Why Haven’t Loan Officers Been Told These Facts?

On land purchases and private financing (investor), is the lender required to follow Regulation Z? Because the lender is a private investor, can the lender process and disclose the loan without regard to the TILA?

The Loan Officer School received this question from a student grappling with Regulation Z questions. The student’s concern underscores a fundamental misunderstanding of the TILA. It is a common mistake to assume that a lender is exempt from Regulation Z because it only makes hard money or land loans and is, therefore, not a covered lender.

When comprehending compliance requirements, it is helpful to step back and focus on the law’s purpose. Consequently, could a class of consumers need greater TILA protection than consumers taking out a High-Cost/Hard Money loan on their primary residence?

The Truth In Lending Act, Subchapter I—Consumer Credit Cost Disclosure, 15 USC§1601
Congressional findings and declaration of purpose
(a) Informed use of credit

“The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit”

Two primary factors determine coverage of the TILA and the implementing Regulation Z:

  • Is the financing for consumer use
  • Is the lender a Creditor or otherwise covered

The business structure of the lender is immaterial to the law’s coverage unless such structure falls within the Regulation Z express coverage exemptions (e.g., seller financier, non-profit, or government organization).

There are no provisions within Regulation Z for “private financing,” whatever that may mean. If the Tooth Fairy makes a covered loan under Regulation Z, then the Tooth Fairy is subject to Regulation Z.

A better question may be, how do the TILA and Regulation Z provisions apply, and to which transaction types?

Covered Persons ( Those entities that must comply with the law)

§ 1026.1(c) In general, Regulation Z applies to each individual or business that offers or extends credit when four conditions are met:

(i) The credit is offered or extended to consumers

(ii) The offering or extension of credit is done regularly

(iii) The credit is subject to a finance charge or is payable by a written agreement in more than four installments

(iv) The credit is primarily for personal, family, or household purposes

Business or Consumer Purpose Loan?

Regulation Z does not apply to anything but consumer-purpose financing or loans made by a person other than a creditor as defined within Regulation Z. Regulation Z provides certain exceptions for some seller-financiers.

§ 1026.2(a)(17) Creditor means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.

Generally, the transaction is not covered if the loan is for business purposes. Business purpose includes non-owner occupied/investor transactions and owner-occupied purchases of properties comprising three or more residential units § 1026.3(a) (Comment 3(a)-5).

§ 1026.2(a)(24) Regulation Z applies to residential mortgage transactions. Residential mortgage transaction means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling.

Dwelling Defined

§ 1026.2(a)(19) Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.

12 CFR 1026.2(a)(19)-1 Official Commentary. A dwelling need not be the consumer’s principal residence to fit the definition, and thus a vacation or second home could be a dwelling. However, for purposes of the definition of residential mortgage transaction and the right to rescind, a dwelling must be the principal residence of the consumer.

The following transactions are generally exempt from Regulation Z:

(1) An extension of credit primarily for a business, commercial or agricultural purpose

(2) An extension of credit to other than a natural person, including credit to government agencies or instrumentalities

If the transaction is not exempt, what provisions of Regulation Z apply?

A sampling of key Regulation Z sections:

12 CFR § 1026.23(a)(1) The Right to Cancel

In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section (purchase transactions). For purposes of this section, the addition to an existing obligation of a security interest in a consumer’s principal dwelling is a transaction. The right of rescission applies only to the addition of the security interest and not the existing obligation.

12 CFR § 1026.36 Prohibited acts or practices and certain requirements for credit secured by a dwelling. a.k.a. The Loan Originator Rule

Notable provisions of 1026.36 include the definition of loan originator, limited exemptions for seller financiers, loan servicing requirements, loan originator compensation, prohibitions on inappropriate steering, loan originator qualifications, use of the NMLS ID, prohibitions against mandatory arbitration clauses, and prohibitions on financing credit insurance.

1026.36 applies somewhat differently to primary dwellings than to vacation homes, but generally applies to closed-end consumer credit transactions secured by a dwelling, including transactions secured by first or subordinate liens and reverse mortgages that are not home equity lines of credit.

§ 1026.43 “Minimum standards for transactions secured by a dwelling.”

