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Consumer Law: Truth in Lending: What you Must Be Told When Getting a Consumer Loan or Other Consumer Credit.

What is the Truth in Lending Act?
The Truth in Lending Act (TILA),was passed by Congress originally in 1968. It provides a uniform manner of calculating and presenting the terms of consumer loans to enable you to compare costs so you can make informed choices about credit. Prior to TILA there were no generally required definitions of loan terms so that consumers were unable compare interest rates and other loan costs. Scams and fraud were pervasive.

TILA can be found at 15 U.S.C. 1600 et. seq. It is implemented by the Federal Reserve Board's Regulation Z at 12 CFR, Part 226 and by the Federal Reserve Board's Official Staff Commentary to Regulations Z to (OSC).

The Act covers both "open ended" and "closed ended" credit transactions. Open ended credit includes credit cards and revolving charge accounts. Under this form of credit you are authorized to purchase items on credit up to a certain limit and you pay interest on the outstanding balance each month. For example, you may have an a department store account where you can charge up to $1,000. You receive a monthly bill with your balance and a minimum payment. Your payment includes interest for one month on the outstanding balance or average daily balance.

Closed ended credit transactions involve borrowing a sum certain (specific amount of money) and paying it back over a certain period of time. Some closed ended credit transactions involve borrowing money directly, such as taking out a bank loan to buy a car. Others involve purchasing goods from a retailer, and paying for them over time. For example, you might buy a car from a dealer for $10,000 plus interest and pay for it in 48 monthly installments over four years.

TILA gives greater protections when you pledge your home as security for a consumer loan. It even gives you the right to rescind (cancel) the loan within three business days. In certain transactions, you cancel up to three years later.

What are some of the more important terms which TILA requires to be disclosed?
There are five terms which are considered to be "material" disclosures required by TILA. While other disclosures are required, these are deemed to be so important that a failure to give any one of them gives rise to the your right to rescind the loan transaction if your home is pledged as security. Regulation Z 226.23. The terms are:

Finance Charge: the "finance charge" is defined as the cost of credit over the life of the loan, expressed as a dollar amount. This includes, not only interest, but any other charge which is required as a condition of receiving credit. Examples include: "points", document preparation fees and other fees which are excessive compared to their purpose (like excessive fees for notaries, appraisals, credit reports, title examinations, etc.). Regulation Z 226.4.

Annual Percentage Rate (APR): the APR is the cost of credit expressed as a percentage. For example, a loan with an interest rate of 17% may have an APR of 25% (all finance charges are rolled into the APR). Regulation Z 226.22.

Amount Financed: the "amount financed" is also expressed as a dollar amount . It is calculated by taking the principal amount of the loan and subtracting those amounts which are financed as part of the principal that are considered part of the finance charge. For example: you take out a $100,000 note and deed of trust on your home. The 5 points ($5,000) charged on this loan are financed and are therefore included in the $100,000 principal on the note. However, since the five points are defined as part of the finance charge, they are subtracted from the $100,000 in determining the amount financed ($100,000-$5,000 = $95,000). Regulation Z 226.18 (b).

Schedule of Payments: the "schedule of payments" tells you the day of the month, timing, number and dollar amount of payments due over the entire course of the loan. Example: 1 payment of $500 on 1-5-96 and 50 payments of $100 on the 5th of each month beginning 2-5-96. Regulation Z 226.18(g).

Total of Payments: the "total of payments" is also expressed as a dollar amount. It represents the total dollar cost of the loan to you, assuming all payments are made on time. The total of payments is calculated by adding up all payments disclosed in the schedule of payments. OSC 226.18 (h).

What disclosures must a bank or other lender make regarding my credit card?
TILA requires that you receive certain disclosures prior to signing up for your credit card. Because the credit is open ended you do not know in the "financed charge", total of payments, schedule of payments or the "amount financed". The lender must disclose the APR. The lender must also disclose whether you have a "free period" or "grace period" which allows you to avoid a finance charge by paying your current balance in full before the "due date" shown on your monthly statement. Knowing whether a credit card has a free period is especially important if you plan to pay your account in full each month.

The lender must also disclose whether there is an annual fee. Most credit card issuers charge annual membership or other participation fees. These fees range from $25 to $50 for most cards and from $75 on up for premium "gold" or "platinum" cards. You may also pay transaction fees and other charges. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you fail to make a payment on time, or when you go over your credit line. Some charge a flat monthly fee whether or not you use the card at all.

