Consumer Loan Compliance · 2020-04-21 · Regulation Z – Definitions and Finance Charge Consumer...

Consumer Loan Compliance Section 3: Regulation Z - Finance Charges, Closed-end Lending and Private Education Loans

Regulation Z – Definitions and Finance Charge

Consumer Loan Compliance: Section 3 – Closed End Loans 1

Purpose The purposes of the Truth and Lending Act and Regulation Z are to:

• To promote the informed use of consumer credit by requiring disclosures about its terms

and cost.

• To provide substantive protections for consumers in regards to consumer credit.

Regulation Z applies when four conditions are met:

• The credit is offered or extended to consumers.

• The offering or extension of credit is done regularly.

• The credit is subject to a finance charge or is payable by a written agreement in more

than four installments.

• The credit is primarily for personal, family, or household purposes.

Exemptions The following types of credit are exempt from Reg Z:

• Business, commercial, agricultural, or organizational credit.

• Credit over the threshold amount (currently $58,300) except when the extension of credit

is:

o Secured by any real property.

o Secured by personal property used or expected to be used as the principal

dwelling of the consumer.

o A private education loan.

• Student loans made, insured, or guaranteed pursuant to a program authorized by title IV

of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq).

• An extension of credit to a participant in an employer-sponsored retirement plan.

Business Credit The commentary to section 1026.3 of Regulation Z provides guidance on when an extension of

credit can be considered for “business purposes.”



Primary Purpose

• A creditor must determine in each case if the transaction is primarily for a business

purpose.

• If some question exists as to the primary purpose for a credit extension, the creditor is, of

course, free to make the disclosures.

• In determining whether credit to finance an acquisition is primarily for business or

commercial purposes, the following factors should be considered:

o The relationship of the borrower's primary occupation to the acquisition. (The

more closely related, the more likely it is to be business purpose.)

o The degree to which the borrower will personally manage the acquisition. (The

more personal involvement there is, the more likely it is to be business purpose.)

o The ratio of income from the acquisition to the total income of the borrower. (The

higher the ratio, the more likely it is to be business purpose.)

o The size of the transaction. (The larger the transaction, the more likely it is to be

business purpose.)

o The borrower's statement of purpose for the loan.

Business Purpose Examples Examples of business-purpose credit include:

• A loan to expand a business, even if it is secured by the borrower's residence or personal

property.

• A loan to improve a principal residence by putting in a business office.

• A business account used occasionally for consumer purposes.

Consumer Purpose Examples Examples of consumer-purpose credit include:

• A loan secured by a mechanic's tools to pay a child's tuition.

• A personal account used occasionally for business purposes.

Credit Cards

• If a business-purpose credit card is issued to a person, the provisions of the regulation do

not apply, even if extensions of credit for consumer purposes are occasionally made using

that business-purpose credit card.



• Likewise, if a consumer-purpose credit card is issued to a person, the provisions of the

regulation apply, even to occasional extensions of credit for business purposes made

using that consumer-purpose credit card.

Non-Owner-Occupied Rental Property

• Credit extended to acquire, improve, or maintain rental property (regardless of the

number of housing units) that is not owner-occupied is deemed to be for business

purposes.

• If the owner expects to occupy the property for more than 14 days during the coming

year, the property cannot be considered non-owner-occupied and this special rule will not

apply.

Owner-Occupied Rental Property If credit is extended to acquire, improve, or maintain rental property that is or will be owner-

occupied within the coming year, different rules apply:

• Credit extended to acquire the rental property is deemed to be for business purposes if it

contains more than 2 housing units.

• Credit extended to improve or maintain the rental property is deemed to be for business

purposes if it contains more than 4 housing units.

Organizational Credit

• Transactions in which the borrower is not a natural person are exempt from the regulation

(for example, to loans to corporations, partnerships, associations, churches, unions, and

fraternal organizations).

• The exemption applies regardless of the purpose of the credit extension and regardless of

the fact that a natural person may guarantee or provide security for the credit.

