Module 1: Truth-in-Lending Act and Regulation Z Unit 1: Truth in lending Act and Regulation Z Review PAGE 1: MOD1-1_1COVERAGE.CFM (3 MIN) UNIT 1 LEARNING OBJECTIVES This unit will teach the student to: identify the purpose of the Truth-in-Lending Act (TILA) and Regulation Z (Reg Z); understand and identify the financing events which trigger disclosures required by Reg Z; and determine the threshold at which a lender becomes a Reg Z lender. TILA HISTORY The Truth-in-Lending Act (TILA) was established in 1968 to provide consumers with information about the costs of credit. TILA’s goal was to create a better-informed consumer base to force lenders to provide more stable lending products. The housing crash and the financial crisis hit the U.S. economy in 2007. At the center of the maelstrom were the housing and mortgage industries. During the Millennium Boom, the government mandate to increase homeownership allowed upwards of $2 trillion dollars in cheap, short-term money to be loaned at enticingly low teaser rates. As a result of this aggressive lending environment, underwriting guidelines became lax. Exotic loans snared borrowers who did not fully understand the complicated and often deceptive financial agreements they were signing. The resultant crash left the U.S. economy in tatters. It became clear the framework of consumer protection in place during the boom years, including the TILA, was not enough to provide discipline to an industry used to writing its own rules. On July 21, 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. One of the aims of the Dodd-Frank Act was to better protect consumers from unfair, abusive and deceptive lending and servicing practices prevalent during the boom of the early 2000s. The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) as the central consumer protection authority. Among the laws assigned to the CFPB was the TILA. Prior to the CFPB’s inception, the Federal Reserve Board of
37
Embed
Module 1: Truth-in-Lending Act and Regulation Z Unit 1 ... › course › NMLS › N102 › Mod1 › module1.pdfThe Truth-in-Lending Act (TILA) was established in 1968 to provide consumers
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Module 1: Truth-in-Lending Act and Regulation Z
Unit 1: Truth in lending Act and Regulation Z Review
PAGE 1: MOD1-1_1COVERAGE.CFM (3 MIN)
UNIT 1 LEARNING OBJECTIVES
This unit will teach the student to:
identify the purpose of the Truth-in-Lending Act (TILA) and Regulation Z (Reg Z);
understand and identify the financing events which trigger disclosures required by Reg
Z; and
determine the threshold at which a lender becomes a Reg Z lender.
TILA HISTORY
The Truth-in-Lending Act (TILA) was established in 1968 to provide consumers with information
about the costs of credit. TILA’s goal was to create a better-informed consumer base to force
lenders to provide more stable lending products.
The housing crash and the financial crisis hit the U.S. economy in 2007. At the center of the
maelstrom were the housing and mortgage industries. During the Millennium Boom, the
government mandate to increase homeownership allowed upwards of $2 trillion dollars in
cheap, short-term money to be loaned at enticingly low teaser rates. As a result of this
aggressive lending environment, underwriting guidelines became lax. Exotic loans snared
borrowers who did not fully understand the complicated and often deceptive financial
agreements they were signing.
The resultant crash left the U.S. economy in tatters. It became clear the framework of
consumer protection in place during the boom years, including the TILA, was not enough to
provide discipline to an industry used to writing its own rules.
On July 21, 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) was signed into law. One of the aims of the Dodd-Frank Act was to better
protect consumers from unfair, abusive and deceptive lending and servicing practices prevalent
during the boom of the early 2000s. The Dodd-Frank Act established the Consumer Financial
Protection Bureau (CFPB) as the central consumer protection authority. Among the laws
assigned to the CFPB was the TILA. Prior to the CFPB’s inception, the Federal Reserve Board of
Governors (The Board) had authority over the TILA. The transfer of authority from the Board to
the CFPB occurred on July 21, 2011.
The Dodd-Frank Act amended the TILA to provide additional consumer protections, particularly
in the realm of loans and lending.
Comprehension check
You must answer this question before you may proceed to the next page.
Which government agency currently has regulatory oversight over the Truth in Lending Act
(TILA)?
The Consumer Financial Protection
The Federal Reserve
The Federal Trade Commission
The Supreme Court
TRANSACTIONS COVERED BY REG Z
Federal disclosures under TILA are designed to give borrowers standardized loan information
for easy comprehension of loan terms and pricing. Regulation Z (Reg Z) implements the TILA
disclosure requirements on federally defined consumer financing. [12 Code of Federal
Regulations §1026.1(c)]
Consumer financing, also called Reg Z financing or personal-use financing, arises out of:
real estate loans, their assumptions or refinance;
personal property loans; and
carryback financing by dealers.
