Truth in Lending Act (TILA) Overview

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Questions and Answers

Which of the following practices does the Truth in Lending Act (TILA) protect consumers against?

Unfair credit card practices

Inaccurate credit billing

Deceptive mortgage lending tactics

All of the above (correct)

What is a "business day" for the purposes of TILA's rescission rule?

Monday through Friday, excluding holidays

Any day that is not a weekend or a federal holiday

Every calendar day except Sundays and legal holidays (correct)

Any day the creditor's offices are open

What is the main objective of the Truth in Lending Act (TILA)?

To protect consumers from unfair credit practices

To regulate mortgage lenders' practices

To promote transparency in loan terms for consumers (correct)

To establish minimum standards for dwelling-secured loans

What does TILA require lenders to provide consumers?

A detailed explanation of all loan fees and charges (D) Signup and view all the answers

What is a dwelling, as defined by TILA?

A structure with one to four units, attached or detached, used for residential purposes (A) Signup and view all the answers

Which of the following transactions are NOT subject to TILA/Reg Z?

A loan offered to a business for commercial purposes (A) Signup and view all the answers

What is the primary purpose of the "right to rescind" provision in TILA?

To allow consumers to cancel a loan within a specific timeframe (B) Signup and view all the answers

What is the main objective of TILA in requiring lenders to use consistent terminology and methods of calculation?

To make it easier for consumers to compare loan terms across different lenders (C) Signup and view all the answers

Within how many business days of a loan application must the lender provide an appraisal disclosure stating that they may order an appraisal and charge the borrower for it?

3 (D) Signup and view all the answers

When must a lender provide the borrower with a copy of any written appraisal for a loan that is not consummated?

No later than 30 days after the creditor determines that the loan will not be consummated. (D) Signup and view all the answers

What is the earliest point in time that a lender can charge a prepayment penalty on a loan?

After the second year of the loan (C) Signup and view all the answers

Which of the following is NOT a restriction imposed on prepayment penalties in HPML loans?

The penalty applies to all loans secured by a dwelling, even if the loan does not meet the HPML requirements. (A) Signup and view all the answers

According to Dodd-Frank, loan originators CANNOT be compensated based on which of the following?

All of the above (D) Signup and view all the answers

Which of the following situations is NOT prohibited under Dodd-Frank regulations regarding loan originator compensation?

A loan originator having their compensation reduced to offset the cost of a change in transaction terms, such as pricing concessions (D) Signup and view all the answers

In which of the following situations is it permissible for a loan originator to receive compensation based on a “proxy” for loan terms?

None of the above (D) Signup and view all the answers

Which of the following is NOT a key compensation limitation under Dodd-Frank for loan originators?

Loan originators cannot be compensated based on the amount of the loan (D) Signup and view all the answers

Which type of loan is NOT exempt from TILA/Reg Z disclosures?

A loan made to an individual for the purchase of a vacation home (A) Signup and view all the answers

What is the primary purpose of the Truth in Lending Act (TILA)?

To standardize loan terms and make them understandable for consumers (A) Signup and view all the answers

Which of the following is NOT a factor considered when calculating the Annual Percentage Rate (APR)?

The borrower's credit score (B) Signup and view all the answers

In a fixed-rate mortgage transaction, what is the acceptable difference between the stated APR and the actual APR?

Up to 0.125% (A) Signup and view all the answers

Which of the following is NOT included in the Finance Charge?

Interest rate adjustments (B) Signup and view all the answers

What is the purpose of the Consumer Handbook on Adjustable Rate Mortgages booklet?

To explain the risks and benefits of adjustable rate mortgages (B) Signup and view all the answers

The right of rescission allows borrowers to cancel a mortgage transaction within

3 business days (A) Signup and view all the answers

Which of the following transactions is NOT exempt from the right of rescission?

A refinance of an existing mortgage on a primary residence with new funds advanced (D) Signup and view all the answers

Who is entitled to rescind a mortgage transaction?

Everyone who holds title to the property (B) Signup and view all the answers

What is the deadline for notifying the lender of a decision to rescind a mortgage transaction?

