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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

Truth in Lending: 7.2.5.7 Acquired Accounts

Special rules for re-evaluations apply for acquired accounts. If a card issuer acquires a credit card account from another issuer, the acquiring issuer must conduct rate re-evaluations using either the factors considered by the issuer from which it acquired the accounts or use the factors that it currently considers.268

Truth in Lending: 7.3.1 Overview; Substantive Right to Reject Changes

The Credit CARD Act requires issuers to provide, in any notice of a change in account terms or increase in APR, and pursuant to requirements established in Regulation Z, a brief statement of the consumer’s right to cancel the account before the changes take effect.273 While the Act does not specify which types of changes require this notice, Regulation Z limits this requirement to only certain account terms,274 and does not require it for increases in the APR.

Truth in Lending: 7.3.2.1 Substantive Right Exists Only When Change-in-Terms Notice Required to Be Given

The right to reject changes to an account generally applies whenever the issuer is required to send a change-in-terms notice that discloses the right to reject.280 In general, a change-in-terms notice is required when there is a “significant change in account terms,”281 meaning a change to a term required to be disclosed in the account-opening table, an increase in the required minimum periodic payment, or the addition of a security interest.282

Truth in Lending: 7.3.2.2 Exceptions

The most critical exception to the right to reject changes is that it does not apply to any increases in the APR for an account. Even though the Credit CARD Act specifically requires a notice of the right to cancel for APR increases,287 the FRB excluded these increases from the right to reject288 because it believed that the right was redundant to the protections against APR increases for a protected balance.289

Truth in Lending: 7.2.3.1.2 Pricing terms covered by the protections

The Credit CARD Act prohibits increases in the annual percentage rate for an outstanding or “protected”38 balance.39 “Annual percentage rate” is defined as the product of multiplying each “periodic rate” used to compute the finance charge by the number of periods in a year.40 The “periodic rate” is defined as “a rate of finance charge that is, or may be, imposed by a creditor on a balance for a day, week, month, or other subdivision of a year