What protections do I have when using my credit card?
Federal law provides a number protections regarding credit card use. They include the following items.

Prompt credit for payment. Your account must be credited on the date your payment is received (unless you make a mistake regarding how to make payments or the delay does not result in a charge to you). 15 U.S.C. 1666c. Payments sent to the wrong location can cause delay in getting credit for your payment for up five days. If you lose your payment envelope look on the billing statement for the address where payment should be sent or call the card issuer.

Refunds of credit balances. When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund. 15 U.S.C. 1666d. To obtain a refund write to the card issuer, who must send you the refund within 7 business days after receiving your request.

Errors on your bill. The card issuer must follow specific rules in correcting billing errors. The issuer must give you a statement describing those rules when you open your credit card account and after that, at least wants a year. Most issuers print a summary of your rights on each bill they send you. Your rights include:

correction of mistakes - if you discover a mistake on your bill you must notify the card issuer in writing at the address specified for billing errors within 60 days after the first bill containing the mistake was mailed to you. The issuer, in turn, must look into the problem and either: (1) correct the error or (2) explain to you why the bill is correct. This must occur within two billing cycles and not later than 90 days after the issuer receives your billing error notice. During the period that the issuer is investigating the mistake, you do not have to pay the amount in question. 15 U.S.C. 1666 or if it to (a).
unauthorized charges - if your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, the card issuer cannot hold you responsible for any unauthorized charges. If the thief makes use of your card before you report it missing, the most that you owe for unauthorized charges is $50.00. 15 U.S.C. 1643. Report losses as soon as possible. Use the toll-free number on your statement and follow up with a letter.
returned merchandise - when a seller takes setups or allows a return of merchandise which you purchased with your credit card, the seller must promptly inform the credit card issuer that you are entitled to a credit the amount of the transaction. 15 U.S.C. 1666e.
disputes regarding merchandise or services - if you have a problem with merchandise or services charged your credit card, you must first make a good faith effort to work out the problem with the seller. If your good faith effort fails, you have the right to withhold payment from the credit card issuer. 15 U.S.C. 1666i(a). You can withhold up to the amount of credit outstanding for the purchase, plus finance or related charges.
CAUTION: If the card used was a bank card, a travel and entertainment card, or a card not issued by the seller of merchandise, you may withhold payment only if the purchase was over $50.00 and occurred in your home state or within 100 miles of your billing address. 15 U.S.C. 1666i(a). If the purchase occurred more than 100 miles from your billing address owe the credit card charges. To recover your money you must sue the seller.

If I pledge my home as security for a consumer loan, what dangers do I face?
If you own a home it is likely to be your greatest single asset. Unfortunately, if you agree to a loan that is based on the equity which you have in your house, you are putting your most valuable asset at risk. You should be careful because certain abusive or exploitive lenders target home owners (particularly the elderly, minorities, low income persons and those with poor credit ratings).

What are some common home equity scams?
According to the Federal Trade Commission (FTC), you should be aware of the following schemes:

Equity Stripping. A lender tales you that you can get a loan, even though you know your income is not enough to keep up the monthly payments. The lender encourages you to "pad" your income on your application form to help get the loan approved. The lender doesn't care if you can't make your monthly payments. As soon you miss a payment, the lender will foreclose - taking your home and stripping you of the equity you spent years building.

Balloon Payments. You are behind in your mortgage face foreclosure. Another lender offers to save you by financing your mortgage and lowering your monthly payments. Check the loan terms carefully because the payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end, the principal (i.e. the entire amount borrowed) is due in one lump sum, called a "balloon payment". If you can't make the balloon payment or refinance the debt, you face foreclosure again.

Loan Flipping. Suppose you had your mortgage for years but could use some extra money. A lender calls to talk about refinancing, and using the availability of extra cash as "bait", claims it is time that the equity in your home started "working" for you. You agree to refinance. If after a few payments, the lender calls to offer you a bigger loan for another purpose; say a vacation. If you accept, the lender refinances your original loan and then lends you additional money. In this practice, called "flipping", the lender charges you high points each time you refinance, and may increase your interest rate is well. If the loan has a prepayment penalty, you pay that each time you get a new loan. With each refinancing, you increase your debt and probably pay a high-price for some extra cash. After a while you are over your head and face losing your home.

