Truth-in-Lending and Regulation Z
The Truth-in-Lending Simplification and Reform Act (TILA), a revision of the old truth-in-lending law, is another federal disclosure act affecting the purchase and financing of residences. The primary purpose of TILA is disclosure of credit information by means of standardized terms, such as “annual percentage rate” and “finance charge,” with disclosures presented to the consumer before closing. The Federal Reserve Board is empowered to issue regulations to carry out the purposes of TILA, and the result is Regulation Z. Various federal agencies are charged with enforcement of TILA, depending upon the nature of the financial institution. The discussion in this book is a cursory examination of those portions of TILA and Regulation Z that affect a closing lawyer. It should also be noted that TILA and Regulation Z, as used here, refer to the Reform Act and the revised Regulation Z. Finally, the discussion in this and the following sections relates to “closed-end” credit transactions, which make up the majority of real estate loan closings. As with RESPA, TILA enforcement was transferred to the Consumer Financial Protection Bureau on July 21, 2011. This gave one federal agency document design and enforcement control over the mortgage loan and closing process. The plan was to design coordinated TILA, GFE, and HUD documents and procedures starting in 2012.
Generally, if a purchase and sale transaction is subject to RESPA, then TILA and Regulation Z also apply. Also, even if the transaction is only a loan and no purchase is involved, then TILA and Regulation Z will apply. Generally, all financial institutions are subject to the act, and also covered in some cases are lenders who are not generally regarded as financial institutions. In transactions involving no purchase, the borrower is given the right of rescission. The lender has the primary responsibility for compliance with the act, but the closing lawyer performs many of the requirements for the lender.1
Responsibilities of Examiner and Closing Lawyer
The examiner has no responsibilities related to TILA and Regulation Z unless there is a foreclosure. However, an examiner cannot tell from the deed records whether past closing lawyers and lenders, or the current lawyer and lender, did or will comply with the act. Thus an examiner may want to make an exception in his or her title report for all matters related to TILA and Regulation Z.
The closing lawyer, however, is generally responsible for the final disclosures made at closing. How much he or she has to do depends on the lender. Some lenders complete a disclosure form in its entirety and the closing lawyer is responsible for seeing that the borrower signs the form and that copies are disbursed. Some lenders complete a form partially and the lawyer must complete the remainder, have it signed, and disburse copies. Some lenders have the lawyer complete the entire form and supply instructions for how the form is to be completed.
Form of Disclosure, Receipt of Disclosure, and Timing of Disclosure
The Federal Reserve Board has published model forms and clauses for common transactions. These forms are sufficient for compliance with TILA, although certain deletions and variations are permitted. It is the lender’s primary responsibility to comply with the act. If the lender supplies a closing lawyer with a form, the lawyer should use that form. If not, the lawyer should use an appropriate form without deletions or variations except on instructions from the lender.
If there is only one borrower, the disclosure must be given to that borrower. If two or more borrowers are jointly liable, the disclosure should be given to one of them, although many lenders and lawyers give one to each. Again, a lawyer should follow any specific instructions from the lender.
A lawyer is not responsible for any disclosures required to be made before closing. The lender is responsible for such advance disclosures. However, the lawyer is responsible for the disclosures to be made at the closing ceremony.2
The following disclosures must be made under TILA and Regulation Z:
- Name of lender3
- Amount financed4
- Itemization of amount financed5
- Finance charge6
- Annual percentage rate7
- Variable rate (only for variable-rate loans)8
- Payment schedule9
- Total of payment10
- Demand feature11
- Late payment13
- Security interest14
- Certain security interest charge16
- Contract reference17
- Assumption policy18
- Required deposits19
Right of Rescission
Basically, the right of rescission is the right of a borrower to cancel a loan transaction. It applies only when a security interest is taken in the principal dwelling of the borrower, who must be an individual. The right generally applies when no purchase is involved but the loan is a refinance, second loan, or additional advance on an existing loan. The right is furnished to each borrower, so when there are co-borrowers, the right is furnished to each one. The rescission period ends at midnight of the third business day after the date of disclosure and consummation before disbursing funds. Sundays and federal holidays are not counted, but Saturdays may be. Thus, for a loan closing on Monday, the closing lawyer must wait until Friday before disbursing funds. For a loan closed on Friday, funds can be disbursed either the next Wednesday or Thursday, depending on whether the lender considers Saturday a business day.
The borrower must actually make two trips for the loan closing, once to sign all the documents and again four days later to sign an affidavit of nonrescission. This affidavit of nonrescission is required for the funds to be disbursed.
