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  • 1. NCHELP TRAINING CONFERENCE Overview and Practical Application of Regulation Z November 5, 2007 Presented By: Bennet S. Koren McGlinchey Stafford PLLC Telephone: (504) 596-2783 E-mail: bkoren@mcglinchey.com
  • 2. Truth-In-Lending Act/Regulation Z Definitions
    • Credit
    • Consumer Credit
    • Open-end/Closed-end
    • Creditor
  • 3. Credit/Consumer Credit
    • CREDIT
    • The right to incur payment of debt or to
    • incur debt and defer its payment
    • CONSUMER CREDIT
    • Credit offered or extended to a consumer primarily for personal, family or household purposes
  • 4. Open-End/Closed-End Credit
    • Open-end credits is credit where the creditor reasonably anticipates repeated advances, the creditor assesses a finance charge on the outstanding balance and the amount of credit that may be extended is generally made available to the extent the outstanding balance is repaid
  • 5. Open-End/Closed-End Credit (cont’d)
    • Closed-end is every other type of credit
    • Home equity lines of credit and credit cards are examples of open-end credit; purchase money mortgage loans and home equity loans are examples of closed-end credit
  • 6. Multiple Advance Loans
    • Borrower can “draw” up to a stated maximum amount
    • Borrower can/must take all proceeds in increments
    • Creditor is obligated to make subsequent advances if borrower is not in default
  • 7. Multiple Advance Loans (cont’d)
    • Closed-end or open-end?
    • Can borrower take more than one advance?
    • Is there a right to re-borrow?
  • 8. Reusable Line Feature
    • A true open-end plan has an unlimited amount of total credit extended-use; repay; use again
    • This is different from a series of advances made pursuant to a closed-end credit loan commitment
  • 9. Reusable Line Feature (cont’d)
    • EXAMPLE: Creditor agrees to lend a total of $10,000 in a series of advances as agreed by the consumer. Once consumer has borrowed the full $10,000, no more is advanced even if some of the debt has been repaid
  • 10. Consequences of Mischaracterizing Closed-End Credit
    • Open-end disclosure is not accurate
    • No closed-end disclosure
    • RESULT: Failure to make any relevant disclosure
  • 11. Creditor
    • A person who regularly extend credit that is subject to a finance charge or is payable by written agreement in more than 4 installments
    • “ Regularly extends credit” = 25 times per calendar year
  • 12. Exemptions
    • Extensions of credit > $25,000 unless secured by the consumer’s dwelling
    • Business purpose transactions
    • Higher Education Act Title IV Loan Programs
  • 13. Finance Charge
    • The cost of credit expressed as a dollar amount
    • All charges not also incurred in a comparable cash transaction are included (unless excluded by Regulation Z)
  • 14. Examples of Finance Charges
    • Interest
    • Points
    • Credit report fees/application fees (unless charged to all applicants, approved or denied)
  • 15. Disclosure Requirements
    • Retainable by consumer
    • Given to the consumer before consummation
    • Reflect legal obligation of the consumer
    • Estimates can be used for unknown information
    • Minor variables in timing and amount can be ignored
  • 16. Closed-End Disclosure Statements
    • Must be provided to borrower before consummation
    • Consummation is determined by state law
    • Disclosure at Disbursement: Is this sufficient?
