Mortgage Meltdown: RESPA, Truth in Lending Audits/ Foreclosure Defense

Here is where you can make some headway and push back against the lender. Taken from Show this to your attorney but make absolutely certain he/she knows about this or the mistakes mentioned in the article will be repeated.


We have names of attorneys and auditors who do this for a living. 

ACTION AUDIT Regulation Z: Checking APRs

You cannot do a compliance audit of loans without checking the finance charge and the annual percentage rate calculations and disclosures. It is a basic part of any loan compliance audit. So the question is not whether but how. 

Unfortunately, it is all too easy to review Truth in Lending disclosures without finding critical errors. That’s because of the old but very true adage: garbage in, garbage out. 

In checking TIL compliance, there are often key steps that are skipped. And by skipping these steps, the TIL review can miss the fundamental mistakes that caused the disclosure to be wrong. And sometimes, by missing the basic step that was in error, the audit merely confirms the mistake, believing it to be accurate. This is why a TIL audit must start with – or go back to – the basics. 

The first basic is always the loan agreement. Why? Because of our favorite section of Regulation Z: §226.17(c)(1). No TIL review is complete without it.What §226.17(c)(1) says is that the disclosures must reflect the terms of the legal agreement. 

A key test of the accuracy of disclosures is whether they reflect the legal agreement – or stray off into another pasture. The closely related principle is that you cannot charge it if you didn’t disclose it. So even if a loan contract provides for certain fees or interest calculations, you cannot exercise them if they conflict with the TIL disclosure that you gave to the customer when you closed the loan. 

Usually §226.17(c)(1) gets the most attention when we are trying to figure out whether a transaction is a refinance or a modification. We look to the underlying legal agreement and whether it is changed to make this determination. In this context, it is often a positive and helpful provision. 

But §226.17(c)(1) has a dark side and nowhere is it more evident than in the recently popular “premium rate adjustable rate mortgage.” A premium rate ARM is a variable rate loan for which the first time period – anywhere from one to five years – is based on a premium rate which is actually higher than the index plus margin. After the premium period, the loan reverts to traditional variable rate adjustments. 

Here’s the catch: many of these premium rate ARMs have floors – a rate below which the loan simply won’t go. Let’s say that the loan originates at a premium rate of 5.75%. Then assume that the index plus margin would be 4.5%. But the loan has a floor of 5%. In other words, the loan rate will never drop as low as the current index plus margin. 

Now for the mistake. Many of the TIL disclosures prepared on these loans ignore the floor of 5% and instead calculate the interest, finance charge and APR using the index-plus-margin rate of 4.5%. The disclosure shows the first payment stream of one year at 5.75% and the remaining 29 years at 4.5%. The result is a seriously under disclosed finance charge and APR because according to the note (enter §226.17(c)(1)) that 4.5% rate is never going to happen. 

When a compliance auditor simply checks the numbers on the TIL disclosures, the auditor won’t find the mistake. To make sure this doesn’t happen, the auditor should start with some additional steps.

Audit mortgage loans by each product type. Audit premium rate-ARMs separately from more standard instruments.

Review the note before you do anything else. Determine the key terms of the note that will affect the TIL calculations. This includes identifying any variable rate features, the timing and duration of those features, and any rate caps and floors. (Note: if the loan is dwelling-secured, it must have a rate cap.)

Run a payment stream for each rate cycle of the loan. Remember to use all of the variable rate assumptions – rates will change based on the loan agreement using the rates we know about at closing.

Amortize each payment stream for the appropriate time period and then calculate the next payment stream with the new amortization period.

Plug your payment numbers and rates into your APR checker. Do not use the same tool that was used to generate the disclosures in the first place.

Now compare the results. If necessary, calculate the restitution.

Determine how any errors occurred and recommend solutions to prevent such errors in the future.


9 Responses

  1. I would like to have an audit done on my 2006 Argent refinance. Please help me find an auditor. I’m in PA

  2. The TIL Audit Test for APR accuracy is not simple, it is 100% correct to say the terms of the loan must be considered exactly as prescribed by the note. The basic problem with loans between 1995 and 2007 , and maybe that lenders had unexperienced under trained $10.00 an hour clerks, prepairing these “important” documents and were underestimating the consequences of having under qualified personnel in charge of such an important task. I have done many audits and have found that at least 90% have TILA violations not to mention material disclosure violations and more….more that is invisible to softwares. An audit is performed by the naked eye not by some software. If the auditor is under skilled and unexperienced as those clerks working for the lenders… (and 99% of brokers were sales people not knowledgable brokers)…then your audit will also be as wrong as that TIL disclosed by the lender. BE CAREFUL!
    Miramar, Florida

  3. please provide your fee structure for forensic audits and also the names of professional auditors who work on behalf of attorneys. i am not an attorney but work with a firm located in california, if that makes a difference, and will have 8-10 files for audit in the next month.

    one of the posters on this site linked to US Lender Audit, based in southern california. does anyone here have feedback regarding their services? seems expensive. what is the going rate for audit?

  4. No such thing as a “premium rate” ARM. Many of them have fixed periods prior to the start of the adjustments, but they are just regular arms. Why would anyone get a loan that starts with a higher rate? What is happening now is the indexes that were used are lower now (because of government intervention) than they were at the time of closing. The result is that the payment is going down instead of up as it was assumed it would.

    Second, the way the payment schedule and the resulting finance charge and APR are calculated is by applying the applicable rate to the unpaid principal balance. The applicable rate is determined by adding the margin to the index. The index rate is determined by looking up the current rate or the rate, as per the note, at the time of closing. So, if the note say the rate will be determined by the current Libor 6 month dollar index 30 days prior to the adjustment date, you take the current index as of 30 day prior to the same month in the note as currently published there is no way for anyone to predict what the future rate would be.
    Additionally, all of the LOS programs will automatically apply the floor, cap and ceiling to all calculations.

  5. hello, this is gary,
    please furnish names of auditors and attorneys who do this for a living, as your headline says, action audit reg z checking apr tila action audit,,,need help desparately
    thank u gary

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  8. […] lookernHAudit mortgage loans by apiece creation type. Audit commercialism rate-ARMs severally from more acknowledged instruments. Review the land before you do anything else. Determine the key outlay of the land that power modify the TIL calculations. … […]

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