Midnight on the 3rd business day after the latest of three events (D) Signup and view all the answers

In the context of TILA advertising, what does 'clear and conspicuous' mean?

Easy to understand and readily noticeable to consumers (D) Signup and view all the answers

If an advertisement states a specific loan term, what is the lender obligated to do?

Actually offer that loan term to any borrower who qualifies (B) Signup and view all the answers

What is the purpose of the loan program disclosure for adjustable rate mortgages?

To provide detailed information about the specific adjustable rate mortgage program the borrower is considering. (C) Signup and view all the answers

What is the difference between a 'Regular Transaction' and an 'Irregular Transaction' in terms of APR accuracy?

Regular Transactions refer to fixed-rate mortgages, while Irregular Transactions refer to adjustable-rate mortgages. (B), Irregular Transactions have a stricter tolerance for APR accuracy, allowing a maximum difference of 1/4th of a percentage point. (C), Regular Transactions have a stricter tolerance for APR accuracy, allowing a maximum difference of 1/8th of a percentage point. (D) Signup and view all the answers

Which of these is NOT included in the finance charge?

Credit report fees (D) Signup and view all the answers

What is a prepaid finance charge?

A finance charge paid separately in cash or check before or at closing (B) Signup and view all the answers

Which of the following loan types is not exempt from HOEPA coverage?

Loans secured by a second lien (B) Signup and view all the answers

What is the maximum late fee allowed for a HOEPA loan?

4% (A) Signup and view all the answers

What type of payment is prohibited for HOEPA loans?

Negative amortization (B) Signup and view all the answers

Which of the following loan terms is not restricted under HOEPA?

Late fees (B) Signup and view all the answers

What disclosure must be provided to the borrower at least three business days before closing a HOEPA loan?

A conspicuous statement that the borrower is not required to complete the agreement merely because they have received disclosures or signed an application (B) Signup and view all the answers

Under the CFPB rule update to TILA, what are lenders required to provide to consumers within three business days after they apply for a mortgage loan?

A list of homeownership counseling organizations (D) Signup and view all the answers

Higher-priced Mortgage Loans (HPMLs), also known as “section 35” loans, are defined by their:

Interest rate (D) Signup and view all the answers

Which of the following loans would not be considered an HPML based on the interest rate?

A first lien loan with a principal obligation exceeding the Freddie Mac limit with an APR that exceeds the APOR by 1.5 percentage points (D) Signup and view all the answers

A lender making an HPML is generally required to obtain a(n):

Appraisal (C) Signup and view all the answers

In what circumstances might a lender be required to obtain two appraisals for an HPML?

When the property might be being “flipped” (B) Signup and view all the answers

When is escrow for taxes and insurance not required for an HPML?

When the loan is secured by a cooperative (C) Signup and view all the answers

What is the unpaid principal balance threshold that might allow a borrower to request cancellation of the escrow account after 5 years?

80% (A) Signup and view all the answers

Which of the following is not a provision of the CFPB rule update to TILA related to homeownership counseling?

Lenders must require borrowers to complete a homeownership counseling course before receiving a loan (C) Signup and view all the answers

Which of the following is a specific type of loan that is required to assess the consumer's ability to repay under the Bureau's 2013 Ability-to-repay (ATR) Final Rule?

HELOC (A) Signup and view all the answers

What is the APOR?

Average Prime Offer Rate (C) Signup and view all the answers

What is the loan term restriction for temporary or “bridge” loans that are exempt from escrow requirements for taxes and insurance for HPMLs?

Twelve Months or Less (B) Signup and view all the answers

What is the maximum percentage of points and fees that can be charged in a loan under $20,000, according to HOEPA guidelines?

8% (D) Signup and view all the answers

When is a prepayment penalty exceeding 2% of the prepaid amount permitted under HOEPA?

Never (C) Signup and view all the answers

Which of the following is NOT considered a triggering term that requires additional disclosures in a dwelling loan advertisement?

The name of a government program (E) Signup and view all the answers

What is the primary entity responsible for enforcing HOEPA provisions after the CFPB amendment?

The Consumer Financial Protection Bureau (D) Signup and view all the answers

Which of these is NOT a deceptive practice prohibited by the Truth in Lending Act (TILA) in mortgage loan advertisements?

