19.48 Truth-In-Lending

19.48.1

In General

The federal Truth-in-Lending Act became effective July 1, 1969, and forms Part I of the Omnibus “Consumer Credit Protection Act” passed by Congress. It is now codified as 15 USC Section 1601, et seq.. Regulations governing compliance with the Act have been promulgated by the Federal Reserve Board and appear at 12 CFR Part 226 (Regulation Z). Both the Act and the Regulations have been amended several times.

The purpose of the Federal Truth-in-Lending Act is to acquaint borrowers with the cost of credit so that consumers can more easily compare the available credit options. The Act requires creditors to disclose in writing, in a prescribed and uniform manner, and prior to the time a borrower or consumer credit becomes obligated by contract, the cost, terms and conditions of credit. The Act does not establish or limit the cost of credit.

The Act proceeds on the premise that unless otherwise excepted, all credit transactions are covered, irrespective of whether the same arise in connection with the sale of property, the loan of money or otherwise.

The Exclusion from Coverage in the Mortgagee Policy makes it unnecessary for the title insurer to be concerned with the requirements of the Federal Truth-in-Lending Act or any other Federal or State consumer credit protection act.

“5. Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which arises out of the transaction evidenced by the insured mortgage and is based upon usury or any consumer credit protection or truth-in-lending law.”

19.48.2

Exempt Transactions

·  Transactions excluded from coverage under this Act: (Section 1603)

¨  Credit transactions involving extension of credit primarily for business, commercial or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

¨  Transactions in securities or commodities accounts by a broker-dealer registered with the SEC.

¨  Credit transactions, other than those in which a security interest is or will be acquired in real property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.

¨  Transactions under public utility tariffs, if the Board determines that a state regulatory body regulates the charges for the public services involved, the charges for delayed payment, and any discount allowed for early payment.

·  Transactions excluded from coverage under the regulations. (Section 226.3)

¨  Business, commercial, agricultural, or organizational credit.

An extension of credit primarily for a business, commercial or agricultural purpose.

An extension of credit to other than a natural person, including credit to government agencies or instrumentalities.

¨  Credit over $25,000 not secured by real property or a dwelling. An extension of credit not secured by real property, or by personal property used or expected to be used as the principal dwelling of the consumer, in which the amount financed exceeds $25,000 or in which there is an express written commitment to extend credit in excess of $25,000.

¨  Public utility credit. An extension of credit that involves public utility services provided through pipe, wire, other connected facilities, or radio or similar transmission (including extensions of such facilities), if the charges for service, delayed payment, or any discounts for prompt payment are filed with or regulated by any government unit. The financing of durable goods or home improvements by a public utility is not exempt.

¨  Securities or commodities accounts. Transactions in securities or commodities account in which credit is extended by a broker-dealer registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission.

¨  Home fuel budget plans. An installment agreement for the purchase of home fuels in which no finance charge is imposed.

·  How certain transactions are being defined.

¨  Consumer Credit

“‘Consumer credit’ means credit offered or extended to a consumer primarily for personal, family, and household purposes.” (12 CFR Section 226.2)

¨  Residential Mortgage Transaction

“‘Residential mortgage transaction’ means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling.” (12 CFR Section 226.2 (a)(24))

¨  Dwelling

“‘Dwelling’ means a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home and trailer, if it is used as a residence.” (12 CFR Section 226.2 (a)(19))

19.48.3

Disclosure Requirement

12 CFR Section 226.18 contains the specific disclosure requirements for closed-end credit transaction (open-end credit applies mainly to revolving credits or charge accounts).

Eighteen disclosures are set forth in Section 226.18 and all that are applicable to a particular credit transaction must be disclosed. The disclosures are as follows:

·  The identity of the creditor;

·  The amount financed;

·  A separate written itemization of the amount financed;

·  The finance charge;

·  The annual percentage rate;

·  Any variable rate terms;

·  The payment schedule;

·  Total of payments;

·  Any demand feature;

·  The total sale price;

·  Any prepayment penalty;

·  Any late payment charge;

·  The security interest acquired;

·  Premiums for credit life, accident, health or loss-of-income insurance required under 12 CFR sec. 226.4(d) in order to exclude certain premiums from the finance charge;

·  Certain security interest charges as required by sec. 226.4(e);

·  A reference to the appropriate contact for further information about the loan terms;

·  In a residential mortgage transaction, a statement regarding the assumption policy; and

·  The terms of any required deposit.