  • 17. Disclosure Requirements
    • Clear and Conspicuous
    • Retainable by consumer
    • Given to the consumer before consummation
    • Reflect legal obligation of the consumer
  • 18. Disclosure Requirements (cont’d)
    • Estimates can be used for unknown information
    • Minor variables in timing and amount can be ignored
  • 19. Contents of Disclosures
    • Creditor
    • Payment Schedule
    • Itemization of Amount Financed
    • Fed Box: Amount Financed, Finance Charge
  • 20. Contents of Disclosures (cont’d)
    • APR, Total of Payments
    • Variable Rate Information
    • Late Charge, Prepayment, Security Interest
  • 21. Annual Percentage Rate (APR)
    • Finance charge expressed as a percentage
    • APR typically exceeds contract rate
    • Appendix J- Calculation Rules
  • 22. Variable Rate Disclosures
    • Circumstances under which rate may increase
    • Limitation on increase
    • Effect of an increase
    • An example of the payment terms that would result from an increase
  • 23. Special Disclosure Rules
    • Mail/Telephone Orders
    • Interim Student Loans
  • 24. Mail/Telephone Orders
    • Disclosure is delayed until due date of first payment
    • Representative amounts or ranges of certain information is made available in writing to the consumer before actual order
  • 25. Mail/Telephone Orders (cont’d)
    • Principal loan amount
    • Finance Charge
    • APR; variable rate information, if applicable
    • Repayment Terms
  • 26. Interim Student Loans
    • Origination Disclosure and Repayment Disclosure
    • Origination Disclosure deletes finance charge, payment schedule, total of payments
    • These items are not known at disbursement because beginning of repayment period is not known
  • 27. Contents of Disclosures
    • Creditor
    • Payment Schedule
    • Itemization of Amount Financed
    • Fed Box: Amount Financed, Finance Charge
    • APR, Total of Payments
    • Variable Rate Information
    • Late Charge, Prepayment, Security Interest
  • 28. Variable Rate Disclosures
    • Circumstances under which rate may increase
    • Limitation on increase
    • Effect of an increase
    • An example of the payment terms that would result from an increase
  • 29. Practical Example (Loan with an interim period)
    • John Brown applies for a private loan. He is offered the following terms:
      • Loan Amount: $5,000
      • Origination fee: 5% of Principal Balance
      • First disbursement on September 1, 2004, in the amount of $2,500
      • Second disbursement on November 3, 2004, in the amount of $2,500
  • 30. Practical Example
    • First payment due on December 1, 2006
    • Annual rate of interest: 5.0%
  • 31. Subsequent Disclosure Requirements
    • Refinancing requires new disclosures
    • Workouts are not refinancings
    • No variable rate adjustment notices required
  • 32.  
  • 33.  
  • 34. Miscellaneous Issues
    • Record Retention – 2 years
    • Language of Disclosures – can be in language other than English, if available in English upon request
  • 35. Miscellaneous Issues (cont'd)
    • Electronic communication
      • Compliance is not mandatory
      • Incorporates E-Sign consent rules
      • Permits use of e-mail disclosures or disclosures posted at a website
      • E-Sign consent rules do not apply to advertising
  • 36. Miscellaneous Issues (cont’d)
    • State Exemptions
      • Certain states have a comparable law; transactions in these states are not subject to Regulation Z
      • This exemption does not apply to federally chartered institutions
  • 37. Advertising
    • Actually available terms
    • Finance charges must be expressed as an APR
    • Variable rate statement
    • Triggering term system
    • Catalogs/Multiple page documents
  • 38. Triggering Term System
    • Use of following terms triggers full
    • disclosures:
    • Down payment Amount
    • Repayment Term
    • Payment Amount
    • Finance Charge Amount
  • 39. Examples of Triggering Terms
    • Repayment Terms
      • 30 Years to Repay
      • 240 Month Payment Terms
      • But Not: “Monthly Payments” or “Take Years to Repay”
  • 40. Examples of Triggering Terms (cont'd)
    • Payment Amount
      • “ Payable with installments of $XY”
      • “ $XXXXX Balance Payable in Y Equal Installments”
  • 41. Examples of Triggering Terms (cont'd)
    • Finance Charge Amount
      • “ $XXXXX Total Cost of Credit”
      • “ Origination Fee of X%”
      • But Not: “No Origination Fee ”
  • 42. Triggering Term System (cont'd)
    • If any triggering term appears in the advertisement, the following terms must be included:
      • Down payment
      • Repayment terms
      • APR and variable rate statement, if applicable
  • 43. Disclosure of Required Terms
    • Repayment Terms
      • Generally speaking, this means the repayment schedule
      • But does not have to correspond to an exact repayment schedule
  • 44. Disclosure of Required Terms (cont'd)
    • APR
      • Use “APR”
      • Refer to possibility of increase if variable rate
  • 45. Disclosure of Required Terms (cont'd)
    • Use of Examples
      • Use a “Typical Transaction”
      • Call the example what it is
      • Use representative terms
  • 46. Catalogs/Multiple Page Advertisments
    • Table or chart can be used to make required disclosures
    • Table must be clearly and conspicuously set forth
    • Text mentioning triggering terms must refer to the location of the chart
  • 47. THE END