Only individuals are considered consumers under Reg Z. [12 CFR §1026.2(a)(11)]
Reg Z mandates disclosures on a loan transaction or carryback sale only if the loan funds or
carryback notes are:
used primarily to purchase real estate, personal property or services for personal,
family, or household use, called a personal use;
from a lender or carried back by a seller who regularly finances loans or extends credit
on sales; and
repayable with interest, or, if no interest, payable in five or more installments. [12 CFR
§1026.1(c)(1)]
The real estate encumbered by a trust deed to secure a personal-use loan originated by a
lender and controlled by Reg Z includes all types of real estate and is not limited to a borrower’s
owner-occupied property. [Official Interpretation of §1026.2(a)(19)-1]
Consider a borrower who obtains a loan to purchase a recreational boat. The loan is secured by
a trust deed on a rental property they own. Is the loan subject to Reg Z disclosures?
Yes! Since the proceeds from the loan were for the borrower’s personal use, Reg Z applies to
this loan.
However, special disclosure rules do apply to residential mortgage transactions. A residential
mortgage transaction is defined as a transaction in which a mortgage, deed of trust, purchase
money security interest arising under an installment sales contract or equivalent security
interest is created or retained in the consumer’s principal dwelling to finance the acquisition or
initial construction of that dwelling. [12 CFR §1026.2(a)(24)]
For Reg Z purposes, a dwelling is a residential structure that contains one to four units, whether
or not that structure is attached to real property. The term includes individual condominium
units, cooperative units, mobile homes and trailers, if used as a residence. [12 CFR
§1026.2(a)(19)]
Comprehension check
You must answer this question before you may proceed to the next page.
Regulation Z applies to:
a business-purpose loan secured by a principal residence.
a personal-use loan secured by a recreational boat.
a personal-use loan secured by a single family residence.
a personal-use loan secured by an 10-unit apartment building.
PAGE 2: MOD1-1_2CARRYBACK.CFM (3 MIN)
CONTROLLED CARRYBACK NOTES
Most carryback sellers are exempt from Reg Z disclosures since most are not regular financiers.
The typical seller of real estate to a buyer-occupant is a homeowner who rarely sells more than
five properties in any one calendar year, and even fewer structured as carryback sales to assist
borrowers in the purchase of their principal residence.
Carryback sales include land sales contracts and lease-option sales, as well as carryback trust
deed notes, both regular and all-inclusive. [In re Hanley (1990) 111 BR 709]
Real estate dealers, builders and developers carrying back paper on more than five sales of
owner-occupied one-to-four unit residential real estate in any calendar year are extending
regular financing and are targeted by Reg Z.
Also, an investor purchasing carryback paper from sellers who are not regular financiers (five or
fewer sales) is not controlled by Reg Z. The seller is the original payee on the note, not the trust
deed investor who is acquiring the paper by assignment of the note or trust deed.
Editor’s note —The remainder of this material addresses loans by lenders only. However, the
material applies equally to carryback sellers — dealers — who regularly finance sales of single
family residences and duplexes to borrowers.
Comprehension check
You must answer this question before you may proceed to the next page.
A carryback seller who carries back paper on more than ___________ sales of owner-occupied
one-to-four unit residential real estate in any calendar year is targeted by Reg Z.
three
two
four
five
PURCHASE-ASSIST FINANCING, ASSUMPTIONS AND SUBJECT-TO SALES
Before Reg Z controls the origination of any consumer credit (i.e., loan), the real estate or
personal property financed by the loan proceeds must be acquired for personal use. [12 CFR
§1026.2(a)(12)]
Personal-use acquisitions, funded by a loan, include:
a principal residence for the borrower, including condominiums, cooperative units,
mobile homes and trailers, if used as a residence;
a vacation home or second home;
personal property for personal use, such as boats, trailers and recreational vehicles;
services provided on credit for personal use, such as brokerage fees due from a
borrower to acquire a principal residence or second home, or construction/repair on
personal-use property; or
any other real estate or personal property acquired for personal enjoyment rather than
for business, investment or farming.
A mixed-use loan requires Reg Z disclosures when the primary use (specifically defined by case
law as more than half) of the loan proceeds are used to purchase property or services for
personal use. [Bokros v. Associates Finance, Inc. (1984) 607 F.Supp 869]
To advise the lender of any personal use to be made of loan proceeds, a loan purpose
statement from the borrower about their intended use of the loan proceeds should be included
as part of the loan application package the borrower fills out for the lender. The borrower’s
statement will clarify whether the loan requires Reg Z disclosures.
