Truth in Lending Act and Regulation Z
Regulation Z, which was enacted pursuant to the Truth in Lending Act, by the Federal Trade Commission (FTC), requires that credit institutions inform borrowers of the true cost of obtaining credit. With proper disclosures, borrowers can compare the costs of various lenders to avoid the uninformed use of credit. Regardless of the amount, however, Regulation Z applies when a credit transaction is secured by a residence. The regulation does not apply to business or commercial loans or to agricultural loans of any amount.
Under the Truth-in-Lending Act, Regulation Z, a consumer must be fully informed of all finance charges and the true interest rate before a transaction is completed.
The total finance charge calculation, or APR (Annual Percentage Rate) must include any:
In the case of a mortgage loan made to finance the purchase of a dwelling, the lender must compute and disclose the annual percentage rate (APR) (Could be considered Actual Percentage Rate).
Creditor
A creditor, for purposes of Regulation Z, is any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions involve dwellings as security. The credit must be subject to a finance charge or payable in more than four installments by written agreement.
Three-day right of rescission
In the case of many consumer credit transactions covered by Regulation Z, the borrower has three days in which to rescind the transaction by merely notifying the lender. However, this right of rescission does not apply to owner-occupied residential purchase-money, first mortgage, or deed of trust loans. It does, however, apply to refinancing a home mortgage or to a home equity loan.
Advertising
Regulation Z provides strict regulation of real estate advertisements in all media (e.g., newspapers, flyers, signs, billboards, Web sites, radio or television ads, direct mailings) that refer to mortgage financing terms. General phrases like “flexible terms available” may be used, but if details are given, then all details in the transaction must be disclosed, including rate, down payment, term, etc. they must comply with the act. The APR which is calculated, based on all charges rather than the interest rate alone, must be stated.
Specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge, or term of the loan are referred to as trigger terms. These terms may not be advertised unless the advertisement includes the following information:
Penalties
Regulation Z provides penalties for noncompliance. The penalty for violation of an administrative order enforcing Regulation Z is $10,000 for each day the violation continues. A fine of up to $10,000 may be imposed for engaging in an unfair or a deceptive practice. In addition, a creditor may be liable to a consumer for twice the amount of the finance charge, for a minimum of $100 and a maximum of $1,000, plus court costs, attorneys’ fees, and any actual damages. Willful violation is a misdemeanor punishable by a fine of up to $5,000, one year’s imprisonment, or both.
Equal Credit Opportunity Act (ECOA)
The federal Equal Credit Opportunity Act (ECOA) prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of :
Furthermore, lenders and other creditors must inform all rejected credit applicants of the principal reasons for the denial or termination of credit. The notice must be provided in writing within 30 days. The ECOA also provides that a borrower is entitled to a copy of the appraisal report if the borrower paid for the appraisal.
Community Reinvestment Act (CRA)
Community reinvestment refers to the responsibility of financial institutions to help meet their communities’ needs for low-income and moderate-income housing. In 1977, Congress passed the Community Reinvestment Act (CRA). Under the CRA, financial institutions are expected to:
The law requires any federally supervised financial institution to prepare a statement containing
Financial institutions are periodically reviewed by one of three federal financial supervisory agencies: the Comptroller of the Currency, the Federal Reserve’s Board of Governors, or the Federal Deposit Insurance Corporation (FDIC). The institutions must post a public notice that their community reinvestment activities are subject to federal review, and they must make the results of these reviews public.
Real Estate Settlement Procedures Act (RESPA)
The federal Real Estate Settlement Procedures Act (RESPA) applies to any residential real estate transaction involving a new first mortgage loan. RESPA is designed to ensure that buyer and seller are fully informed of all settlement costs.