Key Definitions

Business Day A day on which the creditor’s offices are open to the public for carrying on substantially all of its

business functions. (Different definition for some aspects of real estate lending)

Closed-end Credit Any consumer credit other than “open-end credit.”

Open-end Credit Consumer credit extended by a creditor under a plan in which:

• The creditor reasonably contemplates repeated transactions.



• The creditor may impose a finance charge from time to time on an outstanding unpaid

balance.

• The amount of credit that may be extended to the consumer during the term of the plan

(up to any limit set by the creditor) is generally made available to the extent that any

outstanding balance is repaid.

Consumer A consumer is a person to whom consumer credit is offered or extended.

Consumer Credit Credit offered or extended to a consumer primarily for personal, family, or household purposes.

Consummation The time that a consumer becomes contractually obligated on a credit transaction.

Finance Charge

Definition The cost of consumer credit as a dollar amount:

• Includes any charge payable directly or indirectly by the consumer and imposed directly

or indirectly by the creditor as an incident to or a condition of the extension of credit.

• Does not include any charge of a type payable in a comparable cash transaction.

Prepaid Finance Charge Any finance charge paid separately in cash or by check before or at consummation of a

transaction, or withheld from the proceeds of the credit at any time.

Third Party Charges The finance charge includes fees and amounts charged by someone other than the creditor, (with

some exceptions), if the creditor:

• Requires the use of a third party as a condition of, or incident to the extension of credit,

even if the consumer can choose the third party, OR

• Retains a portion of the third-party charge, to the extent of the portion retained.

Examples of Finance Charges The finance charge includes the following types of charges:

• Interest

• Service, transaction and activity charges



• Points, loan fees, assumption fees, finder's fees, and similar charges

• Discounts for inducing payment by means other than credit

• Appraisal, investigation, and credit report fees (exceptions apply)

• Premiums or other charges for any guarantee or insurance protecting the creditor against

the consumer's default or other credit loss

• Charges imposed on a creditor by another person for purchasing or accepting a

consumer’s obligation, if the consumer is required to pay the charges

• Premiums or other charges for credit life, accident, health, or loss-of-income insurance,

written in connection with a credit transaction (exceptions apply)

• Premiums or other charges for insurance against loss of or damage to property written in

connection with a credit transaction (exceptions apply)

• Charges or premiums paid for debt cancellation or debt suspension coverage written in

connection with a credit transaction (exceptions apply)

Exclusions Charges excluded from the finance charge include:

• Application fees charged to all applicants for credit, whether or not credit is actually

extended.

• Charges for actual unanticipated late payment, for exceeding a credit limit, or for

delinquency, default, or a similar occurrence.

• Charges imposed by a financial institution for paying items that overdraw an account,

unless the payment of such items and the imposition of the charge were previously agreed

upon in writing.

• Fees charged for participation in a credit plan, whether assessed on an annual or other

periodic basis.

• Seller's points (or any other seller paid fees).

Real-Estate Related Fees The following fees in a transaction secured by real property or in a residential mortgage

transaction, if the fees are bona fide and reasonable in amount:

• Fees for title examination, abstract of title, title insurance, property survey, and similar

purposes.



• Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance

or settlement documents.

• Notary and credit-report fees.

• Property appraisal fees or fees for inspections to assess the value or condition of the

property if the service is performed prior to closing, including fees related to pest-

infestation or flood-hazard determinations.

• Amounts required to be paid into escrow or trustee accounts if the amounts would not

otherwise be included in the finance charge.

Property Insurance Premiums Premiums for insurance against loss of or damage to property may be excluded from the finance

charge if the following conditions are met:

• The insurance coverage may be obtained from a person of the consumer's choice and this

fact is disclosed. (A creditor may reserve the right to refuse to accept, for reasonable

cause, an insurer offered by the consumer.)

• If the coverage is obtained from or through the creditor, the premium for the initial term

of insurance coverage must be disclosed.

