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Return to Revised Examination Procedures for the Truth in Lending Act (TILA) (249 KB PDF) Coverage Considerations under Regulation Z Closed-End Credit: Finance Charge Accuracy Tolerances Closed-End Credit: Accuracy and Reimbursement Tolerances for Closed-End Credit: Accuracy Tolerances for Closed-End Credit: Accuracy and Reimbursement Tolerances HIGH-COST MORTGAGE (§ 226.32) WORKSHEET HIGH-COST MORTGAGE (§ 226.32) WORKSHEET HIGH-COST MORTGAGE (§ 226.32) WORKSHEET Coverage Considerations under Regulation Z The first question is �Is the purpose of the credit for personal, family or household use?' If "No", then Regulation Z does not apply, except for the rules of issuance of and unauthorized use liability for credit cards. Exempt credit includes loans with a business or agricultural purpose, and certain student loans. Credit extended to acquire or improve rental property that is not owner-occupied is considered business purpose credit. However, if the answer to the first question is "Yes", then the a second question must be asked, 'Is the consumer credit extended to a consumer?' If "No", then Regulation Z does not apply. Credit that is extended to a land trust is deemed to be credit extended to a consumer. However, if the answer to the second question is "Yes", then a third question must be asked, 'Is the consumer credit extended by a creditor?' To answer �No�, the institution would not a �creditor� and Regulation Z would not apply if at least one of the following tests is met: 1) The institution extends consumer credit regularly and a) The obligation is initially payable to the institution and b) The obligation is either payable by written agreement in more than four installments or is subject to a finance charge, 2) The institution is a card issuer that extends closed-end credit that is subject to a finance charge or is payable by written agreement in more than four installments, or 3) The institution is not the card issuer, but it imposes a finance charge at the time of honoring a credit card. NOTE: All persons, including noncreditors, must comply with the advertising provisions of Regulation Z. However, if the answer to the third question, is �Yes,� then a fourth question must be asked, 'Is the loan or credit plan secured by real property or by the consumer's principal dwelling? If "Yes" then Regulation Z applies. However, if "No", then a final question must be asked 'Is the amount financed or credit limit $25,000 or less?' If "Yes" then Regulation Z applies. However, if "No", then Regulation Z does not apply, but may apply later if the loan is refinanced for $25,000 or less. In addition, if other changes occur, Regulation Z may apply. For example, if the principal dwelling is taken as collateral after consummation, rescission rights will apply and, in the case of open-end credit, billing disclosures and other provisions of R A finance charge is the dollar cost of consumer credit. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition of or incident to the extension of credit. The following four lists describe items that are or are not included in the finance charge. The first list is a list of items always included in the finance charge:
In addition, other examples of finance charges are: fee for preparing Truth In Lending Act disclosures; real estate construction loan inspection fees; fees for post-consummation tax or flood service policy; and required credit life insurance charges.
The second list is a list of items that are included in the finance charge unless specific conditions are met on any loan:
The third list is a list of items that are not included in a finance charge in the case of residential mortgage transactions and loans secured by real estate:
The fourth list is a list of items that are never included in a finance charge:
Closed-End Credit: Finance Charge Accuracy TolerancesThe first question is �Is this a closed-end credit TILA claim asserting rescission rights?' If "Yes", then the second question must be asked 'Is the rescission claim a defense to foreclosure action?' If "Yes", then finance charge tolerance is $35. An overstated finance charge is not considered a violation. However, if answer to the second question is "No", then a third question must be asked 'Is the transaction a refinancing?' If "No", then finance charge tolerance is one-half of 1% of the loan amount or $100, whichever is greater. An overstated finance charge is not considered a violation. However, if the answer to the third question is "Yes", then a fourth question must be asked 'Is the transaction a high-cost mortgage loan [See 15 USC 160 (aa) and 12 CFR 226.32]?' If �Yes', then finance charge tolerance is one-half of 1% of the loan amount or $100, whichever is greater. An overstated finance charge is not considered a violation. If the answer to the fourth question is �No', then a first question must be asked 'Does the refinancing involve a consolidation or new advance?' If "Yes", then again the finance charge tolerance is one-half of 1% of the loan amount or $100, whichever is greater. An overstated finance charge is not considered a violation. However, if answer to the fifth question is "No", then finance charge tolerance is 1% of the loan amount or $100, whichever is greater. An overstated finance charge is not considered a violation. Now, returning to the first question, 'Is this a closed-end credit TILA claim asserting rescission rights?' a second set of questions is asked if the answer is "No." The first question is "Is the transaction secured by real estate or dwelling?" If "No", then the finance charge shall be considered accurate if it is not more than $5 above or below the exact finance charge in a transaction involving an amount financed of $1,000 or less, or not more than $10 above or below the exact finance charge in a transaction involving an amount financed of