Truth in Lending: 5.13.4.5.1 Overview
Creditors are required to give a simplified example of how the consumer could be affected by rate changes.
Creditors are required to give a simplified example of how the consumer could be affected by rate changes.
If the creditor chooses to provide a historical example, it must be based upon a $10,000 loan amount, which illustrates how payments and the loan balance would have been affected by changes in the index being used by the creditor.1416 Because the example is not based on the actual amount to be borrowed, creditors can use preprinted disclosures for each loan program and give them to consumers with the ARM Handbook.
The maximum payment example required under Regulation Z § 1026.19(b) is not the maximum payment possible on the consumer’s loan or even on any actual loan.1425 Instead, it is a hypothetical maximum payment, based on a hypothetical $10,000 loan, using a “recent” index, but not necessarily the actual index value or interest rate applicable to that loan. There is indeed no requirement in section 1026.19(b) that the actual maximum payment be disclosed.1426
The consequences of failure to make the required TILA early variable rate disclosures are not entirely clear. The variable rate disclosures are not among the specific violations listed in 15 U.S.C.
In reviewing ARM disclosures, practitioners should compare the early ARM information to that contained in the adjustable-rate note provided at closing. If the information differs, the consumer may have a claim for damages,1443 based on the failure to make the disclosures clearly and conspicuously or to conform the disclosures to the legal obligation.1444
Despite the fact that many, if not most consumers, use the monthly payment to gauge their ability to repay loans,1449 TILA did not mandate disclosure of the maximum payment for closed-end ARMs until 2008. In 2008, Congress instructed the Federal Reserve Board to implement a disclosure of the maximum payment no later than February of 2011.1450
The Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter the Dodd-Frank Act)1464 added a host of new disclosure requirements for closed-end residential mortgage loans.1465 Among those are new disclosure requirements for variable rate residential mortgage loans for which an escrow or impound account will be established for the payment of all applicable taxes, insurance, and assessments.1466 For such loans, the TILA disclosure
Lenders making private student loans are required to provide special disclosures.1469 As of the effective date of additions to Regulation Z that implement the Higher Education Opportunity Act of 2008 (HEOA), there are three sets of required disclosures: (1) application and solicitation; (2) loan approval; and (3) final disclosures.
This set of rules applies to “private education loans,” that is, loans extended to consumers by the educational institution or by other creditors that are expressly, in whole or in part, for postsecondary educational expenses and are not made, insured, or guaranteed by the federal government under the Higher Education Act.1488 Open-end credit or any loan secured by real property or a dwelling is not covered.
The application or solicitation disclosures must include information about interest rates.
The approval disclosures must include information about interest rates, including whether the rate is fixed or variable and if it may increase after consummation.1508
The creditor is required to provide the consumer with final disclosures after the consumer has accepted the loan.1517 The content of the final disclosures is similar to the approval disclosures, with the addition of information about the cancellation right.1518 The sample form has a box at the top titled “Right to Cancel” and including this statement: “You have a right to cancel this transaction, without penalty, by midnight on DATE.
The creditor must obtain a self-certification form from the consumer or the school with information about cost of attendance, the expected family contribution, and estimated financial assistance.1519 The creditor may receive the form directly from the consumer or from the consumer through the school.
The consumer has a right to cancel a closed-end private education loan, without penalty, until midnight of the third business day following the date on which the consumer receives the final disclosures. No funds may be disbursed until the three-day period has expired.1529
Actions for violations involving private education loans may be brought one year from the date on which the first regular payment of principal is due under the loan.1530 There is a private right of action for several, but not all, of the approval and consummation disclosure requirements.1531 Congress also added the new private loan right of cancellation to the TILA rescission remedies section.1532 Lenders are not liable for failure to comply
Some lenders offering private student loans may attempt to structure the transactions as open-end credit. The TILA disclosures rules applicable to private education loans discussed above only apply to closed-end consumer credit. Whether any particular student loan actually meets the TILA definition of open-end credit necessitates a careful analysis of the loan terms.
The transfer notice requirement is intended to apply to persons who acquire ownership of mortgage debt.1156 Thus, the rule uses the term “covered person” rather than “creditor” to describe persons subject to its requirements.1157 There are two basic requirements to be a “covered person” under the rule:
The rule applies even if ownership is transferred to a different legal entity based on a merger, acquisition, or reorganization.1180 Affiliates that are separate legal entities from the transferor must provide the disclosure if legal title of the loan is transferred to it.1181 If the original creditor or an assignee transfers partial interests in the loan to two or more entities, each entity becomes a covered person.1182 Assumption of t
One question that arises from the statutory language is whether new assignees of mortgages are covered or only owners of the note.
Theoretically, transfers to or from the Mortgage Electronic Registration System (MERS) should not trigger the requirement of notice.1195 MERS never owns the debt obligation; at most it is a nominee for the true holder.1196 Rather, MERS acts as a public place holder for the true owner, while the ownership of the note is transferred within the MERS system.
The notice is to be provided to the “borrower,” a term not defined in TILA.1206 The implementing regulations use the term, “consumer,”1207 which includes anyone to whom the credit is offered or extended.1208 Thus, borrowers whose personal liability is extinguished in a bankruptcy should still be entitled to notice because the credit was originally offered and extended to them.1209
The notice sent to the borrower must identify the loan that was acquired or transferred. The covered person is given flexibility on how to disclose this, such as by providing the property address and the pre-transfer loan number, or just the pre-transfer loan number, or the date when the credit was extended and the original loan amount or credit line.1211 The notice sent to the borrower also must contain disclosure of four categories of information discussed in the following subsections.
The covered person under the rule who is the party acquiring the loan must disclose its name, address, and telephone number.1213 This information must be provided even if there is another party who is servicing the loan.1214 If there is more than one covered person, the information need only be provided for one person, if that person is authorized to receive notice of rescission and resolve payment issues.