TILA Flashcards by John Prietto

Record Retention Timeframes

General Records Retained for 2 years
Residential Loans Related records retained for 3 years
Closing Documents Retained for 5 years even if the loan is sold.
Lender Compensation: Records retained for 3 years.

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The primary goals of TILA are to

Protect consumers by disclosing the costs and terms of credit
Create uniform standards for stating the cost of credit thereby encouraging consumers to compare the costs of loans offered by different creditors
Ensure that advertising for credit is truthful and not misleading
Provide borrowers with the right to rescind certain types of mortgage transactions

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TILA does not apply to the following types of credit transactions:

Transactions for business, agricultural, or organizational credit` (A,B,C)

▪ Credit in excess of a threshold amount that is adjusted annually (this threshold does not

apply to transactions that are secured by real property or a dwelling)

▪ Public utility credit

▪ Credit extended by a broker registered with the Securities and Exchange Commission or

the Commodity Futures Trading Commission

▪ Home fuel budget plans

▪ Student loans made, insured, or guaranteed by the federal government,or

▪ Employment-sponsored retirement plans

(12 C.F.R. §1026.3)

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6 pieces of information for application

The consumer’s name:

2) Social Security Number which is used to obtain a credit report

3) Income

4) The address of the property to secure the loan

5) An estimate of the value of the property securing the loan

6) The loan amount sought

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General Business Day means

General Business Day means:

Any Day on which the creditor’s offices are Open to the Public for carrying out substantially all business functions.

→This is the definition that applies to deadlines for providing the Loan Estimate

 These are for Providing Disclosures

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Specific Business day means?

All calendar days except Sundays and Legal Public Holidays.

→These are used in regards to “**`Waiting Period Timeframes

“how long before you can close`”

“how long before you can fund a loan”

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One of the primary goals of TILA is the establishment of

uniform standards for stating the cost of credit. Use of the same standard is intended to help consumers to compare the costs of loans offered by competing creditors.

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The two uniform standards created by TILA are

1) The Finance Charge ($ Amount):

Regulation Z defines finance charge as the cost of credit as a dollar amount (12 C.F.R. §1026.4(a)). The calculation of a loan’s finance charge is a process that involves determining which of the many fees associated with a loan’s origination and closing are included in the charge.

2) The Annual Percentage Rate (APR) (% Amount):

Regulation Z defines the APR as a measure of the cost of credit, expressed as a yearly rate` (12 C.F.R. §1026.22(a)).

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The two uniform standards created by TILA are

1) The Finance Charge ($ Amount):

2) The Annual Percentage Rate (APR) (% Amount):

Regulation Z defines the APR as a measure of the cost of credit, expressed as a yearly rate` (12 C.F.R. §1026.22(a)).

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The “Finance Charge” does include:

(Fees that you only pay because your borrowing money)

fees paid to third parties if the creditor requires the use of a particular third party (condition of the loan)
retains a portion of the third-party charge (Lender Fee)

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Closing agent charges:

fees charged by the closing agent are included in the finance charge if the creditor requires these services requires a charge for these services, or retains a portion of the charge

If the creditor retains a portion of the charges, the finance charge  should reflect only the portion of the fee that the creditor keeps (12 C.F.R. §1026.4(a)(2)).

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Mortgage broker fees:

→a mortgage broker’s fees are always included in the finance charge even if the lender does not require the use of the broker’s services and does not retain a portion of the charge` (12 C.F.R. §1026.4(a)(3)).

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Charges Always Included

Loan origination fees
Mortgage broker fees
Transaction fees
Discount for inducing payment without using credit
Borrower-paid points
Credit guarantee insurance premiums
Construction loan inspection fees
Fees imposed, regardless of when collected, for services performed periodically during the loan term in connection with a real estate or residential mortgage transaction such as tax lien searches or flood insurance policy determinations

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Charges Never Included

Charges for an unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence are not finance charges
Seller’s points
Taxes, license fees, or registration fees paid by both cash and credit customers are generally not finance charges.However, a tax imposed by a state or other governmental body solely on acreditor (not the consumer) that the creditor separately imposes on the consumer is a finance charge.Also, to the extent a charge imposed by a creditor exceeds the same charge in a comparable cash transaction, the difference is a finance charge.
When a borrower is required to purchase an item or service in a credit transaction, but that item or service is not required in a comparable cash transaction, the charge would be a finance charge, even if the item or service may be voluntarily purchased by a consumer paying cash. For example, if a lender required the purchase of a maintenance or service contract in a credit transaction, the charge would be a finance charge even though cash customers in that scenario have theoptionof purchasing such a contract.