A sale-leaseback of an owner-occupied one- or two-unit residential property with an option
granting repurchase rights to the seller/occupant constitutes a personal-use loan and is subject
to Reg Z. [Long v. Storms (1981) 50 Or.App 39]
Reg Z disclosures on an assumption of a loan by a buyer are triggered primarily by the buyer’s
occupancy of the property as their principal residence.
A lender who agrees in writing to the assumption of a loan must make Reg Z disclosures when:
the original buyer and the assuming buyer are both consumers;
the loan is a residential mortgage transaction to the buyer assuming the loan;
the assumption agreement specifically and unequivocally accepts the assuming buyer as
the individual primarily responsible for the debt; and
the assumption agreement is in writing. [12 CFR §1026.20(b); Official Interpretation of
12 CFR §1026.20(b)]
Under Reg Z, an individual may only maintain one principal residence. A second or vacation
home is not considered a principal residence unless the individual buys or builds the new home
and plans to make it their principal residence within one year or upon completion of
construction. [Official Interpretation of §1026.2(a)(24)-3]
Further, a loan has not been assumed and thus is not subject to Reg Z disclosures when the
buyer does not enter into a written agreement with the lender. Without a formal assumption
shifting primary responsibility for the loan to the buyer who occupies the property as their
principal residence, the loan is not subject to Reg Z disclosures.
A loan assumption does not trigger Reg Z disclosures if the conduct of the lender is limited to
only:
approving the buyer’s creditworthiness;
changing its records to reflect the new ownership;
delivering a coupon book to the buyer; or
accepting payments on the loan from the buyer. [Official Interpretation of 12 CFR
§1026.20(b)-3]
The eventual assumption of a loan by a buyer in a subject-to sales transaction, be it a legal or
equitable (land sales contract or lease-option sale) transfer of ownership is not controlled by
Reg Z. Although the initial carryback is a Reg Z transaction, neither the transfer nor the later
assumption requires a Reg Z disclosure. [Official Interpretation of 12 CFR §1026.2(a)(24)-5]
Comprehension check
You must answer this question before you may proceed to the next page.
A mixed-use loan requires Reg Z disclosures when ____________ of the loan proceeds are used
to purchase property or services for personal use.
none
less than half
more than half
exactly one third
PAGE 3: MOD1-1_3REFINANCE.CFM (3 MIN)
REFINANCING AN EXISTING PERSONAL-USE LOAN
A lender who provides financing to fund the payoff of an existing loan is required to make Reg Z
disclosures when the existing loan paid off by the refinancing:
was originated or assumed by the current owner;
funded or was used by the owner to acquire property or services for the owner’s
personal use, such as a second home or family education;
was secured by any real property, whether a first or junior lien; and
was made by any lender or carryback seller.
A refinance may include:
consolidation of several existing loans;
disbursement of new money to the owner; or
a modification or rescheduling of payments under the existing loan. [Official Interpretation of 12 CFR §1026.20(a)-1]
However, modifications which do not trigger Reg Z disclosures include:
the renewal of a single payment obligation with no change in the original terms (i.e., a
balloon payment);
a modification of a note arising from a court proceeding, such as a bankruptcy
reorganization;
the reduction in the annual percentage rate (APR) with a corresponding change in the
payment schedule over the remaining period of amortization;
a change in the payment schedule without a change in the interest rate, due to a
default; or
adding insurance premiums to the loan balance. [12 CFR §1026.20(a)]
Comprehension check
You must answer this question before you may proceed to the next page.
A ___________ triggers Regulation Z disclosures.
balloon payment
cash-out refinance
modification of a note ordered by a bankruptcy court
All of the above.
COUNTING LOANS TO BECOME A REG Z LENDER
A lender must first be classified as a regular financier of Reg Z loans before they are required to
make disclosures and provide the notice of the right to rescind any loan. Determining if a lender
is a regular financier depends on how often during the prior or current year they make
personal-use loans to consumers, called an annual count.
For the lender to be considered a regular financier, the lender must have an annual count of:
over one Section 32 high-cost loan;
over five personal-use loans secured by one-to-four unit residential property, whether
or not owner-occupied; or
over 25 personal-use loans, secured or unsecured, which include any personal-use
equity loans secured by one-to-four residential units. [12 CFR §1026.2(a)(17)(v)]
The number of personal-use loans originated by a lender to bring that lender under Reg Z
disclosure requirements is determined by its lending volume during the preceding calendar
year, and the current calendar year. [Official Interpretation of 12 CFR §1026.2(a)(17)(i)-4]
Consider a lender who, in January 2013, began making personal-use equity or refinance loans,
secured by one-to-four unit residential real estate, whether or not owner-occupied.
In the calendar year 2013, the lender made only five such personal-use loans and was not
subject to Reg Z. None were Section 32 loans which would have independently required
disclosures. Thus, the lender was not a Reg Z lender based on its activity in 2013.