Credit Life, Accident, Disability Insurance Premiums for credit life, accident, health, or loss-of-income insurance may be excluded from the

finance charge if the following conditions are met:

• The insurance coverage is not required by the creditor, and this fact is disclosed in

writing

• The premium for the initial term of insurance coverage is disclosed in writing

• The consumer signs or initials an affirmative written request for the insurance after

receiving disclosures

Gap Insurance Charges or premiums paid for debt cancellation coverage for amounts exceeding the value of the

collateral securing the obligation may be excluded from the finance charge if the following

conditions are met:

• The coverage is not required by the creditor, and this fact is disclosed in writing.

• The fee or premium for the initial term of coverage is disclosed in writing.

• For debt suspension coverage: That the obligation to pay loan principal and interest is

only suspended, and that interest will continue to accrue during the period of suspension.



• The consumer signs or initials an affirmative written request for coverage after receiving

the disclosures.

Security Interest Charges If itemized and disclosed, taxes and fees prescribed by law that actually are or will be paid to

public officials for determining the existence of or for perfecting, releasing, or satisfying a

security interest may be excluded from the finance charge.

Regulation Z – Closed End Loans


Accuracy of Annual Percentage Rate

General Explanations, equations and instructions for determining the annual percentage rate in

accordance with the actuarial method are set forth in appendix J to Regulation Z.

Tolerances • As a general rule, the disclosed annual percentage rate is considered accurate if it is not

more than 1/8 of 1 percentage point above or below the actual annual percentage rate.

• In an irregular transaction, the disclosed annual percentage rate is considered accurate if

it is not more than 1/4 of 1 percentage point above or below the actual annual percentage

rate. An irregular transaction is one that includes one or more of the following features:

o Multiple advances

o Irregular payment periods

o Irregular payment amounts (other than an irregular first period or an irregular

first or final payment)

Truth in Lending Disclosure

General Required elements:

• Clear and conspicuous

• In writing

• In a form that the consumer may keep

• Grouped together, except for:

o Itemization of amount financed (must be separate)

o Creditor’s identity

o Variable rate example

o Insurance or debt cancellation

o Security interest charges

• Segregated from everything else



• Must not contain any information not directly related to the disclosures

Optional elements:

• Acknowledgment of receipt

• Date of the transaction

• Consumer's name

• Consumer’s address

• Account number

Annual Percentage Rate and Finance Charge

• The terms “finance charge” and “annual percentage rate,” together with a corresponding

amount or percentage rate, should be more conspicuous than any other disclosure, except

the creditor's identity.

• For private education loan disclosures, the term “annual percentage rate,” and the

corresponding percentage rate must be less conspicuous than the following terms:

o “Finance charge”

o The interest rate

o The notice of the right to cancel

Basis of Disclosures and Use of Estimates • The disclosures shall reflect the terms of the legal obligation between the parties.

• If any information necessary for an accurate disclosure is unknown to the creditor, the

creditor shall make the disclosure based on the best information reasonably available at

the time the disclosure is provided to the consumer, and shall state clearly that the

disclosure is an estimate.

Multiple Consumers If there is more than one consumer, the disclosures may be made to any consumer who is

primarily liable on the obligation.

Disclosure Content For each transaction, the creditor shall disclose the following information as applicable:



Creditor Disclose the identity of the creditor making the disclosures.

Amount Financed • Disclose the amount financed, using that term, and a brief description such as “the

amount of credit provided to you or on your behalf.”

• The amount financed is calculated by:

o Determining the principal loan amount or the cash price (subtracting any

downpayment)

o Adding any other amounts that are financed by the creditor and are not part of the

finance charge

o Subtracting any prepaid finance charge

Itemization of Amount Financed • Provide a separate written itemization of the amount financed, including:

o The amount of any proceeds distributed directly to the consumer

o The amount credited to the consumer's account with the creditor

o Any amounts paid to other persons by the creditor on the consumer's behalf. (The

creditor must identify those persons).

o The following payees may be described using generic or other general terms and

need not be further identified: public officials or government agencies, credit

reporting agencies, appraisers, and insurance companies.

o The prepaid finance charge.

