Truth in Lending Act (TILA) (Free Tutorial)

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The Truth in Lending Act (TILA) was enacted in 1968 and implemented as Regulation Z. It only applies to residential loans (1-4 units). The law covers three basic areas:
• Disclosure of financing charges (Annual Percentage Rate (interest rate + other financing charges = true yearly rate of borrowing), finance charge (a fee you wouldn’t pay on a cash deal), amount financed, and total amount paid over the life of the loan.) APR must be finalized at least 3 days before closing.
• Trigger terms in ads. Mention a financing item (down payment, interest rate, payment amount, etc.) and APR needs to be disclosed.
• Consumer Handbook on Adjustable-Rate Mortgages (CHARM)
• Right of Recission - a 3-day cooling-off period for refinances, home improvement or second mortgage loan on a primary residence. Loan not funded until period is over. Borrowers receive a Notice of Right to Rescind when applying. They can cancel in writing up until midnight of the third business day (including Saturday) after signing the contract.

TILA financial disclosures only apply to:
• Reverse Mortgages
• Home Equity Lines of Credit (HELOC)
• Mortgages for mobile homes and dwellings not attached to land

Home Ownership and Equity Protection Act (HOEPA)
Establishes requirements for certain loans on primary residences that have high rates and/or high fees. These loans are enforced by the Consumer Financial Protection Board.
Covered loans include:
• Purchase money mortgages.
• Home equity loans. (HELOCS)
• Refinances.

Exempt loan types include:
• Reverse mortgages.
• FHA, VA and USDA loans.
• Investment properties.
• New construction loans.

The thresholds for determining if the loan is high-cost are as follows:
• First-lien transaction is more than 6.5 percent higher than the prime offer rate.
• Junior lien transactions are more than 8.5 percent higher than the prime offer rate.
• Total fees and points payable by the consumer at or before closing exceed five percent of the total loan amount.

Restrictions on high-cost loans include:
• No prepay penalties.
• Balloon mortgages are generally not allowed except short-term bridge loans (12 months or less) are allowed to finance the purchase of a new home for a consumer who is selling their home.
• No negatively amortizing loans.
• No refinancing any high-cost mortgage into another high-cost mortgage within 1 year after having extended credit, unless the refinancing is in the consumers’ interest.
• No increase in interest rate upon default.
• Cannot accelerate the loan (call it due) after default.
• Borrowers must have a documented ability to repay the loan prior to funding.
• Borrowers must receive homeownership counseling from a HUD-approved counselor.
• Late fees may not exceed 4% of the past-due payment.

Higher-Priced Mortgage Loans
Higher-priced loans are ones in which the APR exceeds the Average Prime Offer Rate by at least 1.5% for first-lien loans or 2.5% for a jumbo loan or 3.5% for a subordinate lien.
• When the annual percentage rate (APR) for a mortgage loan on a primary residence exceeds a specified threshold, lenders must have an appraisal performed by a certified appraiser who enters the home and writes the report.
• The appraisal must be sent to the consumer promptly or at least three business days before closing.
• An additional appraisal is required if the purchase is a “flipped” home. Flips are defined as resells within 90 days with seller paying a minimum 10 percent price increase, or resells within the past 91-180 days with seller paying a minimum 20 percent price increase.
• These additional appraisals must be completed by a different appraiser and at no cost to the applicant.
• Refinancing a higher-priced mortgage may not result in a higher balance, balloon
payments or negative amortization.

MLO Compensation
A mortgage broker or loan originator cannot be paid based on any loan term or condition except for the loan amount. If the loan originator receives compensation from the consumer, then they cannot also be paid by the lender.