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Truth in Lending: 5.15.10.4 Content
The creditor or servicer must disclose certain information clearly and conspicuously using the heading “Escrow Closing Notice.”1674 The disclosure must:
Truth in Lending: 5.15.10.5 Timing
When the consumer requests cancellation, the creditor or servicer must ensure that the consumer receives the cancellation notice no later than three business days before the closure of the account.1680 The official interpretations provide an example.1681 If the creditor or servicer initiates the closure, that person must ensure that the consumer receives the cancellation disclosure no later than thirty business days before the closure.1682 If
Truth in Lending: 5.15.10.6 Remedies
Violations of these rules trigger actual and statutory damages, attorney fees, and costs because the escrow cancellation provision appears in section 1639d, so is a “requirement imposed under this part,” that is, part B of TILA.1684 The disclosure requirements apply to creditors or servicers. Creditors clearly are subject to liability under section 1640(a).
Truth in Lending: 3.1.1 Overview; Purpose of the Finance Charge Disclosure
The disclosure of the finance charge is at the heart of Truth in Lending.1 An accurately calculated finance charge is a necessary precondition to an accurately disclosed APR.2 The APR is derived from the relationship between the finance charge and the amount financed,3 in light of the repayment schedule.4 The finance charge is the cost of credit as a dollar amount, and the APR reflects that co
Truth in Lending: 3.1.2 Organization of Chapter
The first part of this chapter is directed primarily to readers who are less familiar with TILA (or who are familiar with, but frustrated by, it).
Truth in Lending: 3.2.1 The General Concepts Underlying TILA’s Definition
The interest rate can be a misleading price tag for credit. First, an interest rate can be calculated in a variety of ways, each extracting a different dollar amount from the consumer. Second, not all charges incident to a credit transaction are reflected in that interest rate.
Truth in Lending: 3.2.2 Allocating the Components of the Debt: Finance Charge or Amount Financed?
Determining the accurate cost of credit for TILA purposes involves breaking down the components of the total obligation into two basic classifications: the amount financed and the finance charge.
Truth in Lending: 3.2.3 Distinctions: TILA Finance Charge and Interest; TILA APR and Interest Rate; TILA Amount Financed and Loan Principal
“Why is there a discrepancy between the promissory note and the disclosure statement? The note says this is a $10,000 loan at 15%, but the TILA disclosure says there is a $9,500 amount financed and a 17.35% APR?”
“We have a 24% rate ceiling on second mortgages. Isn’t this 25% APR usurious?”
Truth in Lending: 3.2.4 A Regulatory Road Map: Outline of TILA’s Finance Charge Rules
TILA and Regulation Z provide an organized, methodical framework for determining which credit costs must be allocated to the finance charge for Truth in Lending purposes. The official interpretations correlating to each subsection of section 1026.4 provide a further and essential gloss on the statutory and regulatory framework.
Truth in Lending: 3.3 Finance Charge As a Trigger to Coverage Under TILA
A consumer credit transaction is subject to Truth in Lending only when there is a written agreement to pay the debt in four or more installments or when “a finance charge is or may be required.”62 In most credit transactions, it is quite clear that a finance charge is part of the deal. But occasionally lenders or sellers try to disguise the presence of a finance charge in order to avoid making TILA disclosures.
Truth in Lending: 3.4 Statutory Construction of TILA’s Finance Charge Rules
TILA is remedial legislation, designed to redress an inherently unequal balance of knowledge and power, and thus must be liberally construed in favor of borrowers.67 Given the central importance of the APR and finance charge disclosures, and the goal of providing a standardized, bottom-line cost disclosure, the courts have held that the exclusions authorized by TILA and Regulation Z must be narrowly construed.68
Truth in Lending: 3.5 Basic Definition of the Finance Charge: 15 U.S.C. § 1605(a); Reg. Z § 1026.4(a)
The basic definition of finance charge is a broad, all-inclusive one designed to give consumers a bottom-line dollar amount for the cost of a consumer credit transaction.70 There are specific examples listed, and significant exceptions made, but the fundamental principles boil down to four elements, as expressed in Regulation Z § 1026.4(a).71 The finance charge includes:
Truth in Lending: 3.6.1.2 Treatment of a “Credit” from the Creditor or Other Party to the Consumer
Particularly in home-secured loans, the creditor may offset the closing costs in part by a credit, often in exchange for a higher interest rate. Some lenders pay a credit to the consumer instead of paying a yield spread premium to a broker87 The payment of a credit may mask a broker upcharge even though the credit is applied against closing costs generally.
