Skip to main content

Search

Truth in Lending: 5.4.3.5.3 Fee padding

Another question is whether creditors can simply pad individual fees up to the tolerance, by, for example, marking up a credit report fee from $20 to $50. In general, fees that are not bona fide and reasonable should be included in the finance charge in their entirety,94 and the legislative history is unequivocal that the increased tolerances were not meant to excuse or conceal deliberate padding. The example used in the legislative history is that “if a delivery . . .

Truth in Lending: 5.5.1 The APR and Interest Rate Distinguished

The Truth in Lending APR is a measurement of the total cost of credit, based on both the interest and non-interest finance charges imposed in the transaction.98 As Rohner explains, the Truth in Lending APR is the reverse of the usual way of calculating interest rates.99 The latter “applies” an interest rate to determine the dollar amount of interest due, while the TILA-APR is “derived” from the relationship of the TILA-defined amount financed to the TILA-defined finance charges once those ha

Truth in Lending: 5.5.2 General Disclosure Rules

This subsection discusses the calculation of the annual percentage rate as well as the form of the disclosure. While creditors do err in both the calculation and form of the annual percentage rate disclosure,108 the APR is more often wrong due to an incorrect prepaid finance charge.109 Practitioners thus should review the finance charge calculation before conceding that the lender correctly determined the APR.

Truth in Lending: 5.5.3 More Conspicuous Than Other Disclosures

As a general rule, the disclosure of the annual percentage rate, with the disclosure of the finance charge, must be more conspicuous than any other required disclosure.119 The only required disclosure that may be more conspicuous than the annual percentage rate is the creditor’s identity.120

Truth in Lending: 5.6.6.4 Checking a Variable Rate Payment Schedule

Careful practitioners will always want to review the payment schedule for inaccuracies, particularly because there is no tolerance for payment schedule violations, at least in transactions not covered by the TILA-RESPA integrated disclosure rules.295 Amortization schedules can be used to do this, as can most spreadsheet programs or financial calculators. The basic approach is to check the creditor’s assumptions to make sure that the variable rate contract terms in the loan note and riders were followed.

Truth in Lending: 5.6.7 Demand Obligations

Disclosures in a demand obligation transaction (that is, the debt is payable on demand) must be based on an assumed maturity of one year, unless an alternate maturity date is stated in the legal obligation between the parties.297 If no alternate maturity date is disclosed (that is, other than one year), then only the due dates or payment periods for any scheduled interest payments for the first year must be disclosed.

Truth in Lending: 5.6.8 Alternate Payment Schedules

Creditors may offer the consumer the option of paying a loan on a bi-weekly, rather than a monthly, basis. This has become more common in the mortgage loan context. This offer usually occurs after the loan consummation via a mail solicitation. The creditor touts the interest savings and accelerated payoff rate that result from, in effect, paying one extra monthly payment each year.301 However, some of the savings are offset by periodic administrative fees imposed by the creditor.

Truth in Lending: 5.6.9.1.1 Required disclosure

The accurate “total of payments” must be disclosed in the federal box using that term, and a brief description of the total of payments must also be provided.304 The regulation suggests using the description “the amount you will have paid when you have made all scheduled payments.”305

Truth in Lending: 5.6.9.1.3 Pickup payments

One arises when the consumer agrees to make a “pickup payment,” i.e., a deferred portion of the down payment.314 In this situation, if the creditor discloses a pickup payment as part of the payment schedule, it must be included in the total of payments, even if it is not included in either the finance charge or the amount financed.315

Truth in Lending: 5.6.9.1.4 Finance charges paid in cash

The second circumstance occurs where finance charges are paid in cash at, or before, closing. The total of payments may reflect the sum of all scheduled payments but not the sum of the finance charge plus the amount financed. This happens because prepaid finance charges that are not financed will not appear in the payment schedule.316 Even though paid in cash, however, they must still appear in the finance charge.317

Truth in Lending: 5.6.9.1.6 Irregular first payment period

Creditors may, in some circumstances, ignore the impact of an irregular first payment period in making calculations and disclosures.320 One court, invoking that provision, permitted nearly a $100 understatement of the total of payments where the creditor assumed an even payment schedule despite a higher first payment.321

Truth in Lending: 5.6.9.1.7.1 Calculation formula

In the context of the TILA-RESPA integrated disclosures, described in more detail in § 5.11, infra, the total of payments is the sum of the principal, interest (including per diem interest paid at or before closing), mortgage insurance, and loan costs scheduled to be paid.322 “Mortgage insurance” includes the premiums the consumer will pay until the date on which the credit

Truth in Lending: 5.5.4.1.1 Regular transactions

As a general rule, the annual percentage rate is considered accurate if it is not more than 1/8 of 1 percentage point (.125%) above or below the annual percentage rate determined by the actuarial method or the U.S.

Truth in Lending: 5.5.4.1.3 Tolerance for APRs calculated using the annual percentage rate tables

If the creditor uses the annual percentage rate tables published pursuant to Regulation Z, the creditor may disclose the rate determined by the tables even if not within the tolerance.137 For example, the official interpretations point out that volume I of the tables produces an annual percentage rate for a transaction with a large final balloon payment that is considerably higher than the exact rate determined by the actuarial method described in appendix J of the regulation.

Truth in Lending: 5.5.4.1.4 Where the misdisclosure of the APR is based on an inaccurate finance charge

The 1995 amendments to TILA created some special rules for accuracy of the APR disclosure in closed-end transactions secured by real property or a dwelling when the error is based on miscalculation of the finance charge.140 As a result, when an APR disclosure error is caused by a finance charge error, the finance charge tolerance applies even if the resulting error to the APR is greater than the margin allowed by the applicable APR tolerance.141 The official interpretations also protect disc

Truth in Lending: 5.5.4.2 Overstated APR

While the Act appears to permit any overdisclosure of any numerical disclosure, including the APR,145 the regulation treats over-disclosure and under-disclosure of the APR equally severely,146 at least in the non-mortgage-loan context.147

Truth in Lending: 5.5.4.3.1 Errors attributable to a faulty calculation tool

The regulation excuses an error in the disclosure of the annual percentage rate that results from a corresponding error in a calculation tool used in good faith by the creditor, as long as the creditor promptly discontinues the use of the tool and notifies the Consumer Financial Protection Bureau in writing of the error in the tool.157 For example, if a creditor in good faith purchased an annual percentage rate computer program that calculated inaccurate annual percentage rates, the creditor would be excused from liability if it stopped usi

Truth in Lending: 5.5.4.3.2 Accuracy rules for add-on rates

Creditors that apply a single “add-on” interest rate to all transactions up to sixty months in duration with regular payment amounts and periods have a special accuracy rule. In that situation, the creditor may uniformly disclose the highest possible annual percentage rate in that range of transactions, rather than the exact annual percentage rate for each transaction.160

Truth in Lending: 5.5.4.3.3 Accuracy for fixed dollar finance charges

Another exception is for creditors that impose a fixed dollar finance charge on all balances within a specified range of balances.162 This exception applies to disclosing annual percentage rates for mail or telephone orders163 and for a series of sales.164 In those situations, the creditor has the option of disclosing each time the annual percentage rate computed for the median balance, as long as that annual percentage rate does not understa

Truth in Lending: 5.5.5 Proving the Accurate APR in Litigation

In some instances, the accuracy of APR calculations are disputed in the context of litigation. The issues that arise are similar or identical to those arising for interest rate calculations to establish usury claims.166 The major question is how to put the accurate calculations and the method of calculation before the court.