THE TRUTH-IN-LENDING ACT
The purpose of the Truth-In-Lending Act (TILA) is to ensure that credit terms are disclosed in a meaningful way so borrowers can compare credit terms both more readily and knowledgeably. Before its enactment, borrowers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format.
Now, all creditors must use the same credit terminology and expressions of rates so that consumers can shop for their loans. The problem was akin to one that grocery shoppers often faced in the past: which is the better buy? 11.5 oz of coffee @ $5.39 or 1 lb. at $7.50? Nowadays, grocery stores are required to display the cost per oz. so that consumers can make an informed decision. (Incidentally, the answer to the above question is the former (46.869 cents per oz. vs. 46.875 cents per oz.).
Similarly, the lender must disclose to the borrower the annual percentage rate (APR). The APR reflects the cost of credit to the consumer. In addition to the interest rate it contains other items such as origination fees and discount points.
The APR Is Not the Same as the Interest Rate
Despite its avowed purpose, the TIL is, nevertheless, a document that borrowers routinely have questions about. Federal regulations require that lenders provide this disclosure to the borrower with in 3 business days of receiving a loan application. Once borrowers receive it, a loan officer typically receives a phone call that goes something like this: "You told me that my rate was 5% and this TIL thing here says it's 5.22%. What gives?"
The problem is that borrowers typically confuse the actual note rate (interest rate) with the APR. THE APR IS NOT A BORROWER'S INTEREST RATE. INSTEAD, IT IS A MEASURE OF THE TOTAL COST OF A LOAN TRANSACTION EXPRESSED AS A YEARLY INTEREST RATE.
APR = Interest Rate + Lender Fees
When a mortgagor applies for a loan, it is for a specified amount, say "X" dollars, at a particular interest rate of say "Y%" for a term of "Z" years. The lender computes the monthly principal & interest (P & I) based on the loan, rate and term. But the government says this is not enough information for a borrower to make an informed decision. So, if the lender makes a loan in the amount of, say, $100,000 at 5% for 30 years, the lender must remind borrowers that they are also paying certain fees to the lender to obtain the loan which is reducing the actual amount financed and raising the cost of obtaining the loan above the actual note rate. Again, using the $100,000 example, if this is the loan amount, but the lender charges fees in the amount of $2,500 at closing, then the actual amount financed is $97,500. Thus, the loan amount less the fees equals the amount financed and the true cost of obtaining the loan would be displayed in the percentage rate on an annualized basis or APR.
An example with actual lender fees may better illustrate the concept. Let's say a borrower wishes to obtain a loan, once more, in the amount of a $100,000 at an interest rate of 5%. Naturally, as every borrower has experienced, there are costs associated with obtaining a home loan. Principally among them are underwriting fees, a loan processing fee, a doc prep fee, perhaps a loan origination fee, and possibly PMI, as well. Now, allow me to assign some real world numbers for these different fees: underwriting, $750; loan processing, $500; doc prep fee $250; an origination fee of 1% or $1000; and to simplify matters let's say there is no need for PMI because the Loan to Value (LTV) is 80%. After plugging in the numbers one finds that the payment would be $536.82 per month to borrow a $100,000 at a 5% fixed rate for 30 years. With an origination fee of 1% or $1000 plus $1500 = ($750 + 500 + 250) in loan costs, this would give us the same $2500 in lender fees in the previous paragraph and yield an APR of 5.22%, not the 5% that borrowers often mistakenly believe. (You*ll have to take my word on this because one needs a mortgage calculator to do the math). It only stands to reason, though, that if there are additional costs involved, that the true cost of borrowing is going to be higher than the actual note (interest) rate.
