Unit 1 REGULATION Z Truth in Lending Closed-End Credit 60-Second Compliance Summary Establishes comprehensive disclosure requirements for consumer credit products Protects consumers against unfair credit billing practices Provides consumers with rescission rights Imposes limitations on certain closed-end home mortgage loans Delineates and prohibits unfair and deceptive mortgage lending practices Does not mandate how much interest banks may charge Most recent rulemaking addressed comprehensive mortgage reform mandated by the Dodd-Frank Act
Chapter 1 Overview Truth in Lending legislation was enacted on May 29, 1968, (15 U.S.C 1601 et seq.) and was intended by Congress to promote consistent and informed use of Consumer Credit. T he Truth in Lending Act is implemented by Regulation Z and became effective July 1, 1969. The regulation requires creditors to disclose the terms and cost of consumer credit transactions. The Regulation promotes disclosing consistent credit information to consumers: it does not regulate the cost or charge of the credit itself. State usury laws typically regulate the cost of credit. The Regulation also provides consumers the right to cancel certain transaction secured by their principal dwelling, as well as private education loans. Regulation Z implements several laws or acts. It incorporates rules governing credit card practices (Fair Credit Billing Act & Fair Credit and Charge Card Disclosure Act), interest rate ceilings for adjustable rate mortgages (Competitive Equality Banking Act) adverse actions regarding home equity lines of credit (Home Equity Loan Consumer Protection Act), disclosure requirements for dwelling secured loans (Mortgage Disclosure Improvement Act of 2008), open-end consumer credit (Credit Card Accountability and Disclosure Act of 2009), notices when a mortgage loan is sold or transferred (Helping Families Save Their Homes Act of 2009), and consumer protection reforms (Dodd-Frank Act). The Regulation also provides a means for resolving credit card billing disputes. Regulation Z has experienced significant amendments since 2008, beginning with changes to implement the Mortgage Disclosure Improvement Act and most recently, amendments related to the Dodd-Frank Act. The flurry of changes have also included several proposals that were issued and subsequently withdrawn (for example, open-end credit proposal in 2008) compounding the challenge to keep up with the status of the evolving regulation. With the establishment of the Consumer Financial Protection Bureau and the requirement for certain RESPA and Regulation Z disclosures to be integrated, the changes will likely continue for the next several years. Independent Community Bankers of America 1 Bequeaith Banking Solutions, LLC
ICON KEY Valuable information Test your knowledge Auditor review Take a closer look A new concept Regulatory Citation Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 (Dodd-Frank Act), the Bureau has been transferred authority of this particular regulation. Formerly, the Federal Reserve Board carried the responsibility of writing and amending this regulation. The regulation is now codified at 12 CFR 1026. Current events Format of Regulation Z The disclosure requirements of Regulation Z are set forth in several distinct subparts within the regulation. The type of consumer credit product generally determines the subparts creditors must follow to achieve compliance. Subpart A General Provisions (1026.1-1026.4) This subpart provides general information that applies to both open-end and closed-end credit transactions. An important section to consult is the section containing rules for determining which fees are finance charges. Subpart B Open-End Credit (1026.5-1026.16) This subpart relates to open-end credit and contains rules on account-opening disclosures and periodic statement delivery. Subpart C Closed-End Credit (1026.17-1026.24) This subpart contains provisions applicable to closed-end credit. It addresses disclosure requirements for account opening, APR calculations, and rescission requirements. Subpart D Miscellaneous Provisions (1026.25-1026.30) This subpart contains requirements regarding oral disclosures, disclosures in other languages, record retention, state law impacts, and rate limitations. Subpart E Certain Mortgage Transactions (1026.31-1026.45) This subpart contains rules addressing certain mortgage transactions, including loans subject to HOEPA and HPML requirements. Additionally, it contains requirements for reverse mortgage transactions and rules on valuation independence requirements. Requirements applicable to home equity plans have also been included in this subpart. Subpart F Private Education Loans (1026.46-1026.48) This subpart contains requirements for private education loans including disclosure rules, limitations on changing terms of such loans, the right to cancel this type of loan, and cobranding restrictions. Independent Community Bankers of America 2 Bequeaith Banking Solutions, LLC
