Chapter 1
Federal Mortgage Laws and Consumer Protection Regulations
Course: Safe Mlo Prep
Subject: Safe Mlo Prep
Chapter: Federal Mortgage Laws And Consumer Protection Regulations
OVERVIEW
The Truth in Lending Act was enacted in 1968 to ensure consumers can compare the true cost of credit by requiring uniform disclosure of financing terms. TILA is implemented through Regulation Z and is enforced by the CFPB. It covers all consumer credit transactions secured by a dwelling including purchase loans, refinances, home equity loans, and HELOCs.
- The Four Required TILA Disclosures — FIAT
TILA requires lenders to disclose four key figures — remembered by the acronym FIAT:
Finance Charge: The total dollar cost of the loan expressed as a dollar amount — includes interest, origination fees, points, and other finance charges.
Amount Financed: The loan amount minus prepaid finance charges — represents the net amount of credit provided to the borrower.
Annual Percentage Rate (APR): The cost of credit expressed as an annual percentage — includes all finance charges. The APR is almost always higher than the note rate unless there are zero lender fees.
Total of Payments: The total amount the borrower will pay over the life of the loan — principal plus all interest and finance charges.
- APR vs. Note Rate
- APR always exceeds the note rate on any loan with lender fees
- The APR reflects the true annual cost including fees — not just the interest rate
- The only scenario where APR equals the note rate is when the lender charges absolutely no fees
- Finance charges included in APR: origination fees, discount points, mortgage broker fees, prepaid interest
- Finance charges NOT included in APR: title insurance, appraisal fee, recording fees, property taxes
- Right of Rescission
TILA provides borrowers with a right to cancel certain credit transactions secured by their primary residence:
- Applies to: Refinances, home equity loans, and HELOCs secured by a primary residence
- Does NOT apply to: Purchase money mortgages
- Standard period: 3 business days after consummation, delivery of all required TILA disclosures, and delivery of the Notice of Right to Rescind — whichever is latest
- Business day for rescission: Every calendar day except Sundays and federal holidays — Saturdays count
- Extended rescission: If the lender fails to deliver the required TILA disclosures or the Notice of Right to Rescind, the rescission period extends to 3 years from consummation
- HOEPA — High Cost Mortgage Protections
HOEPA was added to TILA in 1994 to address predatory lending:
HOEPA triggers — a loan is a high-cost mortgage if:
- APR exceeds APOR by more than 6.5% for first liens
- APR exceeds APOR by more than 8.5% for subordinate liens
- Total points and fees exceed 5% of the total loan amount
- Prepayment penalty exceeds 2% or is charged more than 36 months after consummation
Prohibited features in HOEPA-covered loans:
- No balloon payments within the first 60 months
- No negative amortisation
- No due-on-demand clauses
- Mandatory pre-loan HUD-approved counselling
- TILA Advertising Rules — Triggering Terms
Triggering terms — if any appear, full disclosure required:
- Down payment amount or percentage
- Monthly payment amount
- Number of payments
- Finance charge amount
Non-triggering terms — may appear alone:
- "Low rates available"
- "No closing costs"
- APR stated alone
- Case Studies
Case Study 1 — The Missing Rescission Notice
David refinances his primary residence to lower his rate. The closing takes place on a Friday afternoon. In the rush to close, the settlement agent forgets to provide David with the Notice of Right to Rescind. David does not realise this until 18 months later when he reads about TILA rights online.
Result: Because the Notice of Right to Rescind was never delivered, David's rescission period extended from 3 business days to 3 full years from the date of consummation. David still has the legal right to rescind his refinance — 18 months after closing. This is one of the most severe consequences for failing to deliver required TILA notices and illustrates why proper closing procedures are critical.
Case Study 2 — The Misleading Advertisement
A mortgage company runs a radio advertisement stating: "Buy your dream home in Riverside for payments as low as $899 per month! No down payment required!" The advertisement contains no other credit information.
TILA violation? Yes — two triggering terms appear in the same advertisement: the monthly payment amount and the down payment statement. Once a triggering term is used in advertising, all of the following must also be disclosed: the APR, the down payment amount or percentage, the number of payments, and the payment amounts. The advertisement as written violates TILA's advertising requirements by stating triggering terms without the required accompanying disclosures.
Case Study 3 — Comparing True Loan Costs
Sarah is choosing between two loan offers for a $300,000 mortgage:
- Lender A: 6.5% rate, 0 points
- Lender B: 6.25% rate, 4,500)
Lender B's note rate is lower — but which loan is truly less expensive?
TILA's APR disclosure answers this. Lender A's APR would equal the note rate of 6.5% (no fees). Lender B's APR would be significantly higher than 6.25% because the $8,500 in total fees are included in the cost calculation. TILA's purpose is precisely this — allowing Sarah to compare the true annual cost of both offers rather than just the headline rate. If Sarah plans to sell within 3 years, Lender A may be less expensive despite its higher rate.
- Key Facts to Memorise
- TILA enacted: 1968
- Implementing regulation: Regulation Z
- Enforced by: CFPB
- Four disclosures: Finance Charge, Amount Financed, APR, Total of Payments — FIAT
- APR: Always higher than note rate when fees exist
- Rescission period: 3 business days (Sat counts, Sun excluded)
- Extended rescission: 3 years if notice not delivered
- Lender must return funds after rescission: Within 20 days
- HOEPA first lien trigger: 6.5% above APOR
- HOEPA subordinate lien trigger: 8.5% above APOR
- HOEPA points and fees trigger: 5% of loan amount
- HOEPA prepayment trigger: After 36 months or greater than 2%