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Determining Finance Charges

Basic Rules

Inclusions

Fees that you only pay because you’re borrowing money.

Third-party fees required by the creditor.

Lender-retained portions of third-party charges.

Mortgage broker fees, regardless of lender requirements.

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TILA is called ? Eat. when ?

Truth in Lending Act Est 1968

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Purpose of Tila was to inform the ______ the ____ of ____? and to protect consumers from unfair treatment from _____?

Inform consumers on the use of credit.

disclosure requirements as a means of protecting consumers from unfair treatment by creditors.

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Primary goals of TILA are to ?

1) Disclose the cost and terms of credit
2) Standards for stating the cost of credit
3) Make sure that the advertising for credit is truthful and not misleading
4) Provide borrowers the right to remind from certain transactions

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TILA is known as Reg ____?

Reg Z

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Loans Covered by TILA?

Place where:
1. Credit is offered and make regularly
2. Credit where there is a finance charge and plan to pay back in more than 4 installments
3. Credit is for personal , family or household

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TILA does not apply to ?

A,B,C loans
Credit that is in excess amount
Public Utility credit
Credit extended by a broker that is registered with Securities and Exchange Commission or the Commodity Futures Trading Commission
Student Loans
Employee sponsored Retirement

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Application has 6 requirements

1) The consumer’s name

2) Social Security Number which is used to obtain a credit report

3) Income

4) The address of the property to secure the loan

5) An estimate of the value of the property securing the loan

6) The loan amount sought

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APR is defined as ?

APR as a measure of the cost of credit, expressed as a yearly rate

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Finance charge is ?

finance charge as the cost of credit as a dollar amount

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TILA states that Finance Charge includes Fees that you only pay because your borrowing money, for example...

1. Interest Charges 2. Loan Origination Fees 3. Discount Points 4. Mortgage Insurance Premiums 5. Credit Insurance Premiums 6. Application Fees 7. Underwriting Fees 8. Prepayment Penalties 9. Servicing Fees 10. Closing Costs

Regulation Z also creates two additional rules related to the calculation of finance charges referring to each as a “Special Rule.”

▪ **Closing agent charges:** fees charged by the closing agent are included in the finance charge** if the creditor requires these services**, **requires a charge** for these services, or **retains a portion of the charge**. If the creditor retains a portion of the charges, the finance charge should reflect only the portion of the fee that the creditor keeps*(12 C.F.R. §1026.4(a)(2)). ▪ Mortgage broker fees mortgage broker’s fees are always included in the finance charge even if the lender does not require the use of the broker’s services and does not retain a portion of the charge`

Accuracy Tolerances for Finance Charges are ? for closed and open ended loans?

Closed= The charge is not understated by more than $100. "or" The amount stated is greater than the amount required to be disclosed Open= no error

Inaccurate disclosures of the finance charge or APR give consumers the right to rescind a loan up to ___ years after consummation.

3 years

APR is defined as?

“annual percentage rate” as a measure of the cost of credit, expressed as a yearly rate

when calculating the APR these are usually not included ?

Title fees Escrow fees Notary fees Appraisal and credit report fees and Document preparation fees

APR is accurate if it is : not more than ____of one percentage point above or below the APR

1/8 (.125)

If the loan is an Irregular loan,(Adjustable Mortgage) or one that allows for multiple advances or irregular payment periods or amounts, the APR is regarded as accurate if it: is not more than ____ of one percentage point above or below the APR when the APR is calculated using the actuarial method

1/4 of one percentage point above or below the APR when the APR is calculated using the actuarial method

TILA requires many disclosures for ARMS , These disclosures provide consumers with:

Summaries of loan costs and lending terms ▪ Warnings related to the inherent risks of adjustable interest rates ▪ Advance notice of rate changes that will impact the amount of future loan payments

Examples of disclosures required by RESPA are?

