TRUTH IN LENDING ACT

TRUTH IN LENDING ACT

Background

Congress enacted the Truth in Lending Act (TILA) based on findings that economic stability would be
enhanced and competition among creditors/lenders would be strengthened by the informed use of credit
resulting from the awareness by consumers/borrowers of the true cost of credit. Further, among the stated
purposes of TILA were procedural and substantive protections for consumers/borrowers.

TILA became effective July 1, 1969. The principal purpose of TILA is to promote the informed use of
consumer credit by increasing consumer understanding about the true costs of financing, including the effective
interest rates imposed for extensions of credit. TILA authorizes the Federal Reserve Board (FRB) to prescribe
regulations to carry out the purposes of the statute (15 USC Section 1604(a)). The FRB adopted Regulation Z
to implement TILA. TILA requires extenders of credit to disclose the credit terms to enable
consumers/borrowers to make meaningful comparisons between various creditors/lenders (12 CFR Section 226
et seq.).

A principal objective of TILA is to promote the informed use of consumer credit by requiring disclosures about
material loan terms and the fees, costs, and expenses of the extensions of credit. TILA requires
creditors/lenders to disclose the cost of credit as a dollar amount (the finance charge) and as an annual
percentage rate (APR), i.e., the effective interest rate. TILA requires in certain loan transactions that
consumers/borrowers receive the opportunity to cancel or rescind the contemplated loan to be secured by their
principal dwelling (15 USC Section 1635 and 12 CFR Section 226.23).

After a decade of experience subsequent to the enactment of TILA and the adoption of Regulation Z, it became
clear to practitioners this law placed too great a burden on creditors/lenders, provided too many disclosures for
consumers/borrowers, and fostered too much litigation. This prompted Congress to amend TILA in 1980 by
passing the Truth in Lending Simplification and Reform Act. To reflect these amendments to TILA, the FRB
undertook the first of several substantive revisions to Regulation Z. Compliance with the TILA Simplification
and Reform Act and the related revised Regulation Z became mandatory on October 1, 1982.

When the first revisions of TILA were promulgated, the FRB adopted model disclosure forms for closed-end
transactions such as purchases and refinances of real property. The FRB also adopted model language for
certain other TILA disclosures and notice of rights. The FRB also announced that its staff would no longer
provide written responses to individual requests for interpretations of Regulation Z, but would issue from time
to time Official Staff Commentaries to address questions of interpretation. When preparing the Official Staff
Commentaries, the FRB receives input from the Federal Trade Commission (FTC) through the offering of
suggestions and the making of recommendations to enhance consumer protection.

Since the enactment of the TILA Simplification and Reform Act, further amendments to TILA have been
implemented that were primarily directed at loan transactions with fees, costs, and expenses that when
calculated with the nominal interest rate results in APRs (the effective interest rates) exceeding certain
prescribed limits. In addition, loan transactions with points and fees exceeding certain prescribed percentages
of the loan amount are among the extensions of credit that have been identified as “high-cost”. These
amendments applied to transactions known in the industry as “high cost” mortgage loans, which occurred in
1995, 1996; 2001 and 2007; and with the latest amendments being subject to a mandatory compliance date of
October 1, 2008 (later extended to July 30, 2009).

Among the most recent amendments is a defined additional category of mortgage loans known as “higher-
cost/priced mortgage loans”. The earlier amendments added new disclosure requirements and altered the
definition of creditor in residential mortgage loan transactions subject to TILA. The latest amendments added
prohibited acts and practices in connection with “higher-cost/priced mortgage loans” (15 USC Section 1602
and 12 CFR Sections 226.2, 226.31, 226.32, 226.35, and 226.36).

This Section reviews TILA, Regulation Z, and various amendments to each, including residential mortgage
loan transactions subject to 12 CFR Sections 226.32 and 226.35 (commonly known as “Section 32” and
“Section 35” loan transactions). Also discussed is the role of the real estate broker/mortgage broker
(MLB/MLO) when making or arranging residential mortgage loans (as defined). Included is a brief review of
loan transactions subject to “Section 32” and Section 35”.

The Role of Mortgage Brokers

Real Estate Brokers acting as mortgage loan brokers (MLBs/MLOs) are able to negotiate loans for
consumers/borrowers who are or expect to become property owners. These loans include conventional
residential mortgage loans, residential loans insured or indemnified by HUD/FHA or VA, and alternative
mortgage loans or non-traditional loan products often securitized through Wall Street. These residential
mortgage loans have been delivered by MLBs/MLOs to financial depository institutions and to licensed lenders
sometimes referred to in this Chapter as non-banks.

MLBs/MLOs also negotiate residential mortgage loans on behalf of consumers/borrowers delivered to private
investors/lenders as previously discussed in this Chapter. Mortgage brokers (MLBs) may also negotiate
mortgage loans secured by other than 1 to 4 residential units that are delivered to private investors/lenders or to
financial depository institutions that are willing to accept commercial loan packages prepared by these brokers.

Creditors

As previously discussed in this Chapter, the terms “lender” and “creditor” are distinguishably defined in federal
law. The term “lender” is the person or entity that regularly makes loans and whose name appears on the
promissory note (evidence of indebtedness) as the initial payee or that meets a defined status (12 USC Section
2601 et seq.). The term “creditor” is the person or entity that, among other defined disclosure responsibilities
and reporting obligations, extends credit to consumers/borrowers in transactions subject to TILA. Accordingly,
the federal definition is two-pronged, i.e., “creditor” for the purpose of making disclosures and delivering
notices of rights pursuant to TILA, and “lender” describing persons that regularly make loans and whose names
appear on the promissory note (evidence of indebtedness) as the initial payee and on the security
device/instrument (deed of trust or mortgage) as the beneficiary/lender/mortgagee (12 USC Section 2601 et seq.
and 24 CFR Section 3500 et seq.; 15 USC Section 1602, and 12 CFR Sections 226.2, 226.31, 226.32, 226.35,
and 226.36).

The creditor is responsible for furnishing TILA disclosures to the consumer/borrower. Regulation Z defines a
creditor as a person (including an entity) that extends consumer credit more than 25 times or more than 5 times
for transactions secured by a dwelling during the preceding calendar year. If the person (or entity) did not meet
these numerical standards in the preceding calendar year, the same standards are to apply to the current calendar
year. Further, the creditor’s name must appear on the promissory note or evidence of indebtedness as the initial
payee.

The credit extended must be subject to a finance charge or is to be payable by a written agreement requiring
more than four installments. The definition of creditor has been expanded to include any person (or entity)
originating two or more “Section 32” or reverse mortgages in any 12 month period, or any person (or entity)

originating one or more of these types of mortgages through a MLB/MLO (15 USC Section 1602, and 12 CFR
Sections 226.2 and 226.32).

As a part of the TILA Simplification and Reform Act, the definition of “creditor” was revised to exclude the
“arranger of credit”. TILA as initially enacted defined the term “arranger of credit” as a person (or entity) that
arranged for the extension of credit made by persons (including entities) whether such persons met the
“creditor” definition. The objective was to ensure consumers/borrowers received disclosures and notices of
rights required by TILA and the implementing Regulation Z, regardless of whether the lender making the loan
met the definition of creditor.

Arrangers of credit (mortgage brokers (MLBs)) are for purposes of the SAFE Act (previously discussed in this
Chapter) mortgage loan originators (MLOs). These brokers are identified as MLBs/MLOs throughout this
Chapter in connection with residential mortgage loan transactions. MLBs/MLOs are not “creditors” for the
purposes of TILA or Regulation Z (although they may be “creditors” for other purposes as defined in
applicable federal law). Congress resolved this question in 1982 in the Federal Depository Institutions Act (the
Garn-St. Germain Act), which included amendments to TILA that deleted “arranger of credit” from the
definition of ‘‘creditor.”

To implement this change, the FRB revised Regulation Z by, among other amendments, removing the “arranger
of credit” from the definition of “creditor”. The effect of the FRB’s action was to release real estate/mortgage
brokers (MLBs/MLOs) or other “arrangers of credit” from the responsibility of providing TILA/Regulation Z
disclosures and notices of rights. This release occurred approximately 30 years ago and is consistent with
recent holdings in a cited federal district case that was subject to appeal (Vallies v. Sky Bank, 432 F. 3d 493 –
2006; Vallies v. Sky Bank, 583 F. Supp. 2d 687 – 2008; and Vallies v. Sky Bank, 591 F. 3d 152 – 2009).

While MLBs/MLOs as “arrangers of credit” are not obligated to complete and deliver disclosures and notices
of rights, such brokers must remain informed about each of the requirements imposed upon “creditors” by
TILA and Regulation Z. Mortgage brokers (MLBs/MLOs) as fiduciaries of consumers/borrowers who have
applied for residential mortgage loans through such brokers (whether to be delivered to financial depository
institutions, licensed lenders or private investors/lenders) are obligated to disclose and explain the material
terms of the contemplated loan transaction (Business and Professions Code Sections 10131(d) and (e),
10176(a), (b), (c), and (d), 10177(q), and 10237 et seq.; Civil Code Sections 2295 et seq., 2349 et seq., and
2923.1; Corporations Code Sections 25100(e) and 25206; Corporations Commissioner’s Regulations 10CCR,
Chapter 3, Sections 260.115 and 260.204.1; and Financial Code Sections 4979.5, 4995(c) and (d) and
4995.3(c), among others).

In addition, MLBs/MLOs are required to complete and deliver the California required Mortgage Loan
Disclosure Statement (MLDS) and in most fact situations will be completing and delivering the RESPA
required Good Faith Estimate (GFE). To complete the MLDS and the GFE and to represent properly
consumers/borrowers in residential loan transactions requires MLBs/MLOs to understand TILA and Regulation
Z.

Exempt Transactions

Three basic types of credit transactions directly or indirectly involving real property are exempt from coverage
under TILA and Regulation Z. The first exemption is for credit extended primarily for a business, commercial,
or agricultural purpose (other than for a personal, family or household purpose, i.e., a consumer purpose). This
exemption includes organizational credit as well as credit extended to governments, or to governmental
agencies or instrumentalities.

Should the creditor/lender extend credit for the sole purpose of acquiring, improving, or maintaining a rental
property (that neither is currently nor intended to become owner occupied, regardless of the number of family
units); the transaction is presumably for a business purpose. If the consumer/borrower intends the use of the
proceeds of the loan to be for both business and personal use, the primary use of the proceeds governs whether
the loan is subject to TILA and to Regulation Z. For example, if 51 percent of more of the loan proceeds are
used for business purposes, the loan is generally exempt from TILA and Regulation Z. An inquiry is necessary
to identify the purpose of the loan and the use of the loan proceeds as represented in writing by the

consumer/borrower. Further, the creditor/lender should obtain sufficient supporting documentation to confirm
the consumer/borrower’s representations.

If the consumer/borrower declares the purpose for the extension of credit is to finance an acquisition of the
security property, factors to consider when determining whether the loan is for a business or commercial
purpose (as opposed to a consumer purpose) include:

■ The relationship of the borrower’s primary occupation to the acquisition (the more closely related, the
more likely it is to be a business purpose);

■ The degree to which the borrower will personally manage the acquisition (the more personal
involvement the more likely it is a business purpose);

■ The ratio of income from the acquisition to the total income of the borrower (the higher the ratio, the
more likely it is to be a business purpose);

■ The size of the transaction (the larger the transaction in loan amount and property value, the more
likely it is to be a business purpose);

■ The borrower’s statement of purpose for the loan (it is preferable to have this statement in the
handwriting of the borrower or directly from the borrower through electronic means); and,

■ The use of loan funds in connection with the borrower’s occupation (e.g., a substantial portion of the
loan proceeds are applied to the working capital required by the self-employed borrower would
suggest a business purpose).

While the factors above were included in the FRB Official Staff Commentaries for loans to finance the
acquisition of the real property, they are useful as well to determine the purpose of the extension of credit when
refinancing or further encumbering the intended security property. Further, special rules apply for credit to
acquire, improve, or maintain rental property that is or will become owner occupied within a year from
consummation of the loan transaction.

The Official Staff Commentaries suggest credit extensions to acquire rental property consisting of more than
two housing units are presumably for business purposes. TILA as amended, Regulation Z, and the Official
Staff Commentaries describe dwellings as consisting of 1 to 4 residential units and, therefore, credit extended to
improve or maintain the rental property may not be for business purposes (unless the security real property
contains more than four residential units). The foregoing distinction between acquisition as compared to
improvement or maintenance of rented residential real property at loan consummation may be confusing and
could lead to an inappropriate characterization for the extension of credit.

The amended TILA statute defines the term dwelling as “… a residential structure or mobile home [sic] which
contains one to four family units, or individual units of condominiums or cooperatives”. Accordingly, the
amended statute establishes that 1 to 4 residential units would constitute a dwelling and, therefore, an apparent
presumption of consumer purpose. This means TILA and Regulation Z required disclosures are to be
completed and delivered to the consumer/borrower and the right of rescission for the credit extended in other
than acquisition loan transactions is preserved.

The Official Staff Commentaries are not entirely clear about whether the transaction is for a business or
commercial purpose. Therefore, the practitioner should review the factors described above and the specific
facts of the loan transaction prior to identifying a business or commercial purpose, when the intended security
property is from 1 to 4 residential units (15 USC Sections 1601(f),(h) and (v), and 1603, 12 CFR Sections
226.1 and 226.2 (a)17 and 19; and the FRB Official Staff Interpretations 3(a) and 4).

When the purpose of the extension of credit is to acquire, improve, or maintain the intended security property
consisting of other than 1 to 4 residential units, a business or commercial purpose will generally apply to the
loan transaction. These rules do not prevent an extension of credit secured by real property consisting of less
than four residential units from being considered for a business or commercial purpose. However, if at any
time during the calendar year a consumer/borrower occupies the intended security property for more than 14
days, regardless if it is rented for the remainder of the year, the security property will be considered owner

occupied and, therefore, a loan transaction in such event will not qualify for a business or commercial purpose
exemption.

Even when a business or commercial purpose is determined to be operative for an extension of credit, the
Official Staff Commentaries suggest that later rewriting or refinancing of the loan transaction may result in re-
characterization as a consumer credit transaction. This occurs if the existing obligation is satisfied and replaced
with a new extension of credit undertaken by the same consumer/borrower for consumer purposes. The
possibility of a novation in the context of loan modifications, extensions or forbearances should be considered
when establishing the purpose of the extension of credit (15 USC Section 1601(f),(h) and (v) and Section 1603;
12 CFR Sections 226.1 and 226.2 (a)17 and 19; and the FRB Official Staff Interpretations 3(a) 4 and 5).

The Official Staff Commentaries also apply the term organizational credit to establish an exemption from TILA
and Regulation Z disclosures and notices of rights. The organizational credit exemption extends to
“…transactions in which the person is not a natural person and [sic] applies, for example, to loans to
corporations, partnerships, associations, churches, unions and fraternal organizations”. This exemption also
applies to governments, or governmental agencies or instrumentalities. Further, the exemption is operative
regardless of the purpose of the extension of credit and irrespective of whether a natural person guarantees the
debt/obligation or provides security in the transaction for the borrowing entity.

