Truth-in-Lending Act (Regulation Z)
Overview
The purpose of Regulation Z (The Truth-in-Lending Act) is to promote the informed use of consumer credit by requiring disclosures about its terms and costs. The regulation also gives consumer the right to cancel credit card practices, and provides a means for fair and timely resolution of credit billing disputes.
Policy
It is the policy of Park Avenue Bank (the Bank) to comply with the disclosure and all other requirements of Regulation Z in consumer credit transactions.
Loans covered by Regulation Z and Exemptions
- Regulation Z applies only to credit offered, applied for, or extended to an individual for a consumer purpose. The first requirement therefore is that the borrower be a natural person. Loans to entities such as corporations, partnerships, associations, and estates are not covered.
- The second requirement is that the loan be for a consumer purpose rather than a business, commercial, or agricultural purpose. A consumer loan would be one primarily to be used for personal, family, or household purposes.
- A loan for more than $25,000 is exempt from Regulation Z unless it is secured by real estate or a dwelling. For purpose of Regulation Z, real estate includes vacant land or a home, office building, or any other structure where land is included. A dwelling is a residential structure of one to four units, regardless of whether it is attached to land. (A mobile home or a houseboat are considered dwellings if they are to be used as a residence).
- Loans to purchase or improve non-owner occupied rental properties are considered business loans and are exempt from Regulation Z.
- For owner-occupied rental properties, if the loan is to purchase the property and the property contains more than two units, it is considered a business loan and is exempt; however if the loan is to improve or maintain the property, it is a consumer loan unless the property contains more than four units.
Definitions
Business Day - A business day is any day a lender's offices are open to the public for carrying on substantially all of its business functions. For purposes of the "right of rescission," every day except Sunday and federal public holidays are business days. Saturday is a business day for determining a rescission period regardless of whether the bank is open.
Open-end credit - An open-end credit is a loan where the borrower may redraw amounts previously paid. A credit card amount is the most common open-end account.
Closed-end credit - A closed-end credit is a loan where the borrower does not have the right to re-borrow principal that has been paid.
Finance Charge
The finance charge is the cost of consumer credit expressed in dollars. The overall finance charge on a loan may be made up of several components such as interest and loan fees.
It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.
Examples of finance charges include:
- Interest;
- Service, transaction, activity, and carrying charges;
- Point, loan fees, assumption fees, finder's fees and similar charges; and
- Appraisal, investigation, and credit report fees.
Charges excluded from the definition of finance charges include:
- Application fees; and
- Overdraft fee - Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and imposition of the charges was previously agreed upon in writing.
Open-End Credit
Regulation Z classifies all credit as either open-end or closed-end. If a consumer may re-borrow amounts of principal previously repaid on a credit, it is open-end.
Regulation Z imposes some requirements on all open-end credits. If the credit line can be accessed with a credit or charge card, there are additional requirements. If the credit plan is secured by the consumer's dwelling (a home equity plan), there are additional requirements.
Disclosures
All disclosures required by the regulation must be clear and conspicuous, must be in writing, and must be in a form that the consumer may keep. When the terms "finance charge" and "annual percentage rate" are required to be disclosed, they must generally be more conspicuous than any other required disclosure. The bank must provide the disclosures to a consumer prior to the first transaction, if there are multiple consumers liable for the payment the disclosure need only be given to one of them. The disclosure must reflect the legal obligations of the plan.
The initial disclosures must tell the borrower when the bank will impose a finance charge and how the finance charge will be calculated. If a variable interest rate is used in the plan, the bank must tell the consumer the following:
- The index used;
- The circumstances under which the rate may increase;
- When the rate may increase
- Any limits on increase; and
- Examples of the efforts of a rate increase.
If the bank does not tie its variable rate program to an index but merely reserves the right to change the rate it charges from time to time, the bank must give a "change in terms" notice at each adjustment of the rate.
Charges other than the annual percentage rate must also be in the initial disclosures, such as late charges. On open-end credit plans secured by real estate, charges such as appraisal fee's and title insurance need to be disclosed.
A consumer is granted certain rights if they believe an error has occurred with regard to their open-end credit plan. A "Billing Error Rights" disclosure is required with language mandated by Regulation Z.
Periodic Statements
A creditor must furnish a consumer with periodic statement at least quarterly. It must disclose the beginning and closing dates and balances. It must show each transaction and each credit to the account. It must disclose each periodic rate that may be used to compute the finance charge, the range of balances to which it is applicable and the corresponding annual percentage rate. The statement must contain an address for notice of billing errors.
Subsequent Disclosures
If a creditor does not provide a short form billing error notice on its periodic statements, it must provide a long form at least annually.
If a creditor changes a term of a plan that was required to be disclosed initially, the creditor must provide 15 days prior written notice of the change to the consumer.
Home Equity Plans
If the credit line is secured by the consumer's dwelling, additional disclosure requirements apply and some limits are placed on the terms of the plan and the action the creditors may take. Home equity plan disclosures must be given to a consumer when the consumer is given an application for a home equity plan. Information disclosed must be clear, conspicuous, and segregated from unrelated information.
Closed-End Credit
A closed-end credit is one in which the borrower may not draw principal that has been previously repaid.