more than $1,000. However, if the answer to the first question in the second sent is"Yes", then a second question must be asked 'Did the transaction originate before September 30, 1995?' If "Yes", then finance charge tolerance is $200 for understatements. An overstated finance charge is not considered a violation. However, if the answer to the second question is "No", then finance charge tolerance is $100 for understatements. An overstated finance charge is not considered a violation. * See 15 USC 160 (aa) and 12 CFR 226.32 Closed-End Credit: Accuracy and Reimbursement Tolerances forUNDERSTATED FINANCE CHARGES The first question is �Is the loan secured by real estate or a dwelling?' If "No", then a tier of questions must be asked to determine whether a finance charge violation has occurred. The next question to be asked 'Is the amount financed greater than $1,000?' If "No", then the question must be asked 'Is the disclosed finance charge understated by more than $5?' If "No", there is no violation. However, if "Yes", then there is an finance charge violation. Once a finance charge violation is found, the next step will be to answer questions, outlined below, to determine whether or not reimbursements are required. Returning to the first tier of questions, �Is the amount financed greated than $1,000', if the answer is �Yes� then the question must be asked 'Is the disclosed finance charge understated by more than $10?' If "No", there is no violation. However, if "Yes", then there is a finance charge violation. Once a finance charge violation is found, the next step will be to answer questions, outlined below, to determine whether or not reimbursements are required. Returning to the very first question 'Is the loan secured by real estate or a dwelling?, if "Yes", then the question must be asked 'Is the disclosed finance charge understated by more than $100 (or $200 if the loan originated before September 30, 1995)?' If "No", there is no violation. However, if "Yes", then there is an finance charge violation and the next step is to answer questions, outlined below, to determine whether or not reimbursements are required. To determine whether or not reimbursements, the first question is 'Is the loan term greater than 10 years?' If "No" or if the loan term is greater than 10 years but the loan is not a regular loan, then the question must be asked 'Is the disclosed finance charge plus the finance charge reimbursement tolerance (based on a one-quarter of 1 percentage point APR tolerance) less than the correct finance charge? If "Yes", then it is subject to reimbursement. If "No", it is not subject to reimbursement. Now, returning to the question to determine whether or not reimbursements have occurred 'Is the loan term greater than 10 years?' if the answer is �Yes' and the loan is a regular loan, the question must be asked 'Is the disclosed finance charge plus the finance charge reimbursement tolerance (based on a one-eighth of 1 percentage point APR tolerance) less than the correct finance charge?' If "Yes", then it is subject to reimbursement. If"No", it is not subject to reimbursement. Closed-End Credit: Accuracy Tolerances for OVERSTATED FINANCE CHARGES The first question is �Is the loan secured by real estate or a dwelling?' If "Yes", there is no violation. However, if "No", then the second question must be asked 'Is the amount financed greater than $1,000?' If "No", then the question must be asked 'Is the disclosed finance charge less $5 greater than the correct finance charge? If "No", there is no violation. However, if "Yes", then there is a finance charge violation. Returning to the second question, �Is the amount financed is greater than $1,000?', if the answer is �Yes', then the question must be asked 'Is the disclosed finance charge less $10 greater than the correct finance charge?' If "No", there is no violation. However, if "Yes", then there is a finance charge violation. Closed-End Credit: Accuracy and Reimbursement Tolerances For UNDERSTATED APRs The first question is �Is this a �regular� loan [see 12 CFR 226, footnote 46]?' If "No", then the question must be asked 'Is the disclosed APR greater than the correct APR by more than one-quarter of one percentage point?' If "No", then there is no violation. However, if "Yes", the next question, discussed below, will ask about the security of the loan. First, returning to the first question �Is this a �regular� loan [see 12 CFR 226, footnote 46]? If the answer is "Yes", then the question must be asked 'Is the disclosed APR greater than the correct APR by more than one-eighth of one percentage point?' If "No", then there is no violation. However, if "Yes", the next question, discussed below, will ask about the security of the loan. The question on the security of the loan is 'Is the loan secured by real estate or a dwelling?' If "No", then there is an APR violation. However, if "Yes", then the question must be asked 'Is the finance charge disclosed greater than the correct finance charge?' If "No", then there is an APR violation. However, if "Yes", then the question must be asked 'Was the finance charge disclosure error the cause of the APR disclosure error? If "No", then there is an APR violation. However, if "Yes", then there is no violation HIGH-COST MORTGAGE (§ 226.32) WORKSHEET
COVERAGE
TEST 1 - CALCULATION OF APR
TEST 1 - CALCULATION OF APR (continued)
HIGH-COST MORTGAGE (§ 226.32) WORKSHEET
B. Certain Non-Finance Charges Under § 226.4(c)(7) � Include fees paid by consumers only if the amount of the fee is unreasonable or if the creditor receives direct or indirect compensation from the charge or the charge is paid to an affiliate of the bank. (See the example in § 226.32(b)(1)(ii) of the commentary for further explanation.)
HIGH-COST MORTGAGE (§ 226.32) WORKSHEET
TEST 2 � CALCULATION OF POINTS AND FEES (continued)
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