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A body of federal law effective July 1969 as part of the Consumer Credit Protection Act, and implemented by the Federal Reserve Board’s Regulation Z and amended in 1982 and later by the Truth-in-Lending Simplification and Reform Act. The main purpose of TIL is to ensure that borrowers and customers in need of consumer credit are given meaningful information with respect to the cost of credit so they can more readily compare the various credit terms available to them. TIL law creates a disclosure device only, and does not establish any set maximum or minimum interest rates or require any charges for credit. In addition, some states have adopted their own truth-in-lending laws.

All real estate credit is covered by Regulation Z when it is extended to a natural person (the customer) and does not apply to business, commercial, or agricultural transactions. Personal property credit transactions over $25,000 are exempt from Regulation Z, as is the extension of credit to the owner of a dwelling containing more than four family housing units or a construction loan to a builder (this is considered a business purpose). However, if the extension of credit is secured by real property or by personal property used or expected to be used as the principal dwelling of the consumer (manufactured home), then the transaction is covered by Regulation Z. The credit offered must either involve a finance charge or, by written agreement, be payable in more than four installments.

The finance charge and the annual percentage rate (APR) are the two most important disclosures required. They provide a quick reference for consumers, informing them how much they are paying for credit and its relative cost in percentage terms. Note that a cushion or tolerance is given of $5 if the transaction is less than $1,000 and $10 if it is more than $1,000.

Finance charge:
The finance charge is the total of all costs the customer must pay, directly or indirectly, for obtaining credit, and includes such costs as interest, loan fee, loan-finder’s fee, time-price differential, discount points, service fee, and premium for credit life insurance if it is a condition for granting credit. Real estate purchase costs that would be paid regardless of whether credit is extended are not included in the finance charge, provided these fees are bona fide, reasonable in amount, and not excluded for the purpose of evading the law.

Annual percentage rate (APR):
Under Regulation Z, the APR is not interest although interest is figured in along with the other finance charges in computing the annual percentage rate. The APR is the relationship of the total finance charge to the total amount to be financed computed to the nearest one-eighth of 1 percent.

Disclosure statement:
The disclosure statement for real estate transactions must contain the following information: total dollar amount of the “finance charge,” the annual percentage rate, the number, amounts, and timing of payments, the total of payments, the amount charged for any late payments, the fact that the creditor may acquire a security interest in the property, prepayment privileges or penalties, and more. If the required disclosures were not made or a notice of rescission was not given to a borrower, the borrower’s right to rescind continues for a period of three years after the date of consummation of the transaction or upon sale of the property, whichever occurs first.

Right to rescind:
The borrower has a limited right to rescind or cancel a credit transaction. This rescission is intended to protect the homeowner from losing his or her home to unscrupulous sellers of home improvements, appliances, or furniture, who secure the credit advance by taking a second mortgage on the purchaser’s home. In most situations, the borrower has the right to cancel the transaction (in writing) by midnight of the third business day (including Saturdays) following the date of consummation of the transaction, delivery of the notice of right to rescind, or delivery of all material disclosures, whichever is later. The right to rescind does not apply to the initial loan to purchase or construct the consumer’s principal dwelling.

Creditors:
This law requires compliance by all creditors who regularly extend credit. A person “regularly extends” credit only if that person extended credit more than 25 times (or more than five times for transactions secured by a dwelling) in the preceding calendar year. Owner/occupants of a single-family home ordinarily do not have to comply with the disclosure requirements of Regulation Z even when selling under a contract for deed payable in more than four installments. A broker who is an operative builder, a subdivider, a broker selling property on his or her own account (except for the sale of his or her own permanent dwelling), or a broker taking a second mortgage as a commission may be deemed to be a creditor and thus must comply with the law.

Advertising:
Regardless of who the advertiser may be, Regulation Z also affects all advertising to aid or promote any extension of consumer credit, including window displays, fliers, billboards, multiple-listing cards if shown to the public, and direct mail literature.

Certain credit terms, when mentioned in an ad, trigger the required disclosure of other items. The purpose of this requirement is to give the prospective purchaser a complete and accurate picture of the transaction being offered.
Any advertisement that mentions an interest rate but omits the APR or omits the words annual percentage rate is in violation. Any advertisement that includes any trigger term without all of the required disclosures is in violation.
General terms such as “small down payment OK,” “FHA financing available,” or “compare our reasonable rates” do not trigger required disclosures. When advertising an assumption of mortgage, the ad can state the rate of finance charge without any other disclosure. The finance charge, however, must be stated as an annual percentage rate, using that term and stating whether increase is possible. For example, “assume 7 percent mortgage” is improper, whereas “assume 7 percent annual percentage rate mortgage” is permissible. The interest rate can be stated in advertisements in conjunction with, but not more conspicuously than, the annual percentage rate. Also, “annual percentage rate” is usually spelled out but it is permissible to abbreviate it to APR. Bait advertising is prohibited; thus, an advertisement offering new homes at “$1,000 down” is improper if the seller normally does not accept this amount as a down payment, even if all the other required credit terms are disclosed in the ad.

Creditors should keep records of all compliance with the disclosure requirements of the federal Truth-in-Lending Act for at least two years after the date disclosures are required to be made or action is required to be taken. Truth-in-lending requires advance disclosure of any variable rate clause in a credit contract that may result in an increase in the cost of credit to the customer.
Where joint ownership is involved, the right to receive disclosures, and notice of the right of rescission, the right to rescind, and the need to sign a waiver of such right applies to each consumer whose ownership interest is subject to the security interest.

Penalties:
The penalty for violation of Regulation Z is twice the amount of the finance charge or a minimum of $100, up to a maximum of $1,000, plus court costs, attorney fees, and any actual damages. Willful violation is a misdemeanor punishable by a fine up to $5,000 or one year’s imprisonment, or both. The Federal Trade Commission is in charge of enforcing Regulation Z.
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.