• An itemization of amount financed is not required if:

o The creditor provides a statement that the consumer has the right to receive a

written itemization of the amount financed, together with a space for the

consumer to indicate whether it is desired, and

o The consumer does not request it.

Finance Charge Disclose the finance charge, using that term, and a brief description such as “the dollar amount

the credit will cost you.”

Accuracy for Non-Mortgage Loans



The amount disclosed as the finance charge is accurate if:

• In a transaction involving an amount financed of $1,000 or less, it is not more than $5

above or below the amount required to be disclosed

• In a transaction involving an amount financed of more than $1,000, it is not more than

$10 above or below the amount required to be disclosed.

Annual Percentage Rate Disclose the annual percentage rate, using that term, and a brief description such as “the cost of

your credit as a yearly rate.”

Variable Rate Provide the following disclosure if the annual percentage rate may increase after consummation:

• The circumstances under which the rate may increase

• Any limitations on the increase

• The effect of an increase

• An example of the payment terms that would result from an increase.

Payment Schedule • Disclose, the number, amounts, and timing of payments scheduled to repay the

obligation.

• In a transaction in which a series of payments varies because a finance charge is applied

to the unpaid principal balance, the creditor may comply with this paragraph by

disclosing the following information:

o The dollar amounts of the largest and smallest payments in the series.

o A reference to the variations in the other payments in the series.

Total of Payments • Disclose the total of payments, using that term, and a descriptive explanation such as “the

amount you will have paid when you have made all scheduled payments.”

• In any transaction involving a single payment, the creditor does not need to disclose the

total of payments.

Demand Feature • Disclose if the obligation has a demand feature

• When the disclosures are based on an assumed maturity of 1 year, that fact must also be

disclosed.



Total Sale Price In a credit sale, disclose the total sale price, using that term, and a descriptive explanation

(including the amount of any downpayment) such as “the total price of your purchase on credit,

including your downpayment of $----.”

Prepayment • When an obligation includes a finance charge computed from time to time by application

of a rate to the unpaid principal balance, disclose whether or not a penalty may be

imposed if the obligation is prepaid in full.

• When an obligation includes a finance charge other than the finance charge disclose

whether or not the consumer is entitled to a rebate of any finance charge if the obligation

is prepaid in full.

Late Payment Disclose any dollar or percentage charge that may be imposed before maturity due to a late

payment, other than a deferral or extension charge.

Security Interest Disclose the fact that the creditor has or will acquire a security interest in the property purchased

as part of the transaction, or in other property identified by item or type.

Insurance and Debt Cancellation Include required disclosures in order to exclude certain insurance premiums and debt

cancellation fees from the finance charge.

Certain Security Interest Charges Include required disclosures in order to exclude from the finance charge certain fees prescribed

by law or certain premiums for insurance in lieu of perfecting a security interest.

Contract Reference Include a statement that the consumer should refer to the appropriate contract document for

information about nonpayment, default, the right to accelerate the maturity of the obligation, and

prepayment rebates and penalties.

Required Deposit • If the creditor requires the consumer to maintain a deposit as a condition of the specific

transaction, include a statement that the annual percentage rate does not reflect the effect

of the required deposit

• A required deposit need not include, for example:

o An escrow account for items such as taxes, insurance or repairs

o A deposit that earns not less than 5 percent per year



o Required membership shares

Subsequent requirements regarding post-consummation events

Refinancings • A refinancing is a new transaction requiring new disclosures.

• A refinancing occurs when an existing obligation is satisfied and replaced by a new

obligation undertaken by the same consumer.

• The following are not refinancings:

o A renewal of a single payment obligation with no change in the original terms.

o A reduction in the annual percentage rate with a corresponding change in the

payment schedule.

o An agreement involving a court proceeding.

o A change in the payment schedule or a change in collateral requirements as a

result of the consumer's default or delinquency, unless:

▪ The rate is increased

▪ The new amount financed exceeds the unpaid balance plus earned finance

charge and premiums for continuation of insurance.

o The renewal of optional insurance purchased by the consumer and added to an

existing transaction, if disclosures relating to the initial purchase were originally

disclosed.

o Changes in the terms of an existing obligation, such as the deferral of individual

installments, will not constitute a refinancing unless accomplished by the

cancellation of that obligation and the substitution of a new obligation.

