Mortgage Analysis Uses the Truth in Lending Act to Thwart Predatory Lending

The federal Truth In Lending Act was originally enacted by Congress in 1968 as a part of the Consumer Protection Act. The law is designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The law was simplified and reformed as a part the Depository Institutions Deregulations and Monetary Control Act of 1980. The Truth in Lending Act is important for small businesses involved in consumer credit transactions or consumer leasing.

Regulations The law has been implemented by the Federal Reserve Board through two key regulations:

Regulation Z explains how to comply with the consumer credit parts of the law.

Regulation Z applies to each individual or business that offers or extends consumer credit if four conditions are met:

1. The credit is offered to consumers.

2. Credit is offered on a regular basis.

3. The credit is subject to a finance charge (i.e. interest) or must be paid in more than four installments according to a written agreement.

4. The credit is primarily for personal, family or household purposes.

If credit is extended to business, commercial or agricultural purposes, Regulation Z does not apply.

Regulation M includes all the rules for consumer leasing transactions.

Regulation M applies to contracts in the form of a bailment or lease where the use of personal property by a person primarily for personal, family or household purposes. The lease period must exceed four months, and the total contractual obligations must not exceed $25,000, regardless of whether the lessee has the option to purchase the property at the end of the lease term.

Other Agencies In addition to the Federal Reserve Board, other federal agencies may have regulations for certain special lines of business. For example, the Department of Transportation has certain Truth In Lending Act regulations applicable to airlines. The Veterans Administration, the Department of Housing and Urban Development, the Federal Home Loan Bank Board and the National Credit Union Administration are also involved in the enforcement of the Truth In Lending Act. The Truth In Lending Act is designed to reduce confusion among consumers resulting from the different methods of computing interest. It does not require creditors to calculate their credit charges in any particular way. However, whatever alternative they use, they must disclose certain basic information so that the consumer can understand exactly what the credit costs.

Home Mortgages One of the biggest lending transactions any individual is likely to enter is borrowing to purchase a home. These transactions have become more complicated in recent years. Historically, someone trying to buy a home had very few options. Often, only a traditional thirty year loan was available. Now, loans of various duration and interest rate variations are available to every home buyer. The Federal Reserve Board and the Federal Home Loan Bank Board have published a book entitled "Consumer Handbook on Adjustable Rate Mortgages " to help consumers understand the purpose and uses of adjustable rate mortgage loans. Regulation Z requires that creditors offering adjustable rate mortgage loans make this booklet, or a similar one, available to consumers.

Disclosure Disclosure is generally required before credit is extended. In certain cases, it must also be made in periodic billing statements. Regulation M includes similar rules for disclosing terms when leasing personal property for personal, family or household purposes, if the obligations total less than $25,000.

In general, disclosure is required before any "closed end credit transaction" is completed. There is an exception where credit is extended over the telephone or by the mails. In those cases, a disclosure may be made after the fact. Disclosure is also required before the first transaction under an open end account, and again at the time the periodic billing statement is sent.

The term "closed end credit transaction" is defined by exclusion. That is, it includes any credit arrangement (either a consumer loan or credit sale) that does not fall within the definition of an "open end credit transaction". Open end credit includes credit arrangements like revolving credit cards, where the "borrower" (that is the credit card holder) is not required to pay off the principal amount by any particular point in time. Rather, the borrower is simply charged interest periodically and is usually required only to make some minimum payment.

The term credit sale means a sale in which the seller is the creditor. That is, the amount of the purchase price is financed by the seller. This includes any consumer lease, unless the lease is terminable without penalty at any time by the consumer, or when:

1. The consumer agrees to pay an amount substantially equal to, or more than, the total value of the property or services involved.

2. The consumer has the opportunity to purchase the property for at least nominal consideration.

Under Regulation Z, disclosure must be made of the following important credit terms:

Finance Charge - This is perhaps the most important disclosure made. This is the amount charged to the consumer for the credit.

Annual Percentage Rate - This is the measure of the cost of the credit which must be disclosed on a yearly basis. The method for calculating this rate is determined the underlying transaction.

Amount Financed - This the amount that is being borrowed in a consumer loan transaction, or the amount of the sale price in a credit sale.

Total of Payments - This includes the total amount of the periodic payments by the borrower/buyer.

Total Sales Price - This is the total cost of the purchase on credit, including the down payment and periodic payments.

Evidence of compliance with the Truth In Lending requirements must be retained for at least two years after the date of disclosure. Disclosures must be clear and conspicuous and must appear on a document that the consumer may keep.

Other Features of the Truth in Lending Act The Truth In Lending Act has other important features. If you elect to advertise credit terms, the law requires disclosure of key lending terms. Also, the law entitles the consumer the right to rescind certain credit transactions within a short period, such as home equity loans.

To assist creditors, sellers and lessors, the Federal Reserve Board has provided a series of model disclosure forms and clauses for Regulation Z and Regulation M. You may find copies of these regulations and model forms at most public libraries and law school libraries. Regulation Z is in the Code of Federal Regulations at 12 C. F. R. Part 226. Regulation M is also in the Code of Federal Regulations at 12 C. F. R. Part 213. (The librarian can use these citations to locate these regulations.)

The penalties for failure to comply with the Truth In Lending Act can be substantial. A creditor who violates the disclosure requirements may be sued for twice the amount of the finance charge. In the case of a consumer lease, the amount is 25% of the total of the monthly payments under the lease, with a minimum of $200 and a maximum of $2000. Costs and attorney's fees may also be awarded to the consumer. A lawsuit must be begun by the consumer within 3 years of the closing. However, if a creditor sues more than a year after their violation date, violations of the Truth In Lending Act can be asserted as a defense.

The key to a successful action against the predatory lending practices of lenders is accurate, complete paperwork that properly cites the statutes and case law. That is what an experienced, well-trained audit and compliance professional can do for you.