[NMLS SAFE] 3, TILA & Regulation Z: Finance Charge and Rescission

Lesson three of the free Quibank NMLS SAFE course. Federal law begins — twenty-four percent of your exam — and it begins with TILA, the Truth in Lending Act, and its regulation, Regulation Z. TILA's job is simple: make the cost of credit visible before the borrower is committed. Two ideas carry most of the TILA questions: the finance charge, and the right of rescission.

The finance charge is the cost of the credit, expressed as a dollar amount — every charge the creditor imposes as a condition of extending the credit. Discount points, prepaid per-diem interest, mortgage insurance premiums: all in. But charges you would pay in a cash deal anyway — title insurance, the closing agent, appraisal, credit report, recording fees — stay out. Exam version: which fee is not part of the finance charge?

The private mortgage insurance premium? Discount points? Per-diem interest collected at closing? Or the title insurance premium and closing agent fee?

Title and closing — those are costs of the transaction, not costs of the credit. Now rescission — the three-day cooling-off period. It exists when a loan places a lien on the borrower's principal dwelling and it is not the loan buying that home. Purchase loans: no rescission.

Vacation homes and rentals: no rescission. A company as borrower: no rescission. But refinance your own home with a new lender, and you can walk away for three business days. Test it.

Which of these can be rescinded? A loan to an LLC on a rental building? A purchase-money first mortgage? A refinance of a vacation home?

Or a cash-out refinance on the borrower's principal residence? The cash-out refinance — it is a new, non-purchase lien on the home the borrower lives in. How do you count the three days? Regulation Z uses its precise definition of a business day here: every calendar day except Sundays and the ten federal holidays.

Saturday counts. Whether the lender's office happens to be open does not matter. And the penalty question. If the creditor never delivers the rescission notice, the three days stretch to three years from consummation.

And once the borrower does rescind, the creditor has twenty calendar days to return the money and release the lien. Three days becomes three years — and then twenty days to unwind. One more from the bank. A borrower refinanced her principal residence and never got the rescission notice.

What are her rights? She can rescind for up to three years, and after she does, the creditor has twenty calendar days to return what it received and release its security interest. Recap. Finance charge equals cost of the credit: points, prepaid interest, mortgage insurance in; title, appraisal, and recording out.

Rescission: non-purchase lien on the principal dwelling, three business days, Saturdays count, Sundays and federal holidays do not. No notice: three years. After rescission: twenty days to unwind. Next lesson: RESPA — kickbacks, referral fees, and the settlement rules.

Practice today's rules free at quibank.com/mlo. See you in lesson four.