1. Loan Estimate and Closing disclosure 2. CHARM Booklet 3. loan program disclosures for each variable rate

The loan program disclosures must contain the following information:

A statement that the interest rate, payment, or loan term can change ▪ Identification of the index or formula used to make adjustments ▪ An explanation of how the interest rate and payment will be determined ------------------- A recommendation that the borrower ask about the current margin value and current interest rate ▪ A notation that the interest rate will be discounted and a recommendation that the loan applicant ask about the amount of the discount ▪ The frequency of interest rate and payment changes ▪ The rules relating to index, interest rate, and payment amount, such as the use of rate and payment caps ▪ A statement, when applicable, of the fact that negative amortization can occur ▪ An explanation of how to calculate payments for the loan amount ▪ A reminder that the loan contains a demand feature ▪ A statement of the type of information that will be provided in notices of interest rate adjustments and an indication of when these notices will arrive ▪ An indication that disclosure forms are available for other variable-rate loan programs

What is the Current Margin Value and how is it calculated?

What is the Index Rate ?

The index rate, in the context of Adjustable-Rate Mortgages (ARMs), is a benchmark interest rate that reflects general market conditions. It serves as a base rate to which a margin is added to determine the fully indexed interest rate for the mortgage.

Several common indexes are used to set ARM rates: such as ?

LIBOR (London Interbank Offered Rate): Historically popular, though being phased out. SOFR (Secured Overnight Financing Rate): Replacing LIBOR. CMT (Constant Maturity Treasury): Rates based on U.S. Treasury securities. COFI (Cost of Funds Index): Based on the interest expenses of savings institutions. Prime Rate: The rate at which banks lend to their most creditworthy customers.

How is the Index Rate calculated ?

How is the Index Rate Calculated? The calculation of the index rate depends on the specific index used: LIBOR: Based on the average interest rate at which major global banks borrow from one another. Rates are calculated for different periods (e.g., one month, three months). SOFR: Calculated based on transactions in the Treasury repurchase market, reflecting the cost of borrowing cash overnight collateralized by Treasury securities. CMT: Derived from the yields of U.S. Treasury securities with various maturities (e.g., 1-year, 5-year). COFI: Represents the weighted average interest rate paid by financial institutions on deposits and other borrowing. Prime Rate: Generally derived from the federal funds rate, which is set by the Federal Reserve.

Fully Indexed Rate=Index Rate+Margin ? T/F

True Suppose an ARM uses the 1-year CMT as its index, currently at 2.5%, and the loan's margin is 2.75%. The fully indexed rate would be: 2.5% (CMT)+2.75%(Margin)=5.25%

The margin is set by the ____ at the time of loan origination and does not change over the life of the loan

Lender

Interest rate discount and why knowing it is important ?

Interest Rate Discount and Discount Amount Interest Rate Discount: - Sometimes lenders offer a discounted initial interest rate on an ARM, which is lower than the fully indexed rate. - This discount is temporary and is typically in place for a short period at the beginning of the loan term, such as the first year. - Example: If the fully indexed rate (index rate + margin) is 5.5%, the lender might offer a discounted initial rate of 4% for the first year. Recommendation to Ask About the Discount Amount: - TILA suggests that borrowers ask about the amount of the interest rate discount to understand how much lower their initial rate is compared to the fully indexed rate. - It is important for borrowers to know how long the discount lasts and what the rate will be after the discount period ends. - **Example:** If the fully indexed rate is 5.5% and the discount rate is 4%, the borrower should ask how long the 4% rate applies and what their rate will adjust to after the first year.

How Lenders determine Margin Rate ?

How Lenders Determine the Margin Rate: Lenders consider several factors when determining the margin rate for ARMs: 1. Credit Risk: - Borrower’s Credit Score: Higher credit scores often result in lower margins as they indicate lower credit risk. - Loan-to-Value Ratio (LTV): A lower LTV (more equity in the home) might result in a lower margin. - Debt-to-Income Ratio (DTI): A lower DTI can lead to a lower margin as it shows the borrower has less debt relative to income. 2. Market Conditions: - Interest Rate Environment: In a low-interest-rate environment, margins might be lower as the lender’s cost of funds is lower. - Economic Indicators: General economic conditions and forecasts can influence the margin rate. 3. Profit Margins: - Lender’s Desired Profit: Lenders set the margin to ensure they make a profit over the life of the loan. - Operational Costs: Lenders factor in the costs of servicing the loan, such as administration, customer service, and risk management. 4. Loan Product Features: - Type of ARM: Different types of ARMs (e.g., 3/1 ARM, 5/1 ARM) might have different margins. - Initial Fixed-Rate Period: Loans with longer initial fixed-rate periods might have higher margins. 5. Competition: - Market Competition:Competitive pressure can influence lenders to adjust their margins to attract borrowers. 1. Assume the Following: - Indexed Rate (e.g., 1-Year LIBOR): 2.5% - Margin: 2.25% 2. Calculate the Fully Indexed Rate: - Fully Indexed Rate = Indexed Rate + Margin - Fully Indexed Rate = 2.5% + 2.25% = 4.75%