Notwithstanding the foregoing, consideration must be given to the amount of the security and the nature and
use of the security property offered by the natural person. It should be noted that under existing California law,
Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) are to be treated depending
upon the facts and the applicable law as corporations for certain defined purposes and as partnerships for
certain defined purposes (FRB Official Staff Interpretations 7; and Corporations Code Section 17000 et seq.).

The second exemption is for extensions of credit over $25,000. The dollar limitation does not apply if the
loan/extension of credit is secured by real property that is used or expected to be used as the consumer’s
principal dwelling.

The third exemption has an indirect impact on transactions involving real property. This exemption is for
transactions in securities or commodities by broker-dealers registered with the Securities and Exchange
Commission (SEC). The investment vehicle for the securities may be equities or fee interests in real property
or interests in deeds of trust or mortgages secured by liens against real property. Accordingly, this exemption
would apply to transactions involving interests in real property when the securities are issued through or sold
by registered broker-dealers.

While real estate brokers performing as mortgage brokers are defacto broker-dealers when issuing/selling
securities qualified by exemption or registration under California law, these brokers are not typically registered
with the SEC or the DOC as broker-dealers. Accordingly, unregistered defacto broker-dealers would not
benefit from this exemption (15 USC Section 1603 and 12 CFR Section 226.3; Business and Professions Code
Section 10131.3, Corporation Code Section 25206, and 10 CCR, Chapter 3, Sections 260.115 and 260.204.1).

Finance Charges

The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable by the
consumer/borrower or required by the creditor/lender, whether directly or indirectly as an incident to or a
condition of the extension of credit. Such charges include the fees imposed by MLBs/MLOs and other third
party service providers, unless expressly exempt in accordance with the requirements established by TILA and
Regulation Z.

Finance charges that are prepaid (paid prior to or at settlement or loan closing, sometimes referred to as
settlement charges) may be included or excluded from the calculation of the APR, i.e., the effective interest rate
for the extension of credit (pursuant to the provisions of TILA and Regulation Z). The annual percentage rate
(APR) is a measure of the cost of credit expressed as a yearly rate, that relates the amount and timing of value
received by the consumer/borrower to the amount and timing of payments made. The APR is to be determined
in accordance with either the actuarial method or the United States Rule method (12 CFR Section 226.22).

The finance charges to be included in the calculation of the APR are numerous and varied:

1. Among these charges are fees, costs, and expenses representing amounts imposed by third parties (charges
imposed by someone other than the creditor/lender) if the creditor:

■ Requires the use of a third party as a condition of or an incident to the extension of credit, even if the
consumer/borrower can choose the third party; or,

■ Retains a portion of the third-party charge to the extent of the portion retained.

2. Fees charged by closing or settlement agents (such as an attorney, escrow holder, title company, public
escrow or another escrow agent authorized to conduct escrows by applicable state law) are included if the
creditor:

■ Requires the particular services for which the consumer/borrower is charged;

■ Requires the imposition of the charge; or

■ Retains a portion of the third-party charge, to the extent of the portion retained.

3. Regarding fees imposed by mortgage brokers (MLBs/MLOs), such fees are included within the finance
charge whether paid by the consumer/borrower directly to the mortgage broker or to the creditor/lender for
delivery to the broker. The fees of mortgage brokers (MLBs/MLOs) are finance charges included in the
calculation of the APR, even if the creditor/lender does not require the consumer/borrower to use the services
of such brokers and whether the creditor/lender retains any portion of the charge.

4. Further examples of finance charges included when calculating the APR are:

■ Interest, time price differential (e.g., interest imposed in a seller carry-back), and any amount payable
under an add-on or discount system of additional charges (other than simple interest);

■ Service, transaction, activity, and carrying charges, including any fees imposed on a checking or other
transaction account to the extent the amount exceeds the charge for a similar account without a credit
feature;

■ Points (typically defined to include origination fees, commissions, and loan discounts), any other loan
fees, assumption fees, finder's fees, and similar charges;

■ Appraisal, investigation, and credit report fees (unless otherwise specifically excluded in real estate
related transactions);

■ Premiums or other charges for any guarantee or insurance coverage protecting the creditor/lender
against the consumer/borrower's default or other credit loss (e.g., mortgage insurance coverage),
unless otherwise specifically excluded by Regulation Z;

■ Charges imposed on a creditor/lender by another person for purchasing or accepting a
consumer/borrower's debt/obligation, if the consumer/borrower is required to pay the charges in cash
as an addition to the debt/obligation, or as a deduction from the proceeds of the debt/obligation;

■ Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in
connection with a credit transaction as authorized by applicable federal and state law and provided that
each of the required disclosures are made and delivered to the consumer/borrower who has elected and
freely selected the source of such coverage (unless otherwise specifically excluded by Regulation Z);

■ Premiums or other charges for insurance against loss of or damage to or against liability arising out of
the ownership or use of the security property written in connection with a credit transaction, unless
otherwise specifically excluded by Regulation Z;

■ Discounts for the purpose of inducing payment by a means other than the use of credit; and,

■ Charges or premiums paid for debt cancellation agreements or insurance coverage (including debt
payment suspension agreements) written in connection with a credit transaction, whether the coverage
is determined insurance under applicable federal and state law (unless otherwise specifically excluded
by Regulation Z) (15 USC Section 1605 and 12 CFR Section 226.4).

The prepaid finance charges that are excluded are generally (although not entirely) fees, costs, and expenses
that would be imposed in a cash transaction in which no third party financing is required (15 USC Section
1605 and 12 CFR Section 226.4).

1. The prepaid finance charges to be excluded from the calculation of the APR are:

■ Application fees charged to all applicants for credit, whether or not credit is actually extended (under
California law such fees may not be charged by MLBs/MLOs without an advanced fee agreement
previously approved by the Commissioner of the DRE);

■ Charges for actual unanticipated late payments, for exceeding a credit limit, or for delinquencies,
defaults or similar occurrences;

■ Charges imposed by a financial depository or other financial institution authorized to maintain or
issue accounts for paying items that overdraw accounts, unless the payment of such items and the
imposition of the charges were previously agreed to in writing;

■ Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis;

■ Seller’s points (percentage of loan amounts in the form of discounts paid to the creditor/lender by the

seller to adjust investment yields); and,

■ Interest forfeited because of an interest reduction on a time deposit used as security for an extension
of credit (e.g., interest earned on a cash collateral account).

2. Notwithstanding the previous discussion in this Section regarding finance charges to be included, real estate
related fees are excluded (as defined), if they are bona fide and reasonable in amount (i.e., reasonably earned
and actually incurred or reasonably related to the value of the goods and facilities provided and to the services
rendered):

■ Fees for title examination, abstract of title, title insurance, property survey, and for similar purposes;

■ Fees for preparing loan related documents such as deeds, deeds of trust, mortgages, reconveyances, or

settlement documents (e.g., escrow instructions and loan closing or settlement statements);

■ Fees for notary acknowledgments or credit reports;

■ Property appraisal fees or fees for inspections to assess the value or condition of the security property,
if the service is performed prior to settlement or loan closing (including fees related to pest infestation
or flood hazard determination); and,

■ Amounts required to be paid into escrow or impound accounts held in trust provided the amounts are
not otherwise expressly included in the finance charge (examples of excluded amounts are advanced
deposits for mortgage insurance premiums, property taxes, casualty and hazard insurance premiums,
and other real property related matters such as dues and assessments imposed by homeowners
associations, but excluding prepaid interest).

3. Discounts offered to induce payments for a purchase by cash, check or other means as described in TILA
and Regulation Z (typically occurring in personal property transactions).

4. Voluntary insurance premiums for various forms of coverage if each of the following conditions are met:

■ Premiums for life, accident, or health insurance are excluded from the finance charge if the coverage is
not required by the creditor/lender and this fact is disclosed in writing, the premium for the initial term
of the insurance coverage is specifically disclosed, and additional required disclosures for the
insurance coverage and the premiums to be paid are also made and delivered to the
consumer/borrower in accordance with TILA and Regulation Z (including that such coverage may
only be obtained at the election of and pursuant to the choice of the consumer/borrower from persons
[insurers or through agents/brokers] other than the creditor/lender or a subsidiary or an affiliate
thereof);

■ Premiums for insurance coverage for loss or damage or for liability arising from the ownership or use
of the intended security real property (provided that required disclosures are made and delivered to the
consumer/borrower, including that such coverage may be obtained from insurers and agents/brokers
selected by the consumer/borrower whether from persons other than the creditor/lender or a subsidiary
or an affiliate thereof); and,

■ In connection with credit life, accident, health or loss-of-income insurance coverage obtained in
compliance with applicable federal and state law, the consumer/borrower must sign or initial an
affirmative written request for the coverage after receiving the previously mentioned disclosures
required by TILA and Regulation Z.

5. Fees for voluntary cancelation agreements (as authorized under TILA and Regulation Z) or for insurance
coverage that provides for cancelation of all of the consumer/borrower’s liability or in part for amounts
exceeding the value of the collateral securing the debt/obligation; or in the event of the loss of life, health, or
income, or in the case of an accident when the foregoing agreements/coverage are not required by the
creditor/lender and the following conditions are met:

■ The debt cancellation agreement or coverage is not required by the creditor/lender and this fact is
disclosed in writing to the consumer/borrower;

■ The fee or premium for the initial term of coverage is disclosed in writing, and if the term of coverage
is less than the term of the credit transaction, the limited term of coverage shall also be separately
disclosed;

■ The fee or premium may be disclosed on a unit-cost basis only in open-end credit transactions, and
closed-end credit transactions are to be disclosed by mail or telephone under 12 CFR Section
226.17(g) as well as certain closed-end credit transactions involving a debt cancellation agreement that
limits the total amount of indebtedness subject to the coverage;

■ The following additional disclosures, as applicable, are made and delivered to the consumer/borrower
in the event the coverage is for debt suspension, i.e., the obligation to pay loan principal and interest is
only suspended for the identified period and that interest will continue to accrue during such period of
suspension; and,

■ The consumer/borrower signs or initials an affirmative written request for coverage after receiving the
specified disclosures.

6. If itemized and disclosed, as required under Regulation Z, the following charges to protect the security
interests of the creditor/lender may be excluded from the finance charge:

■ Taxes and fees prescribed by law that actually are or will be paid to public officials for determining the
existence of or for perfecting, releasing, or satisfying a security interest;

■ The premiums for insurance in lieu of perfecting a security interest to the extent the premiums do not
exceed the fees described above that otherwise would be payable to public officials; and,

■ Taxes levied on security instruments or on documents evidencing indebtedness if the payment of such
taxes is a requirement for recording the device/instrument securing the evidence of indebtedness.

7. If interest, dividends, or other income is received or to be received by the consumer/borrower on deposits or
investments, the amounts thereof shall not be deducted in computing the finance charge (15 USC Section 1605
and 12 CFR Section 226.4).

Timing of Required Disclosures

Distinguishable disclosures are required pursuant to TILA and Regulation Z depending upon whether the loan
transaction is for “open-end credit” or “closed-end credit”. Open-end credit to be extended in connection with
an owner occupied dwelling is a Home Equity Plan or a Home Equity Line Of Credit (HELOC). Whether in
the form of a conventional loan, a HUD/FHA insured or VA indemnified loan, or an alternative mortgage loan
(referred to as a nontraditional loan product); such mortgage loans secured by 1 to 4 residential units are
examples of closed-end credit.

The creditor/lender must make disclosures before consummation of the loan transaction. In certain mortgage
loan transactions, special timing requirements are included in 12 CFR Section 226.19(a). Consummation is
defined as the time that a consumer/borrower becomes contractually liable on a credit obligation as determined
by state law. Special timing requirements for variable-rate disclosures (other than fixed interest rate loans) are
included in 12 CFR Sections 226.19(b) and 226.20(c). Certain variable-rate disclosures must be provided at an
earlier point in time than loan consummation. In addition, early disclosures made pursuant to 12 CFR Sections
226.17(b) and (f) are required and may be subject to the provisions of Sections 226.19(a)(2) and
226.19(a)(5)(iii).

In 2008, Congress enacted the Mortgage Disclosure Improvement Act (MDIA) as an amendment to TILA. The
MDIA amends the disclosure requirements pursuant to Regulation Z for closed-end mortgage transactions
secured by a consumer/borrower's dwelling when the loan transaction is subject to the RESPA (15 USC Section
1601 et seq. and 12 USC Section 2601 et seq.). The MDIA is contained in Sections 2501 through 2503 of the
Housing and Economic Recovery Act of 2008 (HERA), Public Law 110-289, enacted on October 3, 2008. The
Emergency Economic Stabilization Act of 2008, Public Law 110-343, also enacted on October 3, 2008,
amended the MDIA.

Among the amendments to TILA and Regulation Z included in MDIA were the early disclosure requirements
codified in 15 USC Section 1638 (b)(2) and in 12 CFR 226.17. The effective date for the provisions of MDIA
was July 30, 2009. On July 30, 2008, the FRB published a final rule amending Regulation Z (July 2008 Final
Rule (73 FR 44522)). This rule requires, among other objectives, that creditors/lenders provide early TILA
disclosures, even when the loan is not to finance the purchase or initial construction of the consumer/borrower's
principal dwelling.

Subsequent to the adoption of this rule change, disclosures of material loan terms including the APR (as
required under TILA and Regulation Z) must be completed and delivered to the consumer/borrower
concurrently with the RESPA required GFE as implemented by Regulation X. Accordingly, early disclosures
must be given in purchase, initial construction, refinance or loan transactions further encumbering the intended
security property that is or expected to become the consumer/borrower’s principal dwelling (15 USC Section
1638, 12 CFR Sections 226.5(b), 226.17 , 226.18, 226.19, 226.20, and 226.22; 12 USC 2601 et seq. and 24
CFR Section 3500.7).

The specific regulatory changes adopted by the FRB to implement the MDIA early disclosure requirements
became effective on July 30, 2009 included:

1. The requirement that early disclosures be given for all “dwelling-secured” residential mortgage loans
rather than only for “residential mortgage transactions'' to finance the purchase or initial construction
of the dwelling (12 CFR Section 226.17(f) and 226.19(a)(1)(i) and associated Official Staff
Commentaries); and,

2. That early disclosures be given before consumers pay any fee other than a fee for obtaining the
consumer/borrower's credit history (12 CFR Section 226.19(a)(1)(ii) and (iii) and associated Official
Staff Commentaries).

The July 2008 Final Rule also requires TILA and RESPA GFE disclosures to be completed and delivered to the
consumer/borrower before the payment of fees to any party, including Mortgage Brokers (MLBs/MLOs) or
Appraisal Management Companies. If the required disclosures are delivered through the U.S. Mail to the
consumer/borrower, the required disclosures are considered to have been received three (3) business days after
mailing. As noted above, a bona fide and reasonable credit report fee may be collected in advance of the
delivery of the required disclosures.