Notable provisions of 1026.43 include the ATR, QM, use of third-party records, refinancing exceptions to ATR, and limits on prepayment penalties.

These transactions are exempt from § 1026.43 minimum standards:

  • A home equity line of credit
  • A reverse mortgage subject to § 1026.33
  • A temporary or “bridge” loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling
  • A construction phase of 12 months or less of a construction-to-permanent loan
  • Vacant Land

Lastly, what about the TRID Rule?

Notably, the TRID Rule does not apply to:

  • HELOCs
  • Reverse mortgages

However, the TRID rule does apply to consumer-purpose transactions such as:

  • Construction-only loans
  • Loans secured by vacant land or by 25 or more acres

As previously stated, it pays to step back from the regulation’s granular requirements to better comprehend it as a cohesive shield against consumer misuse of credit. The TILA and Regulation Z provide the highest protections for the consumer’s principal residence, and rightfully so.

Because of the lender’s security interest, if the consumer fails to comprehend or abide by the mortgage agreements, their family, with all their household belongings, can end up on the street.

Therefore the answer to the student’s question is more complex. Some elements of Regulation Z apply to land loans, and some do not. Regarding “Private Lenders” or “Major Lenders,” the TILA focus is not so much on which lender is covered and which is not. Instead, the focus falls on mitigating identified risks, chiefly consumers’ ill-informed and unwise credit use.

Glad we could clear that up for you!

***The LOSJ does not provide legal advice. Nor should anything in the LOSJ be construed as a legal opinion on specific facts or circumstances. The contents are intended for general informational purposes only. Readers are encouraged to consult with legal counsel concerning legal matters and specific legal questions.


BEHIND THE SCENES – The Naughty List
CFPB Proposes Registering Mortgage Offenders

The Consumer Financial Protection Bureau (CFPB) proposed requiring certain nonbank financial firms to register with the CFPB when they become subject to certain local, state, or federal consumer financial protection agency or court orders. The CFPB has further proposed to publish the orders and company information via an online registry. Larger companies subject to the CFPB’s supervisory authority would be required to designate an individual to attest whether the firm is adhering to registered law enforcement orders. The CFPB’s proposed rule would help the agency identify and mitigate risks to American households and ensure that supervised companies perform their obligations to consumers.

“Protecting American households is a shared effort across local, state, and federal authorities,” said CFPB Director Rohit Chopra. “The proposed registry will help the CFPB, the law enforcement community, and the public limit the harms from repeat offenders.”

Congress, in creating the CFPB, tasked it with monitoring for risks to consumers in the offering or provision of consumer financial products and services and supervising the activities of certain nonbanks. Because the issuance of agency and court orders serves as one of the most important tools to pursue lawbreakers in these markets, it is important that the CFPB maintain a central repository of nonbanks subject to agency and court orders. The repository will allow the CFPB to track and mitigate the risks posed by repeat offenders, while also being able to monitor all lawbreakers subject to agency and court orders. The CFPB will share this powerful source of information with others, including with fellow regulators and law enforcement agencies, by making the registry public.

The registry will help unify the efforts of consumer financial protection enforcers’ efforts and provide the increased transparency and coordination critical to ensuring accountability and fairness in the marketplace. The CFPB’s proposal will enhance market monitoring and risk-based supervision efforts to ensure that the CFPB and its enforcement partners can identify previous lawbreakers and are positioned to take action to stop further large-scale harm or continued illegal efforts across the country.

    • Covered nonbanks would report certain agency and court orders connected to consumer financial products and services: Generally, nonbanks would have to report final agency and court orders and judgments, including consent and stipulated orders, brought under federal consumer financial protection laws or state laws regarding unfair, deceptive, or abusive acts or practices.

    • Larger supervised nonbanks would designate a senior executive to attest regarding the firm’s compliance with covered orders: Larger nonbanks that are supervised by the CFPB would be required to designate a senior executive to submit an annual supervisory written statement attesting to the steps taken to oversee the activities subject to the order and whether the executive knows of any violations of, or other instances of noncompliance with, the covered order.

In addition to publishing information about the agency or court order, the CFPB is considering publication of certain registration information about the company via release on the CFPB’s publicly available website.

