Interest Rate Buydowns – Are You Violating Regulation Z?

A fresh look at broker responsibilities under the Truth in Lending Act.

By Beth McGonigle, Education Content Officer

When home prices and interest rates rise, as we’ve seen recently, mortgage companies may look for ways to make home ownership more affordable for buyers.  Some are offering loan programs with interest rate buydowns.  It is important that brokers understand what is required when advertising that a lender is offering a buydown for a listed property. This article provides a brief refresher on the requirements of Regulation Z, as it applies to real estate brokers, and more specifically, what items must be disclosed when advertising the availability of a buydown.

Truth in Lending Act Refresher

The Truth in Lending Act (TILA) was enacted in 1968 to protect consumers of credit by requiring that lenders provide disclosures related to the terms and true cost of credit to consumers.  The law has been amended several times, including after the financial crisis during 2007-2008.  Sweeping legislation, aimed at preventing excessive risk-taking and abuses in the credit industry, was enacted at that time. These changes also created the Consumer Financial Protection Bureau (CFPB).

One of the roles of the CFPB was to create regulations for the new laws and TILA.  These are known as Regulation Z and can be found at 12 Code of Federal Regulations (CFR) Part 1026.  The CFPB was also tasked with creating a new disclosure format by replacing the existing Truth in Lending Statement under TILA and the disclosures required under the Real Estate Settlement Procedures Act (RESPA).  Thus, the Loan Estimate and Closing Disclosure that are used today were created and implemented in 2015.

All mortgage lenders, including banks, credit unions, and finance companies, are subject to TILA and Regulation Z.  “Arrangers of credit” are not.  Arranging credit means a person or entity is simply introducing or referring a consumer to a lender.  Mortgage brokers and real estate brokers are considered arrangers of credit and therefore not subject to the law.  However, if an arranger of credit advertises certain terms of a loan, called “trigger terms,” then the ad becomes subject to TILA.  See the chart below for a list of trigger terms.

Down Payment
Whether expressed as a dollar amount or percentage
-Only $2,500 down
-As little as 3% down
-90% financing*
-100% USDA financing*
-Total move-in costs of $1,200  
-Low down payment required
Payment Amount
When expressed as a dollar amount
-Payments only $800 per month
-Payments of $6.22 per $1,000 borrowed
-$100,000 balance payable in 60 equal payments  
-Monthly payments to suit your needs
-Equal monthly payments
-Fixed monthly payments
Number of Payments-Only 120 low monthly payments
30-year mortgage available
-Repay in as little as 24 installments  
-Take months or years to repay
-Make weekly payments
-Monthly payment terms available
Finance Charge
When expressed as a dollar amount of a portion or the entire amount
-$1,000 total cost of credit
-$20 per month finance charge
-Interest less than $100 per month
-$50,000 mortgages with 2 points to the borrower  
-No charge for appraisal
-6% APR**
-No closing costs
*   Note that, even though the down payment percentage is not explicitly stated, it can be derived from the percentage of financing and is therefore a trigger term.
** The annual percentage rate or APR may be used without triggering Regulation Z.

Additional Terms That Must Be Disclosed (When Triggered)

If a broker includes a trigger term in their advertising, then the broker must also disclose all of the following within the same advertisement:

The amount or percentage of the required down payment.

The full terms for loan repayment or payment schedule including any balloon payments.  This must include the payment amounts for the full term.  These can be generic, such as 360 monthly payments of $5.68 per $1,000 borrowed.

The annual percentage rate (APR).  This calculation includes all charges to the borrower including interest on the loan, origination fees, mortgage insurance, underwriting fees, and other closing costs, expressed as an annual percentage of the loan amount.  Most brokers do not possess the knowledge or desire to calculate the APR for a mortgage loan.  They would need to know the amount of all borrower fees in order to properly disclose the APR. Without that knowledge and ability, the broker should avoid advertising an APR.