Post-Consummation (post Closing) disclosures :

Apply to ARMs that are: ▪ Closed-end loans, and ▪ Secured by the borrower’s principal residence

Post Consummation Disclosures: Rate-change disclosure, due at least ___ days but no more than 120 days before a change in the interest rate results in a new payment amount

Disclosures for home equity plans, as well as the informational brochure “What You Should Know about Home Equity Lines of Credit,” are due at the time an application is provided to a consumer?

True

If a consumer applies via telephone or through an intermediary agent or broker, the disclosures must be delivered within ___ business days

3 business days

Rescission

a legal remedy that voids a contract between 2 parties, restoring each to the position held prior to the transaction

Finance charge for a closed-end transaction: - Understated by no more than ______ of 1% of the face amount of the note or $100, whichever is greater, or - Greater than the amount required to be disclosed

1/2 of 1% of face amount of the note or $100

Finance charge for a refinance transaction: - Understated by no more than __ % of the face amount of the note or $100, whichever is greater, or - Greater than the amount required to be disclosed

1 % of face amount of note or $100

- Consumer may exercise the right to rescind after foreclosure proceedings have commenced if: - Loan originated through a mortgage broker and creditor failed to include the ______________ __________________ fee in the finance charge. This has a ___ year deadline ?

Mortgage Broker, 3 years

Must make required disclosures with equal prominence and in close proximity to promotional/ advertised rate? T/F

True

Period of Time for Discount or Premium Rate: Advertisements must specify the duration for which the discounted or premium rate will be valid. This ensures transparency regarding the temporary nature of the special rate. T/F?

So, providing the "current APR if it's fully indexed" in an advertisement means disclosing the APR that would be in effect once any introductory or promotional rate period ends and the loan adjusts to its fully indexed rate. This helps borrowers understand the long-term cost implications of the loan beyond any initial special rates. T/F?

Fully Indexed Rate: The advertisement must also provide the fully indexed rate, which is the ____ that would apply after the discounted or premium period ends and the loan transitions to its fully indexed state. This fully indexed rate should be presented in close proximity to the discounted rate, allowing consumers to easily compare the special rate with the rate that will apply later on.

APR

If home equity loans exceed the value of the home used to secure the loan, the interest on the portion of the credit extension that is greater than the market value of the property is ___________, and ▪ The consumer should consult a tax adviser regarding the amounts that may be deductible

not deductible

discounted or premium rate as an initial ______ not based on index and margin for adjustable-rate home equity plans. Specifying the period of time the discount or premium rate will be effective. Providing a reasonably current APR for the loan, if fully indexed, with equal prominence to the discount rate. Displaying the fully indexed rate in close proximity to the discount rate

APR

Period of Time for Discount or Premium Rate: Advertisements must specify the ______________ for which the discounted or premium rate will be valid. This ensures transparency regarding the temporary nature of the special rate.

Duration

Reasonably Current APR for the Loan: Alongside the discounted or premium rate, the advertisement must include a reasonably _________ APR for the loan if it's fully indexed.

Current

advertising a minimum periodic payment necessitates including a statement about the potential for a balloon payment. T?F??