Treatment of Credit Balances When a credit balance in excess of $1 is created in connection with a transaction, you must:

• Credit the amount of the credit balance to the consumer's account

• Refund any part of the remaining credit balance, upon the written request of the

consumer



• Make a good faith effort to refund to the consumer by cash, check, or money order, or

credit to a deposit account of the consumer, any part of the credit balance remaining in

the account for more than 6 months (except that no further action is required if the

consumer's current location is not known to the creditor and cannot be traced through the

consumer's last known address or telephone number)

Record Retention Retain evidence of compliance for two years after the date disclosures are required to be made or

action is required to be taken.

Oral Disclosures • In an oral response to a consumer's inquiry about the cost of closed-end credit, only the

annual percentage rate can be stated

• If the annual percentage rate cannot be determined in advance, the annual percentage rate

for a sample transaction must be stated, and other cost information for the consumer's

specific transaction may be given

Private Education Loans

General • Regulation Z has been amended to implement the provisions of the Higher Education

Opportunity Act (HEOA)

• Under the Regulation Z amendments, creditors that extend private education loans must

provide disclosures about:

o Loan terms and features

o Federal student loan programs that may offer less costly alternatives

Coverage • Disclosure requirements apply to loans made expressly for postsecondary educational

expenses

• Disclosures are not required when educational expenses are funded by:

o Open-end credit such as credit card advances

o Real-estate secured loans

o Education loans made, insured, or guaranteed by the federal government, which

are subject to disclosure rules issued by the Department of Education



Definition • “Private Education Loan” means a loan that is extended to a consumer expressly, in

whole or in part, for postsecondary educational expenses.

• Postsecondary educational expenses include:

o Tuition and fees

o Books

o Supplies

o Miscellaneous personal expenses

o Room and board

Rules • Creditors must give the consumer 30 days after a private education loan application is

approved to decide whether to accept the loan offered.

• During that time, the creditor may not change the rates or terms of the loan offered,

except for rate changes based on changes in the index used for rate adjustments on the

loan.

• The consumer has a right to cancel the loan for up to three business days after

consummation.

• Creditors are prohibited from disbursing funds until the three-day cancellation period has

run.

Disclosure Requirements

Transaction Specific Disclosures

• Transaction specific disclosures are required at three different times in the loan process:

o At application

o Upon approval

o At consummation

• You don’t need to provide the application disclosures if a loan application may be used

for multiple purposes and you don’t know until the application is submitted whether or

not the loan qualifies as a “Private Education Loan” (the other disclosures must be

provided)

• Disclosures are required if even part of the loan proceeds will be used for education costs.



Self Certification Form

• Once a consumer applies for a private education loan, the consumer must complete a

‘‘self-certification form’’ with information about the cost of attendance at the school that

the student will attend or is attending

• The creditor must obtain the signed and completed form before consummating the private

education loan

Regulation Z – Closed End Loan Advertising


Definition Messages inviting, offering, or otherwise announcing generally to prospective customers the

availability of credit transactions, whether in visual, oral, or print media, are advertisements.

Examples Examples include:

• Messages in a newspaper, magazine, leaflet, promotional flyer, or catalog

• Announcements on radio, television, or public address system

• Electronic advertisements, such as on the Internet

• Direct mail literature or other printed material on any exterior or interior sign

• Point-of-sale displays

• Telephone solicitations

• Letters sent to customers or potential customers as part of an organized solicitation of

business.

• Messages on checking account statements offering auto loans at a stated annual

percentage rate.

• Communications promoting a new open-end plan or closed-end transaction.

Exclusions The term does not include:

• Direct personal contacts, such as follow-up letters, cost estimates for individual

consumers, or oral or written communication relating to the negotiation of a specific

transaction.

• Informational material, for example, interest-rate and loan-term memos, distributed only

to business entities.

