Reg Z / TILA, Part 2: Closed-End and Mortgages

Now the heavyweight: closed-end credit under Reg Z, with the spotlight on mortgages. Closed-end credit is a fixed amount repaid over a set term, an auto loan, a personal loan, a home mortgage. The disclosures here differ from the open-end world.

For most closed-end consumer loans, the consumer receives Truth in Lending disclosures showing the A-P-R, finance charge, amount financed, and total of payments. But mortgages secured by a dwelling carry an extra layer of rules, and that layer generates a large share of exam questions. We'll walk through the big four: T-R-I-D disclosures, ability-to-repay and qualified mortgages, the right of rescission, and the high-cost and higher-priced mortgage triggers.

T-R-I-D, the TILA-RESPA Integrated Disclosure rule, merged the old Truth in Lending and RESPA mortgage forms into two. First, the Loan Estimate must be delivered or mailed within three business days of receiving a consumer's application for most closed-end mortgages. Second, the Closing Disclosure must be received by the consumer at least three business days before consummation, so they can compare it against the estimate.

T-R-I-D enforces tolerances: some fees can't increase at all from the estimate, others can increase only within ten percent, and others can change freely. The exam tests the two three-day rules and which fees fall into which tolerance bucket. Remember: three days to give the Loan Estimate, three days before closing for the Closing Disclosure.

A subtle trigger worth knowing: certain changes after the Closing Disclosure is issued, a change in the A-P-R beyond tolerance, a change in the loan product, or the addition of a prepayment penalty, require a new three-business-day waiting period before closing, while many lesser changes do not. So not every revision restarts the clock. Knowing which changes trigger a fresh waiting period is a classic application question, so file those three away.

After the financial crisis, Reg Z added the Ability-to-Repay rule. For most closed-end residential mortgages, a lender must make a reasonable, good-faith determination that the borrower can actually repay, verifying income, employment, assets, and debts. The Qualified Mortgage, the Q-M, is a category of loans that meet defined standards and give the lender a presumption of compliance, in effect, a legal safe harbor.

Q-M loans avoid risky features like negative amortization, interest-only periods, or balloon payments in most cases, and observe limits on points and fees and on the debt-to-income consideration. The exam may ask which loan features disqualify a Q-M, or what an A-T-R determination must consider. Tie it back to the consumer-protection purpose.

The right of rescission is a classic exam topic. For certain credit secured by the consumer's principal dwelling, mainly refinances with a new creditor and home-equity lines, the consumer has three business days to rescind, to cancel, the transaction. The clock starts on the latest of consummation, delivery of the rescission notice, or delivery of the material Truth in Lending disclosures.

Critically, the right of rescission does not apply to a purchase-money mortgage, the loan used to buy the home. And if the bank botches the notice or disclosures, the rescission window can stretch to three years. Watch for the purchase-versus-refinance distinction; it decides whether rescission applies at all.

Finally, two tiers of higher-risk mortgages. The Home Ownership and Equity Protection Act, HOEPA, designates high-cost mortgages when a loan exceeds thresholds tied to the A-P-R, the points and fees, or a prepayment-penalty test. High-cost loans trigger extra disclosures and ban certain terms, like most balloon payments and prepayment penalties.

Separately, higher-priced mortgage loans, H-P-M-Ls, are loans whose A-P-R exceeds an average-prime benchmark; they require an escrow account for a period and a separate appraisal with a copy to the borrower. The exam may give you rate and fee figures and ask whether a loan is high-cost or higher-priced. Don't memorize every shifting threshold, but know the categories and their consequences.

Keep the two tiers straight: HOEPA high-cost loans are the more extreme category, triggering the strongest protections and bans, while higher-priced mortgage loans are a broader middle tier whose main consequences are mandatory escrows for a period and a separate appraisal requirement. A loan can be neither, higher-priced, or high-cost, and the exam may walk you up that ladder. The unifying idea is that as a mortgage gets more expensive relative to the market, Reg Z piles on more borrower protections, because more expensive credit carries more risk of consumer harm.

Recap of mortgage Reg Z. T-R-I-D gives you the Loan Estimate within three business days of application and the Closing Disclosure at least three business days before closing. Ability-to-Repay requires verifying the borrower can pay, and the Qualified Mortgage offers a safe harbor.

The right of rescission applies to refinances and home-equity lines on the principal dwelling, three business days, but not to purchase loans. And know HOEPA high-cost versus higher-priced loans and their extra protections. This is dense, high-yield material, drill it.

Go test yourself, then on to the Home Mortgage Disclosure Act.