The definition of a business day for early disclosures is a day on which the creditor/lender's offices are open to
the public for carrying on substantially all of its business functions. This is an important distinction as the
definition of a business day alters for subsequent disclosures including corrected disclosures, for rescission
waiting periods, and for certain home mortgage transactions pursuant to Regulation Z (12 CFR Sections 226.2,

226.15, 226.17, 226.19(a)(1)(ii), 226.19(a)(2), 226.23 and 226.31). The same standards apply to mortgage
brokers (MLBs/MLOs) directed by creditors/lenders to deliver the early disclosures to consumers/borrowers.

However, it is important to note many creditors/lenders no longer require MLBs/MLOs to complete and deliver
the TILA and RESPA early disclosures. TILA and Regulation Z disclosures are the obligation of
creditors/lenders and not of mortgage brokers (MLBs/MLOs) who are “arrangers of credit” excluded from the
definition of “creditor”. The liability for the contents and the timing of these disclosures rests primarily with
creditors/lenders.

MDIA also imposes additional requirements not contained in the July 2008 Final Rule. Included is the
requirement that creditors/lenders must deliver or mail the early disclosures at least seven (7) business days
before consummation of the loan transaction. Should a material loan term that was disclosed in the early
disclosures become inaccurate, creditors/lenders are to re-disclose by providing corrected disclosures the
consumer/borrower must receive at least three (3) business days before consummation of the loan transaction.

An example of a material change in loan terms contained in an early disclosure is the APR. As previously
discussed, the APR is the calculated effective interest rate typically altered by a change in loan terms. The
required disclosures are to inform consumers/borrowers they are not obligated to complete the loan transaction
simply because disclosures were completed and delivered or otherwise provided, or because an application has
been submitted for a residential mortgage loan.

The term business day for the seven (7) day disclosure and for the three (3) day corrected disclosure means all
calendar days except Sundays and the legal public holidays specified in applicable federal law, i.e., New Year's
Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day (5 USC Section 6103(a)).

The MDIA imposes different requirements for early disclosures in closed-end mortgage transactions secured by
a consumer/borrowers interest in a timeshare plan. The MDIA also contains additional disclosure requirements
for variable-rate transactions (other than non-fixed interest rate residential mortgages) that will not become
effective until January 30, 2011, unless the FRB establishes an earlier compliance date.

If the consumer/borrower determines the extension of credit is needed to meet a bona fide personal financial
emergency, the consumer may modify or waive the seven (7) business day or three (3) business day waiting
periods required by Regulation Z after receiving the required disclosures. The consumer/borrower must deliver
to the creditor/lender a dated written statement bearing the signature of each consumer/borrower who is liable
under the legal obligation in the loan transaction describing the emergency and specifically modifying or
waiving the waiting period. Printed forms for this purpose are prohibited (12 CFR Sections 226.17(a)(2) and
226.18).

General Disclosure Requirements

TILA and Regulation Z require disclosures concerning the credit sale or residential mortgage loans to be
grouped together and segregated from other information. Regulation Z prohibits the inclusion of any
information not directly related to the required disclosures. It also provides that any itemization of the amount
financed be made separately from the other required disclosures and, in recent amendments,
consumers/borrowers are to receive the GFE concurrently with the TILA required disclosures for purposes of
the itemization of the fees, costs, and expenses and related material loan terms (the early disclosures previously
discussed). In addition, Regulation Z currently requires the terms “finance charge” and APR be more
conspicuous than other required disclosures (12 USC Section 2601 et seq. and 24 CFR Section 3500 et seq. and
15 USC Section 1601 et seq. and 12 CFR Section 226.17).

As previously mentioned, the FRB has published model TILA/Regulation Z disclosure forms and notices of
rights for over 25 years. The most recent model forms included within Regulation Z (as promulgated by the
FRB) may be found at the Government Printing Office (GPO) website using the following link:

http://ecfr.gpoaccess.gov/cgi/t/text/text-

idx?c=ecfr&sid=7e4061234f6f19d7d81f66741aecd35f&rgn=div9&view=text&node=12:3.0.1.1.7.7.8.10.24&i
dno=12

The FRB published recent amendments to some of the model forms on June 26, 2010. The amendments were
made to the model forms promulgated in connection with Regulation Z (12 CFR 226 et seq.). The link to the
most recent published amendments is http://ecfr.gpoaccess.gov/cgi/t/text/text-
idx?c=ecfr;sid=7e37b455429ed4bacfed9ee128d12794;rgn=div2;view=text;node=20100629%3A1.22;idno=12;
cc=ecfr;start=1;size=25

The following is the list of the model forms for open-end and closed-end credit transactions that are operative
as of this writing:

Appendix G to Part 226—Open-End Model Forms and Clauses

1. G–1 Balance Computation Methods Model Clauses (Home-equity Plans) (Sections 226.6 & 226.7);

2. G–1(A) Balance Computation Methods Model Clauses (Plans other than Home-equity Plans)
(Sections 226.6 & 226.7);

3. G–2 Liability for Unauthorized Use Model Clause (Home-equity Plans) (Section 226.12);

4. G–2(A) Liability for Unauthorized Use Model Clause (Plans Other Than Home-equity Plans) (Section
226.12);

5. G–3 Long-Form Billing-Error Rights Model Form (Home-equity Plans) (Sections 226.6 & 226.9);

6. G–3(A) Long-Form Billing-Error Rights Model Form (Plans Other Than Home-equity Plans)
(Sections 226.6 & 226.9);

7. G–4 Alternative Billing-Error Rights Model Form (Home-equity Plans) (Section 226.9);

8. G–4(A) Alternative Billing-Error Rights Model Form (Plans Other Than Home-equity Plans) (Section
226.9);

9. G–5 Rescission Model Form (When Opening an Account) (Section 226.15);

10. G–6 Rescission Model Form (For Each Transaction) (Section 226.15);

11. G–7 Rescission Model Form (When Increasing the Credit Limit) (Section 226.15);

12. G–8 Rescission Model Form (When Adding a Security Interest) (Section 226.15);

13. G–9 Rescission Model Form (When Increasing the Security) (Section 226.15);

14. G–10(A) Applications and Solicitations Model Form (Credit Cards) (Section 226.5a(b));

15. G–10(B) Applications and Solicitations Sample (Credit Cards) (Section 226.5a(b));

16. G–10(C) Applications and Solicitations Sample (Credit Cards) (Section 226.5a(b));

17. G–10(D) Applications and Solicitations Model Form (Charge Cards) (Section 226.5a(b));

18. G–10(E) Applications and Solicitations Sample (Charge Cards) (Section 226.5a(b));

19. G–11 Applications and Solicitations Made Available to General Public Model Clauses (Section
226.5a(e));

20. G–12 Reserved;

21. G–13(A) Change in Insurance Provider Model Form (Combined Notice) (Section 226.9(f));

22. G–13(B) Change in Insurance Provider Model Form (Section 226.9(f)(2));

23. G–14A Home-equity Sample;

24. G–14B Home-equity Sample;

25. G–15 Home-equity Model Clauses;

26. G–16(A) Debt Suspension Model Clause (Section 226.4(d)(3));

27. G–16(B) Debt Suspension Sample (Section 226.4(d)(3));

28. G–17(A) Account-opening Model Form (Section 226.6(b)(2));

29. G–17(B) Account-opening Sample (Section 226.6(b)(2));

30. G–17(C) Account-opening Sample (Section 226.6(b)(2));

31. G–17(D) Account-opening Sample (Section 226.6(b)(2));

32. G–18(A) Transactions; Interest Charges; Fees Sample (Section 226.7(b));

33. G–18(B) Late Payment Fee Sample (Section 226.7(b));

34. G–18(C)(1) Minimum Payment Warning (When Amortization Occurs and the 36-Month Disclosures
Are Required); (Section 226.7(b));

35. G–18(C)(2) Minimum Payment Warning (When Amortization Occurs and the 36-Month Disclosures
Are Not Required) (Section 226.7(b));

36. G–18(C)(3) Minimum Payment Warning (When Negative or No Amortization Occurs) (Section
226.7(b));

37. G–18(D) Periodic Statement New Balance, Due Date, Late Payment and Minimum Payment Sample
(Credit cards); (Section 226.7(b));

38. G–18(E) [Reserved];

39. G–18(F) Periodic Statement Form;

40. G–18(G) Periodic Statement Form;

41. G–18(H) Deferred Interest Periodic Statement Clause;

42. G–19 Checks Accessing a Credit Card Account Sample (Section 226.9(b)(3));

43. G–20 Change-in-Terms Sample (Increase in Annual Percentage Rate) (Section 226.9(c)(2));

44. G–21 Change-in-Terms Sample (Increase in Fees) (Section 226.9(c)(2));

45. G–22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late) (Section 226.9(g)(3));

46. G–23 Penalty Rate Increase Sample (Payment More Than 60 Days Late) (Section 226.9(g)(3));

47. G–24 Deferred Interest Offer Clauses (Section 226.16(h));

48. G–25(A) Consent Form for Over-the-Limit Transactions (Section 226.56); and,

49. G–25(B) Revocation Notice for Periodic Statement Regarding Over-the-Limit Transactions (Section
226.56).

Appendix H to Part 226— Closed-End Model Forms and Clauses

1. H–1 Credit Sale Model Form (Section 226.18);

2. H–2 Loan Model Form (Section 226.18);

3. H–3 Amount Financed Itemization Model Form (Section 226.18(c));

4. H–4(A) Variable-Rate Model Clauses (Section 226.18(f)(1));

5. H–4(B) Variable-Rate Model Clauses (Section 226.18(f)(2));

6. H–4(C) Variable-Rate Model Clauses (Section 226.19(b));

7. H–4(D) Variable-Rate Model Clauses (Section 226.20(c));

8. H–5 Demand Feature Model Clauses (Section 226.18(i));

9. H–6 Assumption Policy Model Clause (Section 226.18(q));

10. H–7 Required Deposit Model Clause (Section 226.18(r));

11. H–8 Rescission Model Form (General) (Section 226.23);

12. H–9 Rescission Model Form (Refinancing (with Original Creditor)) (Section 226.23);

13. H–10 Credit Sale Sample;

14. H–11 Installment Loan Sample;

15. H–12 Refinancing Sample;

16. H–13 Mortgage with Demand Feature Sample;

17. H–14 Variable-Rate Mortgage Sample (Section 226.19(b));

18. H–15 Graduated-Payment Mortgage Sample;

19. H–16 Mortgage Sample;

20. H–17(A) Debt Suspension Model Clause; and,

21. H–17(B) Debt Suspension Sample.

During 2009, the FRB published a series of proposed model TILA/Regulation Z disclosure forms (including
samples with the required disclosures included within the forms) for open-end and closed-end credit
transactions. The proposed model disclosure forms with samples have been the subject of press releases and
staff commentaries. A requirement applicable to the historic model forms is that they appear on a single page.

An essential predicate to the proposed model forms is the amendment to Regulation Z allowing such
disclosures to be continued from one page to another, although the disclosures must remain separated from
other transactional documents. These proposed model forms and samples of required disclosures represent a
substantial departure from the historic model disclosure forms and notices of rights. Their long advance
publication and ongoing amendments to Regulation Z resulted in some industry confusion concerning the
appropriate use of model forms. Apparently, the proposed model forms and samples will not formally replace
the historic forms for approximately 6 to 8 months following the writing of this Chapter. The reader should
undertake to determine which model forms are appropriate for use prior to proceeding with residential
mortgage loan transactions subject to TILA and Regulation Z.

The proposed TILA/Regulation Z amended model disclosure forms with sample illustrations or required
disclosures may be found at http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm. The
model forms and related sample forms are as follows:

Regulation Z—Open-end Mortgages (HELOCs):

1. G-14(A) Early Disclosure Model Form (Home-equity Plans);

2. G-14(B) Early Disclosure Model Form (Home-equity Plans);

3. G-14(C) Early Disclosure Sample (Home-equity Plans);

4. G-14(D) Early Disclosure Sample (Home-equity Plans);

5. G-14(E) Early Disclosure Sample (Home-equity Plans);

6. G-15(A) Account-Opening Disclosure Model Form (Home-equity Plans);

7. G-15(B) Account-Opening Disclosure Sample (Home-equity Plans);

8. G-15(C) Account-Opening Disclosure Sample (Home-equity Plans);

9. G-15(D) Account-Opening Disclosure Sample (Home-equity Plans);

10. G-24(A) Periodic Statement Transactions; Interest Charges; Fees Sample (Home-equity Plans);

11. G-24(B) Periodic Statement Sample (Home-equity Plans);

12. G-24(C) Periodic Statement Sample (Home-equity Plans);

13. G-25 Change-in-Terms Sample (Home-equity Plans); and,

14. G-26 Rate Increase Sample (Home-equity Plans).

Regulation Z--Closed-end Mortgages:

1. H–4(B) Adjustable-Rate Loan Program Model Form;

2. H–4(D) Adjustable-Rate Loan Program Sample (Hybrid ARM);

3. H–4(E) Adjustable-Rate Loan Program Sample (Interest Only ARM);

4. H–4(F) Adjustable-Rate Loan Program Sample (Payment Option ARM);

5. H-4(G) Adjustable-Rate Adjustment Notice Model Form;

6. H–4(I) Adjustable-Rate Adjustment Notice Sample (Interest Only ARM);

7. H–4(J) Adjustable-Rate Adjustment Notice Sample (Hybrid ARM);

8. H–4(K) Adjustable-Rate Annual Notice Model Form;

9. H–4(L) Negative Amortization Monthly Disclosure Model Form;

10. H-19(A) Fixed Rate Mortgage Model Form;

11. H-19(B) Adjustable-Rate Mortgage Model Form;

12. H-19(C) Mortgage with Negative Amortization Model Form;

13. H-19(D) Fixed Rate Mortgage with Balloon Payment Sample;

14. H-19(E) Fixed Rate Mortgage with Interest Only Sample;

15. H-19(F) Step-Payment Mortgage Sample;

16. H-19(G) Hybrid Adjustable-Rate Mortgage Sample;

17. H-19(H) Adjustable-Rate Mortgage with Interest Only Sample; and,

18. H-19(I) Adjustable-Rate Mortgage with Payment Option Sample.

Use of Model Forms and the Most Important Items Disclosed

The model forms including samples are structured to provide disclosures for distinguishable loan transactions.
The contemplated loan transactions may include fixed interest rate mortgages, variable or adjustable rate
mortgages, graduated payment mortgages, hybrid mortgages, and loan assumptions, among other mortgage loan
options. Creditors/lenders may duplicate the model forms for use in residential mortgage loan transactions.
Any changes made to the model forms must be consistent with applicable federal law by including the
appropriate disclosures required for the contemplated extension of credit.

Creditors/lenders must make those disclosures that are relevant to the particular loan transaction contemplated.
Regulation Z requires the use of descriptive phrases for the most important items disclosed. Verbatim use of
these phrases is not necessary (12 CFR Sections 226.17, 226.18, 226.19, and 226.20, among others).

In the model forms operative at the time of this writing (e.g., the H-2), the most important items to be disclosed
include the APR, the finance charge, the amount financed, and the total of payments. Regulation Z defines the
term “finance charge,” as the total dollar amount the extension of credit will cost, including the prepaid finance
charge (the settlement charges) plus the interest for the term of the loan (if each payment is made as scheduled).
The prepaid finance charge included when calculating the APR consists of those charges that add to the cost of
obtaining the loan (12 CFR Section 226.4).

