The Federal Truth-in-Lending Act became effective July 1, 1969, and forms Part I of the Omnibus "Consumer Credit Protection Act" passed by Congress. It is now codified as 15 USC section 1601, et seq. Regulations governing compliance with the Act have been promulgated by the Federal Reserve Board and appear at 12 CFR Part 226 (Regulation Z). Both the Act and the Regulations have been amended several times.

The Federal Truth-in-Lending Act requires lenders to tell borrowers the cost of credit so that they can compare available credit options. The Act requires creditors to disclose the cost, terms and conditions of credit in writing, in a prescribed and uniform manner, prior to the time a borrower or consumer signs a contract. The Act does not establish or limit the cost of credit.

The Act proceeds on the premise that unless otherwise excepted, all credit transactions are covered, irrespective of whether the transaction is sale of property or the loan of money.

Unless the ALTA Endorsement Form 2 is being issued, the exclusions from the coverage in the ALTA Loan Policy-1970 and in the ALTA Loan Policy 1992 make it unnecessary for the title insurer to be concerned with the requirements of the Federal Truth-in-Lending Act or any other Federal or State consumer credit protection act.

Loan Policy-1970 - Insuring Provisions.

5. The invalidity or unenforceability of the lien of the insured mortgage upon said estate or interest except to the extent that such invalidity or unenforceability, or claim thereof, arises out of the transaction evidenced by the insured mortgage and is based upon................

(b)any consumer credit protection or truth in lending law;

Loan Policy 1992 - Exclusions from coverage

5. Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which arises out of the transaction evidence by the insured mortgage and is base upon usury or any consumer credit protection or truth in lending law.

Transactions excluded from coverage under this Act: (Section 1603)

Credit transactions involving extension of credit primarily for business, commercial or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

Transactions in securities or commodities accounts by a broker-dealer registered with the SEC.

Credit transactions, other than those in which a security interest is or will be acquired in real property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.

Transactions under public utility tariffs, if the Board determines that a state regulatory body regulates the charges for the public services involved, the charges for delayed payment, and any discount allowed for early payment.

Transactions excluded from coverage under the regulations. (Section 226.3)

Business, commercial, agricultural, or organizational credit.

An extension of credit primarily for a business, commercial or agricultural purpose.

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

Credit over $25,000 not secured by real property or a dwelling. An extension of credit not secured by real property, or by personal property used or expected to be used as the principal dwelling of the consumer, in which the amount financed exceeds $25,000 or in which there is an express written commitment to extend credit in excess of $25,000.

Public utility credit. An extension of credit that involves public utility services provided through pipe, wire, other connected facilities, or radio or similar transmission (including extensions of such facilities), if the charges for service, delayed payment, or any discounts for prompt payment are filed with or regulated by any government unit. The financing of durable goods or home improvements by a public utility is not exempt.

Securities or commodities accounts. Transactions in securities or commodities account in which credit is extended by a broker-dealer registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission.

Home fuel budget plans. An installment agreement for the purchase of home fuels in which no finance charge is imposed.

Student loan programs. Loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.)

How certain transactions are being defined.

Consumer Credit
?Consumer credit' means credit offered or extended to a consumer primarily for personal, family, and household purposes. (12 CFR Section 226.2)

Residential Mortgage Transaction
?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. 12 CFR Section 226.2 (a)(24))

Dwelling
?Dwelling' means a residential structure that contains 1 to 4 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 Section 226.2 (a)(19))

12 CFR Section 226.18 contains the specific disclosure requirements for closed-end credit transaction (open-end credit applies mainly to revolving credits or charge accounts).

Eighteen disclosures are set forth in section 226.18 and all that are applicable to a particular credit transaction must be disclosed. The disclosures are as follows:

• The identity of the creditor;
• The amount financed;
• A separate written itemization of the amount financed. Good faith estimates of settlement costs provided for transactions subject to the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) may be substituted for this dislcosure;
• The finance charge;
• The annual percentage rate;
• Any variable rate terms;
• The payment schedule;
• Total of payments;
• Any demand feature;
• The total sale price;
• Any prepayment penalty;
• Any late payment charge;
• The security interest acquired;
• Premiums for credit life, accident, health or loss-of-income insurance required under 12 CFR sec. 226.4(d) in order to exclude certain premiums from the finance charge;
• Certain security interest charges as required by sec. 226.4(e).
• A reference to the appropriate contact for further information about the loan terms.
• In a residential mortgage transaction, a statement regarding the assumption policy; and
• the terms of any required deposit.

The provisions of 12 CFR Section 226.23(a) accord a borrower the right to rescind a credit transaction and avoid a security interest which is or will be retained or acquired in real property used as his principal residence.