Truth in Lending: 3.6.1.3.1 Generally
Creditors often require consumers to pay pre-existing debts as a condition of obtaining a new loan. Sometimes, creditors do so because the borrower has too much debt to meet the creditor’s underwriting conditions. In that case, the borrower may pay off the pre-existing debt to reduce the borrower’s total debt load and thereby meet the creditor’s requirements for obtaining new credit.88 Sometimes creditors require a borrower to use the new loan to payoff pre-existing debts, thereby consolidating those debts with the new extension of credit.
Truth in Lending: 3.6.1.3.2 Cases on forced payoffs not involving debts discharged in bankruptcy
The Third Circuit found forced payoffs neither among nor similar to the examples of the finance charge listed in Regulation Z and therefore not a finance charge.94 The court also relied on the omission of payoffs as a required disclosure in the separate refinancing rule to conclude that refinanced debts could not be finance charges.95 Smith and its progeny address the scenario where the creditor requires consumers to refinance their own existing debts owed to third parties or to the
Truth in Lending: 3.6.1.3.3 Bankruptcy Code and reaffirmed debts
No court has fully discussed the impact of modern bankruptcy law on the question of whether a debt reaffirmed without approval is a finance charge. In 1981 the FTC,102 followed by the Seventh Circuit103 in 1984, said debts discharged in bankruptcy and reaffirmed as a condition of getting new credit were not finance charges.
Truth in Lending: 3.6.1.3.4 Collateral purchases
Creditors may also require the borrower to purchase a collateral service or good as a condition of receiving credit.
Truth in Lending: 3.6.1.4 Interest Forfeitures and Offsets May Be a Credit Charge
While add-on costs may be the most common way of thinking of a “charge,” more unusual examples of charges are also addressed by the official interpretations. One example of a charge imposed by the creditor as a condition of credit is the reduction of the interest rate paid to the consumer on a consumer’s deposit account (thereby reducing the amount of interest that the consumer would otherwise be entitled to) as a condition of obtaining credit.
Truth in Lending: 3.6.2.1 General
Under the general definition of Regulation Z § 1026.4(a), charges must be payable by the consumer to be included in the finance charge, though the payment may be indirect as well as direct. The creditor usually takes into consideration its costs of doing business (overhead, salaries, etc.) in determining what interest rate or cash price to charge its customers.
Truth in Lending: 3.6.2.2.1 Selling consumer credit paper at a discount
Prior to Simplification,129 some cases held that the discount at which an originator sells the note was a finance charge that should have been disclosed.130 Selling at discount means that the assignee buys the paper from the original creditor for less than the face value of the debt, thus in effect imposing a cost on the original creditor.131 Sellers of future services, like gyms, often sell their paper at particularly deep discounts.
Truth in Lending: 3.6.2.2.2 Intangible taxes
A tax that a state imposes on the creditor or the creditor’s asset—such as a loan note—is logically a cost of doing business for the seller, just as its property taxes or corporate income taxes are.
Truth in Lending: 3.6.2.2.3 Document preparation fees
Document preparation fees are a classic example of charges that reflect the creditor’s cost of doing business and therefore meet the statutory definition of a finance charge—unless the same documents are prepared in a comparable cash transaction.136 If the fee is imposed in a real-estate-secured transaction, the statute carves out an exception.137
Truth in Lending: 3.6.2.3 Payable by the Consumer
There should be no question that financed closing costs are payable by the consumer. Nevertheless, a Tennessee federal court in Terry v. Community Bank of Northern Virginia,141 focused on the word “payable,” holding that closing costs are “payable” only when the homeowner is required to pay certain points and fees “at or before closing of a loan, not over the course of the loan.”142