The "Home Improvement" Loan. A contractor knocks in your door and offers installing new roof at a price that sounds reasonable. You say that you are interested but can't afford it. He says he can arrange financing through a lender he knows. You agree and he begins the work. At some point after he starts your are asked to sign alot of papers. The papers may be blank or the lender may rush you to sign before you have time to read what you've been given. The contractor threatens to leave the work on your house unfinished if you don't sign. You sign the papers and later realize that you have signed a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn't done right or hasn't been completed. The contractor has been paid by the lender and has little interest in doing the work to your satisfaction.

Credit Insurance Packing. Lenders use many tricks to get you to buy credit insurance that you do not need. At the closing, the lender gives you papers to sign that include charges for credit insurance or other "benefits" that you did not ask for and do not want. The lender hopes you don't notice and doesn't explain how much extra money the insurance costs. You may not ask questions or object because you are afraid that you might lose the loan if you do. The lender may say that insurance comes with the loan to fool you into believing that it comes at no extra cost. If you object, the lender may even tell you that if you want a loan without the insurance, the papers must be rewritten which could take extra time and cause the manager to reconsider whether to approve it. When you agree to buy the insurance, you're paying extra for the loan by purchasing a product you may not want or need.

Mortgage Servicing Abuses. After your mortgage is approved some lenders try to trick you into paying more than you owe. You may get a letter saying that your monthly payments will be higher than you expected. The lender says your payments include escrow taxes and insurance, even though you paid for them yourself with the lender's okay. In a later message, the lender says you are being charged late fees, even though your payments have been on time. You may receive a message saying that you failed to maintain required property insurance and the lender is buying more costly insurance at your expense. Unexplained legal fees are added to the amount you owe without an accurate or complete account of those charges. You ask for a payoff statement to refinance and receive one that is inaccurate or incomplete.

Signing Over Your Deed. If you face foreclosure you may feel desperate. Another "lender" may contact you with an offer to help you find new financing. Before he can help you, he asks that you deed your property over to him (claiming it is a temporary measure to prevent foreclosure). The refinancing that would save your home never comes through. Once the lender has the deed to your property, he starts to treat it as his own. He borrows against it or sells it for his benefit. He treats you as a tenant in your own home and your mortgage payment as rent. If your "rent" payments are late, you'll be evicted.

How can I protect myself against home equity scams?
To protect yourself against losing your home:

DON'T:

agree to a home equity loan if you can't afford the monthly payments,
sign any document that you haven't read or which has blank spaces,
let anyone pressure you into signing anything,
agree to a loan that includes credit insurance that you don't want,
let promises of extra to cash or lower payments cloud your judgment,
deed your property to anyone.

DO:

keep careful records
challenge any charges you think are inaccurate,
check the contractor's references and get more than one estimate,
ask if credit insurance is required as a condition of the loan,
shop around for credit insurance if it is required,
know your rescission rights (see below),
seek advice from knowledgeable family members or others you trust,
investigate the reputation of any prospective lender, and
seek legal advice.

When can I cancel a home equity loan?
When you use your home as collateral for a loan, TILA gives you the right to cancel the credit transaction within three business days. This right of rescission gives you three extra days to reconsider whether you want to use your home to guarantee payment for a personal loan. It applies even if your home is a condominium, mobile home, or house boat, as long it is as it is your principal residence. The right applies to certain installment loans as well as to home equity credit lines (a form of revolving credit in which your home serves as collateral).

You also of the right to rescind when you could lose your home by operation of law for failure to pay a consumer debt. For example, if you sign a home repair contract and agree to repay the debt in over four installments, the repairman could file a lien against your home if you do not pay. Under those circumstances you also have the right to rescind within three days.

The right to rescind does not apply to all situations where your home is used as collateral for a loan. You do not have the right to rescind when:

you apply for a loan to buy or build your home;
you consolidate or refinance a loan already secured by your home with the same creditor, without borrowing additional funds; or
a state agency is the creditor for the loan.

What does it mean to rescind a loan?
To rescind means you are canceling the deal, i.e., deciding that you do not want the loan or the service being financed. You can rescind within three days for any reason. You may find better credit terms or simply change your mind.