Disclosing the amount of each payment that will apply over the term of the loan (A) Signup and view all the answers

What are the two main types of mortgages considered high-cost under the HOEPA amendments?

HOEPA loans and higher-priced mortgage loans (A) Signup and view all the answers

What does the abbreviation APOR stand for in the context of HOEPA loan criteria?

Average Prime Offer Rate (B) Signup and view all the answers

Which of the following is NOT a requirement for a loan to be classified as a HOEPA loan?

Loan includes a balloon payment exceeding 10% of the loan amount (D) Signup and view all the answers

What is the maximum permitted prepayment penalty on a HOEPA loan in percentage of the amount prepaid?

2% (C) Signup and view all the answers

What is the key difference between a HOEPA loan and a higher-priced mortgage loan, as mentioned in the text?

Higher-priced mortgage loans are a broader category that encompasses HOEPA loans (A) Signup and view all the answers

When disclosing additional information about a loan secured by a dwelling in an advertisement, what specific term must be stated, according to the text?

Annual percentage rate (C) Signup and view all the answers

What type of advertisement is explicitly prohibited from using the name of the consumer’s current lender without a prominent disclosure?

Advertisements for mortgage loans only (F) Signup and view all the answers

What are the specific terms that must be provided if an advertisement for a loan secured by a dwelling states the amount of any payment?

The amount of each payment, the period of time it applies, and the fact that taxes and insurance premiums are not included (A) Signup and view all the answers

When does a dwelling loan advertisement need to disclose that the interest rate or payment can vary over time?

Whenever the advertisement states that rates or payments are fixed (D) Signup and view all the answers

A dwelling loan advertisement that uses a low introductory “teaser” rate in a foreign language is required to provide disclosures in what language?

Both the foreign language and English (C) Signup and view all the answers

What specific aspect of adjustable-rate loan advertisements requires disclosing the current index and margin?

The amount of each payment (B) Signup and view all the answers

Study Notes

Truth in Lending Act (TILA) - Key Provisions

Enactment and Purpose: Enacted May 29, 1968, effective July 1, 1969; Amended & revised many times thereafter. Primarily regulates mortgage lenders, requiring standardized disclosure of loan terms for consumer understanding and comparison.
Uniform Disclosure Requirements: Lenders must use standardized terms and calculation methods to disclose interest and loan costs. Prevents the use of confusing terminology and formats.
Consumer Protections: Covers accurate & fair credit billing, allows borrowers to rescind certain home-secured transactions, limits home equity lines of credit & certain mortgage types and sets minimum standards for dwelling- secured loans. Defines & prohibits unfair/deceptive mortgage practices.

TILA - Transaction Coverage & Exemptions

Covered Transactions: Loans to consumers, by lenders in the business of lending, that require charges or are payable in more than four installments, primarily for personal, family, or household purposes. Includes loans secured by owner-occupied residences.
Exempt Transactions: Loans primarily for business, commercial, or agricultural purpose; non-owner-occupied residential properties (exemption based on loan purpose, not property use); loans to entities other than natural persons (e.g., corporations, LLCs).

TILA - Disclosure Requirements & Timing

Standardized Disclosures: Crucially, TILA mandates standardized APR (Annual Percentage Rate) disclosure- a measure of the credit cost expressed as a yearly rate. The APR considers all relevant loan factors, providing a uniform benchmark for comparison. APR disclosures must be accurate or re-disclosed if inaccurate. Tolerance for accuracy in APR calculation differs based on fixed vs. adjustable rate mortgages.
Finance Charge Definition: Covers all fees directly or indirectly charged to the consumer as part of obtaining the loan. Exceptions exclude certain cash transaction-equivalent charges. "Prepaid finance charge" covers separately paid fees before/at closing.
Seller Contributions: Seller contributions towards borrower costs (e.g., seller's points) are excluded from the finance charge, even if passed on to the buyer through a higher sales price.
Adjustable Rate Mortgage (ARM) Specifics: Requires a disclosure booklet on ARMs, and a detailed loan program disclosure for each applicable program.
Rescission Rights: Borrowers have a three-business-day right to rescind (cancel) certain transactions involving loans on their primary dwelling, providing time to reconsider. Exceptions exist for financing initial construction, non-new funds added during refinance/consolidation situations, state agency-originated loans, and certain advance-renewal transactions. Notice rights and procedures for all those in title to the property must be followed for rescission.
Transaction Rescission Timing: Rescission notice to the creditor must be in writing by midnight of the third business day, following the latest of: consummation, disclosure delivery, or rescission notice receipt. A "business day" is any day other than Sundays and legal public holidays.