The amount financed describes the arithmetic residual of the amount borrowed (the original loan amount) and
the prepaid finance charge includable (the settlement charges). The total of payments is the summation of all
required payments, assuming each payment is made as scheduled (12 CFR Sections 226.2, 226.4, and 226.18).

Regarding the proposed model forms and the related samples (e.g., the H-19(A)), the important items disclosed
include the loan summary (a summary of the loan amount, term, type, features and settlement charges); the
APR and a comparison to the average available APR on similar conforming loans offered to
consumers/borrowers (applicants) with excellent credit; a representation of the range of APRs within the “high
cost zone”; the nominal interest rate, and the monthly/periodic scheduled principal and interest payments; and
the estimated periodic payments for the escrow/impound account. In addition, the important disclosures
include whether an escrow/impound account is required; the total of payments including the total amount
imposed for interest during the term of the loan; and the amount of the settlement charges (formerly described
as the prepaid finance charge includable) (12 CFR Sections 226.17, 226.18, 226.19, 226.20, and 226.22).

The proposed TILA disclosure model forms include a new category of disclosures, i.e., key questions about
risk. The questions include whether the interest rate may increase, whether the required monthly/periodic
payments will increase, and whether a prepayment penalty is due in the event of an early termination of the
residential mortgage loan. The proposed forms include the amended Regulation Z disclosures informing the
consumer/borrower no obligation exists to accept the loan as the result of the receipt of the disclosures.

Further, a disclosure is required informing the consumer/borrower the inability to make the scheduled payments
on the loan could result in the loss of the home through foreclosure. The consumer/borrower is also to receive a
disclosure there is no guarantee a refinance loan will be available with a lower interest rate and monthly
payments to pay off the existing loan; and if the loan obtained exceeds the value of the security property, the
extra amount may not be deductible for federal income tax purposes (12 CFR Sections 226.17, 226.18, 226.19,
226.20, and 226.22).

Basis of Disclosures and Use of Estimates

The disclosures shall reflect the terms of the legal obligation of the mortgage loan transaction between the
creditor/lender and the consumer/borrower. If any information necessary for an accurate disclosure is unknown
to the creditor/lender, the disclosure is to reflect the best information reasonably available when the disclosure
is provided to the consumer/borrower. The disclosures are to clearly state they are estimates, as applicable.

For a transaction in which a portion of the interest is determined on a per-diem basis and collected at loan
consummation, the per-diem interest disclosed will be considered accurate (if the disclosure relies on
information known to the creditor/lender when the disclosure documents are prepared for consummation of the
loan transaction) (12 CFR Sections 226.17, 226.18, 226.20, and 226.22).

The creditor/lender may disregard the effects of the following in making calculations and completing
disclosures:

1. Payments must be collected in whole cents;

2. Dates of scheduled payments and advances are subject to change because the scheduled date is not a
business day, as defined;

3. Months have different numbers of days;

4. The occurrence of a leap year alters the number of days in the month of February; and,

5. When making calculations and completing disclosures, the creditor/lender may disregard any irregularity in
the first period that falls within the limits described and any payment schedule irregularity that results from
the irregular first period as follows:

■ For transactions in which the term is less than 1 year, a first period not more than 6 days shorter or 13
days longer than a regular period;

■ For transactions in which the term is at least 1 year and less than 10 years, a first period not more than
11 days shorter or 21 days longer than a regular period; and,

■ For transactions in which the term is at least 10 years, a first period shorter than or not more than 32
days longer than a regular period (12 CFR Section 226.17).

If an obligation is payable on demand, the creditor/lender shall make the disclosures based on an assumed
maturity of one (1) year. If an alternate maturity date is identified in the legal obligation between the
creditor/lender and the consumer/borrower, the disclosures are to be based on that date. A series of advances
under an agreement to extend credit up to a certain amount may be considered as a single loan transaction.
When a multiple-advance loan to finance the initial construction of the intended dwelling of the
consumer/borrower is joined with permanent financing extended by the same creditor/lender, the construction
phase and the permanent phase of the financing may be treated either as a single transaction or as more than
one loan transaction (12 CFR Section 226.17).

Multiple Creditors/lenders; Multiple Consumers/Borrowers

If a transaction involves more than one creditor/lender, only one set of disclosures need be delivered to the
consumer/borrower, and the creditors/lenders are to agree among themselves which creditor/lender must
comply with the requirements of Regulation Z. Should there be more than one consumer/borrower; the
disclosures may be made to a consumer/borrower primarily liable for the debt/obligation. If the transaction is
rescindable under 12 CFR Section 226.23, the disclosures are to be delivered to each consumer/borrower who
has the right to rescind (12 CFR Section226.17).

Effect of Subsequent Events and Required Subsequent Disclosures

Should a disclosure become inaccurate due to an event that occurs after the creditor/lender delivers the required
disclosures and no violation of the tolerance limits has occurred, the inaccuracy is not in violation of Regulation
Z. However, new or subsequent disclosures are required (12 CFR Sections 226.17(f), 226.18, 226.19, and
226.20). If the APR disclosed in a transaction secured by a real property dwelling varies from the actual rate
determined in accordance with the actuarial method or the United States Rule method by more than the
tolerances described below, re-disclosure is required (12 CFR Section 226.22(a)(1), (2), (3), (4), and (5)).

When subsequent events make early disclosures inaccurate, the creditor/lender must re-disclose three (3) days
before loan consummation (12 CFR Sections 226.17(e), (f)(i) and (ii), 226.19(a)(2) and 226.19(a)(5)(iii)). The
re-disclosures are to include:

1. Any changed term, unless the term was based on and labeled as an estimate in accordance with 12 CFR
Section 226.17(c)(2), and the change does not exceed the acceptable tolerances pursuant to applicable
federal law; and,

2. All changed terms, if the annual percentage rate at the time of consummation varies from the annual
percentage rate disclosed earlier by more than 1/8 of 1 percentage point in a regular transaction, or more
than 1/4 of 1 percentage point in an irregular transaction (as defined), and the change is not in violation of
the acceptable tolerances pursuant to applicable federal law (12 CFR Sections 226.17(e), (f)(i) and (ii), and
226.22(a)).

After loan consummation, three additional events require the creditor/lender to make subsequent disclosures,
i.e., a refinancing, an assumption, and adjustments in variable-rate feature loans:

A Refinancing. A “refinancing” is a separate transaction requiring new disclosures to the consumer/borrower.
Refinancing occurs when an existing obligation is satisfied and replaced for the same consumer/borrower.
Regulation Z provides examples of what does not constitute a refinancing, including among others: (l) a
renewal of a single payment obligation with no change in the original terms; (2) a reduction in the APR with a
corresponding change in the payment schedule; and (3) a change in the payment schedule or a change in
collateral requirements as a result of the consumer/borrower’s default or delinquency. As previously mentioned,
consolidation of an exiting loan by the same creditor/lender with no new money advanced would not constitute
a refinancing.

Assumption. An “assumption” is a new transaction requiring new disclosures to the consumer/borrower, and
that an assumption occurs when a new person becomes obligated as a subsequent maker on an existing
debt/obligation. Whenever a creditor/lender agrees in writing to accept a new consumer/borrower as a
subsequent maker on an existing residential mortgage loan transaction (an assumption of the existing
debt/obligation), the creditor/lender must make new disclosures based on the remaining debt/obligation. The
mere addition of a guarantor to an existing debt/obligation for which the consumer/borrower remains primarily
liable does not constitute an “assumption” (12 CFR Sections 226.17(e), 226.18, 226.19 and 226.20).

Variable-rate adjustments. New disclosures are required when an adjustment is made to the interest rate (with
or without an accompanying change in the payment rate) in a variable-rate loan transaction (other than a fixed-
interest rate loan) secured by the consumer/borrower’s principal dwelling and with a loan term of greater than
one year. The creditor/lender must provide the following information in a disclosure at least once each year
during which an interest rate adjustment is implemented without an accompanying payment change, and at least
25 but not more than 120 calendar days before a periodic payment is due at a new level:

1. The current and prior interest rates;

2. The index values on which the current and prior interest rates are based;

3. The extent to which the creditor/lender has foregone any interest rate increase;

4. The contractual effects of the adjustments, including the new payment amount and the loan balance; and,

5. The payment (if different from the payment previously disclosed) that would be required to fully amortize
the loan at the new interest rate over the remaining loan term (12 CFR Section 226.19).

Content of Disclosures

Information and Manner of Disclosure. Consumer/borrowers are to receive the following information and in the
manner described as part of the TILA and Regulation Z disclosures:

1. The identity/name of the creditor/lender and the loan originator (MLO) unique identifier;

2. The disclosures are to be in writing, clearly and conspicuously set forth, and in a form that the
consumer/borrower may keep;

3. The disclosures may be provided in electronic form, subject to compliance with the “consumer consent”
and other applicable provisions of the Electronic Signatures in Global and National Commerce Act, the E-
Sign Act (15 USC Section 7001 et seq.);

4. The disclosures required by 12 CFR Sections 226.17(g), 226.19(b), and 226.24 may be provided to the
consumer/borrower in electronic form without regard to the “consumer’s consent” or other provisions of
the E-Sign Act when the disclosures are made in compliance with the foregoing sections of Regulation Z;

5. The disclosures are to be grouped together, segregated from everything else, and may not contain any
information except that which is directly related thereto as required by Regulation Z (12 CFR Sections
226.17, 226.18, 226.19, 226.20, and 226.24, among others);

6. The disclosures may include an acknowledgment of receipt, the date of the transaction; and the name,
address, and account number of the consumer/borrower (12 CFR Sections 226.17 and 226.18); and,

7. The identity of the following payees may be included in the disclosures using generic or other general
terms:

• Public officials or government agencies;

• Credit reporting agencies;

• Appraisers; and,

• Insurance Companies.

The Most Important Disclosures Required in Historic Model Forms. The following represents the four (4) most
important required disclosures in the model forms historically promulgated by the FRB pursuant to Regulation
Z (12 CFR Section 226.18(a), (b), (d), and (e):

1. The term finance charge is to be more conspicuous than any other disclosure except for the APR and the
name and identity of the creditor/lender and the MLO unique identifier, and a brief description of this term
is to be included such as “the dollar amount the credit will cost you” (whether payable directly or indirectly
by the consumer/borrower and whether imposed directly or indirectly by the creditor/lender as an incident
to the extension of credit);

2. The APR (annual percentage rate) is to be more conspicuously disclosed than any other disclosure except
for the term finance charge and the name and identity of the creditor/lender and the MLO unique identifier,
and a brief description of this term is to be included such as “the cost of your credit as a yearly rate”;

3. The term total of payments (calculated by the sum of the payments disclosed in the payment schedule, i.e.,
the monthly/periodic payments of principal and interest) as well as a brief description such as “the amount
you will have paid when you have timely made all scheduled payments;” and,

4. A brief description of the amount financed as the amount of credit provided to or on behalf of the
consumer/borrower calculated by:

• Determining the principal loan amount or the cash price (subtracting any down payment);

• Adding any other amounts that are financed by the creditor/lender that are not part of the finance
charge; and,

• Subtracting any prepaid finance charge.

The Itemization of the Amount Financed. A written itemization of the amount financed to which the
consumer/borrower is entitled and separated from other required disclosures may be accomplished as part of
the early disclosures through the use of a good faith estimate of settlement charges (GFE) pursuant to RESPA

and to recent amendments of Regulation Z (12 USC Section 2601 et seq. and 24 CFR Section 3500 et seq. and
15 USC 1601 et seq. and 12 CFR Section 226 et seq., specifically Section 226.18(c)(1) and (2)). The
itemization is to include disclosures of the:

• Amount of any proceeds distributed directly to the consumer/borrower;

• Amount credited to the consumer/borrower's account with the creditor/lender; and,

• Any amounts paid to other persons by the creditor/lender on the consumer/borrower's behalf with such
persons identified in the disclosures.

Variable-Rate Transactions. Should the residential mortgage loan transaction be subject to a variable interest
rate (other than a fixed interest rate) and the APR is scheduled to increase within a term of one year or less after
loan consummation in a transaction secured by the consumer/borrower’s principal dwelling, the following
disclosures must be included (12 CFR Sections 226.18(f)(1) and (2) and 226.19(b):

• The circumstances under which the rate may increase;

• Any limitations on the increase;

• The effect of an increase; and,

• An example of the payment terms that would result from an increase.

Should the APR increase within a term greater than one year after loan consummation in a transaction secured
by the consumer/borrower’s principal dwelling, the following disclosures must be included:

• The fact that the transaction contains a variable-rate feature; and,

• A statement that variable-rate disclosures have been previously provided.

Should the consumer/borrower’s principal dwelling be the intended security property for a loan with a term of
greater than one year and a variable-rate feature is included providing for an increase in the APR after loan
consummation (whether scheduled to occur prior to or subsequent to one year thereafter), the following
disclosures must be provided at the time of loan application or before the consumer/borrower pays a non-
refundable fee, whichever is earlier:

1. The booklet entitled Consumer Handbook on Adjustable Rate Mortgages published by the FRB, or a
suitable substitute; and,

2. A loan program disclosure consistent with the applicable model forms for each variable-rate program in
which the consumer/borrower expresses an interest including the following (12 CFR Section 226.19(b)(1)
and (2)):

• The fact that the interest rate, payment, or term of the loan can change;

• The index or formula used in making adjustments, and the source information about the index or

formula;

• An explanation of how the interest rate and payment will be determined, including an explanation of
how the index is adjusted, such as by the addition of a margin;

• A statement that the consumer/borrower should ask about the current margin value and current interest
rate;

• The fact that the interest rate will be discounted, and a statement that the consumer/borrower should
ask about the amount of the interest rate discount;

• The frequency of interest rate and payment changes;

• Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance
including, for example, an explanation of interest rate or payment limitations, negative amortization,
and interest rate carryover; and,

• At the option of the creditor/lender, either of the following:

1. A historical example, based on a $10,000 loan amount, illustrating how payments and the
loan balance would have been affected by interest rate changes implemented according to the
terms of the loan program disclosure. The example is to reflect the most recent 15 years of
index value and all significant loan program terms, such as negative amortization, interest rate
carryover, interest rate discounts, and interest rate and payment limitations to be or that would
have been affected by the index movement during the period; or,

2. The maximum interest rate and payment for a $10,000 loan originated at the initial interest
rate (index value plus margin, adjusted by the amount of any discount or premium) in effect
as of an identified month and year for the loan program disclosure, assuming the maximum
periodic increases in rates and payments under the program; and the initial interest rate and
payment for that loan and a statement that the periodic payment may increase or decrease
substantially depending on changes in the rate.

• An explanation of how the consumer may calculate the payments for the loan amount to be borrowed
based on either:

A. The most recent payment shown in the historical example as described above in item 1; or

B. The initial interest rate used to calculate the maximum interest rate and payment as described
above in item 2.

• The fact that the loan program contains a demand feature;

• The type of information that will be provided in notices of adjustments and the timing of such notices;
and,

• A statement that disclosure forms are available for other variable-rate loan programs offered by the
creditor/lender.