The right of rescission may be waived by the borrower’s written request because of a bona fide personal financial emergency. The request may not be preprinted, and the lawyer, if involved, should insist that the request be in the borrower’s own handwriting, that it specifically waive the right of rescission, and that it include a brief description of the emergency. The lawyer cannot accept any waiver that has not been accepted by the lender.
Internal Revenue Code
Section 6045 of the Internal Revenue Code requires that a closing lawyer report all sales of property on Form 1099-S.20 The transactions that must be reported to the Internal Revenue Service are all those sales or exchanges of one- to four-family real estate by individuals (not corporations). However, there is a significant exemption for the sale of a principal residence when the gain on the sale or exchange of the entire residence is $250,000 or less for an individual or $500,000 or less for a married couple. The seller must have owned and used the property as his principal residence for at least two years of the five-year period prior to closing, and not sold or exchanged another principal residence during the two-year period prior to closing.
Receipt of more than $10,000 in cash from one person requires the filing of Form 8300 with the Internal Revenue Service.
Environmental laws have been developing rapidly in the United States since the early 1970s. They now constitute an imposing body of law that creates significant compliance burdens and liability for all owners of real property. The Comprehensive Environmental Response, Compensation, and Liability Act of 198021 (CERCLA), commonly known as Superfund, imposes on an owner of real property substantial civil liability for the cleanup or damage caused by the contamination of property by hazardous waste, as defined in CERCLA. No attempt will be made in this book to cover all the aspects of liability under CERCLA, but practitioners who deal in the area of real property should become familiar with this law.
Under the statute, liability is placed on
- the present owner or operator of the hazardous-waste operation;
- those persons who owned the property at the time the hazardous material was disposed;
- persons related by contract to those who transported or disposed of the material;
- persons actually transporting the material; and
- past owners who had actual knowledge of the existence of the material and failed to make disclosure before sale.
Virtually every transaction involving commercial property, and some residential property, will prompt the question of hazardous waste. Typically, in response to CERCLA, purchasers have been requiring from sellers—and lenders from borrowers—certain environmental affidavits and indemnities. In addition, purchasers and lenders are obtaining environmental audits by professional environmental consulting firms. They are also closely scrutinizing the chain of title to properties to see whether any of the owners may have been involved in the production, use, or storage of hazardous substances.
1. See generally id.
2. Id. §§ 2-15, 2-40, 2-42 (discussing disclosure issues; book also includes hypothetical examples of completed forms for a variety of transactions).
3. Id. § 2-15(e)(1).
4. Id. §§ 2-15(e)(2), 2-31, 2-33, 2-39 (general information, interim interest, wraparound loans, and graduated-payment loans, respectively).
5. Id. §§ 2-15(e)(3), 2-33 (general information and wrap-around loans, respectively).
6. Id. §§ 2-15(e)(4) & 246 (general information), 2-17 (prepaid finance charges), 2-26 (mortgage guaranty insurance premiums), 2-27 (mortgage insurance premiums), 2-29 (arrearage), 2-15(e)(6) & 2-30 (variable-rate features), 2-31 (interim interest), 2-36 (Fannie Mae review fee and tax service fee), 2-44 (finder’s fees, appraisal fees, and credit report fees), 2-45 (discount points), 2-46 (buy-downs).
7. Id. §§ 2-15(e)(5) & 2-18 (general information), 2-31 (interim interest), 2-32 (balloon payments), 2-15(e)(6) (variable rates), 2-46 (buy-downs).
8. Id. §§ 2-15(e)(6) & 2-18 (general information), 2-38 (variable-rate hypothetical), 2-46 (buy-downs).
9. Id. §§ 2-15(e)(7), 2-26, 2-28, 2-39 (general information, mortgage guaranty insurance premiums, balloon payments, and graduated-payment loans, respectively).
10. Id. §§ 2-15(e)(8), 2-28, 2-29, 2-31 (general information, balloon payments, arrearage, and interim interest, respectively).
11. Id. § 2-15(e)(9).
12. Id. § 2-15(e)(11).
13. Id. §§ 2-15(e)(12), 2-42, 2-43 (general information, right of acceleration, and attorneys’ fees and foreclosure costs, respectively).
14. Id. § 2-15(e)(13).
15. Id. § 2-15(e)(14).
16. Id. § 2-15(e)(15).
17. Id. § 2-15(e)(16).
18. Id. § 2-15(e)(17).
19. Id. § 2-15(e)(18).
20. I.R.C. § 6045 (1994).
21. 42 U.S.C. §§ 9601 et seq. (1994).
Reprinted with permission from Kathleen J. Hopkins and Evan L. Loeffler, Real Estate Closing Deskbook (3d Ed. 2012), at 77-81. © 2012 American Bar Association. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.