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1.7 Getting Started: Quick Reference Checklist (Closed-End)

Evaluating a consumer credit transaction for TILA disclosure rule compliance consists at a minimum of three tasks: evaluating the accuracy of the numerical disclosures on their face; determining whether those numerical disclosures were made in accordance with TILA rules (including assessing the legitimacy of charges imposed); and evaluating the adequacy of the non-numerical disclosures under TILA rules. For all closed-end mortgages, the practitioner should check the discussion at Chapter 9, infra, regarding substantive protections such as loan affordability, income verification, and loan steering, including the ban on yield spread premiums and similar mortgage originator compensation as well as whether HOEPA or the higher-cost rules apply. For credit cards, compliance with the Credit CARD Act should be determined, as described at Chapter 7, infra. Home equity lines of credit have their own disclosure requirements and substantive protections, which are spelled out at Chapter 8, infra.

For those who are new to TILA, it may be useful to refer to § 3.11, infra. That section includes sample documents for a closed-end home equity loan, which are analyzed in terms of the first two of those tasks. With its concrete example, and more detailed discussion of what to look for, working through that hypothetical may help flesh out the quick reference checklist below.281

Practitioners should be wary of anyone offering so-called “forensic loan audits” that purport to identify TILA or other violations in a borrower’s loan documents. The FTC has identified these forensic loan audits as yet another scam.282

Before working through the checklist, getting started means collecting the necessary paper and tools.

Collecting the papers: Creditors differ in how they do their paperwork. Some lenders will use a single, integrated document that has TILA disclosures on the same piece of paper with the sales contract or note. Retail installment sales contracts are often on a single document, as are non-mortgage loans from finance companies. Mortgage loans, on the other hand, may have the bare bones TILA disclosures on one piece of paper, separate note and mortgage documents, and an itemization of the loan’s components on yet another document. Irrespective of how the creditor handles it, a thorough analysis requires that you collect:

  • • The note or contract;283
  • • The TILA disclosure statement;
  • • Some document breaking down the components of the loan;
  • • The itemization of the amount financed,
  • • A HUD-1 settlement statement provided with many mortgage loans,284 or
  • • A disbursal statement;
  • • The notices given to the consumers informing them of the right to rescind, if that right is applicable to the transaction.285

HOEPA loans should have an advance look disclosure, which practitioners will want to evaluate for compliance. More thorough investigation and discovery will be necessary to evaluate compliance with TILA’s substantive rules regarding issues such as loan originator compensation, steering, and loan affordability.

A review of substantive compliance under the Dodd-Frank Act (and prior to finalizing of those regulations, under the FRB’s substantive rules regarding issues including mortgage originator compensation, steering, loan affordability) will require a more thorough investigation and discovery. Income and credit history information from the time the loan was made should be obtained, as should the application, if any, the lender’s complete underwriting records, the payment history, and the loan file. In order to review steering issues, pricing sheets, either from the creditor or from public sources, will be helpful.286

Similarly, for Credit CARD Act compliance, a careful investigation and discovery strategy will be important. Marketing and application materials will be helpful, as will periodic statements and other mailings from the creditor.

Calculation Tools Needed: With the exception of the APR and determining whether the payment amounts are correct,287 doing a check of the TILA numbers requires nothing more sophisticated than either a recollection of multiplication tables or a simple calculator. Adding, subtracting, and multiplying is all that is needed to check the non-APR numeric disclosures.

An APR check, though, is another matter. That does require special tools that, fortunately, are readily available.

FRB Tables: The APR can be calculated manually, using a set of tables prepared by the Federal Reserve Board.288

Software programs: This treatise’s online version provides access to two APR programs. Commercial programs are also available. Microsoft Excel can be used for most APR calculations. In addition, the Office of the Comptroller of the Currency makes an APR calculator available for downloading at www.occ.treas.gov/aprwin.htm.

Having collected your papers, your tools, and your thoughts, you can do a quick check of disclosures and other requirements for a typical closed-end transaction using the following step-by-step approach.

Check the numbers on their face:

Do the numbers as disclosed add up?

  • • Number of payments × amount of payments = total of payments
  • • Amount financed + finance charge = total of payments
  • • Itemization of amount financed = amount financed
  • (Watch for areas of possible confusion: down payments and “pick-up payments” particularly in auto loans;289 prepaid finance charges, which are part of the total finance charge, but are listed in the itemization of the amount financed.290)
  • • If there are any errors in the finance charge or inaccuracies in other disclosures affected by a finance charge error, are they within the relevant tolerance for error?291

Do an APR check, taking the lender’s numbers at face value:

  • • Is it within the allowable tolerance (.125% for most transactions)?292
  • • If the loan is “irregular” or contains an adjustable rate, use NCLC’s APR Program, Tab 3, to check the APR.293

Verify the lender’s allocation of components of the total of payments as between finance charge and amount financed.294

  • • Determine how the lender treated each charge. Watch carefully for prepaid finance charges, which should be listed in an itemization of the amount financed, but calculated as part of the finance charge.295
  • • Test each charge against TILA’s rules as to what is a finance charge, what is not, and under what circumstances certain types of charges may be excluded.296 Verify that:
  • • Each item the lender allocated to the amount financed is not excessive;
  • • Each item has actually been paid; and
  • • Each item pays for what it purports to.297 (A side trip to § 3.11, infra, analyzing a sample home equity loan, may be useful here.)