However, in 2014, it originated seven personal-use loans. Consequently, its sixth and seventh
loans in 2014 became subject to Reg Z. It is now required to make Reg Z disclosures on all Reg Z
personal-use loans originated in 2015 since it exceeded five originations secured by one-to-four
unit properties in 2014.
In 2015, the lender funds four personal-use loans secured by any type of real estate. The lender
made Reg Z disclosures on all four loans since its lending volume in 2014 established it as a
regular financier under Reg Z for 2015.
If the lender makes only five loans secured by one-to-four unit residential property (owner-
occupied or not) in the calendar year 2016, must it make Reg Z disclosures on each loan?
No! During the preceding calendar year (2015) it only made four personal-use loans secured by
one-to-four unit properties. Thus, it is not considered a regular financier required to make Reg Z
disclosures on its first five personal-use loans during the following year (2016).
However, if the lender makes more than five loans secured by one-to-four unit residential
property in 2016, it will once again be required to make Reg Z disclosures with every personal-
use real estate loan it funds after the fifth loan — no matter the type of property which is the
security — as well as all personal-use loans made in 2017. The same annual counting applies to
becoming a regular financier when originating more than 25 personal-use loans annually, which
are not secured by real estate (or a mobile home which is the borrower’s principal residence).
[Official Interpretation of 12 CFR §1026.2(a)(17)]
Comprehension check
You must answer this question before you may proceed to the next page.
Which of the following individuals is required to provide Regulation Z disclosures? Assume no personal-use loan were made the prior calendar year.
A lender who makes 20 personal-use loans this calendar year, 6 of which are secured by a one-to-four unit residential property.
A lender who makes 22 personal-use loans this calendar year, 3 of which are secured by a one-to-four unit residential property.
A lender who makes 5 personal-use loans secured by a one-to-four unit residential property this calendar year.
A lender who makes 1 Section 32 loan this calendar year.
Unit 2: Integrated disclosures
MOD4-3_1LOANESTIMATE1.CFM (4 MIN)
UNIT 2 LEARNING OBJECTIVES
In this unit, you’ll learn about:
the purpose, structure and use of the new integrated Loan Estimate form; and
the purpose, structure and use of the new integrated Closing Disclosure.
THE NEW, INTEGRATED LOAN ESTIMATE FORM — GENERAL APPLICABILITY AND
SCOPE
The Consumer Financial Protection Bureau (CFPB) unveiled the final rules for the integrated
Loan Estimate form for consumer mortgages in November of 2013. This new form was created
to be a uniform, clutter-free and user-friendly replacement for the good faith estimate (GFE)
and the initial Truth in Lending disclosure forms provided to consumers during the loan
origination process. The Loan Estimate form replaced these forms on October 3, 2015.
The integrated forms will remove confusing and inconsistent language from both forms, and
make the loan costs easier for the consumer to understand, and the loan originator to explain.
The consolidation of the two forms also means that loan originators will have an easier time
adhering to the strict guidelines of TILA and RESPA.
The three main uses of the Loan Estimate form are:
to allow consumers to locate key information about the loan they have applied for;
to give the consumer a form with which to compare loan options; and
to give the consumer a way to compare initial costs disclosed by the lender with the
actual closing costs on the loan.
The Loan Estimate form is required to be provided by Regulation Z creditors on closed-end
consumer credit transactions secured by real estate, except reverse mortgages. Note that this
definition is broader than is currently found under the good faith estimate rules. Thus, the Loan
Estimate disclosure is also required on:
construction-only loans;
loans secured by vacant land; and
credit extended to trusts for tax or estate planning purposes. [12 CFR §1026.19(e);
Official Interpretation of 12 CFR §1026.3(a)-10]
Mortgage brokers may provide the Loan Estimate on behalf of the creditor. However, the
creditor is ultimately responsible for any Loan Estimate prepared and provided to the
consumer. It is not permissible for the creditor to simply issue a “revised” Loan Estimate to
correct disclosure errors made by the mortgage broker. [12 CFR §1026.19(e)(1)(ii); Official
Interpretation of 12 CFR §1026.19(e)(1)(ii)]
If the mortgage broker provides the Loan Estimate, the mortgage broker must retain the Loan
Estimate form for three years. [Official Interpretation of 12 CFR §10269.19(e)(1)(ii)-1]
Comprehension check
You must answer this question before you may proceed to the next page.
The good faith estimate and the initial Truth in Lending disclosure were merged into the:
Section 32 disclosure.
Loan Estimate form.
Closing Disclosure.
Mortgage call report.
