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Truth in Lending: 9.6.6.1 Required Disclosures

The disclosure requirements applicable to covered loans are found in 15 U.S.C. § 1639.723 These disclosures do not replace the existing disclosure requirements under “regular” TILA rules found in 15 U.S.C.

Truth in Lending: 9.6.6.6 Tolerances

The APR disclosed in the HOEPA notice must be accurate to within the usual tolerance of 1/8 of 1% for regular transactions and 1/4 of 1% for irregular transactions and the finance charge cannot be understated by more than $100.756 An overdisclosure is not actionable if the overdisclosure is based upon a misallocation of the finance charge. The tolerance rules applicable to rescissions do not affect the APR disclosure on the HOEPA notice, however.

Truth in Lending: 9.6.6.7 Additional Inconsistent Information

Some lenders may add information to the HOEPA notice or may include a separate notice or letter when the HOEPA notice is provided. While a lender can provide more information than required by law, the additional verbiage, if inconsistent with the required language, may violate the clear and conspicuous requirement in 15 U.S.C.

Truth in Lending: 9.6.6.8 Timing of Disclosures

The disclosures required for covered loans must be given not less than three business days prior to consummation of the transaction.763 A “business” day is defined as including all calendar days except Sundays and certain listed holidays.764

Truth in Lending: 9.6.6.9 Delivery of Notice; Presumption of Delivery

Although the timing requirements appear straightforward, it is a common practice for predatory lenders to rush the consumer to complete a loan quickly, before the consumer understands the nature of the scam or can obtain advice from a lawyer, friend, or relative. Lenders may be tempted to fudge the date on the notice because complying with this requirement gums up their bureaucratic operation.

Truth in Lending: 9.6.7 Modification or Waiver of the HOEPA Notice

Regulation Z authorizes a modification or waiver of rights when necessary to permit homeowners to meet “bona fide personal financial emergencies.”773 This means the three-day advance look at the prescribed disclosures can be waived in genuine, immediate financial emergencies.

Truth in Lending: 9.6.8 Electronic Disclosures

Regulation Z allows electronic provision of the disclosures that are required for HOEPA loans, but only if the creditor complies with the Electronic Signatures in Global and National Commerce Act (E-Sign).779 Electronic disclosures are addressed in the TILA context at § 4.3, supra, and analyzed more generally in another treatise in this series.

Truth in Lending: 9.6.10.2.1 Introduction

Below we discuss the rules that apply to high-cost mortgages as of January 10, 2014. In the archived version of Chapter 9 available online as companion material to this treatise there are discussions of the prepayment penalty rules that apply to loans made before October 1, 2009 and those that apply as of October 1, 2009 and before January 10, 2014.

Truth in Lending: 9.6.10.2.2 Rules for applications received on or after January 10, 2014

Effective January 10, 2014, prepayment penalties (regardless of duration or amount) are banned from loans that otherwise trigger HOEPA.805 Congress accomplished this result by removing the statutory exceptions to the ban.806 Note that because prepayment penalties are also a trigger for high-cost mortgages after this same effective date,807 if a loan has a prepayment penalty that brings it within the high-cost loan range, the penalty will auto

Truth in Lending: 9.6.10.3 Prohibition of Interest Rate Increases on Default

A covered loan may not include a term that increases the interest rate in the event of a default.808 This prohibition prevents creditors from including provisions in covered loans that make it impossible, or nearly impossible, for a homeowner to cure a default. Similarly, creditors will not be permitted to artificially inflate the amount due on a loan after default to obtain excessive repayment through the foreclosure process.809

Truth in Lending: 9.6.10.4.1 General

Balloon payments are large payments which come due during a loan term, usually at the end of the loan. They pose a problem for consumers who usually do not have the means to make such payments from their income or liquid assets. The problem is compounded if the loan contains a prepayment penalty that penalizes a consumer who refinances before the balloon is due.813 Balloon payment loans have caused special hardship for many consumers, because they are often coupled with a fraudulent oral promise to refinance.

Truth in Lending: 9.6.10.4.2 Rule prior to January 10, 2014

The pre-Dodd-Frank version of HOEPA prohibits balloon payments in covered loans with terms of less than five years.816 Thus, for loans of less than five years, the payments were required to fully amortize the outstanding principal balance. Practitioners were advised to demonstrate to the court the actual amortization schedule and not rely on summary allegations that the payments do not cover all the principal and interest due on the note.817

Truth in Lending: 9.6.10.4.3 Rule for applications received on or after January 10, 2014

The Dodd-Frank Act goes beyond the original version of HOEPA and bans balloon payments entirely, not just in loans of less than five years.825 It also includes its own definition of balloon payment—one that is more than twice as large as the average of the earlier scheduled payments.826 It includes an exception for payment schedules that are adjusted to match a borrower’s seasonal or irregular income.827

Truth in Lending: 9.6.10.5 Prohibition of Negative Amortization

Negative amortization occurs when the payments due each period are insufficient to cover the interest on the loan as it comes due. The balance due therefore goes up as the additional unpaid interest is added to the principal. Since such interest can compound, the ultimate balance can quickly and easily exceed the consumer’s ability to repay.835

Truth in Lending: 9.6.10.6 Limitation on Prepaid Payments

Prepaid payments involve amounts that are withheld from the proceeds of the loan to cover one or more payments that would otherwise be paid over the course of the loan. They have been used by some unscrupulous creditors to disguise the real amount of credit granted and to increase the consumer’s obligation to pay interest. In addition, because the lender retains use of this money, the lender frequently earns interest on that use without crediting those amounts to the account of the borrower.838

Truth in Lending: 9.6.11.1 Introduction

In addition to requiring disclosures and prohibiting certain terms, the pre-Dodd-Frank version of HOEPA addresses three practices in connection with covered loans.