If the transaction is one to which the right of rescission applies:

  • • Check the notice of right to cancel, to be sure that all requirements were complied with.298
  • • Question the consumer about when the notice was actually provided and how many copies were given.299

For every closed-end mortgage, check compliance with the Dodd-Frank Act’s requirements and with the CFPB’s finalized substantive rules, including those on mortgage originator compensation and steering for closed-end mortgage loans, as well as loan affordability for higher-cost loans:

  • • Check that income was verified and that the correct income was used;
  • • Check that the loan meets affordability requirements and verify whether the loan falls within the safe harbor;
  • • Refer to creditor price sheets to ensure that the consumer was not steered to a loan outside the safe harbor or a loan more expensive than that for which she qualified;
  • • Check for compliance with all other substantive origination and servicing rules;
  • • Determine whether traditional TILA and enhanced damages are available and calculate accordingly.

If the transaction involves a non-purchase money, closed-end mortgage on the consumer’s principal dwelling, are the points and fees or APR high enough to trigger the applicability of HOEPA?300

  • • If the loan is covered by HOEPA, did the creditor comply with HOEPA’s special “advance look” disclosure requirements and substantive restrictions?301

If it is a credit card transaction, determine compliance with all Credit CARD Act requirements.

Are all the other disclosures mandated by section 1026.18 (and section 1026.19 if the transaction involved a variable rate) properly made?302

If you discover any violations:

  • • Are they among the statutory penalty violations?303
  • • Is there a possibility of actual damages (which might occur both with “penalty” violations and with non-penalty violations)?304
  • • If applicable, are they violations that trigger a continuing right to rescind?305
  • • Do statutory defenses306 or tolerances protect the lender?307
  • • Check the statute of limitations:
  • • One year for statutory damages;308
  • • Three years for rescission or for actions under HOEPA and the rules regarding mortgage originator compensation and loan affordability;309
  • • Recoupment is explicitly available for violations of the Dodd-Frank Act’s mortgage originator compensation or loan affordability rules, and recoupment or fraudulent concealment might extend the statute of limitations for other protections, at least for damage claims.310

Footnotes

  • 281 {247} See also § 3.8.3, infra (looking at how to determine what constitutes a prepaid finance charge in two sample loans).

  • 282 {248} See Fed. Trade Comm’n, Forensic Mortgage Loan Audit Scams: A New Twist on Foreclosure Rescue Fraud (Mar. 2010), available at www.ftc.gov. See also Hanson v. Wells Fargo Bank, 2011 WL 2144836, at *3 n.6, *4 (W.D. Wash. May 26, 2011) (“[t]he credibility of the Audit Report is dubious;” “the Audit Report’s findings are completely baseless”). See generally National Consumer Law Center, Foreclosures and Mortgage Servicing § 18.2.4 (5th ed. 2014), updated at www.nclc.org/library (loan modification scams).

  • 283 {249} The disclosures must reflect the legal obligation. See § 4.5.1, infra (closed-end). See also Reg. Z § 1026.5(c) (open-end).

  • 284 {250} This is required in many mortgage loans by the Real Estate Settlement Procedures Act (RESPA). 12 U.S.C. § 2603; Reg. X, 12 C.F.R. §§ 1024.7–1024.10.

  • 285 {251} If the consumer did not get the TILA disclosure statement, or, where required, the notice of right to cancel, that constitutes a violation in and of itself. See §§ 4.2.5, 10.4.4, infra.

  • 286 {252} For example, some historical price sheets are available at http://milestonerates.com.

  • 287 {253} See § 5.5, infra (closed-end). The initial APR disclosure for open-end credit is much simpler. See § 6.6, infra. See also § 6.7, infra (periodic-statements).

  • 288 {254} There are two volumes. Volume I is suitable for the overwhelming majority of consumer credit transactions, and Volume II is used when less common, irregular transactions are involved. Consumer practitioners would rarely need Volume II. The tables may be ordered for $5 each from the FRB. Prepaid orders should be sent to: Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, (202) 452-3245, fax (202) 728-5886. An order form is available online at www.federalreserve.gov/pubs/order.htm.

  • 289 {255} See § 5.3.2.1, infra.

  • 290 {256} See § 3.8, infra.

  • 291 {257} See § 5.4.3, infra.

  • 292 {258} See § 5.4.4, infra. But cf. § 5.4.3, infra.

  • 293 {259} See § 5.5.6.3, infra.

  • 294 {260} See Ch. 3, infra.

  • 295 {261} See § 3.8, infra (§ 3.8.3 for a sample analysis).

  • 296 {262} See generally Ch. 3, infra.

  • 297 {263} See, e.g., §§ 3.9.6 (real-estate loan closing costs), 3.9.7 (security interest charges), 3.10 (hidden finance charges in inflated sales price), infra. Discovery may be necessary to obtain some of this information.

  • 298 {264} See § 10.4.4, infra.

  • 299 {265} See §§ 10.4.4.2, 10.4.4.7, infra.

  • 300 {266} See §§ 9.6.2, 9.6.3, infra.

  • 301 {267} See §§ 9.6.6, 9.6.10, 9.6.11, infra.

  • 302 {268} See also Reg. Z § 1026.17; Ch. 5, infra.

  • 303 {269} See § 11.6.5, infra.

  • 304 {270} See § 11.5, infra.

  • 305 {271} See § 10.4, infra.

  • 306 {272} See §§ 10.4.4.9, 12.4, infra.

  • 307 {273} See § 5.4.3, infra.

  • 308 {274} See § 12.2.2, infra.

  • 309 {275} See § 10.3.2, infra.

  • 310 {276} See §§ 10.3.3, 12.2.3, 12.2.4, 12.2.5, infra.

    Note, however, that the U.S. Supreme Court has severely restricted the ability to extend the three-year limitation on rescission. See § 10.6.3, infra.