While the CFPB might later consider collecting or publishing the information described in the proposal from insured banks and credit unions, there is currently greater need to collect this information from nonbanks under its jurisdiction. Among other things, the identity and size of all insured banks and credit unions are known to the CFPB. Also, there are only four federal prudential regulators for insured banks and credit unions, and they regularly publish their consumer financial protection orders. In contrast, comprehensive, readily accessible information is lacking about the identity of orders issued against nonbanks subject either to the CFPB’s market monitoring authority or to its supervisory authority across the various markets for consumer financial products and services.


Tip of the Week – Reduce Compliance Confusion
Know the Relationship Between Statutes and Regulations

MLOs sometimes confuse the connection or relationship between statutes and regulations. So, this week, the Journal provides a quick overview of the nexus between statutes and regulations to help our readers better comprehend compliance.

Article I of the Constitution establishes our Congress. Yes, it sucks, but it beats the hell out of the alternative. Imagine waking up to someone like King George or Idi Amin telling us what to do.

“All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.”

This legislative branch of our government consists of the House of Representatives and the Senate, forming the United States Congress. Article I gives Congress the sole authority to enact legislation or laws. The laws or statutes enacted through the legislative process are subject to Constitutional tests. The Judiciary determines if Congressional acts or Presidential orders are constitutional. Therefore, the Judiciary is supposed to be a separate and independent branch of government.

You may ask, why does Congress create so many laws?

Legislation originates in many ways. Foremost is the Congress member’s self-interest in keeping their job while lining their pockets. Additionally, coercion, lust, drunkenness, blackmail, avarice, and sexual enticements are known, legislative drivers.

Often to get elected, members make empty promises to constituents. Then seeking to appear to fulfill the campaign pledge, they sponsor legislation never intended to advance. In addition, special interest groups often champion members to legislate, amend or repeals law they don’t like. Much like war or a game of chess, members use surprise, feigns, the concentration of force, cooperation, and sustainability to advance their cause.

Once the President signs a bill into law, the law may require some form of management or administration. Consequently, administrative actions taken by regulators subject to federal administrative law and Congressional oversight create regulations or rules.

Picture the statutes like a road map with the destination circled in bright red marker. Congress determines the destination but may leave the path, the means of transportation, and the departure time to the Administrator/Regulator.

The Regulator also promulgates the law. Let’s face it, comprehending legislative acts is no simple task in some cases. Regulators may provide necessary specificity and clarity to the statutory requirements through regulation. By the promulgation (making known) of the statute, covered persons can comprehend the contours of compliance. What to do or not to do and when to do it.

Congress also depends on the agency’s administrative and technical expertise to fulfill the statute’s purposes. Regulators, in some cases, act with standing authority from Congress to get the job done.

An excellent example of an administrative implementation is the TRID rules. The CFPB manages the TILA through Regulation Z. The section from the TILA below helps illustrate the relationship between the TILA statute and Regulation Z.

First, Congress directs the Regulator to develop and deploy better financial disclosure for mortgage consumers. Second, the CFPB created rules that instruct lenders on disclosing financial terms to consumers using the new format. Instructions for creating and delivering the “Loan Estimate” are found primarily in sections of (Regulation Z) 12 CFR 1026.37 and 12 CFR 1029.19(e).

After the passage of the Dodd-Frank legislation, it took the CFPB and other stakeholders over five years (07.21.10 to 10.03.15) to develop the new disclosures and implement the timeframe for mandatory use.

Here is the section of the TILA as amended by Dodd-Frank prescribing the development of new financial disclosures (TILA) USC §1604. “Disclosure guidelines (a) The Bureau shall prescribe regulations to carry out the purposes of this subchapter. (b) Model disclosure forms and clauses; publication, criteria, compliance, etc. The Bureau shall publish a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) which includes the disclosure requirements of this subchapter (TILA financial disclosure) in conjunction with the disclosure requirements of the Real Estate Settlement Procedures Act of 1974 [12 U.S.C. 2601 et seq.] that, taken together, may apply to a transaction that is subject to both or either provision of law. The purpose of such model disclosure shall be to facilitate compliance with the disclosure requirements of this subchapter and the Real Estate Settlement Procedures Act of 1974 and to aid the borrower or lessee in understanding the transaction by utilizing readily understandable language to simplify the technical nature of the disclosures.”