Over-Stated APRs & Preliminary TIL Disclosures
By David Dickinson
The Philadelphia FRB has come to the rescue! There has been much debate about whether or not an over-disclosed APR triggers re-disclosure of the Preliminary Truth in Lending disclosure under the new MDIA rules. The FRB recently released a series of Q&As concerning the MDIA rules. While they are all worth reading, Q&A #6 is of particular interest. It states:
6. Are corrected disclosures required when the APR is overstated on the early disclosures? What if this overstatement is the result of fees being waived at or near consummation?
The rule specifies that if the APR is inaccurate as determined under §226.22(a), a corrected disclosure is required and the three-business-day waiting period prior to consummation would apply. Sections 226.22(a)(2) and (a)(3) state that APRs are considered accurate if they are not more than one-eighth (for regular transactions) or one-quarter (for irregular transactions) of 1 percent, respectively, above or below the actual APR, as determined in accordance with §226.22(a)(1). Thus, some overstated APRs may require corrected disclosures just as understated APRs do.
However, paragraphs (a)(4) and (a)(5) contain additional tolerances for APR accuracy on mortgage loans. Specifically, for a mortgage loan, the disclosed APR is considered accurate under §226.22(a)(4) if the rate is overstated but results from the disclosed finance charge which is also overstated. Further, under §226.22(a)(5), a disclosed APR that is closer to the actual APR than the APR that would be considered accurate under §226.22(a)(4) is also considered accurate. Creditors should closely examine these two paragraphs when determining whether an APR that is overstated is inaccurate and thus requires corrected disclosures and a three-business-day waiting period.
Note that §226.17(f) may also require a corrected disclosure (but no three-business-day waiting period) before consummation. This requirement is triggered if any aspect of the earlier disclosure, as opposed to only the APR, has become inaccurate.
Note the second paragraph points us to an exception for real estate loans. Most of the time, when an APR is overstated, it is because of the finance charge also being overstated. If this is the case, re-disclosure is not required.