Schedule of Payments. The creditor/lender must disclose the number, amounts, and timing of payments
scheduled to repay the debt/obligation. Regulation Z provides for an abbreviated disclosure of the payment
schedule for transactions in which a series of payments vary solely because of the application of a finance
charge to the unpaid principal balance. This situation arises most frequently in graduated payment mortgages or
in mortgages where mortgage insurance premiums are determined by the unpaid principal balance (12 CFR
Section 226.18(g)).

In a demand obligation with no alternative maturity date, the creditor/lender is to disclose the due dates or
payment periods of any schedule interest payments for the first year. In a transaction in which a series of
payments varies because a finance charge is applied to the unpaid principal balance, the creditor/lender is to
disclose the following information:

1. The dollar amount of the largest and smallest payments in the series; and,

2. The reference to the variations in other payments in the series.

As previously mentioned, the total of payments is the amount the consumer/borrower will have paid when all
scheduled payments are timely made. However, in a transaction involving a single payment, the creditor/lender
need not disclose the total of payments (12 CFR Section 226.18(g) and (h)).

Demand Feature. Regulation Z requires that if the obligation has a demand feature, this fact must be disclosed.
This disclosure is required only for a demand feature contemplated as part of the legal obligation for the
mortgage loan transaction between the creditor/lender and the consumer/borrower. Transactions that convert to
a demand status due to the consumer/borrower’s default are not within the purview of this requirement, as is
neither a due-on-sale nor a due on further encumbrance clause (12 CFR Sections 226.17(c)(5) and 226.18(i)).

Total Sale Price. In a credit sale (a sale in which the seller is a creditor) Regulation Z requires the use of the
term “total sale price” together with a brief description such as “the total price of your purchase on credit,
including your down payment of $___.” (12 CFR Section 226.18(b)(2), (d) and (j)).

Prepayment Penalties and Rebates. Creditors/lenders are required to make a disclosure of the existence of a
penalty on prepayments of the amount owing prior to the maturity date. Even if a creditor/lender does not
charge a prepayment penalty, a statement to that effect must be included. However, this disclosure is only
required if the finance charge is computed from time to time by application of a rate to the unpaid principal
balance. In any other type of transaction, a statement must be included indicating whether the
consumer/borrower is entitled to a rebate of any portion of the finance charge in the event of prepayment. It is
no longer necessary to disclose a particular method of rebate, such as the rule of 78s (12 CFR Section
226.17(k)).

Late Payment Charge. A disclosure is required only for those charges imposed before maturity due to a late
payment. The disclosure may reflect the fact that late charges may be determined as either a percentage or a
specified dollar amount (12 CFR Section 226.18(l)).

Security Interest. Regulation Z requires the creditor/lender to disclose what security interest is or will be
retained in the property purchased in the transaction or other security property. In transactions in which the
credit is being extended to purchase the collateral, the creditor/lender is required to give only a general
identification such as “the property purchased in this transaction.” The security interest in after-acquired
property need not be disclosed (12 CFR Section 226.18(m)).

Insurance. If charges for credit life, accident, health, or loss-of-income insurance are excluded from the finance
charge, there must be a disclosure of the premium and that the insurance is not required to obtain credit, and the
consumer must sign or initial a request for the insurance. If the charges for property insurance are excluded
from the finance charge there must be a disclosure setting forth the cost of the insurance if obtained from the
creditor/lender and stating that the insurance may be obtained from a person of the consumer/borrower’s
choice. The disclosure may be made on the disclosure form, or, at the creditor/lender’s option, on a document
different from the disclosure form (12 CFR Sections 226.4(d) and 226.18(n)).

Certain Security Charges. If disclosed, taxes and fees paid to a public official with respect to a security interest
may be excluded from the finance charge. The charges may be aggregated, or may be broken down by
individual charge. No special form is required for this disclosure, which could be labeled “filing fees and
taxes”. This disclosure may be made on the disclosure form, or, at the creditor/lender’s option, on a document
different from the disclosure form (12 CFR Section 226.4(a) and (e) and Section 226.18(o)).

Reference to Contract Terms. Regulation Z requires that creditors/lenders include in their disclosures a
statement that refers consumers/borrowers to appropriate contract documents for information about non-
payment, default, the right to accelerate the maturity of the obligation, and prepayment rebates or penalties. At
the creditor/lender’s option, the statement can also include a reference to the contract for more information
about security interests and the creditor/lender’s assumption policy (12 CFR Section 226.18(p) and (q)).

Assumption Policy. In a residential mortgage loan transaction, the creditor/lender must state whether a
subsequent purchaser of the dwelling who acquired the property from the consumer/borrower may be permitted
(if qualified) to assume the remaining debt/obligation on its original terms (12 CFR Section 226.18(q).

Required Deposit. An example of a required deposit is a savings account created as a condition of a loan. If a
creditor/lender requires the consumer/borrower to maintain the deposit as a condition of the extension of credit,
the creditor/lender must state the annual percentage rate (APR) does not reflect the effect of the required
deposit including any interest that may accrue therefrom (12 CFR Section 226.18(r)).

Consumer/Borrower’s Right to Rescind

Notice of Right to Rescind. Creditors/lenders must provide each consumer/borrower entitled to rescind with
two (2) copies of the notice of the right to rescind (one copy to each if the notice is in electronic form in
accordance with the “consumer consent” and other applicable provisions of the E-Sign Act). The rescission
notice is to be given to any consumer/borrower with an “ownership interest” in the principal dwelling, i.e., the
security property for the loan transaction (even when the consumer/borrower is not personally liable under the
terms of the promissory note and the deed of trust or mortgage). In the case of a mortgage loan being made to a
family trust, the beneficiaries of the trust own the interest in the security property. Therefore, if the beneficiaries
occupy the property as their principal dwelling, they are entitled to receive the notice of the right to rescind.

The notice is to be on a separate document that identifies the transaction that clearly and conspicuously
discloses the following:

• The retention or acquisition of a security interest in the consumer/borrower's principal dwelling;

• The consumer/borrower's right to rescind the transaction;

• How the consumer/borrower may exercise the right to rescind with a form for that purpose designating
the address of the creditor/lender's place of business;

• The effects of rescission, as described in Regulation Z; and,

• The date the rescission period expires.

To satisfy the notice and disclosure requirements in connection with the right to rescind, the creditor/lender is
to provide the appropriate model form or a notice and disclosure with substantially similar language. The FRB
has published a model rescission form previously listed and identified on page ___ of this Section that meets
these requirements. When more than one consumer/borrower in a transaction has the right to rescind, the
exercise of the right by any one consumer/borrower is also effective as to the remaining consumers/borrowers
(12 CFR Section 226.23).

Rescission Period. The consumer/borrower has the right to rescind until midnight of the third business day (as
defined) subsequent to the last to occur of the following events:

1. Consummation of the loan transaction;

2. Delivery of all material TILA disclosures; or

3. Delivery of the notice of right to rescind (12 CFR Section 226.23(a)).

For this purpose, a business day is any calendar day, except Sundays and federal legal holidays (5 USC
6103(a)).

Waiver of right to rescind. Regulation Z provides that the consumer/borrower may waive the right to rescind, if
the consumer/borrower determines that the extension of credit is needed to meet a bona fide personal financial
emergency. In such event, the consumer/borrower must give the creditor/lender a dated and written statement
(executed by the consumer/borrower) that describes the emergency and specifically waives the right to rescind
(preferably in the handwriting of the consumer/borrower). Unless specifically authorized by applicable law,
Regulation Z prohibits the use of preprinted waiver forms (12 CFR Section 226.23(e)).

The need of the consumer/borrower to obtain funds immediately is considered a bona fide personal financial
emergency if the dwelling securing the extension of credit is located in a declared major disaster area by the
federal government. In such event, creditors/lenders may use printed forms for the consumer/borrower to waive
the right to rescind. This exemption regarding the procedures required to waive the right to rescind generally
expires one (1) year from the date an area was declared a major disaster (42 USC Section 5170 and 12 CFR
Section 226.23(e)(1)).

Transactions Subject to the Right to Rescind. Generally, the right of rescission applies to all consumer/borrower
credit transactions where the debt/obligation is secured by a lien against the consumer/borrower’s principal
dwelling. A consumer/borrower can have only one “principal dwelling” at a time. Since the definition of a
dwelling is not limited to real property, loan transactions involving mobile homes can be rescindable, even if
they are treated as personal property under state law (12 CFR Section 226.23, and a parallel provision exists in
12 CFR Section 226.15 for liens against principal dwellings securing open-end credit).

Exempt Transactions- A residential mortgage loan transaction in which the loan proceeds fund the acquisition
or initial construction of the intended security property that is to become the principal dwelling of the
consumer/borrower is not subject to the right to rescind. This exemption applies regardless of the priority of the
lien established through recording the security devise/instrument (a deed of trust or mortgage). Accordingly,

neither a senior or junior deed of trust or mortgage securing a loan from the acquisition or initial construction of
the intended security property would be subject to a right of rescission (12 CFR Section 226.23(a) and (f)).

Another exemption is for a refinancing by the same creditor/lender of a loan secured by the
consumer/borrower’s principal dwelling, provided no new money is advanced (a refinance consolidation of an
extension of credit already secured by the principal dwelling). If new money is advanced, the transaction is
rescindable to the extent of the new money if the loan is secured by the consumer/borrower’s principal
dwelling. This exemption is most likely to arise in connection with renewals, extensions, or refinancing of
balloon notes (12 CFR Section 226.23(f)).

Further, the right to rescind does not apply to a loan transaction in which a state agency is a creditor/lender. A
loan advance, other than an initial advance, in a series of single-payment debts/obligations treated as a single
transaction under 12 CFR Section 226.17(c)(6) is not subject to the right to rescind. However, the notice of the
right to rescind and all material disclosures must be given to the consumer/borrower in connection with the
initial advance (12 CFR Section 226.23(b) and (f)).

While an addition (an increase in the principal balance) to an existing debt/obligation of a security interest in a
consumer/borrower's principal dwelling is a transaction, the right of rescission applies only to the addition of
the security interest and not to the existing debt/obligation. Renewal of optional insurance coverage is not a
refinancing and, therefore, is not subject to the right to rescind (12 CFR Sections 226.20(a)(5) and 226.23(f)).

By restricting the right of rescission to transactions in which the secured property is currently used as the
consumer/borrower’s principal dwelling, Regulation Z has exempted from the rescission requirements loans
secured by property that is expected to be used as other than a principal dwelling, such as vacant lots, vacation
homes, and retirement homes (12 CFR Section 226.23(a) and (f)).

The Rescission Period. Delivery of the required notice and disclosure begins the rescission period. To exercise
the right to rescind, the consumer/borrower is to notify the creditor/lender of the rescission by mail, or other
means of written communication. Notice is considered given if mailed, when filed for telegraphic transmission
or, if sent by other means, when delivered to the creditor/borrower's designated place of business. Regulation Z
was amended to allow the creditor/lender to deliver the notice and disclosure in an electronic form in
accordance with the “consumer consent” and other applicable provisions of the E-Sign Act. Accordingly, the
consumer/borrower should be able to respond to the notice and disclosure in the same manner it was delivered
(i.e., electronically) when seeking to timely rescind the contemplated loan transaction (12 CFR Section
226.23(a) and (b)).

The consumer/borrower may exercise the right to rescind until midnight of the third business day (as defined)
following loan consummation, delivery of the notice of right to rescind, or delivery of required material
disclosures, whichever occurs last. If the required notice or material disclosures are not delivered, the right to
rescind will expire three (3) years after loan consummation, upon transfer of all of the consumer/borrower's
interest in the property, or upon sale of the property, whichever occurs first (12 CFR Section 226.23(a), (b), and
(c)).

The term “material disclosures” means the required disclosures of the annual percentage rate (APR), the finance
charge, the amount financed, the total of payments, the schedule of payments, and the applicable disclosures
and limitations referred to in connection with “high-cost” and “higher-cost/priced” mortgages (12 CFR Sections
226.32 (c) and (d) and 226.35(b)(2)).

Delay of Creditor/Lender’s Performance. Unless a consumer/borrower properly waives the right of rescission
due to a personal emergency, no money is to be disbursed (other than a deposit in an escrow), no services are to
be performed, and no materials are to be delivered to the intended security property until the rescission period
has expired and the creditor/lender is reasonably satisfied that the consumer/borrower has not rescinded (12
CFR Section 226.23(c)).

Effects of Rescission. When a consumer/borrower rescinds a transaction, the security interest subject to the
right of rescission becomes void and the consumer/borrower is not liable for any amount, including any finance
charge regarding the contemplated loan transaction. Within 20 calendar days after receipt of a notice of

rescission, the creditor/lender is to return any money or property transferred to anyone in connection with the
transaction.

In addition, the creditor/lender is to take any action necessary to reflect the termination of the security interest.
If the creditor/lender has delivered any money or property, the consumer/borrower may retain possession until
the creditor/lender has met its previously described obligations. When the creditor/lender has complied with
applicable law, the consumer/borrower is to tender the money or property to the creditor/lender or, where the
latter would be impracticable or inequitable, tender its reasonable value. At the consumer/borrower's option,
tender of property may be made at the location of the property or at the consumer/borrower's residence. Tender
of money must be made at the creditor/lender's designated place of business.

If the creditor/lender does not take possession of the money or property within 20 calendar days after the
consumer/borrower's lawful tender, the consumer/borrower may keep it without further obligation. A court of
competent jurisdiction may modify the procedures and remedies outlined and discussed to accomplish properly
the rescission of a contemplated loan transaction (12 CFR Section 226.23(c)).

Tolerances for Accuracy. The tolerances for accuracy are subject to specific standards in the context of the
consumer/borrower’s right to rescind. The finance charge and other disclosures affected by the finance charge
(such as the amount financed and the APR) are considered accurate for purposes of the right to rescind if the
disclosed finance charge:

• is understated by no more than 1/2 of 1 percent of the face amount of the note or $100, whichever
is greater; or

• is greater than the amount required to be disclosed.

When refinancing a residential mortgage loan transaction with a new creditor/lender that does not include a
new advance or a consolidation of existing loans (other than a transaction covered by 12 CFR Section 226.32,
i.e., a “high-cost” mortgage), the finance charge and other disclosures affected by the finance charge (such as
the amount financed and the APR) are considered accurate for purposes of the right to rescind, if the disclosed
finance charge:

• is understated by no more than 1 percent of the face amount of the note or $100, whichever is
greater; or

• is greater than the amount required to be disclosed (12 CFR Section 226.23(g)).

Special Rules for Foreclosures. After the initiation of foreclosure on the consumer/borrower's principal
dwelling that secures the debt/obligation, the consumer/borrower shall have the right to rescind the transaction
if:

• A mortgage broker fee that should have been included in the finance charge was not included; or

• The creditor/lender did not provide the properly completed appropriate model form promulgated

by the FRB, or a substantially similar notice of rescission(12 CFR Section 226.23(h)(1)).

Further, after the initiation of foreclosure on the consumer/borrower's principal dwelling that secures the
debt/obligation, the finance charge and other disclosures affected by the finance charge (such as the amount
financed and the APR) shall be considered accurate for purposes of the right to rescind, if the disclosed finance
charge:

• is understated by no more than $35; or

• is greater than the amount required to be disclosed (12 CFR Section 226.23(h)(2)).

