on HCLs, expands the list oflimitations and restrictions that apply to HCLs, and adds two cure provisions regarding HCL violations -one, within 30 days after closing for any good faith violation and, two, within 60 days after discovery ornotice (but before commencement of any action) of an unintentional violation or bona fide error.

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Copyright 2011 Robert M. JaworskiAll rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, inany form or by any means, electronic, mechanical,

photocopying, recording, or otherwise, without the priorwritten permission of the author.

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