PROHIBITED ACTIVITIES BEFORE DISCLOSURE
No person or entity may charge the consumer any fees until the Loan Estimate has been
provided AND the consumer has indicated they will proceed with the loan covered by the Loan
Estimate.
The only exception to the rule is for bona fide and reasonable fees for pulling the consumer’s
consumer credit report. This prohibition extends to the practice of requiring a check from the
consumer to be held until the consumer is provided the Loan Estimate, or states their intention
of proceeding with the loan. [12 CFR §1026.19(e)(2)(i)]
If the creditor provides a consumer with a written estimate of terms and costs specific to the
consumer before they provide the Loan Estimate form, the written estimate needs to clearly
and conspicuously state at the top of the front of the first page of the estimate in a font size
that is no smaller than 12-point font: “Your actual rate, payment, and costs could be higher. Get
an official Loan Estimate before choosing a loan.” The written estimate of terms or costs must
be visually distinct from the Loan Estimate form. [12 CFR §1026.19(e)(2)(ii)]
Additionally, no person or entity may require the consumer to provide information verifying
information in the loan application until the Loan Estimate has been delivered. [12 CFR
§1026.19(e)(2)(iii)]
DEFINITION OF BUSINESS DAY
For the Loan Estimate, a business day is any day on which the lender’s offices are open to the
public, and carrying out substantially all of its business functions. Note that this is a different
definition than the definition of business day for the Closing Disclosure form. [Official
Interpretation of 12 CFR §1026.19(e)(1)(iii)-1; 12 CFR §1026.2(a)(6)]
DELIVERY
The integrated Loan Estimate form must be delivered or mailed to the consumer within three
business days after the consumer submits a loan application. If the Loan Estimate is not
delivered in person, it’s considered received by the borrower three business days after it’s
placed in the mail. [12 CFR §1026.19(e)(1)(iii),12 CFR §1026.19(e)(1)(iv)]
WHAT IS AN APPLICATION?
Since the delivery of the Loan Estimate form is predicated on the receipt of an application, let’s
discuss what makes up an application.
An application consists of 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. [12 CFR §1026.2(a)(3)]
The information may be received in written or electronic format. [Official Interpretation of 12
CFR §1026.2(a)(3)-1]
As soon as all six pieces of information are received, the three-business-day countdown to
providing the Loan Estimate form begins. The creditor may collect additional information, but
may not delay delivery of the Loan Estimate form based on any other information than the six
pieces of information above. [Official Interpretation of 12 CFR §1026.2(a)(3)-1]
In verbal, informal guidance given by the CFPB in their webinar on the integrated loan
disclosures, they confirmed that nothing prevents a creditor from strategically gathering
information to control the timing of the Loan Estimate disclosure. However, in all cases, once an
application, as defined, is received, the Loan Estimate form is due within three business days.
The creditor must act in good faith and exercise due diligence to obtain information unknown,
but necessary to completing the Loan Estimate form. Any information which the creditor
cannot reasonably determine may be included, labeled as estimates. [12 CFR §1026.17(c)(2)(i),
Official Interpretation of 12 CFR §1026.17(c)(2)(i)]
MOD4-3_2LOANESTIMATE2.CFM (4 MIN)
TOLERANCES
Generally, creditors are bound by the terms in the Loan Estimate. The integrated disclosure rule
allows variance in charges at three different levels, called tolerances.
Unrestricted variances permitted
These charges may change from the amounts provided in the Loan Estimate:
prepaid interest;
property insurance premiums;
amounts placed into an escrow or impound account;
settlement services for which the borrower is able to shop and chooses a service
provider who is not on a list of service providers provided by the creditor;
charges not required by the creditor and paid to third-party service providers. [12 CFR
§1026.19(e)(3)(iii)]
10% cumulative tolerance
Other charges are subject to a 10% cumulative variance from the amounts entered in the Loan
Estimate. These charges include:
recording fees; and
third-party settlement service provider charges which are not paid to the creditor, or
the creditor’s affiliate and for which the consumer is able to shop, and chooses from a
service provider who is on the list of service providers provided by the creditor. [12 CFR
§1026.19(e)(3)(ii)]
Again, the 10% is cumulative. For instance, if the recording fee amount changes 11% from the
charge recorded in the Loan Estimate, but all third-party settlement service charges under the
10% cumulative tolerance do not change, the estimate is still considered in good faith.
Zero tolerance
The following charges may not change:
fees paid to the creditor, mortgage broker, or an affiliate of either [12 CFR
§1026.19(e)(3)(ii)(B)];
fees paid to an unaffiliated third party settlement service provider if the creditor did not
allow the consumer to shop for the settlement service provider [12 CFR
§1026.19(e)(3)(ii)(C)]; and
transfer taxes. [Official Interpretation of 12 CFR §1026.19(e)(3)(i)-1, -4]
Comprehension check
You must answer this question before you may proceed to the next page.