Advertising Consumer Credit

General Requirements. Anyone placing an advertisement regardless of media (including through a website or
other electronic means) for consumer credit must comply with the advertising requirements of TILA and

Regulation Z. An “advertisement” is any commercial message in a medium that promotes, directly or in
directly, a consumer credit transaction. Thus, real estate brokers (including mortgage brokers) and
homebuilders, among others; who place ads must comply with TILA and Regulation Z, even if they are not
creditors/lenders in the financing being advertised (12 CFR Section 226.24(a)).

Disclosures in advertisements for credit extensions must be made clearly and conspicuously. This standard
requires that disclosures be made in a reasonably understandable form, but does not prescribe the specific type
or font size or the placement of disclosures in the ad (12 CFR Section 226.24(b) and (f)(2)).

An advertisement of a creditor/lender may state specific credit terms only if the person (or entity) identified is
actually prepared to offer those terms. If the advertisement is placed by other than the creditor/lender, the
person (or entity) identified in the ad (a real estate broker including a mortgage broker or a homebuilder) must
have available evidence of a creditor/lender’s willingness to offer the terms described and of the identity of the
creditor/lender from whom the loan will be obtained. Loan terms offered for only a limited period or that will
become available at a future date may be advertised, if the foregoing conditions are clearly set forth in the ad
copy (12 CFR Section 226.24(i)).

Advertising the Rate of Finance Charge. If an advertisement states a rate of finance charge, the rate must be
stated as an “annual percentage rate” using that term. The advertisement is to state if the annual percentage rate
may be increased after loan consummation. If an advertisement is for credit secured by a dwelling, the
advertisement may not state any other rate than the annual percentage rate, except that a simple annual rate that
is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual
percentage rate (12 CFR Section 226.24(c)).

Advertisement of Terms that Require Additional Disclosures. If any one the following terms (referred to as
triggering terms) is set forth in an advertisement, additional disclosures are required:

• The amount or percentage of any down payment;

• The number of payments or period of repayment;

• The amount of any payment; and,

• The amount of any finance charge.

When the advertisement includes any one of the foregoing triggering terms, the following disclosures, as
applicable, must be included within the copy of the ad:

• The amount or percentage of the down payment;

• The terms of repayment which reflect the repayment obligations over the full term of the loan,
including any balloon payment; and,

• The annual percentage rate, using that term, and, if the rate may be increased after consummation,
a disclosure of that fact (12 CFR Section 226.24(d)).

Disclosure of Rates and Payments in Advertisements for Credit Secured by a Dwelling. Specific requirements
apply to any advertisement for credit secured by a dwelling, other than television or radio advertisements,
including promotional materials accompanying applications. If an advertisement for credit secured by a
dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over
the term of the advertised loan, the advertisement is to disclose in a clear and conspicuous manner the
following:

• Each simple annual rate of interest that will apply; and in variable-rate transactions, a rate
determined by adding an index and margin is to be disclosed based on a reasonably current index
and margin;

• The period of time during which each simple annual rate of interest will apply; and,

• If such rate is variable, the annual percentage rate shall comply with the accuracy standards in 12
CFR Sections 226.17(c) and 226.22 (12 CFR Section 226.24(f)).

The foregoing disclosures are to be made clearly and conspicuously. This means the disclosures of the required
information as described above must be presented in the ad with equal prominence and in close proximity to
any advertised rate that triggered the required disclosures. The APR may be disclosed with greater prominence
than the other information (12 CFR Section 226.24(f)).

Disclosure of Payments. In addition to the requirements regarding the disclosure of the APR and the finance
charge, if an advertisement for credit secured by a dwelling includes the amount of any payment, the ad is to
disclose the following in a clear and conspicuous manner:

• The period of time during which each payment will apply;

• The amount of each payment that will apply over the payment of the loan, including any balloon
payment; and,

• In an advertisement for credit secured by a first lien on a dwelling, the fact that the payments do
not include amounts for taxes and insurance premiums, if applicable, and that the actual payment
obligation will be greater (12 CFR Section 226.24(f)(3)).

Envelope Excluded. The disclosure requirements included in advertisements disclosing rates and payments do
not apply to an envelope in which an application or solicitation is mailed, or to a banner advertisement or pop-
up advertisement linked to an application or solicitation provided electronically (12 CFR Section 226.24(f)(4)).

Alternative Disclosures -Television or Radio Advertisements. An advertisement made through television or
radio including any of the terms requiring additional disclosures as previously discussed above may comply by
either by:

• Stating clearly and conspicuously each of the additional disclosures required under 12 CFR
Section 226.24(d)(2); or,

• Stating clearly and conspicuously the disclosures required under 12 CFR Section 226.24(d)(2) and
listing a toll-free telephone number, or any telephone number that allows a consumer/borrower to
reverse the phone charges when calling for information, along with a reference that such number
may be used by consumers/borrowers to obtain additional information about the cost of a loan (12
CFR Section 226.24(f)(4).

Tax Implications. If an advertisement distributed in paper form or through the Internet (rather than by radio or
television) is for a loan secured by the consumer/borrower's principal dwelling (and the advertisement states
that the advertised extension of credit may exceed the fair market value of the dwelling), the advertisement
copy is to clearly and conspicuously include:

• The interest on the portion of the credit extension that is greater than the fair market value of the
dwelling is not tax deductible for Federal income tax purposes; and,

• The consumer/borrower should consult a tax adviser for further information regarding the deductibility

of interest and charges (12 CFR Section 226.24(h)).

Prohibited Acts or Practices in Advertisements for Credit Secured by a Dwelling. The following acts or
practices are misleading or constitute a misrepresentation and, therefore, are prohibited in advertisements for
credit secured by a dwelling:

1. Advertising of “fixed'' rates and payments. Using the word “fixed'' to refer to rates, payments, or to the
credit transaction in an advertisement for variable-rate transactions or other transactions where the payment
will increase, unless (depending upon the fact situation):

• The phrase “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” appears in the
advertisement with equal prominence as any use of the term “fixed”, “fixed-rate mortgage”, or similar
terms; and further, appears before the first use of the word “fixed” and is at least as conspicuous as any
use of the word “fixed” in the advertisement; and,

• Each use of the word “fixed” referring to a rate, payment, or to the credit transaction is accompanied
by an equally prominent and closely proximate statement of the time period for which the rate or
payment is fixed, the fact that the rate may vary or the payment may increase after that period, and a
reference to the transactions for which the rates are fixed and to which transactions that the variable-
rate applies, among other disclosures (12 CFR Section 226.24(i)(1)).

2. Misleading comparisons in advertisements. Making any comparison in an advertisement between actual or
hypothetical credit payments or rates and any payment or simple annual rate that will be available under the
advertised product for a period less than the full term of the loan, unless:

• The advertisement includes a clear and conspicuous comparison to the information required to be
disclosed under Sections 226.24(f)(2) and (3); and,

• If the advertisement is for a variable-rate transaction, and the advertised payment or simple annual rate
is based on the index and margin that will be used to make subsequent rate or payment adjustments
over the term of the loan, the advertisement includes an equally prominent statement in close
proximity to the payment or rate that the payment or rate is subject to adjustment and the time period
when the first adjustment will occur (12 CFR Section 226.24(i)(2)).

3. Misrepresentations about government endorsement. Making any statement in an advertisement that the
product offered is a “government loan program”, “government-supported loan”, or is otherwise endorsed or
sponsored by any federal, state, or local government entity, unless the advertisement is for an FHA loan, VA
loan, or similar loan program that is, in fact, endorsed or sponsored by a federal, state, or local government
entity (12 CFR Section 226.24(i)(3)).

4. Misleading use of the current creditor/lender's name. Using the name of the consumer/borrower's current
creditor/lender in an advertisement that is not sent by or on behalf of the consumer/borrower's current lender,
unless the advertisement:

• Discloses with equal prominence the name of the person or creditor/lender making the advertisement;
and,

• Includes a clear and conspicuous statement that the person making the advertisement is not associated
with, or acting on behalf of, the consumer/borrower's current creditor/lender (12 CFR Section
226.24(i)(4)).

5. Misleading claims of debt elimination. Making any misleading claim in an advertisement that the mortgage
product offered will eliminate debt or result in a waiver or forgiveness of a consumer/borrower's existing loan
terms with, or obligations to, another creditor/lender (12 CFR Section 226.24(i)(5)).

6. Misleading use of the term “counselor”. Using the term “counselor” in an advertisement to refer to a for-
profit mortgage broker or mortgage creditor, its employees, or persons working for the broker or creditor/lender
that are involved in offering, originating, or selling mortgages (12 CFR Section 226.24 (i)(6)).

7. Misleading foreign-language advertisements. Providing information about some trigger terms or required
disclosures, such as an initial rate or payment, only in a foreign language in an advertisement, but providing

information about other trigger terms or required disclosures, such as information about the fully-indexed rate
or fully amortizing payment, only in English in the same advertisement (12 CFR Section 226.24 (i)(7)).

Examples of Advertising Requirements for Other than Fixed Interest Rate Mortgages. If the APR offered may
be increased after consummation of the transaction, the advertisement must state that fact. An advertisement for
a variable rate mortgage with an initial APR of 6% that may vary after settlement without any limit could be
advertised as “6% APR, subject to increase after settlement.” However, a review of the most recent
amendments to Regulation Z and to the Official Staff Commentaries must be undertaken before proceeding
with such an advertisement. The regulatory trend may well impose a “worst case example” when making such
disclosures.

The foregoing disclosure may be used subject to the caution noted for any type of mortgage instrument with a
variable interest rate. It may not be used in advertisements of graduated payment mortgages that have a fixed
interest rate and payments that may increase on a pre-set basis during the term of the loan. Fixed-rate
“buydowns” and “step-rate” mortgages are also not variable rate mortgages. These mortgages involve different
interest rates in effect during the life of the loan, all of which are known at settlement or loan closing. A
variable rate transaction involves future interest rates unknown at settlement.

The Official Staff Commentary to Regulation Z, includes special rules for advertising rates other than simple
annual or periodic rates, i.e., for “buydowns” and “payments” or “effective” rates. A seller or creditor/lender
may advertise a reduced simple interest rate resulting from a “buydown” so long as the advertisement shows the
limited term to which the reduced rate applies, the simple interest rate that applies to the balance of the term, as
well as the APR that is determined in accordance with the Commentaries to 12 CFR Section 226.17(c) of
Regulation Z. Where more than one reduced rate applies, the advertisement must show each rate and the
respective term for which each rate is effective. The advertisement may also show the effect of the “buydown”
on the payment schedule without triggering additional disclosures under 12 CFR Section 226.24(c) of
Regulation Z.

Adjustable rate mortgages (ARMs) often have a first-year “discount” or “teaser” feature in which the initial rate
is substantially reduced. In these loans, the first year’s rate is not computed in the same way as the rate for later
years. Often the “spread” or “margin” that is normally added to an “index” (such as the one-year Treasury-note
rate) to determine changes in the interest rate in the future is not included in the first year of a discounted ARM
offered by a creditor/lender. Special rules, similar to those for “buydowns”, apply to advertising a discounted
variable rate.

An advertisement for this type of plan can show the simple interest rate during the discount period, as long as it
also shows the APR. However, in contrast to “buydowns”, it may not be necessary to show in the ad the simple
interest rate applicable after the discount period. Again, a review of the most recent amendments to Regulation
Z and to the Official Staff Commentaries is required before concluding how the previous disclosures are to be
made. Assuming, the disclosure may proceed as suggested, an example would include a plan with a lower first
year’s interest rate (6%), but with a 8.25% rate in subsequent years and with additional credit costs. This plan
could be advertised as follows: “6% first-year financing. APR 8.41%; APR subject to increase after settlement
or loan closing.”

As in “buydowns”, the APR in discounted plans is a composite figure that must take into account the interest
rates that are known at closing. In the above example, the disclosed APR must reflect the 6% rate for the first
year, as well as, for example, the 8.25% rate applicable for the remainder of the term, plus any additional credit
costs (such as the consumer/borrower’s points). An ad for a discounted variable-rate loan, like an ad for a
“buydown”, may show the effect of the discount on the payment schedule during the discount period without
triggering other disclosures (subject to revisions to Regulation Z and the Official Staff Commentaries). An
example of a disclosure that complies with Regulation Z is: “Interest rate of 6% first year. APR 8.50% subject
to increase. With this discount, your monthly payments for the first year will be $_.”

In some transactions, particularly some graduated payment loans, the consumer/borrower’s payments for the
first few years of the loan may be based upon an interest rate lower than the rate for which the
consumer/borrower is liable (a situation referred to as “negative amortization”). As with “buydowns”, special
rules apply when the “effective” or “payment” rates are advertised for such transactions. Again, the regulatory

trend is to limit or otherwise control “negative amortization”. Prior to proceeding with such a loan plan, a
review of the then applicable provisions or Regulation Z as well as the Official Staff Commentaries is required.
Currently, the following information must be included in any advertisements containing effective rates: (1) the
“effective” or “payment” rate; (2) the term of the reduced payments; (3) the “note rate” at which interest is
actually accruing; and (4) the APR.

The advertised APR must take into account the interest for which the consumer/borrower is liable, even though
it is not paid by the consumer/borrower during the period of reduced payments. This type of financing could be
advertised as: “An effective first-year rate of 6-1/2 percent. Interest being charged at 8-1/2 percent. 8-3/4%
APR.” In contrast to an ad for a “buydown” or a discounted variable rate, an ad for an “effective” or “payment”
rate may not show the monthly payments without triggering the disclosures required in 12 CFR Section
226.24(d).

In addition to the Official Staff Commentaries published by the FRB, the Federal Trade Commission (FTC)
publishes a manual for business entitled “How to Advertise Consumer Credit: Complying with the Law.” This
manual is available from the U.S. Government Printing Office.

Record Retention

General Rule. A creditor/lender is to retain evidence of compliance with TILA and Regulation Z (other than
advertising requirements under 12 CFR Sections 226.16 and 226.24) for two (2) years after the date disclosures
are required to be made or action is required to be taken. The administrative agencies responsible for enforcing
the regulation may require creditors/lenders under their jurisdictions to retain records for a longer period if
necessary to carry out enforcement responsibilities as authorized under Section 108 of TILA (12 CFR Section
226.25).

Inspection of Records. A creditor/lender is to permit the agency responsible for enforcing TILA and Regulation
Z with respect to that creditor/lender to inspect its relevant records for purposes of compliance.

Language of disclosures

Disclosures required by TILA and Regulation Z may be made in a language other than English, provided that
the disclosures are made available in English upon the consumer/borrower’s request. This requirement for
providing English disclosures on request does not apply to advertisements subject to Sections 226.16, 226.24.,
and 226.27. When negotiating a transaction in a language other than English (as defined), California law
requires disclosures and transactional documents to be made and provided in the language through which the
transaction was negotiated. These languages include Spanish, Chinese, Tagalog, Vietnamese, or Korean (Civil
Code Section 1632).

