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Truth in Lending Act (Regulation Z) | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
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hey everyone my name is paul bachewski
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and welcome to the real estate classroom
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youtube channel real
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real quick before we get to today's
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video on truth and lending do me a favor
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give this video a thumbs up
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hit that red subscribe button click on
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the notification bell
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[Music]
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so what is the truth and lending act
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well a couple of things that you need to
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know as a student for your real estate
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licensing exam
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number one is truth and lending act is
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synonymous with regulation z
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it they mean the same thing they're both
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the same
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that they're they're used
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interchangeably those terms are
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and you have to know the origins
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of the law so it was very common
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practice for lending institutions to
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pre-approve somebody
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at a certain rate and certain fees only
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six weeks later right before the closing
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date they would throw a curveball on the
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borrower
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and charge and say listen if you want
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our money there's been a change and you
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know you got to pay a half a percent
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more
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on your apr and uh there's going to be x
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amount of dollars in additional fees and
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many times the borrower found themselves
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in a position where
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they had no choice but to go along with
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it and banks
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use this on a regular basis to pad the
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bottom line
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so in 1968 congress said enough and they
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passed the truth and lending
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act now there are some things that you
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have to know about this
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act number one it was passed in 1968
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number two this law only applies to
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institutions that uh that um
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regular that are regular extenders of
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credit and that term regular is
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important as we get into this video
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so we're talking about institutions like
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banks savings and loans
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mutual fund companies should they
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provide
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home loans car loans credit card
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companies it's not just real estate
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it's it's all borrowing okay
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and it applies to those type of lending
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institutions that
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on a regular basis extend credit to
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people now
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it does not apply to real estate
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professionals
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i think i i had a student one time call
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and ask about this because there was a
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question about that on her licensing
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exam
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and just understand that real estate
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professionals we arrange
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things we're not extending anything so
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if we have a borrower or we have a buyer
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that needs to
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find a mortgage company we're going to
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arrange the meeting between the borrower
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and the mortgage company but that's all
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we're doing we're not extending any
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credit so we're exempt in that capacity
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from the truth and lending law alright
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so the other thing you have to know
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is in so far as real estate loans go
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the truth and lending act only applies
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to
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number one owner-occupied homes that's
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one to four
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family residents so single-family home a
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duplex
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a triplex a four-plex so if somebody was
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buying a
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rental property that was going to be
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used as obviously as an investment
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property
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or they're buying a single-family home
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for a rental property
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truth in lending really doesn't apply
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but i will tell you
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generally speaking in the real real
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estate world almost everybody complies
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whether someone is exempt or not just
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from an efficiency point of view
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right but it only applies to owner
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occupied residents
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one to four family units and the other
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one you have to know
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because the real estate licensing exam
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does occasionally ask this
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and in fact with all of these laws that
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we talk about here
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sometimes the real estate exam will ask
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you which
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federal agency is tasked with
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enforcing that particular law and under
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the truth and lending act it is the
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consumer finance protection bureau
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commonly known as the cfpb
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they're the ones that have been tasked
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with uh enforcing the truth and lending
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act all right so what does the truth and
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lending act require
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well it basically requires disclosure
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to the consumer remember this law is
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specifically
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designed to protect the consumer and the
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first thing and the most
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prominent i think is the lenders
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have to disclose the true annual
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percentage rate now if you
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closed on a property in the last 20
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years you're going to notice
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that if you paid attention on your
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closing documents
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there were two annual percentage rates
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that were identified
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on the disclosure and one would say like
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3.5
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the other one would be like 3.75 just a
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little bit more than the other one
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and that is the the higher one is the
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true annual percentage rate so what's
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the difference well you go to the bank
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and you
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you fill out an application for a
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30-year fixed conventional loan
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and they give you a quote of 3.5 well
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that 3.5 percent
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is what we call the note rate and it's
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based on
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the amount that's borrowed right so
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you're gonna borrow two hundred thousand
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dollars
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at three point five percent however the
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true annual
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percentage rate includes all the
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additional
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fees that you're going to have to pay up
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front whether you
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finance them into the loan or not it
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doesn't matter it's those
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upfront lender fees like origination
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fees discount points those type of
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things
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that add to the cost of that purchase
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so let's say that you're borrowing two
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hundred thousand dollars you have ten
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thousand dollars
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in additional fees well
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if you take that ten thousand dollars
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and amortize it over the 30 years of the
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loan