Under the Loan Estimate form, which fees may change without restriction?
Transfer taxes.
Fees paid to a loan originator.
Recording fees.
Property insurance premiums.
REVISIONS OF THE LOAN ESTIMATE AND CHANGED CIRCUMSTANCES
The charges above may only exceed the allowable thresholds in limited circumstances. In that
case, a revised or corrected Loan Estimate form may be disclosed.
Settlement service charges may vary above the set tolerances only in the case of a changed
circumstance.
Changed circumstances include:
an extraordinary event beyond the control of any interested party, e.g., war or natural
disaster;
an unexpected event specific to the consumer or transaction, e.g., the creditor provides
an estimate of title insurance costs, but the title insurer goes out of business;
a change or inaccuracy in the information the consumer provided, upon which the
creditor relied when preparing the Loan Estimate form, e.g., the consumer indicated
their income was $90,000 but an underwriter determines the income is only $80,000;
and
new information specific to the consumer or transaction, e.g., a boundary claim is filed
against the property, affecting its value. [12 CFR §1026.19(e)(3)(iv)(A)]
Additionally, a revised Loan Estimate may be provided if:
a changed circumstance affects the consumer’s eligibility for the terms applied for, or
the value of the property;
the consumer requests a change to the credit terms;
the interest rate was not locked when the Loan Estimate was provided, and locking the
rate causes the points or lender credits to change;
the consumer indicates the intent to proceed with the transaction more than ten
business days after the Loan Estimate was provided; or
the loan is a new construction loan, and settlement is delayed more than 60 calendar
days, as long as the original Loan Estimate states that the creditor may issue a revised
disclosure 60 days before loan consummation. [12 CFR §1026.19(e)(3)(iv)]
Editor’s note — The day of “loan consummation” is not always the same day as “loan closing.”
Consummation occurs when the consumer becomes contractually obligated to creditor on the
loan. This date varies, according to state law. [12 CFR §1026.2(a)(13); Official Interpretation of
12 CFR §1026.2(a)(13)-1]
Creditors may not issue revisions to a Loan Estimate due to technical errors, miscalculations or
underestimations of charges — whether the creditor is making the disclosure, or a mortgage
broker is making a disclosure on the creditor’s behalf. [12 CFR §1026.19(e)(3)(iv)]
Revised Loan Estimates must be given to the borrower no later than four business days before
consummation, or placed in mail no later than three business days after the creditor receives
information sufficient to justify a revision. [12 CFR §1029.19(e)(4)(i)]
Additionally, seven business days must pass between delivering or mailing the Loan Estimate
(or revised Loan Estimate) before the loan may close. [12 CFR §1029.19(e)(1)(iii)(B)]
If the amounts paid by the borrower at consummation exceed the amounts in the Loan
Estimate or the set tolerances, the excess is to be refunded to the borrower within 60 days of
consummation. [12 CFR §1026.19(f)(2)(v)]
MOD4-3_3LOANESTIMATE3.CFM (4 MIN)
CONTENT - GENERAL
The Loan Estimate form contains a good faith estimate of credit costs and transaction terms,
and must be provided in writing. If any information necessary for an accurate disclosure is
unknown, the creditor must make the disclosure based on the best information reasonably
available at the time the disclosure is provided to the consumer, and use due diligence in
obtaining the information. [12 CFR §1026.19(e)(1)(i); Official Interpretation to 12 CFR
§10269.19(e)(1)(i)-1; 12 CFR §1026.37(o)]
Now we’ll briefly go over the contents of the Loan Estimate disclosure by page. There are a few
variants of the form depending on the transaction terms, but we’ll do a general overview of the
form, with some references to requirements for different types of loans.
To familiarize yourself with the form, download and print a sample of the form here:
[Download Link]
LOAN ESTIMATE – PAGE 1
This page gives a general overview of the loan.
General information
This section discloses identifying information of the consumers, creditors and the loan. It also
discloses the core features of the loan, including loan purpose, sale price or property value of
the property, loan term, product and interest rate. This section must also include the following
statement: “Save this Loan Estimate to compare with your Closing Disclosure." [12 CFR
§1026.37(a)]
All consumers are to be named on the Loan Estimate. If not all names will fit in the space
allotted, a separate sheet is to be attached. [Official Interpretation of 12 CFR §1026.37(a)(5)]
The existence and effect of any rate lock is also disclosed in the General information. [12 CFR
§1026.37(a)(13)]
Loan terms
This section discloses the loan amount, interest rate, the interval of payment (e.g., monthly)
and interval principal and interest payment (e.g., monthly principal and interest payment).