How can I rescind a credit transaction?
You have until midnight of the third business day after the transaction to rescind. Day One is the first day after all three of the following events occur:

You sign the credit contract.
Your receive a Truth in Lending disclosure form containing certain important (material) disclosures about the credit contract.. These disclosures explain the key terms of the credit being offered. They are:
the Annual Percentage Rate (APR),
the finance charge,
the amount financed,
the total of payments, and
the payment schedule.
You receive two copies of a notice explaining your right to rescind.
For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays. Regulation Z 226.2(a)(6). During the three-day period, your creditor should not take any action such as giving you the money from the loan or starting work on a home improvement contract.

If you decide to rescind, you must notify the creditor in writing that you are canceling the contract. You may use the form provided to you by the creditor, a letter, or telegram. Make sure that your written notice is delivered, mailed, or filed for telegraphic transmission before midnight of the third business day. Regulation Z 226.23(a). You cannot rescind by simply telephoning or visiting the creditor.

If you never received the disclosures or the notice of rescission from the creditor (nos. 2 & 3 above), you can cancel at any time during the first three years after you signed the credit contract or before you sell your home...whatever occurs first.In 1995, however, Congress relaxed the requirements on lenders to be completely accurate in disclosing the amount of the finance charge, creating five categories of "tolerances". How much of an error which can be tolerated depends upon whether the consumer is suing for damages, exercising the extended right to rescind (up to 3 years), or facing foreclosure. See 15 U.S.C. 1605(f).

What happens if I rescind a loan?
Within 20 days after a creditor receives your notice of rescission, all money or property you paid as part of the transaction must be returned to you. The creditor must also release any security interest in your home.

If you received money or property (such as building materials) from the creditor, keep them until the creditor proves that your home is no longer be held as collateral and has returned any money you have already pay. (For example, the creditor may show you a release of a lien which was filed at your city or county clerk's office to prove that your house is no longer held as collateral). You must then offer to return the creditor's property or money. If the creditor does not reclaim it within 20 days, you may keep the property or money.

Can I waive my right to rescind?
Yes. If you have a financial emergency, you may be unable to wait for three business days. For example, you may need to borrow money quickly to have a damaged roof or foundation repaired. You can waive your right to rescission if you have a "bona fide personal financial emergency". If so, you can have a loan processed to meet the emergency situation. You must give the creditor your own written statement (pre-printed forms do not count) describing the emergency and clearly stating that you are waiving your right to rescind. The waiver must be dated and signed by you, as well as anyone else who shares in the ownership of your home.

Consider this decision carefully. If you waive your right to rescind, you must go ahead with the deal.

Am I entitled to any extra protections if I receive a high cost home loan?
Yes. In 1994, Congress amended TILA to protect consumers who could fall prey to "high cost" lenders. These high-cost mortgages (referred to as Section 32 mortgages by the Federal Reserve Board) require additional disclosures in mortgage transactions consummated after 10-1-95. A failure to provide these disclosures gives a new basis to rescind a Section 32 mortgage loan. Regulation Z 226.23(a)(3) and 226.32 (c).

When must be additional disclosures in high-cost mortgages be given?
As noted above, traditional TILA disclosures must be given at the time the loan papers are signed. Borrowers then have an additional three business days to rescind if their homes are pledged as collateral. For high cost mortgage loans, the disclosures must be given three days earlier, i.e., three days prior to the signing of the loan documents.

What are the additional disclosures that must be made in high-cost mortgages?
Four additional disclosures are required. Regulation Z 226.32 (c). They are:

The following statement must be included:
"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 lender will have a mortgage on your home. You could lose your home, and any money you put into it, if you do not meet your obligations under the loan."
The APR
The dollar amount of the regular payment
For variable rate loans, the creditor must say that the interest rate and monthly payment may increase and disclose the maximum possible monthly payment.

Are there any loan terms in high cost mortgages which are forbidden by TILA?
Yes. If any of the following prohibited loan terms appear in a high cost mortgage loan, you have a right to rescind:

balloon payments, if the loan term is less than five years; 15 U.S.C.1639(e),
advance payments, that is a payment schedule that consolidates more than 2 periodic payments and pays them in advance from loan proceeds;15 U.S.C.1639(g),
negative amortization , which occurs when the borrower's payments are less than the interest accruing on the loan, thus causing the principal to grow over the course of the loan, instead of decreasing;15 U.S.C.1639(f),
an interest rate which decreases after default; 15 U.S.C.1639(d)
rebates which are calculated by method unfavorable to the consumer; 15 U.S.C.1639(d), and
Prepayment penalties with certain exceptions; 15 U.S.C.1639(c).

