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Truth in Lending: 5.1 Introduction

This chapter reviews the specific disclosures required under TILA for closed-end loans. Special disclosures required for reverse mortgages, mortgage loans more generally, and HOEPA loans are discussed elsewhere in this treatise.1

Truth in Lending: 5.3.1 General

The “amount financed” must be disclosed using that term.8 A brief description of the amount financed must be provided, in language similar to the regulation’s “the amount of credit provided to you or on your behalf.”9

Truth in Lending: 5.3.2.1 General

The down payment is the amount, including the value of any property used as a trade-in, paid to a seller to reduce the cash price of goods or services purchased in a credit sale transaction.20 It may include cash rebates or incentives paid to consumers.21 In some circumstances, deferred or “pickup” payments also may be included in the down payment.22

Truth in Lending: 5.5.6.2.2 Payment schedule and other irregularities in calculating the APR

Creditors have the option of disregarding some payment schedule irregularities.180 Creditors may disregard first payment periods that are longer or shorter than “regular” periods within prescribed limits, as well as any payment irregularity that results from the irregular first period.181 A “first” period runs from the date on which the finance charge begins to be earned to the date of the first payment.182 The “regular” period is the most co

Truth in Lending: 5.5.6.3.1 Introduction

The APR for a variable rate transaction is calculated like other APRs, based on the legal obligation as it exists at the time of origination. With a variable rate transaction, however, the question arises as to which interest rate to use in calculating the payment schedule on which the APR is based. The rate at origination will change; from the beginning, the note presumes a change in the rate. This choice is further complicated in notes that set an initial rate artificially low, such that the rate will, without doubt readjust to a higher rate during the note term.

Truth in Lending: 5.5.6.3.2 Calculation of interest rate changes in variable rate transactions

Variable rate transactions, like fixed rate transactions, will usually have a stated interest rate in the note. This stated interest rate, however, is subject to change. Usually, after some specified period (which may be as little as a day), the fixed rate in the note gives way to a variable rate. The note will set forth how the rate will be calculated after the initial fixed period expires.

Truth in Lending: 5.5.6.3.5 Calculation of APR in construction loans

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.

Truth in Lending: 5.5.7 Calculation of the APR in Single-Advance Single-Payment Transactions and Demand Obligations

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.

Truth in Lending: 5.3.2.2 Negative Equity

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.

Truth in Lending: 5.3.2.3 Pickup Payments

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

Truth in Lending: 5.3.3 Other Amounts That Are Financed

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.

Truth in Lending: 5.3.4 Premiums and Rebates

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

Truth in Lending: 5.4.1 General Disclosure Rules

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

Truth in Lending: 5.4.2 More Conspicuous Than Other Disclosures

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

Truth in Lending: 5.4.3.1 General

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.

Truth in Lending: 5.4.3.2 Tolerances for Credit Other Than Mortgage Loans

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.

Truth in Lending: 5.4.3.3.1 Tolerances for damages

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

Truth in Lending: 5.6.1 General

Prior to January 30, 2011, Regulation Z required the same payment schedule disclosures for all transactions:

  • • The number of payments;
  • • The amount of each payment; and
  • • The timing of payments scheduled to repay the obligation.226

These disclosure requirements still apply to non-mortgage transactions.