• Notices required by federal or state law.

• News articles the use of which is controlled by the news medium.

• Market-research or educational materials that do not solicit business.

• Communications about an existing credit account (for example, a promotion encouraging

additional or different uses of an existing credit card account.)



General All advertisements must:

• State credit terms that are actually available

• State any rate of finance charge as an APR

• State if the APR can be increased after consummation

• State no other rate except:

o A simple annual rate or a periodic rate for consumer loans not secured by a

dwelling

o A simple annual rate for credit secured by a dwelling

• Show the simple annual rate or the periodic rate simultaneously with the APR for

advertisements made through electronic communication (you can’t link to the APR)

Trigger Terms If an advertisement for a closed-end loan contains any one of the following terms, you must

include additional disclosures:

• The amount or percentage of any down payment

• The number of payments or the period of repayment

• The amount of any payment

• The amount of any finance charge

• The amounts of any other charges you might impose or an explanation of how you would

determine them.

• The fact that the creditor will take a security interest in any asset.

Additional Disclosures An advertisement for closed-end credit that contains one or more of the above trigger terms also

must disclose the following:

• The amount or percentage of the down payment

• The terms of repayment, which reflect the repayment obligations over the full term of the

loan, including any balloon payment

• The APR



• For an APR that may be increased after consummation, a statement to that effect

Electronic Advertisements If an electronic advertisement (such as an advertisement appearing on an Internet Web site), is

considered a single advertisement if

• The table or schedule containing all required disclosure is clearly identified

• Any triggering terms appearing anywhere else in the advertisement clearly refers to the

page or location where the required disclosures begin. “Click here for important account

terms”

Exceptions A television or radio advertisement that states any of the closed-end triggering terms may

comply by:

• Stating the APR

• Listing a toll-free telephone number, or any telephone number that allows a consumer to

reverse the phone charges when calling for information, along with a reference that the

number may be used by members to obtain additional cost information.

UCC-9


Introduction • The Uniform Commercial Code, Article 9 (UCC 9) sets forth rules for creating and

perfecting security interests in various types of property and assets.

• UCC 9 does not apply to property that is titled (for example, automobiles) or is real

property.

Creating a Security Interest • A valid security agreement can only be created by completing the following three steps:

o The creditor gives something of value

o The borrower has rights in the collateral

o The borrower has authenticated the security agreement

Perfection • In general, creditors use a financing statement to perfect a security interest for certain

types of collateral.

• The UCC-1 financing statement is filed with the Secretary of State

Filing a Financing Statement • In general, creditors should file a financing statement in the place of the debtor’s location.

• Creditors should take care that the debtor’s name is the legal name used by the debtor.

• The financing statement should contain a description that reasonably identifies the

collateral.

• Cross-collateral clauses are permitted with some limitations.

Continuation Statements • Financing statements expire five years from the date of filing (30 years for manufactured

homes).

• A continuation statement can be filed within the six month time period prior to the

expiration date, which will extend that date for an additional five years.

UCC-9


Filing Priority In general, the first secured party to file a financing statement or to perfect its security interest

has priority.

Transfer of Collateral A security interest continues after a debtor transfers collateral unless the secured party authorizes

the transfer free of the security interest.

Satisfaction of a Lien A creditor must file a termination statement:

• Within one month after there is no obligation secured by the collateral covered by the

financing statement and no commitment to make an advance, incur an obligation, or

otherwise give value OR

• Within twenty days after the secured party receives an authenticated demand from a

debtor (if this happens earlier).

Enforcement and Default Each aspect of a foreclosure sale must be “commercially reasonable.”

Notices • Creditors are required to provide detailed information to consumers before any

disposition of collateral.

• For consumer-goods transactions where the debtor is entitled to a surplus or owes a

deficiency balance after a disposition, the creditor must send the debtor a “Notice of

Calculation of Deficiency” after the resale, which states the amount of the surplus or

deficiency and how it was calculated.

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Consumer Loan Compliance · 2020-04-21 · Regulation Z – Definitions and Finance Charge Consumer...

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