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that's what gives you that additional
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bump in percentage rate so
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when you include the upfront fees that
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you have to pay that gives you the true
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annual percentage rate of 3.75 which is
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just a little bit higher than the note
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rate of 3.5
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that is because remember the reason this
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law was passed is
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banks would say oh yeah your rate's 3.75
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but then they'd whack you at 25 000
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in fees and the actual percentage rate
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would be like four
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four and a half percent so again it was
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a hook and bait so this way here
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the consumer is being notified of the
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true annual percentage rate that's
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probably one of the main core
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things that that you have to know about
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this particular law
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now the other thing that the truth and
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lending act requires
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is if advertising of key credit terms
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is put into the advertising then there
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are certain things
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that need to be disclosed and and what
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we're talking about here is what's
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called
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trigger terms credit terms are used in
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advertising
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we call these cred or trigger terms now
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think about this
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i'm sure we've all heard on the radio or
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tv uh
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car ads right so they're advertising a
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car and then it says zero percent
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financing over 60 months and then all of
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a sudden
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somebody goes so real quick they put the
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terms out there you don't understand any
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of it and it's a little tiny fine print
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at the bottom of the screen
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well because they they uh
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used one of those trigger terms
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that meant that they had to disclose all
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the terms for the credit uh to get
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credit so
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what are these trigger terms they're
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they're terms like down payment amount
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or no down payment at all sometimes you
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know hey no down payment or
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500 down a zero percent interest
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you know payment period payment amount
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number of payments
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finance charges anytime somebody says
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interest free or interest-free for a
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certain amount of
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time or or no payments for your first
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six months anytime they use one of these
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trigger terms then they have to disclose
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in that advertising actually in that
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advertisement
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all the terms and conditions of
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that that loan all right so one thing i
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want you to note though look at the
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bottom it says
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simply stating the price of a home or
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the true
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apr does not trigger uh
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the disclosure of the terms right
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just saying that it's 3.5 percent
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that doesn't and we do see that
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sometimes with new construction where
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it'll be
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you know the price of the home is 450
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000
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and 3.5 true apr right so that
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just simply stating that does not
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trigger truth and lending but when we
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start using these trigger terms
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that hook and bait then we have to make
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the full disclosure
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all right so what does truth and lending
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require
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if we use those trigger terms then what
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disclosures
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must be made and i have them on your
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screen here number one the date
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financing charges commence number two
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uh the true annual percentage rate three
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the number of monthly payments required
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uh number four the payment due dates
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when when are the due dates number five
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charges for late payments or defaults if
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any
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uh is there a prepayment penalty and
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then what are the total charges
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for the loan if you ever want to feel
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sick to your stomach pull out your
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old disclosure form when you purchased
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your house
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and you and you had that 30-year
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mortgage and you paid a hundred thousand
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dollars for the house but by the time
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you paid all the financing charges 30
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here
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over a 30-year period you find that you
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probably paid 400 000 for the house
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that's why it has to be disclosed so
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anytime trigger terms
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are used all of these things on your
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screen have to be disclosed
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in that individual advertisement
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truth in lending also requires that you
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know or at least a real estate uh
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the real estate exam is going to require
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you to know the exemptions and when does
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it not apply
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so the truth and lending act does not
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apply to investor financing again
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rental properties those type of things
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it's not applicable
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commercial or business loans loans that
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are made to corporations
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and partnerships loans with four or
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fewer installment payments
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seller financing such as land contracts
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or
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deeds of trust where the seller is
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financing the equity
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and then loan assumptions because loan
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assumptions
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if it's a true loan assumption the
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original terms have already been stated
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and they're not
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changing now if for whatever reason
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under the loan assumption that the term
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the original terms
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would change then there would have to be
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a disclosure
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that is made
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all right here are some here's another
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application that you probably need to
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know
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under the truth and lending act and that
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is
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the law provided for a three-day right
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to resend
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after closing happens if it's if you're
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refinancing your existing home
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if you're taking out a a heloc or a home
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equity line of credit
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something like that so once you sat down
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and signed
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all the documents at closing no monies
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are going to be dispersed for three days
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there's a three day
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right of rescission and that comes from
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the truth and lending act
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that's all i got for the truth and
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lending act if you're here to continue
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to study check out
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this video i think you'll find it very
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helpful and if you have not subscribed
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to our channel please do so click the
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little circle to my left i would
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appreciate it
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i will see you in my next video
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