Disclosures
Three rules apply to all Regulation Z disclosures:
- Disclosures must be clear, conspicuous, in writing, and in a form the consumer may keep.
- Required disclosures must be grouped together, segregated from all other information, and the segregated information must not contain any information not directly related to the required disclosures.
- The terms "finance charge" and "annual percentage rate" when required to be disclosed, shall be "more conspicuous" than any other disclosure other than the creditor's identity.
These three requirements are disclosed in what is known as the "Fed Box."
Content of Disclosures
- The identity of the creditor;
- The amount financed. This is amount of the loan minus any prepaid finance charges;
- An itemization of the amount financed;
- The amount of the finance charge;
- The annual percentage rate;
- The number, amounts, and timing of payments scheduled to repay the obligation;
- If a loan has demand feature, that must be disclosed;
- If a penalty will be imposed for prepayment, that must be disclosed;
- If charges will imposed for late payment, the dollar or percentage charge that will be imposed;
- If the loan will be secured, a description of the collateral;
- If credit life or other similar insurance is being purchased and is excluded from the finance charge, then there must be a disclosure of the premium and a space for the consumer to affirmatively request the insurance coverage;
- If taxes, recording fees, and other similar costs are to be excluded from the finance charge, they must be itemized and disclosed;
- A statement that the consumer should refer to the loan documents for information about non-payment, default and prepayment penalties and rebates;
- In a residential mortgage transaction, a statement of whether or not a purchaser of the dwelling will be allowed to assume the remaining obligation on its original terms; and
- If a creditor requires the consumer to maintain a deposit as a condition of a transaction, a statement that the APR does not reflect the effect of the required deposit. An escrow account is not a deposit for this purpose.
Variable Rate Loans
A variable rate loan is one in which the APR may increase after the loan is consummated. If the loan is not secured by the consumer's principal dwelling or if the loan is so secured and has a term of less than one year, the disclosure must include the following:
- The circumstances under which the rate may change;
- Any limitations on the increase;
- The effect of an increase; and
- An example of payment terms that would result from the increase.
If the variable rate loan is secured by the consumer's principal dwelling and has a term greater than one year, then the disclosure must state that the loan contains a variable rate feature and that the variable rate disclosures have been given earlier. The earlier disclosure is generally referred to as adjustable-rate mortgage or "ARM" disclosure and must be given at the time a loan application is provided to a consumer.
Delivery of Disclosures
Closed-end loan disclosures must be provided prior to the closing of the loan. In a residential mortgage transaction the disclosures must be given within three days after the creditor receives the consumer’s written application.
Subsequent Disclosure Requirements
One of the events that required redisclosure is a refinancing. A refinancing occurs when an existing obligation is satisfied and replaced by a new obligation. In general, if the consumer signs a new note, the transaction is a refinancing, and new disclosures must be given. Alternatively, if the existing note is modified then it is not a refinancing.
Finance Charge and Annual Percentage Rate Tolerance
Regulation Z requires that creditor make all disclosures accurately using the best information reasonably available.
Finance Charge Tolerance - The general rule is that a finance charge disclosure is considered accurate if the amount disclosed is not more than $10 above or below the exact finance charge in a transaction involving an amount financed of more than $1,000 or not more than $5 above or below the exact finance charge in a transaction involving an amount of $1,000 or less.
Annual Percentage Rate Tolerance - The general rule is that an APR disclosure is accurate if the APR disclosed is within 1/8 of 1% of the actual APR.
Right of Rescission
In a consumer credit transaction in which a creditor will require or retain a security interest in a consumer's principal dwelling, each consumer whose ownership interest is subject to security interest has the right to rescind the transaction. Business purpose loans, residential mortgage transaction, and refinancings of an existing loan already secured by the consumer's principle residence by the same creditor are exempt from the right of rescission.
In a transaction subject to rescission, a creditor must deliver two copies of the notice of the right to rescind to each consumer entitled to rescind. It must identify the transaction and contain the following information:
- That the creditor is acquiring or retaining a security interest in the consumer's principal dwelling;
- That the consumer has the right to rescind the transaction;
- How the consumer can rescind the transaction, together with a form for that purpose designating the creditor's address;
- The effects of the rescission; and
- The date the rescission period ends.
Unless a consumer waives the right of rescission the creditor may not fund the loan, other than into escrow, until the rescission period has expired, and the creditor is reasonably satisfied that the consumer has not rescinded. A consumer may exercise the right of rescission at any time up until midnight of the third business day following the later to occur of; the signing of the loan documents; delivery of the rescission notice; or delivery of the material disclosures. If the notice of right to rescind or accurate disclosures are not provided to the consumer, the three-day right-of rescission period does not begin to run.
When a loan is rescinded, the creditor's security interest in the consumer's principal dwelling becomes void. Within 20 days of rescission of the creditor must give the consumer a release of the security interest and pay to the consumer and amount equal to all money that the consumer paid in connection with the transaction. A creditor must repay not only fees and costs that it retained, but also fees and costs paid to third parties such as appraisers.
Record Retention
Regulation Z requires that a creditor maintain evidence of compliance for two years.