The consumer has until midnight of the third business day following the consummation of the transaction or the delivery of the notice of right to rescind or the delivery of all material disclosures, to exercise his right to rescind. Exercise must be by mail, telegram, or other written communication, and is considered given when mailed, filed for telegraphic transmission or, if by other means when delivered to the creditor's designated place of business.

In any transaction subject to rescission, the creditor must give to the consumer two copies of the notice of right to rescind. The notice must be a separate document that clearly and conspicuously discloses the rights and process of rescission. A consumer may modify or waive this right of rescission if he determines he needs the credit for a "bona fide personal emergency,? but the waiver or modification must be by means of a signed, dated and written statement that describes the emergency and specifically modifies or waives the right to rescind. Printed forms for this purpose are prohibited.

Although a mortgage transaction may fall within the purview of the Act requiring a disclosure of the cost of the credit, 12 CFR Sec. 226.23(f) provides that the consumer will not have a right to rescind the transaction in the following situations if the mortgage is:

• "A residential mortgage transaction." Section 226.2 (a)(24) defines this term as "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." (Note that first lien status is no longer required by this definition.).
  
  
• A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer's principal dwelling. If the new amount financed exceeds the unpaid finance charge on the existing debt, this exemption applies only to the existing debt and its security interest.
  
  
• A transaction in which a state agency is a creditor.
  
  
• Certain renewals of optional insurance premiums.

There are two essential elements relative to the exception for a residential mortgage transaction:

• The security interest must be a lien on the dwelling in which the borrower resides; and
• The credit extended must be to enable the borrower to acquire that dwelling.

Caveat: Borderline cases present difficult questions of interpretation in deciding whether a transaction is technically excepted from the right of rescission.

Civil Liability

The creditor may be liable for the sum of:

• Any actual damages sustained; plus
  
  
• Statutory damages of twice the amount of the finance charge, with a minimum of $100 and a maximum of $1,000 (in the case of an individual action releating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, not less than $200 or greater than $2,000); plus
  
  
• Costs and attorneys' fees.

Restitution

Creditors must make restitution in connection with certain disclosure violations (15 USC Sec. 1607).

Criminal Liability

Whoever willfully and knowingly (1) gives false or inaccurate information or fails to provide information which he is required to disclose, or (2) uses any chart or table authorized by the Board under section 107 [15 USCS § 1606] in such a manner as to consistantly understate the annual percentage rate determined under section 107(a)(1)(A) [15 USCS § 1606(a)(A)], or (3) otherwise fails to comply with any requirement imposed under this title [15 USCS §§ 1601 et seq.], shall be fined not more than $5,000 or imprisoned not more than one year, or both.

The Act imposes no liability upon an escrow agent in the normal process of servicing and closing an escrow nor upon a title company employee who records documents involving an extension of credit. But it is possible a claim may be made that responsibility has been assumed for compliance with Truth-in-Lending as a result of attempting to comply or failing to comply with such instructions. On the other hand, it may be necessary for an escrow closer to aid the lender in complying with the Act through the performance of strictly ministerial functions.

Under no circumstances should any Company's employee or agent:

• Advise customers or attempt to interpret the Act for them.
• Examine documents, escrows or recordings to determine compliance with the Act.
• Act upon instructions which make compliance with the Act, or any portion thereof, a condition precedent to performance.
• Prepare escrow instruction which demand compliance with any of the provisions of the Act.
• Discuss or perform any requirement of the Act.
• Represent that any form of settlement sheet or statement prepared by the Company or furnished to it by the lender complies with the Act.
• Make any representation as to what information or items should appear in the disclosure statement nor the accuracy of the amount of any items in the disclosure statement except your own charges and for which you have invoices in your file.
• Undertake to determine which items constitute the Finance Charge or compute the Annual Percentage Rate.
• Compose any form for notice of right of rescission.
• Determine the date when the transaction is "consummated."
• Prepare any waiver statement for signature of the borrower or rely on any waiver statement for the purpose of disbursing escrow funds in cases where an escrow closer assumed the responsibility of determining that the three-day period has terminated prior to the disbursement.
  

The ALTA Truth-in-Lending Endorsement is designed to affirmatively insure an insured under a loan policy against loss or damage sustained by reason of the exercise or attempted exercise of the right of rescission conferred upon a mortgage borrower under the Federal Truth-in-Lending Act, as implemented by Regulation Z.

The exclusive basis for the issuance of the endorsement is the determination that the transaction secured by the insured instrument is exempt from the Act or is excepted from any right of rescission granted by the act.

Company approval is required prior to the issuance of ALTA Form 2.