TILA - Advertising Regulations

Truthful Advertising: Advertisements must reflect actual loan terms offered, and required disclosures must be presented clearly and conspicuously. If APR may increase after loan consummation, that fact must also be disclosed. If a dwelling is security, then the advertisement can only state a simple annual rate, in conjunction with an APR, but not more conspicuously.
Triggering Terms: If advertising mentions terms like down payment amounts, payment numbers or amounts or interest rates, additional required disclosures must clearly and conspicuously be included, encompassing full loan terms (including balloon payments), APR, adjustable loan terms and conditions, and other relevant disclosures.
Dissemination Options: Multi-page ads, websites or other electronic formats, radio or television advertisements should follow clear dissemination guidelines for sufficient disclosure.
Deceptive Practices Prohibition: TILA prohibits certain deceptive or misleading acts/practices in advertisements for mortgage loans, including misrepresentation of fixed rate terms, inappropriate comparisons of payments and rates with alternative options under advertised terms, use of government names falsely misleadingly, false claims of debt elimination or other misleading claims, deceptive uses of names of current lenders, misleading advertising that uses foreign languages for terms/disclosures, claims that are not backed by the specific products.

Home Ownership and Equity Protection Act (HOEPA) - Section 32

Amendments & Enforcement: Dodd-Frank Act amendments expanding HOEPA coverage and protections; primarily enforced by the CFPB.
HOEPA Loan Definitions: A loan is a HOEPA loan if the APR exceeds the APOR by specified amounts, or the points and fees exceed 5% of the loan (or 8% and $1,000 maximum dollar adjusted for inflation for loans under $20,000). Additional criteria includes circumstances surrounding prepayment, fees, or penalties.
HOEPA Loan Restrictions: Prohibiting balloon payments (except in certain circumstances), negative amortization, prepayment penalties, financing points/fees (other than bona fide third-party charges), limited late fees, pay-off statement fees, and modification or deferral fees and other compensation limitations. Lenders must determine consumer ability to repay high-cost loans and verify income and assets. Restrictions against lender-recommedations and encouragement of loan defaults or refinancing as a high-cost product.
HOEPA Loan Loan Counseling Requirements: Loans to first-time homebuyers must enforce homeownership counseling before loan approval, with required disclosure on Counseling options available
Pre-Closing Disclosure: Additional disclosure requirement stating that the borrower is not obligated to enter into the transaction from the mere receipt of disclosures. The risk of home loss associated with the loan must be explicitly outlined.

Higher-Priced Mortgage Loan (HPML) - Section 35

Definition: A "higher-priced mortgage loan" as defined by a range of conditions that depend on lien-type and loan amount.
Requirements: HPMLs typically require more stringent requirements than other loan types regarding loan origination , appraisal requirements within 3 business days (with additional appraisal if property is being “flipped”), and income verification along with the prohibition of prepayment penalties (exceptions, two years; refinancing is exempt), fixed interest rates and payment amounts typically for at least four years, and prohibition of further lender compensation after default.
Escrow Requirements: Escrow accounts for property taxes and hazard premiums are usually mandatory, with some exceptions, for most mortgages. This applies regardless of the LTV ratio. Loan-term exceptions exist for cooperative housing, construction transactions, bridge/temporary loans, and reverse mortgages.
Additional Considerations: Mortgage lenders must provide copies of any appraisal to the borrower regardless of loan closure. There is a 30-day grace period for non-consummated loans.

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Explore the key provisions and protections provided by the Truth in Lending Act (TILA). This quiz covers the enactment, uniform disclosure requirements, and the types of transactions covered under TILA. Test your knowledge on how TILA safeguards consumers in the lending process.