Truth in Lending: 5.5.6.3.4 Calculation of APR in timely payments rewards programs
Some mortgages provide for a future discount in the interest rate if timely payments are made.
Some mortgages provide for a future discount in the interest rate if timely payments are made.
Special rules apply when calculating the APR in a construction loan in which multiple advances are made during the course of the construction and the actual schedule of advances is not known at the outset. These rules are spelled out in appendix D of Regulation Z (reproduced in volume II of this treatise). They apply when the same creditor may permanently finance the construction of the dwelling either as a single transaction or as more than one transaction.
If the initial interest rate stated in the note is the same as the fully-indexed rate, then the APR is calculated as if the loan were a fixed-rate mortgage.
One of the APR computer programs (“NCLC APR Program”) included online as companion material to this treatise can produce an APR when there are the types of variations on the payment schedule that are produced by the use of teaser or premium rates and payment or rate caps. The tab to select in that program is marked “3. Irreg. Pay.”
A payday loan is an example of a single advance, single payment transaction. The lender advances a sum of money in a single installment, and the borrower is typically required to repay it a week or two later in a single payment. For these transactions, if the term is exactly one month (or some other whole number of months), then the APR is calculated as twelve times the rate for one month.220 Pawn transactions are another example.
Sometimes, an existing lien on a trade-in exceeds its value. The negative equity—the difference between the existing lien and the value of a trade-in—may be included in the amount financed, unless paid down by the borrower through a cash down payment which reduces the existing lien.27 Whether a creditor “nets” the negative equity and cash down payment or not makes no difference in the disclosure of the total amount financed.
Pickup payments are deferred portions of the down payment. Creditors may treat “pickup payments” as part of the down payment if they are payable no later than the due date of the second regularly scheduled payment and are not subject to a finance charge.30 A pickup payment treated as part of the down payment is subtracted in calculating the amount financed.31
Any financed fee or other charge that is not part of the finance charge must be included in the amount financed.42 For example, in a transaction secured by real property, the regulation permits the exclusion from the finance charge of bona fide, reasonable fees for a title examination.43 Such fees must then be included in the amount financed.
Sometimes a creditor in a loan transaction will offer cash or merchandise premiums to prospective borrowers or the seller in a credit sale transaction may offer seller’s or manufacturer’s rebates to prospective buyers. The official interpretations provide that creditors may disclose these premiums or rebates “in any manner” or not at all in the TILA disclosures.47
The disclosure of the amount financed is usually related to the disclosure of the finance charge, and thus governed by the finance charge tolerances. As a result, this issue is discussed at § 5.4.3.4, infra.
The finance charge must be disclosed as a dollar amount, the term “finance charge” must be used, and a brief description of the finance charge must be provided.49 The regulation suggests the description “the dollar amount the credit will cost you.”50 In variable rate transactions, the creditor has the option of modifying the description with a phrase such as “which is subject to change.”51
The disclosure of the finance charge (along with the disclosure of the annual percentage rate) must be more conspicuous than any other required disclosure.56 The only required disclosure that may be, but need not be, more conspicuous than the finance charge is the creditor’s identity.57 This rule highlights the central role of the APR and finance charge in the statute.58
In evaluating an inaccurate finance charge, practitioners must determine whether the misdisclosure falls within TILA’s “tolerance” for error. The 1995 amendments to TILA created a complicated system for determining tolerances for the disclosure of the finance charge for different types of transactions and claims. The finance charge tolerance for a particular claim depends on the type of transaction, the type of relief sought, and, for some real-estate-secured loans, whether or not the creditor has initiated foreclosure. The following sections discuss these rules.
Regulation Z provides a general tolerance for the disclosure of the finance charge, which applies to all non-mortgage credit.62 If the amount financed exceeds $1,000, then the finance charge is considered accurate if it is no more than $10 above or below the exact finance charge.63 If the amount financed is $1,000 or less, then the finance charge is considered accurate if it is no more than $5 above or below the exact finance charge.
For damage remedies, the tolerance in closed-end loans secured by real estate or a dwelling made after September 30, 1995 is $100.65 When it enacted this prospective tolerance in 1995, Congress also applied retroactive tolerances to all closed-end loans secured by real-estate and dwellings, including a $200 underdisclosure tolerance for damages66 and an unlimited tolerance for overdisclosures.67 An exception to the $100 tolerance applies when
Prior to January 30, 2011, Regulation Z required the same payment schedule disclosures for all transactions:
These disclosure requirements still apply to non-mortgage transactions.
The creditor must disclose the number of payments needed to pay the originally scheduled transaction.231 In a transaction which requires payments of different amounts, the creditor need not disclose the total number of payments for the entire transaction as one sum.232 For example, a creditor need disclose only that a transaction requires 104 payments of $10.00 and 111 payments of $11.00, but would not be required to disclose that there is a total of 215 payments.
The entire finance charge, not merely the interest portion, must be reflected in the payment schedule; however, the prepaid finance charge should not be shown as a separate payment in the payment schedule.233 Insurance that is included in the finance charge, including mortgage insurance, must be included in the payment schedule.234 The schedule must also include the entire amount financed.
The payment schedule must include the amount of the payments.240 Payments should be disclosed as dollar amounts.
The official interpretations permit abbreviated disclosure of the payment schedule in three instances:
The statutory requirement of disclosing due dates or period of payments is treated in the regulation as disclosure of “timing of payments.”259 The official interpretations state, as a general rule, that creditors may list all of the payment due dates or may disclose the payment intervals, for example, that payments are due “monthly beginning July 1, 2005.”260 Although neither Regulation Z nor the official interpretations is explicit, the sample forms suggest it is not necessary to give the d
If the loan contains a variable rate feature, the payment schedule will be calculated based on the assumption that the current prevailing market interest rates will not change for the duration of the loan.279 What this means is that if the initial interest rate is the same as the so-called “fully-indexed” rate, or the margin plus the appropriate index value in effect at origination,280 then the payment schedule will look exactly the same as if it were a payment schedule for a fixed rate note
A similar process happens with payment caps in the loan. Most payment option adjustable-rate mortgages (POARMs) have annual caps on payment increases ranging between 5% and 10%. These payment caps are usually in effect for the first five or sometimes ten years of the mortgage. At the end of that initial time period, the payments become fully amortizing.
Even if the payment schedule reflects a fully-indexed rate, the payment schedule will still not reflect the true volatility of the loans.