These items must also disclose whether the amounts can increase after consummation. If they
can, additional disclosures are required. [12 CFR §1026.37(b)(1)-(3), (6)]
Additionally, this section discloses whether or not the loan involves a prepayment penalty or
balloon payment. If the loan bears these features, additional disclosures are required. [12 CFR
The Closing Disclosure form is an integration of the final Truth in Lending disclosure and
the HUD-1 Settlement Statement.
The Closing Disclosure form must be provided within three business days after the
consumer submits a mortgage application.
A lender has to retain copies of the Closing Disclosure for three years after loan closing.
Unit 3: Rescission and Reg Z advertising rules
PAGE 1: MOD1-2_3RESCIND.CFM (4 MIN)
UNIT 3 LEARNING OBJECTIVES
This unit will teach the student to:
identify the proper guidelines to follow in connection with a notice of right to rescind; understand the advertising rules set forth by Regulation Z; and identify triggering terms and the disclosures they trigger.
THE RIGHT TO RESCIND
In addition to other disclosures required on a Reg Z-controlled transaction, Reg Z also requires
that a notice of right to rescind be given to borrowers on some loan transactions.
The borrower on a Reg Z loan is entitled to a notice of right to rescind (cancel) the loan
transaction, at no cost or expense to them, if:
the property to be security for the loan is a one-to-four unit residential property which
is presently owned and occupied as the borrower’s principal residence, or personal
property occupied as the borrower’s principal residence; and
the property will be further encumbered to secure an equity loan or refinance, or as
additional or substitute security for an existing Reg Z loan, which funds or funded a
personal use of the borrower, their family, or household. [12 CFR §1026.23(a)(1)]
Loans on which the borrower is not entitled to a notice of right to rescind include:
purchase-assist loans funding the acquisition of a principal residence;
commercial loans funding a trade, business, investment or agricultural operation of the
borrower, even if the loan further encumbers the borrower’s one-to-four unit principal
residence, as these loans are exempt from Reg Z; and
a rate and term refinance of an existing personal-use loan encumbering the principal
residence and extended by the same lender who originally closed the refinanced loan,
called a streamline refinance. [12 CFR §1026.23(f); Official Interpretation of 12 CFR
§1026.23(f)-4]
Note that if the loan (secured by the borrower’s principal residence) is a cash-out refinance by
the same lender who financed the existing loan, the new loan is only rescindable to the extent
that the refinanced principal exceeds the prior principal balance. A variation of the general
notice of right to rescind may be used for same-lender refinances. [12 CFR §1026.23(f)(2);
Appendix H of 12 CFR §1026]
If required, two copies of the notice of right to rescind must be delivered to each borrower with
the right to rescind. If the notice is delivered electronically under the E-Sign Act provisions, only
one copy needs be sent to each borrower. [12 CFR §1026.23(b)(1)]
The notice of right to rescind must disclose:
the lender’s security interest in the borrower’s principal dwelling;
the borrower’s right to rescind the loan;
how to exercise the right to rescind, including a separate form for that purpose which
includes the lender’s address;
the effects of the rescission; and
the date the rescission period expires. [12 CFR §1026.23(b)(1)]
Comprehension check
You must answer this question before you may proceed to the next page.
Which of the following loans triggers the delivery of the notice of right to rescind?
A purchase-money loan secured by the borrower's one-unit principal residence.
A purchase-money loan secured by a single family residence used as an
investment/rental property.
A rate-and-term refinance secured by a single family residence used as a rental
property.
A non-streamline rate-and-term refinance secured by the borrower's single family
principal residence.
HELOCS AND RESCISSION
For open-end loans secured by the borrower’s principal residence, i.e., a home equity line of
credit (HELOC), the transaction which establishes the HELOC may be rescinded by the borrower,
but the subsequent draws under that established HELOC are not subject to rescission. [12 CFR
§1026.15(a)(1)(ii)]
For example, consider a borrower who opens a HELOC of $50,000 secured by their primary
residence. They have the right to rescind the entire HELOC during the applicable rescission
period.
