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Truth in Lending: 9.7.1 Calculating the Average Prime Offer Rate

The average prime offer rate (or APOR) is the standard for determining whether a loan is subject to HOEPA’s rules for high-cost mortgages and TILA’s rules for higher-cost mortgage loans (HPML). If a loan’s APR exceeds the APOR by the amount specified in Regulation Z,1065 the loan is said to have exceeded the APR trigger and becomes subject to the relevant provisions.

Truth in Lending: 9.7.2 HOEPA Pre-Dodd-Frank Act: Finding the Relevant Rate and Calculating the APR Trigger

For loans with applications pre-dating the effective date of the Dodd-Frank Act, HOEPA’s APR triggers are measured against the relevant U.S. Treasury bond rate. Finding and calculating the APR trigger is not difficult, though the process includes three steps. First, find the relevant rate. To do so, go to the Federal Reserve Board’s website at https://www.federalreserve.gov/Releases/H15/data.htm which should refer to “H.15” and “Selected Interest Rates” at the top of the page.

Truth in Lending: 9.7.3 Calculating the APR Trigger for an Open-End Mortgage

For home equity lines of credit, the APR for the loan should be compared to the “most closely-comparable” closed-end transaction.1081 The official interpretations spell out how to identify the most closely-comparable closed-end transaction, depending upon whether the open-end credit plan is fixed or variable-rate, the term of the plan to maturity, the term of any initial fixed-rate period on a variable-rate plan, and the date the interest rate is set.

Truth in Lending: 9.8.1 Introduction

The points and fees calculation is critical to determining HOEPA coverage as well as the Dodd-Frank Act’s qualified mortgage definition. This discussion focuses on the mechanics of calculating the HOEPA points and fees under the pre-Dodd-Frank version of the statute.

Truth in Lending: 9.8.2.2.1 Points and fees

The Dodd-Frank Act expands the definition of points and fees to include yield spread premiums, premiums for financed credit life, disability, or unemployment insurance, the maximum prepayment penalty on the loan, and all prepayment fees from the prior loan if held by the same creditor or an affiliate.1096

For loans originated after January 10, 2014, points and fees include all of the following:

Truth in Lending: 9.8.2.2.2 Calculating mortgage originator compensation

The Dodd-Frank Act provides that “all compensation paid directly or indirectly by a consumer or creditor to a mortgage originator” must be included in the points and fees calculation.1105 This is the amendment that results in yield spread premiums being clearly and indisputably captured in the points and fees trigger.1106

Truth in Lending: 9.8.2.2.4 Total loan amount

For closed-end mortgages, the total loan amount is calculated by taking the amount financed, as determined according to 12 C.F.R. § 1026.18(b), and deducting any of the following costs that are both included in the points and fees calculation and financed by the creditor:

Truth in Lending: 9.8.2.3.2 Discount points

The calculation of excluded bona fide discount points is identical to that for closed-end mortgages, except that a “point,” which is equal to one percent of the loan amount in a closed-end transaction, is one percent of the credit limit in an open-end transaction.1120

Truth in Lending: 9.9.1 Introduction

The phrase “foreclosure rescue scam” describes various types of schemes targeted at homeowners already facing foreclosure and in financial distress.1122 One of the more common and insidious versions occurs when homeowners deed their property to the “rescuers” or third parties believing that they are saving their home. These transactions take the form of sale-and-leaseback contracts or complicated trust arrangements. Rarely are any of these transactions structured as loans.

Truth in Lending: 9.9.2 APR Calculations in Foreclosure Rescue Scams

One way to determine whether a foreclosure rescue transaction meets the HOEPA APR trigger is to consider the terms of the repurchase portion of the transaction alone or the unified impact of the sale and the repurchase. When the homeowner’s repurchase price is higher than the sale price, the lost equity is arguably a finance charge that should be considered in the calculation.1125 Foreclosure rescue scams are structured in a variety of ways, however, so other ways of determining the APR may be appropriate for a particular case.