19.48.4

Right to Rescind Certain Real Estate Transactio

The provisions of 12 CFR Section 226.23(a) accord a borrower the right to rescind a credit transaction and avoid a security interest which is or will be retained or acquired in real property used as his principal residence.

The consumer has until midnight of the third business day following the consummation of the transaction or the delivery of the notice of right to rescind or the delivery of all material disclosures, to exercise his right to rescind. Exercise must be by mail, telegram, or other written communication, and is considered given when mailed, filed for telegraphic transmission or, if by other means when delivered to the creditor’s designated place of business.

In any transaction subject to rescission, the creditor must give to the consumer two copies of the notice of right to rescind. The notice must be a separate document that clearly and conspicuously discloses the rights and process of rescission. A consumer may modify or waive this right of rescission if he determines he needs the credit for a “bona fide personal emergency”, but the waiver or modification must be by means of a signed, dated and written statement that describes the emergency and specifically modifies or waives the right to rescind. Printed forms for this purpose are prohibited.

19.48.5

Exceptions to the Right of Rescission

Although a mortgage transaction may fall within the purview of the Act requiring a disclosure of the cost of the credit, 12 CFR Sec. 226.23(f) provides that the consumer will not have a right to rescind the transaction in the following situations of the mortgage is:

·  (a) “A residential mortgage transaction” Section 226.2 (a)(24) defines this term as “a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest, is created or retained in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling”. (Note that first lien status is no longer required by this definition.)

·  (b) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. If the new amount financed exceeds the unpaid finance charge on the existing debt, this exemption applies only to the existing debt and its security interest.

·  (c) A transaction in which a state agency is a creditor.

·  (d) Certain renewals of optional insurance premiums.

It needs to be noted that there are two essential elements relative to the exception referred to at (a) above:

·  The security interest must be a lien on the dwelling in which the borrower resides; and

·  The credit extended is for the purpose of enabling the borrower to acquire that dwelling.

Caveat:

Borderline cases are bound to present difficult questions of interpretation in deciding whether a transaction is technically excepted from the right of rescission.

19.48.6

Lack of Compliance with the Truth-in-Lending Ac

·  Civil Liability

The creditor may be liable for the sum of:

¨  any actual damages sustained; plus

¨  statutory damages of twice the amount of the finance charge, with a minimum of $100 and a maximum of $1,000; plus

¨  costs and attorneys’ fees.

·  Restitution

Creditors must make restitution in connection with certain disclosure violations (15 USC Sec. 1607).

19.48.7

Escrow Consequences of the Act

The Act imposes no liability upon an escrow agent in the normal process of servicing and closing an escrow nor upon a title company employee who records documents involving an extension of credit. However, notwithstanding the policy exclusion, it is possible a claim may be made that responsibility has been assumed for compliance with Truth-in-Lending as a result of attempting, or failing to comply with such instructions. On the other hand, it is recognized that in many instances, it may be necessary for an escrow closed to aid the lender in complying with the Act through the performance of strictly ministerial functions.

In this regard, and under no circumstances, should any Company’s employee or agent:

·  Advise customers or attempt an interpretation of the Act for them.

·  Examine documents, escrows or recordings for the purpose of determining compliance with the Act.

·  Act upon instruction which makes compliance with the Act, or any portion thereof, a condition precedent to performance.

·  Prepare escrow instruction which demand compliance with any of the provisions of the Act.

·  Participate in discussion or function directed toward a performance under any requirement of the Act.

·  Represent that any form of settlement sheet or statement prepared by the Company or furnished to it by the lender complies with the Act.

·  Make any representation as to what information or items should appear in the disclosure statement nor the accuracy of the amount of any items therein except your own charges and for which you have invoices in your file.

·  Undertake to determine which items constitute the Finance Charge or compute the Annual Percentage Rate.

·  Compose any form for notice of right of rescission.

·  Determine the date when the transaction is “consummated”.

·  Prepare any waiver statement for signature of the borrower or rely on any waiver statement for the purpose of disbursing escrow funds in cases where an escrow closer assumed the responsibility of determining that the three-day period has terminated prior to the disbursement.