However, suppose that same borrower draws $10,000 out of the HELOC a year after the HELOC
is opened. That $10,000 draw is not a rescindable transaction. [12 CFR §1026.15(a)(1)(ii)]
Subsequent increases in the maximum HELOC amount are rescindable. For example, if the
borrower later requests and is granted a $5,000 increase to the HELOC (for a total maximum
HELOC amount of $55,000), that increase is a rescindable transaction during its applicable
rescission period. [12 CFR §1026.15(a)(1)(i)]
NOTICE OF RIGHT TO RESCIND DELIVERY AND TIMING
A borrower with the right to rescind has until midnight of the third business day following the
latest of:
the signing of loan documents;
the delivery of material disclosures; or
the delivery of the notice of right to rescind. [12 CFR §1026.23(a)(3)(i)]
Material disclosures for this purpose include disclosures regarding the:
APR;
finance charge;
amount financed;
total of payments;
the payment schedule;
Section 32 high-cost mortgage loan disclosures; and
limits on prepayment penalties. [12 CFR §1026.23(a)(3)(ii)]
Like the three- and seven-business-day waiting periods required on the standard Reg Z
disclosure, the three-business-day right to rescind can be waived to meet a bona fide personal
financial emergency. Each borrower who has the right to rescind must sign the waiver. No pre-
printed waiver form can be used. Thus, the waiver must be written to describe the emergency,
be worded as a waiver of the right to rescind, and be signed by all owner-occupants whose
interest in the property will be encumbered. [12 CFR §1026.23(e)]
The lender, the broker, and the escrow involved must not allow the release of any funds to the
borrower until after the three business days have lapsed, unless waived. Delivery of funds to
the borrower before the lapse of the three-business-day period is prohibited. [12 CFR
§1026.23(c)]
Similar to other Reg Z-required disclosures, the three business days begins to run on the first
day after the latest of:
the borrower’s receipt of the notice of right to rescind;
all other Reg Z disclosures having been properly delivered; or
loan documents are signed and returned. [Official Interpretation of 12 CFR
§1026.23(a)(3)]
Waiver aside, the rescission (cancellation) period expires and the loan may fund if none of the
borrowers mailed or otherwise handed a notice of rescission to the lender.
Expiration of the three business days can be tricky because the lender must confirm (be
reasonably satisfied) a mailing of a cancellation by the borrower prior to the midnight hour of
the third day is not still in transit.
Thus, it is imperative for the lender and broker involved to get a written confirmation after the
third day and before funding, signed by all the borrowers who hold the right to rescind, that the
borrowers did not exercise their right to cancel by sending a notice of rescission. To do
otherwise is to act at the peril of the borrower’s rescission.
Delivery of both Reg Z disclosures (one copy to each borrower) and the notice of right of
rescission (two copies to each borrower), is best done by having the borrowers and
encumbered property owners sign each document, acknowledging and dating their receipt.
When they have done so, the three-business-day waiting period begins. Recall that three
business days must pass after delivery of the loan documents and disclosures before a loan may
be consummated.
Editor’s note — For the purposes of Reg Z, midnight is considered the end of the day, and not
the beginning. Staff Commentary contrasting Section 32 disclosure periods with the rescission
period states that, under the three-business-day timeline of Section 32, a loan may close any
time on the third day (Tuesday, in the given example), and indicates that, in contrast, if the
rescission period were used, the loan could not close until midnight of that Tuesday. The logical
conclusion is that, under rescission rules, midnight is interpreted as the end of the day. [Official
Interpretation of 12 CFR §1026.31(c)(1)-1]
Consider a borrower who signs loan documents and receives all material disclosures on
Monday, June 1. The actual timeline would go like this:
Monday, June 1 – Day of disclosure/signing. Rescission begins running on the day after this day.
Tuesday, June 2 – First day of three-day rescission period.
Wednesday, June 3 – Second day of the three-day rescission period.
Thursday, June 4 – Third day of the three-day rescission period. The loan cannot close until all
of Thursday has passed, and it is midnight.
Comprehension check
You must answer this question before you may proceed to the next page.
The borrower's right to rescind lasts until midnight of the _____________ following the later of
the signing of loan documents, material disclosure delivery or the delivery of the notice of right
to rescind.
ninth business day
seventh business day
fifth business day
third business day
PAGE 2: MOD1-2_4RESCIND2.CFM (4 MIN)
RESCISSION, AND FAILURE TO DISCLOSE
If a lender fails to deliver the notice of right of rescission or other material disclosure to the
borrower before the loan closes, the right to rescind will expire on the earliest of:
three years after the consummation of the transaction;
the transfer of the borrower’s interest in the property; and
the sale of the property, which includes a carryback sales transaction or an installment contract sale. [Official Interpretation of 12 CFR §1026.23(a)(3)-3]
The effects of a borrower’s rescission are as follows:
the lender’s security interest in the property is voided;
the lender must return all fees paid to all parties in connection with the loan within 20 calendar days after receiving the notice of rescission; and
the borrower must return any money or property acquired as a result of the loan. [12 CFR §1026.23(d)]
A notice of rescission given by any co-owner of the property who is entitled to rescind cancels
the loan escrow transaction. All this comes at no cost to the borrower when avoiding a