Although it has obvious value, looking solely at the APR is a flawed way to comparison shop for a mortgage and can cause borrowers to make costly wrong decisions because of certain implicit assumptions. To see why and for a more in depth explanation of APR see the Feb. '08 issue of my newsletter on my website at www.mortgagestraightTalk.com
Newly Enacted TILA Revision
I had scheduled a piece about the TIL disclosure for the December newsletter but because of the Mortgage Disclosure Information Act (MDIA), a newly enacted revision to the TIL this past month, (it went into effect on July 30, 2009) I decided to move up its publication date. The purpose of the amendment is to provide consumers with loan disclosures BEFORE they pay any fees for an application, order an appraisal, inspections, etc. The reason that the authorities felt the need to enact new regulations was because many mortgage brokers and lenders often collected fees covering appraisal, credit and various other charges at the time of application*sometimes amounting to hundreds of dollars and thereby tethering them to the lender
Unfortunately, as with so many governmental regulations, the unintended consequence of full disclosure is further obfuscation and almost always more paperwork and delays. The net effect of these changes is that, in some cases, the various waiting and delivery requirements may extend or delay closing. Among the changes are receipt of loan disclosures, ordering appraisals, collecting fees and various required waiting periods.
Lender Disclosures and Delivery Requirements
As previously mentioned, BEFORE an appraisal can be ordered and fees collected the borrower must receive loan disclosures from the lender. There are three means of transmission for loan disclosures: 1) in person delivery, 2) postal mail, 3) electronic (either fax or email). If the disclosures are mailed (postal), it is presumed that the borrower is in receipt of them 3 days after the date they are sent at which time fees can be collected for additional services. If the lender delivers disclosures to the borrower in person, an appraisal can be ordered and fees for these services can be collected at that time.
In the event that they are delivered electronically (via fax or email) the lender may consider the borrower to have received the TIL upon evidence of actual delivery in the form of an email response from the borrower confirming receipt. Despite requests to the contrary, most lenders, at present, are postal mailing lending disclosures, thereby adding three days to the close of escrows. These disclosures affect all mortgage loans secured by any primary, secondary, or non-owner occupied dwelling. As a consequence, the changes may delay the appraisal, affect the lock expiration or other necessary services which may impact the closing date of a purchase or refinance.
Changes in Fees
If there are any changes to the loan (such as changes in loan parameters, changes in loan fees, or interest rate) that change the APR at loan docs by more than .125% from the previously disclosed APR, a new TIL must be re-disclosed and delivered to the borrower which would entail another 3-day waiting period must elapse before the signing/closing date.
What might cause the APR to increase following the initial disclosure? Lots of things. If the interest rate is not locked, but allowed to float, and the rate were to increase would be one example. Or, perhaps, the lender got inaccurate estimates of costs from third-party participants in the transaction, such as the escrow company. Or say that unexpected, 11th-hour junk fees materialize. All these events, which have been frequent sources of consumer complaints, could force the lender to re-disclose loan costs and set back timing for the close of escrow.
Multiple waiting periods
The rules require that new mandatory waiting periods must elapse before loan documents can be signed or a loan closed. A loan cannot close until 7 days after the lender mails the initial disclosures to a borrower regardless of how the TIL was delivered. The 7 day waiting period occurs only once. Saturday is included in the 7 day waiting period. Should a re-disclosure be necessary the signing would need to be postponed 3-6 days: If a lender mails the disclosures, receipt would be presumed after 3 days via postal delivery at which time the 3 day waiting period would begin, resulting in a total of 6 business days). If the disclosures were faxed, emailed or delivered in person and the borrower signs, dates, and faxes or emails them back to the lender the same day, the total time would be limited to the 3 day wait/review period. There may be multiple 3-day waiting periods. Preliminary HUD-1s (estimated settlement costs) are due three business days before closing. Also, the new Fed rules require lenders to deliver a copy of the real estate appraisal to the borrower 3 days before the scheduled closing on the loan. Now the timing of the loan closing itself is dependent upon the borrower's receipt of the appraisal in advance. The exception here is that the 3 day rule can be waived if the borrower doesn't think receiving the appraisal is necessary.
As has been shown, per the revisions to the TILA, there are a variety of changes that may critically affect a transaction's closing date.
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