Are there any acts or practices which TILA forbids by high rate mortgage lenders?
Yes. Regulation Z 226.32 (e) forbids certain acts and practices in connection with high rate mortgages. It isn't clear, however, whether any remedies, other than damages, are available to consumer. The forbidden acts and practices are:

Engaging in a pattern or practice of extending credit to consumers based on the value of the consumer's equity ("equity skimming") where the consumer's income is insufficient to repay the loan.
Paying a home improvement contract directly from the loan proceeds (the lender is permitted to issue a check payable jointly to the consumer and contractor or the consumer alone or to a third party escrow agent).
Selling or assigning a high rate mortgage without furnishing the following statement to the purchaser/assignee:
"Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against creditor.
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How does TILA define a high cost mortgage?
High cost mortgages fall into two categories. Neither category has a clear definition. The first category is based on the APR and is "high cost" if the APR exceeds certain established rates by more than 10%. Regulation Z, 226.32(a)(1)(i). The second category is based upon the "points and fees " charged to the borrower and is "high cost" where "points and fees" exceed the greater of $400 or 8% of the "total loan amount". Regulation Z, 226.32(b)(1).

What can I do if my TILA rights are violated?
If your TILA rights are violated, you may enforce them in either state or federal court. You have the following possibilities:

Suits for damages: you may file a civil lawsuit either as an individual or a class-action for damages if the lender has failed to provide you with proper TILA disclosures. 15 U.S.C.1640. You may also file a TILA counterclaim if you are sued on the debt. In an individual action you may recover any actual damages that you have suffered plus :

an amount equal to twice the finance charge,
for consumer lease violations, 25% of the total of monthly payments under the lease ( but not less than $100 nor more than $1000),or
for individual actions related to credit transactions, not under an open end credit plan that is secured by real property or a dwelling, not less than $200 or more than $2,000.
for failure to comply with the disclosure requirements related to high interest mortgages, an amount equal to the sum of all finance charges and fees paid by the consumer (unless the lender demonstrates that they are to comply is not material).
For class-action lawsuits there is no minimum recovery for each member. The total recovery to the class is limited to not more then $500,000 or 1% of the net worth of the creditor.

Rescission rights. You may also sue or counterclaim to enforce your right to rescind a loan transaction secured by your home. 15 U.S.C. 1635 & 1640 (a)(3). You also have the right to enforce your rescission rights in the context of state court foreclosure proceedings. 15 U.S.C. 1635(I). The allowed tolerance for an inaccurately disclosed finance charge raised as a basis for rescission in foreclosure proceedings is only $35.00 [much higher tolerances are allowed to consumer files and affirmative action. 15 U.S.C. 1605 (f)].

Attorneys fees and court costs. If you are successful in a suit for either damages and/or enforcement of rescission rights the court should require that the lender pay your attorneys fees and court costs.

Suits by state Attorney Generals. A state Attorney General may also sue to enforce the requirements under 15 U.S.C. 1639 regarding high rate mortgages.

What can lenders due to keep from paying me damages once they have violated TILA?
Even if a lender fails to accurately make all disclosures required by TILA, a lender may avoid liability. First the lender is allowed to correct errors within sixty days after discovering them, unless you have already filed a lawsuit or notified the lender in writing of the error. 15 U.S.C. 1640 (b). Next the lender may avoid liability by showing that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid the error. Such mistakes as miscalculations, clerical errors, computer malfunctions, printing errors, etc. may be held to be bona fide good faith errors. 15 U.S.C. 1640(b).

If the lender has made multiple errors in the same transaction, you may recover damages for only one error. 15 U.S.C. 1640 (g). You must generally bring your lawsuit within one year of the occurrence of the TILA violation. 15 U.S.C.1640 (e).

Should I contact an attorney if I believe that my TILA rights have been a violated?

Yes. The Truth in Lending Act is highly technical. It is best to seek the assistance of an attorney. If you do not known an attorney or cannot afford one, you may contact:

Washoe Legal Services
299 South Arlington Avenue
Reno, Nevada 89501
(775) 329-2727
FAX: (775) 324-5509

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