Effect on State Laws

Inconsistent Disclosure Requirements. State Law requirements that are inconsistent with Chapter 1, General
Provisions; Chapter 2, Credit Transactions; Chapter 3, Credit Advertising; and, Chapter 4, Credit Billing of
TILA are pre-empted by the federal law to the extent of any inconsistency. The pre-emption of federal law
extends to Regulation Z. A state law is inconsistent if it requires a creditor/lender to make disclosures or take
actions that contradict the requirements of federal law. A state law is contradictory if it requires the use of the
same term to represent a different amount or a different meaning than federal law, or if it requires the use of a
term different from that required in the federal law to describe the same item (12 CFR Section 226.28).

If state law provides rights, responsibilities, or procedures for consumers/borrowers or creditors/lenders that are
different from those required by federal law regarding the correction of billing errors or the regulation of credit
reports, such requirements are pre-empted by federal law. However, a state law that allows
consumers/borrowers to inquire about an open-end credit account and imposes on creditors/lenders an
obligation to respond to such inquiry after the time allowed in federal law for consumers/borrowers to submit
written notices of billing errors is not pre-empted.

In any situation where the period for submitting a notice under Regulation Z has expired, consumers/borrowers
are to receive a notice that reliance on the longer time available under state law may result in the loss of
important rights that may be preserved by acting more promptly under federal law. A creditor/lender, state, or
other interested party may request the FRB to determine whether a state law requirement is inconsistent or

contradictory to federal law. After the FRB determines that a state law is inconsistent or contradictory, a
creditor/lender may not make disclosures using the inconsistent term or form, or take or pursue contradictory
action (12 CFR Section 226.28(c)).

Equivalent Disclosure Requirements. If the FRB determines that a disclosure required by State Law (other than
a requirement relating to the finance charge, annual percentage rate (APR), or the disclosures required for
“high-cost mortgages” under Section 226.32 is substantially the same in meaning as a disclosure required under
TILA or Regulation Z, creditors/lenders in that state may make the state disclosure in lieu of the federal
disclosure. A creditor/lender, state, or other interested party may request the FRB to determine whether a state
disclosure is substantially the same in meaning as a federal disclosure (12 CFR Section 226.28(b)).

State Exemptions. A state may apply to the FRB to exempt a class of transactions within the state from the
requirements of Chapter 2, Credit Transactions, or Chapter 4, Credit Billings of TILA and the corresponding
provisions of Regulation Z. The FRB is to grant an exemption if it determines that:

• The state law is substantially similar to the federal law or, in the case of Chapter 4, Credit Billing,
affords the consumer/borrower with greater protection than the federal law; and,

• There is adequate provision for enforcement under state law (12 CFR Section 226.29).

Administrative Enforcement

The Federal Trade Commission (FTC) enforces TILA and Regulation Z with respect to real estate brokers,
mortgage loan brokers, mortgage bankers, and other creditors/lenders and advertisers are regulated by the
following federal agencies, which have jurisdiction over the indicated financial institutions:

• Office of the Comptroller of the Currency (OCC) - national banks;

• Federal Deposit Insurance Corporation (FDIC) - insured banks that are not members of the Federal
Reserve System;

• Federal Reserve Board (FRB) - state member banks of the Federal Reserve System;

• Office of Thrift Supervision (OTS) - Federally-insured savings institutions and members of the Office
of Thrift Supervision System not insured by FDIC; and,

• National Credit Union Administration (NCUA) - federally chartered credit unions.

The FTC may determine that a creditor/lender or advertiser has violated the law and order the creditor/lender or
advertiser to cease and desist from further violations. Violations of such an administrative order may result in
an $11,000 civil penalty each day the violation continues. Further, if creditors/lenders or advertisers engage in
practices which they know the FTC has previously determined to be unfair or deceptive, the FTC may file an
action in federal district court seeking penalties of up to $11,000 for each violation.

In addition, where a creditor/lender inaccurately discloses an APR or a finance charge, the FTC can require the
creditor/lender to adjust the accounts of persons to whom credit was extended to assure the obligors will not be
required to pay a finance charge in excess of the finance charge actually disclosed or the dollar equivalent of
the disclosed APR, whichever is lower. Section 108(e) of TILA sets forth the conditions under which these
administrative restitution cases may be brought, as well as defenses the creditor/lender can assert in such cases
(15 USC Section 1607).

Civil Liability

In addition to any actual damage sustained by a consumer/borrower because of the failure of the creditor/lender
to comply with TILA and Regulation Z, the creditor/lender may be liable to a consumer/borrower for a
statutory penalty of twice the amount of the finance charge, with a minimum of $100 and a maximum of
$1,000. In the case of an individual action relating to a credit transaction not under an open end credit plan

secured by real property or a dwelling, a creditor/lender may be liable to a consumer/borrower for not less than
$400 or greater than $4000.

Generally, statutory liability applies to seven specific violations:

• Failing to properly disclose the right of rescission, where applicable; and,

• The improper disclosure of the amount financed, the finance charge, the APR, the total of
payments, the payment schedule, or of the security interest taken by the creditor/lender.

In case of any successful action to enforce the foregoing liability or in any action in which a person
(consumer/borrower) is determined to have a right of rescission, the creditor/lender is liable for the costs of the
action, together with a reasonable attorney’s fee as determined by the court. In the case of a failure to comply
with any requirement under 15 USC Section 1639 (“Section 32 Mortgages”), the creditor/lender is liable in
amount equal to the sum of all finance charges and fees paid by the consumer/borrower, unless the
creditor/lender demonstrates that the failure to comply is not material (15 USC Section 1640(a)).

In addition, the creditor/lender is liable for actual damages suffered by the consumer/borrower and, if the
consumer/borrower prevails, for the reasonable attorney’s fees and costs of the consumer/borrower. The
creditor/lender can avoid such liability if it notifies the consumer/borrower within 60 days after discovering the
error and adjusts the account to reflect the correct APR or finance charge, provided the consumer/borrower has
not instituted suit or the creditor/lender has not received written notice of its error, prior to its notification to the
consumer/borrower.

In the case of a class action, the creditor/lender will be liable for such amount as the court may allow, except
that as to each member of the class no minimum recovery will be applicable, and the total recovery in any class
action or series of class actions arising out of the same failure to comply by the same creditor/lender will not be
more than $500,000 or 1% of the net worth of the creditor/lender, whichever is less.

Creditors/lenders are not liable for violations that were unintentional and resulted from bona fide errors. An
adequate showing must be made procedures were in place that reasonably prevented such errors. Examples of
bona fide errors include clerical, calculation, computer malfunction/programming, and printing errors. Errors
of legal judgment do not qualify as bona fide.

The multiple failure to disclose to any person (consumer/borrower) information required under TILA or
Regulation Z to be disclosed in connection with a single account under an open end consumer credit plan, other
single consumer credit sale, consumer/borrower loan, and consumer lease, or other extension of consumer
credit, will entitle the person (consumer/borrower) to a single recovery but continued failure to disclose after a
recovery has been granted will give rise to rights to additional recoveries (15 USC Section 1640(d)).

Creditors/lenders are deemed to be in compliance with the non-numerical disclosure provisions of TILA if the
creditor/lender: (l) uses any appropriate model form or clause as published by the FRB; or (2) uses any such
model form or clause and changes it by (a) deleting any information that is not required by TILA, or (b)
rearranging the format, if in making such deletion or in the rearranging of the format, the creditor/lender does
not affect the substance, clarity, or meaningful sequence of the disclosures (Sections 105(b) and 130 of TILA,
15 USC Sections 1604 and 1640).

Creditor/Lender Defenses

A creditor/lender or assignee has no liability under 15 USC Sections 1607, 1611 and 1640 for any failure to
comply with any requirement imposed under TILA or Regulation Z, if within 60 days after discovering an error
(whether pursuant to a final written examination report or notice issued under 15 USC Section 1607(e)(1), or
through the creditor/lender's or assignee's own procedures); and prior to the institution of an action under 15
USC Section 1640, or the receipt of written notice of the error from the consumer/borrower, the creditor/lender
or assignee:

1. Notifies the person (consumer/borrower) concerned of the error; and,

2. Makes whatever adjustments in the appropriate account are necessary to assure that the person
(consumer/borrower) will not be required to pay an amount in excess of the charge actually
disclosed, or the dollar equivalent of the APR actually disclosed, whichever is lower (15 USC
Section 1640(b))

Unintentional Violations; Bona Fide Errors. As previously mentioned, a creditor/lender or assignee may not be
held liable in any civil action for a violation of TILA or Regulation Z if the creditor/lender or assignee shows
by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error
notwithstanding the maintenance of procedures reasonably adapted to avoid any such error (15 USC Section
1640(c))

Criminal Liability

A creditor/lender is also subject to a fine of not more than $5,000 or imprisonment for not more than one year,
or both, for willfully and knowingly violating TILA or Regulation Z. The violations may include giving false
or inaccurate information, failing to provide required disclosures, using any chart or table authorized by the
FRB in such a manner as to consistently understate the APR, or otherwise failing to comply with any
requirement imposed by TILA or Regulation Z (Section 112 of TILA, 15 USC Section 1611).

Assignee Liability

General Liability. Except as otherwise specifically provided in TILA or Regulation Z, any civil action for a
violation or administrative proceeding which may be brought against a creditor/lender may be maintained
against an assignee of the creditor/lender only if the violation for which such action or proceeding is brought is
apparent on the face of the required disclosure statement, except where the assignment was involuntary. A
violation apparent on the face of the disclosure statement includes, but is not limited to:

1. Disclosures which can be determined to be incomplete or inaccurate from the face of the
disclosure statement or other documents assigned; or,

2. A disclosure which does not use the terms required to be used by TILA or Regulation Z (15 USC
Section 1641(a), (e)(1) and (e)(2)).

Proof of Compliance with Statutory Provisions. Except as provided in 15 USC Section 1635(c), in any action
or proceeding by or against any subsequent assignee of the original creditor/lender without knowledge to the
contrary by the assignee when the assignee acquires the obligation, written acknowledgement of receipt by a
person to whom a statement or disclosure is required to be given will be conclusive proof of the delivery
thereof and, except as provided above, of compliance with TILA or Regulation Z (15 USC Section 1641(b)).

Right of Rescission. Any borrower who has the right to rescind a transaction may rescind the transaction as
against any assignee of the obligation (15 USC Section 1641(c)).

Additional Disclosures Required for “High-Cost”, “Higher-Cost/Priced” Mortgages

The “Home Ownership and Equity Protection Act of 1994” amended TILA and Regulation Z to establish new
requirements for certain loans secured by the consumer/borrower’s principal dwelling in which either:

1. The APR at loan consummation will exceed by more than 8 percentage points for loans secured by first
liens, or more than 10 percentage points for loans secured by junior liens (deeds of trust or mortgages) the
yield on U. S. Treasury Securities having comparable periods of maturity to the maturity of the
contemplated loan as of the 15th day of the month immediately preceding the month in which the
application or the extension of credit is received by the creditor/lender; or,

2. The total points and fees payable by the consumer/borrower at or before settlement or loan closing will
exceed the greater of 8 percent of the total loan amount or $400 (the dollar amount to be adjusted annually
by the FRB, based on changes in the Consumer Price Index that was reported on the preceding June 1 – the
adjusted dollar amount for 2009 is $583).

The Official Staff Commentaries should be consulted annually to determine the applicable adjusted dollar

amount, i.e., the comment in 12 CFR Section 226.32(a)(1)(ii) for the most current year's adjusted figure. As
previously mentioned in this Chapter and in this Section, loans subject to 12 CFR Section 226.32 are known as
“Section 32” or “high-cost” mortgage loans.

Exemptions. Exempted from the requirements for “high-cost” mortgage loans are the following transactions:

• A residential mortgage transaction (as defined for this purpose);

• A reverse mortgage transaction subject to 12 CFR Section 226.33; and,

• Open end credit plans or open end credit lines (HELOCs).

Definitions. For the purposes of “Section 32”, the terms points and fees means:

• All items required to be disclosed under 12 CFR Sections 226.4(a) and 226.4(b), except interest or
the time-price differential;

• All compensation paid to mortgage brokers (MLOs);

• All items listed in 12 CFR Section 226.4(c)(7) (other than amounts held for future payment of
taxes) unless the charge is reasonable, the creditor/lender receives no direct or indirect
compensation in connection with the charge, and the charge is not paid to an affiliate of the
creditor/lender; and,

• Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-
cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable
law) that provides for cancellation of all or part of the consumer's liability in the event of the loss
of life, health, or income or in the case of accident, written in connection with the credit
transaction.

The term affiliate means any company that controls, is controlled by, or is under common control with another
company, as set forth in the Bank Holding Company Act of 1956 (12 USC Section 1841 et seq.).

Disclosures. In addition to other disclosures required, in a “Section 32” mortgage loan, the creditor/lender is to
disclose the following in conspicuous type size:

1. Notices. The following statement: “You are not required to complete this agreement merely because you
have received these disclosures or have signed a loan application. If you obtain this loan, the
creditor/lender will have a mortgage on your home. You could lose your home, and any money you have
put into it, if you do not meet your obligations under the loan.''

2. Annual percentage rate. The annual percentage rate (APR).

3. Regular payment; balloon payment. The amount of the regular monthly (or other periodic) payment and
the amount of any balloon payment. The regular payment disclosed is to be treated as accurate if it is
based on an amount borrowed that is deemed accurate and is disclosed under 12 CFR Section 226.32(c)(5).

4. Variable-rate. For variable-rate transactions, a statement that the interest rate and monthly payment may
increase, and the amount of the single maximum monthly payment, based on the maximum interest rate
required to be disclosed under 12 CFR Section 226.19(b)(2)(viii)(B).

5. Amount borrowed. For a mortgage refinancing, the total amount the consumer/borrower will borrow, as
reflected by the face amount of the note; and where the amount borrowed includes premiums or other

charges for optional credit insurance or debt-cancellation coverage, that fact is to be stated, grouped
together with the disclosure of the amount borrowed. The disclosure of the amount borrowed shall be
treated as accurate if it is not more than $100 above or below the amount required to be disclosed.

Limitations. A mortgage transaction subject to this section is not to include the following terms:

1. Balloon payment. For a loan with a term of less than five years, a payment schedule with regular periodic
payments that when aggregated do not fully amortize the outstanding principal balance.

• Exception. The limitation above does not apply to loans with maturities of less than one year, if
the purpose of the loan is a “bridge'' loan connected with the acquisition or construction of a
dwelling intended to become the consumer/borrower's principal dwelling.

2. Negative amortization. A payment schedule with regular periodic payments that cause the principal
balance to increase.

3. Advance payments. A payment schedule that consolidates more than two periodic payments and pays
them in advance from the loan proceeds.

4. Increased interest rate. An increase in the interest rate after default.

5. Rebates. A refund calculated by a method less favorable than the actuarial method (as defined by Section
933(d) of the Housing and Community Development Act of 1992, 15 USC Section 1615(d)), for rebates of
interest arising from a loan acceleration due to default.

6. Prepayment penalties. Except as allowed under 12 CFR Section 226.32(d)(7), a penalty for paying all or
part of the principal before the date on which the principal is due. A prepayment penalty includes
computing a refund of unearned interest by a method that is less favorable to the consumer than the
actuarial method, as defined by Section 933(d) of the Housing and Community Development Act of 1992
(15 USC Section 1615(d).

