Section 32 (Regulation Z; 12 CFR 226.32)

Regulation Z can be accessed here.

Coverage: Section 32 applies to consumer credit transactions secured by a consumer's principal dwelling. Excluded from coverage are:

• residential mortgage transactions (means a transaction in which a security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling)
• reverse mortgage transactions
• open-end credit plans

Thresholds: A Section 32 loan is a loan that satisfies either or both of the following tests:

1. APR Test: The loan's APR at consummation will exceed by more than either 8% (for first liens) or 10% (for subordinate liens), the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application is received by the creditor; or
2. Points and Fees Test: The total points and fees payable by the consumer at or before loan closing will exceed the greater of eight percent (8%) of the total loan amount, or a specified dollar amount that is subject to change annually.

The Points and Fees Test: Points and fees are defined as follows:

	Prepaid Finance Charge (the total amount of prepaid finance charges)
-	Prepaid Interest (to be deducted from prepaid finance charge)
+	Other Mortgage Broker Compensation (the total amount of any non-prepaid finance charge paid to broker by borrower (does not include YSPs and other lender-paid compensation to broker))
+	Other Charges Paid to Creditor/Affiliate (the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate)
+	Optional Credit Insurance/Related Products Paid at or Before Closing (optional credit life/accident/health/loss of income/debt cancellation coverage costs, regardless of how named or paid (in cash or financed) and regardless if a single premium or initial payment)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

Total Loan Amount: Total loan amount is defined in the Federal Reserve Board commentary to Section 32 to mean the following:

	Amount Financed (loan amount - prepaid finance charges)
-	Other Charges Paid to Creditor/Affiliate and Financed (the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate and financed)
-	Optional Credit Insurance/Related Products Finance by Creditor (optional credit life/accident/health/loss of income/debt cancellation coverage costs if financed (i.e., excludes paid amounts)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

Disclosures:

A. Notice to Borrower. The following disclosures must be given at least 3 days prior to consummation (the date the borrower signs the loan documents) in conspicuous type size:

1. Notices. The following statement: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan."
2. Annual percentage rate. The annual percentage rate.
3. Regular payment; balloon payment. The amount of the regular monthly (or other periodic) payment and the amount of any balloon payment. The regular payment disclosed under this paragraph shall be treated as accurate if it is based on an amount borrowed that is deemed accurate and is disclosed under paragraph (c)(5) of Section 226.32. See Amount borrowed below.
4. Variable-rate. For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed.
5. Amount borrowed. For a mortgage refinancing, the total amount the consumer will borrow, as reflected by the face amount of the note; and where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact shall be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed shall be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.

B. Notice to assignee. The following statement must be provided to the purchaser or assignee:

"Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor."

Prohibitions and Limitations:

• No balloon loans with terms of less than 5 years (excluding bridge loans)
• No negative amortization
• No more than 2 payments collected in advance
• No default rates of interest
• No prepayment penalty after 5 years; prepayments only permitted if source of prepayment funds is not a refinancing by the creditor or creditor affiliate, and if at consummation, consumer's total monthly debts do not exceed 50% of the consumer's verified monthly gross income
• No due-on-demand clause
• Limitations on payments under home improvement contracts - must be paid either to the contractor and the consumer jointly, or at the consumer's election, through a third-party escrow agent pursuant to a written agreement signed by the consumer, creditor and contractor
• No refinancing by the same lender or an assignee or servicer of one Section 32 loan into another Section 32 loan within one year unless the refinancing is in the borrower's interest
• No engaging in pattern or practice of extending credit based on the consumer's collateral without regard to the consumer's repayment ability
• No structuring of closed-end loan as an open-end plan to evade requirements of Section 32