Total Annual Loan Cost (TALC) Disclosures
TALC History
The Home Owner Equity Protection Act (HOEPA) of 1994 subjected all reverse mortgages to a new Truth-in-Lending disclosure formulated specifically to fit them. This provision required lenders to project the total annual average cost of these loans on a consistent methodological basis, facilitating true €œapples to apples€ comparisons. It provided a fair and accurate way to evaluate and compare the true, total cost of reverse mortgage alternatives.
A comprehensive, standardized disclosure was important because without it, reverse mortgage cost comparisons were virtually impossible to make. The unique structure and varied features of these loans generate a pattern of annual average costs that varies widely within a given transaction, and from one reverse mortgage program to another.
Unique Structure
Because they require no repayment for as long as borrowers live in their homes, reverse mortgages have a rising balance over time. But they are also €œnonrecourse€ loans, i. e., the amount due can never exceed the home€™s value. So the central lending risk is that borrowers will live in their homes so long or their homes will appreciate so little that the rising balance will catch up to €“ and then be limited by €“ the home€™s value.
If that occurs, lenders may nonetheless be obligated to make additional monthly loan advances for an indeter- minate number of years or provide an ever-increasing creditline despite the fact that the loan balance is now limited. If a home€™s value is decreasing, a lender would be obligated to make additional loan advances in the face of a decreasing loan balance. With loan balances limited by home values on the one hand, and open- ended loan advances on the other, the magnitude of losses on reverse mortgages can be significant.
Moreover, the combined risk of appreciation and tenancy had not previously been underwritten. So there was a wide disparity in risk assessment and pricing structures among different reverse mortgage programs. In addition, the federally-insured program included an array of equity limits that generated non-actuarial cross-subsidies within its insurance pool. As a result, the different reverse mortgage programs exhibited a wide array of pricing structures, including nonconventional cost items unfamiliar to most consumers; and provided a wide array of loan advance amounts (determined principally by borrower age and home value) and payout patterns.
The unique and varied features of reverse mortgages generated annual average cost patterns that were virtually impossible for even financial professionals to compare without a comprehensive measure based on a standardized methodology.
TALC Statute
In September of 1994, Section 154 of the Home Ownership and Equity Protection Act of 1994 (which was part of the Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160) added a new section 138 to Truth-in-Lending to establish the TALC disclosure.
Simply put, the statute defined the Total Annual Loan Cost as the single rate that includes all of a reverse mortgage€™s costs. It is the single rate that would generate the total amount projected to be owed on the loan at a future time when it is applied to all the cash advances the borrower will receive (not including any advances used to finance loan costs).
Since this total annual average rate will vary with future changes in the home€™s value over time, the statute specified that TALC rates should be disclosed for €œnot less than 3 projected appreciation rates and not less than 3 credit transaction periods.€
TALC Regulation
On March 16, 1995, the Federal Reserve Board issued amendments to Regulation Z implementing the TALC requirement. The amendments required TALC rates projected at 0%, 4%, and 8% home appreciation rates for loan periods equaling two years, the borrower€™s life expectancy, and 40% beyond the borrower€™s life expectancy. In explaining the TALC regulation, the Fed also stated its belief that €œthe Congress intended a very broad application of the term €˜costs and charges.€™€
A subsequent commentary (33(c)(1)) underlined the unique nature of the TALC disclosure: €œAll costs and charges to the consumer that are incurred in a reverse mortgage transaction are included in the . . . total annual loan cost rates, whether or not the cost or charge is a finance charge under 226.4 of the regulation.€
This commentary emphasized that the TALC disclosure is sui generis. It is calculated in a unique manner that reflects the specific and unique class, purpose, and function of financial instruments to which it applies.
Annuities On October 10, 1998, the Federal reserve clarified the requirement to include in the TALC calculation the costs of any annuity it €œoffers, arranges, assists the consumer in purchasing, or that the (lender) is aware the consumer is purchasing as part of the transaction.€ This interpretation applies €œwhether the annuity purchase is mandatory or voluntary or whether it is made through the (lender) or a third party.€ Lenders €œmay rely on information provided by the consumer concerning their intent to purchase an annuity as part of the transaction.€ 12 CFR Part 226.33 (FR Doc. 98-8829).