True

The "minimum periodic payment requirement" refers to the lowest mount of money that a borrower must pay at regular intervals, such as monthly or quarterly, to satisfy the terms of a loan agreement. This requirement typically applies to loans with variable interest rates, such as adjustable-rate mortgages (ARMS) or home equity lines of credit (HELOC)

True

If you use any of these terms " - Finance charge - Other charges, such as late payment charges, - title, - appraisal, - and credit report fees - Taxes imposed on the credit transaction, and - Payment terms of the home equity plan" you must provide " - Any loan fee that is a percentage of the credit limit - An estimate, stated as a dollar amount, of any fee to open the plan - Any periodic rate used to compute the finance charge, and - The maximum annual percentage rate that may be imposed under a variable-rate plan"

true

- When these trigger terms are used, advertisements must” clearly and conspicuously include additional information. This information includes: - any loan fee that is a percentage of the credit limit (see examples Below) - an estimate of the fee to open the plan, -any periodic rate used to compute the finance charge, - and the maximum annual percentage rate that may be imposed under a variable-rate plan.

true

discounted or premium rate as an initial APR not based on _____ and ______ for adjustable-rate home equity plans.

Index and Margin

advertising such rates (discounted or premium) triggers additional disclosure requirements, including:

1) Specifying the period of time the discount or premium rate will be effective/valid 2) Providing a reasonably current APR for the loan, if fully indexed, with equal prominence to the discount rate. **means disclosing the APR that would be in effect once any introductory or promotional rate period ends and the loan adjusts to its fully indexed rate** 3)Displaying the fully indexed rate in close proximity to the discount rate

Loan Estimate requirements for at least ___ years after consummation

3 years

Retain copies of the Closing Disclosure for at least _____ years after consummation

5 hears

The Escrow Closing Notice and Post-Consummation Partial Payment Policy for at least ____Years

2 years

Loan originator compensation must be retained for at least ____ years after each receipt of payment

3 years

Records related to compliance with ability to repay requirements must be kept for at least ___ years after consummation

3 years

Penalties for criminal liability may include a fine of up to $________ imprisonment for up to one year, or both a fine and imprisonment. may lead to: ▪ Actual damages, which are the losses that a consumer can show that he/she actually suffered as a result of the violation(s) ▪ Twice the amount of any finance charge ▪ Monetary penalties, and ▪ The costs of bringing the action and attorney’s fees

$5,000

for closed-end loans secured by a dwelling, the penalty for violating the law is no less than $_____, and no more than $___________

$400, $4000

In class actions, the amount of recovery possible is limited to $1,000,000 or _____% of the creditor’s net worth, whichever is less.

Adjustable Rate Mortgage (ARM): In an ARM, the interest rate can change over time based on market conditions. For example, a lender might offer a 5/1 ARM with an initial interest rate of 3.0%. This means that the interest rate is fixed for the first ____ years of the loan, and then adjusts annually based on an index, such as the LIBOR or the Treasury rate, **plus a margin.

5 years

margin is: a fixed percentage that the ______ adds to the index rate to determine the borrower's interest rate

Lender

A Hybrid ARM (Adjustable Rate Mortgage) is a type of mortgage that starts with a fixed interest rate for a certain period of time and then switches to an __________ rate for the remainder of the loan term. Hybrid ARMs are a popular choice for borrowers who want to take advantage of lower initial interest rates but also want some protection against future rate increases.

Adjustable

Types of hybrid ARM loans available, each with different initial fixed rate periods: 1. 3/1 ARM: This loan has an initial fixed rate period of 3 years, after which the interest rate adjusts every year for the remainder of the loan term. 2. 5/1 ARM: This loan has an initial fixed rate period of 5 years, after which the interest rate adjusts every year for the remainder of the loan term. 3. 7/1 ARM: This loan has an initial fixed rate period of 7 years, after which the interest rate adjusts every year for the remainder of the loan term. 4. 10/1 ARM: This loan has an initial fixed rate period of 10 years, after which the interest rate adjusts every year for the remainder of the loan term.

true

The adjustment caps, which limit how much the interest rate can change each adjustment period, vary depending on the loan program and lender. For example, a common cap structure for a 5/1 ARM is 2/2/5, which means the interest rate can adjust by no more than ___% at each adjustment period, and no more than ____% over the life of the loan.