7. Prepayment penalty exception. A mortgage transaction subject to “Section 32” may provide for a
prepayment penalty (including a refund calculated according to the rule of 78s) otherwise permitted by law
if, under the terms of the loan:

• The penalty will not apply after the two-year period following consummation;

• The penalty will not apply if the source of the prepayment funds is a refinancing by the
creditor/lender or an affiliate of the creditor/lender;

• At consummation, the consumer/borrower's total monthly debt payments (including amounts
owed under the mortgage) do not exceed 50 percent of the consumer's monthly gross income, as
verified in accordance with 12 CFR Section 226.34(a)(4)(ii); and,

• The amount of the periodic payment of principal or interest or both may not change during the
four-year period following consummation.

8. Due-on-demand clause. A demand feature that permits the creditor/lender to terminate the loan in advance
of the original maturity date and to demand repayment of the entire outstanding balance, except in the
following circumstances:

• There is fraud or material misrepresentation by the consumer/borrower in connection with the
loan;

• The consumer/borrower fails to meet the repayment terms of the agreement for any outstanding
balance; or,

• There is any action or inaction by the consumer that adversely affects the creditor/lender's security
for the loan, or any right of the creditor/lender in such security.

Prohibited Acts or Practices

The prohibited acts or practices in connection with credit extended subject to 12 CFR Section 226.32 are found
in 12 CFR Section 226.34.

General prohibitions and practices. Creditors/lenders are prohibited from engaging in a pattern or practice of
lending based on the collateral value of the security property without regard to the consumer/borrower’s ability
to repay the loan. In addition, proceeds for home improvement loans must be disbursed either directly to the
consumer/borrower, jointly to the consumer/borrower and home improvement contractor or through an
authorized escrow agent, in accordance with terms established in a written agreement signed by and at the
election of the consumer/borrower.

Notice to assignee. Sell or otherwise assign a “Section 32” mortgage loan without furnishing the following
statement to the purchaser or assignee: “Notice: This is a mortgage subject to special rules under TILA and
Regulation Z. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect
to the mortgage that the consumer/borrower could assert against the creditor/lender.”

Loan refinances within a one-year period. Within one year of having extended credit subject to 12 CFR
Section 226.32, refinance any loan to the same consumer/borrower into another loan subject to “Section 32”,
unless the refinancing is in the consumer/borrower's interest. An assignee holding or servicing an extension of
mortgage credit subject to 12 CFR Section 226.32, is not to refinance any loan subject to “Section 32” for the
remainder of the one-year period following the date of origination of the credit to the same consumer/borrower
into another loan subject to 12 CFR Section 226.32, unless the refinancing is in the consumer/borrower's
interest.

Certain prohibited practices and fees. A creditor/lender (or assignee) is prohibited from engaging in acts or
practices to evade this provision, including a pattern or practice of arranging for the refinancing of its own
loans by affiliated or unaffiliated creditors/lenders, or modifying a loan agreement (whether or not the existing
loan is satisfied and replaced by the new loan) and charging a fee therefor.

Repayment ability. The creditor/lender is not to extend credit subject to 12 CFR Section 226.32 to a
consumer/borrower based on the collateral without regard to the consumer/borrower's repayment ability,
including the consumer/borrower's current and expected income, employment, assets other than the collateral,
current obligations, and mortgage-related obligations. The creditor/lender is presumed to have violated this
provision if the creditor/lender fails to verify and document the consumer/borrower’s repayment ability,
expected income or assets, current obligations, and the consumer/borrower’s mortgage related obligations. The
standards for verification include reviewing the consumer/borrower’s IRS form W-2, tax returns, payroll
receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence
of the consumer/borrower’s income, assets or obligations.

Exclusions from presumption of compliance. Notwithstanding the previous paragraph, no presumption of
compliance is available to the creditor/lender for a transaction for in which:

• The regular periodic payments for the first seven (7) years would cause the principal balance to
increase; or,

• The term of the loan is less than seven (7) years and the regular periodic payments when aggregated
do not fully amortize the outstanding principal balance.

Exemption. The previous paragraph does not apply to temporary or “bridge” loans with terms of twelve months
or less, such as a loan to purchase a new dwelling where the consumer/borrower plans to sell a current dwelling
within twelve months.

Prohibited acts or practices for dwelling-secured loans, open end credit plans (HELOCs). In connection with
credit secured by the consumer/borrower's dwelling that does not meet the definition in 12 CFR Section
226.2(a)(20), a creditor/lender shall not structure a home-secured loan as an open end plan (HELOC) to evade
the requirements of 12 CFR Section 226.32.

Prohibited Acts or Practices In Connection with “Higher-Cost/Priced” Mortgage Loans

Effective October 1, 2009, amendments were made to TILA and Regulation Z regarding “higher-cost/priced”
mortgage loans (12 CFR Sections 226.34 and 226.35). These loans are also known as “Section 35” or “high-
cost/priced” mortgage loans that are defined as follows:

• A consumer credit transaction secured by the consumer/borrower's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of
the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on
a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a
dwelling.

• “Average prime offer rate” means an annual percentage rate that is derived from average interest
rates, points, and other loan pricing terms currently offered to consumers by a representative
sample of creditors/lenders for mortgage transactions that have low-risk pricing characteristics.
The FRB publishes average prime offer rates for a broad range of types of transactions in a table
updated at least weekly as well as the methodology the FRB uses to derive these rates in the
publication, H-15, among others.

Same standards as 12 CFR Sections 226.32 and 226.34. The disclosure and prohibited acts or practices
standards that apply to “Section 32” mortgage loans generally apply as well to Section 35 mortgage loans.

Exemption. The term “higher-cost/priced” mortgage loan does not include a transaction to finance the initial
construction of a dwelling, a temporary or “bridge'' loan with a term of twelve months or less, such as a loan to
purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-
mortgage transaction subject to 12 CFR Section 226.33, or a home equity line of credit (HELOC) subject to 12
CFR Section 226.5b.

Rules for “higher-cost/priced” mortgage loans. “Higher-cost/priced” mortgage loans are subject to the
following restrictions:

1. Repayment ability. A creditor/lender is not to extend credit based on the value of the consumer/borrower's
collateral without regard to the consumer/borrower's repayment ability as of loan consummation as
provided in 12 CFR Section 226.34(a)(4).

2. Prepayment penalties. A loan may not include a penalty described in 12 CFR Section 226.32(d)(6) unless:

• The penalty is otherwise permitted by law, including 12 CFR Section 226.32(d)(7) if the loan is a
mortgage transaction described in 12 CFR Section 226.32(a); and,

• Under the terms of the loan:

A. The penalty will not apply after the two-year period following consummation;

B. The penalty will not apply if the source of the prepayment funds is a refinancing by the
creditor/lender or an affiliate of the creditor/lender; and,

C. The amount of the periodic payment of principal or interest or both may not change during
the four-year period following consummation.

3. Escrows or impound accounts. A creditor/lender may not extend a loan secured by a first lien on a
principal dwelling, unless an escrow or impound account is established before loan consummation for
payment of property taxes and premiums for mortgage-related insurance required by the creditor/lender,
such as insurance against loss of or damage to property, or against liability arising out of the ownership or
use of the property, or insurance protecting the creditor/lender against the consumer/borrower's default or
other credit loss subject to the following exemptions:

• Loans secured by shares in a cooperative and for certain condominium units; and,

• Insurance premiums need not be included in escrow or impound accounts for loans secured by
condominium units, where the condominium association has an obligation to the condominium
unit owners to maintain a master policy insuring the condominium units or separate interests of
each member/owner.

A creditor/lender or servicer may permit a consumer/borrower to cancel the escrow or impound account in
response to a consumer/borrower's dated written request to cancel the escrow account if received no earlier
than 365 days after loan consummation. An “escrow account'' or “impound account” is to have the same
meaning as in 24 CFR Section 3500.17(b), as amended. Compliance with the “escrow account” or
“impound account” is mandatory for “high-cost/priced” mortgage loans as of 4/1/2010 (10/1/2010 for
higher-cost/priced mortgage loans secured by manufactured housing). 73 Federal Register 44595 and
Official Staff Interpretations to 12 CFR Section 226.1(d)(5).

4. Evasion; open end credit (HELOC). In connection with credit secured by a consumer/borrower's principal
dwelling that does not meet the definition of open end credit in 12 CFR Section 226.2(a)(20), a
creditor/lender is not to structure a home-secured loan as an open end plan (HELOC) to evade the
requirements of “Section 35”.

Prohibited Acts or Practices In Connection With Credit Secured by a Consumer/Borrower's Principal
Dwelling

Effective 10/1/2009, 12 CFR Section 226.36 was amended to provide:

Mortgage broker defined. The term ``mortgage broker'' means a person, other than an employee of a
creditor/lender, who for compensation or other monetary gain, or in expectation of compensation or other
monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person.
The term includes a person meeting this definition, even if the consumer credit obligation is initially payable to
such person, unless the person provides the funds for the transaction at consummation out of the person's own
resources, out of deposits held by the person, or by drawing on a bona fide (independent) warehouse line of
credit.

Misrepresentation of the value of the consumer/borrower's dwelling

1. Coercion of appraiser. In connection with a consumer credit transaction secured by a consumer/borrower's
principal dwelling, no creditor or mortgage broker, and no affiliate of a creditor/lender or mortgage broker
shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or
misrepresent the value of such dwelling.

• Examples of actions that violate this provision include:

A. Implying to an appraiser that current or future retention of the appraiser depends on the amount at
which the appraiser values a consumer/borrower's principal dwelling;

B. Excluding an appraiser from consideration for future engagement because the appraiser reports a
value of a consumer/borrower's principal dwelling that does not meet or exceed a minimum
threshold;

C. Telling an appraiser a minimum reported value of a consumer/borrower's principal dwelling that is
needed to approve the loan;

D. Failing to compensate an appraiser because the appraiser does not value a consumer/borrower's
principal dwelling at or above a certain amount; and,

E. Conditioning an appraiser's fee or compensation on loan consummation.

• Examples of actions that do not violate this provision include:

A. Asking an appraiser to consider additional information about a consumer/borrower's principal
dwelling or about comparable properties;

B. Requesting that an appraiser provide additional information about the basis for a valuation;

C. Requesting that an appraiser correct factual errors in a valuation;

D. Obtaining multiple appraisals of a consumer/borrower's principal dwelling, so long as the creditor
adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the
highest value;

E. Withholding compensation from an appraiser for breach of contract or substandard performance
of services as provided by contract; and,

F. Taking action permitted or required by applicable federal or state statute, regulation, or agency
guidance.

2. When extension of credit is prohibited. In connection with a consumer credit transaction secured by a
consumer's principal dwelling, a creditor who knows, at or before loan consummation, of a violation of this
provision in connection with an appraisal is not to extend credit based on such appraisal, unless the
creditor/lender documents that it has acted with reasonable diligence to determine that the appraisal does
not materially misstate or misrepresent the value of such dwelling.

3. Appraiser defined. An appraiser is a person who engages in the business of providing assessments of the
value of dwellings. The term “appraiser” includes persons that employ, refer, or manage appraisers and
affiliates of such persons.

Servicing practices. In connection with a consumer credit transaction secured by a consumer/borrower's
principal dwelling, no servicer is to:

• Fail to credit a payment to the consumer/borrower's loan account as of the date of receipt, except when
a delay in crediting does not result in any charge to the consumer/borrower or in the reporting of
negative information to a consumer reporting agency, or except as provided in 12 CFR Section
226.36(c)(2);

• Impose on the consumer/borrower any late fee or delinquency charge in connection with a payment,
when the only delinquency is attributable to late fees or delinquency charges assessed on an earlier
payment, and the payment is otherwise a full payment for the applicable period and is paid on its due
date or within any applicable grace period; or,

• Fail to provide, within a reasonable time after receiving a request from the consumer/borrower or any
person acting on behalf of the consumer/borrower, an accurate statement of the total outstanding
balance that would be required to satisfy the consumer/borrower's obligation in full as of a specified
date.

If a servicer specifies in writing requirements for the consumer/borrower to follow in making payments, but
accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days
after receipt. The terms “servicer” and “servicing” have the same meanings as provided in 24 CFR 3500.2(b),
as amended. 12 CFR Section 226.34 does not apply to a home equity line of credit (HELOC) subject to 12
CFR Section 226.5b.

Assignment of “Section 32” and “Section 35” Mortgage Loans

Any person who purchases or is otherwise assigned a “Section 32” mortgage loan will be subject to all claims
and defenses with respect to that mortgage that the consumer/borrower could assert against the creditor/lender
of the mortgage. This transfer of liability applies unless the purchaser or assignee demonstrates, by a
preponderance of the evidence, that a reasonable person exercising ordinary due diligence could not determine
(based on the documentation required by TILA or Regulation Z),including the itemization of the amount
financed and other disclosure of disbursements that the mortgage was a “Section 32” mortgage.

The liability of an assignee pursuant a Section 32 mortgage will generally extend to an assignee of Section 35
mortgages. This is because Section 35 mortgages will likely qualify as well as Section 32 mortgages. The
foregoing does not affect the rights of a consumer/borrower under any provision of TILA or Regulation Z (15
USC Section 1641(d)(1)).

Notwithstanding any other provision of law, relief provided because of any action made permissible by the
foregoing provisions may not exceed:

1. With respect to actions based upon a violation of TILA or Regulation Z, the amount specified in 15 USC
Section 1640 (civil liability); and,

2. With respect to all other causes of action, the sum of:

(A) The amount of all remaining indebtedness; and,

(B) The total amount paid by the consumer/borrower in connection with the transaction (15 USC
Section 1641(d)(2)).

The amount of damages that may be awarded under item (2) above will be reduced by the amount of any
damages awarded under item (1) above (15 USC Section 1641(d)(3).

Conclusion

The foregoing summary of TILA and Regulation Z incorporates the amendments to TILA and Regulation Z
and the revisions of FRB’s Official Staff Commentaries issued to June 2010. The practitioner should be
advised TILA and Regulation Z are undergoing continued amendments and revisions to be followed by revised
Official Staff Commentaries. Accordingly, prior to proceeding to rely on this Section on TILA, review of the
latest operative amendments and revisions is necessary.

Anyone needing additional information may contact the Federal Trade Commission (FTC), 11000 Wilshire
Blvd., Suite 13209, Los Angeles, California 90024. Telephone number: 1-877-FTC-HELP (1-877-382-4357).
Further, the Federal Reserve Board may be contacted at www.federalreserve.gov.

California Housing Finance Agency

The California Housing Finance Agency (CalHFA) is a self-supporting state government agency, established in
1975, that finances mortgage loans to low and moderate income first-time homebuyers. The Agency, which
until 2002 was known as CHFA, is not a direct lender, but offers its products through a network of approved,
private lenders. CalHFA loan products are typically priced at reduced, fixed interest rates and often add down
payment assistance. CalHFA also partners with other housing authorities to help borrowers secure additional
assistance for a lower monthly mortgage payment.