We are defending TILA rescission claims with regularity these days. Before going into the merits on TILA rescission as a remedy, below is a short outline I have prepared on the Truth in Lending Act as it relates to mortgages:
TRUTH IN LENDING ACT of 1968
I. What is it and Where is it found?
a. Part of the Consumer Credit Protection Act, found in 15 U.S.C. §1601 et seq.
b. Regulation Z – regs implementing the statute, codified in 12 CFR 226 (available online at FDIC website).
c. Official Staff Commentary, found at Supp I of Reg Z
II. What is it For?
a. was designed to protect consumer borrowers from the "uninformed use of credit," 15 U.S.C. § 1601(a), ie uniform assessment of costs
b. Regulates loans secured by consumer’s principal dwelling
c. Regulates credit card billing practices
III. TILA Amendments: HOEPA (Home Ownership & Equity Protection Act of 1994)
a. Also called “Section 32” loans/mortgages because HOEPA is contained in Section 32 of Reg Z.
b. A loan is covered by the HOEPA if it meets the following tests:
i. for a first-lien loan, that is, the original mortgage on the property, the annual percentage rate (APR) exceeds by more than eight percentage points the rates on Treasury securities of comparable maturity;
ii. for a second-lien loan, that is, a second mortgage, the APR exceeds by more than 10 percentage points the rates in Treasury securities of comparable maturity; or
iii. the total fees and points payable by the consumer at or before closing exceed the larger of $583 or eight percent of the total loan amount. (The $583 figure is for 2009. This amount is adjusted annually by the Federal Reserve Board, based on changes in the Consumer Price Index.) Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.
c. Requires special Section 32 Disclosures, including written notice stating the loan need not be completed.
i. Regulates or in some cases prohibits: prepayment penalties, default interest rate increases, balloon payments, neg am loans, prepaid interest and due-on-demand clauses.
IV. Recent Amendments – Mortgage Disclosure Improvement Act of 2008 (MDIA)
a. Effective July 30, 2009
i. Earlier disclosures required
ii. Not just “principal residence” – any dwelling
iii. loan may only close 7 days after the Good Faith Estimate has been mailed or delivered to the consumer.
iv. This 7 day period can only be shortened on consumer’s waiver due to “bona fide” personal financial emergency.
v. GFE disclosure must be provided before any fee paid by consumer, except credit score application cost.
b. Effective January 30, 2011
i. Additional disclosures for variable rate transactions
V. What’s a Covered Loan?
a. “consumer” defined as:
(h) The adjective “consumer”, used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes. [15 U.S.C. §1602(h)
b. Prior to MDIA, early disclosures were required only consumer’s principal dwelling [see 12 CFR 226.2(a)(24)]
c. Exemptions, TILA does not apply: [see 12 CFR 226.3]
i. Business, commercial or agricultural purposes
ii. Credit over $25,000 not secured by real property or a dwelling
iii. Student Loans
iv. Special topic – Official Staff Commentary §226.2(a)(11) states: Guarantors, endorsers, and sureties are not generally consumers for purposes of the regulation, but they may be entitled to rescind under certain circumstances and they may have certain rights if they are obligated on credit card plans.
v. Special topic - “trusts” TILA applies to “natural persons” ie, not corporations, partnerships, unions, government agencies….and “trusts”
d. “Purposes” of the Loan – Stillman test more than 50% for consumer use. “Where more than half the money loaned is for an exempt purpose, such as to fund a business, the disclosure requirements are deemed not to apply.” [Stillman v. First National Bank of N. Idaho, 117 Idaho 642, 791 P.2d 23(Idaho, 1990)] (But see Ninth Circuit Thorns factors below.)
i. Thorns v. Sundance Properties (9th Cir. 1984) 726 F.2d 1417
1. The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be a business purpose.
2. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be a business purpose.
3. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be a business purpose.
4. The size of the transaction. The larger the transaction, the more likely it is to be a business purpose.
5. The borrower’s statement of purpose for the loan.
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