Truth in Lending: 7.1.1 Organization of This Chapter

The prior chapter details open-end credit disclosure requirements. This chapter examines TILA provisions that substantively regulate the terms of credit cards and, in some cases, other non-home-secured open-end credit. Many of these provisions were added by the Credit Card Accountability, Responsibility and Disclosures (CARD) Act of 2009,1 and became effective on February 22, 2010.2

Truth in Lending: 7.1.2.1 Enactment of Credit CARD Act

From about 1980 to 2010, there was little regulation of credit card practices, due to the sweeping expansion of federal bank preemption.3 Most credit card issuers are federally chartered depository institutions, and thus were not required to abide by state limits on interest rates, fees, and other lending practices.4 As a result, abuses by credit card issuers spun out of control, creating enormous hardships for consumers.5

Truth in Lending: 7.1.2.2 Scope of Protections

The vast majority of the Credit CARD Act provisions specifically apply to “credit cards under an open-end (not home-secured) consumer credit plan.” Thus, the Credit CARD Act protections do not apply to all open-end credit. Furthermore, Regulation Z defines “credit cards under an open-end (not home-secured) consumer credit plan” to exclude two specific types of credit cards:17

Truth in Lending: 7.2.1 Introduction

One of the biggest problems with credit card pricing had been that issuers were not required to abide by a fundamental contract principle—that a “deal is a deal.” Prior to the Credit CARD Act, credit card issuers were permitted to raise the interest rate for any reason, or no reason at all, by simply mailing a notice to consumers. These rate increases were a major impetus behind the Credit CARD Act.22

Truth in Lending: 7.2.2.1 Penalty Rates

A penalty rate is an increase in a credit card account’s APR, triggered by the occurrence of a specific event, such as the consumer’s making a late payment or exceeding the credit limit. Raising an APR from the mid-teens to 30% or higher on future transactions simply on the basis of a single transgression alone would be enough to draw criticism. After all, the credit card lender has already collected a one-time charge for that late payment or over-the-limit transaction, which probably more than covers its costs.

Truth in Lending: 7.2.2.2 Universal Default

Universal default is an especially criticized form of credit card repricing. With universal default, credit card issuers impose penalty rates on consumers, not for late payments or any behavior with respect to the consumer’s account with that particular lender, but for late payments to any of the consumer’s other creditors. In some cases, issuers will impose penalties simply if the credit score drops below a certain number, whether the drop was due to a late payment on that other account, or due to some entirely different factor.

Truth in Lending: 7.2.3.1.1 Overview

The Credit CARD Act prohibits an issuer from increasing the APR or certain fees and charges on an outstanding or “protected”30 balance,31 except pursuant to four exceptions:32

Truth in Lending: 7.2.5.3 Rate Increases That Must Be Re-Evaluated

The re-evaluation requirements applies both to: (1) APR increases based on an individual consumer’s credit risk or other circumstances specific to that consumer and (2) APR increases based on non-individualized factors, such as changes in market conditions or the issuer’s cost of funds.239 However, re-evaluation is required for only those rate increases that require a change-in-terms or penalty-rate notice.240

Truth in Lending: 7.2.5.4 Intersection with Right to Reinstatement of Pre-Increase Rate After Six Months of On-Time Payments

In some cases, a rate increase may be applied to an outstanding or protected balance because the required minimum payment on the account is over sixty days late.250 In those cases, the consumer has the right to have the pre-increase rate reinstated if she makes six months of on time payments.251 When this six-month reinstatement right applies, the issuer does not need to conduct a rate re-evaluation.252 However, if the consumer fails to make

Truth in Lending: 7.2.5.6 Rate Reductions Resulting from Re-Evaluation

The rate re-evaluation requirement does not require the issuer to reduce the APR for an account by any specific amount, even if the re-evaluation indicates that the rate should be reduced.261 Thus, the issuer need not decrease the rate to the rate that was in effect prior to the increase that triggered the re-evaluation.262