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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.

Truth in Lending: 5.5.6.1 General

These rules are based on the assumption that the creditor has accurately allocated all the components of the transaction as between the amount financed or the finance charge. If any of those costs are misallocated, the APR may be inaccurate.171 For that reason, a check on the accuracy of the APR must always include a check on how the creditor has allocated the loan components.

Truth in Lending: 5.6.9.1.7.2 Total of payments tolerances

As a general rule, TILA sets a zero-tolerance rule for errors in the total of payments disclosure for misdisclosures that are not related to an understatement of the finance charge.346 This standard has applied consistently to all closed-end credit transactions, including unsecured credit and credit secured by personal property, by real property, or by a dwelling.

Truth in Lending: 5.7.1 General

The FRB replaced the existing payment schedule disclosures, discussed above, with an “interest and payment” summary for closed-end mortgages secured by real property or a dwelling for which the creditor received an application on or after January 30, 2011 and until October 3, 2015 for all closed-end mortgages secured by real property or a dwelling other than reverse mortgages.359 A total of payments, schedule of when payments are due, and the date on which payments commence are no longer required.360

Truth in Lending: 5.7.2 Taxes and Insurance

If an escrow account is set up under the mortgage, the estimated taxes and insurance must be disclosed on a separate line.373 Effective October 3, 2015, this rule also applies to any fee that is “functionally equivalent” to taxes and insurance, other than a condominium fee.374 Those amounts are then summed with the principal and interest payment for a total monthly payment disclosure.

Truth in Lending: 5.7.3 Mortgage Insurance Premiums

The Homeowners Protection Act of 1998 limits the amount of private mortgage insurance (PMI) consumers can be required to purchase.378 In addition, creditors must terminate PMI automatically when certain conditions are met.

Truth in Lending: 5.7.4 Construction Loans Secured by Real Property or a Dwelling

Construction loans have slightly different disclosure rules, depending on whether the creditor discloses the construction phase as a separate transaction or discloses the construction and post-construction phase as a single transaction.395 If the construction loan is disclosed as a separate transaction, the creditor must follow the general disclosure rules of Reg. Z § 1026.18(s), and may not omit the interest only payments.

Truth in Lending: 5.8.1 General Disclosure Requirements

The disclosure rules for closed-end mortgage transactions to which the TILA-RESPA integrated regime applies are discussed at § 5.11.2, infra. For all other transactions, the creditor must disclose whether it has or will acquire a security interest in the property being purchased as part of the transaction or in other property, identified by item or type.396 No specific ter

Truth in Lending: 5.8.2.1 General

Probably in hopes of limiting litigation on the meaning of “security interest,” a frequent subject of pre-Simplification litigation, the regulation takes a narrow view of what constitutes a security interest.

Truth in Lending: 5.8.2.2 Exclusions from Security Interest Definition

A security interest does not include “incidental interests,” interests in after-acquired property, and security interests that “arise solely by operation of law.”407 These interests need not be disclosed as security interests in the segregated disclosures regardless of whether they are recognized as such under applicable law.408 However, nothing in the Act or Regulation Z prohibits the creditor from contractually reserving or enforcing these interests.

Truth in Lending: 5.8.2.4 What If the Creditor Is Unsure?

The official interpretations twice give their blessing to creditors who disclose a security interest even if they are unsure of whether an interest is a security interest under applicable law433 or whether it is one of the interests excluded from the definition of “security interest.”434 However, this should be strictly limited to those situations where the creditor is genuinely and in good faith unsure about whether a particular interest is a security interest under state law (e.g., a right

Truth in Lending: 5.8.3 Purchase Money Security Interests

If the consumer purchases the secured property as part of the credit transaction (a credit sale) or with the proceeds of the credit transaction (a loan), the property need only be generally identified.436 For example, the official interpretations suggest disclosing a security interest in “the property purchased in this transaction.”437 At its option, the creditor can provide a more specific identification of the secured property.438

Truth in Lending: 5.8.4.1 General

If the consumer does not purchase the secured property as part of the credit transaction or with the proceeds of the credit transaction, the secured property must be identified by item or type.441 Ordinarily only a general disclosure of the category of property subject to the security interest is necessary.

Truth in Lending: 5.8.4.2 Identification of the Collateral

In non-purchase-money transactions, the property in which a security interest is taken must be identified by item or type. Although a categorical identification generally may be acceptable,444 a cryptic reference to a category of property by use of industry shorthand may not be understood by a layman, and probably does not meet the requirements for a clear and conspicuous identification by item or type.445 Old Act cases are relevant and helpful.

Truth in Lending: 5.8.4.3 Overinclusive Description of Collateral

In describing the collateral for a debt, a creditor may disclose a security interest that it does not in fact have by the terms of the underlying security agreement. Such an overinclusive disclosure violates the Act. The policy reasons for prohibiting overinclusive security interest disclosures were well stated by the First Circuit:

Truth in Lending: 5.8.4.4 Underinclusive Disclosure of Security Interests

Lenders may also make an “underinclusive” disclosure.468 For example, mortgages may include language taking a security interest in existing personal property, but the disclosure statement may reflect only the security interest in the real estate.469 Except insofar as the particular additional collateral is specifically excluded from Truth in Lending disclosure as an “incidental” security interest,470 this is a violation of the Act and Regulat

Truth in Lending: 5.8.5 Mixed Purchase-Money and Non-Purchase-Money Collateral

Sometimes creditors will take a security interest in property being purchased as well as in other property. The official interpretations refer to those cases as involving “mixed collateral” and advise creditors to mix the disclosures as well. That is, the purchase-money collateral should be identified generally and the non-purchase-money collateral should be identified more specifically.475

Truth in Lending: 5.8.6 Property Already Secured: “Spreader Clauses”

The term “spreader clause” has been introduced into the TILA dictionary; however, its meaning is the same as the more commonly used terms “cross-collateral” or “dragnet” clauses.476 A “spreader clause” merely refers to a contractual provision under which collateral for previous credit transactions is also being used to secure the new transaction. For example, a bank may have taken a non-purchase-money security interest in a consumer’s household goods in a 2004 loan.

Truth in Lending: 5.8.7 Disclosure of Interests in Property Not Owned by Debtor

Occasionally and sometimes inadvertently, a creditor may take a security interest in property that does not belong to the consumer, but instead belongs to someone else. The official interpretations give the somewhat unrealistic example of a student loan secured by furniture belonging to the student’s parents.482 More typically loans are secured by all personal property in the consumer’s residence, regardless of whether the property belongs to the consumer, his or her friends, his or her relatives, or someone else.

Truth in Lending: 5.9.1 Overview

After TILA Simplification, statutory damages are no longer available for some violations of the statute.488 These provisions are tied only to actual damage relief under TILA. The availability of actual damages is discussed at § 11.6, infra.