Kim's home is valued at $250,000. Kim has paid the mortgage¾she has 100 percent equity in the property. She wants to start a new business with Lloyd. To obtain funds, Kim refinances the loan through Metro Bank, borrowing $200,000 for fifteen years at an interest rate of 4.85 percent. Before the loan is completed, Metro provides Kim with all of the required disclosures. On the day of the loan, a fifteen-year Treasury bond is yielding 2.85 percent. Kim pays $7,500 in fees to the bank. Less than a month later, she sells her interest in the new business to Lloyd and wants to rescind the loan. Which federal law covers this loan¾TILA, HOEPA, HPML, or HAMP? Can Kim rescind the deal? Explain.
What will be an ideal response?
With respect to real estate transactions, the Truth-in-Lending Act (TILA) applies to residential loans. The Home Ownership and Equity Protection Act (HOEPA) covers mortgage loans that carry a high rate of interest or impose high fees on borrowers. HOEPA applies if the annual percentage rate (APR) exceeds the interest rate on Treasury bonds of comparable maturity by 8 points for a first mortgage, or when the loan fees exceed the loan amount by 8 percent. To qualify as a Higher-Priced Mortgage Loan (HPML), a mortgage must secure a borrower's principal home and have, if the loan is a first lien, an APR that exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more. The U.S. Treasury Department's Home Affordable Modification Program (HAMP) encourages private lenders to modify mortgages to lower the monthly payments of borrowers in default.
In this problem, the mortgage is a residential loan, and thus TILA applies. The loan is a first mortgage but the APR exceeds the interest rate on Treasury bonds of comparable maturity by only 2 points and the fees are not more than 8 percent of the loan. On these facts, HOEPA does not apply. The mortgage is a first lien and is secured by the borrower's home, but the APR does not most likely exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more. Thus, the loan is not an HPML. The borrower is not in default, so the loan is not eligible for HAMP.
TILA imposes disclosure requirements on lenders. When all required disclosures are provided, a borrower's right to rescind is limited to three business days (not including Sunday) after a loan is finalized. If a lender fails to provide material required disclosures, the borrower has a right to rescind the transaction for up to three years. In this problem, the loan falls under TILA, and the bank gave the borrower all of the required disclosures. Thus, the right to rescind expired after three days. One month after the loan is too late.
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