2%, 5%

There are several types of ARM loans available, including: 1. Hybrid ARMs: These loans have a fixed interest rate for a set period of time, usually 3, 5, 7, or 10 years, and then the rate adjusts annually thereafter. 2. Interest-only ARMs: With these loans, you only pay the interest portion of the mortgage payment for a set period of time, usually 5-10 years. After that, the loan amortizes and the payment increases to include principal as well. 3. Payment-option ARMs: These loans give you the option to choose a payment amount each month, including a minimum payment that may not cover the interest owed. This can lead to negative amortization, where the loan balance grows over time. 4. Cash-flow ARMs: These loans are designed for borrowers with irregular income, such as those who work on commission or are self-employed. The payment adjusts based on the borrower's cash flow, with higher payments during periods of high income and lower payments during periods of low income.

true

Advertising Rules for Open-End Credit: - Trigger terms such as finance charge or payment terms require additional _______________. - Advertisements of discounted or premium rates must include information about the rate period and fully _______________ rate. - Minimum periodic payment advertisements must include statements about potential ___________ payments. - Advertisements regarding tax-deductible interest must not include misleading statements and must advise consulting a ____________.

Disclosures Indexed Balloon Tax Advisor

Clear and Conspicuous Standards: - Disclosures in non-printed advertisements (e.g., online or TV) must ____ be obscured by graphical displays or presented in unreadable fine print. - Radio advertisements must be at a speed and volume that consumers can _________.

not Follow

Advertising Rules for Open-End Credit: 1) Trigger terms include finance charge, other charges, taxes, payment terms. 2) Use of trigger terms requires additional disclosures: - Loan fee percentage of credit limit. - Estimate of opening fee. - Periodic rate for finance charge computation. - Maximum annual percentage rate for variable- rate plans.

true

What is the primary goal of the Truth in Lending Act (TILA)? a. To regulate interest rates on mortgage loans b. To promote the informed use of credit by consumers c. To provide consumers with free credit reports d. To oversee real estate transactions

b. To promote the informed use of credit by consumers

Which regulatory agency is primarily responsible for implementing and enforcing TILA? a. Federal Trade Commission (FTC) b. Department of Housing and Urban Development (HUD) c. Consumer Financial Protection Bureau (CFPB) d. Federal Reserve

c. Consumer Financial Protection Bureau (CFPB)

TILA applies to all credit transactions that meet which of the following conditions? a. Credit is offered to businesses b. Credit includes a finance charge or is payable in more than four installments c. Credit is primarily for commercial purposes d. Credit is secured by real property only

B, but why? The key factors are whether the credit is offered to consumers, includes a finance charge, or is payable in more than four installments.

Which of the following is an example of a closed-end credit transaction under TILA? a. Home equity line of credit b. Credit card account c. Mortgage loan for purchasing a home d. Overdraft protection

Which type of credit is NOT covered by TILA? a. Business credit b. Credit secured by a dwelling c. Consumer credit including a finance charge d. Credit with a written agreement payable in more than four installments

How long is the rescission period for a borrower to cancel certain mortgage transactions under TILA? a. 1 business day b. 3 business days c. 7 business days d. 10 business days

What is the main purpose of the APR disclosure required by TILA? a. To show the interest rate on the loan b. To list all the fees associated with the loan c. To provide a measure of the cost of credit expressed as a yearly rate d. To disclose the borrower’s monthly payments

Under TILA, how long must a creditor retain evidence of compliance with Loan Estimate requirements? a. 1 year b. 2 years c. 3 years d. 5 years

3 years

Explain the purpose of the "Right to Rescind" under TILA and the timeframe within which it can be exercised - The Right to Rescind allows borrowers to cancel certain mortgage transactions, such as refinances or home equity loans, within 3 business days after closing, providing a cooling-off period to reconsider the loan agreement. This right can be exercised if the borrower did not receive proper disclosures or notice of the right to rescind.

true

What are the two main components that must be disclosed under TILA to help consumers compare the costs of credit? - The two main components are the finance charge, which represents the cost of credit as a dollar amount, and the annual percentage rate (APR), which is a measure of the cost of credit expressed as a yearly rate.

true

Describe the requirements for advertising discounted or premium rates under TILA. - Advertisements must specify the period during which the discounted or premium rate will be in effect, - provide a reasonably current APR if fully indexed, and -display the fully indexed rate in close proximity to the discounted rate to ensure transparency and allow consumers to understand the long-term cost implications.

True

Record Retention Timeframes - General Records: Retained for two years - Residential Loans: Related records retained for three years. - Closing Documents: Retained for five years, even if the loan is sold. - Lender Compensation: Records retained for three years.

true

TILA Flashcards

(94 cards)