The Truth in Lending Simplification & Reform Act: Real Estate Loans
| Publication year | 1981 |
| Pages | 2778 |
| Citation | Vol. 10 No. 11 Pg. 2778 |
1981, November, Pg. 2778. The Truth in Lending Simplification & Reform Act: Real Estate Loans
The Truth in Lending Act(fn1) was recently changed by the adoption of the Truth in Lending Simplification and Reform Act ("Act").(fn2) Revised Regulation Z has been issued by the Board of Governors of the Federal Reserve System to implement the new Act.(fn3) The new Regulation became effective April 1, 1981, but creditors have the option of continuing to comply with the current law and Regulation until March 31, 1982. Compliance may be accomplished all at once or creditors may phase into compliance by loan category, type of transaction or by branch office. It is not permissible to combine new and old disclosures in the same transaction with the exception of advertising and right of rescission disclosures.(fn4) A Commentary has been issued by the Federal Reserve Board's Division of Consumer and Community Affairs in the form of an official staff commentary.(fn5) Creditors acting in conformity with this official staff Commentary are not liable for violations arising from those actions.(fn6)
The Federal Reserve Board release which introduces Revised Regulation Z contains an explanation of the principal changes in the Regulation, along with the old rule and the reason for the change. This release is a good place for those not familiar with Regulation Z to start to study the Act.
The Regulation is broken into five parts: Subpart A---General; Subpart B---Open-End Credit; Subpart C---Closed-End Credit; Subpart D---Miscellaneous; and Appendices A-J. This article focuses on the application of the Act, Regulation and Commentary as they apply to closedend credit(fn7) secured by real estate. As such, subparts A and C of the Act are the main points of discussion here. Upon reading the Regulation and Commentary, one will realize that it is difficult if not impossible to cover all points in a short article. Therefore, by necessity, only the main sections of the Regulation are discussed so the reader will be familiar with the general requirements. The Act and especially the Regulation and Commentary must be read in their entirety to assure compliance in each different credit transaction.
Footnote references to the Regulation in this article should be read in conjunction with the corresponding section in the Commentary. As an example, a footnote to § 226.18(q), Assumption Policy of the Regulation should be read with 18(q), Assumption Policy, found on page C27 of the Commentary. Except for specific discussions on the Commentary, no cite is made to the Commentary in this article.
As defined in the Regulation,(fn8) coverage is extended to each individual or business that offers or extends credit when four circumstances are present:(1) the credit is offered or extended to consumers;(fn9) (2) the offering or extension is done regularly.
(3) there is a finance charge or the credit is payable by a written agreement in more than four installments; and (4) the credit is primarily for personal, family or household purposes.
Real estate loans which fall under this definition are comprised primarily of consumer loans made:
a) to assist in the purchase of the principal dwelling;
b) to refinance the mortgage on the principal dwelling;
c) for second mortgages on the principal dwelling for home improvement or non-business use;
d) to purchase vacant land to be used for consumer purposes (i.e., to build a principal dwelling or vacation home); and
The Regulation sets forth certain transactions which are not covered and should be of assistance in formulating a decision if there is a question on coverage.(fn10) In those instances where there is a question on coverage, a closer reading of the Regulation and Commentary may help, followed with a call to the Federal Reserve (202-452-3000), if necessarye) for construction loans obtained by the ultimate homeowner to build a principal dwelling or vacation home.
As noted above, closed-end disclosure requirements fall under Subpart C of the Regulation and Commentary. The following is a list of the requirements of this part.
The disclosures must be made clearly in writing on a form the consumer may keep. They must be grouped together(fn11) and segregated from other disclosures. The Commentary gives examples of how to segregate. The Regulation is specific in detailing which disclosures must be grouped together11 and that the terms "finance charge" and "annual percentage rate" ("APR"), when required to be disclosed together with a corresponding percentage rate, must be more conspicuous than other disclosures, except for the creditor's identity.(fn12)
The Regulation still requires that disclosure be made before "consummation." The Commentary indicates that state law will determine when consummation has occurred. The common practice in Colorado with real estate transactions is to give the disclosure right before the note is signed or, if a commitment is issued to the consumer, before the commitment is signed. As noted below, this practice must be changed for residential mortgage transactions.
Under the new Regulation,(fn13) in those residential mortgage transactions(fn14) [i.e., a loan to finance the acquisition or initial construction of the consumer's principal dwelling, and which is subject to the Real Estate Settlement Procedures Act ("RESPA")],(fn15) good faith estimates of the disclosures required by § 226.18 must be made either before consummation or by placing them in the mail or delivering them not later than three business days(fn16) after the written loan application is received, whichever is earlier. In general, RESPA applies only to (1) first mortgage loans made by a lender which is federally insured or regulated or (2) loans which are government insured or guaranteed and are made on 1-4 family residential property.(fn17)
If the final APR in the transaction differs by more than 1 / 8 of 1 percent in a regular transaction or 1/4 of 1 percent in an irregular transaction,(fn18) the disclosures of the changed terms must be given again no later than at consummation or settlement.(fn19) Estimates may be used in those instances where actual figures are not available,(fn20) making certain that all estimates are so marked by an asterisk or
other type of identification. Provisions are also made for certain irregularities, such as months having different numbers of days and leap years.(fn21)
Although all creditors in a transaction are responsible for complying with the Act, one must give the disclosure for all. Each creditor must make certain that all disclosures it is responsible for are given and are correct, since all are liable regardless of which creditor gives the disclosure.
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