Subpart G Credit Cards & Other Specific Open-End Credit (1026.51-1026.60) This subpart outlines the compliance requirements applicable to credit card and charge card accounts. This subpart was established by directive within the Credit Card Act. Appendices & Official Staff Interpretations (Appendix A-N, Supplement) A critical element to the overall implementing regulation and practical application of the rules is the establishment of the appendices and official staff interpretations. These sections provide for comprehensive model forms, calculation methods, and official staff interpretations. General Provisions A Creditor is: [1026.2(a)(17)] 1. A person (natural person, organization, corporation, partnership, etc.) who regularly extends consumer credit that is subject to a finance charge. OR 2. A person that extends consumer credit evidenced by a written agreement which is payable in four or more installments. ("regularly" = more than 25 times in a calendar year or more than 5 times if secured by a dwelling.) AND (#1 or #2, plus #3) 3. The person is the initial person extending consumer credit. Why do we check disclosures on indirect paper? While we're not the initial creditor and not subject to criminal violations, we can still "buy" civil liability. Effective January 5, 1996: Assignees of transactions secured by real property may be liable for violations if the violation is apparent on the face of the disclosure statement and assignment was voluntary. What Obligations Must be Disclosed? Coverage [1026.1(c) Credit is extended to consumers Credit is primarily for personal or household purposes Credit is subject to finance charge or payable in more than four installments Offering or extension of credit is done regularly What Obligations are Not Disclosed? [1026.3] Business, Agricultural, & Organizational Credit Reg Z does not apply to business, agricultural or organizational credit [1026.3(a)]. Furthermore, business-purpose credit cards issued to employees are not subject to the Independent Community Bankers of America 3 Bequeaith Banking Solutions, LLC
provisions of Reg Z. Liability falls on the card holder even if unauthorized use of a business credit card is for consumer-purpose transactions. There are five determining factors to distinguish between personal and business purpose if unsure. [Commentary 1026.3(a)(2)] 1. The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose. 2. 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. 3. 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. 4. The size of the transaction. The larger the transaction, the more likely it is to be business purpose. 5. The borrower's statement of purpose for the loan. Note: See page #1 of the Regulation Z Appendix for the Coverage Considerations diagram. Rental Property Special exemption rules apply to Rental Property. Non-owner occupied rental property is exempt unless the property is occupied by the owner for more than 14 days. For owner occupied rental property to be exempt the property must have more than two units. Or the owner occupied property must Independent Community Bankers of America 4 Bequeaith Banking Solutions, LLC
Consumer Credit > $53,000 Consumer credit over $53,000 not secured by real property or personal property used as the consumer s principal dwelling. *Effective 7/21/2011, the dollar threshold will be adjusted annually to reflect any increase in the consumer price index. [1026.3(b)] The annual adjustments may be found in the Reg Z Commentary. Personal property includes mobile homes. If a loan is to a consumer > $53,000, made for a consumer purpose and secured by any real property, THE TRANSACTION MUST BE DISCLOSED. Private education loans as defined in 1026.46(b)(5) are subject to Reg Z requirements and THE TRANSACTION MUST BE DISCLOSED. Student Loan Programs Some student loan programs are exempt. These are loans guaranteed by Title IV of the Higher Education Act of 1965 GSL s, PLUS s & National Direct Student Loans. Public Utility Credit & Securities Public utility credit, securities or commodities accounts and home fuel budget plans are also exempt from Reg Z requirements. Mixed Purpose Loans Mixed purpose loans require a greater understanding of the transaction. The regulation states: Figure out the primary purpose of the loan. (i.e. for what purpose does the majority of loan proceeds go toward?). Best practice is when in doubt, disclose. Finance Charge [1026.4] VIP to understanding and treating new charges properly; but recognize that this will likely be one of the fundamental changes going forward. This is the cost, stated as a dollar amount, which the consumer incurs as the result of the credit. This includes charges imposed by the creditor and payable by the consumer. Finance charges do not include items incurred by consumers in comparable cash transactions. This means that taxes, license fees and registration fees incurred by consumers for both cash and credit transactions are not considered finance charges. Generally, treatment of various costs can be divided into the following three groups, and the outline is organized in that manner: Always considered a finance charge Never considered a finance charge Treated as a finance charge unless certain conditions met to allow exclusions Prepaid Finance Charge More of a function of when the fee is incurred. The importance of prepaid finance charges is that those fees are deducted from the loan contract amount to determine the amount financed, an important number in the determination of the annual percentage rate (APR). 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. Examples: origination fee, odd-days interest, first year mortgage guaranty insurance premium, mortgage Independent Community Bankers of America 5 Bequeaith Banking Solutions, LLC