Interest Rate Buydown

When triggered, the additional required disclosure becomes more complicated when the interest rate is variable or there is an interest rate buydown.  An interest rate buydown, sometimes called a “mortgage buydown” or simply a “buydown,” is a loan program in which the initial interest rate is lower than the current market rate for a specific number of years or for the life of the loan.  After the initial term, if applicable, the interest rate jumps up to the higher original market rate. 

In exchange for the lower rate, borrowers must pay a fee for the buydown.  The fee is generally paid at settlement.  Often the seller offers to pay for the buydown fee.

3-2-1 Buydown Example

TERMS:  $300,000 mortgage loan at 7.25% market interest rate with a 3-2-1 buydown

Each of the numbers in “3-2-1” represent the reduction in the interest rate for the first three years.  Thus, the first year’s interest rate would be:

7.25% minus 3% = 4.25%

The monthly payment (principal and interest only) and the amount saved by the borrower in each year are provided in the table below.

YearInterest RateMonthly PaymentMonthly SavingsAnnual SavingsTotal Savings
47.25%$2,047  $13,943

Buydown and Regulation Z

Regulation Z states that when an advertisement includes a buydown:

  • An arranger of credit may advertise the reduced simple interest rate, provided the ad shows the limited term to which the reduced rate applies and states the simple interest rate applicable to the balance of the term.
  • The advertisement may also show the effect of the buydown agreement on the payment schedule for the buydown period, but this will trigger the required additional disclosures (required down payment, full terms of payment schedule, and APR).

Can You Identify the Trigger Term?

Below are actual advertisements from brokers.  Most are on behalf of a builder-client.

AD #1:             YEAR END CLOSEOUT SALE!!

Put one of our finished homes under contract before the end of the year and take advantage of an insanely low 5.63% interest through 2/1 buydown OR $10,000 in concessions!  Available properties include…

AD #2:             LIMITED TIME OFFER!!

For a limited time, our builder is offering a rate buydown with a 5.99% fixed interest rate available on select homes in…  Payment includes P&I, 20% down, 30 year conventional fixed rate at 5.99% (6.125% APR).  Call for details.

AD #3              DID YOU KNOW…

Did you know that you can buy a brand new home in XYZ town for less than $2,500/month?

Ad #1 quotes an interest rate of 5.63%.  However, it does not include the term or number of years the rate would apply.  Is it the first year, second year, or all remaining years?  To be compliant with Regulation Z, the ad would need to indicate which years of repayment would reflect the quoted rate.

In Ad #2, the trigger terms include the 20% down payment and the interest rate for the buydown.  As in Ad #1, this ad would also need to state the terms applicable to the 5.99% interest rate.  In addition, the full payment terms or schedule would need to be included, showing the payment amounts for years 1, 2, and all remaining years.  In addition, the use of the term “fixed interest rate” is confusing since the interest rate is different in years 1 and 2.

Ad #3, while not related to a buydown, quotes a monthly payment of $2,500.  This is a trigger term under Regulation Z.  To be compliant, the ad must include the required down payment, full terms of payment schedule, and the APR.

Penalties and Recommendations for Brokers

Violation of Regulation Z may result in various penalties including imprisonment, fines (a fine of $6 million was levied in 2022 to a violator); civil actions that could include treble damage awards, and for companies, class action lawsuits.  Violations can also render the mortgage loan “unsecured,” meaning the property is no longer collateral for the loan.  In addition to trigger term issues, violations include inaccurate calculations of APR, finance charges, and the amount financed.

Regulation Z violations can also affect your broker license.  Under North Carolina General Statute 93A-6(a) (8) and (10), the Commission can discipline a broker for violating Regulation Z.

Here are a few recommendations to avoid penalties:

  1. Review your existing ads against the requirements of Regulation Z and make adjustments as needed.
  2. When creating a new ad, be sure to adhere to Regulation Z.  Look for trigger terms.
  3. You may want to work with a lender on the specific financial terms.  However, if it’s your ad, YOU are responsible.
  4. If you represent a builder, educate them on the requirements of Regulation Z and/or review their ads containing financial information.
  5. Seek legal advice on these types of ads.